Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating to Amendments to LCH SA's Liquidity Risk Modelling Framework, 67488-67491 [2019-26497]

Download as PDF 67488 Federal Register / Vol. 84, No. 237 / Tuesday, December 10, 2019 / Notices the list of Negotiated Service Agreements in the Mail Classification Schedule’s Competitive Products List. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87655; File No. SR–LCH SA–2019–007] Date of required notice: December 10, 2019. DATES: FOR FURTHER INFORMATION CONTACT: Sean Robinson, 202–268–8405. The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on December 4, 2019, it filed with the Postal Regulatory Commission a USPS Request to Add Priority Mail Contract 569 to Competitive Product List. Documents are available at www.prc.gov, Docket Nos. MC2020–46, CP2020–44. SUPPLEMENTARY INFORMATION: Sean Robinson, Attorney, Corporate and Postal Business Law. [FR Doc. 2019–26480 Filed 12–9–19; 8:45 am] BILLING CODE 7710–12–P POSTAL SERVICE Product Change—Priority Mail Negotiated Service Agreement AGENCY: ACTION: Notice. The Postal Service gives notice of filing a request with the Postal Regulatory Commission to add a domestic shipping services contract to the list of Negotiated Service Agreements in the Mail Classification Schedule’s Competitive Products List. SUMMARY: Date of required notice: December 10, 2019. DATES: FOR FURTHER INFORMATION CONTACT: Sean Robinson, 202–268–8405. The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on December 4, 2019, it filed with the Postal Regulatory Commission a USPS Request to Add Priority Mail Contract 568 to Competitive Product List. Documents are available at www.prc.gov, Docket Nos. MC2020–45, CP2020–43. SUPPLEMENTARY INFORMATION: Sean Robinson, Attorney, Corporate and Postal Business Law. jbell on DSKJLSW7X2PROD with NOTICES BILLING CODE 7710–12–P VerDate Sep<11>2014 17:08 Dec 09, 2019 Jkt 250001 December 4, 2019. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 3, 2019, Banque Centrale de Compensation, which conducts business under the name LCH SA (‘‘LCH SA’’), filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change (‘‘Proposed Rule Change’’) described in Items I, II, and III below, which Items have been primarily prepared by LCH SA. The Commission is publishing this notice to solicit comments on the Proposed Rule Change from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change Postal ServiceTM. [FR Doc. 2019–26479 Filed 12–9–19; 8:45 am] Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating to Amendments to LCH SA’s Liquidity Risk Modelling Framework LCH SA is proposing to amend its Liquidity Risk Modelling Framework (the ‘‘Framework’’), which describes the Liquidity Stress Testing framework by which the Collateral and Liquidity Risk Management department (‘‘CaLRM’’) of LCH Group Holdings Limited (‘‘LCH Group’’) assures that LCH SA has enough cash available to meet any financial obligations, both expected and unexpected, that may arise over the liquidation period for each of the clearing services that LCH SA offers.3 The Commission first approved the Framework by Order dated July 18, 2018.4 II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, LCH SA included statements concerning 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 LCH SA, a subsidiary of LCH Group, manages its liquidity risk pursuant to, among other policies and procedures, the Group Liquidity Risk Policy and the Group Liquidity Plan applicable to each entity within LCH Group. In addition to its CDSClear service, LCH SA provides clearing services in connection with cash equities and derivatives listed for trading on Euronext (EquityClear), commodity derivatives listed for trading on Euronext (CommodityClear), and tri-party Repo transactions (RepoClear). 4 Securities Exchange Act Release No. 34–83691 (July 24, 2018), 83 FR 36635 (July 30, 2018); File No. SR–LCH SA–2018–003) (the ‘‘Release’’). 2 17 PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 the purpose of and basis for the Proposed Rule Change and discussed any comments it received on the Proposed Rule Change. The text of these statements may be examined at the places specified in Item IV below. LCH SA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Framework is one of several welldeveloped policies and procedures that LCH SA maintains to manage its liquidity risk, i.e., the risk that LCH SA will not have enough cash available, in extreme but plausible circumstances, to settle margin payments or delivery obligations when they become due, in particular upon the default of a clearing member. Such policies and procedures include, among others: (i) The Group Liquidity Risk Policy; (ii) the Group Liquidity Plan; (iii) the Group Financial Resource Adequacy Plan; (iv) the Group Collateral Risk Policy; (v) the Group Investment Risk Policy; and (vi) the LCH SA Collateral Control Framework. The Framework complements these policies and procedures and develops further the Group Liquidity Risk Policy. In brief, the Framework: (i) Identifies LCH SA’s sources of liquidity and corresponding liquidity risks; (ii) identifies LCH SA’s liquidity requirements with respect to its members and its interoperable central counterparty (‘‘CCP’’); 5 (iii) describes the metrics and limits that LCH SA monitors; and (iv) describes the scenarios under which these metrics are computed.6 (i) Physically-Settled Options LCH SA is proposing to amend the Framework in order to address more accurately its liquidity requirements in the event of the assignment and exercise of physically-settled options involving a defaulting clearing member during the liquidation period of such clearing member. Specifically, the amended Framework will address LCH SA’s liquidity requirements in the event options that are in the money are 5 LCH SA has an interoperability agreement with Cassa di Compensazione e Garanzia (‘‘CC&G’’), an Italian CCP, pursuant to which LCH SA’s clearing members and CC&G’s clearing members are able to benefit from common clearing services without having to join the other CCP. Each CCP is a clearing member of the other one with a particular status when accessing the clearing system of the other counterparty. 6 The Release describes the operation of the Framework in greater detail. E:\FR\FM\10DEN1.SGM 10DEN1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 84, No. 237 / Tuesday, December 10, 2019 / Notices exercised either on the day (‘‘T’’), or on the business day immediately following the day (‘‘T+1’’), on which the clearing member that is a seller of the options defaults. If such defaulting clearing member is a seller of a Call option that is in the money, LCH SA would have to purchase the underlying securities in the market at a stressed price and await payment at the strike price from the non-defaulting purchaser of the Call option at settlement. If such defaulting clearing member is a seller of a Put option that is in the money, LCH SA would have to purchase the underlying securities at the strike price from the non-defaulting purchaser of the Put option. Although margins should cover any potential loss, liquidity outflows as a result of the sales’ proceeds are included as liquidity requirements, in each case. In the current Framework, there is no liquidity provision related to the risk of assignment and exercise of options at expiration. In order to address this concern, the amended Framework will anticipate, prior to the expiration dates, the amount of liquidity funding that may arise from options that may be exercised, in the event of the default of LCH SA’s two largest members (‘‘Cover2’’). On a daily basis, LCH’s Liquidity and Concentration Risk (‘‘LCR’’) calculation will identify all of the potential positions that are in the money or at the money on that day and the next business day. Given the potential option exercise, the LCR will generate a liquidity need. The additional liquidity amount that LCH SA could potentially need will be equal to the sum of the equities to source following the option assignments at expiration and/or the difference between the underlying securities and the strike price or the strike price minus the asset in the event of a cash settlement. In practice, the process will work as follows on a daily basis: • The liquidity needs arising from the options that are in the money or at the money, having their expiries on T or T+1, will be computed by applying no market stress to the equities. • The liquidity needs arising from the options that are in the money or at the money, having their expiries on T or T+1, will be computed by applying a stress scenario to the equities. • LCH SA will select the positions consistent with the Cover2 for both modes described above and will retain the most punitive one. This amount will be added to the current cash equity