Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating To Providing Clearing Services for Additional Index and Single Name CDS, 55872-55876 [2022-19579]
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55872
Federal Register / Vol. 87, No. 175 / Monday, September 12, 2022 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–19581 Filed 9–9–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
Notice is hereby given,
pursuant to the provisions of the
Government in the Sunshine Act, Public
Law 94–409, that the Securities and
Exchange Commission will hold an
Open Meeting on Wednesday,
September 14, 2022 at 10:00 a.m. (ET)
PLACE: The meeting will be webcast on
the Commission’s website at
www.sec.gov.
STATUS: This meeting will begin at 10:00
a.m. (ET) and will be open to the public
via webcast on the Commission’s
website at www.sec.gov.
MATTERS TO BE CONSIDERED:
1. The Commission will consider
whether to propose amendments to the
standards applicable to covered
agencies of the U.S. Treasury securities
regarding their membership
requirements and risk management and
whether to propose amendments to the
broker-dealer customer protection rule
regarding margin held at covered
clearing agencies of U.S. Treasury
securities.
CONTACT PERSON FOR MORE INFORMATION:
For further information and to ascertain
what, if any, matters have been added,
deleted or postponed, please contact
Vanessa A. Countryman from the Office
of the Secretary at (202) 551–5400.
Authority: 5 U.S.C. 552b.
TIME AND DATE:
Dated: September 7, 2022.
Vanessa A. Countryman,
Secretary.
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
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
topics:
Institution and settlement of
injunctive actions;
Institution and settlement of
administrative proceedings;
Resolution of litigation claims; and
Other matters relating to examinations
and 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.
CONTACT PERSON FOR MORE INFORMATION:
For further information; please contact
Vanessa A. Countryman from the Office
of the Secretary at (202) 551–5400.
Authority: 5 U.S.C. 552b.
STATUS:
Dated: September 8, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022–19738 Filed 9–8–22; 11:15 am]
BILLING CODE 8011–01–P
[FR Doc. 2022–19691 Filed 9–8–22; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95674; File No. SR–LCH
SA–2022–007]
Sunshine Act Meetings
2:00 p.m. on Thursday,
September 15, 2022.
PLACE: The meeting will be held via
remote means and/or at the
Commission’s headquarters, 100 F
Street NE, Washington, DC 20549.
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TIME AND DATE:
42 17
17:06 Sep 09, 2022
September 6, 2022.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
CFR 200.30–3(a)(12).
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Self-Regulatory Organizations; LCH
SA; Notice of Filing of Proposed Rule
Change Relating To Providing Clearing
Services for Additional Index and
Single Name CDS
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or ‘‘Exchange Act’’),1 and Rule 19b–4
thereunder,2 notice is hereby given that
on August 29, 2022, Banque Centrale de
Compensation, which conducts
business under the name LCH SA (‘‘LCH
SA’’), filed with the Securities and
Exchange Commission (‘‘Commission’’
or ‘‘SEC’’) the proposed rule change
(‘‘Proposed Rule Change’’) described in
Items I, II and III below, which Items
have been primarily prepared by LCH
SA. The Commission is publishing this
notice to solicit comments on the
Proposed Rule Change from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
LCH SA is proposing to expand its
CDSClear service to provide clearing
services for additional index and single
name credit default swaps (‘‘CDS’’).
Specifically, LCH SA is proposing to
provide clearing services with regard to
the iTraxx Asia ex Japan Index, the
Markit CDX Emerging Markets
(‘‘CDX.EM’’) Index and the single names
that comprise each index, as well as a
list of additional sovereign single names
which are not constituent of an index
(all together the ‘‘New Products’’). To
expand its clearing services in this way,
LCH SA is proposing to amend its CDS
Clearing Supplement (the
‘‘Supplement’’) and Section 2 of the
CDS Clearing Procedures (the
‘‘Procedures’’) to accommodate these
additional indices and single names.
LCH SA is further proposing to amend
its CDS Margin Framework and CDS
Default Fund Methodology (Guide
Stress Testing) to reflect the addition of
the New Products in the scope of
instruments eligible for clearing by
members of LCH SA CDSClear service.
The text of the Proposed Rule Change
is in Exhibit 5.3
The launch of the various initiatives
reflected in the Proposed Rule Change
will be contingent upon LCH SA’s
receipt of all necessary regulatory
approvals, including the approval by the
Commission of the Proposed Rule
Change described herein.
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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Capitalized terms used but not defined herein
shall have the meaning specified in the CDS
Clearing Rule Book or the Clearing Supplement, as
applicable.
2 17
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Federal Register / Vol. 87, No. 175 / Monday, September 12, 2022 / Notices
any comments it received on the
Proposed Rule Change. The text of these
statements may be examined at the
places specified in Item IV below. LCH
SA has prepared summaries, set forth in
sections A, B, and C below, of the most
significant aspects of such statements.
A. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
The Proposed Rule change is being
adopted to expand LCH SA’s CDSClear
service to provide clearing services for
additional index and single name CDS.
Specifically, LCH SA is proposing to
provide clearing services with regard to
the iTraxx Asia ex Japan Index, the
CDX.EM Index and the single names
that comprise each index, as well as a
list of additional sovereign single names
which are not constituent of an index.
LCH SA has determined that the
existing CDSClear risk model currently
appropriately takes into account the risk
associated with the New Products but is
proposing to amend both its CDS
Margin Framework and CDS Default
Fund Methodology (Guide Stress
testing) in order to reflect the addition
of the New Products to the list of
instruments eligible for clearing. To
accommodate the New Products, LCH
SA is further proposing to amend the
Supplement and Section 2 of the
Procedures.
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(a) The CDS Clearing Supplement
To accommodate the New Products,
LCH SA is proposing to amend the
following definitions set out in Section
1.2 of Part B of the Supplement: (i)
‘‘Compression Cut-off Date’’; (ii)
‘‘Novation Cut-off Date’’; (iii) ‘‘Index
Cleared Transaction Confirmation’’; and
(iv) ‘‘Transaction Business Day’’.
