Self-Regulatory Organizations; LCH SA; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 2, Relating to Providing Clearing Services for Additional Index and Single Name Credit Default Swaps, 76519-76523 [2022-27052]

Download as PDF Federal Register / Vol. 87, No. 239 / Wednesday, December 14, 2022 / Notices 39 CFR part 3040, subpart B. Comment deadline(s) for each request appear in section II. II. Docketed Proceeding(s) 1. Docket No(s).: CP2020–192; Filing Title: Notice of the United States Postal Service of Filing Modification Two to International Priority Airmail, Commercial ePacket, Priority Mail Express International, Priority Mail International & First-Class Package International Service with Reseller Contract 2 Negotiated Service Agreement; Filing Acceptance Date: December 8, 2022; Filing Authority: 39 CFR 3035.105; Public Representative: Jennaca D. Upperman; Comments Due: December 16, 2022. 2. Docket No(s).: CP2020–202; Filing Title: Notice of the United States Postal Service of Filing Modification Two to International Priority Airmail, Commercial ePacket, Priority Mail Express International, Priority Mail International & First-Class Package International Service Contract 9 Negotiated Service Agreement; Filing Acceptance Date: December 8, 2022; Filing Authority: 39 U.S.C. 3642, 39 CFR 3040.130 through 3040.135, and 39 CFR 3035.105; Public Representative: Jennaca D. Upperman; Comments Due: December 16, 2022. 3. Docket No(s).: CP2023–75; Filing Title: Notice of United States Postal Service of Filing Functionally Equivalent Inbound Competitive MultiService Agreement with Foreign Postal Operator—FY23–2; Filing Acceptance Date: December 7, 2022; Filing Authority: 39 U.S.C. 3633, 39 CFR 3035.105, and Docket Nos. MC2010–34 and CP2010–95, Order Adding Inbound Competitive Multi-Service Agreements with Foreign Postal Operators 1 to the Competitive Product List and Approving Included Agreement, September 29, 2010 (Order No. 546); Public Representative: Katalin K. Clendenin; Comments Due: December 16, 2022. This Notice will be published in the Federal Register. Erica A. Barker, Secretary. lotter on DSK11XQN23PROD with NOTICES1 [FR Doc. 2022–27120 Filed 12–13–22; 8:45 am] BILLING CODE 7710–FW–P VerDate Sep<11>2014 17:11 Dec 13, 2022 Jkt 259001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–96468; File No. SR–LCH SA–2022–007] Self-Regulatory Organizations; LCH SA; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 2, Relating to Providing Clearing Services for Additional Index and Single Name Credit Default Swaps December 8, 2022. I. Introduction 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’’), 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 provide clearing services for the iTraxx Asia ex Japan Index, the Markit CDX Emerging Markets (‘‘CDX.EM’’) Index and the single name credit default swaps (‘‘CDS’’) that comprise each index, as well as a list of additional sovereign single name CDS which do not constitute an index (together, the ‘‘New Products’’). The proposed rule change was published for comment in the Federal Register on September 12, 2022.3 On October 25, 2022, the Commission designated a longer period within which to take action on the proposed rule change, until December 11, 2022.4 The Commission did not receive comments regarding the proposed rule change. On December 2, 2022, LCH SA filed Amendment No. 1 to the proposed rule change. On December 7, 2022, LCH SA filed Amendment No. 2 to the proposed rule change, which replaced and superseded in their entirety both the original filing and Amendment No. 1.5 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating to Providing Clearing Services for Additional Index and Single Name CDS, Exchange Act Release No. 95674 (Sep. 6, 2022); 87 FR 55872 (Sep. 12, 2022) (SR–LCH SA–2022–007) (‘‘Notice’’). 4 Self-Regulatory Organizations; LCH SA; Notice of Designation of Longer Period for Commission Action on Proposed Rule Relating To Providing Clearing Services for Additional Index and Single Name CDS, Exchange Act Release No. 96148 (Oct. 25, 2022); 87 FR 65629 (Oct. 31, 2022) (SR–LCH SA–2022–007). 5 Amendment No. 2 amends confidential Exhibit 5C, LCH SA Methodology Services Reference Guide: CDS Margin Framework (V3.14), to correct a non-substantive formatting error. Amendment No. 2 also submits three exhibits to the proposed rule change, each as an Exhibit 3. In a separate 2 17 PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 76519 The Commission is publishing this notice to solicit comments on Amendment No. 2 from interested persons and is approving the proposed rule change, as modified by Amendment No. 2 (hereinafter, ‘‘proposed rule change’’), on an accelerated basis. II. Description of the Proposed Rule Change To accommodate clearing of the New Products, the proposed rule change would amend (A) the CDS Clearing Supplement (the ‘‘Clearing Supplement’’); (B) the Methodology Services Reference Guide: Credit Default Swap Margin Framework (‘‘CDSClear Risk Methodology’’); and (C) the CDS Default Fund Methodology (Guide Stress Testing) (‘‘CDSClear Default Fund Methodology’’). Unrelated to clearing of the New Products, the proposed rule change also would make two other amendments to the Clearing Supplement and would make a correction to Section 2 of the LCH SA CDS Clearing Procedures (Margin, NPV Payment and Price Alignment) (the ‘‘CDS Clearing Procedures’’).6 A. Clearing Supplement The proposed rule change would amend certain defined terms in the Clearing Supplement and amend the Index Cleared Transaction Confirmation to accommodate clearing of the New Products. The proposed rule change also would amend Section 4, which relates to certain events affecting reference entities, and Section 6, which relates to physical settlement, to apply to the New Products. With respect to defined terms, the proposed amendments would take into account the New Products. For example, the proposed rule change would revise the definitions of ‘‘Compression Cut-off Date’’ and ‘‘Novation Cut-off Date’’ to include two additional credit events. These credit events are the ‘‘Obligation Acceleration Credit Event’’ and the ‘‘Repudiation/Moratorium Credit Event.’’ While both of these Credit Events are standard for the 2014 Credit Derivatives Definitions published by the correspondence that accompanied Amendment No. 2, LCH SA requested confidential treatment for these exhibits (together, ‘‘Confidential Exhibit 3’’). Confidential Exhibit 3 reproduces certain information that LCH SA submitted to the Commission in support of the proposed rule change. 6 This description is substantially excerpted from the Notice, 87 FR at 55872. Capitalized terms used but not defined herein have the meanings specified in the LCH SA CDS Clearing Rule Book, Clearing Supplement, CDSClear Risk Methodology, CDSClear Default Fund Methodology, or the CDS Clearing Procedures, as applicable. E:\FR\FM\14DEN1.SGM 14DEN1 lotter on DSK11XQN23PROD with NOTICES1 76520 Federal Register / Vol. 87, No. 239 / Wednesday, December 14, 2022 / Notices International Swaps and Derivatives Association (‘‘ISDA’’), they do not apply to any of the products that LCH SA currently clears. These Credit Events do apply to certain sovereign CDS that are included in the New Products, however, so the proposed rule change would add these Credit Events to accommodate clearing of these products. For a similar reason, the proposed rule change would amend the term ‘‘Transaction Business Day.’’ Currently, ‘‘Transaction Business Day’’ means a Business Day, as defined in the Index Cleared Transaction Confirmation or the Single Name Cleared Transaction Confirmation, as applicable. The proposed rule change would add to this definition a qualification. If the relevant Index Cleared Transaction Confirmation or Single Name Cleared Transaction Confirmation defines such term differently depending upon its use, then such distinction shall also apply to the use of the term ‘‘Transaction Business Day’’ in the terms of the cleared transaction. The proposed rule change would add this provision to account for the situation where such confirmations could include different definitions of the term ‘‘Business Day’’ depending on the circumstances. This would apply, for example, when LCH SA clears certain of the New Products related to the iTraxx Asia ex Japan index. The proposed rule change would amend the definition of ‘‘Index Cleared Transaction Confirmation’’ as well as how LCH SA modifies the Index Cleared Transaction Confirmation when it accepts a transaction for clearing. The Index Cleared Transaction Confirmation is the document that sets out the contractual terms that govern a transaction in an index CDS. The Index Cleared Transaction Confirmation in turn incorporates certain standard terms set out in a document known as a standard terms supplement, and the content of the standard terms supplement varies depending on the type of index involved and the series number of the index. In LCH SA’s Clearing Supplement, the defined term ‘‘Index Cleared Transaction Confirmation’’ determines which standard terms supplement applies to a transaction based on the index type and series number. For example, for a transaction in Markit iTraxx® Europe Index Series 22 or above, the Index Cleared Transaction Confirmation is the form of confirmation that incorporates the iTraxx® Europe Untranched Standard Terms Supplement. The proposed rule change would amend the definition of ‘‘Index Cleared Transaction Confirmation’’ to accommodate clearing VerDate Sep<11>2014 17:11 Dec 13, 2022 Jkt 259001 of the iTraxx Asia ex Japan Index and the CDX.EM Index. For transactions in the iTraxx Asia ex Japan Index Series 27 or above, the Index Cleared Transaction Confirmation would be the form of confirmation that incorporates the iTraxx® Asia/Pacific Untranched Standard Terms Supplement. For transactions in the CDX.EM Index Series 27 or above, the Index Cleared Transaction Confirmation would be the form of confirmation that incorporates the CDX Emerging Markets Untranched Transactions Standard Terms Supplement. The Clearing Supplement also modifies the terms of the standard terms supplement in certain minor respects. For example, Section 2.2 of the Clearing Supplement replaces the standard names for parties to the transaction (‘‘Party A’’ and ‘‘Party B’’) with ‘‘LCH SA’’ and ‘‘Clearing Member.’’ The proposed rule change would amend Section 2.2 to make it applicable to the clearing of the New Products. The proposed rule change would do so by adding to Section 2.2 references to the iTraxx Asia ex Japan Index and the CDX.EM Index. The proposed rule change would next amend Section 4. Section 4 applies to certain events that affect the reference entity covered by a CDS, such as a credit event, a succession, or a rename. Section 4.1 prohibits LCH SA and a Clearing Member from sending certain notices during restructurings following such events. Specifically, the proposed rule change would 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. While these types of notices do not apply to any of the products that LCH SA currently clears, they do apply to certain sovereign CDS that are included in the New Products. Accordingly, the proposed rule change would add these notices to accommodate clearing of these products. The proposed rule change also would amend Section 6. Section 6 describes how LCH SA would implement physical settlement, which could apply as a fallback method to certain cleared transactions. Section 6.5 sets out details related to providing notices related to physical settlement. The proposed rule change would add to Section 6.5 a ‘‘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. While the Package Observable Bond does not apply to any of the PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 products that LCH SA currently clears, it does apply to certain sovereign CDS that are included in the New Products. Accordingly, the proposed rule change would add the Package Observable Bond to Section 6.5 to accommodate clearing of these products.7 Finally, and for a similar reason, the proposed rule would add to Section 6.8 a new subsection (c). New Section 6.8(c) would clarify the application of the ‘‘60 Business Day Cap on Settlement’’ under the ISDA 2014 Credit Derivatives Definitions. This provision would be relevant to transactions in the CDX.EM Index. Accordingly, the proposed rule change would add these notices to accommodate clearing of this product.8 B. CDSClear Risk Methodology The CDSClear Risk Methodology describes LCH SA’s pricing and margin methodologies for single-name CDS, CDS indices, and CDS Index Options. Section 3.4.5 of the CDSClear Risk Methodology describes portfolio margining, which is a reduction in overall margin that results from a Clearing Member holding offsetting positions in its portfolio. European Union regulations applicable to LCH SA limit how much LCH SA can reduce overall margin due to portfolio margining. There is an exception to this limitation for an index basis package, which is a term that describes a Clearing Member portfolio containing an index and a basket of single-name constituents of the index that perfectly offsets the position in the index. Section 3.4.5 lists various combinations of products that together can constitute an index basis package. The proposed rule change would update this list to include the iTraxx Asia ex Japan Index and its single-name constituents, as well as the CDX.EM Index and its single-name constituents. Section 3.5 of the CDSClear Risk Methodology describes the Short Charge aspect of margin. The Short Charge covers the cost of liquidating a defaulting Clearing Member’s portfolio where one or more of the reference entities in the portfolio has gone into default. Section 3.5 begins with a 7 For the same reason, the proposed rule change would make a similar amendment to Section 5 of Appendix XIII of Part B of the Clearing Supplement. Appendix XIII of Part B of the Clearing Supplement sets out the terms of transactions between a Clearing Member and its Client with respect to client clearing. 8 For the same reason, the proposed rule change would make a similar amendment to Sections 7.8 and 7.18 of Appendix XIII of Part B of the Clearing Supplement. Appendix XIII of Part B of the Clearing Supplement sets out the terms of transactions between a Clearing Member and its Client with respect to client clearing. E:\FR\FM\14DEN1.SGM 14DEN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 87, No. 239 / Wednesday, December 14, 2022 / Notices general description of the Short Charge and notes that in determining the Short Charge, LCH SA considers the worst consecutive defaults within the applicable holding periods for all eligible products across Europe and the US. The proposed rule change would add ‘‘Asia’’, in addition to Europe and the US, to account for the iTraxx Asia ex Japan Index and related single-name constituents. As part of the Short Charge, LCH SA considers the recovery rate, which is used to calculate an estimate of the amount that could be recovered in a default. Section 3.5.1 lists recovery rates for categories of reference entities, like insurers and banks. The proposed rule change would add a recovery rate for state-owned enterprises. This change would account for the additional sovereign single names that LCH SA will clear as part of the new products. Relatedly, the proposed rule change would add a new Section 3.5.2 9 to explain how LCH SA would treat a Clearing Member’s positions in a stateowned enterprise and its sovereign entity. If those positions are not risk reducing, and the sovereign entity owns more than 50% of the state-owned enterprise, then LCH SA would default the two entities jointly. New Section 3.5.2 also would explain that LCH SA would calculate exposures for stateowned enterprises with a fixed 70% recovery rate. Section 3.8 of the CDSClear Risk Methodology describes the Wrong Way Risk aspect of margin. Wrong Way Risk accounts for the risk that exposure to a given counterparty increases when that counterparty defaults. This could occur, for example, when a Clearing Member sells protection on a CDS index of which it is a constituent. LCH SA calculates Wrong Way Risk by, among other things, considering the risk in certain geographic regions because historical data shows correlations among defaults in these regions. The proposed rule change would expand these regions to include Asia, to account for the iTraxx Asia ex Japan Index and related single-name constituents. Section 4.1 of the CDSClear Risk Methodology describes the Liquidity and Concentration Charge aspect