Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating to Portfolio Margining, 46221-46232 [2023-15257]
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Federal Register / Vol. 88, No. 137 / Wednesday, July 19, 2023 / Notices
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subject to copyright protection. All
submissions should refer to file number
SR–CboeBZX–2023–042 and should be
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.73
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–15272 Filed 7–18–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97888; File No. SR–LCH
SA–2023–005]
Self-Regulatory Organizations; LCH
SA; Notice of Filing of Proposed Rule
Change Relating to Portfolio Margining
July 13, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 29,
2023, Banque Centrale de
Compensation, which conducts
business under the name LCH SA (‘‘LCH
SA’’), filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change (‘‘Proposed
Rule Change’’) described in Items I, II
and III below, which Items have been
prepared primarily by LCH SA. The
Commission is publishing this notice to
solicit comments on the Proposed Rule
Change from interested persons.
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I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
LCH SA is proposing to amend its
FCM/BD CDS Clearing Regulations
(‘‘Regulations’’) and certain provisions
of its CDS Clearing Rule Book (‘‘Rule
Book’’) to implement a portfolio
margining program (‘‘Program’’),
pursuant to which FCM/BD Clearing
Members may offer FCM/BD Clients the
opportunity to portfolio margin FCM/
BD Cleared Transactions that are
security-based swaps (‘‘SBS’’) with
FCM/BD Cleared Transactions that are
Cleared Swaps in the participating
FCM/BD Clearing Member’s FCM/BD
Swaps Client Account Structure. LCH
SA is also proposing to amend certain
provisions of its Rule Book and its CDS
Clearing Procedures (‘‘Procedures’’) 3
73 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The version of the Rule Book and Section 3 of
the Procedures which includes the Proposed Rule
Change reflects a separate proposed rule change
1 15
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regarding permitted Collateral
(including Eligible Collateral and
Eligible Currency), the Client Collateral
Buffer, and the release of Collateral to a
Clearing Member. In addition, LCH SA
is making other miscellaneous
amendments to its Rule Book,
Procedures and CDS Clearing
Supplement and will adopt a new
Clearing Notice. Further, LCH SA is also
making a number of amendments to its
Liquidity Risk Modelling Framework
(‘‘Framework’’) 4 to take into account the
segregation requirements and
investment restrictions applicable to
FCMs’ customer funds. (collectively, the
‘‘Proposed Rule Change’’).5
The text of the Proposed Rule Change
has been annexed as Exhibit 5 to file
number SR–LCH SA–2023–005.6
The implementation of the Proposed
Rule Change will be contingent on 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
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
In separate orders issued in
November, 2021, the SEC and the
Commodity Futures Trading
Commission (‘‘CFTC’’ and collectively
with the SEC, the ‘‘Agencies’’) set out
the terms and conditions pursuant to
which LCH SA’s FCM/BD Clearing
previously submitted to the Securities and
Exchange Commission (SEC) under the Filing No.
SR–LCH SA–2023–004’’ which is still subject to
SEC’s approval.
4 The amendments are to the version of the
Framework that has been submitted to SEC for
approval under the Filing No SR–LCH SA–2023–
003, which conforms the Framework to the
common template adopted by the London Stock
Exchange Group (‘‘LSEG’’) for use by each of its
affiliates.
5 Capitalized terms not defined herein are defined
in LCH SA’s Rule Book, available at https://
www.lch.com/rules-regulations/rulebooks/sa.
6 All capitalized terms not defined herein have
the same definition as in the Rule Book or
Procedures, as applicable.
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Members may elect to offer their FCM/
BD Clients the opportunity to portfolio
margin FCM/BD Cleared Transactions
that are SBS with FCM/BD Cleared
Transactions that are Cleared Swaps in
the participating FCM/BD Clearing
Member’s FCM/BD Swaps Client
Account Structure. The Proposed Rule
Change is being adopted, in part, to
implement this Program. In addition,
the Proposed Rule Change will amend
certain provisions of its Rule Book and
its Procedures regarding permitted
Collateral, the Client Collateral Buffer,
and the release of Collateral to a
Clearing Member. The Proposed Rule
Change will also make other
miscellaneous amendments to LCH SA’s
Rule Book and Procedures. Finally, the
Proposed Rule Change will also update
the Liquidity Risk Modelling
Framework with respect to the liquidity
resources and requirements applicable
to FCM/BD Clearing Members.
a. Portfolio Margining Program
The rules establishing the Program
will be set out primarily in a new
Regulation 7 in LCH SA’s FCM/BD
Clearing Regulations (‘‘Regulations’’),
which are designed to ensure that the
Program complies with the terms and
conditions set out in the SEC Portfolio
Margining Order 7 and the CFTC
Portfolio Margining Order.8
• Section 7(a) of the Regulations, In
General, will define the ‘‘Portfolio
Margining Program’’ as the program by
which LCH SA is authorized, pursuant
to the SEC Portfolio Margining Order
and the CFTC Portfolio Margining
Order, to offer FCM/BD Clearing
Members, on behalf of their FCM/BD
Clients, the ability to elect to portfolio
margin FCM/BD Cleared Transactions
that are SBS with FCM/BD Cleared
Transactions that are Cleared Swaps.9
• Section 7(b) of the Regulations,
Participation, will provide that FCM/BD
Clearing Members may participate in
7 The Definitions section of the Regulations will
be amended to define the ‘‘SEC Portfolio Margining
Order’’ to mean ‘‘Exchange Act Release 34–93501
(Order Granting Conditional Exemptions Under the
Securities Exchange Act of 1934 in Connection
With the Portfolio Margining of Cleared Swaps and
Security-Based Swaps That Are Credit Default
Swaps’’, 86 FR 61357 (November 5, 2021)). This
Order applies to all SEC-registered clearing agencies
and all SEC-registered broker-dealers.
8 The Definitions section of the Regulations will
be amended to define the ‘‘CFTC Portfolio
Margining Order’’ to mean the ‘‘Treatment of Funds
Held in Connection with Clearing by LCH SA of
Single-Name Credit Default Swaps, Including SpunOut Component Transactions’’ issued on November
1, 2021. This Order applies solely to LCH SA and
its FCM/BD Clearing Members.
9 The Definitions section of the Regulations will
be amended to define the ‘‘Portfolio Margining
Program’’ by making a direct reference to
Regulation 7(a) in the Regulations.
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the Program by providing LCH SA such
materials that LCH SA may require from
time to time, including in respect of its
FCM/BD Clients. This section also
provides that, in providing these
materials to LCH SA, the FCM/BD
Clearing Member shall be deemed to
represent that: (a) it is both an FCM and
a BD and neither such status has been
revoked; (b) it is in compliance with the
applicable requirements of the SEC
Portfolio Margining Order and the CFTC
Portfolio Margining Order; and (c) each
relevant FCM/BD Client is an ‘‘eligible
contract participant’’ as defined in
Section 1a(18) of the Commodity
Exchange Act.10
• Section 7(c) of the Regulations,
Operation, will provide that, following
the Portfolio Margining Start Date, all
FCM/BD Cleared Transactions that are
SBS for the relevant FCM/BD Client will
be treated as FCM/BD Portfolio
Margining Transactions 11 and will be
held (along with any associated
Collateral) in the FCM/BD Swaps Client
Account Structure on a commingled
basis with FCM/BD Cleared
Transactions that are Cleared Swaps for
such FCM/BD Client. Further, all such
FCM/BD Portfolio Margining
Transactions will constitute Cleared
Swaps for purposes of the CDS Clearing
Rules and the resulting combined
positions will be margined on a
portfolio basis in respect of the relevant
FCM/BD Client. Finally, this section
will provide that the relevant FCM/BD
Client will be deemed to acknowledge
and agree that any property used to
margin, guarantee or secure the FCM/BD
Portfolio Margining Transactions will
not receive customer protection
treatment under the Securities Exchange
Act (‘‘Act’’) or SIPA 12 and will instead
receive customer protection treatment
under the commodity broker liquidation
provisions of the Code 13 and the rules
and regulations promulgated
thereunder.14
10 This section further provides that, if LCH SA
determines that an FCM/BD Clearing Member may
participate in the Portfolio Margining Program on
behalf of its FCM Client(s), it will advise the FCM/
BD Clearing Member when such participation shall
begin, which date is defined as the ‘‘Portfolio
Margining Start Date’’.
11 The Definitions section of the Regulations will
be amended to define an ‘‘FCM/BD Portfolio
Margining Transaction’’ to mean an ‘‘FCM/BD
Cleared Transaction that is an SBS and which is
held in the FCM/BD Swaps Client Account
Structure pursuant to the Portfolio Margining
Program.
12 The Definitions section of the Regulations
defines SIPA to mean U.S. Securities Investor
Protection Act of 1970, as amended.
13 The Definitions section of the Regulations
defines the Code to mean U.S. Bankruptcy Code, as
amended.
14 The purpose of this provision is to cause the
FCM/BD Clearing Member to acknowledge that it
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In addition to new Regulation 7,
certain conforming changes will also be
made to other sections of the
Regulations. In particular, in the
Definitions section of the Regulations,
the definition of the LCH Cleared Swaps
Client Segregated Depository Account
will be amended to make clear that the
account includes, where relevant, FCM/
BD Portfolio Margining Transactions.
Similarly, the definition of the LCH SBS
Client Segregated Depository Account
will be amended to make clear that the
account excludes any FCM/BD Portfolio
Margining Transactions. 15 Equivalent
changes will be made to the relevant
provisions of the Rule Book and Section
3 of the Procedures by adding a
reference to the new defined term of
‘‘FCM/BD Portfolio Margining
Transaction’’, where needed.
Further, Article 6.2.1.1 (iii) of the
Rule Book will be deleted. Article
6.2.1.1(iii) establishes the terms and
conditions pursuant to which, prior to
the compliance date for the final capital,
margin, and segregation requirements
for security-based swap dealers and the
adoption of the SEC Portfolio Margining
Order, an FCM/BD Clearing Member
that is both an FCM and a BD was
authorized to clear and hold FCM/BD
Cleared Transactions that are SBS for
FCM/BD Clients in the FCM/BD Swaps
Client Account Structure on a
commingled basis with Cleared
Swaps.16 With the implementation of
has complied with the SEC Portfolio Margining
Order, which, inter alia, requires the FCM/BD to
furnish to the FCM/BD Client a disclosure
document containing the following information: (i)
a statement indicating that the FCM/BD’s money,
securities, and property will be held in an account
maintained in accordance with the segregation
requirements of Section 4d(f) of the Commodity
Exchange Act and that the FCM/BD Client has
elected to seek protections under Subchapter IV of
Chapter 7 of Title 11 of the United States Code and
the rules and regulations thereunder with respect to
such money, securities, and property; and (ii) a
statement that the broker-dealer segregation
requirements of Section 15(c)(3) and Section 3E of
the Exchange Act and the rules thereunder, and any
customer protections under SIPA and the
stockbroker liquidation provisions, will not apply
to such FCM/BD Client.
15 Specifically, an LCH SBS Client Segregated
Depository Account will be defined in the
Regulations to mean one or more accounts at one
or more Banks which are commingled for purposes
of the applicable provisions of the Exchange Act
and SEC Regulations) maintained by LCH SA for
the benefit of SBS Customers of its FCM/BD
Clearing Members with a Bank, which is segregated
in accordance with the Exchange Act and SEC
Regulations and contains Collateral deposited by
such FCM/BD Clearing Members on behalf of their
SBS Customers in connection with FCM/BD
Cleared Transactions that are SBS cleared for such
SBS Customers by such FCM/BD Clearing Members,
excluding any FCM/BD Portfolio Margining
Transactions.
16 See, Order Granting Conditional Exemptions
under the Securities Exchange Act of 1934 in
Connection with Portfolio Margining of Swaps and
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the more comprehensive Portfolio
Margining Program set out in Section 7
of the Regulations, Article 6.2.1.1 is
unnecessary.
