Self-Regulatory Organizations; LCH SA; Order Approving Rule Change Relating to the Updated 2018 Version of the Recovery Plan, 68989-68992 [2019-27092]
Download as PDF
<![CDATA[
Federal Register / Vol. 84, No. 242 / Tuesday, December 17, 2019 / Notices
enhance OCC’s ability to accurately and
appropriately size its Clearing Fund,
consistent with the requirements of Rule
17Ad–22(e)(4)(vi).
Accordingly, the Commission believes
that, taken together, OCC’s proposed
changes to its stress testing methodology
would be consistent with the
requirements of Rules 17Ad–22(e)(4)(i),
(iii), and (vi).38
2. Clearing Fund Allocation
jbell on DSKJLSW7X2PROD with NOTICES
As noted above, Rule 17Ad–22(e)(4)
under the Exchange Act generally
requires that a covered clearing agency
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to effectively
identify, measure, monitor, and manage
its credit exposures to participants and
those arising from its payment, clearing,
and settlement processes.39
OCC relies on the Clearing Fund as a
source of mutualized resources available
to manage losses arising out of a
Clearing Member’s default. OCC’s
method for allocating contributions to
the Clearing Fund among Clearing
Members is aligned primarily with the
credit risk posed by each Clearing
Member.40 OCC proposes to redefine the
margin risk component of its Clearing
Fund allocation formula such that it
would rely on the same underlying
model—STANS—for all Clearing
Members (as opposed to relying on
STANS for most Clearing Members and
SPAN for certain Clearing Members
with segregated futures accounts). The
proposed change would not change the
overall allocation weighting (i.e., margin
risk would still account for 70 percent
of the Clearing Fund allocation among
Clearing Members), but the Commission
believes it would provide a more
consistent metric by which to assess
margin risk across Clearing Members.
Accordingly, the Commission believes
that the proposed change is reasonably
designed to support the management of
OCC’s credit exposures to its
participants. The Commission believes,
therefore, that OCC’s proposed change
to its Clearing Fund allocation
methodology is consistent with the
requirements of Rule 17Ad–22(e)(4).41
38 17 CFR 240.17Ad–22(e)(4)(i); 17 CFR
240.17Ad–22(e)(4)(iii); and 17 CFR 240.17Ad–
22(e)(4)(vi).
39 17 CFR 240.17Ad–22(e)(4).
40 Clearing Fund allocations are based on a
weighting of 70 percent margin risk, what OCC
refers to as the ‘‘total risk’’ component of its
Clearing Fund allocation formula, with open
interest and cleared volume weighted at 15 percent
each.
41 17 CFR 240.17Ad–22(e)(4).
VerDate Sep<11>2014
18:15 Dec 16, 2019
Jkt 250001
3. Cooling-Off Period
Rule 17Ad–22(e)(4)(ix) under the
Exchange Act requires, in part, that a
covered clearing agency establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to describe its
process to replenish any financial
resources it may use following a default
or other event in which use of resources
is contemplated.42
As noted above, OCC’s current
recovery tools include a cooling-off
period, during which OCC’s authority to
assess Clearing Members for funds to
replenish OCC’s Clearing Fund is
limited. Recognizing the limit that such
a cooling-off period places on the
financial resources available to OCC, the
Commission continues to believe that
the cooling-off period provides certainty
and predictability regarding Clearing
Members’ maximum liability for
Clearing Fund contributions.43 OCC
proposes to expand the set of events that
would start the cooling-off period to
include proportionate Clearing Fund
charges to Clearing Members triggered
by certain protective transactions or the
failure of a Clearing Member to meet
certain obligations under OCC’s rules,
consistent with OCC’s original intention
with its prior filing. The two events to
be added as triggers for the cooling-off
period are similar to the current triggers
in that they pertain to amounts paid out
of the Clearing Fund to manage the
failure of a Clearing Member to meet its
obligations to OCC. Consistent with the
Commission’s statements regarding the
current formulation of the cooling-off
period, the Commission believes that
the proposed expansion is consistent
with OCC’s obligations to describe its
process to replenish any financial
resources it may use following a default
or other event in which use of resources
is contemplated as required under Rule
17Ad–22(e)(4)(ix).44
Accordingly, and for the reasons
stated above, the Commission believes
the changes proposed in the Proposed
Rule Change are consistent with Rule
17Ad–22(e)(4) under the Exchange
Act.45
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the Proposed
Rule Change is consistent with the
requirements of the Exchange Act, and
in particular, the requirements of
42 17
CFR 240.17Ad–22(e)(4)(ix).
Securities Exchange Act Release No. 83916
(Aug. 23, 2018), 83 FR 44076, 44082 (Aug. 29, 2018)
(SR–OCC–2017–020).
44 17 CFR 240.17Ad–22(e)(4)(ix).
45 17 CFR 240.17Ad–22(e)(4).