of margin. The Liquidity and Concentration Charge covers the cost of liquidating a defaulting Clearing Member’s portfolio that contains a very concentrated or illiquid position. To estimate this cost, LCH SA mimics the liquidation procedure used in its default management process. The first step in 9 LCH would move the contents of current Section 3.5.2 to a new Section 3.5.3. VerDate Sep<11>2014 17:11 Dec 13, 2022 Jkt 259001 this process is to macro-hedge a portfolio to reduce the impact of market risk. As part of the macro-hedge, LCH SA divides portfolios into separate indices and their components. Section 4.1.2 lists these different indices, which are the indices that LCH SA clears. Thus, the proposed rule change would add to this list in Section 4.1.2 the iTraxx Asia ex Japan Index and CDX.EM Index. Moreover, the proposed rule change would move from Section 4.1.2 to Section 4.1.1 language to note that the liquidation cost of a sub-portfolio composed of a single year position in the principal on the run index is simply the sum of the macro hedging costs, and add to Section 4.1.1 a note that 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, in Section 4.1.7 the proposed rule change would make certain updates related to clearing the New Products. Specifically, the proposed rule change would update the existing thresholds and include more cleared indexes in the table for volume thresholds. The proposed rule change also would add a dedicated liquidity grid for sovereign single names. C. CDSClear Default Fund Methodology The CDSClear Default Fund Methodology describes how, during extreme but plausible circumstances, LCH ensures its financial resources are enough to cover the potential losses from a close-out of the largest two groups of members’ portfolios and all clients of both of these groups of members. Section 2 of the CDSClear Default Fund Methodology describes the stress-testing framework that LCH SA uses to assess the potential impact of the default of one or more clearing members under stressed market conditions in excess of the initial margin that LCH SA has collected for those clearing members. This stress testing aims to identify a total stress test loss over initial margin under extreme but plausible scenarios. Section 2.2 provides an overview of how LCH treats single-name CDS and CDS indices in these extreme but plausible scenarios. The proposed rule change would amend this description to include the iTraxx Asia ex Japan Index and CDX.EM Index, as well as the iTraxx Australia Indices.10 10 Although LCH SA added clearing of the iTraxx Australia Indices in a prior rule change, that prior rule change did not add the iTraxx Australia Indices to this description. Thus, the proposed rule change would correct this error and add the iTraxx Australia Indices to Section 2.2. See Notice, 87 FR at 55874; Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 76521 Moreover, one component of the stress test loss over initial margin is the stressed short charge, which considers the jump to default risk under stress conditions. With respect to the sovereign single names that LCH SA will clear, the proposed rule change would amend Sections 2.4.1 and 2.4.2 to describe how LCH SA would add StateOwned Entities’ exposures to the stressed short charge. The proposed rule change also would amend Sections 2.4.3 and 2.7.2 to describe the same with mathematical formulas instead of with plain text. Finally, in Section 2.6, which discusses how LCH SA treats index options in default scenarios, the proposed rule change would add a description of how LCH SA would consider the stressed short charge for sovereigns. D. Unrelated Changes Unrelated to clearing the New Products, the proposed rule change would make two other amendments to the Clearing Supplement. First, the proposed rule change would modify Section 2.2 to provide an additional term for each Index Cleared Transaction Confirmation. This new term would specify that the applicable Physical Settlement Matrix is the version of the Physical Settlement Matrix that is in force on the Clearing Day on which the Index Cleared Transaction is registered by LCH SA. LCH explains that this amendment would ensure that the Additional Provisions for Certain Russian Entities published by ISDA on March 25, 2022 will apply to the relevant cleared trades.11 Next, the proposed rule change would make a correction in Section 7 of Appendix XIII of Part B of the Clearing Supplement. Appendix XIII of Part B sets out the terms of transactions between a Clearing Member and its Client. The proposed rule change would remove from Section 7.15 and Section 7.17 of Appendix XIII the phrase ‘‘for the purposes of the Matched Contracts of the related Settlement Matched Pair.’’ This phrase is applicable to transactions the Clearing of Markit iTraxx® Australia Indices and the Associated Single-Name Constituents and Remediation of WWR Margin Instability, Exchange Act Release No. 95503 (Aug. 16, 2022), 87 FR 51471 (Aug. 22, 2022) (SR–LCH SA–2022–004). 11 See Notice, 87 FR at 55873. For additional detail on these provisions and how compliance with them would facilitate the clearance of transactions in CDS contracts (or components thereof) for which the Russian Federation is a reference entity, see Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change Relating to the ICC Clearing Rules, Exchange Act Release No. 94784 (Apr. 22, 2022), 87 FR 25324 (Apr. 28, 2022) (SR–ICC–2022–005). E:\FR\FM\14DEN1.SGM 14DEN1 76522 Federal Register / Vol. 87, No. 239 / Wednesday, December 14, 2022 / Notices between LCH SA and a Clearing Member. Because Appendix XIII applies to transactions between a Clearing Member and its Client, this phrase is unnecessary. Finally, the proposed rule change would make a correction to Section 2.7 of the CDS Clearing Procedures. Specifically, the first sentence of Section 2.7(c) currently states 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.’’ To acknowledge that a credit event may occur with respect to more than one Reference Entity, the proposed rule change would revise this sentence to read ‘‘one or more Reference Entities.’’ 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.12 Based on its review of the record, including the supporting information provided in Confidential Exhibit 3, and for the reasons given below, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 13 and Rules 17Ad–22(e)(4)(ii) and 17Ad–22(e)(6)(i).14 lotter on DSK11XQN23PROD with NOTICES1 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.15 Based on its review of the record, including the supporting information provided in Confidential Exhibit 3, and for the reasons discussed below, the Commission believes the proposed changes are consistent with the promotion of the prompt and accurate clearance and settlement of securities transactions at LCH SA. As discussed above, the proposed rule change would amend the Clearing Supplement, the CDSClear Risk 12 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 14 17 CFR 240.17Ad–22(e)(4)(ii) and 17Ad– 22(e)(6)(i). 15 15 U.S.C. 78q–1(b)(3)(F). 