In addition, because LCH SA expects
that all FCM/BD Clients will elect to
portfolio margin all of their SBS
transactions rather than maintain a
separate FCM/BD SBS Client Segregated
Depository Account,17 Regulation 2(a)
will be amended to provide that an
FCM/BD Clearing Member will maintain
an FCM/BD SBS Client Segregated
Depository Account only if required,18
and Regulation 2(b) will be amended to
provide that LCH SA will establish an
LCH SBS Client Segregated Depository
Account 19 for an FCM/BD Clearing
Member only upon request. Finally,
Regulation 2(c) will be amended to
confirm that all Collateral deposited
with LCH SA by FCM/BD Clearing
Members in connection with Cleared
Swaps will include Collateral deposited
in connection with FCM/BD Portfolio
Margining Transactions and will be held
in an LCH Cleared Swaps Segregated
Depository Account.
Section 3 of the Procedures will also
be revised in the expectation that all
FCM/BD Clients will elect to portfolio
margin their SBS transactions.
Specifically:
• Section 3.3(b) will be revised to
provide that LCH SA will maintain an
FCM/BD SBS Client Collateral Account
to record the Collateral held by LCH SA
for the benefit of such FCM/BD Clearing
Security-based Swaps, Exchange Act Release No.
68433 (Dec. 12, 2012) 77 FR 75211 (Dec. 19, 2012).
17 The Regulations define an FCM/BD SBS Client
Segregated Depository Account to mean an omnibus
account (which will consist of one or more accounts
at one or more Banks which are commingled for
purposes of the applicable provisions of the
Exchange Act and SEC Regulations) maintained by
an FCM/BD Clearing Member for its SBS Customers
with a Bank, which is segregated in accordance
with the Exchange Act and SEC Regulations and
contains Collateral deposited by such SBS
Customers in connection with FCM/BD Cleared
Transactions that are SBS cleared for such SBS
Customers by such FCM/BD Clearing Member,
excluding any FCM/BD Portfolio Margining
Transactions.
18 Therefore, any reference to the FCM/BD SBS
Client Segregated Depository Account in Section 3
of the Procedures will be preceded by the condition
that such account is established.
19 The Regulations define an LCH SBS Client
Segregated Depository Account to mean an omnibus
account (which will consist of one or more accounts
at one or more Banks which are commingled for
purposes of the applicable provisions of the
Exchange Act and SEC Regulations) maintained by
LCH SA for the benefit of SBS Customers of its
FCM/BD Clearing Members with a Bank, which is
segregated in accordance with the Exchange Act
and SEC Regulations and contains Collateral
deposited by such FCM/BD Clearing Members on
behalf of their SBS Customers in connection with
FCM/BD Cleared Transactions that are SBS cleared
for such SBS Customers by such FCM/BD Clearing
Members, excluding any FCM/BD Portfolio
Margining Transactions.
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Member’s SBS Customers with respect
to SBS only where required. Any
reference to the FCM/BD SBS Client
Collateral Account in Section 3 of the
Procedures will be preceded by the
condition that such account is
established.
• Section 3.7(a)(ii)(z) will be revised
to provide that LCH SA will maintain a
TARGET2 Account to be used to make
Collateral Calls in relation to the Client
Margin Requirement(s) with respect to
SBS only where required.20
• Section 3.7(b) will be revised to
provide that an FCM/BD Clearing
Member has an obligation to maintain a
TARGET2 Account for the purposes of
the Collateral Calls in respect of its
Client Margin Requirement(s) with
respect to SBS only where required.
Any reference to such TARGET2
Account in Section 3 of the Procedures
will be preceded by the condition that
such account is established.
• Section 3.8(b) will be revised to
provide that LCH SA will be required to
maintain a USD account to credit USD
Cash Collateral which is transferred by
FCM/BD Clearing Members to be
recorded in their FCM/BD SBS Client
Collateral Account (the ‘‘LCH FCM/BD
SBS Client USD Account’’) only where
required. Any reference to the LCH
FCM/BD SBS Client USD Account in
Section 3 of the Procedures will be
preceded by the condition that such
account is established.
• Section 3.14 (a) will be revised to
provide that LCH SA will be required,
upon request, to maintain a segregated
depository account in BNYM US’ books
to register BNYM US Eligible
Collateral 21 which is transferred by
FCM/BD Clearing Members in
connection with SBS other than SBS
that constitute FCM/BD Portfolio
Margining Transactions (the ‘‘LCH SBS
Client Depository Account’’). Any
reference to the LCH SBS Client
Depository Account in Section 3 of the
Procedures will be preceded by the
condition that such account is
established.
• A new Section 3.18(b)(y) will be
added to provide that the FCM/BD
Clearing Member will establish a
TARGET2 Account for the purposes of
the Collateral Calls in respect of its
20 As defined in the Rule Book, TARGET2 is the
system known as Trans-European Automated Realtime Gross Settlement Express Transfer 2. A
TARGET2 Account is an account held by a
TARGET2 participant in TARGET2 payment
module with a Eurosystem Central Bank which is
necessary for such TARGET2 participant to: (i)
submit payment orders or receive payments via
TARGET2; and (ii) settle such payments with such
Eurosystem Central Bank.
21 ‘‘BNYM US’’ and ‘‘BNYM US Eligible
Collateral’’ are defined below.
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Client Margin Requirement(s) with
respect to SBS only where required. As
noted earlier, LCH SA expects that all
FCM/BD Clients will elect to portfolio
margin all of their SBS transactions
rather than maintain a separate FCM/BD
SBS Client Segregated Depository
Account. New Section 3.18(b)(y)
confirms that LCH SA will not establish
a TARGET2 Account with respect to
SBS unless an FCM/BD Client does not
elect to portfolio margin its SBS
transactions.
• Section 3.18(c) will be revised to
provide that an FCM/BD Clearing
Member has an obligation to hold a
Bank of New York Mellon (‘‘BNYM’’)
cash account for the purposes of
satisfying its Cash Payments obligations
in respect of its Client Cleared
Transactions that are SBS only where
required.22
Certain definitions set out in the Rule
Book will also be revised, in each case,
to recognize that FCM/BD Portfolio
Margining Transactions, i.e., FCM/BD
Cleared Transactions that are SBS and
that are held in the FCM/BD Swaps
Client Account Structure pursuant to
the Portfolio Margining Program
established in new FCM/BD Regulation
7, will be treated as Cleared Swaps for
all purposes and, as such, governed by
new FCM/BD Regulation 7. As with
Article 6.2.1.1(iii), discussed earlier, the
current definitions were adopted to
implement the structure in place prior
to the compliance date for the final
capital, margin, and segregation
requirements for security-based swap
dealers and the adoption of the SEC
Portfolio Margining Order, pursuant to
which an FCM/BD Clearing Member
that is both an FCM and a BD is
authorized to clear and hold FCM/BD
Cleared Transactions that are SBS for
FCM/BD Clients in the FCM/BD Swaps
Client Account Structure on a
commingled basis with Cleared Swaps.
With the adoption of new FCM/BD
Regulation 7, references to current
definitions or Articles in the Rule Book
are revised to reflect the Portfolio
Margining Program.23
In particular:
• Cleared Swap. This definition
currently provides that a Cleared Swap
is an FCM/BD Cleared Transaction (i)
constituting a Cleared Swap as defined
in CFTC Regulation 22.1 or (ii)
22 In each case, the revisions also make clear that
the term ‘‘SBS’’ excludes SBS that constitute FCM/
BD Portfolio Margining Transactions.
23 In particular, references to Article 6.2.1.1(iii)
have been removed. As noted earlier, with the
implementation of the more comprehensive
Portfolio Margining Program set out in Section 7 of
the Regulations, Article 6.2.1.1 is unnecessary and
is being deleted.
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constituting an SBS that is held in the
FCM/BD Swaps Client Account
Structure set out in Article 6.2.1.1(i) in
pursuant to Article 6.2.1.1(iii). As
revised, subparagraph (ii) of the
definition will provide that a Cleared
Swap is an FCM/BD Cleared
Transaction ‘‘constituting an FCM/BD
Portfolio Margining Transaction.’’
• Cleared Swaps Customer. This
definition currently provides that a
Cleared Swaps Customer is (i) a Cleared
Swaps Customer, as defined in CFTC
Regulation 22.1, of an FCM/BD Clearing
Member with respect to Cleared Swaps,
that is an eligible contract participant as
defined in Section 1a(18) of the CEA,
other than subparagraph (C) thereof, or
as may be further defined by CFTC
Regulations, and (ii) a person that
would be a Cleared Swaps Customer, as
defined in CFTC Regulation 22.1, of an
FCM/BD Clearing Member with respect
to any transaction constituting an SBS
that is a Cleared Swap under the
definition in this Section 1.1.1, as if
such transaction is a Cleared Swap for
purposes of the definition of Cleared
Swaps Customer in CFTC Regulation
22.1. As revised, subparagraph (ii) of the
definition will provide that a Cleared
Swaps Customer is ‘‘a person that is
treated as a Cleared Swaps Customer in
connection with maintaining FCM/BD
Portfolio Margining Transactions in the
FCM/BD Swaps Client Account
Structure of an FCM/BD Clearing
Member pursuant to the Portfolio
Margining Program.
• Cleared Swaps Customer Collateral.
This definition currently provides that
Cleared Swaps Customer Collateral is
Cleared Swaps Customer Collateral, as
defined in CFTC Regulation 22.1, with
respect to Cleared Swaps, including
with respect to any transaction
constituting an SBS that is a Cleared
Swap under the definition in Section
1.1.1, as if such transaction is a Cleared
Swap for purposes of the definition of
Cleared Swaps Customer Collateral in
CFTC Regulation 22.1. As revised, this
definition will provide that Cleared
Swaps Customer Collateral is Cleared
Swaps Customer Collateral, as defined
in CFTC Regulation 22.1, with respect to
Cleared Swaps, including with respect
to any transaction constituting an SBS
that is an FCM/BD Portfolio Margining
Transaction.
• FCM/BD Swaps Client Trade
Account. This definition currently
provides that an FCM/BD Swaps Client
Trade Account is an account opened by
LCH SA in the name of an FCM/BD
Clearing Member for the benefit of the
Customer of such FCM/BD Clearing
Member in order to register all Cleared
Swaps (including any SBS that are held
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in the FCM/BD Swaps Client Account
Structure as Cleared Swaps pursuant to
Article 6.2.1.1(iii)) in relation to such
FCM/BD Client). As revised, this
definition will provide that an FCM/BD
Swaps Client Trade Account is an
account opened by LCH SA in the name
of an FCM/BD Clearing Member for the
benefit of the Customer of such FCM/BD
Clearing Member in order to register all
Cleared Swaps (including any SBS that
constitute FCM/BD Portfolio Margining
Transactions in relation to such FCM/
BD Client).
• FCM/BD SBS Client Collateral
Account. This definition currently
provides, in relevant part, that an FCM/
BD SBS Client Collateral Account is an
account opened in the books of LCH SA
to record the Collateral held by LCH SA
for the benefit of an FCM/BD Clearing
Member’s SBS Customers with respect
to FCM/BD Cleared Transactions that
are SBS (excluding any SBS transactions
held in the FCM/BD Swaps Client
Account Structure as Cleared Swaps
pursuant to Article 6.2.1.1(iii)). As
revised, this definition will provide, in
relevant part, that an FCM/BD SBS
Client Collateral Account is an account
opened in the books of LCH SA to
record the Collateral held by LCH SA for
the benefit of an FCM/BD Clearing
Member’s SBS Customers with respect
to FCM/BD Cleared Transactions that
are SBS (excluding any SBS that
constitute FCM/BD Portfolio Margining
Transactions).
