Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change, as Modified by Amendments No. 1 and 2, To Implement Settled-to-Market Treatment of Variation Margin, Permit the Creation of Multiple Account Structures, Permit Select Members to Provide Clearing Services to Affiliated Firms, and Update the Onboarding Procedures, 34955-34960 [2019-15347]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 139 (Friday, July 19, 2019)]
[Notices]
[Pages 34955-34960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15347]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86376; File No. SR-LCH SA-2019-003]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change, as Modified by Amendments No. 1 and 2, To Implement 
Settled-to-Market Treatment of Variation Margin, Permit the Creation of 
Multiple Account Structures, Permit Select Members to Provide Clearing 
Services to Affiliated Firms, and Update the Onboarding Procedures

July 15, 2019.

I. Introduction

    On May 13, 2019, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its rules regarding 
settled-to-market treatment of variation margin and make other changes. 
On May 21, 2019, LCH SA filed Amendment No. 1 to the proposed rule 
change, and on May 24, 2019, LCH SA filed Amendment No. 2 to the 
proposed rule change.\3\ The proposed rule change, as modified by 
Amendments No. 1 and 2, was published for comment in the Federal 
Register on May 31, 2019.\4\ The Commission did not receive comments on 
the proposed rule change, as modified by Amendments No. 1 and 2. For 
the reasons discussed below, the Commission is approving the proposed 
rule change, as modified by Amendments No. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendments No. 1 and 2 both corrected technical issues with 
the initial filing of the proposed rule change but did not make any 
changes to the substance of the filing or the text of the proposed 
rule change.
    \4\ Securities Exchange Act Release No. 85940 (May 24, 2019), 84 
FR 25318 (May 31, 2019) (SR-LCH-SA-2019-003) (``Notice'').
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II. Description of the Proposed Rule Change

A. Introduction

    The proposed rule change would amend LCH SA's (i) CDS Clearing Rule 
Book (``Rule Book''), (ii) CDS Clearing Supplement (``Supplement''), 
and (iii) CDS Clearing Procedures (``Procedures'') (collectively the 
``CDS Clearing Rules'') to make the changes discussed below.\5\
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    \5\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in the CDS Clearing Rules. This 
description summarizes the description found in the Notice, 84 FR at 
25318.
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    First, the proposed rule change would make conforming, clarifying, 
and clean-up changes intended to implement a settled-to-market 
treatment of variation margin.
    Second, the proposed rule change would permit Clearing Members \6\ 
to create multiple account structures for a single client and multiple 
trade accounts per client within a single omnibus account structure.
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    \6\ Clearing Members at LCH SA include Select Members and 
General Members. At LCH SA, a member may be a ``CCM'' (generally any 
legal entity admitted as a clearing member in accordance with the 
CDS Clearing Rules and party to the CDS Admission Agreement) or an 
``FCM Clearing Member'' (generally any Futures Commission Merchant 
(``FCM'') that has been admitted as a clearing member in accordance 
with the CDS Clearing Rules and is a party to the CDS Admission 
Agreement but has not elected to become a CCM).
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    Third, the proposed rule change would permit Select Members \7\ to 
provide client clearing services to their Affiliated Firms.
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    \7\ A Select Member is a CCM or an FCM Clearing Member that does 
not provide CDS Client Clearing Services to Clients other than 
Affiliated Firms and has been admitted by LCH SA as a Select Member.
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    Fourth, the proposed rule change would make certain clarifications 
and enhancements to LCH SA's existing onboarding procedures.
    Fifth and finally, the proposed rule change would also correct 
typographical errors, make clean-up changes, and update references to 
new or revised defined terms.

B. Amendments To Permit Settled-to-Market Treatment for Cleared 
Transactions

    Variation margin is margin exchanged by parties to a CDS 
transaction as a result of a change in market value of that CDS 
transaction. The CDS Clearing Rules currently treat variation margin as 
collateralized-to-market. Under the collateralized-to-market model, 
parties to a CDS transaction make daily payments of variation margin, 
and these payments are treated as a transfer of collateral. Parties 
receiving variation margin pay Price Alignment Interest on the 
variation margin to the party that paid the variation margin.