Specifically, the definitions of
‘‘Compression Cut-off Date’’ and
‘‘Novation Cut-off Date’’ are each being
amended to add two additional credit
events that are taken into consideration
in determining the ‘‘Compression Cutoff Date’’ and ‘‘Novation Cut-off Date’’:
(i) the ‘‘Obligation Acceleration Credit
Event’’; and (ii) the ‘‘Repudiation/
Moratorium Credit Event’’. These credit
events, which are both standard under
the 2014 ISDA Credit Derivatives
Definitions, are not credit events that
apply to any of the transaction types
referenced by CDS that are currently
eligible for clearing at LCH SA and,
therefore, did not previously need to be
addressed in the Supplement. These
credit events apply to certain
transaction types for sovereigns, and are
proposed to be added as a result of
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index comprising of and single name
CDS referencing sovereign reference
entities becoming eligible for clearing.
In addition, the definition of ‘‘Index
Cleared Transaction Confirmation’’ is
proposed to be revised to provide that:
(i) with regard to any index cleared
transaction that references a Markit
iTraxx ex Japan Index Series [27] or
above, the confirmation will be the form
of confirmation that incorporates the
iTraxx Asia/Pacific Untranched
Standard Terms Supplement; and (ii)
with regard to any index cleared
transaction that references a Markit
CDX.EM Index Series [27] or above, the
form of confirmation that incorporates
the CDX Emerging Markets Untranched
Transactions Standard Terms
Supplement, in each case being the
latest version in force as published by
Markit North America, Inc.
The definition of a ‘‘Transaction
Business Day’’ is currently defined to
mean a ‘‘Business Day’’, as defined in
the Index Cleared Transaction
Confirmation or the Single Name
Cleared Transaction Confirmation, as
applicable. This term is proposed to be
amended to take into account the
situation where such confirmations
could include different definitions of
the term ‘‘Business Day’’ depending on
the circumstances by providing that, ‘‘if
the relevant Index Cleared Transaction
Confirmation or Single Name Cleared
Transaction Confirmation defines such
term differently depending upon its use,
such distinction shall also apply to the
use of the term Transaction Business
Day herein.’’
In Section 2 of Part B of the
Supplement, LCH SA is proposing to
amend Section 2.2 (Index Cleared
Transaction Confirmation) which
specifies the manner in which an Index
Cleared Transaction Confirmation is
amended, supplemented and completed
depending on the index CDS that is
cleared to include, in addition to the
indices currently set out in the section,
the iTraxx Asia ex Japan Index and the
CDX.EM Index and provide for the
necessary amendments to be made to
the relevant confirmations depending
on the index. Section 2.2 is also
proposed to be amended to provide that
‘‘The applicable Physical Settlement
Matrix is the version of the Physical
Settlement Matrix which is in force on
the Clearing Day on which the Index
Cleared Transaction is registered by
LCH SA’’ in a new indent (i) of
paragraph (f). The purpose of this
amendment is to ensure that the
Additional Provisions for Certain
Russian Entities published by ISDA on
March 25, 2022 will apply to the
relevant cleared trades, including the
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trades submitted through the
backloading cycle that could have been
entered into before the implementation
date of these Additional Provisions and
updated Physical Settlement Matrix and
for which one of the parties, or both, did
not adhere to the ISDA 2022 Russia
Additional Provisions Protocol
published by ISDA on March 29, 2022.
In Section 4 of Part B of the
Supplement, LCH SA is proposing to
amend Section 4.1(b) to add a
‘‘Repudiation/Moratorium Extension
Notice’’ to the types of notices that
neither LCH SA nor a clearing member
is entitled to deliver with regard to an
M(M)R Restructuring in accordance
with the terms of any Restructuring
Cleared Transaction. As above, a
‘‘Repudiation/Moratorium Extension
Notice’’ is standard under the 2014
ISDA Credit Derivatives Definitions and
is being proposed to be added as a result
of index comprising of and single name
CDS referencing sovereigns becoming
eligible for clearing.4
In Section 6 of Part B of the
Supplement, Section 6.5(c) is proposed
to be amended to add ‘‘Package
Observable Bond’’ to the types of asset
packages that can be identified in a
Notice of Physical Settlement (‘‘NOPS’’)
or a NOPS Amendment Notice. The
Package Observable Bond provisions in
the 2014 ISDA Credit Derivatives
Definitions only apply to transactions
referencing sovereigns. As a result, they
did not previously need to be referenced
in the Supplement.
LCH SA is also proposing to add a
new section 6.8(c) entitled ‘‘Buy-in of
Bonds—Cap on Settlement’’ for the
purposes of clarifying how the ‘‘60
Business Day Cap on Settlement’’,
which is relevant for transactions
derived from the CDX EM Index
amongst others, will apply to CCM
Client Transactions in respect of the
Matched Contracts of a Settlement
Matched Pair. This proposed
amendments consist in making an
adjustment as to the manner in which
Section 9.10 of the 2014 ISDA Credit
Derivatives Definitions works between
Matched Buyer and Matched Seller to
ensure that the extension of the
Termination Date provided for by
Section 9.10 will apply when there has
been a notice delivered to Matched
Seller by its client under a CCM Client
Transaction. This is to ensure that the
Termination Date of the Cleared
4 For the same reason, ‘‘Repudiation/Moratorium
Extension Notice’’ is proposed to be added to
Section 5(b) of Appendix XIII of Part B of the
Supplement (CCM Client Transaction
Requirements).
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Transactions and related CCM Client
Transaction is the same.5
(b) Section 2 of the Procedures
LCH SA is also proposing to make one
minor technical amendment to Section
2 of the Procedures (Margin, NPV
Payment and Price Alignment).
Specifically, the initial sentence of
Section 2.7(c) currently provides, inter
alia, that, where a Clearing Member is
acting as a CDS Seller, Short Charge
Margin will be required to cover the risk
that the Clearing Member is subject to
an event of default at the same time that
a credit event occurs ‘‘with respect to a
Reference Entity’’. Recognizing that a
credit event may occur with respect to
more than one Reference Entity, this
sentence is proposed to be revised to
refer to ‘‘one or more Reference
Entities’’.
