Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Amendments to LCH SA's Liquidity Risk Modelling Framework, 5489-5491 [2020-01649]

Download as PDF Federal Register / Vol. 85, No. 20 / Thursday, January 30, 2020 / Notices documents can be obtained from Kennisha C. Tucker at (312) 469–2591 or Kennisha.Tucker@RRB.gov. Comments regarding the information collection should be addressed to Brian Foster, Railroad Retirement Board, 844 North Rush Street, Chicago, Illinois, 60611–1275 or Brian.Foster@rrb.gov and to the OMB Desk Officer for the RRB, Fax: 202–395–6974, Email address: OIRA_Submission@omb.eop.gov. Brian D. Foster, Clearance Officer. [FR Doc. 2020–01625 Filed 1–29–20; 8:45 am] BILLING CODE 7905–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–88039; File No. SR–LCH SA–2019–007] Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Amendments to LCH SA’s Liquidity Risk Modelling Framework January 24, 2020. khammond on DSKJM1Z7X2PROD with NOTICES I. Introduction 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’’), 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 (‘‘Proposed Rule Change’’) to amend its Liquidity Risk Modeling Framework (the ‘‘Framework’’). The Proposed Rule Change was published for comment in the Federal Register on December 10, 2019.3 II. Description of the Proposed Rule Change LCH SA is proposing to amend its Framework, which describes the Liquidity Stress Testing framework by which the Collateral and Liquidity Risk Management department 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.4 The Framework identifies LCH SA’s sources of liquidity and corresponding liquidity risks; identifies LCH SA’s liquidity requirements with respect to its members and its interoperable central counterparty; describes the metrics and limits that LCH SA monitors; and describes the scenarios under which these metrics are computed.5 The proposed rule change would make revisions to three aspects of the Framework related to physicallysettled options, Fixed Income Clearing System, and stress tests. A. 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.6 Specifically, the amended Framework will address LCH SA’s liquidity requirements in the event options that are in the money are 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.7 If a 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.8 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.9 Although margins should cover any potential loss, liquidity outflows as a result of the sales’ proceeds are included as liquidity requirements, in each case.10 In the current Framework, there is no liquidity provision related to the risk of assignment and exercise of options at expiration.11 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 (‘‘Cover 2’’).12 On a daily basis, LCH’s liquidity coverage ratio (‘‘LCR’’) calculation will 5 Notice, 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Securities Exchange Act Release No. 87655 (Dec. 4, 2019), 84 FR 67488 (Dec. 10, 2019) (SR–LCH– SA–2019–007) (‘‘Notice’’). 4 The following description is substantially excerpted from the Notice. VerDate Sep<11>2014 16:56 Jan 29, 2020 Jkt 250001 identify all of the potential positions that are in the money or at the money on that day and the next business day.13 Given the potential option exercise, the LCR calculation will generate a liquidity need.14 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.15 In practice, the process would 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 Cover 2 for both modes described above and will retain the most punitive one. This amount would be added to the current cash equity amount in the LCR calculation, which LCH would then retain through qualified liquid resources.16 B. Fixed Income Clearing System 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.17 LCH SA initially provided clearing services only with respect to French sovereign debt.18 The Fixed Income Clearing service subsequently added the sovereign debt of Italy, Spain, Germany, and Belgium.19 More recently, the Fixed Income Clearing System has been extended to eight additional Euro markets: Austria, Netherlands, Finland, Ireland, Portugal, Slovakia, Slovenia and Supranationals.20 In this regard, therefore, the Framework would be 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 13 Id. 84 FR at 67488. 6 Id. 14 Id. 7 Notice, 15 Id. 84 FR at 67488–67489. 8 Notice, 84 FR at 67489. 9 Id. 10 Id. 11 Id. 12 Id. PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 5489 16 Id. 17 Id. 18 Id. 19 Id. 20 Id. E:\FR\FM\30JAN1.SGM 30JAN1 5490 Federal Register / Vol. 85, No. 20 / Thursday, January 30, 2020 / Notices at the Banque de France.21 The amended Framework would also clarify 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.22 Further, the Framework would be revised to (i) identify the relevant central securities depository (‘‘CSD’’) through which transactions in the sovereign debt of the different jurisdictions may settle, (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).23 khammond on DSKJM1Z7X2PROD with NOTICES C. Stress Tests The proposed rule change would make clarifications with respect to certain aspects of its stress tests.24 With respect to the operational liquidity target, 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 would note that LCH SA uses a three-day window with regard to margin reduction.25 