Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Eligible Collateral and Liquidity Risk Management, 55061-55065 [2021-21614]

Download as PDF Federal Register / Vol. 86, No. 190 / Tuesday, October 5, 2021 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.59 J. Matthew DeLesDernier, Assistant Secretary. in order to trade options. There is also a possible range of alternative strategies, including routing to the exchange through another participant or market center or accessing the Exchange indirectly. For example, there are 15 other U.S. options exchanges, which the Exchange must consider in its pricing discipline in order to compete for market participants. In this competitive environment, market participants are free to choose which competing exchange to use to satisfy their business needs. As a result, the Exchange believes this proposed rule change permits fair competition among national securities exchanges. Accordingly, the Exchange does not believe its proposed fee changes impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. institute proceedings to determine whether the proposed rule should be approved or disapproved. Paper Comments I. Introduction C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange received one comment on the proposed rule change.55 The Exchange notes that the Exchange, and its affiliates, MIAX Pearl and MIAX, justified similar fee changes in the past with similar, if not identical, justifications in previous filings that have been noticed by the Commission for public comment and are currently in effect.56 Nonetheless, the Exchange has sought to address the commenters concerns via the enhanced justification and additional information included in this proposal. • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. On August 18, 2021, Banque Centrale de Compensation, which conducts business under the name LCH SA (‘‘LCH SA’’), filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4,2 a proposed rule change to expand the non-cash collateral that a Clearing Member may post with LCH SA to meet margin requirements and make certain other changes as described further below.3 The proposed rule change was published for comment in the Federal Register on August 27, 2021.4 The Commission did not receive comments regarding the proposed rule change. For the reasons discussed below, the Commission is approving the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act,57 and Rule 19b–4(f)(2) 58 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall 55 See the SIG Comment Letter, supra note 8. Securities Exchange Act Release Nos. 90980 (January 25, 2021), 86 FR 7602 (January 29, 2021) (SR–MIAX–2021–02); 90981 (January 25, 2021), 86 FR 7582 (January 29, 2021) (SR–PEARL– 2021–01); 91033 (February 1, 2021), 86 FR 8455 (February 5, 2021) (SR–EMERALD–2021–03); 91460 (April 2, 2021), 86 FR 18349 (April 8, 2021) (SR– EMERALD–2021–11). 57 15 U.S.C. 78s(b)(3)(A)(ii). 58 17 CFR 240.19b–4(f)(2). 56 See lotter on DSK11XQN23PROD with NOTICES1 55061 VerDate Sep<11>2014 18:56 Oct 04, 2021 Jkt 256001 IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– EMERALD–2021–31 on the subject line. All submissions should refer to File Number SR–EMERALD–2021–31. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. 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–EMERALD–2021–31 and should be submitted on or before October 26, 2021. Frm 00146 Fmt 4703 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–93176; File No. SR–LCH SA–2021–002] Electronic Comments PO 00000 [FR Doc. 2021–21619 Filed 10–4–21; 8:45 am] Sfmt 4703 Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Eligible Collateral and Liquidity Risk Management September 29, 2021. II. Description of the Proposed Rule Change A. Additional Eligible Collateral The proposed rule change would expand the list of non-cash collateral that a Clearing Member may post with LCH SA to meet margin requirements to include certain non-Euro government securities.5 To carry out this change, 59 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Capitalized terms used but not defined herein have the meanings specified in the CDS Clearing Rule Book, the CDS Clearing Procedures, the Clearing Notice, or the Liquidity Risk Modelling Framework the Clearing Regulations, as applicable. 4 Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change to Relating to Eligible Collateral and Liquidity Risk Management, Exchange Act Release No. 34–92723 (Aug. 23, 2021); 86 FR 48257 (Aug. 27, 2021) (SR–LCH SA– 2021–002) (‘‘Notice’’). 5 This description is substantially excerpted from the Notice, 86 FR 48257. 1 15 E:\FR\FM\05OCN1.SGM 05OCN1 55062 Federal Register / Vol. 86, No. 190 / Tuesday, October 5, 2021 / Notices lotter on DSK11XQN23PROD with NOTICES1 LCH SA would publish a new Clearing Notice, in accordance with Article 4.2.6.1 of the CDS Clearing Rule Book (the ‘‘Rule Book’’), specifying the additional acceptable non-Euro government securities.6 The Clearing Notice would refer to the additional acceptable non-Euro government securities as the ‘‘New Instruments.’’ The Clearing Notice would further specify that only New Instruments with a minimum outstanding amount equivalent of 500 million Euros would be eligible. Moreover, the Clearing Notice would specify that New Instruments transferred by a Clearing Member to LCH SA as Collateral shall be taken into account to satisfy the Clearing Member’s Margin Requirements only up to 15% of the total Margin Requirements and New Instruments transferred by a Clearing Member to LCH SA as Collateral in excess of such 15% cap shall be ignored for the purposes of determining whether the Clearing Member’s Margin Requirements are satisfied. LCH SA is including this particular limitation because the European Central Bank will not convert New Instruments to Euros and LCH SA currently does not otherwise have the operational capacity to convert New Instruments to Euros.7 Moreover, LCH SA has determined, at this time, not to treat New Instruments as Pledged Eligible Collateral. Pledged Eligible Collateral is that Eligible Collateral which a Clearing Member may pledge to LCH SA under a pledge agreement entered into between LCH SA and the Clearing Member. Under Article 3.2.3.2 of the Rule Book, Pledged Eligible Collateral is transferred to LCH SA using a Belgian law security interest with no title transfer pursuant to the applicable provisions of Belgian law. LCH SA determined that Clearing Member interest was not sufficient to justify the additional operational resources needed to allow the transfer of New Instruments as Pledged Eligible Collateral. Accordingly, the Clearing Notice would specify that New Instruments are not eligible as Pledged Eligible Collateral. Moreover, the proposed rule change would amend the definition of Pledged Eligible Collateral in Section 1.1.1 of the Rule Book to provide that the term means ‘‘Eligible 6 The additional non-Euro Eligible Collateral would be: (i) Australian Treasury Bills and Government Bonds; (ii) Canadian Treasury Bills and Government Bonds; (iii) Danish Treasury Bills and Government Bonds; (iv) Japanese Treasury Bills, Treasury Discount Bills, and Government Bonds; (v) Norwegian Treasury Bills and Government Bonds; (vi) Swedish Treasury Bills and Government Bonds; and (vii) Swiss Treasury Bills and Government Bonds. 7 Notice, 86 FR 48257. VerDate Sep<11>2014 18:56 Oct 04, 2021 Jkt 256001 Collateral as described in a Clearing Notice which is pledged in accordance with a Pledge Agreement.’’ Because the proposed Clearing Notice would specify that New Instruments are not Pledged Eligible Collateral, this proposed change would exclude New Instruments from the definition of Pledged Eligible Collateral in Section 1.1.1 of the Rule Book. In furtherance with this change, the proposed rule change also would amend Section 3.13 of the CDS Clearing Procedures. Section 3.13 describes how Clearing Members may transfer Eligible Collateral pursuant to a Pledge Agreement under Article 3.2.3.2 of the Rule Book. The proposed rule change would clarify that the term Eligible Collateral, as used in Section 3.13, means Eligible Collateral as described in a Clearing Notice. Because the proposed Clearing Notice would specify that New Instruments are not Pledged Eligible Collateral, this proposed change would exclude New Instruments from amended Section 3.13 of the CDS Clearing Procedures. The proposed rule change also would amend LCH SA’s Liquidity Risk Modelling Framework (the ‘‘Framework’’) to take into account this expansion of Eligible Collateral. The Framework describes the Liquidity Stress Testing framework by which the Collateral and Liquidity Risk Management department of LCH Group Holdings Limited (‘‘CaLM’’) 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. The proposed rule change would amend Sections 4.1.3, 4.1.4, 5.2.1.1, 5.3.5, and 5.4.3 of the Framework to clarify that LCH SA will exclude New Instruments from the calculation of LCH SA’s liquidity resources. The proposed rule change would further specify the reason for this exclusion: New Instruments are not European Central Bank eligible and currently not covered by CaLM’s activities for transformation into Euros. In other words, the European Central Bank will not convert New Instruments to Euros and LCH SA currently does not otherwise have the operational capacity to convert them to Euros.8 For this same reason, the proposed rule change would amend Section 5.5.1 of the Framework to clarify that Non-Euro, non-cash Collateral like the New Instruments are not European Central Bank eligible assets. 8 Notice, PO 00000 86 FR 48257. Frm 00147 Fmt 4703 Sfmt 4703 Finally, in accordance with these changes, the proposed rule change also would amend Section 3.9 of the CDS Clearing Procedures to update the link to the portion of LCH SA’s website that contains a list of Eligible Collateral. B. Other Changes In addition to the expansion of Eligible Collateral, the proposed rule change would also expand the custodians at which Clearing Members may deposit Eligible Collateral by adding Clearstream Banking Luxembourg as a central securities depository for LCH SA. The proposed rule change would amend Section 3.4(d) of the CDS Clearing Procedures to include Clearing Banking Luxembourg in the list of entities through which securities may be transferred to LCH SA. Similarly, the proposed rule change would amend Sections 3.10 and 3.12 to include Clearing Banking Luxembourg in the list of central securities depositories in which LCH SA holds Eligible Collateral. Moreover, unrelated to the expansion of Eligible Collateral, the proposed rule change also would amend the Framework to clarify certain sections, tables, and formula in response to model validations and other routine updates. Beginning in Section 4.1.1, Description of sources of liquidity, the proposed rule change would add description to clarify LCH SA’s ability to use Collateral as a source of liquidity. Specifically, the proposed rule change would clarify that, with limited exceptions, LCH SA generally receives Collateral on a full title transfer basis, which permits LCH SA to use such collateral, to offset it with all related claims and to consider such Collateral available for liquidity purposes. As would be described, the two exceptions are: (i) Collateral deposited through a pledge and (ii) Collateral deposited through a central bank guarantee. Next, in Sections 4.1.3 and 4.1.4, the proposed rule change would clarify that Collateral deposited through a pledge may be used for liquidity purposes only if the Clearing Member pledging such Collateral has defaulted. The proposed rule change also would amend Section 4.1.4 regarding the use of non-Euro cash Collateral posted in full title by Clearing Members (i.e. Collateral that is not pledged). Section 4.1.4 currently describes how such Collateral may be used to raise liquidity and how CaLM has demonstrated its ability to raise Euro cash with non-Euro non-cash collateral. The proposed rule change would specify that the non-Euro noncash collateral used by CaLM in that case was collateral in USD and GBP. E:\FR\FM\05OCN1.SGM 05OCN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 86, No. 190 / Tuesday, October 5, 2021 / Notices The proposed rule change also would add to Section 4.1.4 a short explanation of the overdraft facility in place with Citibank that allows LCH SA to source non-Euro currencies in case of liquidity needs. In Section 4.2.1.4, the proposed rule change would update the table of figures of the liquidity injected in the settlement system to smooth settlement activity. LCH SA represents that these figures are updated periodically in line with the observed cash flows.9 In Section 5.1.1, the proposed rule change would clarify that LCH SA has a group policy that allows LCH SA to perform an extraordinary margin call if liquidity deteriorates. Section 5.1.2 currently describes how LCH SA monitors liquidity risks potentially arising from operational issues at settlement platforms and how any warnings about such risks are escalated to senior management to provide colours. The proposed rule change would replace the word ‘‘colours’’ with ‘‘justifications.’’ Section 5.2.1.1 currently notes that investments maturing over the operational target are not factored as liquidity resources for certain purposes. The proposed rule change would replace the word ‘‘over’’ with ‘‘beyond.’’ In Section 5.3.1, which provides an overview of the Liquidity Coverage Ratio (‘‘LCR’’), the proposed rule change would add an explanation that the LCR is an internal ratio similar, but not equivalent, to the banking metric defined in the Basel III framework and is used to ensure compliance with EMIR. The proposed rule change would also correct two typographical errors in Section 5.3.1. Section 5.3.1.1 currently describes the assessment of the market risk related to the volatility of the value of the securities arising from RepoClear settlement and pledged at the Banque de France. The proposed rule change would add further description of the formula and assumptions used in making that assessment. Next, the proposed rule change would amend Section 5.3.1.3, to clarify the treatment of settlement risk to account for early exercise of American-style options. The proposed rule change would describe how the liquidity needs coming from American-style options are computed. Section 5.3.1.4 currently specifies that the liquidity needs arising from variation margin are assessed consistent with the relevant listed derivatives stress scenario. The proposed rule change would specify that such scenario 9 Notice, 86 FR 48258. VerDate Sep<11>2014 18:56 Oct 04, 2021 Jkt 256001 includes spread shifts and implied volatility shifts, thus clarifying the calculation of that particular LCR component. The proposed rule change would make similar updates to Sections 5.3.1.5 and 5.3.4. In Section 5.5, the proposed rule change would delete a duplicated sentence. Section 5.5.1 of the Framework describes the independent stress of various risk factors, and it includes a discussion of how many defaults LCH SA can sustain before generating a liquidity shortfall. The proposed rule change would add a clarification to this discussion that, when considering multiple defaults, the clearing members with the worst credit quality are assumed defaulting first. Finally, the proposed rule change would update Appendix 3 and Appendix 5 to add description of the overdraft facility in place with Citibank that allows LCH SA to source non-Euro currencies in case of liquidity needs. III. Discussion and Commission Findings Section 19(b)(2)(C) of the Act directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization.10 For the reasons given below, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 11 and Rules 17Ad–22(e)(5), (e)(7), and (e)(7)(ix).12 A. Consistency With Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of LCH SA be designed to promote the prompt and accurate clearance and settlement of securities transactions and, to the extent applicable, derivative agreements, contracts, and transactions, as well as to assure the safeguarding of securities and funds which are in the custody or control of LCH SA or for which it is responsible.13 As discussed in more detail below, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act.14 i. Additional Eligible Collateral As discussed above, the proposed rule change would expand the list of non10 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 12 17 CFR 240.17Ad–22(e)(5), (e)(7), and (e)(7)(ix). 13 15 U.S.C. 78q–1(b)(3)(F). 