13 15 VerDate Sep<11>2014 17:11 Dec 13, 2022 Jkt 259001 Methodology, and the CDSClear Default Fund Methodology to accommodate clearing of the New Products. For example, the proposed rule change would amend the Clearing Supplement to, among other things, introduce new defined terms and revise the Index Cleared Transaction Confirmation to accommodate clearing of the New Products. The proposed rule change also would amend the CDSClear Risk Methodology and the CDSClear Default Fund Methodology to consider the New Products in calculating certain components of margin and in calculating the stress test loss over initial margin. The Commission believes that the amendments to the Clearing Supplement would help to ensure that LCH SA has in place rules to appropriately govern the clearing of the New Products. The Commission also believes that the amendments to the CDSClear Risk Methodology and the CDSClear Default Fund Methodology would help to ensure that LCH SA’s risk management system considers the risks of clearing the New Products. The Commission believes that these changes, taken together in consideration with the supporting information provided in Confidential Exhibit 3, would promote the prompt and accurate clearance and settlement of transactions in the New Products at LCH SA. The Commission similarly believes that the unrelated changes discussed in Part II.D above would promote the prompt and accurate clearance and settlement of transactions at LCH SA. Specifically, the Commission believes specifying that the Physical Settlement Matrix is the version in force on the Clearing Day on which the Index Cleared Transaction is registered would help to ensure the application of the Additional Provisions for Certain Russian Entities published by ISDA on March 25, 2022. In doing so, the Commission believes this change would help facilitate LCH SA’s clearance and settlement of transactions to which these additional provisions would apply.16 Moreover, the Commission believes that removing an inapplicable phrase from Appendix XIII of Part B of the Clearing Supplement would correct a potential error that could hinder the consistent application of Appendix XIII 16 For additional detail on these provisions and how compliance with them would facilitate the clearance of transactions in CDS contracts (or components thereof) for which the Russian Federation is a reference entity, see Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change Relating to the ICC Clearing Rules, Exchange Act Release No. 94784 (Apr. 22, 2022), 87 FR 25324 (Apr. 28, 2022) (SR–ICC–2022– 005). PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 to cleared transactions. Finally, the Commission believes that correcting ‘‘Reference Entity’’ to ‘‘Reference Entities’’ in Section 2 of the CDS Clearing Procedures would help to ensure that LCH SA applies Section 2 to multiple Reference Entities, as intended, should ever a credit event occur for more than one Reference Entity. Therefore, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act.17 B. Consistency With Rule 17Ad– 22(e)(4)(ii) Rule 17Ad–22(e)(4)(ii) requires that LCH SA establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain, to the extent not already maintained pursuant to Rule 17Ad– 22(e)(4)(i),18 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 LCH SA in extreme but plausible market conditions.19 As discussed above, the proposed rule change would amend the CDSClear Default Fund Methodology to accommodate clearing of the New Products. Among other things, these changes would revise the description of the stress scenarios and of the calculation of stress test loss over initial margin to consider the New Products. LCH SA sizes its default fund to cover the highest two exposures arising from the stress test loss over initial margin calculation under extreme but plausible stress scenarios. Considering the New Products in these calculations would help to ensure that LCH SA, while clearing the New Products, continues to maintain financial resources to cover the default of the two participant families that would potentially cause the largest aggregate credit exposure for LCH SA in extreme but plausible market conditions. Therefore, the Commission finds that this aspect of the proposed rule change is consistent with Rule 17Ad– 22(e)(4)(ii).20 C. Consistency With Rule 17Ad– 22(e)(6)(i) Rule 17Ad–22(e)(6)(i) requires that LCH SA establish, implement, maintain and enforce written policies and procedures reasonably designed to cover 17 15 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(4)(i). 19 17 CFR 240.17Ad–22(e)(4)(ii). 20 17 CFR 240.17Ad–22(e)(4)(ii). 18 17 E:\FR\FM\14DEN1.SGM 14DEN1 Federal Register / Vol. 87, No. 239 / Wednesday, December 14, 2022 / Notices its credit exposures to its participants by establishing a risk-based margin system that, at a minimum, considers, and produces margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market.21 As discussed above, the proposed rule change would amend the CDSClear Risk Methodology to accommodate clearing of the New Products. These changes would revise the descriptions of the Short Charge, Wrong Way Risk, and Liquidity and Concentration Charge to cover clearing of the New Products. Because LCH SA uses the Short Charge, Wrong Way Risk, and Liquidity and Concentration Charge to calculate initial margin along with the other components discussed in the CDSClear Risk Methodology, and based on the Commission’s review of the proposed rule change, including the supporting information provided in Confidential Exhibit 3, the Commission believes these changes will help to ensure that LCH SA’s margin system identifies the risks of clearing the New Products. Therefore, the Commission finds that these aspects of the proposed rule change are consistent with Rule 17Ad– 22(e)(6)(i).22 IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as modified by Amendment No. 2, is consistent with the Act. Comments may be submitted by any of the following methods: lotter on DSK11XQN23PROD with NOTICES1 Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– LCH SA–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 21 17 22 17 CFR 240.17Ad–22(e)(6)(i). CFR 240.17Ad–22(e)(6)(i). VerDate Sep<11>2014 17:11 Dec 13, 2022 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 January 4, 2023. V. Accelerated Approval of the Proposed Rule Change, as Modified by Amendment No. 2 Under Section 19(b)(2)(C)(iii) of the Act,23 the Commission may grant accelerated approval of a proposed rule change if the Commission finds good cause for doing so. For the reasons discussed below, the Commission finds good cause, pursuant to Section 19(b)(2)(C)(iii) of the Act,24 for approving the proposed rule change on an accelerated basis prior to the 30th day after the date of publication of notice of Amendment No. 2 in the Federal Register. Amendment No. 2, which replaced and superseded in their entirety both the original filing and Amendment No. 1, does not substantively alter the proposed rule change. Rather, it corrects a non-substantive formatting error and includes as Confidential Exhibit 3 certain information that LCH SA submitted to the Commission in support of the proposed rule change. By correcting a non-substantive formatting error in the Confidential Exhibit 5C, Amendment No. 2 should help to ensure that the LCH SA Methodology Services Reference Guide: CDS Margin Framework (V3.14) is accurate, free 23 15 24 15 Jkt 259001 PO 00000 U.S.C. 78s(b)(2)(C)(iii). U.S.C. 78s(b)(2)(C)(iii). Frm 00072 Fmt 4703 Sfmt 9990 76523 from error, and therefore can be used and applied consistently by LCH SA personnel. Because LCH SA uses its CDS Margin Framework in clearing transactions, the Commission believes correcting this error would be consistent with the prompt and accurate clearance and settlement of transactions. Moreover, as noted above, Amendment No. 2 includes Confidential Exhibit 3, which reproduces certain information that LCH SA submitted to the Commission in support of the proposed rule change. The Commission considered this information as part of its review of the record for the proposed rule change and believes this information supports the findings discussed in Part III above. The Commission therefore believes that amending the proposed rule change to include Confidential Exhibit 3 would be consistent with its findings discussed above. The Commission therefore finds good cause, pursuant to Section 19(b)(2)(C)(iii) of the Act,25 for approving the proposed rule change on an accelerated basis prior to the 30th day after the date of publication of notice of Amendment No. 2 in the Federal Register. VI. 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 26 and Rules 17Ad–22(e)(4)(ii) and 17Ad– 22(e)(6)(i).27 It is therefore ordered pursuant to Section 19(b)(2) of the Act 28 that the proposed rule change, as modified by Amendment No. 2 (SR–LCH SA–2022– 007), be, and hereby is, approved.29 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.30 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2022–27052 Filed 12–13–22; 8:45 am] BILLING CODE 8011–01–P 25 15 U.S.C. 78s(b)(2)(C)(iii). U.S.C. 78q–1(b)(3)(F). 27 17 CFR 240.17Ad–22(e)(4)(ii) and (e)(6)(i). 28 15 U.S.C. 78s(b)(2). 29 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). 30 17 CFR 200.30–3(a)(12). 26 15 E:\FR\FM\14DEN1.SGM 14DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 87, Number 239 (Wednesday, December 14, 2022)]
[Notices]
[Pages 76519-76523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27052]