• FCM/BD SBS Client Financial
Account. This definition currently
provides that an FCM/BD SBS Client
Financial Account is a segregated
account opened in the books of LCH SA
for an SBS Customer of an FCM/BD
Clearing Member with a view to record
the Legally Segregated Value related to
SBS (excluding SBS that are held in the
FCM/BD Swaps Client Account
Structure as Cleared Swaps pursuant to
Article 6.2.1.1(iii)) of such FCM/BD
Clearing Member’s SBS Customer as
determined by LCH SA in accordance
with the CDS Clearing Rules. As
revised, this definition will provide that
an FCM/BD SBS Client Financial
Account is a segregated account opened
in the books of LCH SA for an SBS
Customer of an FCM/BD Clearing
Member with a view to record the
Legally Segregated Value related to SBS
(excluding SBS that constitute FCM/BD
Portfolio Margining Transactions) of
such FCM/BD Clearing Member’s SBS
Customer as determined by LCH SA in
accordance with the CDS Clearing
Rules.
• FCM/BD SBS Client Margin
Account. This definition currently
provides that an FCM/BD SBS Client
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Margin Account is an account opened
by LCH SA in the name of an FCM/BD
Clearing Member for the benefit of each
SBS Customer of such FCM/BD Clearing
Member in the CDS Clearing System for
risk management purposes, in which the
SBS of the SBS Customers (excluding
SBS that are held in the FCM/BD Swaps
Client Account Structure as Cleared
Swaps pursuant to Article 6.2.1.1(iii))
are netted and corresponding Open
Positions are registered, and each FCM/
BD Client related SBS positions
(excluding SBS transactions that are
held in the FCM/BD Swaps Client
Account Structure as Cleared Swaps
pursuant to Article 6.2.1.1(iii))
corresponding to Eligible Intraday
Transactions and Irrevocable
Backloading STM Transactions preregistered in the Account Structure of
such FCM/BD Clearing Member (if so
applicable pursuant to Article 6.2.3.1)
are recorded, in order to calculate the
FCM/BD Client Margin Requirement
and Client NPV Payment Requirement
of such FCM/BD Clearing Member in
respect of such SBS Customer. As
revised, this definition will provide that
an FCM/BD SBS Client Margin Account
is an account opened by LCH SA in the
name of an FCM/BD Clearing Member
for the benefit of each SBS Customer of
such FCM/BD Clearing Member in the
CDS Clearing System for risk
management purposes, in which the
SBS of the SBS Customers (excluding
SBS that constitute FCM/BD Portfolio
Margining Transactions) are netted and
corresponding Open Positions are
registered, and each FCM/BD Client
related SBS positions (excluding SBS
transactions that constitute FCM/BD
Portfolio Margining Transactions)
corresponding to Eligible Intraday
Transactions and Irrevocable
Backloading STM Transactions preregistered in the Account Structure of
such FCM/BD Clearing Member (if so
applicable pursuant to Article 6.2.3.1)
are recorded, in order to calculate the
FCM/BD Client Margin Requirement
and Client NPV Payment Requirement
of such FCM/BD Clearing Member in
respect of such SBS Customer.
• FCM/BD SBS Client Trade Account.
This definition provides that an FCM/
BD SBS Client Trade Account is an
account opened by LCH SA in the name
of an FCM/BD Clearing Member for the
benefit of an SBS Customer of such
FCM/BD Clearing Member in order to
register all SBS cleared by such FCM/
BD Clearing Member (excluding SBS
that are held in the FCM/BD Swaps
Client Account Structure as Cleared
Swaps pursuant to Article 6.2.1.1(iii)) in
relation to such SBS Customer. As
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revised, this definition will provide that
an FCM/BD SBS Client Trade Account
is an account opened by LCH SA in the
name of an FCM/BD Clearing Member
for the benefit of an SBS Customer of
such FCM/BD Clearing Member in order
to register all SBS cleared by such FCM/
BD Clearing Member (excluding SBS
that constitute FCM/BD Portfolio
Margining Transactions) in relation to
such SBS Customer.
b. Collateral/Accounts
As noted above, in addition to the
proposed changes linked to the
implementation of the Program
described in paragraph a. above, the
Proposed Rule Change will also amend
certain provisions of the Rule Book and
the Procedures regarding permitted
Collateral (including Eligible Collateral
and Eligible Currency 24), the Client
Collateral Buffer, and the release of
Collateral to a Clearing Member. With
regard to Eligible Collateral, Section 3 of
the Procedures will be amended to
replace any references to US Treasury
Bills (‘‘US T-Bills’’) by Eligible
Collateral that may be held at the Bank
of New York Mellon (‘‘BNYM US’’)
since there are also other securities, in
addition to US T-Bills, that could be
held with BNYM US. Section 3 will
refer instead to ‘‘BNYM US Eligible
Collateral’’ or ‘‘Eligible Collateral held
at BNYM US’’, where appropriate.25
With regard to Eligible Currency,
Section 3.5 of the Procedures will be
amended to provide that the Pound
Sterling will no longer be an Eligible
Currency for purposes of the FCM/BD
Client Account Structure of an FCM/BD
Clearing Member since LCH SA will not
open an account for the purpose of
depositing Cash Collateral under the
form of Pound Sterling on behalf of
FCM/BD Clients with a Permitted
Depository as such term is defined in
CFTC Regulations 22.1 and 22.4. As a
24 ‘‘Eligible Collateral’’ is broadly defined in
Article 1.1.1 of the Rule Book to mean such
securities and other types of non-Cash Collateral as
are set out in Section 3 of the Procedures as being
acceptable by LCH SA for the purposes of satisfying
a Clearing Member’s Margin Requirements;
‘‘Eligible Currency’’ is defined to mean cash in such
currencies as are set out in Section 3 of the
Procedures as being acceptable by LCH SA as Cash
Collateral.
25 ‘‘BNYM US Eligible Collateral is defined in
Section 3.4(d) to mean Eligible Collateral that is
acceptable to LCH SA to be held with BNYM US.
Conforming changes replacing ‘‘US T-Bills’’ with
‘‘BNYM US Eligible Collateral’’ or, as the case may
be, ‘‘Eligible Collateral held at BNYM US’’, are
made in Sections 3.2, 3.4, 3.7, 3.8, 3.9, 3.11, 3.14,
and 3.17. Notwithstanding the above, US T-Bills are
currently the only Eligible Collateral permitted to
be deposited at BNYM US. If LCH SA determines
to add additional Eligible Collateral, it will amend
the List of Eligible Securities by publication of a
Clearing Notice pursuant to Section 3.9.
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result, Eligible Currencies for FCM/BD
Client Account Structure will be limited
to the Euro which is held in an LCH
SA’s TARGET 2 Account opened with
Banque de France and the U.S. Dollar
(‘‘USD’’) which is held in an LCH SA’s
account opened with BNYM US and
Section 3.4(b) will be also amended for
this purpose by permitting the transfer
of non-Euro denominated Cash
Collateral to be credited to LCH SA’s
accounts opened with Euroclear Bank in
respect of the House Collateral Account
and any Collateral Accounts of a CCM
only (i.e. a clearing member that is not
an FCM/BD Clearing Member). Indeed,
LCH SA will not allow the transfer of
Pound Sterling (included in the
reference to ‘‘non-Euro denominated
Cash Collateral’’) on behalf of FCM/BD
Clients to be credited to an LCH SA’s
account opened with Euroclear Bank as
it is not an eligible Permitted Depository
within the meaning of CFTC
Regulations 22.1 and 22.4.
Consequently, the provisions of Section
3.8(a) relating to the FCM/BD Swaps
Client Non Euro Account and FCM/BD
SBS Client Non Euro Account that
should be opened in the name of LCH
SA with Euroclear Bank will be
removed as unnecessary.
The Proposed Rule Change will also
make a number of changes with regard
to rules governing the Client Collateral
Buffer, including the FCM/BD Client
Collateral Buffer.26 The Client Collateral
Buffer is the value of Collateral recorded
as Client Collateral Buffer, which allows
a Clearing Member to satisfy its margin
requirements in respect of a Client
Account Structure of that Clearing
Member if there is no or insufficient
Collateral held in the relevant Client
Account Structure for the purpose of
clearing a client trade leg. These
changes regarding the Client Collateral
Buffer first consist in revising Section
3.1 of Section 3 of the Procedures to
expand the types of Collateral permitted
to be held in the FCM/BD Client
Collateral Buffer. Currently, an FCM/BD
Clearing Member and a CCM may
26 The FCM/BD Client Collateral Buffer’s
definition includes both the FCM/BD Swaps Client
Collateral Buffer and the FCM/BD SBS Client
Collateral Buffer. The FCM/BD Swaps Client
Collateral Buffer is defined in the Rule Book to
mean the aggregate value of Collateral transferred
by an FCM/BD Clearing Member to LCH SA,
comprising such FCM/BD Clearing Member’s own
property, and recorded in such FCM/BD Clearing
Member’s FCM/BD Swaps Buffer Financial Account
which may be used by LCH SA to meet obligations
in respect of the Cleared Swaps of Cleared Swaps
Customers, including for the purpose of satisfying
the Notional and Collateral Checks performed by
LCH SA in respect of Eligible Intraday Transactions
comprising one or more Client Trade Leg(s). The
FCM/BD Swaps Client Collateral Buffer is similarly
defined.
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deposit only Euro to be maintained as
Client Collateral Buffer. As amended,
Section 3.1 will permit:
—an FCM/BD Clearing Member to
maintain as FCM Client Collateral
Buffer Cash Collateral, meaning
Eligible Currencies which will be
limited to the Euro and USD and
Eligible Collateral which is securities
that can be held at BNYM US, as set
out in a list published by LCH SA on
its website, that are acceptable by
LCH SA to be registered in the FCM/
BD Client Collateral Account; 27 and
—a CCM to maintain as CCM Client
Collateral Buffer Cash Collateral,
meaning Eligible Currencies which
will be limited to the Euro, USD and
GBP and Eligible Collateral in the
form of securities that are acceptable
by LCH SA, as set out in a list
published by LCH SA on its website,
that may be transferred by way of full
title transfer on a bilateral basis or
pursuant to a triparty arrangement 28
or by way of security interest under a
Belgian law pledge.
Sections 3.7(f), 3.8(f), 3.8(g), 3.10,
3.15(a) and 3.17(a) of the Procedures,
which describe how a Clearing Member
may transfer each type of Collateral to
LCH SA, will also be revised to refer
specifically to the transfer of Eurodenominated cash, non-Euro
denominated Cash Collateral, USD
denominated Cash Collateral, Eligible
Collateral provided with full title
transfer, Pledged Eligible Collateral and
BNYM US Eligible Collateral,
respectively, to be maintained as Client
Collateral Buffer, provided that such
Clearing Member is permitted to
maintain that type of Collateral as Client
Collateral Buffer. 29
As a consequence of the possibility to
maintain Client Collateral Buffer with
other type of Collateral than Euro Cash
Collateral, the relevant provisions of the
Rule Book 30 pursuant to which the
27 As noted directly above, Eligible Currencies
will be limited to the Euro and the USD and Eligible
Collateral to Eligible Collateral held at BNYM US,
in respect of an FCM/BD Client Account Structure.
28 The possibility for a CCM to provide securities
pursuant to triparty arrangement as Collateral to
LCH SA is covered by a separate proposed rule
change previously submitted to the SEC under the
Filing No. SR–LCH SA–2023–004’’ which is still
subject to SEC’s approval. As noted above in
footnote no. 1, the version of the Rule Book and
Section 3 of the Procedures which includes the
Proposed Rule Change also reflects this separate
proposed rule change.
29 Please refer to the previous paragraph which
describes the type of Collateral accepted by LCH SA
to be maintained as Client Collateral Buffer,
depending on whether the Clearing Member is an
FCM/BD Clearing Member or a CCM.
30 Article 1.3.1.3(iv) of the Rule Book, Clauses
4.2.2(i), 8.1.3 and 8.5.2(a)(i) and (b)(i) of Appendix
1 (CDS Default Management Process) of the Rule
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46225
Allocated Client Collateral Buffer shall
be transferred to the relevant CCM
Client Collateral Account or, as the case
may be, the relevant FCM/BD Client
Financial Account in certain
circumstances will need to be amended.
