Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating to the Clearing of Options on Index Credit Default Swaps in Respect of North American Indices (More Specifically, CDX.NA.IG and CDX.NA.HY), 64551-64556 [2020-22474]
Download as PDF
Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
22. Should Tier II Finders be required
to enter into a written agreement with
the issuer where the issuer, without
affecting the Finder’s obligations, also
assumes liability with respect to
investors for the Finder’s misstatements
in the course of his or her engagement
by the issuer?
23. Should the proposed exemption
be conditioned on a Finder filing a
notice with the Commission of reliance
on the exemption from registration?
Why or why not? If so, when should
Finders be required to file the notice?
What, if any, disclosures should be
required in the notice?
24. Should there be any limitations on
the amount of fee a Finder can receive?
25. Should we impose limitations on
the form of compensation Finders can
receive? Should Finders be prohibited
in certain circumstances from receiving
transaction-based compensation, and
instead be required to receive
compensation that is not tied to the
success of the transaction (that is a fixed
fee or other arrangement)? If so, under
what circumstances and how should
Finders then be compensated?
26. Should a Finder be able to receive
a financial interest in an issuer as
compensation for its services? Why or
why not?
27. Are the explicit limitations on the
activities in which Finders can or
cannot engage appropriate for each tier
of Finder? What other activities should
be expressly permitted or prohibited for
each class of Finder?
28. Should we provide guidance on
how a Finder can establish that he or
she did not know and, in the exercise
of reasonable care, could not have
known, that the issuer had failed to
comply with the conditions of an
exemption?
29. Should we provide further
guidance on the solicitation-related
activities in which Tier II Finders can
engage on behalf of an issuer, for
example, guidance surrounding a Tier II
Finder’s discussion of issuer
information and arrangement and
participation in meetings with issuers
and investors?
30. Should we provide guidance
regarding activities of private fund
advisers, M&A Brokers as defined in the
M&A Broker Letter,99 or real estate
brokers that may require registration
99 An M&A Broker is defined as a person engaged
in the business of effecting securities transactions
solely in connection with the transfer of ownership
and control of a privately-held company through
the purchase, sale, exchange, issuance, repurchase,
or redemption of, or a business combination
involving, securities or assets of the company, to a
buyer that will actively operate the company or the
business conducted with the assets of the company.
See M&A Broker Letter.
VerDate Sep<11>2014
18:52 Oct 09, 2020
Jkt 253001
under Section 15(a) of the Exchange
Act? Should we consider codifying the
M&A Broker Letter? 100
31. Are there other areas in which the
Commission should provide guidance
regarding the registration requirements
of Section 15(a) of the Exchange Act to
other types of limited-purpose brokerdealers?
32. If the proposed exemption is
adopted, which staff letters, if any,
should or should not be withdrawn, and
why?
33. Have we appropriately defined the
disqualification condition for Finders?
34. Have we appropriately limited the
proposed exemption to individuals who
are not associated persons of a brokerdealer?
35. Should the proposed exemption
include a limitation such that it would
not be available to individuals who
were associated persons of a brokerdealer within the previous 12 months?
36. Should the proposed exemption
be limited to individuals who are not
associated persons of a municipal
advisor or investment adviser
representatives of an investment
adviser?
37. Should the proposed exemption
be limited to individuals who are not
associated persons of an issuer? Why or
why not?
38. Would the proposed exemption
provide sufficient investor protections
while promoting capital formation for
small businesses?
39. Would the proposed exemption
have a competitive impact on registered
brokers?
40. With respect to the activities
permitted for Tier I Finders, what are
the practical implications of the
requirements if they were subject to
broker registration? What about for Tier
II Finders?
41. Should we instead take an
alternative approach for either class of
Finders?
42. Are there areas related to the
proposed Finders framework for which
the Commission should provide
guidance?
43. Should we coordinate with other
regulators to provide clarity and
consistency on what types of activities
Finders and other limited purpose
brokers may engage in?
44. Are there any other sources of data
or information that could assist the
Commission in analyzing the
consequences of the proposed
exemption? We request that commenters
provide any relevant data or
information.
45. Other than the possible obligation
of a Finder to register as a broker-dealer,
the proposed exemption is not intended
to affect the rights of the Commission or
any other party to enforce compliance
with applicable law, or the available
remedies for violations of the law. This
includes, in the case of the Commission,
the ability to impose a broker-dealer
registration bar on a person for
misconduct that would warrant a bar.
Are there any other considerations in
this regard that the Commission should
take into account as it considers the
exemptive relief?
By the Commission.
Dated: October 7, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020–22565 Filed 10–9–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90099; File No. SR–LCH
SA–2020–005]
Self-Regulatory Organizations; LCH
SA; Notice of Filing of Proposed Rule
Change Relating to the Clearing of
Options on Index Credit Default Swaps
in Respect of North American Indices
(More Specifically, CDX.NA.IG and
CDX.NA.HY)
October 6, 2020.
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
September 24, 2020, 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 described in
Items I, II, and III below, which Items
have been prepared primarily 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
Banque Centrale de Compensation,
which conducts business under the
name LCH SA (‘‘LCH SA’’), is proposing
to amend its rules to permit the clearing
of options on index credit default swaps
in respect of North American indices
(more specifically, CDX.NA.IG and
CDX.NA.HY) (‘‘CDX Swaptions’’) (the
‘‘Proposed Rule Change’’).
1 15
100 See
PO 00000
supra footnote 24 and accompanying text.
Frm 00111
Fmt 4703
Sfmt 4703
64551
2 17
E:\FR\FM\13OCN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
13OCN1
64552
Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Notices
According to filings LCH SA–2017–
006 and 007, currently, LCH SA clears
today options on certain European
index CDS as the underlying, i.e., CDS
on Markit iTraxx® Europe Index and
iTraxx® Crossover Index (‘‘iTraxx
Swaptions’’).
The text of the Proposed Rule Change
has been annexed as Exhibit 5.3
The launch of the CDX Swaptions
initiative will be contingent on LCH
SA’s receipt of all necessary regulatory
approvals.
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 these statements.
A. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
khammond on DSKJM1Z7X2PROD with NOTICES
1. Purpose
The Proposed Rule Change will
permit LCH SA to introduce clearing of
CDX Swaptions.
As part of this initiative, LCH SA is
proposing to amend its (i) Reference
Guide: CDS Margin Framework
(‘‘CDSClear Margin Framework’’) and
(ii) CDS Clearing Supplement
(‘‘Supplement’’) and (iii) CDS Clearing
Procedures (‘‘Procedures’’).
i. CDSClear Margin Framework
The introduction of CDX Swaptions
requires minimal changes to extend the
existing risk framework to the new
product, these are reflected in the LCH
SA Reference Guide: CDS Margin
Framework alongside other changes
described below enabling it to cover the
clearing of CDX Swaptions. This has led
to an opportunity to make other
changes, unrelated to the CDX
Swaptions, also described below,
including changes to the Vega Margin
which would apply to both iTraxx
Swaptions and CDX Swaptions.