43 See
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
68989
Section 17A of the Exchange Act 46 and
the rules and regulations thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,47
that the Proposed Rule Change (SR–
OCC–2019–009) be, and hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019–27081 Filed 12–16–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87720; File No. SR–LCH
SA–2019–008]
Self-Regulatory Organizations; LCH
SA; Order Approving Rule Change
Relating to the Updated 2018 Version
of the Recovery Plan
December 11, 2019.
I. Introduction
On October 8, 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 (‘‘the ‘‘Proposed
Rule Change’’) to adopt an updated
recovery plan (the ‘‘RP’’). The proposed
rule change was published for comment
in the Federal Register on October 29,
2019.3 The Commission has not
received any comments on the proposed
rule change. For the reasons discussed
below, the Commission is approving the
proposed rule change.
II. Description of the Proposed Rule
Change
The purpose of LCH SA’s RP is to
maintain the continuity of critical
services in times of extreme stress and
to facilitate its recovery.4 Generally, the
RP identifies if and to what level LCH
SA’s services are critical for the market
46 In approving this Proposed Rule Change, the
Commission has considered the proposed rules’
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
47 15 U.S.C. 78s(b)(2).
48 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 34–87388
(October 23, 2019), 84 FR 57897 (October 29, 2019)
(SR–LCH SA–2018–008) (‘‘Notice’’).
4 The description herein is substantially
excerpted from the Notice, 84 FR 57897.
E:\FR\FM\17DEN1.SGM
17DEN1
68990
Federal Register / Vol. 84, No. 242 / Tuesday, December 17, 2019 / Notices
jbell on DSKJLSW7X2PROD with NOTICES
and what internal or external services/
systems are critical for the continuity of
LCH SA’s activity; outlines the
scenarios under which recovery of the
LCH SA might be necessary; defines the
early warning indicators and triggers for
initiating the recovery measures; defines
the governance framework to trigger
these recovery measures; and identifies
the available recovery tools to manage
crisis situations and to restore business
as usual.
Significant scenarios that could
prevent LCH SA from providing its
critical services discussed in the RP
include the default of one or multiple
clearing members; liquidity shortfalls as
result of a clearing member or allied
clearing house default; default of an
investment counterparty of LCH SA or
any other investment losses resulting
from changes in the market value on the
investments; losses resulting from an
operational risk event; failure of a
critical IT service provider; and failure
of financial market infrastructures such
as an allied clearing house, CSD, or
Trades Repository.
The proposed rule change intends to
incorporate the following main changes
from the updated 2018 version of the
RP: (1) Inclusion of details on handling
of the recovery from a cyber-risk
scenario, (2) inclusion of fraud as an
operational risk, (3) inclusion of tools
for non-Euro transactions and collateral,
(4) implementation of CC&G rulebook
changes related to service closure, (5)
inclusion of a comprehensive list of
LCH SA’s critical service providers, (6)
inclusion of details regarding the
monitoring of capital related tools, and
(7) inclusion of details for managing the
failure of LCH Ltd as a service provider.
A. Recovery From a Cyber-Risk Scenario
Under the proposed rule change, the
RP would include more details on the
management of a cyber-risk scenario
with the addition of the Cyber Crisis
Management Plan as a new recovery
tool. The Cyber Crisis Management Plan
would define ‘‘cyber-crisis’’ and provide
a framework of procedures describing
and specifying how LCH SA would
respond to a potential breach of a
system, service or network indicating
possible problems with information
security policy or a failure of controls.
The RP further defines cyber-risks as a
single or a series of unwanted or
unexpected information security events
that have a significant probability of
compromising business operations and
threatening information security taking
the form of unauthorized scans or
probes, malicious code, denial of
service, or attempts to gain access. The
framework and procedures would be
VerDate Sep<11>2014
18:15 Dec 16, 2019
Jkt 250001
activated in event that LCH SA detected
a cyber incident that could potentially
cause a significant impact on LCH SA
business objectives.
B. Fraud Risk
In addition to losses resulting from a
clearing member default scenarios, the
RP covers losses resulting from a nondefault operational risk event. While the
current version of the RP addresses
operational risks such as failure of third
party service providers or cyber risks,
the proposed rule change would include
as an operational risk losses resulting
from a fraud which impacts the critical
services provided by LCH SA. As is the
case with other operational risks, the RP
would specify that business lines and
operational risk departments have the
responsibility to identify potential fraud
and to put into place relevant controls
to monitor for fraud risk.
C. Non-Euro Recovery Tools
Currently, the RP includes various
tools to deal with liquidity needs
resulting from default losses or other
events giving rise to liquidity
constrains, including deferral of
settlement for fixed income and cash
equity as well as collateral limits. The
RP would now specify that to bolster its
recovery tools, LCH SA can use several
new tools to meet liquidity needs,
including using non-Euro collateral to
raise liquidity, transforming liquidity
received in non-Euro currencies into
Euro through bi-lateral repo transactions
with the ‘‘FXmarkets’’ recovery tool,
receiving liquidity directly in Euro from
Gilt or USD securities, and performing
payments in an alternate currency than
the original obligation.