[[Page 34956]]

    The proposed rule change would amend the CDS Clearing Rules to add 
settled-to-market as a model of characterizing variation margin. Under 
the settled-to-market model, counterparties to a CDS transaction would 
make daily payments of variation margin, called ``NPV Payments'', and 
payments called ``Price Alignment Amount''. The Price Alignment Amount 
would be economically equivalent to Price Alignment Interest, and would 
represent the amount that would have been paid if the variation margin 
were treated as collateral as opposed to a settled amount. Unlike 
collateralized-to-market payments, settled-to-market payments would be 
treated as final, not collateral, and the payments would settle the 
outstanding exposure of the counterparties.
    The proposed rule change would permit Clearing Members to classify 
each of their Trade Accounts as either collateralized-to-market or 
settled-to-market. The proposed rule change would, as a default, treat 
Trade Accounts as CTM Trade Accounts where a Clearing Member does not 
make an election and the Clearing Member is not an FCM or otherwise 
established under US law. Where the Clearing Member is an FCM or 
otherwise established under US law, LCH SA would treat its transactions 
as settled-to-market because, in LCH SA's view, such an approach would 
be consistent with US regulatory requirements.\8\ LCH SA would 
otherwise classify cleared transactions registered within a Trade 
Account the same as the Trade Account itself. Moreover, Trade Accounts 
would only comprise CTM Cleared Transactions or STM Cleared 
Transactions, but not both simultaneously.
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    \8\ See Notice, 84 FR at 25319 (``The proposed rule change to 
require the STM treatment of variation margin would also be 
consistent with a recent CFTC staff Interpretive Letter indicating 
that CTM variation margin payments would not satisfy CFTC 
regulations that require daily settlement that is irrevocable and 
unconditional.'').
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    The proposed rule change would allow Clearing Members to request 
conversion of their collateralized-to-market transactions into settled-
to-market transactions by converting the underlying account from a CTM 
Trade Account into an STM Trade Account. The proposed rule change would 
only allow such a conversion where: (i) The Converting Clearing Member 
is not a Defaulting Clearing Member; (ii) the relevant transactions to 
be converted are not subject to an early termination date; (iii) the 
conversion request does not violate applicable laws or regulations; 
(iv) the Converting Clearing Member has satisfied all of its 
obligations to pay cash and transfer Variation Margin and Collateral; 
and (v) the Converting Clearing Member has paid to LCH SA, or LCH SA 
has paid to the Converting Clearing Member (as applicable), any cash 
settlement amount that LCH SA has determined must be paid to ensure 
that the net present value of each transaction to be converted equals 
zero on the date of the conversion. The proposed rule change would only 
allow such a conversion once and would not allow the conversion to be 
reversed or revoked.
    Under the proposed rule change, settled-to-market processing and 
payments would operate in the same way they do for collateralized-to-
market under the current rules. Specifically, for STM Cleared 
Transactions, either the Clearing Member or LCH SA, as appropriate and 
described in more detail below, would make a payment, called the NPV 
Amount, to account for the variation of the market value of the CDS. 
LCH SA would calculate the NPV Amount based on the net present value of 
the transaction, and LCH SA would derive this value from the End of Day 
Contributed Prices provided to LCH SA. Unless otherwise agreed between 
the Clearing Member and LCH SA, the net present value of the 
transaction would begin at zero. After determining the net present 
value of the transaction, LCH SA would then reset the net present of 
the transaction back to zero.
    If LCH SA determines that the value of the STM Cleared Transaction 
has increased, LCH SA would pay cash to the Clearing Member (the NPV 
Amount) denominated in the same currency as the transaction and equal 
to the amount of the increase in the net present value. If the net 
present value has decreased, then the Clearing Member would make a 
corresponding payment to LCH SA. If there is no change in net present 
value, then no payments would be required. The proposed rule change 
would clarify that, for the avoidance of doubt, an ``increase'' in the 
net present value would mean the value of an STM Cleared Transaction 
has moved in favor of the Clearing Member since the immediately 
preceding reset, while a ``decrease'' would mean the value of an STM 
Cleared Transaction has moved against the Clearing Member since the 
immediately preceding reset.
    In addition to specifying payment of the NPV Amount, the proposed 
rule change would outline the specific operational steps required to 
facilitate accounting for the Price Alignment Amount in a settled-to-
market transaction. As discussed above, the Price Alignment Amount 
would be identical to Price Alignment Interest in a collateralized-to-
market transaction, and the two payments would serve the same 
functional purpose, although the legal status of the two payments would 
be different. Under the proposed rule change, if LCH SA determines that 
the Cumulative Net Present Value is greater than zero, the applicable 
Price Alignment Amount would immediately become payable to LCH SA by 
the Clearing Member in the same currency as the transaction. If LCH SA 
determines that the Cumulative Net Present Value is less than zero, the 
applicable Price Alignment Amount would immediately become payable to 
the Clearing Member by LCH SA in the same currency as the transaction. 
Finally, if the Price Alignment Amount payable by a party on a Cash 
Payment Day is a negative amount, then the proposed rule change would 
specify that the Price Alignment Amount payable by that party would be 
deemed to be zero, and the other party would pay to that party the 
absolute value of the negative Price Alignment Amount on such Cash 
Payment Day.
    The proposed rule change would define Cumulative Net Present Value 
as a hypothetical value computed by LCH SA on each Cash Payment Day 
falling after a Trade Date, based on certain aggregate NPV Amounts 
payable to LCH SA by a Clearing Member and by LCH SA to a Clearing 
Member. LCH SA would compute the Price Alignment Amount on each Cash 
Payment Day after initiation of a transaction. The Price Alignment 
Amount would be the product of (i) the absolute value of the Cumulative 
Net Present Value on each Cash Payment Day; (ii) the applicable Price 
Alignment Amount Rate on each Cash Payment Day; and (iii) the day count 
fraction determined by LCH SA as being applicable to the currency of 
the STM Cleared Transaction. The Price Alignment Amount Rate would be 
the applicable prevailing interest rate of the Cash Payment Date.
    To carry through these requirements to the terms of cleared CDS 
transactions, the proposed rule change would add new provisions to the 
Clearing Supplement to establish the ``STM Cleared Terms'' for each of 
the following categories of transactions: Index Cleared Transactions 
and Single Name Transactions incorporating the 2003 ISDA Credit 
Derivatives Definitions; Index Cleared Transactions and Single Name 
Transactions incorporating the 2014 ISDA Credit Derivatives 
Definitions; and Credit Index Swaptions.
    The proposed rule change would also make a number of other changes 
designed to help ensure the functional