(c) The Reference Guide: CDS Margin
Framework
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LCH SA is proposing to amend the
Margin Framework to reflect the
addition of the new single names. For
example, Section 3.4.5, Portfolio
Margining, which, inter alia, lists the
various combinations of instruments
that can constitute an index basis
package, is proposed to be revised to
add to the list (i) the CDX.EM Index vs
All Single Names Constituents of the
index and (ii) the iTraxx Asia ex Japan
vs All Single Names Constituents of the
index. In addition, LCH SA is proposing
to amend Section 3.1.1, Recovery Rate
for Short Charge to note that the
recovery rate for state-owned enterprises
(‘‘SOE’’) is 70 percent. LCH is also
proposing to move the provisions of
current Section 3.5.2, Short Charge
Calculation, to a new Section 3.5.3. A
new Section 3.5.2, Sovereign Exposures,
is proposed to be added, which notes
the high level of correlation between
SOEs and their sovereign entities. As a
result, an SOE that is more than 50
percent owned by a sovereign entity
would be defaulted jointly with its
sovereign entity when the positions are
not risk reducing. Further, exposures for
SOEs will be calculated using a fixed 70
percent recovery rate.
5 For the same reason, the provisions of section
6.8(c) are effectively repeated in Section 7.8 and
Section 7.18 of Appendix XIII of Part B of the
Supplement (CCM Client Transaction
Requirements). Separately, Section 7.15 of
Appendix XIII, Alternative Procedures relating to
Loans in respect of Matched Contracts, and Section
7.17 of Appendix XIII, Alternative Procedures
relating to Assets Not Delivered, are proposed to be
amended to remove as unnecessary the phrase ‘‘for
the purposes of the Matched Contracts of the related
Settlement Matched Pair’’ and also to use the
correct defined term ‘‘Settlement Matched Pair’’.
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LCH SA is also proposing to amend
Section 3.8.1, Offsets inter-region, to
expand the regional pairs that LCH SA
will consider in calculating wrong way
risk to include: (i) Europe/US; (ii)
Europe/Australia; (iii) Europe/Asia; (iv)
US/Australia; (v) US/Asia; and (vi)
Asia/Australia.
LCH SA is proposing to amend
Section 4.1.1, Liquidity Charge for
Linear Portfolio, to note that the
liquidation cost of a sub-portfolio
composed of a single 5 year position in
the principal on the run index is simply
the sum of the macro hedging cost.
Further, single names without a parent
index are considered a sub-portfolio for
which LCH SA charges the cost of
unwinding a non-hedged sub-portfolio.
Finally, Section 4.1.2, Macro Hedging
Phase, which, inter alia, sets out a list
of sub-portfolios corresponding to
indices and their components is
proposed to be revised to add: (i) the
CDX.EM sub-portfolio; (ii) the iTraxx
Asia ex Japan IG sub-portfolio, and (iii)
the No parent index sub-portfolio.
LCH SA is proposing to amend
Section 4.1.7 to update the existing
thresholds and include more cleared
indexes in the table for volume
thresholds based on calibrations done in
December 2021. A dedicated liquidity
grid has also been added for sovereign
single names in order to reflect their
tighter bid-ask spreads and higher
liquidity profiles.
LCH SA is also proposing to amend
the CDS Default Fund Methodology
(Guide Stress Testing) in a number of
sections, to reflect the extension of the
product offer as well as to introduce a
Sovereign Stressed Short Charge
component aimed to capture a potential
joint default of a member and its
country:
—the last paragraph of section 2.2 adds
to the list of index families covered to
reflect the addition of CDX.EM and
iTraxx Asia. It also adds iTraxx
Australia, as this should have been
updated when introducing that index.
—section 2.4.1 details how State-Owned
Entities’ exposures should be added
to the exposure on the sovereign name
only if risk increasing
—section 2.4.2 introduces a Sovereign
Stressed Short Charge, considering
jointly the top exposure across the
portfolio and if relevant the exposure
on the sovereign name corresponding
to the member’s jurisdiction
—section 2.4.3. and 2.7.2 describe the
same Sovereign Stressed Short Charge
with formulas instead of plain text
—section 2.6.1. and 2.6.3 extend the
logic of exercise decisions to consider
the Sovereign Stressed Short Charge
when relevant
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2. Statutory Basis
LCH SA believes that the Proposed
Rule Change is consistent with the
requirements of Section 17A of the Act 6
and regulations thereunder applicable to
it, including Commission Rule 17Ad–
22(e).7 In particular, Section
17A(b)(3)(F) of the Act requires, inter
alia, that the rules of a clearing agency
be designed to ‘‘promote the prompt and
accurate clearance and settlement of
. . . derivatives agreements, contracts,
and transactions.’’ 8 By proposing to
amend its CDS Clearing Supplement to
authorize the expansion of LCH SA’s
CDSClear Service to provide clearing
services with regard to the New
Products, on the terms and conditions
set out in the Proposed Rule Change,
LCH SA considers that this would
encourage Clearing Members to clear
additional indices and single name CDS
through its CDSClear service, which, in
turn, should promote the prompt and
accurate clearance and settlement of
those instruments within the meaning of
Section 17A(b)(3)(F) of the Act.9 The
Proposed Rule Change, in particular, the
amendments to the CDS Clearing
Supplement, therefore, are consistent
with the requirements of Section
17A(b)(3)(F) of the Act.
Further, from the perspective of
financial risk management and margin
requirements, the clearing of the New
Products would not require changes to
LCH SA’s existing margin methodology,
default management policies and
procedures and operational process, as
LCH SA determined that the current
margin framework for its CDSClear
service already appropriately captures
the risk associated to the New Products.
The New Products would be cleared
pursuant to LCH SA’s existing clearing
arrangements and related financial
safeguards, protections and risk
management procedures which are
consistent with Exchange Act Rule
17Ad–22(e)(17),10 requiring a covered
clearing agency to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
manage the covered clearing agency’s
operational risks by, among other
things, identifying the plausible sources
of operational risk, both internal and
external, and mitigating their impact
through the use of appropriate systems,
policies, procedures, and controls.