D. CC&G Rulebook Changes
The current version of the RP
provides as a recovery tool the closure
of the interoperability link on Italian
debt, which is triggered when CC&G is
declared in default or CC&G has
performed a service closure. Upon
triggering this tool, LCH SA will
proceed with closing out all outstanding
contracts. Further, uncovered losses
from the cash settlement and close out
after a CC&G default will be covered by
deposited collateral of CC&G and the
application of a haircut on outgoing
payments to clearing members. In order
to cover a potential cash shortfall in
case of a CC&G default, LCH SA is
proposing that the RP would state that
in the event of a closure of CC&G, LCH
SA will not be obliged to perform
payment to clearing members until it
receives deposited collateral from the
CC&G estate, which addresses LCH SA’s
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
potential inability to retrieve the
deposited collateral with CC&G.
E. Critical Service Providers
The current RP in general describes
critical services such as those provided
by LCH Ltd and other entities providing
technological services. The RP describes
LCH SA’s approach to the maintaining
continuity of services to LCH SA,
including contractual rights. In this rule
proposal, the RP would describe that
LCH SA will implement a new
framework to manage critical service
providers. The framework would
identify the various types of critical
service providers and include a new list
of such providers in an annex to the RP.
This would layout the overall landscape
of providers and facilitate LCH SA’s
ability to monitor for potential financial
or operational failure of a critical service
provider and plan to replace service
providers or otherwise sustain any
disruption caused by their failure.
F. Monitoring of Capital Related Tools
The quantitative assessment section of
the recovery plan would include more
details on the monitoring of capital
related recovery tools like surplus
capital, variable payments and dividend
payments in order to help ensure their
adequacy to cover the identified
scenarios. This additional detail would
list each tool and describe their
efficiency as recovery tools. The RP
currently notes that LCH SA will
monitor that surplus/buffers capital is
adequate to cover both default and nondefault losses. The proposed rule would
revise the RP to describe the stress
scenarios and associated indicators as
well as the capital coverage tools
available in each case. In addition to the
capital requirements and available
headroom, the RP would note that LCH
SA follows indicators such as the
Liquidity Coverage Ratio, the aggregate
credit risk and market risk exposure on
its investment portfolio, operational risk
and business risks indicators. The RP
would indicate that the capital and
buffers are monitored in order to allow
LCH SA to always be in a situation to
replenish the skin in the game within
one month if the CCP was to face
multiple defaults.
In addition to surplus capital, the RP
would indicate that the LCH Board may
decide to withhold Dividend payment
and Variable bonus payment to be used
as additional buffers.
G. LCH Ltd Exit Plan
In response to French regulatory
recommendations, the RP would
provide information related to the
dependency between LCH SA and LCH
E:\FR\FM\17DEN1.SGM
17DEN1
Federal Register / Vol. 84, No. 242 / Tuesday, December 17, 2019 / Notices
Ltd. LCH Ltd provides IT services to
LCH SA and an approach on how LCH
SA will manage a potential wind down
of LCH Ltd would be included in the
RP. The RP would include scenarios
and mitigating actions in case of failure
of LCH Ltd as a service provider. For
example, LCH SA will take steps to
replicate the exact information
technology services provided by LCH
Ltd.
jbell on DSKJLSW7X2PROD with NOTICES
III Discussion and 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 such
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to such organization.5 For the
reasons given below, the Commission
finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of
the Act 6 and Rules 17Ad–22(e)(2) and
(3) thereunder.7
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,
as well as 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.8
As noted above, the updates to the RP
reflected in this proposed rule change
would add more details on the
management of a cyber-scenario and the
Cyber Crisis Management Plan has been
added as a new recovery tool. By
providing a framework of procedures for
allowing LCH SA to respond to or
prevent cyber incidents, the
Commission believes that LCH SA will
improve its ability to cope with,
prevent, and plan for disruptions to its
clearing services by responding quickly
to such things as software malfunctions
or cyber breaches. Further, the
Commission believes that LCH SA will
be in a position to prioritize incidents
and activate the relevant response teams
and plans.
Similarly, by updating the RP to
account for the failure of entities such
5 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
7 17 CFR 240.17Ad–22(e)(2) and (3).
8 15 U.S.C. 78q–1(b)(3)(F).
6 15
VerDate Sep<11>2014
18:15 Dec 16, 2019
Jkt 250001
as linked CCPs and critical service
providers as described above, the
Commission believes that the proposed
rule change provides LCH SA the ability
to timely and efficiently plan for,
monitor, and respond to failures or
disruptions of these other parties.
Specifically, the RP would note that
LCH SA has implemented the rules
relating to CC&G service closure related
to a potential loss on investment of the
cash collateral with CC&G. LCH SA may
not immediately be able to retrieve the
deposited collateral with CC&G if it is
insolvent and has to wait for the
relevant payment of the estate.