Paragraph 2.3.4 which deals with the
Daily Contributions Assessment has
been expanded in order to include CDX
Swaptions. Members’ price contribution
will be mandatory on CDX Swaptions
for all strikes that are multiples of 2.5
3 All capitalized terms not defined herein have
the same definition as the Framework or Default
Fund Methodology, as applicable.
VerDate Sep<11>2014
18:52 Oct 09, 2020
Jkt 253001
bps for CDX.NA.IG and 0.5 point for
CDX.NA.HY of a given expiry from the
moment Members have at least one
open position on one of that expiry’s
strike, in order to ensure implied
volatility measurements are updated on
a daily basis. Otherwise, LCH SA will
fall back to Markit’s composite prices or
according to section 2.3.3.2 of the
Reference Guide: CDS Margin
Framework, use pre-defined rules to fill
in missing data.
The proposed changes in section 3.9
(which are unrelated to the
requirements for clearing CDS Options
on CDX) serve to enrich and align the
methodology for calculating Vega
Margin with LCH SA’s approach across
all products and business segments.
Vega Margin captures the risk of
volatility changes in the options
premium relative to the strikes, i.e., the
skew risk and the risk of changes in the
volatility of volatility. As a result of a
risk model validation finding, LCH SA
is proposing to transition from a
parametric model to a historical model,
using predefined scenarios to simulate
the risk of volatility change. In order to
introduce shocks on the volatility itself
rather than on the calculation’s model
parameters only as was the case before,
the new methodology would rely on use
of four regular and four stressed
historical scenarios for each index
family, calibrated based on the worst
skew risk and the volatility of volatility
risk at given confidence levels. Since
Vega Margin represents an add-on
amount to spread margin that accounts
for potential moves in assumed
volatility, the P&L impact of the
proposed change is not expected to be
significant.
(a) The volatility scenarios are built
using data going back to April 3, 2007
whereby for each index family,
historical scenarios are identified by
making an estimate of the largest 5-day
shifts in volatility distance, at a given
percentile, between At-The-Money
strikes and implied volatilities for
options with a delta of 10, 25, 75 and
90%, so as to capture the deformation
of volatility surface across.
(b) The Skew and Smile scenarios are
calibrated against the worst volatility
surface distortion (i.e., largest changes
of the volatility distance previously
defined) at a given confidence level. The
scenarios are derived in the form of
volatility shocks at each delta level,
these are used to shift the end of day
volatilities, at the corresponding delta
levels, to calibrate a set of shifted or
Stochastic Volatility Inspired (SVI)
scenarios as depicted in the updated
table in paragraph 3.9.2.
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
(c) The number of scenarios
calculated for each index family has
been adjusted from eight previously to
four as a result of the shocks now being
applied at volatility level.
In paragraph 4.1.9 of CDSClear
Margin Framework,
—As requested by the LCH SA Risk
model validation department, a
comment has been added to highlight
that although the example given
pertains to iTraxx Swaptions, the
same logic applies to CDX Swaptions;
—in the description of Step 2 regarding
the calculation of the cost of vega
hedging, it has been detailed that the
volume of delta neutral Swaption
notional that can be reasonably
unwound by LCH SA in a day is
derived from a clearing member
survey and that the volume of
principal index 5YR Off-The-Run–1
series Swaption notional that can be
reasonably unwound by LCH SA in a
day is defined in the section on
indices;
—in the description of Step 3, the
contributions to the macro-hedge cost,
the CDX Swaptions have been added
to the description of the variable beta
(‘‘b’’) that defines an index subfamily, either Main or Xover for
iTraxx, and IG or HY for CDX.
—in the description of Step 4 regarding
the final Liquidity Charge and in
order to aggregate the costs of delta
hedging and vega hedging, while no
changes are required to the liquidity
and concentration risk margin
methodology, a formula has been
added to clarify that the existing
methodology would also apply and to
describe how the Foreign Exchange
rate is introduced into the final
Liquidity Charge formula in order to
cater for CDX Swaptions.
With respect to the calculation of
liquidity charge, in the event of a
clearing member default the market
does not require for swaptions to be
liquidated as a delta-hedged package
intended to trade and hedge an option
along with an index but it is deemed
more optimal to do so from a friction
cost standpoint as per the market
feedback. LCH SA atte mpts to source
the hedges from the CDS part of the
defaulting member’s portfolio using a
delta hedging algorithm to ensure
minimal hedging costs before sourcing
the hedges from the market, and
language has been added to note that the
volume of the delta neutral package of
the selected option that can be
reasonably unwound per day is based
on a member survey. Finally, additional
commentary serves to confirm how
currency conversion from USD to EUR
E:\FR\FM\13OCN1.SGM
13OCN1
khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Notices
will apply where options forming part
of the delta-hedged package are priced
in USD.
Paragraph 4.2 sets forth accrued
coupon liquidation risk margin (margin
covering the risk that a protection buyer
will not be paying any accrued coupon
via the VM between the time it defaukts
and the end of the liquiditation of its
portfolio) for both CDS and CDS
options. The accrued coupon
liquidation risk margin with respect to
CDS Options remains the same, but now
reflects that any such amount for CDX
Swaptions contracts is converted from
USD to EUR.
Finally, the following changes,
unrelated to the CDX Swaptions
initiative were made.
(a) Section 3 provides for the total
initial margin framework with respect to
both CDS and CDS Options. While the
methodology for calculating Short
Charge margin in section 3.2 remains
the same, the summary language in
paragraph 3.1 has been amended to
explicit that it covers the Profit and Loss
impact of liquidating a defaulting
member’s portfolio under one or two
credit events, whereas the number of
credit events considered was previously
set to two.
This is also reflected in the Risk
Overview table in paragraph 3.2. The
specific rule to calculate the Short
Charge on Financial entities (which
covered the default risk by the two
largest Financials entities comprising
the underlying constituent entities of
the relevant index) has been removed.
The Short Charge accounts for the risk
of default by the underlying constituent
entities of the relevant index, and per
the model used for linear U.S. products
this amount would also cover the
possibility of a default in respect of an
exposure representing the average net
short exposure of the ten (10) riskiest
exposures with the defined recovery
rate cap. Since the approach in respect
of iTraxx Swaptions only accounts for
the risk of default of the entity with the
largest net short exposure, the language
has been amended to include the
additional default risk that must be
taken into account in respect of CDX
Swaptions on CDX.NA.HY.
Additionally, the Financial Short
Charge (which covered the default risk
by the two largest Financials entities
comprising the underlying constituent
entities of the relevant index) has been
deleted. A corresponding change has
been made to section 3.2, which
provides an overview of the risks
captured by each margin component.
(b) Reference to a 10 year sample for
the Foreign Exchange rate has been
removed from paragraph 3.4.8.3 as it
VerDate Sep<11>2014
18:52 Oct 09, 2020
Jkt 253001
was not an accurate description of how
the Foreign Exchange rate was
computed.
(c) A typographical error in paragraph
3.8.2 has been corrected (double
parenthesis and period missing).