14 15 U.S.C. 78q–1(b)(3)(F). 11 15 PO 00000 Frm 00148 Fmt 4703 Sfmt 4703 55063 cash collateral that a Clearing Member may post with LCH SA to meet margin requirements to include New Instruments, which would be certain non-Euro government securities. The proposed rule change would do so by issuing a new Clearing Notice to specify the New Instruments and amending Section 3.9 of the CDS Clearing Procedures to update the link to the portion of LCH SA’s website that contains a list of Eligible Collateral. The Commission believes that by expanding the collateral that Clearing Members may post to satisfy margin requirements to include New Instruments and accordingly updating the link to the portion of LCH SA’s website that contains a list of Eligible Collateral, these proposed changes would promote the ability of Clearing Members to meet margin requirements and therefore clear and settle transactions at LCH SA. Thus, the Commission believes these aspects of the proposed rule change would promote the prompt and accurate clearance and settlement of securities transactions. Moreover, the Commission believes that the conditions placed upon New Instruments would promote the prompt and accurate clearance and settlement of securities transactions and assure the safeguarding of securities and funds which are in the custody or control of LCH SA or for which it is responsible. The Commission believes that, for example, limiting New Instruments to those with a minimum outstanding amount equivalent to 500 million Euros would help to ensure that LCH SA is able to liquidate posted New Instruments if necessary. Moreover, given that that the European Central Bank will not convert New Instruments to Euros and LCH SA currently does not otherwise have the operational capacity to convert New Instruments to Euros, the Commission believes that limiting the amount of additional Eligible Collateral to 15% of a Clearing Member’s total Margin Requirements should help to ensure that LCH SA is able to maintain sufficient liquidity even while accepting New Instruments as Eligible Collateral. Similarly, the Commission believes that amending the Framework to clarify that LCH SA will exclude New Instruments from the calculation of LCH SA’s liquidity resources and that non-Euro, non-cash Collateral like New Instruments are not European Central Bank eligible assets, should help to ensure that LCH SA is able to maintain sufficient liquidity. The Commission believes that maintaining sufficient liquidity should, in turn, help to ensure that LCH SA is able to E:\FR\FM\05OCN1.SGM 05OCN1 55064 Federal Register / Vol. 86, No. 190 / Tuesday, October 5, 2021 / Notices lotter on DSK11XQN23PROD with NOTICES1 continue clearing and settling securities transactions and safeguarding securities and funds in the face of a Clearing Member default or other liquidity need, and therefore the Commission believes these aspects of the proposed rule change would be consistent with Section 17A(b)(3)(F) of the Act.15 Finally, as discussed above, LCH SA has determined, at this time, not to treat New Instruments as Pledged Eligible Collateral due to a lack of Clearing Member interest and the additional operational resources required to allow such treatment. Accordingly, the proposed rule change would amend the Rule Book and the CDS Clearing Procedures to ensure that New Instruments are not treated as Pledged Eligible Collateral. The Commission believes these changes in particular should help to ensure that LCH SA is able to focus its operations and resources on clearing and settling securities transactions and assuring the safeguarding of securities and funds. Therefore, for the reasons discussed above, the Commission finds that these aspects of the proposed rule change are consistent with the Section 17A(b)(3)(F) of the Act.16 ii. Other Changes In addition to the expansion of Eligible Collateral, the Commission believes that the other changes discussed above would promote the prompt and accurate clearance and settlement of securities transactions and would assure the safeguarding of securities and funds which are in the custody or control of LCH SA or for which it is responsible. In particular, the Commission believes that amending Section 3 of the CDS Clearing Procedures to include Clearing Banking Luxembourg in the list of central securities depositories through which securities may be transferred to LCH SA would provide Clearing Members and LCH SA an additional option to use as a central securities depository, therefore increasing LCH SA’s operational resiliency. The Commission believes that increasing operational resiliency, in turn, should promote the prompt and accurate clearance and settlement of securities transactions and assure the safeguarding of securities and funds which are in the custody or control of LCH SA or for which it is responsible by reducing the likelihood that Clearing Members would be unable to provide collateral to LCH SA. Moreover, the Commission believes that the other clarifications, updates, U.S.C. 78q–1(b)(3)(F). 16 15 U.S.C. 78q–1(b)(3)(F). 18:56 Oct 04, 2021 B. Consistency With Rule 17Ad–22(e)(5) Rule 17Ad–22(e)(5) requires that LCH SA establish, implement, maintain and enforce written policies and procedures reasonably designed to limit the assets it accepts as collateral to those with low credit, liquidity, and market risks, and set and enforce appropriately conservative haircuts and concentration limits if LCH SA requires collateral to manage its or its participants’ credit exposure; and require a review of the sufficiency of its collateral haircuts and concentration limits to be performed not less than annually.19 As discussed above, under the proposed new Clearing Notice, only those New Instruments with a minimum outstanding amount equivalent to 500 million Euros would be eligible for posting to LCH SA. The U.S.C. 78q–1(b)(3)(F). U.S.C. 78q–1(b)(3)(F). 19 17 CFR 240.17Ad–22(e)(5). 15 15 VerDate Sep<11>2014 and corrections to the Framework described in Section II.B above would be consistent with the Section 17A(b)(3)(F) of the Act.17 As discussed above, these changes would, among other things, clarify LCH SA’s ability to use Collateral, including Collateral that is pledged; describe the overdraft facility in place with Citibank that allows the LCH SA to source non-Euro currencies in case of liquidity needs; update the figures describing the liquidity injected in the settlement system to smooth settlement activity; clarify the treatment of settlement risk related to American-style options and other aspects of liquidity stress scenarios; and correct typographical and drafting errors. The Commission believes that all of the changes described in Section II.B above would improve the Framework by increasing its clarity and readability and helping to ensure that the Framework accurately describes how LCH SA considers and covers its liquidity needs. The Commission believes that increasing the clarity and readability of the Framework should help to avoid errors and inconsistencies in the application of the Framework and this should, in turn, improve LCH SA’s ability to maintain sufficient liquidity using the Framework. Because the Commission believes that having sufficient liquidity should help to ensure that LCH SA is able to continue clearing and settling securities transactions and safeguarding securities and funds in the face of a Clearing Member default or other liquidity need, the Commission therefore finds these aspects of the proposed rule change are consistent with Section 17A(b)(3)(F) of the Act.18 Jkt 256001 Commission believes that this aspect of the proposed rule change would help to ensure that New Instruments are limited to those assets with low liquidity risks, consistent with Rule 17Ad–22(e)(5),20 by setting a reasonable condition that would help to ensure that LCH SA is able to liquidate the additional Eligible Collateral if necessary. Moreover, as discussed above, under the proposed new Clearing Notice, New Instruments transferred by a Clearing Member to LCH SA as Collateral shall be taken into account to satisfy the Clearing Member’s Margin Requirements only up to 15% of the total Margin Requirements. The Commission believes this aspect of the proposed rule change would set an appropriate limit that