Indeed, where LCH SA determines that
there is insufficient Client Excess
Collateral allocated to: (i) in the case of
a CCM: the relevant CCM Client
Account Structure; or (ii) in the case of
an FCM/BD Clearing Member: the
relevant FCM/BD Client Margin
Account, to enable the novation of a
client trade leg, an amount of the
Available Client Collateral Buffer shall
be ‘‘allocated’’ to: (a) in the case of a
CCM: the relevant CCM Client Account
Structure; or (b) in the case of an FCM/
BD Clearing Member: the relevant FCM/
BD Client Margin Account. Pursuant to
the current provisions of the Rule Book,
in the event of an Event of Default
occurring in respect of a Clearing
Member, LCH SA will: (i) if the
Defaulting Clearing Member is a CCM,
transfer an amount of Cash Collateral
denominated in Euro which is equal to
the CCM Allocated Client Collateral
Buffer for the relevant CCM Client
Account Structure from the CCM House
Collateral Account to the relevant CCM
Client Collateral Account; or (ii) if the
Defaulting Clearing Member is an FCM/
BD Clearing Member, transfer an
amount of Collateral which is equal to
the FCM/BD Allocated Client Collateral
Buffer for the relevant FCM/BD Client
Margin Requirement from the FCM/BD
Buffer Financial Account to the relevant
FCM/BD Client Financial Account.
Since an amount of Collateral equal to
the value of the CCM Allocated Client
Collateral Buffer needs to be transferred
from the House Collateral Account of a
Defaulting Clearing Member that is a
CCM to the relevant CCM Client
Collateral Account, if the Client
Collateral Buffer is to be maintained
with Collateral other than Euro Cash
Collateral, LCH SA will need first to
liquidate into Euro Collateral other than
Euro Cash Collateral to be able to
transfer the relevant amount
denominated in Euro from the House
Collateral Account to the relevant CCM
Client Collateral Account in accordance
with the proposed amended Clause
4.2.2(i) of Appendix 1 (CDS Default
Management Process) of the Rule Book.
Equivalent changes need to be made to
the provisions dealing with the transfer
of an amount in Euro equivalent to the
CCM Allocated Client Collateral Buffer
Book. We have taken the opportunity to remove the
description of these circumstances from Section 2.3
(c) of the Procedures as it was redundant with the
afore-mentioned provisions of the Rule Book.
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of a CCM in the event of: (a) an Early
Termination Trigger Date, in accordance
with the proposed amended Clauses
8.5.2(a)(i) and (b)(i) of Appendix 1 (CDS
Default Management Process) of the
Rule Book; and (b) an LCH Default in
accordance with the proposed amended
Article 1.3.1.3(iv) of the Rule Book, save
that under these circumstances, LCH SA
will not be permitted to liquidate any
Pledged Eligible Collateral taken into
account in that CCM Client Collateral
Buffer.
Finally, Section 2.3(d) of the
Procedures will be revised to provide
that a Clearing Member may set or
update its House Excess Collateral
Threshold and/or Client Collateral
Buffer Threshold on the Business Day
such request will be made, instead of
the next Business Day to meet Clearing
Members’ expectations to be able to
update their House Excess Collateral
Threshold more quickly than is
currently possible.
Further, the Proposed Rule Change
will amend the Rule Book and the
provisions of the Procedures by which
an FCM/BD Clearing Member may
increase the amount of Collateral held
as FCM/BD Client Collateral Buffer 31
above the Collateral Buffer Threshold,
i.e., the minimum value of Collateral
that an FCM/BD Clearing Member
wishes to maintain as FCM/BD Client
Collateral Buffer in the FCM/BD Buffer
Financial Account that is part of the
relevant FCM/BD Client Account
Structure opened by LCH SA. In
accordance with Chapter 2 of Title VI of
the Rule Book, an FCM/BD Clearing
Member may request LCH SA to open
an FCM/BD Swaps Client Account
Structure in which Cleared Swaps
(including SBS that will constitute
FCM/BD Portfolio Margining
Transactions in accordance with the
proposed amendments described in
paragraph a. Portfolio Margining
Program above) will be registered or an
FCM/BD SBS Client Account Structure
in which SBS (excluding SBS that will
constitute FCM/BD Portfolio Margining
Transactions in accordance with the
proposed amendments described in
paragraph a. Portfolio Margining
Program above) will be registered. Each
of these FCM/BD Client Account
Structures currently includes, in
particular:
• an FCM/BD Client Collateral
Account in which all the Collateral held
on behalf of the relevant FCM/BD
Clients is registered; a set of ‘‘financial
accounts’’ in which the value of all the
Collateral registered in the FCM/BD
31 The definition of ‘‘FCM/BD Client Collateral
Buffer’’ is set out in footnote no.23 above.
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Client Collateral Account of that FCM/
BD Client Account Structure is
registered. Such set of financial
accounts currently comprises:
—an FCM/BD Swaps Client Financial
Account for each Cleared Swaps
Customer, in respect of an FCM/BD
Swaps Client Account Structure, in
which the Legally Segregated Value 32
related to Cleared Swaps of such
Cleared Swaps Customer, or an FCM/
BD SBS Client Financial Account for
each SBS Customer in respect of an
FCM/BD SBS Client Account
Structure, in which the Legally
Segregated Value related to SBS
(including SBS that will constitute
FCM/BD Portfolio Margining
Transactions in accordance with the
proposed amendments described in
paragraph a. Portfolio Margining
Program above) of such SBS
Customer;
—an FCM/BD Swaps Client Financial
Account, in respect of an FCM/BD
Swaps Client Account Structure, or an
FCM/BD SBS Buffer Financial
Account, in respect of an FCM/BD
SBS Client Account Structure, in
which the value of the Collateral
recorded as FCM/BD Client Collateral
Buffer is registered; and
—an FCM/BD Swaps Unallocated Client
Collateral Financial Account, in
respect of an FCM/BD Swaps Client
Account Structure in which the value
of FCM/BD Swaps Unallocated Client
Excess Collateral is registered, or an
FCM/BD SBS Client Excess Collateral
Financial Account, in respect of an
FCM/BD SBS Client Account
Structure, in which the value of FCM/
BD SBS Client Excess Collateral is
registered.
The proposed revisions regarding the
possibility for an FCM/BD Clearing
Member to increase the amount of FCM/
BD Client Collateral Buffer above the
FCM/BD Client Collateral Buffer
Threshold are being made to provide for
the more efficient handling of Collateral
held on behalf of FCM/BD Clients.
Specifically:
• Article 4.2.2.3 of the Rule Book
currently provides that only a CCM
Clearing Member, and not an FCM/BD
Clearing Member, may increase the
amount of the Client Collateral Buffer.
32 The Legally Segregated Value’s definition is set
out in Section 1.1.1 of the Rule Book which
currently provide that it is, with respect to an FCM/
BD Clearing Member, the value determined by LCH
SA, at the times and in the manner set out in
Section 2.2(f) of the Procedures, for each FCM/BD
Client Margin Account of such FCM/BD Clearing
Member, based on the aggregate value of the
Collateral (excluding FCM/BD Client Collateral
Buffer) transferred by such FCM/BD Clearing
Member to LCH SA to meet such FCM/BD Clearing
Member’s FCM/BD Client Margin Requirement(s).
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This Article will be amended to confirm
that an FCM/BD Clearing Member may
also increase the amount of Client
Collateral Buffer above the Client
Collateral Buffer Threshold.33
• Article 4.2.2.5 of the Rule Book
currently provides that in the event the
FCM/BD Margin Balance of an FCM/BD
Client Financial Account exceeds the
relevant FCM/BD Client Margin
Requirement prior to the Morning Call
or the value of the Collateral attributed
to the FCM/BD Buffer Financial
Account exceeds the FCM/BD Client
Collateral Buffer Threshold, such
amount of the excess, if related to
Cleared Swaps, is reclassified as FCM/
BD Swaps Unallocated Client Excess
Collateral, as defined in Article 6.2.5.1
of the Rule Book, or, if related to SBS
is reclassified as FCM/BD SBS Client
Excess Collateral, and thereafter may be
returned to the FCM/BD Clearing
Member, or (y) recorded in the relevant
FCM/BD Buffer Financial Account and
further reclassified as FCM/BD Client
Collateral Buffer, in each case in
accordance with Section 3 of the
Procedures and Section 6.2.5 of the Rule
Book. The proposed amendments to
Article 4.2.2.5 will consist in: (i)
removing the reclassification of any
value of the Collateral above the FCM/
BD Client Collateral Buffer Threshold as
FCM/BD Swaps Unallocated Client
Excess Collateral, or FCM/BD SBS
Client Excess Collateral, where
appropriate, and (ii) providing the FCM/
BD Clearing Member with the
alternative of requesting the transfer of
any FCM/BD Swaps Unallocated Client
Excess Collateral, or FCM/BD SBS
Client Excess Collateral, where
appropriate, to the FCM/BD Buffer
Financial Account and its
reclassification as FCM/BD Client
Collateral Buffer.
• Article 6.2.5.1(iv)(d) of the Rule
Book currently provides that if a FCM/
BD Clearing Member delivers Collateral
to LCH SA on behalf of one or more
FCM/BD Clients in an amount that
would cause an FCM/BD Swaps Client
Financial Account to contain FCM/BD
Swaps Client Excess Collateral, then
LCH SA may (i) reject the deposit, (ii)
transfer the excess back to the Clearing
Member, or (iii) accept the deposit and
transfer the excess to the FCM/BD
Swaps Unallocated Client Collateral
Financial Account. In order to provide
for more efficient handling of FCM/BD
Swaps Client Excess Collateral and to
place responsibility for the handling of
33 Article 4.2.2.3 of the Rule Book further
provides that transfers to the Client Collateral
Buffer will be made in accordance with Section 2
and Section 3 of the Procedures.
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such Collateral with the FCM/BD
Clearing Member, Article 6.2.5.1(iv)(d)
will be revised to provide that, upon the
request of an FCM/BD Clearing Member,
LCH SA will either (x) return FCM/BD
Swaps Unallocated Client Excess
Collateral to such FCM/BD Clearing
Member, in accordance with the
conditions set out in Section 3 of the
Procedures; or (y) reclassify such FCM/
BD Swaps Unallocated Client Excess
Collateral as FCM/BD Swaps Client
Collateral Buffer and record the value of
such Collateral to the relevant FCM/BD
Swaps Buffer Financial Account.34 If the
FCM/BD Clearing Member requests LCH
SA to reclassify such FCM/BD Swaps
Unallocated Client Excess Collateral as
FCM/BD Swaps Client Collateral Buffer
and record the value of such Collateral
to the relevant FCM/BD Swaps Buffer
Financial Account, the FCM/BD
Clearing Member will be deemed to
represent to LCH SA that such request
reflects the true characterization of the
Collateral held by LCH SA, including in
particular that the Collateral is the
property of the FCM/BD Clearing
Member.35 A reference to this request
for reclassification will be added to
Article 6.2.5.1(iv)(c) for consistency
purposes. Article 6.2.5.1(iii)(c) will
provide that any excess FCM/BD Swaps
Client Collateral Buffer will be returned
to the relevant FCM/BD Clearing
Member upon request.
• Article 6.2.5.1(ii) of the Rule Book
will be revised to provide that FCM/BD
Swaps Unallocated Client Excess
Collateral also includes any amounts
transferred to the FCM/BD Swaps
Unallocated Client Collateral Financial
Account in accordance with Article
6.2.4.4(i). Further, in the event an FCM/
BD Clearing Member delivers Collateral
to LCH SA on behalf of one or more
FCM/BD Clients in an amount that
34 Article 6.2.5.1(iv)(d) of the Rule Book further
provides that, upon making any request the FCM/
BD Clearing Member will be deemed to represent
and warrant that such request complies with CFTC
Regulations and has been made by an authorized
individual.