[[Page 34957]]

operation of the settled-to-market model. For example, the proposed 
rule change would specify the timing requirements for the payment of 
the NPV Amount and Price Alignment Amount. Moreover, the proposed rule 
change would clarify that satisfaction of the payment obligation 
arising under the NPV Payment Requirement would discharge any such 
obligation required to settle outstanding exposure under an STM Cleared 
Transaction. The proposed rule change would also clarify that LCH SA's 
risk calculations, including the calculation of Margin Requirements, 
would include the calculation of the Variation Margin Requirement and 
NPV Payment Requirement. Finally, the proposed rule change would update 
a number of reports generated and used by LCH SA to incorporate and 
take into consideration the settled-to-market model.
    The proposed rule change would make certain other changes designed 
to maintain collateralized-to-market as a model for non-FCMs and non-US 
Clearing Members. Specifically, the proposed rule change would define 
the Variation Margin Requirement as the requirement to transfer 
Variation Margin to or receive Variation Margin from LCH SA to satisfy 
the Client Variation Margin Requirement and/or House Variation Margin 
Requirement. LCH SA or a Clearing Member would satisfy the Variation 
Margin Requirement by making a Variation Margin Collateral Transfer, 
meaning an amount of cash transferred by way of full title transfer. 
The proposed rule change would also specify that Variation Margin is 
applicable to CTM Cleared Transactions. The proposed rule change would 
further define Price Alignment Interest as applicable to the receipt of 
Variation Margin Collateral Transfers and which is related to CTM 
Cleared Transactions. In addition, the proposed rule change would 
provide that if the applicable Price Alignment Interest rate is 
negative, LCH SA would either (i) pay Price Alignment Interest if a 
Clearing Member has, on a cumulative net basis, received Variation 
Margin from LCH SA, or (ii) charge Price Alignment Interest if a 
Clearing member has, on a cumulative net basis, transferred Variation 
Margin. The proposed rule change would provide that, in case of the 
default of a Clearing Member, LCH SA would be authorized to convert the 
Variation Margin Collateral Transfer obligations into cash payment 
obligations. This change would ensure that in the case of default, LCH 
SA would apply Variation Margin in the same way as an NPV Payment 
(i.e., as a cash payment). This treatment would be consistent with how 
LCH SA currently treats Variation Margin.
    Finally, the proposed rule change would make a number of conforming 
changes and clarifications to the CDS Clearing Rules, including the 
addition of defined terms and the amendment of existing defined terms, 
to carry out the changes discussed above.