The Content table and the summary of
changes to the document have been
updated as a result of the above
mentioned items. Finally,
corresponding changes to provision
numbering throughout the Reference
Guide: CDS Margin Framework have
been made as necessary.
ii. Supplement
(a) CDX Swaption-Related Amendments
The Supplement has been amended in
order to include the relevant provisions
to allow the clearing of the new CDX
Swaptions.
In Part C of the Supplement, the
following amendments have been made
to Section 1.2 (Terms defined in the
CDS Clearing Supplement):
i. The ‘‘CDX Swaption Standard
Terms Supplement’’ definition has been
added to refer to the applicable
documentation to the CDX Swaptions,
as published by Markit North America
Inc. and as amended by the
Supplement;
ii. the definition of the term ‘‘Index
Swaption Cleared Transaction
Confirmation’’ has been amended to
make a reference to the applicable form
of confirmation which is relevant for
CDX Swaptions and make some minor
corrections in new indent (a) and in the
last paragraph of the definition;
iii. the new defined term of
‘‘Submission Deadline’’ has been added
in order to cater for both the Markit
iTraxx and CDX exercise windows in
respect of a swaption which differ; and
iv. the definition of ‘‘Transaction
Data’’ has been amended to make a
reference to the Option Type which is
relevant for CDX Swaptions.
In Sections 6.3, 6.4, 6.5 (paragraph
(c)), 6.10 (paragraph (b)) and Sections
5.3, 5.5 and 5.7 of Appendix VIII (CCM
Client Transaction Requirements) of
Part C of the Supplement, references to
the standard fixed time of 4:00 p.m.
(London time) or 5:00 p.m. (Central
European Time), which would only be
applicable to iTraxx Swaptions, have
been replaced by a reference to the new
defined term of ‘‘Submission Deadline’’.
In Section 7.2, references to the
relevant paragraph of the CDX Swaption
Standard Terms Supplement for
consistency purpose have been added.
References to a CDX as an Underlying
Index and the Swaption Type have been
added to the Schedules of Appendix 1
(Form of Exercise Notice) and Appendix
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
64553
II (Form of Abandonment Notice) to Part
C of the Supplement.
In Appendix VIII (CCM Client
Transaction Requirements) to Part C of
the Supplement, Section 1 has been
amended to refer to the CDX Swaptions
Standard Terms Supplement and the
definition of ‘‘STS Supplement’’ has
been removed. Consequently, the
reference to the ‘‘STS Supplement’’ in
Section 8.2. of this Appendix has been
replaced by a reference to the ‘‘iTraxx
Swaption Standard Terms Supplement’’
as this only concerns iTraxx Swaptions.
References to the relevant paragraph of
the CDX Swaption Standard Terms
Supplement or the relevant paragraph of
such Supplement have been added
where relevant and any reference to the
STS Supplement has been removed
from Sections 8.3 and 8.4 of this
Appendix.
(b) Miscellaneous Amendments
LCH SA is also taking the opportunity
of the modification of the Supplement
to make a few changes for clarification/
harmonization purposes.
In Part C of the Supplement, Section
9.1 (Creation of Matched Pairs), a
principle governing the size of the
Matched Pairs created by LCH SA in the
context of a Restructuring or an Exercise
has been added to align with equivalent
provisions of Parts A and B of the
Supplement. We have taken the
opportunity to remove the amounts of
the Matched Pair from Section 8.1
(Creation of Matched Pairs) of Parts A
and Part B of the Supplement since such
amounts are proposed to be set out in
a new Clearing Notice which outlines
the maximum applicable Matched Pair
notional amounts to allow for greater
flexibility in adapting these amounts
according to market conditions and
evolution of open interest going
forward.
Since the Protocol Effectiveness
Condition in respect of the ISDA 2019
NTCE Protocol published by ISDA on 27
August 2019 is now satisfied, the
conditional with the reference to ‘‘if’’
have been removed from Section 2.4
and Appendix XIII (Section 2.6) of Part
B of the Supplement and from Section
2.3 and Appendix VIII (Section 2.4) of
Part C of the Supplement. An equivalent
amendment has been made to Appendix
XIII of Part A of the Supplement
(Section 2.6) in respect of the 2014 ISDA
Credit Derivatives Definitions Protocol
published by ISDA on 21 August 2014
for consistency purpose.
References to the Implementation
Date as provided for in the 2019 ISDA
Narrowly Tailored Credit Event Protocol
have been removed from the definition
of the ’’ iTraxx® Swaption Standard
E:\FR\FM\13OCN1.SGM
13OCN1
khammond on DSKJM1Z7X2PROD with NOTICES
64554
Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Notices
Terms Supplement’’ in Section 1.2 of
Part C of the Supplement to refer to the
current version of this document which
is the version published on 20 March
2017. Indeed, at the time the 2019 ISDA
NTCE Protocol-related amendments
were drafted and submitted to the
regulatory process, an initial Swaption
Standard Terms Supplement draft
taking into account this Protocol was
available. Finally, this draft was taken
no further and the most recent version
which is applicable remains the version
published in 2017. Consequently, in
Section 2.2 (Index Swaption Cleared
Transaction Confirmation) of Part C of
the Supplement, any confirmation in
respect of a Swaption will be amended
by specifying in a new indent (d) that
the Standard Terms Date applicable to
the underlying transaction of a
Swaption will be the most updated
version of the Standard Terms
Supplement to ensure that the
applicable version is the one that has
taken into account the 2019 ISDA NTCE
Protocol (i.e., the versions applicable to
Markit iTraxx and CDX published on
the Implementation Date of such
Protocol). As consequence, the
following indents in Section 2.2 have
been renumbered from (e) to (i).
Finally, the following corrections
have been made to the Supplement:
i. In Sections 7.10 of Parts A and B,
the reference to a ‘‘CDS Clearing
Member’’ has been replaced by
‘‘Clearing Member’’ which is the correct
defined term to be used;
ii. In Sections 9.1 of Parts A and B,
paragraph (c), it is specified that the Self
Referencing Transaction is a Clearing
Member Self Referencing Transaction to
be consistent with the title of Section
9.1;
iii. In Section 1.2 of Part B, in the
definition of ‘‘Index Cleared Transaction
Confirmation’’, the correct name of the
publisher of the documentation for
Markit CDX has been inserted;
iv. In Section 1.2 of Part C, a
typographical error has been corrected
in the definition of ‘‘Swaption
Restructuring Cleared Transaction’’ and
the word ‘‘Eligible’’ has been removed
from the definition of ‘‘Underlying
Index Transaction’’ as an Eligible Index
Swaption is not a defined term; and
v. In Appendix VIII of Part C, the
definitions have been removed from
Section 1 as these terms are already
defined in Section 1.2 of Part C.
iii. Procedures
LCH SA also proposes to modify
Section 5 of the Procedures (CDS
Clearing Operations) in order to include
the CDX Swaptions in the scope of the
VerDate Sep<11>2014
22:26 Oct 09, 2020
Jkt 253001
End of Day Price Contribution as set out
in Paragraph 5.18.