However, the RP would clarify that LCH
SA is only obliged to perform payment
to clearing members if and when it has
received the relevant funds from the
CC&G estate. The Commission believes
that these changes strengthen LCH SA’s
ability to recover from the liquidity and
credit challenges that could arise from
CC&G’s closure. This in turn enhances
LCH SA’s financial position and
ultimately its ability to continue to
provide prompt and accurate clearance
and settlement. Likewise, the RP would
include scenarios and mitigating actions
in case of the failure of LCH Ltd as a
service provider and include a list of
other critical service providers. The
Commission believes that these
proposed changes enhance LCH SA’s
management of important relationships
by including details of these services
and the steps that it can take to replace
or otherwise respond to disrupted
services. The Commission believes that
this in turn promotes LCH SA’s ability
to continue to promptly and accurately
clear transactions.
Additionally, as noted above, the RP
would include more details on the
monitoring of capital related recovery
tools like surplus capital, variable
payments and dividend payments. For
example, the RP would note that LCH
SA will monitor that ‘‘surplus/buffers
capital’’ is adequate to cover both
default and non-default losses. By
including within the RP the scenarios,
indicators, and capital coverage tools
available in each case, the Commission
believes that LCH SA will enhance its
ability to preserve the requisite financial
resources and hence its ability to
continue to promptly and accurately
clear transactions and safeguard
securities and funds in its custody and
control.
Further, the proposed rule change
would provide that LCH SA can use
several new tools to meet liquidity
needs, including using non-Euro
collateral to raise liquidity, transforming
liquidity received in non-Euro
currencies through bi-lateral repo
PO 00000
Frm 00117
Fmt 4703
Sfmt 4703
68991
transactions with the ‘‘FXmarkets’’
recovery tool, receiving liquidity
directly in Euro from Gilt or USD
securities, and performing payments in
an alternate currency than the original
obligation. The Commission believes
that this enhances LCH SA’s ability to
resolve a specific currency liquidity
shortfall resulting from a management of
a defaulting clearing member and
thereby maintains its financial strength
and ultimately its ability to promptly
and accurately clear transactions.
Overall, the Commission believes that
with the additional detail described
above, the updated RP would continue
to strengthen the purpose of the RP as
originally adopted of maintaining the
continuity LCH SA’s critical services by
reducing the likelihood of a disorderly
or unsuccessful recovery through
planning for various disruptive
scenarios. Therefore, for the reasons
stated above 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.9
B. Consistency With Rule 17Ad–22(e)(2)
Rule 17Ad–22(e)(2) requires that a
covered clearing agency establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to, as applicable,
provide for governance arrangements
that are clear and transparent and
clearly prioritize the safety and
efficiency of the covered clearing
agency, to support the public interest
requirements in Section 17A of the
Act.10
As noted above, more details on the
management of a cyber-scenario and the
Cyber Crisis Management Plan have
been added as a new recovery tool. The
purpose of this document is to provide
a framework of procedures allowing
LCH SA to respond to cyber incidents
and crises. The RP would contain
details about the procedures utilized to
identify incidents, notification of
hierarchy, and for notifying and
activating the Crisis Management Team.
The Commission believes that proposed
details regarding the cyber scenario will
enhance LCH SA’s governance
procedures as they relate to cyber crisis
by setting forth a clear process for
detecting and notifying required
9 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(2).
10 17
E:\FR\FM\17DEN1.SGM
17DEN1
68992
Federal Register / Vol. 84, No. 242 / Tuesday, December 17, 2019 / Notices
management as well as activation of a
specific plan for managing cyber crisis.
Therefore, for the above reasons the
Commission finds that the proposed
rule change is consistent with Rule
17Ad–22(e)(2).
jbell on DSKJLSW7X2PROD with NOTICES
C. Consistency With Rule 17Ad–22(e)(3)
Rule 17Ad–22(e)(3) requires that a
covered clearing agency establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to, as applicable,
maintain a sound risk management
framework for comprehensively
managing legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which must include
plans for the recovery and orderly winddown of the covered clearing agency
necessitated by credit losses, liquidity
shortfalls, losses from general business
risk, or any other losses.
Overall, the Commission believes that
the rule proposal enhances LCH SA’s
ability to manage legal, credit, liquidity,
operational, general business,
investment, and other risks that arise in
or are borne by the covered clearing
agency in the recovery context. As noted
above, the rule proposal updates the RP
to address operational, liquidity, and
investment risks. Specifically, the RP
would include fraud as an operational
risk and incorporate it into its system
for the monitoring and management of
losses. The Commission believes that
with this addition, the RP is more
attentive to fraud as an operational risk.
Additionally, the Commission believes
that the inclusion of non-Euro recovery
tools described above will enhance LCH
SA’s ability to cope with liquidity
challenges by giving it additional ways
to access and meet liquidity needs. The
Commission also believes that by
implementing the rules relating to CC&G
service closure discussed above, LCH
SA has resolved a potential liquidity
risk relating to a CC&G default.