amount in the LCR. VerDate Sep<11>2014 17:08 Dec 09, 2019 Jkt 250001 (ii) Fixed Income Clearing System Further, LCH SA is proposing to amend the Framework to take into account the expansion of sovereign debt for which LCH SA provides clearing services through its Fixed Income Clearing System. LCH SA initially provided clearing services only with respect to French sovereign debt. The Fixed Income Clearing service subsequently added the sovereign debt of Italy, Spain, Germany, and Belgium. More recently, the Fixed Income Clearing System has been extended to eight additional Euro markets: Austria, Netherlands, Finland, Ireland, Portugal, Slovakia, Slovenia and Supranationals.7 In this regard, therefore, the Framework has been revised to provide that all securities resulting from the settlement of all repurchase contracts (‘‘repos’’) on behalf of a defaulting clearing member, not just repos on the sovereign debt of France, Italy and Spain, may be used to generate liquidity at the Banque de France. The amended Framework also clarifies that, in the event that a Central Bank Guarantee (‘‘CBG’’) is triggered by the default of a clearing member posting the CBG, the relevant Central Bank will pay the liabilities of the defaulting clearing member in cash. Further, the Framework has been revised to (i) identify the relevant central securities depository (‘‘CSD’’) through which transactions in the sovereign debt of the different jurisdictions may settle,8 (ii) describe the manner by which LCH SA injects liquidity into each settlement platform, in particular, Euroclear Bank and Clearstream Luxembourg, and (iii) modify the limits by settlement platform on the main liquidity drivers (i.e., cash injected into the platforms, autocollateralization and gross fails). (iii) Stress Tests LCH SA is proposing clarifications with respect to certain aspects of its stress tests. With respect to the operational liquidity target,9 which is a 7 The supranational debt eligible for clearing is currently limited to the Euro denominated debt of the European Investment Bank. 8 French sovereign debt may settle through Euroclear Bank, Italian sovereign debt through Monte Titoli, Spanish sovereign debt through Iberclear, German sovereign debt through Clearstream Frankfurt, and Belgian sovereign debt through the National Bank of Belgium. The sovereign debt of the remaining jurisdictions may settle through either Euroclear Bank or Clearstream Luxembourg. All transactions are settled through Target 2 Securities, a Eurosystem technical platform to which CSDs assign the management of securities settlement in central bank money. 9 Operational liquidity is defined to mean the amount of liquidity related to the operational PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 67489 metric allowing LCH SA to confirm that the business as usual liquidity sources are sufficient for a five day period in stressed situations, consistent with the LCR time horizon, the Framework notes that LCH SA uses a three-day window, in particular with regard to margin reduction. The Framework further clarifies that, in calculating liquidity resources, LCH SA deducts funds required to facilitate settlements, cover end of day fails at Euroclear Bank and Clearstream Luxembourg, and avoid Target 2 Securities fails. In addition, the Framework assumes that members allowed to post CBGs will switch from cash or ECB-eligible non-cash collateral to CBGs (although the Framework does not currently take such switches into account, since all eligible members, i.e., Dutch and Belgian members, have already done so). Moreover, the amended Framework confirms that, in calculating required variation margin payments to CC&G, LCH SA assumes a theoretical 5-day holding period. The amended Framework also clarifies how stressed liquidity requirements and impact are calculated for each clearing member, in particular with respect to the cash equity settlement requirement for options. These calculations are used to determine the two clearing members that would potentially cause the largest aggregate liquidity exposure for the CCP in extreme but plausible market conditions. Finally, the Framework clarifies how LCH SA conducts reverse stress tests in order to determine if there is a combination of changes in LCH SA’s liquidity that could lead to a liquidity shortfall. In particular, the amended Framework considers whether there is a combination of changes in LCH SA’s liquidity resources that could lead to a liquidity shortfall, even in the absence of stress in the market. 2. Statutory Basis LCH SA has determined that Proposed Rule Change is consistent with the requirements of Section 17A of the Act 10 and regulations thereunder applicable to it. Section 17A(b)(3)(F) of the Act requires, inter alia, that the rules of a clearing agency ‘‘assure the safeguarding of securities and funds that are in its custody or control or for which it is responsible.’’ 11 Further, Regulation 17dA–22(e)(4)(ii) requires a CCP that is involved in activities with a more management of LCH SA that is required to be held in a stressed environment that does not lead to a clearing member’s default. 10 15 U.S.C. 78q–1. 11 15 U.S.C. 78q–1(b)(3)(F). E:\FR\FM\10DEN1.SGM 10DEN1 jbell on DSKJLSW7X2PROD with NOTICES 67490 Federal Register / Vol. 84, No. 237 / Tuesday, December 10, 2019 / Notices complex risk profile, e.g., that provides CCP services for security-based swaps, to maintain and enforce written policies and procedures reasonably designed to effectively ‘‘measure, monitor, and manage its credit exposures from its payment, clearing and settlement processes’’ to assure that it maintains additional financial resources to enable it to cover a wide range of stress scenarios that include the default to two participant family clearing members that would potentially cause the largest aggregate liquidity exposure for the CCP in extreme but plausible market conditions.12 As discussed earlier, LCH SA is proposing to amend the Framework to address specifically LCH SA’s liquidity requirements in the event of the assignment and exercise of physicallysettled options involving a defaulting clearing member during the liquidation of such clearing member. The proposed amendment will assist LCH SA in defining more accurately its liquidity requirements by assuring that LCH SA will maintain appropriate levels of liquidity in the event of the assignment and exercise of options involving a defaulting clearing member. Specifically, the amended Framework will anticipate, prior to their expiration dates, the amount of liquidity funding that may arise from options that may be exercised, in the event of the default of LCH SA’s two largest members. The policies and procedures set out in the amended Framework, therefore, are designed to enhance LCH SA’s to measure, monitor, and manage the liquidity risk that may arise in connection with its activities as a covered clearing agency. As such the amendments to the Framework regarding LCH SA’s liquidity requirements in the event of the assignment and exercise of options involving a defaulting clearing member are consistent with the requirements of Regulation 17dA–22(e)(4)(ii). As noted above, Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency ‘‘assure the safeguarding of securities and funds that are in its custody or control or for which it is responsible.’’ To better implement this statutory requirement, LCH SA is proposing to amend the Framework to take into account the expansion of sovereign debt for which LCH SA provides clearing services through its Fixed Income Clearing System. In addition to French sovereign debt, the Fixed Income Clearing service now provides clearing services with respect to the sovereign debt of eleven other 12 17 CFR 240.17Ad–22(e)(4)(ii). VerDate Sep<11>2014 17:08 Dec 09, 2019 Jkt 250001 European jurisdictions, as well as the European Investment Bank.13 The revised Framework: (i) Identifies the relevant CSD through which transactions in the sovereign debt of the different jurisdictions may settle; (ii) describes the manner by which LCH SA injects liquidity into each settlement platform; and (iii) modifies the limits by settlement platform on the main liquidity drivers (i.e., cash injected into the platforms, auto-collateralization and gross fails). The revised Framework also provides that all securities resulting from the settlement of repos on behalf of a defaulting clearing member may be used to generate liquidity at the Banque de France and clarifies that, in the event that a CBG is triggered by the default of a clearing member, the relevant Central Bank will pay the defaulting clearing member’s liabilities in cash. The proposed amendments strengthen LCH SA’s policies and procedures intended to ‘‘assure the safeguarding of securities and funds that are in its custody