should help to ensure that a Clearing Member’s collateral is not overly concentrated in New Instruments. The Commission further believes this limit is important given that the European Central Bank will not convert New Instruments to Euros and LCH SA currently does not otherwise have the operational capacity to convert New Instruments to Euros. Thus, the Commission finds that these aspects of the proposed rule change are consistent with Rule 17Ad–22(e)(5).21 C. Consistency With Rules17Ad–22(e)(7) and)(e)(7)(ix) Rule 17Ad–22(e)(7) generally requires that LCH SA establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively measure, monitor, and manage the liquidity risk that arises in or is borne by LCH SA, including measuring, monitoring, and managing its settlement and funding flows on an ongoing and timely basis, and its use of intraday liquidity.22 As discussed in Part II.B above, the proposed rule change would add to the Framework description of Collateral as a source of liquidity—that LCH SA generally can use Collateral for liquidity purposes except (i) Collateral that is pledged (which could only be used for liquidity purposes if the Clearing Member pledging such Collateral has defaulted) and (ii) Collateral deposited through a central bank guarantee. The Commission believes that this additional description would help to clarify the sources of liquidity that LCH SA would use to, among other things, manage its liquidity risk. Moreover, the proposed rule change would clarify how CaLM has used collateral in USD and GBP to raise Euro cash and update the table of figures of the liquidity injected 17 15 20 17 18 15 21 17 PO 00000 Frm 00149 Fmt 4703 Sfmt 4703 CFR 240.17Ad–22(e)(5). CFR 240.17Ad–22(e)(5). 22 17 CFR 240.17Ad–22(e)(7). E:\FR\FM\05OCN1.SGM 05OCN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 86, No. 190 / Tuesday, October 5, 2021 / Notices in the settlement system to smooth settlement activity. Again, the Commission believes this additional description would help to clarify LCH SA’s sources of liquidity and how it manages settlement and funding flows. Finally, the proposed rule change would add a general explanation of the LCR and how it relates to the Basel III framework. The proposed rule change similarly would add further explanations of some of the assumptions used in calculating the LCR, such as settlement risk associated with American-style options, liquidity needs arising from variation margin, and that when considering multiple defaults Clearing Members with the worst credit quality are assumed defaulting first. Because LCH SA uses the LCR to ensure that it has sufficient liquidity, the Commission believes that the additional description would help to clarify the LCR and therefore how LCH SA manages its liquidity risk. Thus, the Commission believes these aspects of the proposed rule change generally would be consistent with Rule 17Ad– 22(e)(7).23 Rule 17Ad–22(e)(7)(ix), in particular, requires that LCH SA establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively measure, monitor, and manage the liquidity risk that arises in or is borne by LCH SA, including measuring, monitoring, and managing its settlement and funding flows on an ongoing and timely basis, and its use of intraday liquidity by, at a minimum describing LCH SA’s process to replenish any liquid resources that LCH SA may employ during a stress event.24 As discussed in Part II.B above, the proposed rule change would add description to the Framework of LCH SA’s group policy that allows LCH SA to perform an extraordinary margin call if liquidity deteriorates and description of the overdraft facility in place with Citibank that allows the LCH SA to source non-Euro currencies in case of liquidity needs. The Commission believes that these clarifications would help to describe LCH SA’s process to replenish any liquid resources that LCH SA may employ during a stress event, consistent with Rule 17Ad– 22(e)(7)(ix).25 Thus, the Commission finds that these aspects of the proposed rule change are consistent with Rule 17Ad–22(e)(7) generally and (e)(7)(ix) in particular.26 23 17 CFR 240.17Ad–22(e)(7). CFR 240.17Ad–22(e)(7)(ix). 25 17 CFR 240.17Ad–22(e)(7)(ix). 26 17 CFR 240.17Ad–22(e)(7) and (e)(7)(ix). 24 17 VerDate Sep<11>2014 18:56 Oct 04, 2021 Jkt 256001 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 27 and Rules 17Ad–22(e)(5), (e)(7), and (e)(7)(ix).28 It is therefore ordered pursuant to Section 19(b)(2) of the Act 29 that the proposed rule change (SR–LCH SA– 2021–002) be, and hereby is, approved.30 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.31 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–21614 Filed 10–4–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–93173; File No. SR– CboeBZX–2021–024] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Designation of a Longer Period for Commission Action on Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To List and Trade Shares of the WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares September 29, 2021. On March 26, 2021, Cboe BZX Exchange, Inc. (‘‘BZX’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares of the WisdomTree Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The proposed rule change was published for comment in the Federal Register on April 15, 2021.3 27 15 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(5), (e)(7), and (e)(7)(ix). 29 15 U.S.C. 78s(b)(2). 30 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). 31 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 See Securities Exchange Act Release No. 91521 (April 9, 2021), 86 FR 19917 (April 15, 2021). Comments on the proposed rule change can be found at: https://www.sec.gov/comments/srcboebzx-2021024/srcboebzx2021024.htm. 28 17 PO 00000 Frm 00150 Fmt 4703 Sfmt 9990 55065 On May 26, 2021, pursuant to Section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.5 On July 13, 2021, the Commission instituted proceedings under Section 19(b)(2)(B) of the Act 6 to determine whether to approve or disapprove the proposed rule change.7 Section 19(b)(2) of the Act 8 provides that, after initiating proceedings, the Commission shall issue an order approving or disapproving the proposed rule change not later than 180 days after the date of publication of notice of filing of the proposed rule change. The Commission may extend the period for issuing an order approving or disapproving the proposed rule change, however, by not more than 60 days if the Commission determines that a longer period is appropriate and publishes the reasons for such determination. The proposed rule change was published for comment in the Federal Register on April 15, 2021.9 The 180th day after publication of the proposed rule change is October 12, 2021. The Commission is extending the time period for approving or disapproving the proposed rule change for an additional 60 days. The Commission finds that it is appropriate to designate a longer period within which to issue an order approving or disapproving the proposed rule change so that it has sufficient time to consider the proposed rule change and the issues raised in the comment letters that have been submitted in connection therewith. Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,10 designates December 11, 2021, as the date by which the Commission shall either approve or disapprove the proposed rule change (File Number SR– CboeBZX–2021–024). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.11 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–21611 Filed 10–4–21; 8:45 am] BILLING CODE 8011–01–P 4 15 U.S.C. 78s(b)(2). Securities Exchange Act Release No. 92032 (May 26, 2021), 86 FR 29611 (June 2, 2021). 6 15 U.S.C. 78s(b)(2)(B). 7 See Securities Exchange Act Release No. 92392 (July 13, 2021), 86 FR 38154 (July 19, 2021). 8 15 U.S.C. 78s(b)(2). 9 See supra note 3. 10 15 U.S.C. 78s(b)(2). 11 17 CFR 200.30–3(a)(57). 5 See E:\FR\FM\05OCN1.SGM 05OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 190 (Tuesday, October 5, 2021)]
[Notices]
[Pages 55061-55065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21614]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93176; File No. SR-LCH SA-2021-002]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to Eligible Collateral and Liquidity Risk 
Management