The Framework would further clarify 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.26 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).27 Moreover, the amended Framework would confirm that, in calculating required variation margin payments to CC&G, LCH SA assumes a theoretical 5-day holding period.28 The amended Framework would also clarify how stressed liquidity requirements and impact are calculated for each clearing member, in particular 21 Id. with respect to the cash equity settlement requirement for options.29 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.30 Finally, the Framework would clarify 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.31 In particular, the amended Framework would consider 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.32 III. Commission Findings Section 19(b)(2)(C) of the Act directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the organization.33 For the reasons given below, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 34 and Rule 17Ad–22(e)(4)(ii) thereunder.35 A. Consistency With Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of LCH SA be designed to promote the prompt and accurate clearance and settlement of securities transactions and, to the extent applicable, derivative agreements, contracts, and transactions, to assure the safeguarding of securities and funds which are in the custody or control of LCH SA or for which it is responsible, and, in general, to protect investors and the public interest.36 As described above, the proposed rule change would amend the Framework to anticipate, prior to expiration dates, the need for LCH SA to step in and meet a defaulter’s obligation in the event of the assignment or exercise of physicallysettled options involving a defaulting clearing member by utilizing the LCR calculation, on a daily basis, to identify all of the potential positions that are in the money or at the money on that day and the next business day. LCH SA will then be able to calculate the additional 22 Id. 23 Id. 29 Id. 24 Id. 30 Id. 25 Id. 31 Id. 26 Id. 32 Id. Target 2 Securities is a Eurosystem technical platform to which CSDs assign the management of securities settlement in central bank money. 27 Id. 28 Id. VerDate Sep<11>2014 16:56 Jan 29, 2020 Jkt 250001 33 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 35 17 CFR 240.17Ad–22(e)(4)(ii). 36 15 U.S.C. 78q–1(b)(3)(F). 34 15 PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 need and ensure it holds sufficient qualified liquid resources to meet that need. The Commission believes that, by anticipating and ensuring that it meets its liquidity needs in this manner, the proposed rule change would help ensure that LCH SA is able to meet its financial obligations in stressed situations, which in turn would allow LCH SA to continue to meet its obligation to promptly and accurately clear and settle securities transactions in such situations. Further, as noted above, the proposed rule change would 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. Specifically, LCH SA would revise the Framework to provide that all securities resulting from the settlement of all 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, and clarify that, in the event that a 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. The Commission believes that, through these changes, the proposed rule change would enhance LCH SA’s sources of liquidity and thus LCH SA’s financial condition, which in turn would support LCH SA’s ability to continue to promptly and accurately clear and settle securities transactions. Additionally, the Commission believes that by specifying the CSD through which transactions in the identified foreign sovereign debt may settle and describing the manner by which LCH SA injects liquidity into each settlement platform, the proposed rule change would strengthen LCH SA’s procedures for safeguarding securities and funds for which it is responsible and facilitate prompt and accurate clearance and settlement by clarifying procedures for interacting with such platforms. For the reasons stated above, the Commission believes that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act.37 B. Consistency With Rule 17Ad– 22(e)(4)(ii) Rule 17Ad–22(e)(4)(ii) requires that, among other things, LCH SA establish, implement, maintain and enforce written policies and procedures reasonably designed to, as applicable, effectively identify, measure, monitor, and manage its credit exposures to 37 15 E:\FR\FM\30JAN1.SGM U.S.C. 78q–1(b)(3)(F). 30JAN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 85, No. 20 / Thursday, January 30, 2020 / Notices participants and those arising from its payment, clearing, and settlement processes, including by maintaining additional financial resources at the minimum to enable it to cover a wide range of foreseeable stress scenarios that include, but are not limited to, the default of the two participant families that would potentially cause the largest aggregate credit exposure for the covered clearing agency in extreme but plausible market conditions.38 As described above, the proposed rule change would amend the Framework to clarify certain aspects of LCH SA’s stress tests. Specifically, the proposed rule change would clarify how stressed liquidity requirements and impact are calculated for each clearing member. Because