or control or for which it is responsible’’ (i) by specifying the CSDs through which transactions in the identified foreign sovereign debt may settle and the means by which LCH SA interacts with such CSDs, (ii) by confirming that all securities of a defaulting clearing member resulting from repos are available to the Banque de France, and (iii) by providing that a Central Bank that has provided a CBG will pay a defaulting clearing member’s liabilities in cash. As such, the amendments to the Framework regarding the Fixed Income Clearing Service are consistent with Section 17A(b)(3)(F) of the Act. Regulation 17dA–22(e)(4)(i) and (vi)(A) requires a clearing agency to maintain and enforce written policies and procedures reasonably designed to conduct stress testing of its total financial resources once each day using standard predetermined parameters and assumptions to assure that it has sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.14 As discussed above, LCH SA is proposing amendments to the Framework to identify certain additional factors that that LCH will take into account in conducting its stress tests and provide greater clarity regarding LCH SA’s stress testing practices. In particular, the Framework confirms that in calculating its operational 13 The eleven jurisdictions are: Austria; Belgium; Finland; Germany; Ireland; Italy; Netherlands; Portugal; Spain; Slovakia; and Slovenia. 14 17 CFR 240.17Ad-22(e)(4)(i) and (vi). PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 liquidity target,15 LCH SA uses a threeday rather than a five-day window, in particular with regard to margin reduction. The Framework further clarifies that, in calculating liquidity resources, LCH SA deducts funds required to facilitate settlements, cover end of day fails at Euroclear Bank and Clearstream Luxembourg, and avoid Target 2 Securities fails. The Framework also confirms that it assumes that members allowed to post CBGs will switch from cash or ECB-eligible noncash collateral. The amended Framework further clarifies how stressed liquidity requirements are calculated for each clearing member, in particular with respect to the cash equity settlement requirement for options, to determine the two clearing members that would potentially cause the largest aggregate liquidity exposure for the CCP in extreme but plausible market conditions. The Framework also clarifies the manner in which LCH SA conducts reverse stress tests in order to determine if there is a combination of changes in LCH SA’s liquidity that could lead to a liquidity shortfall. By clarifying the factors that it takes into account in conducting daily stress testing, the proposed amendments enhance LCH SA’s written policies and procedures with regard to stress testing and thereby assures that LCH SA maintains sufficient additional financial resources to enable it to cover a wide range of stress scenarios that include the default to two participant family clearing members that would potentially cause the largest aggregate liquidity exposure for the CCP in extreme but plausible market conditions. As such, therefore, the proposed amendments, therefore, are consistent with the requirements of Regulation 17dA– 22(e)(4)(i) and (vi)(A). B. Clearing Agency’s Statement on Burden on Competition Section 17A(b)(3)(I) of the Act requires that the rules of a clearing agency not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.16 LCH SA does not believe the Proposed Rule Change would have any impact, or impose any burden, on competition. The Proposed Rule Change does not address any competitive issue or have any impact on the competition among central counterparties. LCH SA operates an open access model, and the Proposed 15 The term ‘‘operational liquidity’’ is defined at footnote 21, supra. 16 15 U.S.C. 78q–1(b)(3)(I). E:\FR\FM\10DEN1.SGM 10DEN1 Federal Register / Vol. 84, No. 237 / Tuesday, December 10, 2019 / Notices Rule Change will have no effect on this model. C. Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments relating to the Proposed Rule Change have not been solicited or received. LCH SA will notify the Commission of any written comments received by LCH SA. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. jbell on DSKJLSW7X2PROD with NOTICES IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml) or • Send an email to rule-comments@ sec.gov. Please include File Number SR– LCH SA–2019–007 on the subject line. Paper Comments • Send paper comments in triplicate to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–LCH SA–2019–007. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the VerDate Sep<11>2014 17:08 Dec 09, 2019 Jkt 250001 67491 Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filings will also be available for inspection and copying at the principal office of LCH SA and on LCH SA’s website at https://www.lch.com/ resources/rules-and-regulations/ proposed-rule-changes-0. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–LCH SA–2019–007 and should be submitted on or before December 31, 2019. Register on April 8, 2019.3 On May 22, 2019, the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved.4 On July 1, 2019, the Commission instituted proceedings under Section 19(b)(2)(B) of the Act 5 to determine whether to approve or disapprove the proposed rule change.6 On October 3, 2019, FINRA filed partial Amendment No. 2 to the proposed rule change.7 On October 4, 2019, the Commission published notice of Amendment No. 2 to the proposed rule change and designated a longer period for Commission action on the proceedings to determine whether to approve or disapprove the proposed rule change.8 The Commission received comments on the proposal and one response to comments from FINRA.9 This order approves the proposed rule change, as modified by Amendment No. 2. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Jill M. Peterson, Assistant Secretary. II. Summary of the Proposed Rule Change, as Modified by Amendment No. 2 As described in more detail in the Notice and Amendment No. 2,10 FINRA proposes to establish a new issue reference data service for corporate bonds. FINRA states that its proposal is [FR Doc. 2019–26497 Filed 12–9–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87656; File No. SR–FINRA– 2019–008] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 2, To Establish a Corporate Bond New Issue Reference Data Service December 4, 2019. I. Introduction On March 27, 2019, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) 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 establish a new issue reference data service for corporate bonds. The Commission published notice of filing of the proposed rule change in the Federal 17 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 3 See Securities Exchange Act Release No. 85488 (April 2, 2019), 84 FR 13977 (‘‘Notice’’). 4 See Securities Exchange Act Release No. 85911, 83 FR 24839 (May 29, 2019). The Commission designated July 7, 2019, as the date by which it should approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change. 5 15 U.S.C. 78s(b)(2)(B). 6 See Securities Exchange Act Release No. 86256, 84 FR 32506 (July 8, 2019). 7 Partial Amendment No. 1 was also filed on October 3, 2019 and subsequently withdrawn on the same day due to a non-substantive administrative error and replaced with Amendment No. 2. In Amendment No. 2, the Exchange: (i) Withdrew the proposed fees for receipt of corporate new issue reference data in the proposal and stated that a separate proposed rule change would be filed to establish fees related to the corporate bond new issue reference data service at a future date prior to implementing the service; (ii) revised the list of data fields to be collected under the proposal to clarify certain proposed data fields and to add six new data fields; and (iii) included additional rationale for the data fields proposed to be collected. Amendment No. 2 is available at: https://www.sec.gov/ comments/sr-finra-2019-008/srfinra20190086252424-192827.pdf. 8 See Securities Exchange Act Release No. 87232, 84 FR 54712 (October 10, 2019). The Commission extended the date by which the Commission shall approve or disapprove the proposed rule change to December 4, 2019. 9 All comments on the proposed rule change, including FINRA’s response to comments, are available at: https://www.sec.gov/comments/srfinra-2019-008/srfinra2019008.htm. 10 See supra notes 3 and 7. E:\FR\FM\10DEN1.SGM 10DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 237 (Tuesday, December 10, 2019)]
[Notices]
[Pages 67488-67491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26497]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87655; File No. SR-LCH SA-2019-007]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to Amendments to LCH SA's Liquidity Risk 
Modelling Framework