Adopting rules to facilitate the
clearing of the New Products would also
be consistent with other relevant
6 15
U.S.C. 78q–1.
CFR 240.17Ad–22.
8 15 U.S.C. 78q–1(b)(3)(F).
9 15 U.S.C. 78q–1(b)(3)(F).
10 17 CFR 240.17Ad–22(e)(17).
7 17
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requirements of Rule 17Ad–22(e),11 as
set forth in the following discussion.
Margin Requirements. Rule 17Ad–
22(e)(4) 12 requires LCH SA to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to effectively
identify, measure, monitor, and manage
its credit exposures to participants and
those arising from its payment, clearing,
and settlement processes, among other
requirements. In terms of financial
resources, LCH SA would apply its
existing margin methodology to the New
Products. LCH SA believes that the
proposed rules that would apply this
risk model to the New Products will
provide sufficient margin requirements
to cover its credit exposure to its
clearing members from clearing such
contracts, consistent with the
requirements of Rule 17Ad–22I(4).13
[sic]
Financial Resources. Rule 17Ad–
22I(4)(i) 14 [sic] requires LCH SA to
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to effectively
identify, measure, monitor, and manage
its credit exposures to participants and
those arising from its payment, clearing,
and settlement processes by maintaining
sufficient financial resources to cover its
credit exposure to each participant fully
with a high degree of confidence. To the
extent not already maintained pursuant
to paragraph (e)(4)(i), Rule 17Ad–
22(e)(4)(ii) 15 requires LCH SA’s policies
and procedures be reasonably designed
to maintain additional financial
resources at the minimum to enable it
to cover a wide range of foreseeable
stress scenarios that include, but are not
limited to, the default of the two
participant families that would
potentially cause the largest aggregate
credit exposure for the covered clearing
agency in extreme but plausible market
conditions. As explained above, LCH
SA is proposing to make some changes
to its CDS Default Fund Methodology
documentation (Guide Stress Testing) in
order to reflect the extension of the
product list as well as to introduce a
Sovereign Stressed Short Charge
component aimed to capture a potential
joint default of a member and its
country. LCH SA believes that with the
proposed changes in its stress testing
framework, its Default Fund will,
together with the required margin,
provide sufficient financial resources to
support the clearing of the New
CFR 240.17Ad–22(e).
CFR 240.17Ad–22(e)(4).
13 17 CFR 240.17Ad–22(e)4.
14 17 CFR 240.17Ad–22(e)(4)(i).
15 17 CFR 240.17Ad–22(e)(4)(ii).
Products, consistent with the
requirements of Rules 17Ad–22(e)(4)(i)
and (ii).
Operational Resources. Rule 17Ad–
22(e)(3) 16 requires LCH SA to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to maintain a
sound risk management framework for
comprehensively managing legal, credit,
liquidity, operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency. LCH SA believes that
its existing operational and risk
management resources will be sufficient
for clearing of the New Products,
consistent with the requirements of Rule
17Ad–22(e)(3) 17, as these new contracts
are substantially the same from an
operational and risk management
perspective as the existing CDS
contracts cleared by LCH SA CDSClear.
LCH SA will also apply its existing
default management policies and
procedures for the New Products. As
with current CDSClear products with
similar risk profile, LCH SA believes
that these procedures allow for it to take
timely action to contain losses and
liquidity pressures and to continue
meeting its obligations in the event of
clearing member insolvencies or
defaults in respect of the additional
single names, in accordance with Rule
17Ad–22(e)(3).18
Exchange Act Rule 17Ad–22(e)(1) 19
requires that a covered clearing agency
establish, implement, maintain, and
enforce written 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
Change is also modifying the
Supplement to take into account the
New Products and provide for a clear
and transparent legal basis for LCH SA’s
CDS Clearing rules consistent with the
requirements of Exchange Act Rule
17Ad–22(e)(1).20
Credit default swap (CDS) is an overthe-counter (OTC) market on which
participants can be active at any time in
the context of market stress. The LCH
SA CDSClear risk model is considering
5-d moves of unhedged portfolios and
the back testing results confirmed that
the margins for the New Products were
sufficient to cover the exposure in the
interval between the last margin
collection and the close out of the
11 17
16 17
12 17
17 17
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17:06 Sep 09, 2022
CFR 240.17Ad–22(e)(3).
CFR 240.17Ad–22(e)(3).
18 17 CFR 240.17Ad–22(e)(3).
19 17 CFR 240.17Ad–22(e)(1).
20 17 CFR 240.17Ad–22(e)(1).
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55875
portfolio a defaulting cleating member
which is consistent with the
requirements of SEC Rule 17Ad–
22(e)(6)(iii).21
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.22
LCH SA does not believe that its
proposed clearing of the New Products
will adversely affect competition in the
trading market for those contracts or
CDS generally. By allowing LCH SA to
clear the New Products, market
participants will have additional
choices on where to clear and which
products to use for risk management
purposes, which, in turn, will promote
competition and further the
development of CDS for risk
management.
In addition, LCH SA will continue to
apply its existing fair and open access
criteria to the clearing of these
additional products and will apply the
same criteria to every clearing member
or client who proposes to enter into this
clearing activity.
Accordingly, LCH SA does not believe
that the Proposed Rule Change would
impose any burden on competition that
is 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.
21 17
22 15
E:\FR\FM\12SEN1.SGM
CFR 240. 17Ad–22(e)(6)(iii).
U.S.C. 78q–1(b)(3)(I).
12SEN1
55876
Federal Register / Vol. 87, No. 175 / Monday, September 12, 2022 / Notices
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
[FR Doc. 2022–19579 Filed 9–9–22; 8:45 am]
BILLING CODE 8011–01–P
Electronic Comments
SMALL BUSINESS ADMINISTRATION
• 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–2022–007 on the subject line.
[Disaster Declaration #17616 and #17617;
ARIZONA Disaster Number AZ–00086]
Paper Comments
AGENCY:
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
lotter on DSK11XQN23PROD with NOTICES1
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
J. Matthew DeLesDernier,
Deputy Secretary.