these calculations would then be used by LCH SA to determine the two clearing members that would potentially cause the largest aggregate liquidity exposure for LCH SA in extreme but plausible market conditions, the Commission believes that the proposed rule change would support LCH SA’s ability to effectively identify, measure, monitor, and manage its credit exposures to participants, and ultimately maintain additional financial resources at the minimum to enable it to cover a wide range of foreseeable stress scenarios that include, but are not limited to, the default of the two participant families. Further, by clarifying 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 even in the absence of stress in the market, the Commission believes that the proposed rule change would enhance LCH SA’s ability to manage its credit exposures and maintain additional resources. Finally, as discussed above, under the proposed rule change the Framework would anticipate, prior to expiration dates, the need for LCH SA to step in and meet a defaulter’s obligation in the event of the assignment or exercise of physically-settled options involving a defaulting clearing member. The Commission believes that this change as well would enhance LCH SA’s ability to manage its credit exposures and maintain additional financial resources to cover foreseeable stress scenarios involving Cover 2 by identifying the liquidity need ahead of time and then retaining the amounts through qualified liquid resources. For the reasons stated above, the Commission believes that the proposed 38 17 CFR 240.17Ad–22(e)(4)(ii). VerDate Sep<11>2014 16:56 Jan 29, 2020 Jkt 250001 rule changes are consistent with Rule 17Ad–22(e)(4)(ii).39 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, with the requirements of Section 17A(b)(3)(F) of the Act 40 and Rule 17Ad–22(e)(4)(ii) thereunder.41 It is therefore ordered pursuant to Section 19(b)(2) of the Act 42 that the proposed rule change (SR–LCH SA– 2019–007) be, and hereby is, approved.43 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.44 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–01649 Filed 1–29–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–88030; File No. SR–OCC– 2020–001] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change To Modify the Fees for Exercise Notices Submitted After the Deadlines and To Change the Deadline for Submitting a Late Exercise Notice on NonExpiration Dates January 24, 2020. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’ or ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 14, 2020, the Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by OCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 39 17 CFR 240.17Ad–22(e)(4)(ii). U.S.C. 78q–1(b)(3)(F). 41 17 CFR 240.17Ad–22(e)(4)(ii). 42 15 U.S.C. 78s(b)(2). 43 In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capitalformation. 15 U.S.C. 78c(f). 44 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 40 15 PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 5491 I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change This proposed rule change by OCC would amend Rules 801 and 805 to modify the fees for exercise notices submitted after the deadlines and to amend Rule 801 to change the deadline for submitting a late exercise notice on non-expiration dates. The proposed changes to OCC’s Rules are included in Exhibit 5 of the filing. Material proposed to be added to OCC’s Rules as currently in effect is marked by underlining and material proposed to be deleted is marked with strikethrough text. All terms with initial capitalization that are not otherwise defined herein have the same meaning as set forth in the By-Laws and Rules.3 II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, OCC 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. OCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements. (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change (1) Purpose The purpose of this rule filing is to: (1) Amend Rule 801 for exercises on non-expiration dates and Rule 805 for exercises on expiration dates to modify the fee applied to exercise notices that are submitted to OCC after the start of critical processing (‘‘late exercise notices’’), and (2) amend Rule 801 to change the deadline by which late exercise notices are to be submitted to OCC for exercises on non-expiration dates from 6:30 a.m. CT (7:30 a.m. ET) to 6:00 a.m. CT (7:00 a.m. ET). Background Rule 801 addresses the exercise of options other than at expiration. Subject to certain conditions, Rule 801(d) grants the Chief Executive Officer, Chief Operating Officer, or any delegate of such officer the discretion to permit a Clearing Member to file an exercise notice after the prescribed deadline solely for the purpose of correcting a bona fide error on the part of the 3 OCC’s By-Laws and Rules can be found on OCC’s public website: https://optionsclearing.com/ about/publications/bylaws.jsp. E:\FR\FM\30JAN1.SGM 30JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 20 (Thursday, January 30, 2020)]
[Notices]
[Pages 5489-5491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01649]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88039; File No. SR-LCH SA-2019-007]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to Amendments to LCH SA's Liquidity Risk Modelling 
Framework