December 4, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 3, 2019, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change 
(``Proposed Rule Change'') described in Items I, II, and III below, 
which Items have been primarily prepared by LCH SA. The Commission is 
publishing this notice to solicit comments on the Proposed Rule Change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    LCH SA is proposing to amend its Liquidity Risk Modelling Framework 
(the ``Framework''), which describes the Liquidity Stress Testing 
framework by which the Collateral and Liquidity Risk Management 
department (``CaLRM'') of LCH Group Holdings Limited (``LCH Group'') 
assures that LCH SA has enough cash available to meet any financial 
obligations, both expected and unexpected, that may arise over the 
liquidation period for each of the clearing services that LCH SA 
offers.\3\ The Commission first approved the Framework by Order dated 
July 18, 2018.\4\
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    \3\ LCH SA, a subsidiary of LCH Group, manages its liquidity 
risk pursuant to, among other policies and procedures, the Group 
Liquidity Risk Policy and the Group Liquidity Plan applicable to 
each entity within LCH Group.
    In addition to its CDSClear service, LCH SA provides clearing 
services in connection with cash equities and derivatives listed for 
trading on Euronext (EquityClear), commodity derivatives listed for 
trading on Euronext (CommodityClear), and tri-party Repo 
transactions (RepoClear).
    \4\ Securities Exchange Act Release No. 34-83691 (July 24, 
2018), 83 FR 36635 (July 30, 2018); File No. SR-LCH SA-2018-003) 
(the ``Release'').
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, LCH SA included statements 
concerning the purpose of and basis for the Proposed Rule Change and 
discussed any comments it received on the Proposed Rule Change. The 
text of these statements may be examined at the places specified in 
Item IV below. LCH SA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The Framework is one of several well-developed policies and 
procedures that LCH SA maintains to manage its liquidity risk, i.e., 
the risk that LCH SA will not have enough cash available, in extreme 
but plausible circumstances, to settle margin payments or delivery 
obligations when they become due, in particular upon the default of a 
clearing member. Such policies and procedures include, among others: 
(i) The Group Liquidity Risk Policy; (ii) the Group Liquidity Plan; 
(iii) the Group Financial Resource Adequacy Plan; (iv) the Group 
Collateral Risk Policy; (v) the Group Investment Risk Policy; and (vi) 
the LCH SA Collateral Control Framework. The Framework complements 
these policies and procedures and develops further the Group Liquidity 
Risk Policy.
    In brief, the Framework: (i) Identifies LCH SA's sources of 
liquidity and corresponding liquidity risks; (ii) identifies LCH SA's 
liquidity requirements with respect to its members and its 
interoperable central counterparty (``CCP''); \5\ (iii) describes the 
metrics and limits that LCH SA monitors; and (iv) describes the 
scenarios under which these metrics are computed.\6\
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    \5\ LCH SA has an interoperability agreement with Cassa di 
Compensazione e Garanzia (``CC&G''), an Italian CCP, pursuant to 
which LCH SA's clearing members and CC&G's clearing members are able 
to benefit from common clearing services without having to join the 
other CCP. Each CCP is a clearing member of the other one with a 
particular status when accessing the clearing system of the other 
counterparty.
    \6\ The Release describes the operation of the Framework in 
greater detail.
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(i) Physically-Settled Options
    LCH SA is proposing to amend the Framework in order to address more 
accurately its liquidity requirements in the event of the assignment 
and exercise of physically-settled options involving a defaulting 
clearing member during the liquidation period of such clearing member. 
Specifically, the amended Framework will address LCH SA's liquidity 
requirements in the event options that are in the money are