In this regard, LCH SA notes that, in accordance
CFTC Rule 22.2, 17 CFR 22.2, an FCM/BD Clearing
Member is permitted to commingle in a single
account all Cleared Swaps Customer Collateral that
it receives from, for, or on behalf of multiple
Cleared Swaps Customers and, further, is required
to maintain such portion of its own funds as may
be necessary to assure that the assets of one Cleared
Swaps Customer are not used to meet the
obligations of another Cleared Swaps Customer.
(This amount is known as the FCM/BD’s residual
interest.) By requesting LCH SA to reclassify FCM/
BD Swaps Unallocated Client Excess Collateral as
FCM/BD Swaps Client Collateral Buffer, the FCM/
BD would be representing that such amount is a
part of the FCM/BD’s residual interest.
35 The FCM/BD Clearing Member must further
agree to provide such additional information as
LCH SA may reasonably request for purposes of
effecting the requested return or reclassification.
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would cause an FCM/BD Swaps Client
Financial Account to contain FCM/BD
Swaps Client Excess Collateral, LCH SA
will accept the deposit and immediately
transfer the amount of such excess to
the FCM/BD Clearing Member’s FCM/
BD Swaps Buffer Financial Account,
whereupon it shall also become FCM/
BD Swaps Client Collateral Buffer. The
Article currently provides that LCH SA
may also (a) reject the deposit or (b)
immediately transfer the entire deposit
or the amount of such excess back to the
FCM/BD Clearing Member.
• Article 6.2.5.2 of the Rule Book
establishes a procedure with regard to
FCM/BD SBS Excess Collateral or FCM/
BD SBS Client Collateral Buffer that
parallels the procedures in Article
6.2.5.1 above with regard to FCM/BD
Swaps Client Collateral. That is, if a
FCM/BD Clearing Member delivers
Collateral to LCH SA on behalf of one
or more SBS Customers in an amount
that would cause an FCM/BD SBS
Client Financial Account to contain
FCM/BD SBS Client Excess Collateral,
the current rule provides that LCH SA
may (i) reject the deposit, (ii) transfer
the excess back to the Clearing Member,
or (iii) accept the deposit and transfer
the excess to the FCM/BD SBS
Unallocated Client Collateral Financial
Account. In order to provide for more
efficient handling of FCM/BD SBS
Client Excess Collateral and to place
responsibility for the handling of such
Collateral with the FCM/BD Clearing
Member, Article 6.2.5.2(ii) will be
revised to provide that LCH SA will
accept the deposit and immediately
transfer the amount of such excess to
the FCM/BD Clearing Member’s FCM/
BD SBS Buffer Financial Account,
whereupon it shall also become FCM/
BD SBS Client Collateral Buffer.
The Proposed Rule Change will also
amend various provisions of Section 3
of the Procedures to clarify the process
by which a Clearing Member may
request the return of Collateral. In
particular:
• Section 3.7(g) of the Procedures
currently describes the manner in which
an FCM/BD Clearing Member may
request the return of FCM/BD Swaps
Unallocated Client Excess Collateral in
the form of Euro-denominated Cash
Collateral to the FCM/BD Clearing
Member’s Client Collateral Financial
Account. This Article will be revised to
establish the process by which an FCM/
BD Clearing Member may request the
release of Euro denominated Cash
Collateral recorded in the FCM/BD
Client Collateral Account and will
provide that such Collateral may be
released only if LCH SA determines that
it will continue to hold Collateral
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sufficient to cover the FCM/BD Client
Requirement for each FCM/BD Client
Margin Account and to satisfy the FCM/
BD Clearing Member’s Client Collateral
Buffer Threshold.36
• Section 3.8(h) and Section 3.15 (b)
of the Procedures extends the process by
which a CCM may request the return of
non-Euro denominated Cash Collateral
to the return of non-Euro denominated
Cash Collateral and Pledged Eligible
Collateral, respectively, recorded as
CCM Client Collateral Buffer in its CCM
House Collateral Account.37
• Section 3.10.1(c) of the Procedures
and Section 3.10.2(d) set out a similar
process by which a CCM may request
the return of Eligible Collateral
transferred with full title, on a bilateral
basis and pursuant to a triparty
arrangement, respectively, recorded as
CCM Client Collateral Buffer in its CCM
House Collateral Account.
The Proposed Rule Change will also
revise Section 3.18(b) and (c) of the
Procedures to clarify the use of
TARGET2 Accounts by LCH SA and its
Clearing Members for satisfying Cash
Payment obligations and/or Variation
Margin Collateral Transfer obligations 38
in Euro, and the use of BNYM Accounts
by LCH SA and its Clearing Members
with regard to Cash Payments and/or
the transfer of Variation Margin
Collateral in USD. With regard to
36 Section 3.8(i) and Section 3.17(b) set out a
similar process by which an FCM/BD Clearing
Member may request the release of USD
denominated Cash Collateral and Eligible Collateral
held at BNYM US, respectively, recorded in the
FCM/BD Client Collateral Account.
37 Because Section 3.5 of the Procedures will be
amended to provide that the Pound Sterling will no
longer be an Eligible Currency for purposes of the
FCM/BD Client Account Structure of an FCM/BD
Clearing Member, the provisions of Section 3.8(h)
relating to the re-calculation of the Non-Euro Cash
Collateral Value of an FCM/BD Swaps Unallocated
Client Collateral recorded in the FCM/BD Swaps
Unallocated Client Collateral Financial Account
and the re-calculation of the Non-Euro Cash
Collateral Value of an FCM/BD SBS Client Excess
Collateral recorded in the FCM/BD SBS Client
Excess Collateral Financial Account will be
removed as unnecessary.
38 A Cash Payment obligation is broadly defined
in Section 1.1.1 of the Rule Book to mean any
payment due by a Clearing Member to LCH SA, or
due to be received by a Clearing Member from LCH
SA. For FCM/BD Clearing Members, such Cash
Payments include variation margin payments
(because variation margin payments are treated as
settlement). Variation Margin Collateral Transfer
obligations are only relevant to CCM Clearing
Members that treat variation margin as collateral
rather than settlement. Section 3.18(a) of the
Procedures further provides for a list of Cash
Payment and Variation Margin Type which
includes: CDS or Index Swaption-related payments
(Initial Payment Amount, Fixed Amounts or as the
case may be, Premium, cash amounts due upon the
occurrence of Credit Events and cash amounts due
in connection with an MTM change), Variation
Margin, Price Alignment Interest, NPV Payment,
Price Alignment Amount, Clearing House
Adjustments, Fees and remuneration.
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TARGET2 Accounts, Section 3.18(b)
will be revised to provide that, for the
purpose of making or receiving Cash
Payments in Euro, LCH SA will use: (a)
the LCH House TARGET2 Account to
satisfy Cash Payments and/or Variation
Margin Collateral Transfer obligations in
Euro with respect to all relevant House
Cleared Transactions of each Clearing
Member; and (b) the LCH CCM Client
TARGET2 Account for satisfying Cash
Payments and/or Variation Margin
Collateral Transfer obligations in Euro
with respect to all relevant Client
Cleared Transactions of each Clearing
Member.
Section 3.18(b) will be further revised
to provide that, with regard to an FCM/
BD’s Clearing Member’s Client Cleared
Transactions, LCH SA will use: (a) the
FCM/BD Clearing Member’s TARGET2
Account established for the purposes of
the Collateral Calls in respect of its
Client Margin Requirement(s) with
respect to Cleared Swaps and FCM/BD
Client Collateral Buffer Threshold will
be used for the debits and credits made
out the LCH CCM Client TARGET2
Account for the purposes of satisfying
Cash Payments obligations regarding all
relevant Client Cleared Transactions of
that FCM/BD Clearing Member that are
Cleared Swaps; and (b) the FCM/BD
Clearing Member’s TARGET2 Account
established for the purposes of the
Collateral Calls in respect of, where
required, its Client Margin
Requirement(s) with respect to SBS
(excluding SBS that constitute FCM/BD
Portfolio Margining Transactions) and
FCM/BD Client Collateral Buffer
Threshold will be used for the debits
and credits made out the LCH CCM
Client TARGET2 Account for the
purposes of satisfying Cash Payments
obligations regarding all relevant Client
Cleared Transactions of that FCM/BD
Clearing Member that are SBS
(excluding SBS that constitute FCM/BD
Portfolio Margining Transactions).
Section 3.7(d)(iii) will be amended to
provide that, in respect of the FCM/BD
Client Account Structure of an FCM/BD
Clearing Member, there will be no
aggregation of payments between Euro
denominated Cash Payments and Euro
denominated Cash Collateral transfers
through TARGET2 since Euro
denominated Cash Payments will be
made by using the LCH CCM Client
TARGET2 Account whereas the transfer
of Euro denominated Cash Collateral
will be made by using the LCH FCM/BD
Swaps Client TARGET2 Account or, as
the case may be, the LCH FCM/BD SBS
Client TARGET2 Account. Further, and
for the avoidance of doubt, with regard
to the FCM/BD Clearing Members’
Client Cleared Transactions: (x) the
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FCM/BD Clearing Member’s TARGET2
Account established for the purposes of
the Collateral Calls in respect of its
Client Margin Requirement(s) with
respect to Cleared Swaps and FCM/BD
Client Collateral Buffer Threshold will
be used for the debits and credits made
out the LCH CCM Client TARGET2
Account for the purposes of satisfying
Cash Payments obligations regarding all
relevant Client Cleared Transactions of
that FCM/BD Clearing Member that are
Cleared Swaps; and (y) the FCM/BD
Clearing Member’s TARGET2 Account
established for the purposes of the
Collateral Calls in respect of, where
required, its Client Margin
Requirement(s) with respect to SBS
(excluding SBS that constitute FCM/BD
Portfolio Margining Transactions) and
FCM/BD Client Collateral Buffer
Threshold will be used for the debits
and credits made out the LCH CCM
Client TARGET2 Account for the
purposes of satisfying Cash Payments
obligations regarding all relevant Client
Cleared Transactions of that FCM/BD
Clearing Member that are SBS
(excluding SBS that constitute FCM/BD
Portfolio Margining Transactions).
With regard to BNYM Accounts,39
Section 3.18(c) will be revised to
provide that, for the purpose of making
or receiving Cash Payments and/or the
transfer of Variation Margin Collateral
in USD, LCH SA will maintain only two
BNYM Accounts. One account will be
used to debit or credit USD to satisfy
Cash Payments and/or Variation Margin
Collateral Transfer obligations in USD
with respect to all relevant House
Cleared Transactions of each Clearing
Member (the ‘‘LCH House BNYM
Account’’); the second account will be
used to debit or credit USD to satisfy
Cash Payments and/or Variation Margin
Collateral Transfer obligations in USD
with respect to all relevant Client
Cleared Transactions of each Clearing
Member (the ‘‘LCH Client BNYM
Account’’). The provisions of Section
3.18(c) that currently require LCH SA to
maintain (x) a cash account used to
debit or credit USD to satisfy Cash
Payments and/or Variation Margin
Collateral Transfer obligations in USD
with respect to all relevant Client
Cleared Transactions of each CCM (the
‘‘LCH CCM Client BNYM Account’’); (y)
a cash account used to debit or credit
USD to satisfy Cash Payments
obligations in USD with respect to all
relevant Client Cleared Transactions of
each FCM/BD Clearing Member that are
Cleared Swaps (the ‘‘LCH FCM/BD
39 As noted above, USD is the only Eligible
Currency and US Treasury bills are the only Eligible
Collateral held in BNYM accounts.