=======================================================================
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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96468; File No. SR-LCH SA-2022-007]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Amendment No. 2 and Order Granting Accelerated Approval of Proposed 
Rule Change, as Modified by Amendment No. 2, Relating to Providing 
Clearing Services for Additional Index and Single Name Credit Default 
Swaps

December 8, 2022.

I. Introduction

    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''), 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 provide clearing services for the 
iTraxx Asia ex Japan Index, the Markit CDX Emerging Markets 
(``CDX.EM'') Index and the single name credit default swaps (``CDS'') 
that comprise each index, as well as a list of additional sovereign 
single name CDS which do not constitute an index (together, the ``New 
Products''). The proposed rule change was published for comment in the 
Federal Register on September 12, 2022.\3\ On October 25, 2022, the 
Commission designated a longer period within which to take action on 
the proposed rule change, until December 11, 2022.\4\ The Commission 
did not receive comments regarding the proposed rule change. On 
December 2, 2022, LCH SA filed Amendment No. 1 to the proposed rule 
change. On December 7, 2022, LCH SA filed Amendment No. 2 to the 
proposed rule change, which replaced and superseded in their entirety 
both the original filing and Amendment No. 1.\5\ The Commission is 
publishing this notice to solicit comments on Amendment No. 2 from 
interested persons and is approving the proposed rule change, as 
modified by Amendment No. 2 (hereinafter, ``proposed rule change''), on 
an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to Providing Clearing Services for 
Additional Index and Single Name CDS, Exchange Act Release No. 95674 
(Sep. 6, 2022); 87 FR 55872 (Sep. 12, 2022) (SR-LCH SA-2022-007) 
(``Notice'').
    \4\ Self-Regulatory Organizations; LCH SA; Notice of Designation 
of Longer Period for Commission Action on Proposed Rule Relating To 
Providing Clearing Services for Additional Index and Single Name 
CDS, Exchange Act Release No. 96148 (Oct. 25, 2022); 87 FR 65629 
(Oct. 31, 2022) (SR-LCH SA-2022-007).
    \5\ Amendment No. 2 amends confidential Exhibit 5C, LCH SA 
Methodology Services Reference Guide: CDS Margin Framework (V3.14), 
to correct a non-substantive formatting error. Amendment No. 2 also 
submits three exhibits to the proposed rule change, each as an 
Exhibit 3. In a separate correspondence that accompanied Amendment 
No. 2, LCH SA requested confidential treatment for these exhibits 
(together, ``Confidential Exhibit 3''). Confidential Exhibit 3 
reproduces certain information that LCH SA submitted to the 
Commission in support of the proposed rule change.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    To accommodate clearing of the New Products, the proposed rule 
change would amend (A) the CDS Clearing Supplement (the ``Clearing 
Supplement''); (B) the Methodology Services Reference Guide: Credit 
Default Swap Margin Framework (``CDSClear Risk Methodology''); and (C) 
the CDS Default Fund Methodology (Guide Stress Testing) (``CDSClear 
Default Fund Methodology'').
    Unrelated to clearing of the New Products, the proposed rule change 
also would make two other amendments to the Clearing Supplement and 
would make a correction to Section 2 of the LCH SA CDS Clearing 
Procedures (Margin, NPV Payment and Price Alignment) (the ``CDS 
Clearing Procedures'').\6\
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    \6\ This description is substantially excerpted from the Notice, 
87 FR at 55872. Capitalized terms used but not defined herein have 
the meanings specified in the LCH SA CDS Clearing Rule Book, 
Clearing Supplement, CDSClear Risk Methodology, CDSClear Default 
Fund Methodology, or the CDS Clearing Procedures, as applicable.
---------------------------------------------------------------------------

A. Clearing Supplement

    The proposed rule change would amend certain defined terms in the 
Clearing Supplement and amend the Index Cleared Transaction 
Confirmation to accommodate clearing of the New Products. The proposed 
rule change also would amend Section 4, which relates to certain events 
affecting reference entities, and Section 6, which relates to physical 
settlement, to apply to the New Products.
    With respect to defined terms, the proposed amendments would take 
into account the New Products. For example, the proposed rule change 
would revise the definitions of ``Compression Cut-off Date'' and 
``Novation Cut-off Date'' to include two additional credit events. 
These credit events are the ``Obligation Acceleration Credit Event'' 
and the ``Repudiation/Moratorium Credit Event.'' While both of these 
Credit Events are standard for the 2014 Credit Derivatives Definitions 
published by the

[[Page 76520]]

International Swaps and Derivatives Association (``ISDA''), they do not 
apply to any of the products that LCH SA currently clears. These Credit 
Events do apply to certain sovereign CDS that are included in the New 
Products, however, so the proposed rule change would add these Credit 
Events to accommodate clearing of these products.
    For a similar reason, the proposed rule change would amend the term 
``Transaction Business Day.'' Currently, ``Transaction Business Day'' 
means a Business Day, as defined in the Index Cleared Transaction 
Confirmation or the Single Name Cleared Transaction Confirmation, as 
applicable. The proposed rule change would add to this definition a 
qualification. If the relevant Index Cleared Transaction Confirmation 
or Single Name Cleared Transaction Confirmation defines such term 
differently depending upon its use, then such distinction shall also 
apply to the use of the term ``Transaction Business Day'' in the terms 
of the cleared transaction. The proposed rule change would add this 
provision to account for the situation where such confirmations could 
include different definitions of the term ``Business Day'' depending on 
the circumstances. This would apply, for example, when LCH SA clears 
certain of the New Products related to the iTraxx Asia ex Japan index.
    The proposed rule change would amend the definition of ``Index 
Cleared Transaction Confirmation'' as well as how LCH SA modifies the 
Index Cleared Transaction Confirmation when it accepts a transaction 
for clearing. The Index Cleared Transaction Confirmation is the 
document that sets out the contractual terms that govern a transaction 
in an index CDS. The Index Cleared Transaction Confirmation in turn 
incorporates certain standard terms set out in a document known as a 
standard terms supplement, and the content of the standard terms 
supplement varies depending on the type of index involved and the 
series number of the index.
    In LCH SA's Clearing Supplement, the defined term ``Index Cleared 
Transaction Confirmation'' determines which standard terms supplement 
applies to a transaction based on the index type and series number. For 
example, for a transaction in Markit iTraxx[supreg] Europe Index Series 
22 or above, the Index Cleared Transaction Confirmation is the form of 
confirmation that incorporates the iTraxx[supreg] Europe Untranched 
Standard Terms Supplement. The proposed rule change would amend the 
definition of ``Index Cleared Transaction Confirmation'' to accommodate 
clearing of the iTraxx Asia ex Japan Index and the CDX.EM Index. For 
transactions in the iTraxx Asia ex Japan Index Series 27 or above, the 
Index Cleared Transaction Confirmation would be the form of 
confirmation that incorporates the iTraxx[supreg] Asia/Pacific 
Untranched Standard Terms Supplement. For transactions in the CDX.EM 
Index Series 27 or above, the Index Cleared Transaction Confirmation 
would be the form of confirmation that incorporates the CDX Emerging 
Markets Untranched Transactions Standard Terms Supplement.
    The Clearing Supplement also modifies the terms of the standard 
terms supplement in certain minor respects. For example, Section 2.2 of 
the Clearing Supplement replaces the standard names for parties to the 
transaction (``Party A'' and ``Party B'') with ``LCH SA'' and 
``Clearing Member.'' The proposed rule change would amend Section 2.2 
to make it applicable to the clearing of the New Products. The proposed 
rule change would do so by adding to Section 2.2 references to the 
iTraxx Asia ex Japan Index and the CDX.EM Index.
    The proposed rule change would next amend Section 4. Section 4 
applies to certain events that affect the reference entity covered by a 
CDS, such as a credit event, a succession, or a rename. Section 4.1 
prohibits LCH SA and a Clearing Member from sending certain notices 
during restructurings following such events. Specifically, the proposed 
rule change would 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. While these 
types of notices do not apply to any of the products that LCH SA 
currently clears, they do apply to certain sovereign CDS that are 
included in the New Products. Accordingly, the proposed rule change 
would add these notices to accommodate clearing of these products.
    The proposed rule change also would amend Section 6. Section 6 
describes how LCH SA would implement physical settlement, which could 
apply as a fallback method to certain cleared transactions. Section 6.5 
sets out details related to providing notices related to physical 
settlement. The proposed rule change would add to Section 6.5 a 
``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. While the Package Observable Bond does not apply to 
any of the products that LCH SA currently clears, it does apply to 
certain sovereign CDS that are included in the New Products. 
Accordingly, the proposed rule change would add the Package Observable 
Bond to Section 6.5 to accommodate clearing of these products.\7\
---------------------------------------------------------------------------