All submissions should refer to File
Number SR–LCH SA–2022–007. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of 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/rulebooks/proposed-rulechanges.
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–2022–007
and should be submitted on or before
October 3, 2022.
VerDate Sep<11>2014
17:06 Sep 09, 2022
Jkt 256001
Presidential Declaration of a Major
Disaster for Public Assistance Only for
the Salt River Pima-Maricopa Indian
Community in the State of Arizona
Percent
Non-Profit Organizations Without Credit Available Elsewhere .....................................
For Economic Injury:
Non-Profit Organizations Without Credit Available Elsewhere .....................................
1.875
1.875
The number assigned to this disaster
for physical damage is 17616 B and for
economic injury is 176170.
(Catalog of Federal Domestic Assistance
Number 59008)
Rafaela Monchek,
Acting Associate Administrator for Disaster
Assistance.
U.S. Small Business
Administration.
ACTION: Notice.
[FR Doc. 2022–19593 Filed 9–9–22; 8:45 am]
This is a Notice of the
Presidential declaration of a major
disaster for Public Assistance Only for
Salt River Pima-Maricopa Indian
Community in the State of Arizona
(FEMA–4668–DR), dated 09/02/2022.
Incident: Severe Storms.
Incident Period: 07/17/2022 through
07/18/2022.
DATES: Issued on 09/02/2022.
Physical Loan Application Deadline
Date: 11/01/2022.
Economic Injury (EIDL) Loan
Application Deadline Date: 06/02/2023.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that as a result of the
President’s major disaster declaration on
09/02/2022, Private Non-Profit
organizations that provide essential
services of a governmental nature may
file disaster loan applications at the
address listed above or other locally
announced locations.
The following areas have been
determined to be adversely affected by
the disaster:
Primary Counties: Salt River PimaMaricopa Indian Community.
The Interest Rates are:
SMALL BUSINESS ADMINISTRATION
BILLING CODE 8026–09–P
SUMMARY:
Percent
For Physical Damage:
Non-Profit Organizations With
Credit Available Elsewhere ...
23 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00098
Fmt 4703
Sfmt 4703
1.875
[Disaster Declaration #17614 and #17615;
ARIZONA Disaster Number AZ–00083]
Presidential Declaration of a Major
Disaster for the Salt River PimaMaricopa Indian Community in the
State of Arizona
U.S. Small Business
Administration.
ACTION: Notice.
AGENCY:
This is a Notice of the
Presidential declaration of a major
disaster for Salt River Pima-Maricopa
Indian Community in the State of
Arizona, (FEMA–4668–DR), dated 09/
02/2022.
Incident: Severe Storms.
Incident Period: 07/17/2022 through
07/18/2022.
DATES: Issued on 09/02/2022.
Physical Loan Application Deadline
Date: 11/01/2022.
Economic Injury (EIDL) Loan
Application Deadline Date: 06/02/2023.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that as a result of the
President’s major disaster declaration on
09/02/2022, applications for disaster
loans may be filed at the address listed
above or other locally announced
locations.
The following areas have been
determined to be adversely affected by
the disaster:
SUMMARY:
E:\FR\FM\12SEN1.SGM
12SEN1
]]>Agencies
[Federal Register Volume 87, Number 175 (Monday, September 12, 2022)]
[Notices]
[Pages 55872-55876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-19579]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95674; File No. SR-LCH SA-2022-007]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating To Providing Clearing Services for
Additional Index and Single Name CDS
September 6, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on August 29, 2022, Banque Centrale de
Compensation, which conducts business under the name LCH SA (``LCH
SA''), filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change (``Proposed Rule
Change'') described in Items I, II and III below, which Items have been
primarily prepared by LCH SA. The Commission is publishing this notice
to solicit comments on the Proposed Rule Change from interested
persons.
---------------------------------------------------------------------------
\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
LCH SA is proposing to expand its CDSClear service to provide
clearing services for additional index and single name credit default
swaps (``CDS''). Specifically, LCH SA is proposing to provide clearing
services with regard to the iTraxx Asia ex Japan Index, the Markit CDX
Emerging Markets (``CDX.EM'') Index and the single names that comprise
each index, as well as a list of additional sovereign single names
which are not constituent of an index (all together the ``New
Products''). To expand its clearing services in this way, LCH SA is
proposing to amend its CDS Clearing Supplement (the ``Supplement'') and
Section 2 of the CDS Clearing Procedures (the ``Procedures'') to
accommodate these additional indices and single names. LCH SA is
further proposing to amend its CDS Margin Framework and CDS Default
Fund Methodology (Guide Stress Testing) to reflect the addition of the
New Products in the scope of instruments eligible for clearing by
members of LCH SA CDSClear service.
The text of the Proposed Rule Change is in Exhibit 5.\3\
---------------------------------------------------------------------------
\3\ Capitalized terms used but not defined herein shall have the
meaning specified in the CDS Clearing Rule Book or the Clearing
Supplement, as applicable.
---------------------------------------------------------------------------
The launch of the various initiatives reflected in the Proposed
Rule Change will be contingent upon LCH SA's receipt of all necessary
regulatory approvals, including the approval by the Commission of the
Proposed Rule Change described herein.
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
[[Page 55873]]
any comments it received on the Proposed Rule Change. The text of these
statements may be examined at the places specified in Item IV below.
LCH SA has prepared summaries, set forth in sections A, B, and C below,
of the most significant aspects of such statements.
A. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The Proposed Rule change is being adopted to expand LCH SA's
CDSClear service to provide clearing services for additional index and
single name CDS. Specifically, LCH SA is proposing to provide clearing
services with regard to the iTraxx Asia ex Japan Index, the CDX.EM
Index and the single names that comprise each index, as well as a list
of additional sovereign single names which are not constituent of an
index.