[[Page 67489]]

exercised either on the day (``T''), or on the business day immediately 
following the day (``T+1''), on which the clearing member that is a 
seller of the options defaults.
    If such defaulting clearing member is a seller of a Call option 
that is in the money, LCH SA would have to purchase the underlying 
securities in the market at a stressed price and await payment at the 
strike price from the non-defaulting purchaser of the Call option at 
settlement. If such defaulting clearing member is a seller of a Put 
option that is in the money, LCH SA would have to purchase the 
underlying securities at the strike price from the non-defaulting 
purchaser of the Put option. Although margins should cover any 
potential loss, liquidity outflows as a result of the sales' proceeds 
are included as liquidity requirements, in each case.
    In the current Framework, there is no liquidity provision related 
to the risk of assignment and exercise of options at expiration. In 
order to address this concern, the amended Framework will anticipate, 
prior to the expiration dates, the amount of liquidity funding that may 
arise from options that may be exercised, in the event of the default 
of LCH SA's two largest members (``Cover2''). On a daily basis, LCH's 
Liquidity and Concentration Risk (``LCR'') calculation will identify 
all of the potential positions that are in the money or at the money on 
that day and the next business day. Given the potential option 
exercise, the LCR will generate a liquidity need. The additional 
liquidity amount that LCH SA could potentially need will be equal to 
the sum of the equities to source following the option assignments at 
expiration and/or the difference between the underlying securities and 
the strike price or the strike price minus the asset in the event of a 
cash settlement.
    In practice, the process will work as follows on a daily basis:
     The liquidity needs arising from the options that are in 
the money or at the money, having their expiries on T or T+1, will be 
computed by applying no market stress to the equities.
     The liquidity needs arising from the options that are in 
the money or at the money, having their expiries on T or T+1, will be 
computed by applying a stress scenario to the equities.
     LCH SA will select the positions consistent with the 
Cover2 for both modes described above and will retain the most punitive 
one.