Further, the Commission believes that
the proposed changes to the RP related
to LCH Ltd. and other critical service
providers strengthen LCH SA’s ability to
maintain the continuity of critical
services in times of extreme stress and
to facilitate the recovery of LCH SA. For
instance, the Commission believes that
the list of critical service providers and
scope of each service enhances LCH
SA’s ability to identify those services
which could impact the continuity of
LCH SA’s operations and the LCH Ltd
exit plan strengthens LCH SA’s ability
to manage a potential wind down of
LCH Ltd. and replicate or replace the
VerDate Sep<11>2014
18:15 Dec 16, 2019
Jkt 250001
services provided by LCH Ltd. on short
notice.
Additionally, because the quantitative
assessment section of the RP, as
described above, now includes more
details on the monitoring of capital
related recovery tools, the Commission
believes that LCH SA’s ability to
monitor and sustain its capital
requirements under various scenarios
has been strengthened.
Therefore, for the above reasons the
Commission finds that the proposed
rule change is consistent with Rule
17Ad–22(e)(3).
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act, and in
particular, Section 17A(b)(3)(F) of the
Act 11 and Rules 17Ad–22(e)(2) and (3)
thereunder.12
It is therefore ordered pursuant to
Section 19(b)(2) of the Act that the
proposed rule change (SR–LCH SA–
2019–008) be, and hereby is,
approved.13
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.14
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–27092 Filed 12–16–19; 8:45 am]
BILLING CODE 8011–01–P
Commission (‘‘Commission’’) the
proposed rule change SR–OCC–2019–
010 (‘‘Proposed Rule Change’’) pursuant
to Section 19(b) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 2 thereunder to
revise OCC’s Rules, margin policy and
methodology, Clearing Fund policy, and
Clearing Fund and stress testing
methodology to adopt new margin
charges and other risk measures to
address the specific wrong-way risk
presented by certain cleared positions.3
The Proposed Rule Change was
published for public comment in the
Federal Register on October 29, 2019.4
The Commission has received no
comments regarding the Proposed Rule
Change.5 This order approves the
Proposed Rule Change.
II. Background 6
As a central counterparty (‘‘CCP’’),
OCC is exposed to its Clearing Members’
positions. To the extent that the value
of a Clearing Member’s positions is
positively correlated with the
creditworthiness of the Clearing
Member, OCC faces specific wrong-way
risk (‘‘SWWR’’).7 OCC proposes changes
to address such SWWR. Specifically
OCC proposes to: (1) Adopt a new
SWWR margin add-on charge for OCC’s
margin methodology (‘‘SWWR Addon’’); (2) introduce stress test scenarios
to measure the SWWR, to the extent not
addressed in margin, of cleared
positions involving Clearing Member1 15
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87718; File No. SR–OCC–
2019–010]
Self-Regulatory Organizations; the
Options Clearing Corporation; Order
Approving Proposed Rule Change
Related to Proposed Changes to the
Options Clearing Corporation’s Rules,
Margin Policy, Margin Methodology,
Clearing Fund Methodology Policy,
and Clearing Fund and Stress Testing
Methodology To Address Specific
Wrong-Way Risk
December 11, 2019.
I. Introduction
On October 10, 2019, the Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
11 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(2) and (3).
13 In approving the proposed rule change, the
Commission considered the proposal’s impacts on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
14 17 CFR 200.30–3(a)(12).
12 17
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Notice of Filing infra note 4, at 84 FR 57890.
4 Securities Exchange Act Release No. 87387 (Oct.
23, 2019), 84 FR 57890 (Oct. 29, 2019) (SR–OCC–
2019–010) (‘‘Notice of Filing’’). OCC also filed a
related advance notice (SR–OCC–2019–807)
(‘‘Advance Notice’’) with the Commission pursuant
to Section 806(e)(1) of Title VIII of the Dodd-Frank
Wall Street Reform and Consumer Protection Act,
entitled the Payment, Clearing, and Settlement
Supervision Act of 2010 and Rule 19b–4(n)(1)(i)
under the Exchange Act. 12 U.S.C. 5465(e)(1). 15
U.S.C. 78s(b)(1) and 17 CFR 240.19b–4,
respectively. The Advance Notice was published in
the Federal Register on November 12, 2019.
Securities Exchange Act Release No. 87476 (Nov. 6,
2019), 84 FR 61114 (Nov. 12, 2019) (SR–OCC–2019–
807).
5 Since the proposal contained in the Proposed
Rule Change was also filed as an advance notice,
all public comments received on the proposal are
considered regardless of whether the comments are
submitted on the Proposed Rule Change or Advance
Notice.
6 Capitalized terms used but not defined herein
have the meanings specified in OCC’s Rules and ByLaws, available at https://www.theocc.com/about/
publications/bylaws.jsp.
7 SWWR arises when an exposure to a participant
is highly likely to increase when the
creditworthiness of that participant is deteriorating.
See Securities Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786, 70816, n. 317
(October 13, 2016) (S7–03–14) (‘‘Covered Clearing
Agency Standards’’).