C. Amendments To Permit Multiple Account Structures

    The proposed rule change would make a number of changes to permit 
Clearing Members to create multiple account structures for a single 
client and multiple trade accounts per client within a single omnibus 
account structure. Specifically, the proposed rule change would 
eliminate from the Rule Book existing language that restricts a CCM 
Client from being allocated to more than one account structure at the 
same time and add language to permit LCH SA to open one or more trade 
accounts. Similarly, the proposed rule change would add language to 
allow clients to configure account allocations and configure multiple 
accounts. The proposed rule change additionally would replace the 
concept of a ``client'' with a ``client account structure'' and refer 
to the ability of clients to have several account structures and trade 
accounts, thereby permitting more than one account structure for a 
single client. Finally, the proposed rule change would add new defined 
terms, and revise existing defined terms, to account for multiple 
account structures.

D. Amendments To Permit Select Members Clearing for Affiliated Firms

    To permit Select Members to provide client clearing services to 
certain affiliates, the proposed rule change would add a new defined 
term for ``Affiliated Firm.'' The proposed rule change would define 
``Affiliated Firm'' as any Affiliate or any entity that is otherwise 
member to the same institutional protection scheme \9\ as the Clearing 
Member. The proposed rule change would add Affiliated Firm into the 
definition of ``Select Member'' as a category of persons to whom Select 
Members are permitted to provide client clearing services. The proposed 
rule change would make similar conforming changes to other defined 
terms, and to the Rule Book and Procedures.
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    \9\ Under the proposed rule change, the term ``institutional 
protection scheme'' would be defined as that term is set forth in 
Regulation (EU) No. 575/2013 of the European Parliament and of the 
Council of 26 June 2016 on prudential requirements for credit 
institutions and investment firms.
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    The proposed rule change would make other amendments resulting from 
the ability of Select Members to provide CDS Client Clearing Services 
for Affiliated Firms. Specifically, the proposed rule change would 
update a Select Member's ability to add or remove products it clears 
through LCH SA, to account for products held by any Affiliated Firms to 
which the Select Member provides CDS Client Clearing Services. The 
proposed rule change also would make a related change to the form used 
to notify LCH SA of such changes. Additionally, the proposed rule 
change would make conforming amendments to LCH SA's Membership 
Requirements to recognize the ability of ability of Select Members to 
provide CDS Client Clearing Services for Affiliated Firms. Finally, the 
proposed rule change would formally amend the CDS Clearing Rules to 
permit Select Members to provide CDS Client Clearing Services to 
Affiliated Firms and likewise to permit FCM Clearing Members to provide 
CDS Client Clearing services to Affiliated Firms.

E. Clarifications to Onboarding Procedures

    Currently, an applicant for clearing membership (``Applicant'') 
begins the application process by submitting an inquiry to LCH SA and 
providing its most recent financial statements. LCH SA conducts an 
initial review of the Applicant's credit risk. LCH SA attempts to 
complete the initial review within 5 Business Days from receipt of the 
documentation but is not required to do so. Following the initial 
review, LCH SA either confirms that the Applicant may then complete and 
submit the CDSClear Application Form or refuses admission to the 
Applicant. If the application continues, LCH SA then proceeds with 
further due diligence, including a possible site visit. Under the 
current process, LCH SA attempts to complete the review and make a 
determination within 30 Business Days (or 40 Business Days where a 
legal opinion is required regarding the country of incorporation of the 
Applicant), but is not required to do so.
    As revised, the proposed rule change would require that Applicants 
submit the CDSClear Application Form as part of their initial inquiry. 
As under the current process, Applicants would also be required to 
submit their most recent financial statements. Upon receipt of these 
documents, LCH SA would conduct an initial review of the Applicant's 
CDSClear Application Form and credit risk. As under the current