This amount will be added to the current cash equity amount in the LCR.
(ii) Fixed Income Clearing System
    Further, LCH SA is proposing to amend the Framework to take into 
account the expansion of sovereign debt for which LCH SA provides 
clearing services through its Fixed Income Clearing System. LCH SA 
initially provided clearing services only with respect to French 
sovereign debt. The Fixed Income Clearing service subsequently added 
the sovereign debt of Italy, Spain, Germany, and Belgium. More 
recently, the Fixed Income Clearing System has been extended to eight 
additional Euro markets: Austria, Netherlands, Finland, Ireland, 
Portugal, Slovakia, Slovenia and Supranationals.\7\
---------------------------------------------------------------------------

    \7\ The supranational debt eligible for clearing is currently 
limited to the Euro denominated debt of the European Investment 
Bank.
---------------------------------------------------------------------------

    In this regard, therefore, the Framework has been revised to 
provide that all securities resulting from the settlement of all 
repurchase contracts (``repos'') on behalf of a defaulting clearing 
member, not just repos on the sovereign debt of France, Italy and 
Spain, may be used to generate liquidity at the Banque de France. The 
amended Framework also clarifies that, in the event that a Central Bank 
Guarantee (``CBG'') is triggered by the default of a clearing member 
posting the CBG, the relevant Central Bank will pay the liabilities of 
the defaulting clearing member in cash.
    Further, the Framework has been revised to (i) identify the 
relevant central securities depository (``CSD'') through which 
transactions in the sovereign debt of the different jurisdictions may 
settle,\8\ (ii) describe the manner by which LCH SA injects liquidity 
into each settlement platform, in particular, Euroclear Bank and 
Clearstream Luxembourg, and (iii) modify the limits by settlement 
platform on the main liquidity drivers (i.e., cash injected into the 
platforms, auto-collateralization and gross fails).
---------------------------------------------------------------------------

    \8\ French sovereign debt may settle through Euroclear Bank, 
Italian sovereign debt through Monte Titoli, Spanish sovereign debt 
through Iberclear, German sovereign debt through Clearstream 
Frankfurt, and Belgian sovereign debt through the National Bank of 
Belgium. The sovereign debt of the remaining jurisdictions may 
settle through either Euroclear Bank or Clearstream Luxembourg. All 
transactions are settled through Target 2 Securities, a Eurosystem 
technical platform to which CSDs assign the management of securities 
settlement in central bank money.
---------------------------------------------------------------------------