September 29, 2021.

I. Introduction

    On August 18, 2021, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission'' or ``SEC''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (the 
``Act''),\1\ and Rule 19b-4,\2\ a proposed rule change to expand the 
non-cash collateral that a Clearing Member may post with LCH SA to meet 
margin requirements and make certain other changes as described further 
below.\3\ The proposed rule change was published for comment in the 
Federal Register on August 27, 2021.\4\ The Commission did not receive 
comments regarding the proposed rule change. For the reasons discussed 
below, the Commission is approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the CDS Clearing Rule Book, the CDS Clearing 
Procedures, the Clearing Notice, or the Liquidity Risk Modelling 
Framework the Clearing Regulations, as applicable.
    \4\ Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change to Relating to Eligible Collateral and 
Liquidity Risk Management, Exchange Act Release No. 34-92723 (Aug. 
23, 2021); 86 FR 48257 (Aug. 27, 2021) (SR-LCH SA-2021-002) 
(``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

A. Additional Eligible Collateral

    The proposed rule change would expand the list of non-cash 
collateral that a Clearing Member may post with LCH SA to meet margin 
requirements to include certain non-Euro government securities.\5\ To 
carry out this change,

[[Page 55062]]

LCH SA would publish a new Clearing Notice, in accordance with Article 
4.2.6.1 of the CDS Clearing Rule Book (the ``Rule Book''), specifying 
the additional acceptable non-Euro government securities.\6\ The 
Clearing Notice would refer to the additional acceptable non-Euro 
government securities as the ``New Instruments.'' The Clearing Notice 
would further specify that only New Instruments with a minimum 
outstanding amount equivalent of 500 million Euros would be eligible.
---------------------------------------------------------------------------

    \5\ This description is substantially excerpted from the Notice, 
86 FR 48257.
    \6\ The additional non-Euro Eligible Collateral would be: (i) 
Australian Treasury Bills and Government Bonds; (ii) Canadian 
Treasury Bills and Government Bonds; (iii) Danish Treasury Bills and 
Government Bonds; (iv) Japanese Treasury Bills, Treasury Discount 
Bills, and Government Bonds; (v) Norwegian Treasury Bills and 
Government Bonds; (vi) Swedish Treasury Bills and Government Bonds; 
and (vii) Swiss Treasury Bills and Government Bonds.
---------------------------------------------------------------------------

    Moreover, the Clearing Notice would specify that New Instruments 
transferred by a Clearing Member to LCH SA as Collateral shall be taken 
into account to satisfy the Clearing Member's Margin Requirements only 
up to 15% of the total Margin Requirements and New Instruments 
transferred by a Clearing Member to LCH SA as Collateral in excess of 
such 15% cap shall be ignored for the purposes of determining whether 
the Clearing Member's Margin Requirements are satisfied. LCH SA is 
including this particular limitation because the European Central Bank 
will not convert New Instruments to Euros and LCH SA currently does not 
otherwise have the operational capacity to convert New Instruments to 
Euros.\7\
---------------------------------------------------------------------------

    \7\ Notice, 86 FR 48257.
---------------------------------------------------------------------------