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Fmt 4703
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Swaps Client BNYM Account’’); and (z)
a cash account used to debit or credit
USD to satisfy Cash Payments and/or
Variation Margin Collateral Transfer
obligations in USD with respect to all
relevant Client Cleared Transactions of
each FCM/BD Clearing Member that are
SBS (excluding SBS that are held in the
FCM/BD Swaps Client Account
Structure) (the ‘‘LCH FCM/BD SBS
Client BNYM Account’’) will be
removed.40
The references to the former time slot
for the Cash Payments in respect of
Client Variation Margin Requirements of
an FCM/BD Clearing Member that is no
longer exists will be deleted from
Section 3.18(d) and Section 5.5 (step
no.10) of the Procedures.
c. Miscellaneous Amendments
i. Time Reference
Article 1.2.8.1 of the Rule Book
currently provides that where reference
is made in the CDS Clearing
Documentation to a time or deadline, it
shall be understood to mean Central
European Time (CET), unless otherwise
stipulated in the CDS Clearing
Documentation. For the sake of clarity
and avoid any confusion on the time
zone that LCH SA will follow,
especially when Central European
Summer Time (CEST) applies, this
Section will be revised to provide that
where reference is made in the CDS
Clearing Documentation to a time or
deadline, it shall be understood to mean
Paris Time, unless otherwise stipulated
in the CDS Clearing Documentation. As
a result, all references to CET in the
Procedures will be removed and Section
1.4 (Timing) of Parts A, B and C of the
CDS Clearing Supplement to remove the
reference to Central European Time and
provide that any reference to a time of
day herein shall be deemed to be a
reference to the time zone as set out in
Section 1.2.8 (Time reference) of the
Rule Book unless otherwise provided
herein.
Section 5.18 of the Procedures will be
also amended to remove the provisions
pursuant to which references to times
and deadlines in this paragraph 5.18 are
to London local time (being Greenwich
Mean Time (GMT) or British Summer
Time (BST) as applicable) unless
otherwise specified because these
provisions are not used in the absence
of any reference to times or deadlines in
this paragraph.
40 As discussed above, LCH SA expects that all
FCM/BD Clients will elect to portfolio margin their
SBS transactions. Therefore, LCH SA does intend to
maintain SBS related Client Accounts only if
required.
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ii. Real Time Session
The Rule Book defines ‘‘Real Time
Session’’ to mean the period
commencing at the Start of Real Time
and ending at the End of Real Time in
respect of each Clearing Day. Start of
Real Time (SoRT), in turn, is defined as
the time as specified in a Clearing
Notice. LCH SA will adopt a new
Clearing Notice, which will provide
that, unless notified otherwise:
• ‘‘Start of Real Time (SoRT)’’ means
on each Clearing Day, the earlier of: (i)
the time when all relevant Clearing
Members have satisfied the Morning
Call; and (ii) 09.05 (Paris time); and
• ‘‘End of Real Time’’ means 16.30
(New York time) on each Clearing Day.
Further, LCH SA may decide to
change the Start of Real Time and/or the
End of Real Time to a different time for
operational or other reasons (including,
but not limited to, on a Clearing Day
that is a holiday in the United States).
In such circumstances, the Clearing
Members will be informed of the
amended Start of Real Time and/or
amended End of Real Time through
service notification.41 LCH SA will
publish any amendments or
modifications to the content of the
Clearing Notice in an updated Clearing
Notice.
ddrumheller on DSK120RN23PROD with NOTICES1
iii. Opening Hours
Article 2.3.3.5 of the Rule Book will
be revised to provide that each Clearing
Member shall ensure that appropriate
personnel are available for
communications with LCH SA during
the Real Time Session, instead of
Opening Hours. An equivalent change
will be made to Section 5.1(c) of the
Procedures pursuant to which LCH SA
is open during the Real Time Session
and the operations team of LCH SA will
be available during the Real Time
Session. The opening hours applicable
to the customer technical helpdesk will
be also removed from this Section.
Consequently, the defined term
‘‘Opening Hours’’ will be removed from
the definitions section of the Rule Book
since it will be no longer used.
Finally, other minor amendments
made for consistency purposes, or the
sake of clarity, will be made to the Rule
41 This paragraph currently provides: If for any
reason LCH SA is not able to start or end the Real
Time Session at the times indicated above, or is
required to start or end the Real Time Session
otherwise than at the times indicated above, LCH
SA may decide to change the Start of Real Time
and/or the End of Real Time to a different time that
will be communicated to the Clearing Members. In
such exceptional case, the Start of Real Time and/
or the End of Real Time shall be the time where
the relevant service notification of the opening or
the closing (as applicable) of the Real Time Session
is sent.
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Book, the Procedures and the
Regulations. For instance, the definition
of CCM in the Rule Book will be
updated to replace the incorrect
reference to FCM/BD Clearing Member
by FCM/BD since a Clearing Member
cannot be admitted as a CCM and an
FCM/BD Clearing Member at the same
time and the purpose of the reference to
an FCM/BD in the definition of a CCM
is to explain how an entity registered as
an FCM and as a BD may be admitted
as a CCM under the CDS Clearing Rules.
d. Amendments to Liquidity Risk
Modelling Framework
LCH SA is required to maintain
certain levels of liquidity but given the
CFTC segregation requirements
applicable to derivative clearing
organizations (DCOs), FCM/BD Clients’
funds should be considered segregated
as they are not available resources to
LCH SA in a default management
context unless the liquidity requirement
is driven by the FCM/BD Clearing
Member of such FCM/BD Clients. As
part of the effective coming onboarding
process of FCM/BD Clearing Members,
LCH SA will reflect these requirements
by making a number of updates and
adjustments to its Liquidity Risk
Modelling Framework mainly
specifying that resources received from
FCM/BD Clearing Members on behalf on
their FCM/BD Clients or securities
resulting from investment of FCM/BD
Clients’ funds are excluded from
liquidity resources available unless the
liquidity requirement is driven by the
FCM/BD Clearing Member of such FCM/
BD clients. Moreover, LCH SA is also
updating its Liquidity Risk Modelling
for the sake of clarity; such amendments
are not strictly related to the FCM/BD
related initiative.
In this regard:
• Section 1.1.1 (Reminder of SA’s
activities) will be updated in respect of
the description of product scope of
CDSClear to provide that clearing
activities relate to the clearing of US,
Australia, Asia and sovereign index and
single names CDS negotiated on OTC
markets as well. This amendment has
been made for the sake of clarity and it
is not linked to the FCM/BD related
initiative itself.
• Section 1.6.1 (Liquidity Sources)
will provide that cash collateral posted
by FCM/BD Clearing Members on behalf
of their FCM/BD Clients or excess cash
for FCM/BD Clients of FCM/BD Clearing
Member(s) that can be generated on an
intraday basis, as well as securities
resulting from the investment of that
cash are excluded from the available
liquidity resources unless the liquidity
need is generated by the FCM/BD
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Fmt 4703
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46229
Clearing Member of such FCM/BD
Clients. Moreover, it will be clarified
that LCH SA has the right to consider
available for liquidity purposes all the
resources collected if deposited under
the full title transfer regime. Since
Collateral deposited by FCM/BD
Clearing Members on behalf of their
FCM/BD Clients is subject to a security
interest, a footnote, which currently
provides for the list of Collateral which
is not transferred by way of full title
transfer, will be amended to add a
reference to Collateral received from
FCM/BD Clients.
• Section 1.6.1.1 (Collateral transfer
to the 3G pool) will be updated to reflect
the fact that non-cash collateral
deposited via a Single Pledged Account
is a way to post Collateral for activities
not limited to CDS related activities
only and to provide that USD securities
received from FCM/BD Clients would
not be deposited via Full Title Transfer
Accounts.
• Section 1.6.1.2 (Assessment of
assets’ liquidity) will provide that LCH
SA cannot rehypothecate non cash
collateral collected from FCM/BD
Clients to raise liquidity unless the
FCM/BD Clearing Member of such FCM/
BD clients is in default. The same
treatment will also apply to securities
resulting from FCM/BD Clients’ cash
which has been invested.
• Section 1.6.1.3 (Synthesis) which
consists in a table summarizing the
liquidity sources, will be amended as
follows:
Æ Cash and US non cash collateral
received from FCM/BD Clearing
Members on behalf of their FCM/BD
Clients and excess cash for FCM/BD
clients of FCM/BD clearing member(s)
that can be generated on an intraday
basis are excluded unless the liquidity
requirement is driven by the FCM/BD
Clearing Member of such FCM/BD
Clients.
Æ Securities resulting from
investment of FCM/BD Clients’ money
cannot be used for liquidity purposes
unless the liquidity requirement is
driven by the FCM/BD Clearing Member
of such FCM/BD Clients.
• The description of the liquidity
need ‘‘Repayment of excess cash by
members’’ in Section 4.1.2 (Model
inputs and Variable selection) will be
amended by adding a footnote
specifying that Non Euro non cash
securities in DKK, NOK, SEK, JPY, CHF,
CAD, AUD are excluded from the
liquidity resources to be consistent with
the description in section 4.1.5. These
amendments are made for consistency
purposes and are not linked to the FCM/
BD related initiative.
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Sections 4.1.2 (Model inputs and
Variable selection) and 4.1.5 (Model
assumptions) will be amended to
provide that, when calculating the
liquid resources available to be
compared against the Operational
Target 42 the cash received from the
FCM/BD Clearing Members on behalf of
their FCM/BD Clients is excluded. An
equivalent change to the footnotes is
made when computing the liquidity
requirement relating to margin
reduction and repayment of excess
collateral for which the FCM/BD
Clients’ resources are excluded.
Moreover in Section 4.1.5, paragraph c.,
a typographical error in the penultimate
sentence will be amended.
• Sections 4.2.2 (Model inputs and
Variable selection) and 4.2.4
(Mathematical formula, derivation and
algorithm, and numerical
approximation) will be amended to
provide that in the calculation of the
Liquidity Coverage Ratio (LCR) of the
CCP the resources of FCM/BD Clients
must be considered segregated and
therefore unavailable for liquidity
purposes unless the relevant FCM/BD
Clearing Member is among the Cover 2
members assumed to be in default in the
LCR. Also, in the case where an FCM/
BD Clearing Member is among the Cover
2 the possibility to use the resource held
on behalf of FCM/BD Clients for
liquidity purposes is capped to the
obligations of the FCM/BD Client.
• Sections 4.2.5.3 (Stress scenario
selection) will be amended to refer to
CDSClear rather than CDS when
describing the market stress scenario
considered in the LCR. The amendment
is made for consistency purposes and is
not linked to the FCM/BD related
initiative.
• Sections 4.3.2 (Model inputs and
Variable selection) and 4.3.4
(Mathematical formula, derivation and
algorithm, and numerical
approximation) will specify that, in the
calculation of the Liquidity Coverage
Ratio (LCR) for the interoperable CCP,
the resources held on behalf of FCM/BD
Clients must be considered segregated
and therefore unavailable for liquidity
purposes.
In Appendix 6.3 (Reminder of SA’s
sources of liquidity and related risk
drivers), two footnotes have been added
to specify that cash held on behalf of
FCM/BD Clients (allocated and in
excess) is excluded unless the liquidity
requirement is driven by the relevant
FCM/BD Clearing Member. With respect
42 The Operational Target represents the amount
of liquidity to be held to satisfy the liquidity needs
related to the operational management of the CCP
in a stressed environment that does not lead to a
member’s default.
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to the source of liquidity coming from
Non-Euro non-cash collateral posted in
full title transfer, a footnote have been
added to specify that securities
collateral collected from FCM/BD
Clients is excluded unless the liquidity
requirement is driven by an the relevant
FCM/BD Clearing Member; the footnote
has also been expanded by specifying
that securities in DKK, NOK, SEK, CAD,
AUD, CHF and JPY are excluded from
the liquidity resources, which is an
amendment not linked to the FCM/BD
related initiative but made for
consistency purposes. In the end, with
respect to the liquidity source coming
from the collateral of investment
activity, a footnote will be added to
specify that securities coming from
FCM/BD Clients investment shall be
excluded unless the relevant FCM/BD
Clearing Member is in default.