(iii) Stress Tests
    LCH SA is proposing clarifications with respect to certain aspects 
of its stress tests. With respect to the operational liquidity 
target,\9\ which is a metric allowing LCH SA to confirm that the 
business as usual liquidity sources are sufficient for a five day 
period in stressed situations, consistent with the LCR time horizon, 
the Framework notes that LCH SA uses a three-day window, in particular 
with regard to margin reduction. The Framework further clarifies that, 
in calculating liquidity resources, LCH SA deducts funds required to 
facilitate settlements, cover end of day fails at Euroclear Bank and 
Clearstream Luxembourg, and avoid Target 2 Securities fails. In 
addition, the Framework assumes that members allowed to post CBGs will 
switch from cash or ECB-eligible non-cash collateral to CBGs (although 
the Framework does not currently take such switches into account, since 
all eligible members, i.e., Dutch and Belgian members, have already 
done so). Moreover, the amended Framework confirms that, in calculating 
required variation margin payments to CC&G, LCH SA assumes a 
theoretical 5-day holding period.
---------------------------------------------------------------------------

    \9\ Operational liquidity is defined to mean the amount of 
liquidity related to the operational management of LCH SA that is 
required to be held in a stressed environment that does not lead to 
a clearing member's default.
---------------------------------------------------------------------------

    The amended Framework also clarifies how stressed liquidity 
requirements and impact are calculated for each clearing member, in 
particular with respect to the cash equity settlement requirement for 
options. These calculations are used to determine the two clearing 
members that would potentially cause the largest aggregate liquidity 
exposure for the CCP in extreme but plausible market conditions.
    Finally, the Framework clarifies how LCH SA conducts reverse stress 
tests in order to determine if there is a combination of changes in LCH 
SA's liquidity that could lead to a liquidity shortfall. In particular, 
the amended Framework considers whether there is a combination of 
changes in LCH SA's liquidity resources that could lead to a liquidity 
shortfall, even in the absence of stress in the market.
2. Statutory Basis
    LCH SA has determined that Proposed Rule Change is consistent with 
the requirements of Section 17A of the Act \10\ and regulations 
thereunder applicable to it. Section 17A(b)(3)(F) of the Act requires, 
inter alia, that the rules of a clearing agency ``assure the 
safeguarding of securities and funds that are in its custody or control 
or for which it is responsible.'' \11\ Further, Regulation 17dA-
22(e)(4)(ii) requires a CCP that is involved in activities with a more

[[Page 67490]]

complex risk profile, e.g., that provides CCP services for security-
based swaps, to maintain and enforce written policies and procedures 
reasonably designed to effectively ``measure, monitor, and manage its 
credit exposures from its payment, clearing and settlement processes'' 
to assure that it maintains additional financial resources to enable it 
to cover a wide range of stress scenarios that include the default to 
two participant family clearing members that would potentially cause 
the largest aggregate liquidity exposure for the CCP in extreme but 
plausible market conditions.\12\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78q-1.
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ 17 CFR 240.17Ad-22(e)(4)(ii).
---------------------------------------------------------------------------

    As discussed earlier, LCH SA is proposing to amend the Framework to 
address specifically LCH SA's liquidity requirements in the event of 
the assignment and exercise of physically-settled options involving a 
defaulting clearing member during the liquidation of such clearing 
member. The proposed amendment will assist LCH SA in defining more 
accurately its liquidity requirements by assuring that LCH SA will 
maintain appropriate levels of liquidity in the event of the assignment 
and exercise of options involving a defaulting clearing member. 
Specifically, the amended Framework will anticipate, prior to their 
expiration dates, the amount of liquidity funding that may arise from 
options that may be exercised, in the event of the default of LCH SA's 
two largest members.
    The policies and procedures set out in the amended Framework, 
therefore, are designed to enhance LCH SA's to measure, monitor, and 
manage the liquidity risk that may arise in connection with its 
activities as a covered clearing agency. As such the amendments to the 
Framework regarding LCH SA's liquidity requirements in the event of the 
assignment and exercise of options involving a defaulting clearing 
member are consistent with the requirements of Regulation 17dA-
22(e)(4)(ii).
    As noted above, Section 17A(b)(3)(F) of the Act requires that the 
rules of a clearing agency ``assure the safeguarding of securities and 
funds that are in its custody or control or for which it is 
responsible.'' To better implement this statutory requirement, LCH SA 
is proposing to amend the Framework to take into account the expansion 
of sovereign debt for which LCH SA provides clearing services through 
its Fixed Income Clearing System. In addition to French sovereign debt, 
the Fixed Income Clearing service now provides clearing services with 
respect to the sovereign debt of eleven other European jurisdictions, 
as well as the European Investment Bank.\13\ The revised Framework: (i) 
Identifies the relevant CSD through which transactions in the sovereign 
debt of the different jurisdictions may settle; (ii) describes the 
manner by which LCH SA injects liquidity into each settlement platform; 
and (iii) modifies the limits by settlement platform on the main 
liquidity drivers (i.e., cash injected into the platforms, auto-
collateralization and gross fails). The revised Framework also provides 
that all securities resulting from the settlement of repos on behalf of 
a defaulting clearing member may be used to generate liquidity at the 
Banque de France and clarifies that, in the event that a CBG is 
triggered by the default of a clearing member, the relevant Central 
Bank will pay the defaulting clearing member's liabilities in cash.
---------------------------------------------------------------------------