    Moreover, LCH SA has determined, at this time, not to treat New 
Instruments as Pledged Eligible Collateral. Pledged Eligible Collateral 
is that Eligible Collateral which a Clearing Member may pledge to LCH 
SA under a pledge agreement entered into between LCH SA and the 
Clearing Member. Under Article 3.2.3.2 of the Rule Book, Pledged 
Eligible Collateral is transferred to LCH SA using a Belgian law 
security interest with no title transfer pursuant to the applicable 
provisions of Belgian law. LCH SA determined that Clearing Member 
interest was not sufficient to justify the additional operational 
resources needed to allow the transfer of New Instruments as Pledged 
Eligible Collateral. Accordingly, the Clearing Notice would specify 
that New Instruments are not eligible as Pledged Eligible Collateral. 
Moreover, the proposed rule change would amend the definition of 
Pledged Eligible Collateral in Section 1.1.1 of the Rule Book to 
provide that the term means ``Eligible Collateral as described in a 
Clearing Notice which is pledged in accordance with a Pledge 
Agreement.'' Because the proposed Clearing Notice would specify that 
New Instruments are not Pledged Eligible Collateral, this proposed 
change would exclude New Instruments from the definition of Pledged 
Eligible Collateral in Section 1.1.1 of the Rule Book.
    In furtherance with this change, the proposed rule change also 
would amend Section 3.13 of the CDS Clearing Procedures. Section 3.13 
describes how Clearing Members may transfer Eligible Collateral 
pursuant to a Pledge Agreement under Article 3.2.3.2 of the Rule Book. 
The proposed rule change would clarify that the term Eligible 
Collateral, as used in Section 3.13, means Eligible Collateral as 
described in a Clearing Notice. Because the proposed Clearing Notice 
would specify that New Instruments are not Pledged Eligible Collateral, 
this proposed change would exclude New Instruments from amended Section 
3.13 of the CDS Clearing Procedures.
    The proposed rule change also would amend LCH SA's Liquidity Risk 
Modelling Framework (the ``Framework'') to take into account this 
expansion of Eligible Collateral. The Framework describes the Liquidity 
Stress Testing framework by which the Collateral and Liquidity Risk 
Management department of LCH Group Holdings Limited (``CaLM'') 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. The proposed rule change would amend Sections 4.1.3, 4.1.4, 
5.2.1.1, 5.3.5, and 5.4.3 of the Framework to clarify that LCH SA will 
exclude New Instruments from the calculation of LCH SA's liquidity 
resources. The proposed rule change would further specify the reason 
for this exclusion: New Instruments are not European Central Bank 
eligible and currently not covered by CaLM's activities for 
transformation into Euros. In other words, the European Central Bank 
will not convert New Instruments to Euros and LCH SA currently does not 
otherwise have the operational capacity to convert them to Euros.\8\ 
For this same reason, the proposed rule change would amend Section 
5.5.1 of the Framework to clarify that Non-Euro, non-cash Collateral 
like the New Instruments are not European Central Bank eligible assets.
---------------------------------------------------------------------------

    \8\ Notice, 86 FR 48257.
---------------------------------------------------------------------------

    Finally, in accordance with these changes, the proposed rule change 
also would amend Section 3.9 of the CDS Clearing Procedures to update 
the link to the portion of LCH SA's website that contains a list of 
Eligible Collateral.

B. Other Changes

    In addition to the expansion of Eligible Collateral, the proposed 
rule change would also expand the custodians at which Clearing Members 
may deposit Eligible Collateral by adding Clearstream Banking 
Luxembourg as a central securities depository for LCH SA. The proposed 
rule change would amend Section 3.4(d) of the CDS Clearing Procedures 
to include Clearing Banking Luxembourg in the list of entities through 
which securities may be transferred to LCH SA. Similarly, the proposed 
rule change would amend Sections 3.10 and 3.12 to include Clearing 
Banking Luxembourg in the list of central securities depositories in 
which LCH SA holds Eligible Collateral.
    Moreover, unrelated to the expansion of Eligible Collateral, the 
proposed rule change also would amend the Framework to clarify certain 
sections, tables, and formula in response to model validations and 
other routine updates. Beginning in Section 4.1.1, Description of 
sources of liquidity, the proposed rule change would add description to 
clarify LCH SA's ability to use Collateral as a source of liquidity. 
Specifically, the proposed rule change would clarify that, with limited 
exceptions, LCH SA generally receives Collateral on a full title 
transfer basis, which permits LCH SA to use such collateral, to offset 
it with all related claims and to consider such Collateral available 
for liquidity purposes. As would be described, the two exceptions are: 
(i) Collateral deposited through a pledge and (ii) Collateral deposited 
through a central bank guarantee.
    Next, in Sections 4.1.3 and 4.1.4, the proposed rule change would 
clarify that Collateral deposited through a pledge may be used for 
liquidity purposes only if the Clearing Member pledging such Collateral 
has defaulted.
    The proposed rule change also would amend Section 4.1.4 regarding 
the use of non-Euro cash Collateral posted in full title by Clearing 
Members (i.e. Collateral that is not pledged). Section 4.1.4 currently 
describes how such Collateral may be used to raise liquidity and how 
CaLM has demonstrated its ability to raise Euro cash with non-Euro non-
cash collateral. The proposed rule change would specify that the non-
Euro non-cash collateral used by CaLM in that case was collateral in 
USD and GBP.

[[Page 55063]]

The proposed rule change also would add to Section 4.1.4 a short 
explanation of the overdraft facility in place with Citibank that 
allows LCH SA to source non-Euro currencies in case of liquidity needs.
    In Section 4.2.1.4, the proposed rule change would update the table 
of figures of the liquidity injected in the settlement system to smooth 
settlement activity. LCH SA represents that these figures are updated 
periodically in line with the observed cash flows.\9\
---------------------------------------------------------------------------

    \9\ Notice, 86 FR 48258.
---------------------------------------------------------------------------