Therefore, references to ‘‘CDS’’ have
been changed to ‘‘CDS and an Index
Swaption’’ in paragraphs 5.18.3 and
5.18.5, for instruments with a CDS
Contractual Currency in U.S. Dollar. In
paragraph 5.18.4, the first sentence has
been modified to ensure perfect clarity,
additionally the scope of the End of Day
Contributed Prices in respect of CDS
with a Contractual Currency in U.S.
Dollar has been extended to include
Index Swaptions.
In paragraph 5.18 (b), the restriction
to Index Swaptions with a CDS
Contractual Currency in Euro has been
removed and the Delta Hedged
Swaption Package has been split into
two sub-sections in order to cater for the
two different timings for the iTraxx
Swaptions on the one hand and the CDX
Swaptions on the other.
(b) Statutory Basis
LCH SA believes that the Proposed
Rule Change in connection with the
clearing of CDS Options on CDX is
consistent with the requirements of
Section 17A of the Securities Exchange
Act of 1934 4 (the ‘‘Act’’) and the
regulations thereunder, including the
standards under Rule 17Ad–22.5
Section 17(A)(b)(3)(F) 6 of the Act
requires, among other things, that the
rules of a clearing agency be designed to
promote the prompt and accurate
clearance and settlement of securities
transactions and derivative agreements,
contracts, and transactions and to assure
the safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible. As noted above, the
Proposed Rule Change is designed to
manage the risk arising from the
clearing of CDX Swaptions and to
streamline the description of the
existing margin framework for CDS
Options to take into account CDX
Swaptions and improve the organization
and clarity of the CDSClear Margin
Framework.
LCH SA believes that the proposed
changes to the CDSClear Margin
Framework satisfy the requirements of
Rule 17Ad–22(b)(2), (e)(1), and (e)(6).7
Rule 17Ad–22(b)(2) requires a
clearing agency to use margin
requirements to limit its credit
exposures to participants under normal
market conditions and to use risk- based
4 15
U.S.C. 78q–1.
CFR 240.17Ad–22.
6 15 U.S.C. 78q–1(b)(3)(F).
7 17 CFR 240.17Ad–22(b)(2), (e)(1) and (e)(6).
models and parameters to set margin
requirements.8
Rule 17Ad–22(e)(6) requires a covered
clearing agency that provides central
counterparty services to cover its credit
exposures to its participants by
establishing a risk-based margin system
that meets certain minimum
requirements.9
As described above, LCH SA proposes
to amend its margin framework to
manage the risks associated with
clearing CDX Swaptions. Specifically,
the proposed rule change amends the
existing short charge component of the
total initial margin to take into account
a specificity in respect of options on
CDX.NA.HY consistent with Rule
17Ad–22(e)(6)(i) requiring a covered
clearing agency that provides CCP
services to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
result in a margin system that, at a
minimum, considers and produces
margin levels commensurate with the
risks and particular attributes of each
relevant product, portfolio, and market.
In addition, the proposed rule change
adds the new methodology for
calculating Vega Margin, based on a
historical model approach rather than a
parametric model, to account for the
skew risk and volatility of volatility risk
specific to CDS Options. These changes
are unrelated to the clearing of CDX
Swaptions and intended to align LCH
SA’s approach across all products and
business segments, while still relying on
use of a risk-based model to set margin
requirements and limit LCH SA’s credit
exposures to participants in clearing
CDS and/or CDS Options under normal
market conditions, consistent with Rule
17Ad–22(b)(2).
For the same reasons, the Proposed
Rule Change would improve LCH SA’s
ability to manage financial risk
exposures that may arise in the course
of its ongoing clearance and settlement
activities and thus better allow LCH SA
to complete the accurate clearance and
settlement process in the event of a
member default. Similarly, it should
enhance LCH SA’s ability to help assure
the safeguarding of securities and funds
which are in the custody or control of
LCH SA or for which it is responsible,
consistent with the section
17(A)(b)(3)(F).
LCH SA also believes that the
Proposed Rule Change is consistent
with Rule 17Ad–22(e)(6)(i) and (v)
requiring a covered clearing agency to
5 17
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
8 17
9 17
E:\FR\FM\13OCN1.SGM
CFR 240.17Ad–22(b)(2).
CFR 240.17Ad–22(e)(6)(i).
13OCN1
khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Notices
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to ensure the use of
an appropriate method for measuring
credit exposure that accounts for
relevant product risk factors and
portfolio effects across products. Its riskbased margin methodology, including
the new Vega Margin approach, takes
into account, and generates margin
levels commensurate with, the risks and
particular attributes of each of the CDS
and CDS Options at the product and
portfolio levels, appropriate to the
relevant market it serves. CDX
Swaptions initiative will not introduce
any new product risk factors. All risk
factors of North American CDX indices
are already covered as LCH SA already
clears them, and the implied volatilities
were already captured by the existing
model for iTraxx options (partly in the
spread margin for the at-the-money
volatility moves, and partly in the vega
margin for skew and smile risk).
Portfolio effects are still captured in the
same way, also consistent with the
EMIR 80% cap on offsets.
In addition, LCH SA believes that the
margin calculation under the revised
CDSClear Margin Framework would
sufficiently account for the 5-day
liquidation period for house account
portfolio and 7-day liquidation period
for client portfolio and therefore, is
reasonably designed to cover LCH SA’s
potential future exposure to participants
in the interval between the last margin
collection and the close out of positions
following a participant default,
consistent with the provisions of Rule
17Ad–22(e)(6)(iii) requiring a covered
clearing agency to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
calculate margin sufficient to cover its
potential future exposure to participants
in the interval between the last margin
collection and the close out of positions
following a participant default.10
LCH SA also believes that the
proposed rule change is consistent with
Rule 17Ad–22(e)(1), which requires
each covered clearing agency’s policies
and procedures reasonably designed to
provide for a well-founded, clear,
transparent, and enforceable legal basis
for each aspect of its activities in all
relevant jurisdictions. As described
above, the proposed rule change would
streamline the description of margin
methodology in CDSClear legal and
Margin Framework. Instead of relying
on shocks applied to unobservable
parameters of a risk model, the change
introduced to the methodology for
calculating Vega Margin is focusing on
the observable changes in volatilities.
LCH SA believes that the Proposed Rule
Change change would improve the
organization and clarity of these policies
and provide for a clear and transparent
legal basis for LCH SA’s margin
requirements, consistent with Rule
17Ad–22(e)(1).11
For the reasons stated above, LCH SA
believes that the proposed rule change
with respect to CDSClear Margin
Framework in connection with clearing
of CDS Options on CDX is consistent
with the requirements of prompt and
accurate clearance and settlement of
securities transactions and derivative
agreements, contracts and transactions,
and assuring the safeguarding of
securities and funds in the custody or
control of the clearing agency or for
which it is responsible, in accordance
with 17(A)(b)(3)(F) of the Act.12
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.13 LCH SA does not
believe that the proposed rule change
would impose burdens on competition
that are not necessary or appropriate in
furtherance of the purposes of the Act.