    \13\ The eleven jurisdictions are: Austria; Belgium; Finland; 
Germany; Ireland; Italy; Netherlands; Portugal; Spain; Slovakia; and 
Slovenia.
---------------------------------------------------------------------------

    The proposed amendments strengthen LCH SA's policies and procedures 
intended to ``assure the safeguarding of securities and funds that are 
in its custody or control or for which it is responsible'' (i) by 
specifying the CSDs through which transactions in the identified 
foreign sovereign debt may settle and the means by which LCH SA 
interacts with such CSDs, (ii) by confirming that all securities of a 
defaulting clearing member resulting from repos are available to the 
Banque de France, and (iii) by providing that a Central Bank that has 
provided a CBG will pay a defaulting clearing member's liabilities in 
cash. As such, the amendments to the Framework regarding the Fixed 
Income Clearing Service are consistent with Section 17A(b)(3)(F) of the 
Act.
    Regulation 17dA-22(e)(4)(i) and (vi)(A) requires a clearing agency 
to maintain and enforce written policies and procedures reasonably 
designed to conduct stress testing of its total financial resources 
once each day using standard predetermined parameters and assumptions 
to assure that it has sufficient financial resources to cover its 
credit exposure to each participant fully with a high degree of 
confidence.\14\ As discussed above, LCH SA is proposing amendments to 
the Framework to identify certain additional factors that that LCH will 
take into account in conducting its stress tests and provide greater 
clarity regarding LCH SA's stress testing practices.
---------------------------------------------------------------------------

    \14\ 17 CFR 240.17Ad-22(e)(4)(i) and (vi).
---------------------------------------------------------------------------

    In particular, the Framework confirms that in calculating its 
operational liquidity target,\15\ LCH SA uses a three-day rather than a 
five-day window, in particular with regard to margin reduction. The 
Framework further clarifies that, in calculating liquidity resources, 
LCH SA deducts funds required to facilitate settlements, cover end of 
day fails at Euroclear Bank and Clearstream Luxembourg, and avoid 
Target 2 Securities fails. The Framework also confirms that it assumes 
that members allowed to post CBGs will switch from cash or ECB-eligible 
non-cash collateral.
---------------------------------------------------------------------------

    \15\ The term ``operational liquidity'' is defined at footnote 
21, supra.
---------------------------------------------------------------------------

    The amended Framework further clarifies how stressed liquidity 
requirements are calculated for each clearing member, in particular 
with respect to the cash equity settlement requirement for options, to 
determine the two clearing members that would potentially cause the 
largest aggregate liquidity exposure for the CCP in extreme but 
plausible market conditions. The Framework also clarifies the manner in 
which LCH SA conducts reverse stress tests in order to determine if 
there is a combination of changes in LCH SA's liquidity that could lead 
to a liquidity shortfall.
    By clarifying the factors that it takes into account in conducting 
daily stress testing, the proposed amendments enhance LCH SA's written 
policies and procedures with regard to stress testing and thereby 
assures that LCH SA maintains sufficient additional financial resources 
to enable it to cover a wide range of stress scenarios that include the 
default to two participant family clearing members that would 
potentially cause the largest aggregate liquidity exposure for the CCP 
in extreme but plausible market conditions. As such, therefore, the 
proposed amendments, therefore, are consistent with the requirements of 
Regulation 17dA-22(e)(4)(i) and (vi)(A).

B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\16\ LCH SA does 
not believe the Proposed Rule Change would have any impact, or impose 
any burden, on competition. The Proposed Rule Change does not address 
any competitive issue or have any impact on the competition among 
central counterparties. LCH SA operates an open access model, and the 
Proposed

[[Page 67491]]

Rule Change will have no effect on this model.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

C. Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the Proposed Rule Change have not been 
solicited or received. LCH SA will notify the Commission of any written 
comments received by LCH SA.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:
     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml) or
     Send an email to [email protected]. Please include 
File Number SR-LCH SA-2019-007 on the subject line.

Paper Comments

     Send paper comments in triplicate to Vanessa A. 
Countryman, Secretary, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-LCH SA-2019-007. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings will also be available for inspection 
and copying at the principal office of LCH SA and on LCH SA's website 
at https://www.lch.com/resources/rules-and-regulations/proposed-rule-changes-0. All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-LCH SA-2019-007 and should 
be submitted on or before December 31, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-26497 Filed 12-9-19; 8:45 am]
BILLING CODE 8011-01-P

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