[[Page 34958]]

process, LCH SA would attempt to complete the initial review within 5 
Business Days from receipt of the documentation but would not be 
required to do so.
    Following completion of the initial review of the Applicant's 
credit risk and CDSClear Application Form, LCH SA would either confirm 
that the application may continue or refuse admission to the Applicant. 
If the application continues, LCH SA would then proceed with further 
due diligence, including a possible site visit. At the end of this 
further review, LCH SA would accept or reject the Applicant. Under the 
proposed revised process, LCH SA would be required to accept or reject 
the Applicant by the 30th Business Day (or 40th Business Days where a 
legal opinion is required regarding the country of incorporation of the 
Applicant) following receipt of the CDSClear Application Form and all 
required supporting documents by LCH SA. Thus, unlike the current 
process, under the proposed revised process LCH SA would be required to 
complete its review in 30 business days (or 40 business days where a 
legal opinion is required). Moreover, because under the revised process 
Applicants would submit their CDSClear Application Form as part of the 
initial inquiry beginning the initial review and the timeline would 
begin upon receipt of the CDSClear Application Form, LCH SA's timeline 
for approving or disapproving an applicant would effectively begin upon 
the start of LCH SA's initial review.
    Moreover, the Procedures currently state that as part of the review 
process an Applicant may expect at least one visit to the Applicant's 
operations office by one or more representatives of LCH SA. The 
proposed rule change would modify this provision by stating that, 
instead, as part of the review process one or more LCH SA's 
representatives may carry out one or more on-site visits to the 
Applicant's operations office. Thus, the proposed rule change would 
give LCH SA discretion to carry out an on-site visit as needed rather 
than creating an expectation that Applicants may expect an on-site 
visit.
    Additionally, the proposed rule change would clarify LCH SA's 
ability to impose limitations on Applicants. Specifically, the 
Procedures currently state that LCH SA may impose conditions or 
limitations on the exercise of certain rights under the CDS Clearing 
Documentation. The proposed rule change would simplify this concept by 
eliminating the use of the term ``conditions'' and instead permitting 
LCH SA to impose limitations following approval of an Applicant. Thus, 
under the proposed rule change, LCH SA would be able to impose 
limitations, but not conditions, on the exercise of certain rights 
under the CDS Clearing Documentation. This proposed change would 
simplify the documentation in the Procedures but would not impose any 
substantive change on LCH SA's ability to, as needed, limit an 
Applicant's exercise of certain rights under the CDS Clearing 
Documentation. Moreover, the proposed rule change would clarify that an 
Applicant must make its initial Contribution into the CDS Default Fund 
before the submission of its first Original Transaction and post 
sufficient Collateral before the submission of its first Intraday 
Transaction.
    Finally, the existing Procedures state that LCH SA's timeline to 
approve or reject an Applicant is subject to the Applicant providing a 
Power of Attorney with respect to its TARGET2 Accounts that enables LCH 
SA to directly debit or credit such accounts. The proposed rule change 
would modify the Procedures to state that LCH SA's timeline to approve 
or reject an Applicant is subject to the Applicant providing such a 
Power of Attorney with respect to its TARGET2 Accounts or Bank of New 
York Mellon accounts, for the purposes of posting Collateral, 
transferring Variation Margin, and making Cash Payments. This proposed 
change would further facilitate the settled-to-market model, as 
discussed above, by allowing LCH SA to obtain a Power of Attorney with 
respect to an Applicant's Bank of New York Mellon accounts for the 
purposes of posting Collateral, transferring Variation Margin, and 
making Cash Payments.

F. Technical Amendments

    The proposed rule change would also correct certain typographical 
errors, make clean-up changes, and correct various conforming 
references in the Procedures, Rule Book, and Supplement.

III. Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the 
organization.\10\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \11\ and Rules 17Ad-22(e)(1), (e)(6)(ii), (e)(8), and 
(e)(18) thereunder.\12\
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    \10\ 15 U.S.C. 78s(b)(2)(C).
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ 17 CFR 240.17Ad-22(e)(1), (e)(6)(ii), (e)(8), and (e)(18).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of LCH SA be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions, to 
assure the safeguarding of securities and funds which are in the 
custody or control of LCH SA or for which it is responsible, and, in 
general, to protect investors and the public interest.\13\
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the proposed rule change would amend the CDS 
Clearing Rules to require FCMs and U.S. Clearing Members to treat 
variation margin as settled-to-market, while permitting non-FCMs and 
non-U.S. Clearing Members to treat variation margin as either 
collateralized-to-market or settled-to-market. To implement and 
facilitate these amendments, the proposed rule change would introduce 
new definitions, update existing definitions, and update the 
terminology used in certain rules in light of the new settled-to-market 
treatment of variation margin. To facilitate Clearing Members' ability 
to operationalize these changes, the proposed rule change would permit 
certain Clearing Members to classify each of their Trade Accounts as 
either a CTM Trade Account or an STM Trade Account, and to convert 
transactions between the two in certain circumstances. The proposed 
rule change would also amend the Procedures to describe how LCH SA 
would account for settled-to-market transactions, as well as calculate 
and make the payments associated with settled-to-market transactions. 
Finally, the proposed rule change would amend the Clearing Supplement 
to establish the standard contractual terms for CDS transactions that 
LCH SA would clear pursuant to the settled-to-market model.
    The Commission believes that by establishing settled-to-market 
treatment for variation margin in CDS transactions, the proposed rule 
change would help ensure that variation margin is treated as settled 
payments rather than collateral, consistent with the intention of 
Clearing Members that elect, or are required to elect, settled-to-
market treatment. In doing so, the Commission further believes the 
proposed rule change would clarify that LCH SA has all rights and 
outright title

[[Page 34959]]

to settled-to-market payments made to LCH SA, thereby supporting LCH 
SA's ability to use such settled-to-market payments to cover credit and 
market losses. The Commission further believes that in establishing the 
operational aspects of settled-to-market treatment of variation margin, 
including how LCH SA would account for settled-to-market transactions 
and would calculate and make the payments associated with settled-to-
market transactions, the proposed rule change would help ensure the 
effective operation of the settled-to-market model for variation 
margin, thereby helping to improve the operation and effectiveness of 
LCH SA's margin system. Similarly, the Commission believes that in 
establishing the standard contractual terms for CDS transactions that 
LCH SA clears pursuant to the settled-to-market model, the proposed 
rule change would help ensure that variation margin for CDS 
transactions is treated as settled-to-market.
    Given that an effective margin system is necessary to manage LCH 
SA's credit exposures to its CPs and the risks associated with clearing 
security based swap-related portfolios, the Commission believes that 
the proposed rule change would help improve LCH SA's ability to avoid 
potential losses that could result from the mismanagement of credit 
exposures and the risks associated with clearing security based swap-
related portfolios. Because such losses could disrupt LCH SA's ability 
to promptly and accurately clear security based swap transactions, the 
Commission believes that the proposed rule change, by improving the 
operation and effectiveness of LCH SA's margin system, would thereby 
help promote the prompt and accurate clearance and settlement of 
securities transactions.
    Similarly, given that mismanagement of LCH SA's credit exposures to 
its Clearing Members and the risks associated with clearing security 
based swap-related portfolios could cause LCH SA to realize losses on 
such portfolios and threaten LCH SA's ability to operate, thereby 
threatening access to securities and funds in LCH SA's control, the 
Commission believes that the proposed rule change would help assure the 
safeguarding of securities and funds which are in the custody or 
control of the LCH SA or for which it is responsible. Finally, for both 
of these reasons, the Commission believes the proposed rule change 
would, in general, protect investors and the public interest.
    In addition, as discussed above, the proposed rule change would 
permit Clearing Members to create multiple account structures for a 
single client and multiple trade accounts per client within a single 
omnibus account structure and permit Select Members to provide client 
clearing services to their Affiliated Firms. The Commission believes 
that, by allowing clients to create more than one account and allowing 
Select Members to clear trades for their Affiliated Firms, both of 
these changes would expand the clearing services that LCH SA currently 
offers and therefore potentially clear more trades. The Commission 
believes that both of these proposed changes would help expand LCH SA's 
provision of clearing services, which would thereby promote the prompt 
and accurate clearance and settlement of securities transactions.
    As discussed above, the proposed rule change would also make 
certain clarifications and enhancements to LCH SA's existing onboarding 
procedures. The Commission believes that these enhancements would help 
ensure that Applicants are fit for clearing transactions at LCH SA and 
able to satisfy the requirements and obligations associated with 
clearing membership. Because LCH SA cannot clear and settle 
transactions if its Clearing Members do not satisfy their related 
requirements and obligations, such as posting margin and timely 
submitting prices, the Commission believes that that this aspect of the 
proposed rule change also would promote the prompt and accurate 
clearance and settlement of securities transactions.
    Finally, as discussed above, the proposed rule change would correct 
typographical errors, make clean-up changes, and update references to 
new and revised defined terms in the CDS Clearing Rules. The Commission 
believes that these changes would help to ensure that the CDS Clearing 
Rules are clear and operate effectively, consistent with LCH SA's 
intent. The Commission further believes that clear and effective CDS 
Clearing Rules are necessary for LCH SA to promptly and accurately 
clear and settle CDS transactions, and therefore that this aspect of 
the proposed rule change also would promote the prompt and accurate 
clearance and settlement of securities transactions.
    Therefore, the Commission finds that the proposed rule change would 
promote the prompt and accurate clearance and settlement of securities 
transactions, assure the safeguarding of securities and funds in LCH 
SA's custody and control, and in general, protect investors and the 
public interest, consistent with the Section 17A(b)(3)(F) of the 
Act.\14\
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1)