    \7\ For the same reason, the proposed rule change would make a 
similar amendment to Section 5 of Appendix XIII of Part B of the 
Clearing Supplement. Appendix XIII of Part B of the Clearing 
Supplement sets out the terms of transactions between a Clearing 
Member and its Client with respect to client clearing.
---------------------------------------------------------------------------

    Finally, and for a similar reason, the proposed rule would add to 
Section 6.8 a new subsection (c). New Section 6.8(c) would clarify the 
application of the ``60 Business Day Cap on Settlement'' under the ISDA 
2014 Credit Derivatives Definitions. This provision would be relevant 
to transactions in the CDX.EM Index. Accordingly, the proposed rule 
change would add these notices to accommodate clearing of this 
product.\8\
---------------------------------------------------------------------------

    \8\ For the same reason, the proposed rule change would make a 
similar amendment to Sections 7.8 and 7.18 of Appendix XIII of Part 
B of the Clearing Supplement. Appendix XIII of Part B of the 
Clearing Supplement sets out the terms of transactions between a 
Clearing Member and its Client with respect to client clearing.
---------------------------------------------------------------------------

B. CDSClear Risk Methodology

    The CDSClear Risk Methodology describes LCH SA's pricing and margin 
methodologies for single-name CDS, CDS indices, and CDS Index Options. 
Section 3.4.5 of the CDSClear Risk Methodology describes portfolio 
margining, which is a reduction in overall margin that results from a 
Clearing Member holding offsetting positions in its portfolio. European 
Union regulations applicable to LCH SA limit how much LCH SA can reduce 
overall margin due to portfolio margining. There is an exception to 
this limitation for an index basis package, which is a term that 
describes a Clearing Member portfolio containing an index and a basket 
of single-name constituents of the index that perfectly offsets the 
position in the index. Section 3.4.5 lists various combinations of 
products that together can constitute an index basis package. The 
proposed rule change would update this list to include the iTraxx Asia 
ex Japan Index and its single-name constituents, as well as the CDX.EM 
Index and its single-name constituents.
    Section 3.5 of the CDSClear Risk Methodology describes the Short 
Charge aspect of margin. The Short Charge covers the cost of 
liquidating a defaulting Clearing Member's portfolio where one or more 
of the reference entities in the portfolio has gone into default. 
Section 3.5 begins with a

[[Page 76521]]

general description of the Short Charge and notes that in determining 
the Short Charge, LCH SA considers the worst consecutive defaults 
within the applicable holding periods for all eligible products across 
Europe and the US. The proposed rule change would add ``Asia'', in 
addition to Europe and the US, to account for the iTraxx Asia ex Japan 
Index and related single-name constituents.
    As part of the Short Charge, LCH SA considers the recovery rate, 
which is used to calculate an estimate of the amount that could be 
recovered in a default. Section 3.5.1 lists recovery rates for 
categories of reference entities, like insurers and banks. The proposed 
rule change would add a recovery rate for state-owned enterprises. This 
change would account for the additional sovereign single names that LCH 
SA will clear as part of the new products. Relatedly, the proposed rule 
change would add a new Section 3.5.2 \9\ to explain how LCH SA would 
treat a Clearing Member's positions in a state-owned enterprise and its 
sovereign entity. If those positions are not risk reducing, and the 
sovereign entity owns more than 50% of the state-owned enterprise, then 
LCH SA would default the two entities jointly. New Section 3.5.2 also 
would explain that LCH SA would calculate exposures for state-owned 
enterprises with a fixed 70% recovery rate.
---------------------------------------------------------------------------

    \9\ LCH would move the contents of current Section 3.5.2 to a 
new Section 3.5.3.
---------------------------------------------------------------------------

    Section 3.8 of the CDSClear Risk Methodology describes the Wrong 
Way Risk aspect of margin. Wrong Way Risk accounts for the risk that 
exposure to a given counterparty increases when that counterparty 
defaults. This could occur, for example, when a Clearing Member sells 
protection on a CDS index of which it is a constituent. LCH SA 
calculates Wrong Way Risk by, among other things, considering the risk 
in certain geographic regions because historical data shows 
correlations among defaults in these regions. The proposed rule change 
would expand these regions to include Asia, to account for the iTraxx 
Asia ex Japan Index and related single-name constituents.
    Section 4.1 of the CDSClear Risk Methodology describes the 
Liquidity and Concentration Charge aspect of margin. The Liquidity and 
Concentration Charge covers the cost of liquidating a defaulting 
Clearing Member's portfolio that contains a very concentrated or 
illiquid position. To estimate this cost, LCH SA mimics the liquidation 
procedure used in its default management process. The first step in 
this process is to macro-hedge a portfolio to reduce the impact of 
market risk. As part of the macro-hedge, LCH SA divides portfolios into 
separate indices and their components. Section 4.1.2 lists these 
different indices, which are the indices that LCH SA clears. Thus, the 
proposed rule change would add to this list in Section 4.1.2 the iTraxx 
Asia ex Japan Index and CDX.EM Index. Moreover, the proposed rule 
change would move from Section 4.1.2 to Section 4.1.1 language to note 
that the liquidation cost of a sub-portfolio composed of a single year 
position in the principal on the run index is simply the sum of the 
macro hedging costs, and add to Section 4.1.1 a note that 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, in Section 4.1.7 the proposed rule change would make 
certain updates related to clearing the New Products. Specifically, the 
proposed rule change would update the existing thresholds and include 
more cleared indexes in the table for volume thresholds. The proposed 
rule change also would add a dedicated liquidity grid for sovereign 
single names.