2 17
E:\FR\FM\17DEN1.SGM
17DEN1
]]>Agencies
[Federal Register Volume 84, Number 242 (Tuesday, December 17, 2019)]
[Notices]
[Pages 68989-68992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27092]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87720; File No. SR-LCH SA-2019-008]
Self-Regulatory Organizations; LCH SA; Order Approving Rule
Change Relating to the Updated 2018 Version of the Recovery Plan
December 11, 2019.
I. Introduction
On October 8, 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 (``the ``Proposed Rule Change'')
to adopt an updated recovery plan (the ``RP''). The proposed rule
change was published for comment in the Federal Register on October 29,
2019.\3\ The Commission has not received any comments on the proposed
rule change. For the reasons discussed below, the Commission is
approving the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-87388 (October 23,
2019), 84 FR 57897 (October 29, 2019) (SR-LCH SA-2018-008)
(``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The purpose of LCH SA's RP is to maintain the continuity of
critical services in times of extreme stress and to facilitate its
recovery.\4\ Generally, the RP identifies if and to what level LCH SA's
services are critical for the market
[[Page 68990]]
and what internal or external services/systems are critical for the
continuity of LCH SA's activity; outlines the scenarios under which
recovery of the LCH SA might be necessary; defines the early warning
indicators and triggers for initiating the recovery measures; defines
the governance framework to trigger these recovery measures; and
identifies the available recovery tools to manage crisis situations and
to restore business as usual.
---------------------------------------------------------------------------
\4\ The description herein is substantially excerpted from the
Notice, 84 FR 57897.
---------------------------------------------------------------------------
Significant scenarios that could prevent LCH SA from providing its
critical services discussed in the RP include the default of one or
multiple clearing members; liquidity shortfalls as result of a clearing
member or allied clearing house default; default of an investment
counterparty of LCH SA or any other investment losses resulting from
changes in the market value on the investments; losses resulting from
an operational risk event; failure of a critical IT service provider;
and failure of financial market infrastructures such as an allied
clearing house, CSD, or Trades Repository.
The proposed rule change intends to incorporate the following main
changes from the updated 2018 version of the RP: (1) Inclusion of
details on handling of the recovery from a cyber-risk scenario, (2)
inclusion of fraud as an operational risk, (3) inclusion of tools for
non-Euro transactions and collateral, (4) implementation of CC&G
rulebook changes related to service closure, (5) inclusion of a
comprehensive list of LCH SA's critical service providers, (6)
inclusion of details regarding the monitoring of capital related tools,
and (7) inclusion of details for managing the failure of LCH Ltd as a
service provider.
A. Recovery From a Cyber-Risk Scenario
Under the proposed rule change, the RP would include more details
on the management of a cyber-risk scenario with the addition of the
Cyber Crisis Management Plan as a new recovery tool. The Cyber Crisis
Management Plan would define ``cyber-crisis'' and provide a framework
of procedures describing and specifying how LCH SA would respond to a
potential breach of a system, service or network indicating possible
problems with information security policy or a failure of controls. The
RP further defines cyber-risks as a single or a series of unwanted or
unexpected information security events that have a significant
probability of compromising business operations and threatening
information security taking the form of unauthorized scans or probes,
malicious code, denial of service, or attempts to gain access. The
framework and procedures would be activated in event that LCH SA
detected a cyber incident that could potentially cause a significant
impact on LCH SA business objectives.
B. Fraud Risk
In addition to losses resulting from a clearing member default
scenarios, the RP covers losses resulting from a non-default
operational risk event. While the current version of the RP addresses
operational risks such as failure of third party service providers or
cyber risks, the proposed rule change would include as an operational
risk losses resulting from a fraud which impacts the critical services
provided by LCH SA. As is the case with other operational risks, the RP
would specify that business lines and operational risk departments have
the responsibility to identify potential fraud and to put into place
relevant controls to monitor for fraud risk.
C. Non-Euro Recovery Tools
Currently, the RP includes various tools to deal with liquidity
needs resulting from default losses or other events giving rise to
liquidity constrains, including deferral of settlement for fixed income
and cash equity as well as collateral limits. The RP would now specify
that to bolster its recovery tools, LCH SA can use several new tools to
meet liquidity needs, including using non-Euro collateral to raise
liquidity, transforming liquidity received in non-Euro currencies into
Euro through bi-lateral repo transactions with the ``FXmarkets''
recovery tool, receiving liquidity directly in Euro from Gilt or USD
securities, and performing payments in an alternate currency than the
original obligation.
D. CC&G Rulebook Changes
The current version of the RP provides as a recovery tool the
closure of the interoperability link on Italian debt, which is
triggered when CC&G is declared in default or CC&G has performed a
service closure. Upon triggering this tool, LCH SA will proceed with
closing out all outstanding contracts. Further, uncovered losses from
the cash settlement and close out after a CC&G default will be covered
by deposited collateral of CC&G and the application of a haircut on
outgoing payments to clearing members. In order to cover a potential
cash shortfall in case of a CC&G default, LCH SA is proposing that the
RP would state that in the event of a closure of CC&G, LCH SA will not
be obliged to perform payment to clearing members until it receives
deposited collateral from the CC&G estate, which addresses LCH SA's
potential inability to retrieve the deposited collateral with CC&G.