LCH SA has determined that the existing CDSClear risk model
currently appropriately takes into account the risk associated with the
New Products but is proposing to amend both its CDS Margin Framework
and CDS Default Fund Methodology (Guide Stress testing) in order to
reflect the addition of the New Products to the list of instruments
eligible for clearing. To accommodate the New Products, LCH SA is
further proposing to amend the Supplement and Section 2 of the
Procedures.
(a) The CDS Clearing Supplement
To accommodate the New Products, LCH SA is proposing to amend the
following definitions set out in Section 1.2 of Part B of the
Supplement: (i) ``Compression Cut-off Date''; (ii) ``Novation Cut-off
Date''; (iii) ``Index Cleared Transaction Confirmation''; and (iv)
``Transaction Business Day''.
Specifically, the definitions of ``Compression Cut-off Date'' and
``Novation Cut-off Date'' are each being amended to add two additional
credit events that are taken into consideration in determining the
``Compression Cut-off Date'' and ``Novation Cut-off Date'': (i) the
``Obligation Acceleration Credit Event''; and (ii) the ``Repudiation/
Moratorium Credit Event''. These credit events, which are both standard
under the 2014 ISDA Credit Derivatives Definitions, are not credit
events that apply to any of the transaction types referenced by CDS
that are currently eligible for clearing at LCH SA and, therefore, did
not previously need to be addressed in the Supplement. These credit
events apply to certain transaction types for sovereigns, and are
proposed to be added as a result of index comprising of and single name
CDS referencing sovereign reference entities becoming eligible for
clearing.
In addition, the definition of ``Index Cleared Transaction
Confirmation'' is proposed to be revised to provide that: (i) with
regard to any index cleared transaction that references a Markit iTraxx
ex Japan Index Series [27] or above, the confirmation will be the form
of confirmation that incorporates the iTraxx Asia/Pacific Untranched
Standard Terms Supplement; and (ii) with regard to any index cleared
transaction that references a Markit CDX.EM Index Series [27] or above,
the form of confirmation that incorporates the CDX Emerging Markets
Untranched Transactions Standard Terms Supplement, in each case being
the latest version in force as published by Markit North America, Inc.
The definition of a ``Transaction Business Day'' is currently
defined to mean a ``Business Day'', as defined in the Index Cleared
Transaction Confirmation or the Single Name Cleared Transaction
Confirmation, as applicable. This term is proposed to be amended to
take into account the situation where such confirmations could include
different definitions of the term ``Business Day'' depending on the
circumstances by providing that, ``if the relevant Index Cleared
Transaction Confirmation or Single Name Cleared Transaction
Confirmation defines such term differently depending upon its use, such
distinction shall also apply to the use of the term Transaction
Business Day herein.''
In Section 2 of Part B of the Supplement, LCH SA is proposing to
amend Section 2.2 (Index Cleared Transaction Confirmation) which
specifies the manner in which an Index Cleared Transaction Confirmation
is amended, supplemented and completed depending on the index CDS that
is cleared to include, in addition to the indices currently set out in
the section, the iTraxx Asia ex Japan Index and the CDX.EM Index and
provide for the necessary amendments to be made to the relevant
confirmations depending on the index. Section 2.2 is also proposed to
be amended to provide that ``The applicable Physical Settlement Matrix
is the version of the Physical Settlement Matrix which is in force on
the Clearing Day on which the Index Cleared Transaction is registered
by LCH SA'' in a new indent (i) of paragraph (f). The purpose of this
amendment is to ensure that the Additional Provisions for Certain
Russian Entities published by ISDA on March 25, 2022 will apply to the
relevant cleared trades, including the trades submitted through the
backloading cycle that could have been entered into before the
implementation date of these Additional Provisions and updated Physical
Settlement Matrix and for which one of the parties, or both, did not
adhere to the ISDA 2022 Russia Additional Provisions Protocol published
by ISDA on March 29, 2022.
In Section 4 of Part B of the Supplement, LCH SA is proposing to
amend Section 4.1(b) to add a ``Repudiation/Moratorium Extension
Notice'' to the types of notices that neither LCH SA nor a clearing
member is entitled to deliver with regard to an M(M)R Restructuring in
accordance with the terms of any Restructuring Cleared Transaction. As
above, a ``Repudiation/Moratorium Extension Notice'' is standard under
the 2014 ISDA Credit Derivatives Definitions and is being proposed to
be added as a result of index comprising of and single name CDS
referencing sovereigns becoming eligible for clearing.\4\
---------------------------------------------------------------------------
\4\ For the same reason, ``Repudiation/Moratorium Extension
Notice'' is proposed to be added to Section 5(b) of Appendix XIII of
Part B of the Supplement (CCM Client Transaction Requirements).
---------------------------------------------------------------------------
In Section 6 of Part B of the Supplement, Section 6.5(c) is
proposed to be amended to add ``Package Observable Bond'' to the types
of asset packages that can be identified in a Notice of Physical
Settlement (``NOPS'') or a NOPS Amendment Notice. The Package
Observable Bond provisions in the 2014 ISDA Credit Derivatives
Definitions only apply to transactions referencing sovereigns. As a
result, they did not previously need to be referenced in the
Supplement.
LCH SA is also proposing to add a new section 6.8(c) entitled
``Buy-in of Bonds--Cap on Settlement'' for the purposes of clarifying
how the ``60 Business Day Cap on Settlement'', which is relevant for
transactions derived from the CDX EM Index amongst others, will apply
to CCM Client Transactions in respect of the Matched Contracts of a
Settlement Matched Pair. This proposed amendments consist in making an
adjustment as to the manner in which Section 9.10 of the 2014 ISDA
Credit Derivatives Definitions works between Matched Buyer and Matched
Seller to ensure that the extension of the Termination Date provided
for by Section 9.10 will apply when there has been a notice delivered
to Matched Seller by its client under a CCM Client Transaction. This is
to ensure that the Termination Date of the Cleared
[[Page 55874]]
Transactions and related CCM Client Transaction is the same.\5\
---------------------------------------------------------------------------
\5\ For the same reason, the provisions of section 6.8(c) are
effectively repeated in Section 7.8 and Section 7.18 of Appendix
XIII of Part B of the Supplement (CCM Client Transaction
Requirements). Separately, Section 7.15 of Appendix XIII,
Alternative Procedures relating to Loans in respect of Matched
Contracts, and Section 7.17 of Appendix XIII, Alternative Procedures
relating to Assets Not Delivered, are proposed to be amended to
remove as unnecessary the phrase ``for the purposes of the Matched
Contracts of the related Settlement Matched Pair'' and also to use
the correct defined term ``Settlement Matched Pair''.