C. CDSClear Default Fund Methodology

    The CDSClear Default Fund Methodology describes how, during extreme 
but plausible circumstances, LCH ensures its financial resources are 
enough to cover the potential losses from a close-out of the largest 
two groups of members' portfolios and all clients of both of these 
groups of members. Section 2 of the CDSClear Default Fund Methodology 
describes the stress-testing framework that LCH SA uses to assess the 
potential impact of the default of one or more clearing members under 
stressed market conditions in excess of the initial margin that LCH SA 
has collected for those clearing members. This stress testing aims to 
identify a total stress test loss over initial margin under extreme but 
plausible scenarios. Section 2.2 provides an overview of how LCH treats 
single-name CDS and CDS indices in these extreme but plausible 
scenarios. The proposed rule change would amend this description to 
include the iTraxx Asia ex Japan Index and CDX.EM Index, as well as the 
iTraxx Australia Indices.\10\
---------------------------------------------------------------------------

    \10\ Although LCH SA added clearing of the iTraxx Australia 
Indices in a prior rule change, that prior rule change did not add 
the iTraxx Australia Indices to this description. Thus, the proposed 
rule change would correct this error and add the iTraxx Australia 
Indices to Section 2.2. See Notice, 87 FR at 55874; Self-Regulatory 
Organizations; LCH SA; Order Approving Proposed Rule Change Relating 
to the Clearing of Markit iTraxx[supreg] Australia Indices and the 
Associated Single-Name Constituents and Remediation of WWR Margin 
Instability, Exchange Act Release No. 95503 (Aug. 16, 2022), 87 FR 
51471 (Aug. 22, 2022) (SR-LCH SA-2022-004).
---------------------------------------------------------------------------

    Moreover, one component of the stress test loss over initial margin 
is the stressed short charge, which considers the jump to default risk 
under stress conditions. With respect to the sovereign single names 
that LCH SA will clear, the proposed rule change would amend Sections 
2.4.1 and 2.4.2 to describe how LCH SA would add State-Owned Entities' 
exposures to the stressed short charge. The proposed rule change also 
would amend Sections 2.4.3 and 2.7.2 to describe the same with 
mathematical formulas instead of with plain text.
    Finally, in Section 2.6, which discusses how LCH SA treats index 
options in default scenarios, the proposed rule change would add a 
description of how LCH SA would consider the stressed short charge for 
sovereigns.

D. Unrelated Changes

    Unrelated to clearing the New Products, the proposed rule change 
would make two other amendments to the Clearing Supplement. First, the 
proposed rule change would modify Section 2.2 to provide an additional 
term for each Index Cleared Transaction Confirmation. This new term 
would specify that the applicable Physical Settlement Matrix is the 
version of the Physical Settlement Matrix that is in force on the 
Clearing Day on which the Index Cleared Transaction is registered by 
LCH SA. LCH explains that this amendment would ensure that the 
Additional Provisions for Certain Russian Entities published by ISDA on 
March 25, 2022 will apply to the relevant cleared trades.\11\
---------------------------------------------------------------------------

    \11\ See Notice, 87 FR at 55873. For additional detail on these 
provisions and how compliance with them would facilitate the 
clearance of transactions in CDS contracts (or components thereof) 
for which the Russian Federation is a reference entity, see Self-
Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing and 
Order Granting Accelerated Approval of Proposed Rule Change Relating 
to the ICC Clearing Rules, Exchange Act Release No. 94784 (Apr. 22, 
2022), 87 FR 25324 (Apr. 28, 2022) (SR-ICC-2022-005).
---------------------------------------------------------------------------

    Next, the proposed rule change would make a correction in Section 7 
of Appendix XIII of Part B of the Clearing Supplement. Appendix XIII of 
Part B sets out the terms of transactions between a Clearing Member and 
its Client. The proposed rule change would remove from Section 7.15 and 
Section 7.17 of Appendix XIII the phrase ``for the purposes of the 
Matched Contracts of the related Settlement Matched Pair.'' This phrase 
is applicable to transactions

[[Page 76522]]

between LCH SA and a Clearing Member. Because Appendix XIII applies to 
transactions between a Clearing Member and its Client, this phrase is 
unnecessary.
    Finally, the proposed rule change would make a correction to 
Section 2.7 of the CDS Clearing Procedures. Specifically, the first 
sentence of Section 2.7(c) currently states 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.'' To acknowledge that a credit event may occur with 
respect to more than one Reference Entity, the proposed rule change 
would revise this sentence to read ``one or more Reference Entities.''

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.\12\ Based on its review of the record, including the 
supporting information provided in Confidential Exhibit 3, and for the 
reasons given below, the Commission finds that the proposed rule change 
is consistent with Section 17A(b)(3)(F) of the Act \13\ and Rules 17Ad-
22(e)(4)(ii) and 17Ad-22(e)(6)(i).\14\
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    \12\ 15 U.S.C. 78s(b)(2)(C).
    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(e)(4)(ii) and 17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

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.\15\ 
Based on its review of the record, including the supporting information 
provided in Confidential Exhibit 3, and for the reasons discussed 
below, the Commission believes the proposed changes are consistent with 
the promotion of the prompt and accurate clearance and settlement of 
securities transactions at LCH SA.
---------------------------------------------------------------------------

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

    As discussed above, the proposed rule change would amend the 
Clearing Supplement, the CDSClear Risk Methodology, and the CDSClear 
Default Fund Methodology to accommodate clearing of the New Products. 
For example, the proposed rule change would amend the Clearing 
Supplement to, among other things, introduce new defined terms and 
revise the Index Cleared Transaction Confirmation to accommodate 
clearing of the New Products. The proposed rule change also would amend 
the CDSClear Risk Methodology and the CDSClear Default Fund Methodology 
to consider the New Products in calculating certain components of 
margin and in calculating the stress test loss over initial margin. The 
Commission believes that the amendments to the Clearing Supplement 
would help to ensure that LCH SA has in place rules to appropriately 
govern the clearing of the New Products. The Commission also believes 
that the amendments to the CDSClear Risk Methodology and the CDSClear 
Default Fund Methodology would help to ensure that LCH SA's risk 
management system considers the risks of clearing the New Products. The 
Commission believes that these changes, taken together in consideration 
with the supporting information provided in Confidential Exhibit 3, 
would promote the prompt and accurate clearance and settlement of 
transactions in the New Products at LCH SA.
    The Commission similarly believes that the unrelated changes 
discussed in Part II.D above would promote the prompt and accurate 
clearance and settlement of transactions at LCH SA. Specifically, the 
Commission believes specifying that the Physical Settlement Matrix is 
the version in force on the Clearing Day on which the Index Cleared 
Transaction is registered would help to ensure the application of the 
Additional Provisions for Certain Russian Entities published by ISDA on 
March 25, 2022. In doing so, the Commission believes this change would 
help facilitate LCH SA's clearance and settlement of transactions to 
which these additional provisions would apply.\16\ Moreover, the 
Commission believes that removing an inapplicable phrase from Appendix 
XIII of Part B of the Clearing Supplement would correct a potential 
error that could hinder the consistent application of Appendix XIII to 
cleared transactions. Finally, the Commission believes that correcting 
``Reference Entity'' to ``Reference Entities'' in Section 2 of the CDS 
Clearing Procedures would help to ensure that LCH SA applies Section 2 
to multiple Reference Entities, as intended, should ever a credit event 
occur for more than one Reference Entity.
---------------------------------------------------------------------------