E. Critical Service Providers
The current RP in general describes critical services such as those
provided by LCH Ltd and other entities providing technological
services. The RP describes LCH SA's approach to the maintaining
continuity of services to LCH SA, including contractual rights. In this
rule proposal, the RP would describe that LCH SA will implement a new
framework to manage critical service providers. The framework would
identify the various types of critical service providers and include a
new list of such providers in an annex to the RP. This would layout the
overall landscape of providers and facilitate LCH SA's ability to
monitor for potential financial or operational failure of a critical
service provider and plan to replace service providers or otherwise
sustain any disruption caused by their failure.
F. Monitoring of Capital Related Tools
The quantitative assessment section of the recovery plan would
include more details on the monitoring of capital related recovery
tools like surplus capital, variable payments and dividend payments in
order to help ensure their adequacy to cover the identified scenarios.
This additional detail would list each tool and describe their
efficiency as recovery tools. The RP currently notes that LCH SA will
monitor that surplus/buffers capital is adequate to cover both default
and non-default losses. The proposed rule would revise the RP to
describe the stress scenarios and associated indicators as well as the
capital coverage tools available in each case. In addition to the
capital requirements and available headroom, the RP would note that LCH
SA follows indicators such as the Liquidity Coverage Ratio, the
aggregate credit risk and market risk exposure on its investment
portfolio, operational risk and business risks indicators. The RP would
indicate that the capital and buffers are monitored in order to allow
LCH SA to always be in a situation to replenish the skin in the game
within one month if the CCP was to face multiple defaults.
In addition to surplus capital, the RP would indicate that the LCH
Board may decide to withhold Dividend payment and Variable bonus
payment to be used as additional buffers.
G. LCH Ltd Exit Plan
In response to French regulatory recommendations, the RP would
provide information related to the dependency between LCH SA and LCH
[[Page 68991]]
Ltd. LCH Ltd provides IT services to LCH SA and an approach on how LCH
SA will manage a potential wind down of LCH Ltd would be included in
the RP. The RP would include scenarios and mitigating actions in case
of failure of LCH Ltd as a service provider. For example, LCH SA will
take steps to replicate the exact information technology services
provided by LCH Ltd.
III Discussion and 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
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\5\ For the reasons given below, the Commission finds that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act \6\ and Rules 17Ad-22(e)(2) and (3) thereunder.\7\
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78s(b)(2)(C).
\6\ 15 U.S.C. 78q-1(b)(3)(F).
\7\ 17 CFR 240.17Ad-22(e)(2) and (3).
---------------------------------------------------------------------------
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, as well
as 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.\8\
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As noted above, the updates to the RP reflected in this proposed
rule change would add more details on the management of a cyber-
scenario and the Cyber Crisis Management Plan has been added as a new
recovery tool. By providing a framework of procedures for allowing LCH
SA to respond to or prevent cyber incidents, the Commission believes
that LCH SA will improve its ability to cope with, prevent, and plan
for disruptions to its clearing services by responding quickly to such
things as software malfunctions or cyber breaches. Further, the
Commission believes that LCH SA will be in a position to prioritize
incidents and activate the relevant response teams and plans.
Similarly, by updating the RP to account for the failure of
entities such as linked CCPs and critical service providers as
described above, the Commission believes that the proposed rule change
provides LCH SA the ability to timely and efficiently plan for,
monitor, and respond to failures or disruptions of these other parties.
Specifically, the RP would note that LCH SA has implemented the rules
relating to CC&G service closure related to a potential loss on
investment of the cash collateral with CC&G. LCH SA may not immediately
be able to retrieve the deposited collateral with CC&G if it is
insolvent and has to wait for the relevant payment of the estate.
However, the RP would clarify that LCH SA is only obliged to perform
payment to clearing members if and when it has received the relevant
funds from the CC&G estate. The Commission believes that these changes
strengthen LCH SA's ability to recover from the liquidity and credit
challenges that could arise from CC&G's closure. This in turn enhances
LCH SA's financial position and ultimately its ability to continue to
provide prompt and accurate clearance and settlement. Likewise, the RP
would include scenarios and mitigating actions in case of the failure
of LCH Ltd as a service provider and include a list of other critical
service providers. The Commission believes that these proposed changes
enhance LCH SA's management of important relationships by including
details of these services and the steps that it can take to replace or
otherwise respond to disrupted services. The Commission believes that
this in turn promotes LCH SA's ability to continue to promptly and
accurately clear transactions.
Additionally, as noted above, the RP would include more details on
the monitoring of capital related recovery tools like surplus capital,
variable payments and dividend payments. For example, the RP would note
that LCH SA will monitor that ``surplus/buffers capital'' is adequate
to cover both default and non-default losses. By including within the
RP the scenarios, indicators, and capital coverage tools available in
each case, the Commission believes that LCH SA will enhance its ability
to preserve the requisite financial resources and hence its ability to
continue to promptly and accurately clear transactions and safeguard
securities and funds in its custody and control.