With the exception of the above
Proposed Rule Changes, no other change
are required.
2. Statutory Basis
LCH SA has determined that the
Proposed Rule Change is consistent
with the requirements of Section 17A of
the Act 43 and regulations thereunder
applicable to it. In particular, Section
17A(b)(3)(F) of the Act provides, inter
alia, that the rules of a clearing agency
must be designed: (a) to promote the
prompt and accurate clearance and
settlement of derivative agreements,
contracts, and transactions; (b) to assure
the safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible; (c) and, in general, to
protect investors and the public
interest.44 Further, Commission Rule
17Ad–22(e)(21) requires a central
counterparty (‘‘CCP’’) that is involved in
activities with a more complex risk
profile, e.g., that provides CCP services
for security-based swaps, to maintain
and enforce written policies and
procedures reasonably designed, inter
alia, to be efficient and effective in
meeting the requirements of its
participants and the markets it serves.45
As discussed above, the provisions of
the Proposed Rule Change
implementing the Portfolio Margining
Program will authorize LCH SA to offer
FCM/BD Clearing Members, on behalf of
their FCM/BD Clients, the ability to
elect to portfolio margin FCM/BD
Cleared Transactions that are SBS with
FCM/BD Cleared Transactions that are
Cleared Swaps. The Regulations
implementing the Program are designed
PO 00000
U.S.C. 78q–1.
U.S.C. 78q–1(b)(3)(F).
45 17 CFR 240.17Ad–22(e)(21).
to ensure that the Program complies
with the terms and conditions set out in
the SEC Portfolio Margining Order and
the CFTC Portfolio Margining Order.
Among other requirements, these Orders
ensure that all funds deposited with an
FCM/BD Clearing Member to margin
Portfolio Margin Transactions will be
segregated in accordance with the
requirements of Section 4d(f) of the
Commodity Exchange Act 46 and the
rules of the Commodity Futures Trading
Commission thereunder.47 Further,
FCM/BD Clearing Members that provide
FCM/BD Clients the ability to portfolio
margin FCM/BD Cleared Transactions
that are SBS with FCM/BD Cleared
Transactions that are Cleared Swaps
must acknowledge that, in accordance
with the SEC Portfolio Margining Order,
they have provided FCM/BD Clients a
written disclosure to ensure that such
FCM/BD Clients are aware that the
funds deposited with FCM/BD Clearing
Member to margin Portfolio Margining
Transactions will not be held in
accordance with the broker-dealer
segregation requirements of Section
15(c)(3) and Section 3E of the Act 48 and
the rules thereunder, and any customer
protections under SIPA and the
stockbroker liquidation provisions, will
not apply.
By implementing a Portfolio
Margining Program that complies with
the terms and conditions of the SEC
Portfolio Margining Order and the CFTC
Portfolio Margining Order, the
Regulations set out in the Proposed Rule
Change will: (a) promote the prompt
and accurate clearance and settlement of
derivative agreements, contracts, and
transactions by encouraging FCM/BD
Clients to clear more transactions at
LCH SA; (b) assure the safeguarding of
securities and funds which are in the
custody or control of the clearing agency
or for which it is responsible by
allowing LCH SA to margin an FCM/BD
Client’s positions collectively rather
than separately; (c) and, in general,
protect investors and the public interest
by accommodating the portfolio
margining needs of market participants
who must react quickly to dynamic
market conditions, risk management
and hedging requirements, and evolving
portfolio compositions. As such, the
Regulations are reasonably designed to
be efficient and effective in meeting the
requirements of LCH SA’s participants
and the markets it serves, within the
meaning of Section 17A(b)(3)(F) of the
Act and Commission Rule 17Ad–
22(e)(21).
43 15
46 7
44 15
47 17
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U.S.C. 6d(f).
CFR 22.2, 22.3.
48 15 U.S.C. 78o, 78c–5.
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Other provisions of the Proposed Rule
Change will: (a) amend the definition of
Eligible Collateral to provide that the
Pound Sterling will no longer be an
Eligible Currency for purposes of the
FCM/BD Client Account Structure of an
FCM/BD Clearing Member; (b) expand
the types of Collateral permitted to be
held in the FCM/BD Client Collateral
Buffer; (c) set out the process by which
an FCM/BD Clearing Member may
increase the amount of Collateral held
in the FCM/BD Client Collateral Buffer
above the Collateral Buffer Threshold;
(d) set out the process by which a
Clearing Member may request the return
of Collateral; and (e) clarify the use of
TARGET2 Accounts for satisfying Cash
Payment obligations and/or Variation
Margin Collateral Transfer obligations in
Euro, and the use of BNYM Accounts
with regard to Cash Payments and/or
the transfer of Variation Margin
Collateral in USD. The greater detail
provided by these amendments will
similarly: (x) promote the prompt and
accurate clearance and settlement of
derivative agreements, contracts, and
transactions by allowing FCM/BD
Clearing Members to exercise greater
and more flexible control over Collateral
in general and the Collateral Buffer
specifically, which will better assure
that the Clearing Member always have
sufficient Collateral at LCH SA to meet
its obligations; (y) assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible; (z) and, in general, protect
investors and the public interest. These
amendments, therefore, are reasonably
designed to be efficient and effective in
meeting the requirements of LCH SA’s
participants and the markets it serves,
within the meaning of Section
17A(b)(3)(F) of the Act and Commission
Rule 17Ad–22(e)(21).
As discussed above, LCH SA is also
proposing to amend its Liquidity Risk
Modelling Framework to address the
CFTC segregation requirements
applicable to FCMs and customers.49
Specifically, the amended Liquidity
Risk Modelling Framework will
anticipate the effective onboarding
process of FCMs and will permit LCH
SA to take into account, in its liquidity
monitoring process, the specific
segregation requirements to ensure the
customers funds protection of this
category of clearing members which is
fully consistent with the requirements
of Section 17A(b)(3)(F) of the Act
providing, inter alia, that the rules of a
clearing agency must be designed: (b) to
assure the safeguarding of securities and
49 17
funds which are in the custody or
control of the clearing agency or for
which it is responsible; (c) and, in
general, to protect investors and the
public interest.50
LCH SA also believes that this
proposed change is consistent with
Exchange Act Rule 17Ad–22(e)(1) 51 that
requires a covered clearing agency to
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 Rule
Change will be (i) ensuring that the
Program complies with the terms and
conditions set out by the CFTC and SEC
in the US jurisdiction and (ii) taking
into account the CFTC segregation
requirements and investment
restrictions applicable to FCMs’
customer funds which constitutes a
relevant and appropriate legal
framework consistent with the
requirements of Exchange Act Rule
17Ad–22(e)(1).52
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.53 LCH SA does not
believe the Proposed Rule Change
would have any impact, or impose any
burden, on competition. The Proposed
Rule Change does not address any
competitive issue. LCH SA operates an
open access model, and the Proposed
Rule Change will have no effect on this
model.
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
CFR 1.20.
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00:36 Jul 19, 2023
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50 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(1).
52 17 CFR 240.17Ad–22(e)(1).
53 15 U.S.C. 78q–1(b)(3)(I).
51 17
Frm 00105
Fmt 4703
Sfmt 4703
46231
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) by order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
LCH SA–2023–005 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–LCH SA–2023–005. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
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. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
E:\FR\FM\19JYN1.SGM
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Federal Register / Vol. 88, No. 137 / Wednesday, July 19, 2023 / Notices
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to File
Number SR–LCH SA–2023–005 and
should be submitted on or before
August 9, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.54
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–15257 Filed 7–18–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97892; File No. SR–NSCC–
2023–006]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the Clearing
Agency Model Risk Management
Framework
July 13, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 30,
2023, National Securities Clearing
Corporation (‘‘NSCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the clearing agency. NSCC filed the
proposed rule change pursuant to
Section 19(b)(3)(A) of the Act 3 and Rule
19b–4(f)(4) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
ddrumheller on DSK120RN23PROD with NOTICES1
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change consists of
amends (sic) the Clearing Agency Model
Risk Management Framework
(‘‘Framework’’) of NSCC and its
affiliates Fixed Income Clearing
Corporation (‘‘FICC,’’ a central
counterparty, and together with NSCC,
the ‘‘CCPs,’’ and the CCPs together with
The Depository Trust Company
(‘‘DTC,’’) the ‘‘Clearing Agencies’’).5 The
54 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(4).
5 The Framework sets forth the model risk
management practices that the Clearing Agencies
1 15
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Framework was adopted by the Clearing
Agencies to support their compliance
with Rule 17Ad–22(e) (the ‘‘Covered
Clearing Agency Standards’’) under the
Act,6 and, in this regard, applies solely
to models 7 utilized by the Clearing
Agencies that are subject to the model
risk management requirements set forth
in Rules 17Ad–22(e)(4), (e)(6), and (e)(7)
under the Act,8 as described in greater
detail below.9
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
follow to identify, measure, monitor, and manage
the risks associated with the design, development,
implementation, use, and validation of quantitative
models. The Framework is filed as a rule of the
Clearing Agencies. See Securities Exchange Act
Release Nos. 81485 (August 25, 2017), 82 FR 41433
(August 31, 2017) (SR–DTC–2017–008, SR–FICC–
2017–014, SR–NSCC–2017–008) (‘‘2017 Notice’’);
88911 (May 20, 2020), 85 FR 31828 (May 27, 2020)
(SR–DTC–2020–008, SR–FICC–2020–004, SR–
NSCC–2020–008); 92379 (July 13, 2021), 86 FR
38143 (July 19, 2021) (SR–DTC–2021–013); 92381
(July 13, 2021), 86 FR 38163 (July 19, 2021) (SR–
NSCC–2021–008); 92380 (July 13, 2021), 86 FR
38140 (July 19, 2021) (SR–FICC–2021–006); 94273
(February 17, 2022), 87 FR 10395 (February 24,
2022) (SR–DTC–2022–001); 94272 (February 17,
2022), 87 FR 10419 (February 24, 2022) (SR–NSCC–
2022–001); and 94271 (February 17, 2022), 87 FR
10411 (February 24, 2022) (SR–FICC–2022–001)
(collectively, the ‘‘MRMF Filings’’).
6 17 CFR 240.17Ad–22(e). Each of DTC, NSCC
and FICC is a ‘‘covered clearing agency’’ as defined
in Rule 17Ad–22(a)(5) under the Act and must
comply with Rule 17Ad–22(e).
7 Pursuant to Section 3.1 (Model Inventory) of the
Framework, the Clearing Agencies have adopted the
following definition of ‘‘model’’: ‘‘[M]odel’’ refers to
a quantitative method, system, or approach that
applies statistical, economic, financial, or
mathematical theories, techniques, and
assumptions to process input data into quantitative
estimates. A ‘‘model’’ consists of three components:
(i) an information input component, which delivers
assumptions and data to the model; (ii) a processing
component, which transforms inputs into estimates;
and (iii) a reporting component, which translates
the estimates into useful business information. The
definition of model also covers quantitative
approaches whose inputs are partially or wholly
qualitative or based on expert judgment, provided
that the output is quantitative in nature. See 2017
Notice, supra note 9. See also Supervisory
Guidance on Model Risk Management, SR Letter
11–7 Attachment, dated April 4, 2011, issued by the
Board of Governors of the Federal Reserve System
and the Office of the Comptroller of the Currency,
available at https://www.federalreserve.gov/
supervisionreg/srletters/sr1107a1.pdf, page 3.
8 17 CFR 240.17Ad–22(e)(4), (e)(6) and (e)(7).
References to Rule 17Ad–22(e)(6) and compliance
therewith apply to the CCPs only and not to DTC
because DTC is not a central counterparty.
9 Capitalized terms used herein and not defined
shall have the meaning assigned to such terms in
the NSCC Rules, available at https://www.dtcc.com/
legal/rules-and-procedures.aspx.