---------------------------------------------------------------------------
(b) Section 2 of the Procedures
LCH SA is also proposing to make one minor technical amendment to
Section 2 of the Procedures (Margin, NPV Payment and Price Alignment).
Specifically, the initial sentence of Section 2.7(c) currently
provides, inter alia, that, where a Clearing Member is acting as a CDS
Seller, Short Charge Margin will be required to cover the risk that the
Clearing Member is subject to an event of default at the same time that
a credit event occurs ``with respect to a Reference Entity''.
Recognizing that a credit event may occur with respect to more than one
Reference Entity, this sentence is proposed to be revised to refer to
``one or more Reference Entities''.
(c) The Reference Guide: CDS Margin Framework
LCH SA is proposing to amend the Margin Framework to reflect the
addition of the new single names. For example, Section 3.4.5, Portfolio
Margining, which, inter alia, lists the various combinations of
instruments that can constitute an index basis package, is proposed to
be revised to add to the list (i) the CDX.EM Index vs All Single Names
Constituents of the index and (ii) the iTraxx Asia ex Japan vs All
Single Names Constituents of the index. In addition, LCH SA is
proposing to amend Section 3.1.1, Recovery Rate for Short Charge to
note that the recovery rate for state-owned enterprises (``SOE'') is 70
percent. LCH is also proposing to move the provisions of current
Section 3.5.2, Short Charge Calculation, to a new Section 3.5.3. A new
Section 3.5.2, Sovereign Exposures, is proposed to be added, which
notes the high level of correlation between SOEs and their sovereign
entities. As a result, an SOE that is more than 50 percent owned by a
sovereign entity would be defaulted jointly with its sovereign entity
when the positions are not risk reducing. Further, exposures for SOEs
will be calculated using a fixed 70 percent recovery rate.
LCH SA is also proposing to amend Section 3.8.1, Offsets inter-
region, to expand the regional pairs that LCH SA will consider in
calculating wrong way risk to include: (i) Europe/US; (ii) Europe/
Australia; (iii) Europe/Asia; (iv) US/Australia; (v) US/Asia; and (vi)
Asia/Australia.
LCH SA is proposing to amend Section 4.1.1, Liquidity Charge for
Linear Portfolio, to note that the liquidation cost of a sub-portfolio
composed of a single 5 year position in the principal on the run index
is simply the sum of the macro hedging cost. Further, single names
without a parent index are considered a sub-portfolio for which LCH SA
charges the cost of unwinding a non-hedged sub-portfolio. Finally,
Section 4.1.2, Macro Hedging Phase, which, inter alia, sets out a list
of sub-portfolios corresponding to indices and their components is
proposed to be revised to add: (i) the CDX.EM sub-portfolio; (ii) the
iTraxx Asia ex Japan IG sub-portfolio, and (iii) the No parent index
sub-portfolio.
LCH SA is proposing to amend Section 4.1.7 to update the existing
thresholds and include more cleared indexes in the table for volume
thresholds based on calibrations done in December 2021. A dedicated
liquidity grid has also been added for sovereign single names in order
to reflect their tighter bid-ask spreads and higher liquidity profiles.
LCH SA is also proposing to amend the CDS Default Fund Methodology
(Guide Stress Testing) in a number of sections, to reflect the
extension of the product offer as well as to introduce a Sovereign
Stressed Short Charge component aimed to capture a potential joint
default of a member and its country:
--the last paragraph of section 2.2 adds to the list of index families
covered to reflect the addition of CDX.EM and iTraxx Asia. It also adds
iTraxx Australia, as this should have been updated when introducing
that index.
--section 2.4.1 details how State-Owned Entities' exposures should be
added to the exposure on the sovereign name only if risk increasing
--section 2.4.2 introduces a Sovereign Stressed Short Charge,
considering jointly the top exposure across the portfolio and if
relevant the exposure on the sovereign name corresponding to the
member's jurisdiction
--section 2.4.3. and 2.7.2 describe the same Sovereign Stressed Short
Charge with formulas instead of plain text
--section 2.6.1. and 2.6.3 extend the logic of exercise decisions to
consider the Sovereign Stressed Short Charge when relevant
2. Statutory Basis
LCH SA believes that the Proposed Rule Change is consistent with
the requirements of Section 17A of the Act \6\ and regulations
thereunder applicable to it, including Commission Rule 17Ad-22(e).\7\
In particular, Section 17A(b)(3)(F) of the Act requires, inter alia,
that the rules of a clearing agency be designed to ``promote the prompt
and accurate clearance and settlement of . . . derivatives agreements,
contracts, and transactions.'' \8\ By proposing to amend its CDS
Clearing Supplement to authorize the expansion of LCH SA's CDSClear
Service to provide clearing services with regard to the New Products,
on the terms and conditions set out in the Proposed Rule Change, LCH SA
considers that this would encourage Clearing Members to clear
additional indices and single name CDS through its CDSClear service,
which, in turn, should promote the prompt and accurate clearance and
settlement of those instruments within the meaning of Section
17A(b)(3)(F) of the Act.\9\ The Proposed Rule Change, in particular,
the amendments to the CDS Clearing Supplement, therefore, are
consistent with the requirements of Section 17A(b)(3)(F) of the Act.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78q-1.
\7\ 17 CFR 240.17Ad-22.
\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Further, from the perspective of financial risk management and
margin requirements, the clearing of the New Products would not require
changes to LCH SA's existing margin methodology, default management
policies and procedures and operational process, as LCH SA determined
that the current margin framework for its CDSClear service already
appropriately captures the risk associated to the New Products. The New
Products would be cleared pursuant to LCH SA's existing clearing
arrangements and related financial safeguards, protections and risk
management procedures which are consistent with Exchange Act Rule 17Ad-
22(e)(17),\10\ requiring a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to manage the covered clearing agency's operational
risks by, among other things, identifying the plausible sources of
operational risk, both internal and external, and mitigating their
impact through the use of appropriate systems, policies, procedures,
and controls.