    Rule 17Ad-22(e)(1) requires, in relevant part, that LCH SA 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to provide for a well-founded, clear, 
transparent, and enforceable legal basis for each aspect of its 
activities in all relevant jurisdictions.\15\ The Commission believes 
that the proposed rule change, in introducing new definitions, updating 
existing definitions, and updating the terminology used in certain 
rules in light of the new settled-to-market treatment of variation 
margin, as well as correcting typographical errors and updating 
references, would help to ensure that LCH SA's CDS Clearing Rules 
provide a consistent and enforceable legal basis for the settled-to-
market treatment of variation margin. Similarly, the Commission 
believes that the proposed rule change, in amending the Clearing 
Supplement to establish the standard contractual terms for CDS 
transactions that LCH SA clears pursuant to the settled-to-market 
model, would help to establish a clear and enforceable legal basis for 
the settled-to-market treatment of variation margin in cleared 
transactions. Therefore, the Commission finds that the proposed rule 
change is consistent with Rule 17Ad-22(e)(1).\16\
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    \15\ 17 CFR 240.17Ad-22(e)(1).
    \16\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(ii)

    Rule 17Ad-22(e)(6)(ii) requires, among other things, that LCH SA 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum marks participant positions to market and collects margin, 
including variation margin or equivalent charges if relevant, at least 
daily.\17\
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    \17\ 17 CFR 240.17Ad-22(e)(6)(ii).
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    The Commission believes that the proposed rule change, in amending 
the Procedures to operationalize the settled-to-market model for FCMs 
and US Clearing Members while maintaining collateralized-to-market as a 
model for non-FCMs and non-US Clearing Members, would help to ensure 
that LCH SA's margin system marks participant positions to market and 
collects variation margin, for both settled-to-market and 
collateralized-to-

[[Page 34960]]

market transactions. Specifically, in specifying how LCH SA would 
account for settled-to-market transactions and would calculate and make 
the payments associated with settled-to-market transactions, the 
Commission believes the proposed rule change would help to ensure that 
LCH SA marks positions to market daily in settled-to-market 
transactions. Moreover, in establishing the timelines and legal 
obligations for making variation margin payments and Price Alignment 
Amounts in settled-to-market transactions, the Commission believes that 
the proposed rule change would help to ensure that LCH SA and Clearing 
Members collect and make variation margin payments associated with 
settled-to-market transactions daily.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(6)(ii).\18\
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    \18\ Id.
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D. Consistency With Rule 17Ad-22(e)(8)