Specifically, the proposed changes to
CDSClear Margin Framework would
apply equally to all Clearing Members
whose portfolio includes CDS and/or
CDS Options. Because the margin
methodology is risk-based, consistent
with the requirements in Rule 17Ad–
22(b)(2) and (e)(6), depending on a
Clearing Member’s portfolio, each
Clearing Member would be subject to a
margin requirement commensurate with
the risk particular to its portfolio. Such
margin requirement imposes burdens on
a Clearing Member but such burdens
would be necessary and appropriate to
manage LCH SA’s credit exposures to its
CDSClear participants and to maintain
sufficient financial resources to
withstand a default of two participant
families to which LCH SA has the
largest exposures in extreme but
plausible market conditions, consistent
with the requirements under the Act.
Therefore, LCH SA does not believe
that the proposed rule change would
impose a burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
11 17
CFR 240.17Ad–22(e)(1).
U.S.C. 78q–1(b)(3)(F).
13 15 U.S.C. 78q–1(b)(3)(I).
12 15
10 17
CFR 240.17Ad–22(e)(6)(iii).
VerDate Sep<11>2014
18:52 Oct 09, 2020
Jkt 253001
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
64555
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:
Electronic Comments
• 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–2020–005 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–LCH SA–2020–005. 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
E:\FR\FM\13OCN1.SGM
13OCN1
64556
Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Notices
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 the
filing also will 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–2020–005 and
should be submitted on or before
November 3, 2020.
CONTACT PERSON FOR MORE INFORMATION:
For further information; please contact
Vanessa A. Countryman from the Office
of the Secretary at (202) 551–5400.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
J. Matthew DeLesDernier,
Assistant Secretary.
Dated: October 7, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020–22474 Filed 10–9–20; 8:45 am]
[FR Doc. 2020–22617 Filed 10–8–20; 11:15 am]
BILLING CODE 8011–01–P
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
11 a.m. on Wednesday,
October 14, 2020.
PLACE: The meeting will be held via
remote means and/or at the
Commission’s headquarters, 100 F
Street NE, Washington, DC 20549.
STATUS: This meeting will be closed to
the public.
MATTERS TO BE CONSIDERED:
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the closed meeting. Certain
staff members who have an interest in
the matters also may be present.
In the event that the time, date, or
location of this meeting changes, an
announcement of the change, along with
the new time, date, and/or place of the
meeting will be posted on the
Commission’s website at https://
www.sec.gov.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
TIME AND DATE:
khammond on DSKJM1Z7X2PROD with NOTICES
U.S.C. 552b(c)(3), (5), (6), (7), (8), 9(B)
and (10) and 17 CFR 200.402(a)(3),
(a)(5), (a)(6), (a)(7), (a)(8), (a)(9)(ii) and
(a)(10), permit consideration of the
scheduled matters at the closed meeting.
The subject matter of the closed
meeting will consist of the following
topic:
Institution and settlement of
injunctive actions;
Institution and settlement of
administrative proceedings;
Resolution of litigation claims; and
Other matters relating to enforcement
proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting agenda items that
may consist of adjudicatory,
examination, litigation, or regulatory
matters.
[Release No. 34–90114; File No. SR–
NYSECHX–2020–28]
Self-Regulatory Organizations; NYSE
Chicago, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Adopt Temporary
Interpretation and Policy .10 Under
NYSE Chicago Article 6, Rule 13
October 7, 2020.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on
September 25, 2020, NYSE Chicago, Inc.
(‘‘NYSE Chicago’’ or the ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
14 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
18:52 Oct 09, 2020
Jkt 253001
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes a rule change
to adopt temporary Interpretation and
Policy .10 (Temporary Extension of the
Limited Period for Registered Persons to
Function as Principals) under NYSE
Chicago Article 6, Rule 13 (Registration
Requirements) applicable to
Participants. The proposed rule change
is available on the Exchange’s website at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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 those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to adopt
temporary Interpretation and Policy .10
(Temporary Extension of the Limited
Period for Registered Persons to
Function as Principals) under NYSE
Chicago Article 6, Rule 13 (Registration
Requirements) applicable to
Participants.4 The proposed rule change
would extend the 120-day period that
certain individuals can function as a
principal without having successfully
passed an appropriate qualification
examination through December 31,
2020,5 and would apply only to those
individuals who were designated to
function as a principal prior to
September 3, 2020. This proposed rule
change is based on a filing recently
4 The term ‘‘Participant’’ means any Participant
Firm that holds a valid Trading Permit and any
person associated with a Participant Firm who is
registered with the Exchange. A Participant shall be
considered a ‘‘member’’ of the Exchange for
purposes of the Exchange Act. See Article 1, Rule
1(s).
5 If NYSE Chicago seeks to provide additional
temporary relief from the rule requirements
identified in this proposed rule change beyond
December 31, 2020, NYSE Chicago will submit a
separate rule filing to further extend the temporary
extension of time.
E:\FR\FM\13OCN1.SGM
13OCN1
Agencies
[Federal Register Volume 85, Number 198 (Tuesday, October 13, 2020)]
[Notices]
[Pages 64551-64556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22474]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90099; File No. SR-LCH SA-2020-005]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to the Clearing of Options on Index
Credit Default Swaps in Respect of North American Indices (More
Specifically, CDX.NA.IG and CDX.NA.HY)
October 6, 2020.
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 September 24, 2020, 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
described in Items I, II, and III below, which Items have been prepared
primarily by LCH SA. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
Banque Centrale de Compensation, which conducts business under the
name LCH SA (``LCH SA''), is proposing to amend its rules to permit the
clearing of options on index credit default swaps in respect of North
American indices (more specifically, CDX.NA.IG and CDX.NA.HY) (``CDX
Swaptions'') (the ``Proposed Rule Change'').
[[Page 64552]]
According to filings LCH SA-2017-006 and 007, currently, LCH SA
clears today options on certain European index CDS as the underlying,
i.e., CDS on Markit iTraxx[supreg] Europe Index and iTraxx[supreg]
Crossover Index (``iTraxx Swaptions'').
The text of the Proposed Rule Change has been annexed as Exhibit
5.\3\
---------------------------------------------------------------------------
\3\ All capitalized terms not defined herein have the same
definition as the Framework or Default Fund Methodology, as
applicable.
---------------------------------------------------------------------------
The launch of the CDX Swaptions initiative will be contingent on
LCH SA's receipt of all necessary regulatory approvals.
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 these statements.
A. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The Proposed Rule Change will permit LCH SA to introduce clearing
of CDX Swaptions.
As part of this initiative, LCH SA is proposing to amend its (i)
Reference Guide: CDS Margin Framework (``CDSClear Margin Framework'')
and (ii) CDS Clearing Supplement (``Supplement'') and (iii) CDS
Clearing Procedures (``Procedures'').
i. CDSClear Margin Framework
The introduction of CDX Swaptions requires minimal changes to
extend the existing risk framework to the new product, these are
reflected in the LCH SA Reference Guide: CDS Margin Framework alongside
other changes described below enabling it to cover the clearing of CDX
Swaptions. This has led to an opportunity to make other changes,
unrelated to the CDX Swaptions, also described below, including changes
to the Vega Margin which would apply to both iTraxx Swaptions and CDX
Swaptions.