Further, the proposed rule change would provide that LCH SA can use
several new tools to meet liquidity needs, including using non-Euro
collateral to raise liquidity, transforming liquidity received in non-
Euro currencies through bi-lateral repo transactions with the
``FXmarkets'' recovery tool, receiving liquidity directly in Euro from
Gilt or USD securities, and performing payments in an alternate
currency than the original obligation. The Commission believes that
this enhances LCH SA's ability to resolve a specific currency liquidity
shortfall resulting from a management of a defaulting clearing member
and thereby maintains its financial strength and ultimately its ability
to promptly and accurately clear transactions.
Overall, the Commission believes that with the additional detail
described above, the updated RP would continue to strengthen the
purpose of the RP as originally adopted of maintaining the continuity
LCH SA's critical services by reducing the likelihood of a disorderly
or unsuccessful recovery through planning for various disruptive
scenarios. Therefore, for the reasons stated above 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.\9\
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(2)
Rule 17Ad-22(e)(2) requires that a covered clearing agency
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, provide for
governance arrangements that are clear and transparent and clearly
prioritize the safety and efficiency of the covered clearing agency, to
support the public interest requirements in Section 17A of the Act.\10\
---------------------------------------------------------------------------
\10\ 17 CFR 240.17Ad-22(e)(2).
---------------------------------------------------------------------------
As noted above, more details on the management of a cyber-scenario
and the Cyber Crisis Management Plan have been added as a new recovery
tool. The purpose of this document is to provide a framework of
procedures allowing LCH SA to respond to cyber incidents and crises.
The RP would contain details about the procedures utilized to identify
incidents, notification of hierarchy, and for notifying and activating
the Crisis Management Team. The Commission believes that proposed
details regarding the cyber scenario will enhance LCH SA's governance
procedures as they relate to cyber crisis by setting forth a clear
process for detecting and notifying required
[[Page 68992]]
management as well as activation of a specific plan for managing cyber
crisis.
Therefore, for the above reasons the Commission finds that the
proposed rule change is consistent with Rule 17Ad-22(e)(2).
C. Consistency With Rule 17Ad-22(e)(3)
Rule 17Ad-22(e)(3) requires that a covered clearing agency
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, maintain a sound risk
management framework for comprehensively managing legal, credit,
liquidity, operational, general business, investment, custody, and
other risks that arise in or are borne by the covered clearing agency,
which must include plans for the recovery and orderly wind-down of the
covered clearing agency necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses.
Overall, the Commission believes that the rule proposal enhances
LCH SA's ability to manage legal, credit, liquidity, operational,
general business, investment, and other risks that arise in or are
borne by the covered clearing agency in the recovery context. As noted
above, the rule proposal updates the RP to address operational,
liquidity, and investment risks. Specifically, the RP would include
fraud as an operational risk and incorporate it into its system for the
monitoring and management of losses. The Commission believes that with
this addition, the RP is more attentive to fraud as an operational
risk. Additionally, the Commission believes that the inclusion of non-
Euro recovery tools described above will enhance LCH SA's ability to
cope with liquidity challenges by giving it additional ways to access
and meet liquidity needs. The Commission also believes that by
implementing the rules relating to CC&G service closure discussed
above, LCH SA has resolved a potential liquidity risk relating to a
CC&G default.
Further, the Commission believes that the proposed changes to the
RP related to LCH Ltd. and other critical service providers strengthen
LCH SA's ability to maintain the continuity of critical services in
times of extreme stress and to facilitate the recovery of LCH SA. For
instance, the Commission believes that the list of critical service
providers and scope of each service enhances LCH SA's ability to
identify those services which could impact the continuity of LCH SA's
operations and the LCH Ltd exit plan strengthens LCH SA's ability to
manage a potential wind down of LCH Ltd. and replicate or replace the
services provided by LCH Ltd. on short notice.
Additionally, because the quantitative assessment section of the
RP, as described above, now includes more details on the monitoring of
capital related recovery tools, the Commission believes that LCH SA's
ability to monitor and sustain its capital requirements under various
scenarios has been strengthened.
Therefore, for the above reasons the Commission finds that the
proposed rule change is consistent with Rule 17Ad-22(e)(3).
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, Section 17A(b)(3)(F) of the Act \11\ and Rules 17Ad-
22(e)(2) and (3) thereunder.\12\
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ 17 CFR 240.17Ad-22(e)(2) and (3).
---------------------------------------------------------------------------
It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the proposed rule change (SR-LCH SA-2019-008) be, and hereby is,
approved.\13\
---------------------------------------------------------------------------
\13\ In approving the proposed rule change, the Commission
considered the proposal's impacts 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.\14\
---------------------------------------------------------------------------
\14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-27092 Filed 12-16-19; 8:45 am]
BILLING CODE 8011-01-P