    Rule 17Ad-22(e)(8) requires, in relevant part, that LCH SA 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to define the point at which settlement 
is final to be no later than the end of the day on which the payment or 
obligation is due and, where necessary or appropriate, intraday or in 
real time.\19\
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    \19\ 17 CFR 240.17Ad-22(e)(1).
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    As discussed above, the proposed rule change would specify that 
under the settled-to-market model, the daily transfer of NPV Payments 
and Price Alignment Amounts would constitute a final settlement of the 
outstanding exposure between the counterparties. The proposed rule 
change would also specify that all Clearing Members using the settled-
to-market model would make applicable payments each day, thereby 
achieving a final settlement for that day. Each subsequent day, the 
outstanding exposure would change, and new payments would be needed to 
settle the exposure. The Commission believes that in making these 
changes, the proposed rule change would define the point at which 
settlement would be final under the settled-to-market model.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(8).\20\
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    \20\ 17 CFR 240.17Ad-22(e)(8).
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E. Consistency With Rule 17Ad-22(e)(18)

    Rule 17Ad-22(e)(18) requires, among other things, that LCH SA 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to establish objective, risk-based, and 
publicly disclosed criteria for participation which permit fair and 
open access by direct and, where relevant, indirect participants and 
other financial market utilities.\21\
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    \21\ 17 CFR 240.17Ad-22 (e)(18).
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    The Commission believes that the proposed rule change, in enhancing 
LCH's procedures for reviewing and admitting Applicants, would 
contribute to LCH SA's establishment and implementation of objective 
and risk-based policies and procedures for participation. Specifically, 
by requiring that Applicants submit the CDSClear Application Form as 
part of their initial query and prior to LCH SA beginning the initial 
review, the Commission believes that the proposed rule change would 
increase the information available to LCH SA during the initial review, 
thereby improving LCH SA's ability to review and assess Applicants and, 
if necessary and appropriate, disapprove Applicants not suited for 
clearing membership. Moreover, in requiring that LCH SA either reject 
or accept the Applicant no later than 30 business days after receipt of 
the CDSClear Application Form and all required supporting documents by 
LCH SA, the Commission believes the proposed rule change would 
establish a clear and objective process and timeline for admission or 
denial of Applicants. Additionally, in clarifying that LCH SA may carry 
out one or more on-site visits as part of the application process, and 
that an Applicant must make its Initial Contribution into the CDS 
Default Fund before the submission of its first Original Transaction 
and post sufficient Collateral before the submission of its first 
Intraday Transaction, the Commission believes the proposed rule change 
would enhance LCH SA's ability to screen applicants and establish 
objective, risk-based standards for performance that all Applicants 
must satisfy.
    Finally, the Commission believes that, by permitting Clearing 
Members to create multiple account structures for a single client and 
multiple trade accounts per client within a single omnibus account 
structure, and permitting Select Members to provide client clearing 
services to their Affiliated Firms, the proposed rule change would 
permit fair and open access by indirect participants. Specifically, the 
Commission believes that these proposed changes would expand access by 
clients by permitting multiple account structures, and expand access by 
firms by permitting Select Members to provide client clearing services 
to their Affiliated Firms.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(18).\22\
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    \22\ 17 CFR 240.17Ad-22(e)(18).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change, as modified by Amendments No. 1 and 2, is 
consistent with the requirements of the Act, and in particular, with 
the requirements of Section 17A(b)(3)(F) of the Act \23\ and Rules 
17Ad-22(e)(1), (e)(6)(ii), (e)(8), and (e)(18) thereunder.\24\
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
    \24\ 17 CFR 240.17Ad-22(e)(1), (e)(6)(ii), (e)(8), and (e)(18).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\25\ that the proposed rule change, as modified by Amendments No. 1 and 
2 (SR-LCH-SA-2019-003), be, and hereby is, approved.\26\
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15347 Filed 7-18-19; 8:45 am]
BILLING CODE 8011-01-P