Paragraph 2.3.4 which deals with the Daily Contributions Assessment
has been expanded in order to include CDX Swaptions. Members' price
contribution will be mandatory on CDX Swaptions for all strikes that
are multiples of 2.5 bps for CDX.NA.IG and 0.5 point for CDX.NA.HY of a
given expiry from the moment Members have at least one open position on
one of that expiry's strike, in order to ensure implied volatility
measurements are updated on a daily basis. Otherwise, LCH SA will fall
back to Markit's composite prices or according to section 2.3.3.2 of
the Reference Guide: CDS Margin Framework, use pre-defined rules to
fill in missing data.
The proposed changes in section 3.9 (which are unrelated to the
requirements for clearing CDS Options on CDX) serve to enrich and align
the methodology for calculating Vega Margin with LCH SA's approach
across all products and business segments. Vega Margin captures the
risk of volatility changes in the options premium relative to the
strikes, i.e., the skew risk and the risk of changes in the volatility
of volatility. As a result of a risk model validation finding, LCH SA
is proposing to transition from a parametric model to a historical
model, using predefined scenarios to simulate the risk of volatility
change. In order to introduce shocks on the volatility itself rather
than on the calculation's model parameters only as was the case before,
the new methodology would rely on use of four regular and four stressed
historical scenarios for each index family, calibrated based on the
worst skew risk and the volatility of volatility risk at given
confidence levels. Since Vega Margin represents an add-on amount to
spread margin that accounts for potential moves in assumed volatility,
the P&L impact of the proposed change is not expected to be
significant.
(a) The volatility scenarios are built using data going back to
April 3, 2007 whereby for each index family, historical scenarios are
identified by making an estimate of the largest 5-day shifts in
volatility distance, at a given percentile, between At-The-Money
strikes and implied volatilities for options with a delta of 10, 25, 75
and 90%, so as to capture the deformation of volatility surface across.
(b) The Skew and Smile scenarios are calibrated against the worst
volatility surface distortion (i.e., largest changes of the volatility
distance previously defined) at a given confidence level. The scenarios
are derived in the form of volatility shocks at each delta level, these
are used to shift the end of day volatilities, at the corresponding
delta levels, to calibrate a set of shifted or Stochastic Volatility
Inspired (SVI) scenarios as depicted in the updated table in paragraph
3.9.2.
(c) The number of scenarios calculated for each index family has
been adjusted from eight previously to four as a result of the shocks
now being applied at volatility level.
In paragraph 4.1.9 of CDSClear Margin Framework,
--As requested by the LCH SA Risk model validation department, a
comment has been added to highlight that although the example given
pertains to iTraxx Swaptions, the same logic applies to CDX Swaptions;
--in the description of Step 2 regarding the calculation of the cost of
vega hedging, it has been detailed that the volume of delta neutral
Swaption notional that can be reasonably unwound by LCH SA in a day is
derived from a clearing member survey and that the volume of principal
index 5YR Off-The-Run-1 series Swaption notional that can be reasonably
unwound by LCH SA in a day is defined in the section on indices;
--in the description of Step 3, the contributions to the macro-hedge
cost, the CDX Swaptions have been added to the description of the
variable beta (``[beta]'') that defines an index sub-family, either
Main or Xover for iTraxx, and IG or HY for CDX.
--in the description of Step 4 regarding the final Liquidity Charge and
in order to aggregate the costs of delta hedging and vega hedging,
while no changes are required to the liquidity and concentration risk
margin methodology, a formula has been added to clarify that the
existing methodology would also apply and to describe how the Foreign
Exchange rate is introduced into the final Liquidity Charge formula in
order to cater for CDX Swaptions.
With respect to the calculation of liquidity charge, in the event
of a clearing member default the market does not require for swaptions
to be liquidated as a delta-hedged package intended to trade and hedge
an option along with an index but it is deemed more optimal to do so
from a friction cost standpoint as per the market feedback. LCH SA atte
mpts to source the hedges from the CDS part of the defaulting member's
portfolio using a delta hedging algorithm to ensure minimal hedging
costs before sourcing the hedges from the market, and language has been
added to note that the volume of the delta neutral package of the
selected option that can be reasonably unwound per day is based on a
member survey. Finally, additional commentary serves to confirm how
currency conversion from USD to EUR
[[Page 64553]]
will apply where options forming part of the delta-hedged package are
priced in USD.
Paragraph 4.2 sets forth accrued coupon liquidation risk margin
(margin covering the risk that a protection buyer will not be paying
any accrued coupon via the VM between the time it defaukts and the end
of the liquiditation of its portfolio) for both CDS and CDS options.
The accrued coupon liquidation risk margin with respect to CDS Options
remains the same, but now reflects that any such amount for CDX
Swaptions contracts is converted from USD to EUR.
Finally, the following changes, unrelated to the CDX Swaptions
initiative were made.
(a) Section 3 provides for the total initial margin framework with
respect to both CDS and CDS Options. While the methodology for
calculating Short Charge margin in section 3.2 remains the same, the
summary language in paragraph 3.1 has been amended to explicit that it
covers the Profit and Loss impact of liquidating a defaulting member's
portfolio under one or two credit events, whereas the number of credit
events considered was previously set to two.
This is also reflected in the Risk Overview table in paragraph 3.2.
The specific rule to calculate the Short Charge on Financial entities
(which covered the default risk by the two largest Financials entities
comprising the underlying constituent entities of the relevant index)
has been removed. The Short Charge accounts for the risk of default by
the underlying constituent entities of the relevant index, and per the
model used for linear U.S. products this amount would also cover the
possibility of a default in respect of an exposure representing the
average net short exposure of the ten (10) riskiest exposures with the
defined recovery rate cap. Since the approach in respect of iTraxx
Swaptions only accounts for the risk of default of the entity with the
largest net short exposure, the language has been amended to include
the additional default risk that must be taken into account in respect
of CDX Swaptions on CDX.NA.HY. Additionally, the Financial Short Charge
(which covered the default risk by the two largest Financials entities
comprising the underlying constituent entities of the relevant index)
has been deleted. A corresponding change has been made to section 3.2,
which provides an overview of the risks captured by each margin
component.
(b) Reference to a 10 year sample for the Foreign Exchange rate has
been removed from paragraph 3.4.8.3 as it was not an accurate
description of how the Foreign Exchange rate was computed.
(c) A typographical error in paragraph 3.8.2 has been corrected
(double parenthesis and period missing).
The Content table and the summary of changes to the document have
been updated as a result of the above mentioned items. Finally,
corresponding changes to provision numbering throughout the Reference
Guide: CDS Margin Framework have been made as necessary.
ii. Supplement
(a) CDX Swaption-Related Amendments
The Supplement has been amended in order to include the relevant
provisions to allow the clearing of the new CDX Swaptions.