    In Section 5.1.1, the proposed rule change would clarify that LCH 
SA has a group policy that allows LCH SA to perform an extraordinary 
margin call if liquidity deteriorates.
    Section 5.1.2 currently describes how LCH SA monitors liquidity 
risks potentially arising from operational issues at settlement 
platforms and how any warnings about such risks are escalated to senior 
management to provide colours. The proposed rule change would replace 
the word ``colours'' with ``justifications.''
    Section 5.2.1.1 currently notes that investments maturing over the 
operational target are not factored as liquidity resources for certain 
purposes. The proposed rule change would replace the word ``over'' with 
``beyond.''
    In Section 5.3.1, which provides an overview of the Liquidity 
Coverage Ratio (``LCR''), the proposed rule change would add an 
explanation that the LCR is an internal ratio similar, but not 
equivalent, to the banking metric defined in the Basel III framework 
and is used to ensure compliance with EMIR. The proposed rule change 
would also correct two typographical errors in Section 5.3.1.
    Section 5.3.1.1 currently describes the assessment of the market 
risk related to the volatility of the value of the securities arising 
from RepoClear settlement and pledged at the Banque de France. The 
proposed rule change would add further description of the formula and 
assumptions used in making that assessment.
    Next, the proposed rule change would amend Section 5.3.1.3, to 
clarify the treatment of settlement risk to account for early exercise 
of American-style options. The proposed rule change would describe how 
the liquidity needs coming from American-style options are computed.
    Section 5.3.1.4 currently specifies that the liquidity needs 
arising from variation margin are assessed consistent with the relevant 
listed derivatives stress scenario. The proposed rule change would 
specify that such scenario includes spread shifts and implied 
volatility shifts, thus clarifying the calculation of that particular 
LCR component. The proposed rule change would make similar updates to 
Sections 5.3.1.5 and 5.3.4.
    In Section 5.5, the proposed rule change would delete a duplicated 
sentence.
    Section 5.5.1 of the Framework describes the independent stress of 
various risk factors, and it includes a discussion of how many defaults 
LCH SA can sustain before generating a liquidity shortfall. The 
proposed rule change would add a clarification to this discussion that, 
when considering multiple defaults, the clearing members with the worst 
credit quality are assumed defaulting first.
    Finally, the proposed rule change would update Appendix 3 and 
Appendix 5 to add description of the overdraft facility in place with 
Citibank that allows LCH SA to source non-Euro currencies in case of 
liquidity needs.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\10\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \11\ and Rules 17Ad-22(e)(5), (e)(7), and (e)(7)(ix).\12\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(2)(C).
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ 17 CFR 240.17Ad-22(e)(5), (e)(7), and (e)(7)(ix).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of LCH SA be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions, as well 
as to assure the safeguarding of securities and funds which are in the 
custody or control of LCH SA or for which it is responsible.\13\ As 
discussed in more detail below, the Commission finds that the proposed 
rule change is consistent with Section 17A(b)(3)(F) of the Act.\14\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

i. Additional Eligible Collateral
    As discussed above, the proposed rule change would expand the list 
of non-cash collateral that a Clearing Member may post with LCH SA to 
meet margin requirements to include New Instruments, which would be 
certain non-Euro government securities. The proposed rule change would 
do so by issuing a new Clearing Notice to specify the New Instruments 
and amending Section 3.9 of the CDS Clearing Procedures to update the 
link to the portion of LCH SA's website that contains a list of 
Eligible Collateral. The Commission believes that by expanding the 
collateral that Clearing Members may post to satisfy margin 
requirements to include New Instruments and accordingly updating the 
link to the portion of LCH SA's website that contains a list of 
Eligible Collateral, these proposed changes would promote the ability 
of Clearing Members to meet margin requirements and therefore clear and 
settle transactions at LCH SA. Thus, the Commission believes these 
aspects of the proposed rule change would promote the prompt and 
accurate clearance and settlement of securities transactions.
    Moreover, the Commission believes that the conditions placed upon 
New Instruments would promote the prompt and accurate clearance and 
settlement of securities transactions and assure the safeguarding of 
securities and funds which are in the custody or control of LCH SA or 
for which it is responsible. The Commission believes that, for example, 
limiting New Instruments to those with a minimum outstanding amount 
equivalent to 500 million Euros would help to ensure that LCH SA is 
able to liquidate posted New Instruments if necessary. Moreover, given 
that that the European Central Bank will not convert New Instruments to 
Euros and LCH SA currently does not otherwise have the operational 
capacity to convert New Instruments to Euros, the Commission believes 
that limiting the amount of additional Eligible Collateral to 15% of a 
Clearing Member's total Margin Requirements should help to ensure that 
LCH SA is able to maintain sufficient liquidity even while accepting 
New Instruments as Eligible Collateral. Similarly, the Commission 
believes that amending the Framework to clarify that LCH SA will 
exclude New Instruments from the calculation of LCH SA's liquidity 
resources and that non-Euro, non-cash Collateral like New Instruments 
are not European Central Bank eligible assets, should help to ensure 
that LCH SA is able to maintain sufficient liquidity. The Commission 
believes that maintaining sufficient liquidity should, in turn, help to 
ensure that LCH SA is able to

[[Page 55064]]

continue clearing and settling securities transactions and safeguarding 
securities and funds in the face of a Clearing Member default or other 
liquidity need, and therefore the Commission believes these aspects of 
the proposed rule change would be consistent with Section 17A(b)(3)(F) 
of the Act.\15\
---------------------------------------------------------------------------

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

    Finally, as discussed above, LCH SA has determined, at this time, 
not to treat New Instruments as Pledged Eligible Collateral due to a 
lack of Clearing Member interest and the additional operational 
resources required to allow such treatment. Accordingly, the proposed 
rule change would amend the Rule Book and the CDS Clearing Procedures 
to ensure that New Instruments are not treated as Pledged Eligible 
Collateral. The Commission believes these changes in particular should 
help to ensure that LCH SA is able to focus its operations and 
resources on clearing and settling securities transactions and assuring 
the safeguarding of securities and funds.
    Therefore, for the reasons discussed above, the Commission finds 
that these aspects of the proposed rule change are consistent with the 
Section 17A(b)(3)(F) of the Act.\16\
---------------------------------------------------------------------------

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

ii. Other Changes
    In addition to the expansion of Eligible Collateral, the Commission 
believes that the other changes discussed above would promote the 
prompt and accurate clearance and settlement of securities transactions 
and would assure the safeguarding of securities and funds which are in 
the custody or control of LCH SA or for which it is responsible. In 
particular, the Commission believes that amending Section 3 of the CDS 
Clearing Procedures to include Clearing Banking Luxembourg in the list 
of central securities depositories through which securities may be 
transferred to LCH SA would provide Clearing Members and LCH SA an 
additional option to use as a central securities depository, therefore 
increasing LCH SA's operational resiliency. The Commission believes 
that increasing operational resiliency, in turn, should promote the 
prompt and accurate clearance and settlement of securities transactions 
and assure the safeguarding of securities and funds which are in the 
custody or control of LCH SA or for which it is responsible by reducing 
the likelihood that Clearing Members would be unable to provide 
collateral to LCH SA.
    Moreover, the Commission believes that the other clarifications, 
updates, and corrections to the Framework described in Section II.B 
above would be consistent with the Section 17A(b)(3)(F) of the Act.\17\ 
As discussed above, these changes would, among other things, clarify 
LCH SA's ability to use Collateral, including Collateral that is 
pledged; describe the overdraft facility in place with Citibank that 
allows the LCH SA to source non-Euro currencies in case of liquidity 
needs; update the figures describing the liquidity injected in the 
settlement system to smooth settlement activity; clarify the treatment 
of settlement risk related to American-style options and other aspects 
of liquidity stress scenarios; and correct typographical and drafting 
errors. The Commission believes that all of the changes described in 
Section II.B above would improve the Framework by increasing its 
clarity and readability and helping to ensure that the Framework 
accurately describes how LCH SA considers and covers its liquidity 
needs. The Commission believes that increasing the clarity and 
readability of the Framework should help to avoid errors and 
inconsistencies in the application of the Framework and this should, in 
turn, improve LCH SA's ability to maintain sufficient liquidity using 
the Framework. Because the Commission believes that having sufficient 
liquidity should help to ensure that LCH SA is able to continue 
clearing and settling securities transactions and safeguarding 
securities and funds in the face of a Clearing Member default or other 
liquidity need, the Commission therefore finds these aspects of the 
proposed rule change are consistent with Section 17A(b)(3)(F) of the 
Act.\18\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(5)