---------------------------------------------------------------------------
\10\ 17 CFR 240.17Ad-22(e)(17).
---------------------------------------------------------------------------
Adopting rules to facilitate the clearing of the New Products would
also be consistent with other relevant
[[Page 55875]]
requirements of Rule 17Ad-22(e),\11\ as set forth in the following
discussion.
---------------------------------------------------------------------------
\11\ 17 CFR 240.17Ad-22(e).
---------------------------------------------------------------------------
Margin Requirements. Rule 17Ad-22(e)(4) \12\ requires LCH SA to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes, among
other requirements. In terms of financial resources, LCH SA would apply
its existing margin methodology to the New Products. LCH SA believes
that the proposed rules that would apply this risk model to the New
Products will provide sufficient margin requirements to cover its
credit exposure to its clearing members from clearing such contracts,
consistent with the requirements of Rule 17Ad-22I(4).\13\ [sic]
---------------------------------------------------------------------------
\12\ 17 CFR 240.17Ad-22(e)(4).
\13\ 17 CFR 240.17Ad-22(e)4.
---------------------------------------------------------------------------
Financial Resources. Rule 17Ad-22I(4)(i) \14\ [sic] requires LCH SA
to establish, implement, maintain, and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes by
maintaining sufficient financial resources to cover its credit exposure
to each participant fully with a high degree of confidence. To the
extent not already maintained pursuant to paragraph (e)(4)(i), Rule
17Ad-22(e)(4)(ii) \15\ requires LCH SA's policies and procedures be
reasonably designed to maintain additional financial resources at the
minimum to enable it to cover a wide range of foreseeable stress
scenarios that include, but are not limited to, the default of the two
participant families that would potentially cause the largest aggregate
credit exposure for the covered clearing agency in extreme but
plausible market conditions. As explained above, LCH SA is proposing to
make some changes to its CDS Default Fund Methodology documentation
(Guide Stress Testing) in order to reflect the extension of the product
list as well as to introduce a Sovereign Stressed Short Charge
component aimed to capture a potential joint default of a member and
its country. LCH SA believes that with the proposed changes in its
stress testing framework, its Default Fund will, together with the
required margin, provide sufficient financial resources to support the
clearing of the New Products, consistent with the requirements of Rules
17Ad-22(e)(4)(i) and (ii).
---------------------------------------------------------------------------
\14\ 17 CFR 240.17Ad-22(e)(4)(i).
\15\ 17 CFR 240.17Ad-22(e)(4)(ii).
---------------------------------------------------------------------------
Operational Resources. Rule 17Ad-22(e)(3) \16\ requires LCH SA to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to maintain a sound risk management
framework for comprehensively managing legal, credit, liquidity,
operational, general business, investment, custody, and other risks
that arise in or are borne by the covered clearing agency. LCH SA
believes that its existing operational and risk management resources
will be sufficient for clearing of the New Products, consistent with
the requirements of Rule 17Ad-22(e)(3) \17\, as these new contracts are
substantially the same from an operational and risk management
perspective as the existing CDS contracts cleared by LCH SA CDSClear.
---------------------------------------------------------------------------
\16\ 17 CFR 240.17Ad-22(e)(3).
\17\ 17 CFR 240.17Ad-22(e)(3).
---------------------------------------------------------------------------
LCH SA will also apply its existing default management policies and
procedures for the New Products. As with current CDSClear products with
similar risk profile, LCH SA believes that these procedures allow for
it to take timely action to contain losses and liquidity pressures and
to continue meeting its obligations in the event of clearing member
insolvencies or defaults in respect of the additional single names, in
accordance with Rule 17Ad-22(e)(3).\18\
---------------------------------------------------------------------------
\18\ 17 CFR 240.17Ad-22(e)(3).
---------------------------------------------------------------------------
Exchange Act Rule 17Ad-22(e)(1) \19\ requires that a covered
clearing agency establish, implement, maintain, and enforce written
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 Change is also modifying the Supplement to take
into account the New Products and provide for a clear and transparent
legal basis for LCH SA's CDS Clearing rules consistent with the
requirements of Exchange Act Rule 17Ad-22(e)(1).\20\
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\19\ 17 CFR 240.17Ad-22(e)(1).
\20\ 17 CFR 240.17Ad-22(e)(1).
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Credit default swap (CDS) is an over-the-counter (OTC) market on
which participants can be active at any time in the context of market
stress. The LCH SA CDSClear risk model is considering 5-d moves of
unhedged portfolios and the back testing results confirmed that the
margins for the New Products were sufficient to cover the exposure in
the interval between the last margin collection and the close out of
the portfolio a defaulting cleating member which is consistent with the
requirements of SEC Rule 17Ad-22(e)(6)(iii).\21\
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\21\ 17 CFR 240. 17Ad-22(e)(6)(iii).
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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.\22\
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\22\ 15 U.S.C. 78q-1(b)(3)(I).
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LCH SA does not believe that its proposed clearing of the New
Products will adversely affect competition in the trading market for
those contracts or CDS generally. By allowing LCH SA to clear the New
Products, market participants will have additional choices on where to
clear and which products to use for risk management purposes, which, in
turn, will promote competition and further the development of CDS for
risk management.
In addition, LCH SA will continue to apply its existing fair and
open access criteria to the clearing of these additional products and
will apply the same criteria to every clearing member or client who
proposes to enter into this clearing activity.
Accordingly, LCH SA does not believe that the Proposed Rule Change
would impose any burden on competition that is 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.
[[Page 55876]]
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-2022-007 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-2022-007. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of 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/rulebooks/proposed-rule-changes.
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-2022-007 and should
be submitted on or before October 3, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-19579 Filed 9-9-22; 8:45 am]
BILLING CODE 8011-01-P