January 24, 2020.

I. Introduction

    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''), 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 (``Proposed Rule 
Change'') to amend its Liquidity Risk Modeling Framework (the 
``Framework''). The Proposed Rule Change was published for comment in 
the Federal Register on December 10, 2019.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 87655 (Dec. 4, 2019), 84 
FR 67488 (Dec. 10, 2019) (SR-LCH-SA-2019-007) (``Notice'').
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II. Description of the Proposed Rule Change

    LCH SA is proposing to amend its Framework, which describes the 
Liquidity Stress Testing framework by which the Collateral and 
Liquidity Risk Management department 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.\4\ The Framework identifies LCH SA's sources of liquidity 
and corresponding liquidity risks; identifies LCH SA's liquidity 
requirements with respect to its members and its interoperable central 
counterparty; describes the metrics and limits that LCH SA monitors; 
and describes the scenarios under which these metrics are computed.\5\ 
The proposed rule change would make revisions to three aspects of the 
Framework related to physically-settled options, Fixed Income Clearing 
System, and stress tests.
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    \4\ The following description is substantially excerpted from 
the Notice.
    \5\ Notice, 84 FR at 67488.
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A. 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.\6\ Specifically, the amended Framework will address LCH SA's 
liquidity requirements in the event options that are in the money are 
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.\7\
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    \6\ Id.
    \7\ Notice, 84 FR at 67488-67489.
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    If a 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.\8\ 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.\9\ Although margins should cover any 
potential loss, liquidity outflows as a result of the sales' proceeds 
are included as liquidity requirements, in each case.\10\
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    \8\ Notice, 84 FR at 67489.
    \9\ Id.
    \10\ Id.
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    In the current Framework, there is no liquidity provision related 
to the risk of assignment and exercise of options at expiration.\11\ 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 (``Cover 2'').\12\ On a daily basis, 
LCH's liquidity coverage ratio (``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.\13\ Given the potential option 
exercise, the LCR calculation will generate a liquidity need.\14\ 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.\15\
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    \11\ Id.
    \12\ Id.
    \13\ Id.
    \14\ Id.
    \15\ Id.
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    In practice, the process would 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 Cover 
2 for both modes described above and will retain the most punitive one.
    This amount would be added to the current cash equity amount in the 
LCR calculation, which LCH would then retain through qualified liquid 
resources.\16\
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    \16\ Id.
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B. Fixed Income Clearing System

    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.\17\ LCH SA initially provided 
clearing services only with respect to French sovereign debt.\18\ The 
Fixed Income Clearing service subsequently added the sovereign debt of 
Italy, Spain, Germany, and Belgium.\19\ More recently, the Fixed Income 
Clearing System has been extended to eight additional Euro markets: 
Austria, Netherlands, Finland, Ireland, Portugal, Slovakia, Slovenia 
and Supranationals.\20\
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    \17\ Id.
    \18\ Id.
    \19\ Id.
    \20\ Id.
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    In this regard, therefore, the Framework would be 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

[[Page 5490]]

at the Banque de France.\21\ The amended Framework would also clarify 
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.\22\
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    \21\ Id.
    \22\ Id.
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    Further, the Framework would be revised to (i) identify the 
relevant central securities depository (``CSD'') through which 
transactions in the sovereign debt of the different jurisdictions may 
settle, (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).\23\
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    \23\ Id.
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C. Stress Tests

    The proposed rule change would make clarifications with respect to 
certain aspects of its stress tests.\24\ With respect to the 
operational liquidity target, 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 would note that LCH SA uses a three-day window 
with regard to margin reduction.\25\ The Framework would further 
clarify 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.\26\ 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).\27\ Moreover, the amended Framework would 
confirm that, in calculating required variation margin payments to 
CC&G, LCH SA assumes a theoretical 5-day holding period.\28\
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    \24\ Id.
    \25\ Id.
    \26\ Id. Target 2 Securities is a Eurosystem technical platform 
to which CSDs assign the management of securities settlement in 
central bank money.
    \27\ Id.
    \28\ Id.
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    The amended Framework would also clarify how stressed liquidity 
requirements and impact are calculated for each clearing member, in 
particular with respect to the cash equity settlement requirement for 
options.\29\ 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.\30\
---------------------------------------------------------------------------

    \29\ Id.
    \30\ Id.
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    Finally, the Framework would clarify 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.\31\ In 
particular, the amended Framework would consider 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.\32\
---------------------------------------------------------------------------