    Rule 17Ad-22(e)(5) requires that LCH SA establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to limit the assets it accepts as collateral to those with low 
credit, liquidity, and market risks, and set and enforce appropriately 
conservative haircuts and concentration limits if LCH SA requires 
collateral to manage its or its participants' credit exposure; and 
require a review of the sufficiency of its collateral haircuts and 
concentration limits to be performed not less than annually.\19\ As 
discussed above, under the proposed new Clearing Notice, only those New 
Instruments with a minimum outstanding amount equivalent to 500 million 
Euros would be eligible for posting to LCH SA. The Commission believes 
that this aspect of the proposed rule change would help to ensure that 
New Instruments are limited to those assets with low liquidity risks, 
consistent with Rule 17Ad-22(e)(5),\20\ by setting a reasonable 
condition that would help to ensure that LCH SA is able to liquidate 
the additional Eligible Collateral if necessary. Moreover, as discussed 
above, under the proposed new Clearing Notice, New Instruments 
transferred by a Clearing Member to LCH SA as Collateral shall be taken 
into account to satisfy the Clearing Member's Margin Requirements only 
up to 15% of the total Margin Requirements. The Commission believes 
this aspect of the proposed rule change would set an appropriate limit 
that should help to ensure that a Clearing Member's collateral is not 
overly concentrated in New Instruments. The Commission further believes 
this limit is important given that the European Central Bank will not 
convert New Instruments to Euros and LCH SA currently does not 
otherwise have the operational capacity to convert New Instruments to 
Euros.
---------------------------------------------------------------------------

    \19\ 17 CFR 240.17Ad-22(e)(5).
    \20\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------

    Thus, the Commission finds that these aspects of the proposed rule 
change are consistent with Rule 17Ad-22(e)(5).\21\
---------------------------------------------------------------------------

    \21\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------

C. Consistency With Rules17Ad-22(e)(7) and)(e)(7)(ix)

    Rule 17Ad-22(e)(7) generally requires that LCH SA establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively measure, monitor, and manage the 
liquidity risk that arises in or is borne by LCH SA, including 
measuring, monitoring, and managing its settlement and funding flows on 
an ongoing and timely basis, and its use of intraday liquidity.\22\ As 
discussed in Part II.B above, the proposed rule change would add to the 
Framework description of Collateral as a source of liquidity--that LCH 
SA generally can use Collateral for liquidity purposes except (i) 
Collateral that is pledged (which could only be used for liquidity 
purposes if the Clearing Member pledging such Collateral has defaulted) 
and (ii) Collateral deposited through a central bank guarantee. The 
Commission believes that this additional description would help to 
clarify the sources of liquidity that LCH SA would use to, among other 
things, manage its liquidity risk. Moreover, the proposed rule change 
would clarify how CaLM has used collateral in USD and GBP to raise Euro 
cash and update the table of figures of the liquidity injected

[[Page 55065]]

in the settlement system to smooth settlement activity. Again, the 
Commission believes this additional description would help to clarify 
LCH SA's sources of liquidity and how it manages settlement and funding 
flows. Finally, the proposed rule change would add a general 
explanation of the LCR and how it relates to the Basel III framework. 
The proposed rule change similarly would add further explanations of 
some of the assumptions used in calculating the LCR, such as settlement 
risk associated with American-style options, liquidity needs arising 
from variation margin, and that when considering multiple defaults 
Clearing Members with the worst credit quality are assumed defaulting 
first. Because LCH SA uses the LCR to ensure that it has sufficient 
liquidity, the Commission believes that the additional description 
would help to clarify the LCR and therefore how LCH SA manages its 
liquidity risk. Thus, the Commission believes these aspects of the 
proposed rule change generally would be consistent with Rule 17Ad-
22(e)(7).\23\
---------------------------------------------------------------------------

    \22\ 17 CFR 240.17Ad-22(e)(7).
    \23\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(ix), in particular, requires that LCH SA 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively measure, monitor, and 
manage the liquidity risk that arises in or is borne by LCH SA, 
including measuring, monitoring, and managing its settlement and 
funding flows on an ongoing and timely basis, and its use of intraday 
liquidity by, at a minimum describing LCH SA's process to replenish any 
liquid resources that LCH SA may employ during a stress event.\24\ As 
discussed in Part II.B above, the proposed rule change would add 
description to the Framework of LCH SA's group policy that allows LCH 
SA to perform an extraordinary margin call if liquidity deteriorates 
and description of the overdraft facility in place with Citibank that 
allows the LCH SA to source non-Euro currencies in case of liquidity 
needs. The Commission believes that these clarifications would help to 
describe LCH SA's process to replenish any liquid resources that LCH SA 
may employ during a stress event, consistent with Rule 17Ad-
22(e)(7)(ix).\25\
---------------------------------------------------------------------------

    \24\ 17 CFR 240.17Ad-22(e)(7)(ix).
    \25\ 17 CFR 240.17Ad-22(e)(7)(ix).
---------------------------------------------------------------------------

    Thus, the Commission finds that these aspects of the proposed rule 
change are consistent with Rule 17Ad-22(e)(7) generally and (e)(7)(ix) 
in particular.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22(e)(7) and (e)(7)(ix).
---------------------------------------------------------------------------

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 \27\ and Rules 17Ad-22(e)(5), (e)(7), and (e)(7)(ix).\28\
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 17 CFR 240.17Ad-22(e)(5), (e)(7), and (e)(7)(ix).
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\29\ that the proposed rule change (SR-LCH SA-2021-002) be, and hereby 
is, approved.\30\
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(2).
    \30\ 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.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21614 Filed 10-4-21; 8:45 am]
BILLING CODE 8011-01-P

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