In Part C of the Supplement, the following amendments have been
made to Section 1.2 (Terms defined in the CDS Clearing Supplement):
i. The ``CDX Swaption Standard Terms Supplement'' definition has
been added to refer to the applicable documentation to the CDX
Swaptions, as published by Markit North America Inc. and as amended by
the Supplement;
ii. the definition of the term ``Index Swaption Cleared Transaction
Confirmation'' has been amended to make a reference to the applicable
form of confirmation which is relevant for CDX Swaptions and make some
minor corrections in new indent (a) and in the last paragraph of the
definition;
iii. the new defined term of ``Submission Deadline'' has been added
in order to cater for both the Markit iTraxx and CDX exercise windows
in respect of a swaption which differ; and
iv. the definition of ``Transaction Data'' has been amended to make
a reference to the Option Type which is relevant for CDX Swaptions.
In Sections 6.3, 6.4, 6.5 (paragraph (c)), 6.10 (paragraph (b)) and
Sections 5.3, 5.5 and 5.7 of Appendix VIII (CCM Client Transaction
Requirements) of Part C of the Supplement, references to the standard
fixed time of 4:00 p.m. (London time) or 5:00 p.m. (Central European
Time), which would only be applicable to iTraxx Swaptions, have been
replaced by a reference to the new defined term of ``Submission
Deadline''.
In Section 7.2, references to the relevant paragraph of the CDX
Swaption Standard Terms Supplement for consistency purpose have been
added.
References to a CDX as an Underlying Index and the Swaption Type
have been added to the Schedules of Appendix 1 (Form of Exercise
Notice) and Appendix II (Form of Abandonment Notice) to Part C of the
Supplement.
In Appendix VIII (CCM Client Transaction Requirements) to Part C of
the Supplement, Section 1 has been amended to refer to the CDX
Swaptions Standard Terms Supplement and the definition of ``STS
Supplement'' has been removed. Consequently, the reference to the ``STS
Supplement'' in Section 8.2. of this Appendix has been replaced by a
reference to the ``iTraxx Swaption Standard Terms Supplement'' as this
only concerns iTraxx Swaptions. References to the relevant paragraph of
the CDX Swaption Standard Terms Supplement or the relevant paragraph of
such Supplement have been added where relevant and any reference to the
STS Supplement has been removed from Sections 8.3 and 8.4 of this
Appendix.
(b) Miscellaneous Amendments
LCH SA is also taking the opportunity of the modification of the
Supplement to make a few changes for clarification/harmonization
purposes.
In Part C of the Supplement, Section 9.1 (Creation of Matched
Pairs), a principle governing the size of the Matched Pairs created by
LCH SA in the context of a Restructuring or an Exercise has been added
to align with equivalent provisions of Parts A and B of the Supplement.
We have taken the opportunity to remove the amounts of the Matched Pair
from Section 8.1 (Creation of Matched Pairs) of Parts A and Part B of
the Supplement since such amounts are proposed to be set out in a new
Clearing Notice which outlines the maximum applicable Matched Pair
notional amounts to allow for greater flexibility in adapting these
amounts according to market conditions and evolution of open interest
going forward.
Since the Protocol Effectiveness Condition in respect of the ISDA
2019 NTCE Protocol published by ISDA on 27 August 2019 is now
satisfied, the conditional with the reference to ``if'' have been
removed from Section 2.4 and Appendix XIII (Section 2.6) of Part B of
the Supplement and from Section 2.3 and Appendix VIII (Section 2.4) of
Part C of the Supplement. An equivalent amendment has been made to
Appendix XIII of Part A of the Supplement (Section 2.6) in respect of
the 2014 ISDA Credit Derivatives Definitions Protocol published by ISDA
on 21 August 2014 for consistency purpose.
References to the Implementation Date as provided for in the 2019
ISDA Narrowly Tailored Credit Event Protocol have been removed from the
definition of the '' iTraxx[supreg] Swaption Standard
[[Page 64554]]
Terms Supplement'' in Section 1.2 of Part C of the Supplement to refer
to the current version of this document which is the version published
on 20 March 2017. Indeed, at the time the 2019 ISDA NTCE Protocol-
related amendments were drafted and submitted to the regulatory
process, an initial Swaption Standard Terms Supplement draft taking
into account this Protocol was available. Finally, this draft was taken
no further and the most recent version which is applicable remains the
version published in 2017. Consequently, in Section 2.2 (Index Swaption
Cleared Transaction Confirmation) of Part C of the Supplement, any
confirmation in respect of a Swaption will be amended by specifying in
a new indent (d) that the Standard Terms Date applicable to the
underlying transaction of a Swaption will be the most updated version
of the Standard Terms Supplement to ensure that the applicable version
is the one that has taken into account the 2019 ISDA NTCE Protocol
(i.e., the versions applicable to Markit iTraxx and CDX published on
the Implementation Date of such Protocol). As consequence, the
following indents in Section 2.2 have been renumbered from (e) to (i).
Finally, the following corrections have been made to the
Supplement:
i. In Sections 7.10 of Parts A and B, the reference to a ``CDS
Clearing Member'' has been replaced by ``Clearing Member'' which is the
correct defined term to be used;
ii. In Sections 9.1 of Parts A and B, paragraph (c), it is
specified that the Self Referencing Transaction is a Clearing Member
Self Referencing Transaction to be consistent with the title of Section
9.1;
iii. In Section 1.2 of Part B, in the definition of ``Index Cleared
Transaction Confirmation'', the correct name of the publisher of the
documentation for Markit CDX has been inserted;
iv. In Section 1.2 of Part C, a typographical error has been
corrected in the definition of ``Swaption Restructuring Cleared
Transaction'' and the word ``Eligible'' has been removed from the
definition of ``Underlying Index Transaction'' as an Eligible Index
Swaption is not a defined term; and
v. In Appendix VIII of Part C, the definitions have been removed
from Section 1 as these terms are already defined in Section 1.2 of
Part C.
iii. Procedures
LCH SA also proposes to modify Section 5 of the Procedures (CDS
Clearing Operations) in order to include the CDX Swaptions in the scope
of the End of Day Price Contribution as set out in Paragraph 5.18.
Therefore, references to ``CDS'' have been changed to ``CDS and an
Index Swaption'' in paragraphs 5.18.3 and 5.18.5, for instruments with
a CDS Contractual Currency in U.S. Dollar. In paragraph 5.18.4, the
first sentence has been modified to ensure perfect clarity,
additionally the scope of the End of Day Contributed Prices in respect
of CDS with a Contractual Currency in U.S. Dollar has been extended to
include Index Swaptions.
In paragraph 5.18 (b), the restriction to Index Swaptions with a
CDS Contractual Currency in Euro has been removed and the Delta Hedged
Swaption Package has been split into two sub-sections in order to cater
for the two different timings for the iTraxx Swaptions on the one hand
and the CDX Swaptions on the other.