    \31\ Id.
    \32\ Id.
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III. Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the 
organization.\33\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \34\ and Rule 17Ad-22(e)(4)(ii) thereunder.\35\
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    \33\ 15 U.S.C. 78s(b)(2)(C).
    \34\ 15 U.S.C. 78q-1(b)(3)(F).
    \35\ 17 CFR 240.17Ad-22(e)(4)(ii).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of LCH SA be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions, to 
assure the safeguarding of securities and funds which are in the 
custody or control of LCH SA or for which it is responsible, and, in 
general, to protect investors and the public interest.\36\
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    \36\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the proposed rule change would amend the 
Framework to anticipate, prior to expiration dates, the need for LCH SA 
to step in and meet a defaulter's obligation in the event of the 
assignment or exercise of physically-settled options involving a 
defaulting clearing member by utilizing the LCR calculation, on a daily 
basis, to identify all of the potential positions that are in the money 
or at the money on that day and the next business day. LCH SA will then 
be able to calculate the additional need and ensure it holds sufficient 
qualified liquid resources to meet that need. The Commission believes 
that, by anticipating and ensuring that it meets its liquidity needs in 
this manner, the proposed rule change would help ensure that LCH SA is 
able to meet its financial obligations in stressed situations, which in 
turn would allow LCH SA to continue to meet its obligation to promptly 
and accurately clear and settle securities transactions in such 
situations.
    Further, as noted above, the proposed rule change would 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. Specifically, LCH SA would revise the Framework to 
provide that all securities resulting from the settlement of all 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, and clarify that, in the event that 
a 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. The Commission believes that, through these 
changes, the proposed rule change would enhance LCH SA's sources of 
liquidity and thus LCH SA's financial condition, which in turn would 
support LCH SA's ability to continue to promptly and accurately clear 
and settle securities transactions. Additionally, the Commission 
believes that by specifying the CSD through which transactions in the 
identified foreign sovereign debt may settle and describing the manner 
by which LCH SA injects liquidity into each settlement platform, the 
proposed rule change would strengthen LCH SA's procedures for 
safeguarding securities and funds for which it is responsible and 
facilitate prompt and accurate clearance and settlement by clarifying 
procedures for interacting with such platforms.
    For the reasons stated above, the Commission believes that the 
proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act.\37\
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    \37\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4)(ii)

    Rule 17Ad-22(e)(4)(ii) requires that, among other things, LCH SA 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, effectively identify, 
measure, monitor, and manage its credit exposures to

[[Page 5491]]

participants and those arising from its payment, clearing, and 
settlement processes, including by maintaining additional financial 
resources at the minimum to enable it to cover a wide range of 
foreseeable stress scenarios that include, but are not limited to, the 
default of the two participant families that would potentially cause 
the largest aggregate credit exposure for the covered clearing agency 
in extreme but plausible market conditions.\38\
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    \38\ 17 CFR 240.17Ad-22(e)(4)(ii).
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    As described above, the proposed rule change would amend the 
Framework to clarify certain aspects of LCH SA's stress tests. 
Specifically, the proposed rule change would clarify how stressed 
liquidity requirements and impact are calculated for each clearing 
member. Because these calculations would then be used by LCH SA to 
determine the two clearing members that would potentially cause the 
largest aggregate liquidity exposure for LCH SA in extreme but 
plausible market conditions, the Commission believes that the proposed 
rule change would support LCH SA's ability to effectively identify, 
measure, monitor, and manage its credit exposures to participants, and 
ultimately maintain additional financial resources at the minimum to 
enable it to cover a wide range of foreseeable stress scenarios that 
include, but are not limited to, the default of the two participant 
families. Further, by clarifying 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 even in the 
absence of stress in the market, the Commission believes that the 
proposed rule change would enhance LCH SA's ability to manage its 
credit exposures and maintain additional resources.
    Finally, as discussed above, under the proposed rule change the 
Framework would anticipate, prior to expiration dates, the need for LCH 
SA to step in and meet a defaulter's obligation in the event of the 
assignment or exercise of physically-settled options involving a 
defaulting clearing member. The Commission believes that this change as 
well would enhance LCH SA's ability to manage its credit exposures and 
maintain additional financial resources to cover foreseeable stress 
scenarios involving Cover 2 by identifying the liquidity need ahead of 
time and then retaining the amounts through qualified liquid resources.
    For the reasons stated above, the Commission believes that the 
proposed rule changes are consistent with Rule 17Ad-22(e)(4)(ii).\39\
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    \39\ 17 CFR 240.17Ad-22(e)(4)(ii).
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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, with the requirements of Section 17A(b)(3)(F) of the 
Act \40\ and Rule 17Ad-22(e)(4)(ii) thereunder.\41\
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    \40\ 15 U.S.C. 78q-1(b)(3)(F).
    \41\ 17 CFR 240.17Ad-22(e)(4)(ii).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\42\ that the proposed rule change (SR-LCH SA-2019-007) be, and hereby 
is, approved.\43\
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    \42\ 15 U.S.C. 78s(b)(2).
    \43\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
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    \44\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-01649 Filed 1-29-20; 8:45 am]
 BILLING CODE 8011-01-P

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