    \16\ For additional detail on these provisions and how 
compliance with them would facilitate the clearance of transactions 
in CDS contracts (or components thereof) for which the Russian 
Federation is a reference entity, see Self-Regulatory Organizations; 
ICE Clear Credit LLC; Notice of Filing and Order Granting 
Accelerated Approval of Proposed Rule Change Relating to the ICC 
Clearing Rules, Exchange Act Release No. 94784 (Apr. 22, 2022), 87 
FR 25324 (Apr. 28, 2022) (SR-ICC-2022-005).
---------------------------------------------------------------------------

    Therefore, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\17\
---------------------------------------------------------------------------

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

B. Consistency With Rule 17Ad-22(e)(4)(ii)

    Rule 17Ad-22(e)(4)(ii) requires that LCH SA establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to maintain, to the extent not already maintained pursuant to 
Rule 17Ad-22(e)(4)(i),\18\ 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 LCH SA in extreme but plausible market 
conditions.\19\
---------------------------------------------------------------------------

    \18\ 17 CFR 240.17Ad-22(e)(4)(i).
    \19\ 17 CFR 240.17Ad-22(e)(4)(ii).
---------------------------------------------------------------------------

    As discussed above, the proposed rule change would amend the 
CDSClear Default Fund Methodology to accommodate clearing of the New 
Products. Among other things, these changes would revise the 
description of the stress scenarios and of the calculation of stress 
test loss over initial margin to consider the New Products. LCH SA 
sizes its default fund to cover the highest two exposures arising from 
the stress test loss over initial margin calculation under extreme but 
plausible stress scenarios. Considering the New Products in these 
calculations would help to ensure that LCH SA, while clearing the New 
Products, continues to maintain financial resources to cover the 
default of the two participant families that would potentially cause 
the largest aggregate credit exposure for LCH SA in extreme but 
plausible market conditions.
    Therefore, the Commission finds that this aspect of the proposed 
rule change is consistent with Rule 17Ad-22(e)(4)(ii).\20\
---------------------------------------------------------------------------

    \20\ 17 CFR 240.17Ad-22(e)(4)(ii).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(6)(i)

    Rule 17Ad-22(e)(6)(i) requires that LCH SA establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to cover

[[Page 76523]]

its credit exposures to its participants by establishing a risk-based 
margin system that, at a minimum, considers, and produces margin levels 
commensurate with, the risks and particular attributes of each relevant 
product, portfolio, and market.\21\
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    \21\ 17 CFR 240.17Ad-22(e)(6)(i).
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    As discussed above, the proposed rule change would amend the 
CDSClear Risk Methodology to accommodate clearing of the New Products. 
These changes would revise the descriptions of the Short Charge, Wrong 
Way Risk, and Liquidity and Concentration Charge to cover clearing of 
the New Products. Because LCH SA uses the Short Charge, Wrong Way Risk, 
and Liquidity and Concentration Charge to calculate initial margin 
along with the other components discussed in the CDSClear Risk 
Methodology, and based on the Commission's review of the proposed rule 
change, including the supporting information provided in Confidential 
Exhibit 3, the Commission believes these changes will help to ensure 
that LCH SA's margin system identifies the risks of clearing the New 
Products.
    Therefore, the Commission finds that these aspects of the proposed 
rule change are consistent with Rule 17Ad-22(e)(6)(i).\22\
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    \22\ 17 CFR 240.17Ad-22(e)(6)(i).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 2, 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 January 4, 2023.

V. Accelerated Approval of the Proposed Rule Change, as Modified by 
Amendment No. 2

    Under Section 19(b)(2)(C)(iii) of the Act,\23\ the Commission may 
grant accelerated approval of a proposed rule change if the Commission 
finds good cause for doing so. For the reasons discussed below, the 
Commission finds good cause, pursuant to Section 19(b)(2)(C)(iii) of 
the Act,\24\ for approving the proposed rule change on an accelerated 
basis prior to the 30th day after the date of publication of notice of 
Amendment No. 2 in the Federal Register.
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    \23\ 15 U.S.C. 78s(b)(2)(C)(iii).
    \24\ 15 U.S.C. 78s(b)(2)(C)(iii).
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    Amendment No. 2, which replaced and superseded in their entirety 
both the original filing and Amendment No. 1, does not substantively 
alter the proposed rule change. Rather, it corrects a non-substantive 
formatting error and includes as Confidential Exhibit 3 certain 
information that LCH SA submitted to the Commission in support of the 
proposed rule change. By correcting a non-substantive formatting error 
in the Confidential Exhibit 5C, Amendment No. 2 should help to ensure 
that the LCH SA Methodology Services Reference Guide: CDS Margin 
Framework (V3.14) is accurate, free from error, and therefore can be 
used and applied consistently by LCH SA personnel. Because LCH SA uses 
its CDS Margin Framework in clearing transactions, the Commission 
believes correcting this error would be consistent with the prompt and 
accurate clearance and settlement of transactions.
    Moreover, as noted above, Amendment No. 2 includes Confidential 
Exhibit 3, which reproduces certain information that LCH SA submitted 
to the Commission in support of the proposed rule change. The 
Commission considered this information as part of its review of the 
record for the proposed rule change and believes this information 
supports the findings discussed in Part III above. The Commission 
therefore believes that amending the proposed rule change to include 
Confidential Exhibit 3 would be consistent with its findings discussed 
above.
    The Commission therefore finds good cause, pursuant to Section 
19(b)(2)(C)(iii) of the Act,\25\ for approving the proposed rule change 
on an accelerated basis prior to the 30th day after the date of 
publication of notice of Amendment No. 2 in the Federal Register.
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    \25\ 15 U.S.C. 78s(b)(2)(C)(iii).
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VI. 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 \26\ and Rules 17Ad-22(e)(4)(ii) and 17Ad-22(e)(6)(i).\27\
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    \26\ 15 U.S.C. 78q-1(b)(3)(F).
    \27\ 17 CFR 240.17Ad-22(e)(4)(ii) and (e)(6)(i).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\28\ that the proposed rule change, as modified by Amendment No. 2 (SR-
LCH SA-2022-007), be, and hereby is, approved.\29\
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    \28\ 15 U.S.C. 78s(b)(2).
    \29\ 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.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-27052 Filed 12-13-22; 8:45 am]
BILLING CODE 8011-01-P

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