(b) Statutory Basis
LCH SA believes that the Proposed Rule Change in connection with
the clearing of CDS Options on CDX is consistent with the requirements
of Section 17A of the Securities Exchange Act of 1934 \4\ (the ``Act'')
and the regulations thereunder, including the standards under Rule
17Ad-22.\5\ Section 17(A)(b)(3)(F) \6\ of the Act requires, among other
things, that the rules of a clearing agency be designed to promote the
prompt and accurate clearance and settlement of securities transactions
and derivative agreements, contracts, and transactions and to assure
the safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible. As noted
above, the Proposed Rule Change is designed to manage the risk arising
from the clearing of CDX Swaptions and to streamline the description of
the existing margin framework for CDS Options to take into account CDX
Swaptions and improve the organization and clarity of the CDSClear
Margin Framework.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78q-1.
\5\ 17 CFR 240.17Ad-22.
\6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
LCH SA believes that the proposed changes to the CDSClear Margin
Framework satisfy the requirements of Rule 17Ad-22(b)(2), (e)(1), and
(e)(6).\7\
---------------------------------------------------------------------------
\7\ 17 CFR 240.17Ad-22(b)(2), (e)(1) and (e)(6).
---------------------------------------------------------------------------
Rule 17Ad-22(b)(2) requires a clearing agency to use margin
requirements to limit its credit exposures to participants under normal
market conditions and to use risk- based models and parameters to set
margin requirements.\8\
---------------------------------------------------------------------------
\8\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6) requires a covered clearing agency that provides
central counterparty services to cover its credit exposures to its
participants by establishing a risk-based margin system that meets
certain minimum requirements.\9\
---------------------------------------------------------------------------
\9\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
As described above, LCH SA proposes to amend its margin framework
to manage the risks associated with clearing CDX Swaptions.
Specifically, the proposed rule change amends the existing short charge
component of the total initial margin to take into account a
specificity in respect of options on CDX.NA.HY consistent with Rule
17Ad-22(e)(6)(i) requiring a covered clearing agency that provides CCP
services to establish, implement, maintain and enforce written policies
and procedures reasonably designed to result in a margin system that,
at a minimum, considers and produces margin levels commensurate with
the risks and particular attributes of each relevant product,
portfolio, and market.
In addition, the proposed rule change adds the new methodology for
calculating Vega Margin, based on a historical model approach rather
than a parametric model, to account for the skew risk and volatility of
volatility risk specific to CDS Options. These changes are unrelated to
the clearing of CDX Swaptions and intended to align LCH SA's approach
across all products and business segments, while still relying on use
of a risk-based model to set margin requirements and limit LCH SA's
credit exposures to participants in clearing CDS and/or CDS Options
under normal market conditions, consistent with Rule 17Ad-22(b)(2).
For the same reasons, the Proposed Rule Change would improve LCH
SA's ability to manage financial risk exposures that may arise in the
course of its ongoing clearance and settlement activities and thus
better allow LCH SA to complete the accurate clearance and settlement
process in the event of a member default. Similarly, it should enhance
LCH SA's ability to help assure the safeguarding of securities and
funds which are in the custody or control of LCH SA or for which it is
responsible, consistent with the section 17(A)(b)(3)(F).
LCH SA also believes that the Proposed Rule Change is consistent
with Rule 17Ad-22(e)(6)(i) and (v) requiring a covered clearing agency
to
[[Page 64555]]
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure the use of an appropriate
method for measuring credit exposure that accounts for relevant product
risk factors and portfolio effects across products. Its risk-based
margin methodology, including the new Vega Margin approach, takes into
account, and generates margin levels commensurate with, the risks and
particular attributes of each of the CDS and CDS Options at the product
and portfolio levels, appropriate to the relevant market it serves. CDX
Swaptions initiative will not introduce any new product risk factors.
All risk factors of North American CDX indices are already covered as
LCH SA already clears them, and the implied volatilities were already
captured by the existing model for iTraxx options (partly in the spread
margin for the at-the-money volatility moves, and partly in the vega
margin for skew and smile risk). Portfolio effects are still captured
in the same way, also consistent with the EMIR 80% cap on offsets.
In addition, LCH SA believes that the margin calculation under the
revised CDSClear Margin Framework would sufficiently account for the 5-
day liquidation period for house account portfolio and 7-day
liquidation period for client portfolio and therefore, is reasonably
designed to cover LCH SA's potential future exposure to participants in
the interval between the last margin collection and the close out of
positions following a participant default, consistent with the
provisions of Rule 17Ad-22(e)(6)(iii) requiring a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to calculate margin sufficient to
cover its potential future exposure to participants in the interval
between the last margin collection and the close out of positions
following a participant default.\10\
---------------------------------------------------------------------------
\10\ 17 CFR 240.17Ad-22(e)(6)(iii).
---------------------------------------------------------------------------
LCH SA also believes that the proposed rule change is consistent
with Rule 17Ad-22(e)(1), which requires each covered clearing agency's
policies and procedures reasonably designed to provide for a well-
founded, clear, transparent, and enforceable legal basis for each
aspect of its activities in all relevant jurisdictions. As described
above, the proposed rule change would streamline the description of
margin methodology in CDSClear legal and Margin Framework. Instead of
relying on shocks applied to unobservable parameters of a risk model,
the change introduced to the methodology for calculating Vega Margin is
focusing on the observable changes in volatilities. LCH SA believes
that the Proposed Rule Change change would improve the organization and
clarity of these policies and provide for a clear and transparent legal
basis for LCH SA's margin requirements, consistent with Rule 17Ad-
22(e)(1).\11\
---------------------------------------------------------------------------
\11\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------
For the reasons stated above, LCH SA believes that the proposed
rule change with respect to CDSClear Margin Framework in connection
with clearing of CDS Options on CDX is consistent with the requirements
of prompt and accurate clearance and settlement of securities
transactions and derivative agreements, contracts and transactions, and
assuring the safeguarding of securities and funds in the custody or
control of the clearing agency or for which it is responsible, in
accordance with 17(A)(b)(3)(F) of the Act.\12\
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
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.\13\ LCH SA does
not believe that the proposed rule change would impose burdens on
competition that are not necessary or appropriate in furtherance of the
purposes of the Act. Specifically, the proposed changes to CDSClear
Margin Framework would apply equally to all Clearing Members whose
portfolio includes CDS and/or CDS Options. Because the margin
methodology is risk-based, consistent with the requirements in Rule
17Ad-22(b)(2) and (e)(6), depending on a Clearing Member's portfolio,
each Clearing Member would be subject to a margin requirement
commensurate with the risk particular to its portfolio. Such margin
requirement imposes burdens on a Clearing Member but such burdens would
be necessary and appropriate to manage LCH SA's credit exposures to its
CDSClear participants and to maintain sufficient financial resources to
withstand a default of two participant families to which LCH SA has the
largest exposures in extreme but plausible market conditions,
consistent with the requirements under the Act.
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
Therefore, LCH SA does not believe that the proposed rule change
would impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
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:
Electronic Comments
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-2020-005 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-LCH SA-2020-005. 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
[[Page 64556]]
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 the filing also will 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-2020-
005 and should be submitted on or before November 3, 2020.
---------------------------------------------------------------------------
\14\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-22474 Filed 10-9-20; 8:45 am]
BILLING CODE 8011-01-P