PO 00000
Frm 00106
Fmt 4703
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places specified in Item IV below. The
clearing agency 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 of NSCC
amends the Clearing Agency Model Risk
Management Framework (‘‘Framework’’)
of NSCC and its affiliates and Fixed
Income Clearing Corporation (‘‘FICC,’’ a
central counterparty, and together with
NSCC, the ‘‘CCPs,’’ and the CCPs
together with The Depository Trust
Company (‘‘DTC’’), the ‘‘Clearing
Agencies’’).10 The Framework was
adopted by the Clearing Agencies to
support their compliance with Rule
17Ad–22(e) (the ‘‘Covered Clearing
Agency Standards’’) under the Act,11
and, in this regard, applies solely to
models 12 utilized by the Clearing
Agencies that are subject to the model
risk management requirements set forth
in Rules 17Ad–22(e)(4), (e)(6), and (e)(7)
under the Act.13
The proposed rule change would
amend the Framework 14 to account for
10 The Framework sets forth the model risk
management practices that the Clearing Agencies
follow to identify, measure, monitor, and manage
the risks associated with the design, development,
implementation, use, and validation of quantitative
models. The Framework is filed as a rule of the
Clearing Agencies. See Securities Exchange Act
Release Nos. 81485 (August 25, 2017), 82 FR 41433
(August 31, 2017) (SR–DTC–2017–008, SR–FICC–
2017–014, SR–NSCC–2017–008) (‘‘2017 Notice’’);
88911 (May 20, 2020), 85 FR 31828 (May 27, 2020)
(SR–DTC–2020–008, SR–FICC–2020–004, SR–
NSCC–2020–008); 92379 (July 13, 2021), 86 FR
38143 (July 19, 2021) (SR–DTC–2021–013); 92381
(July 13, 2021), 86 FR 38163 (July 19, 2021) (SR–
NSCC–2021–008); 92380 (July 13, 2021), 86 FR
38140 (July 19, 2021) (SR–FICC–2021–006); 94273
(February 17, 2022), 87 FR 10395 (February 24,
2022) (SR–DTC–2022–001); 94272 (February 17,
2022), 87 FR 10419 (February 24, 2022) (SR–NSCC–
2022–001); and 94271 (February 17, 2022), 87 FR
10411 (February 24, 2022) (SR–FICC–2022–001)
(collectively, the ‘‘MRMF Filings’’).
11 17 CFR 240.17Ad–22(e).
12 Supra note 7.
13 Supra note 8.
14 Amending the Framework does not require any
changes to the Rules, By-Laws and Organization
Certificate of DTC (available at https://
www.dtcc.com/∼/media/Files/Downloads/legal/
rules/dtc_rules.pdf) (the ‘‘DTC Rules’’), the
Rulebook of the Government Securities Division of
FICC (available at https://www.dtcc.com/∼/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf) (the
‘‘GSD Rules’’), the Clearing Rules of the MortgageBacked Securities Division of FICC (available at
https://www.dtcc.com/∼/media/Files/Downloads/
legal/rules/ficc_mbsd_rules.pdf) (the ‘‘MBSD
Rules’’), or the Rules & Procedures of NSCC
(available at https://www.dtcc.com/∼/media/Files/
Downloads/legal/rules/nscc_rules.pdf) (the ‘‘NSCC
Rules,’’ and collectively with the DTC Rules, GSD
Rules, and MBSD Rules, the ‘‘Rules’’), because the
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]]>Agencies
[Federal Register Volume 88, Number 137 (Wednesday, July 19, 2023)]
[Notices]
[Pages 46221-46232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15257]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97888; File No. SR-LCH SA-2023-005]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to Portfolio Margining
July 13, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 29, 2023, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (``Commission'') the proposed rule change
(``Proposed Rule Change'') described in Items I, II and III below,
which Items have been prepared primarily by LCH SA. The Commission is
publishing this notice to solicit comments on the Proposed Rule Change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
LCH SA is proposing to amend its FCM/BD CDS Clearing Regulations
(``Regulations'') and certain provisions of its CDS Clearing Rule Book
(``Rule Book'') to implement a portfolio margining program
(``Program''), pursuant to which FCM/BD Clearing Members may offer FCM/
BD Clients the opportunity to portfolio margin FCM/BD Cleared
Transactions that are security-based swaps (``SBS'') with FCM/BD
Cleared Transactions that are Cleared Swaps in the participating FCM/BD
Clearing Member's FCM/BD Swaps Client Account Structure. LCH SA is also
proposing to amend certain provisions of its Rule Book and its CDS
Clearing Procedures (``Procedures'') \3\ regarding permitted Collateral
(including Eligible Collateral and Eligible Currency), the Client
Collateral Buffer, and the release of Collateral to a Clearing Member.
In addition, LCH SA is making other miscellaneous amendments to its
Rule Book, Procedures and CDS Clearing Supplement and will adopt a new
Clearing Notice. Further, LCH SA is also making a number of amendments
to its Liquidity Risk Modelling Framework (``Framework'') \4\ to take
into account the segregation requirements and investment restrictions
applicable to FCMs' customer funds. (collectively, the ``Proposed Rule
Change'').\5\
---------------------------------------------------------------------------
\3\ The version of the Rule Book and Section 3 of the Procedures
which includes the Proposed Rule Change reflects a separate proposed
rule change previously submitted to the Securities and Exchange
Commission (SEC) under the Filing No. SR-LCH SA-2023-004'' which is
still subject to SEC's approval.
\4\ The amendments are to the version of the Framework that has
been submitted to SEC for approval under the Filing No SR-LCH SA-
2023-003, which conforms the Framework to the common template
adopted by the London Stock Exchange Group (``LSEG'') for use by
each of its affiliates.
\5\ Capitalized terms not defined herein are defined in LCH SA's
Rule Book, available at https://www.lch.com/rules-regulations/rulebooks/sa.
---------------------------------------------------------------------------
The text of the Proposed Rule Change has been annexed as Exhibit 5
to file number SR-LCH SA-2023-005.\6\
---------------------------------------------------------------------------
\6\ All capitalized terms not defined herein have the same
definition as in the Rule Book or Procedures, as applicable.
---------------------------------------------------------------------------
The implementation of the Proposed Rule Change will be contingent
on 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 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
In separate orders issued in November, 2021, the SEC and the
Commodity Futures Trading Commission (``CFTC'' and collectively with
the SEC, the ``Agencies'') set out the terms and conditions pursuant to
which LCH SA's FCM/BD Clearing Members may elect to offer their FCM/BD
Clients the opportunity to portfolio margin FCM/BD Cleared Transactions
that are SBS with FCM/BD Cleared Transactions that are Cleared Swaps in
the participating FCM/BD Clearing Member's FCM/BD Swaps Client Account
Structure. The Proposed Rule Change is being adopted, in part, to
implement this Program. In addition, the Proposed Rule Change will
amend certain provisions of its Rule Book and its Procedures regarding
permitted Collateral, the Client Collateral Buffer, and the release of
Collateral to a Clearing Member. The Proposed Rule Change will also
make other miscellaneous amendments to LCH SA's Rule Book and
Procedures. Finally, the Proposed Rule Change will also update the
Liquidity Risk Modelling Framework with respect to the liquidity
resources and requirements applicable to FCM/BD Clearing Members.
a. Portfolio Margining Program
The rules establishing the Program will be set out primarily in a
new Regulation 7 in LCH SA's FCM/BD Clearing Regulations
(``Regulations''), which are designed to ensure that the Program
complies with the terms and conditions set out in the SEC Portfolio
Margining Order \7\ and the CFTC Portfolio Margining Order.\8\
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\7\ The Definitions section of the Regulations will be amended
to define the ``SEC Portfolio Margining Order'' to mean ``Exchange
Act Release 34-93501 (Order Granting Conditional Exemptions Under
the Securities Exchange Act of 1934 in Connection With the Portfolio
Margining of Cleared Swaps and Security-Based Swaps That Are Credit
Default Swaps'', 86 FR 61357 (November 5, 2021)). This Order applies
to all SEC-registered clearing agencies and all SEC-registered
broker-dealers.
\8\ The Definitions section of the Regulations will be amended
to define the ``CFTC Portfolio Margining Order'' to mean the
``Treatment of Funds Held in Connection with Clearing by LCH SA of
Single-Name Credit Default Swaps, Including Spun-Out Component
Transactions'' issued on November 1, 2021. This Order applies solely
to LCH SA and its FCM/BD Clearing Members.
---------------------------------------------------------------------------
Section 7(a) of the Regulations, In General, will define
the ``Portfolio Margining Program'' as the program by which LCH SA is
authorized, pursuant to the SEC Portfolio Margining Order and the CFTC
Portfolio Margining Order, to offer FCM/BD Clearing Members, on behalf
of their FCM/BD Clients, the ability to elect to portfolio margin FCM/
BD Cleared Transactions that are SBS with FCM/BD Cleared Transactions
that are Cleared Swaps.\9\
---------------------------------------------------------------------------
\9\ The Definitions section of the Regulations will be amended
to define the ``Portfolio Margining Program'' by making a direct
reference to Regulation 7(a) in the Regulations.
---------------------------------------------------------------------------
Section 7(b) of the Regulations, Participation, will
provide that FCM/BD Clearing Members may participate in
[[Page 46222]]
the Program by providing LCH SA such materials that LCH SA may require
from time to time, including in respect of its FCM/BD Clients. This
section also provides that, in providing these materials to LCH SA, the
FCM/BD Clearing Member shall be deemed to represent that: (a) it is
both an FCM and a BD and neither such status has been revoked; (b) it
is in compliance with the applicable requirements of the SEC Portfolio
Margining Order and the CFTC Portfolio Margining Order; and (c) each
relevant FCM/BD Client is an ``eligible contract participant'' as
defined in Section 1a(18) of the Commodity Exchange Act.\10\
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\10\ This section further provides that, if LCH SA determines
that an FCM/BD Clearing Member may participate in the Portfolio
Margining Program on behalf of its FCM Client(s), it will advise the
FCM/BD Clearing Member when such participation shall begin, which
date is defined as the ``Portfolio Margining Start Date''.
---------------------------------------------------------------------------
Section 7(c) of the Regulations, Operation, will provide
that, following the Portfolio Margining Start Date, all FCM/BD Cleared
Transactions that are SBS for the relevant FCM/BD Client will be
treated as FCM/BD Portfolio Margining Transactions \11\ and will be
held (along with any associated Collateral) in the FCM/BD Swaps Client
Account Structure on a commingled basis with FCM/BD Cleared
Transactions that are Cleared Swaps for such FCM/BD Client. Further,
all such FCM/BD Portfolio Margining Transactions will constitute
Cleared Swaps for purposes of the CDS Clearing Rules and the resulting
combined positions will be margined on a portfolio basis in respect of
the relevant FCM/BD Client. Finally, this section will provide that the
relevant FCM/BD Client will be deemed to acknowledge and agree that any
property used to margin, guarantee or secure the FCM/BD Portfolio
Margining Transactions will not receive customer protection treatment
under the Securities Exchange Act (``Act'') or SIPA \12\ and will
instead receive customer protection treatment under the commodity
broker liquidation provisions of the Code \13\ and the rules and
regulations promulgated thereunder.\14\
---------------------------------------------------------------------------
\11\ The Definitions section of the Regulations will be amended
to define an ``FCM/BD Portfolio Margining Transaction'' to mean an
``FCM/BD Cleared Transaction that is an SBS and which is held in the
FCM/BD Swaps Client Account Structure pursuant to the Portfolio
Margining Program.
\12\ The Definitions section of the Regulations defines SIPA to
mean U.S. Securities Investor Protection Act of 1970, as amended.
\13\ The Definitions section of the Regulations defines the Code
to mean U.S. Bankruptcy Code, as amended.
\14\ The purpose of this provision is to cause the FCM/BD
Clearing Member to acknowledge that it has complied with the SEC
Portfolio Margining Order, which, inter alia, requires the FCM/BD to
furnish to the FCM/BD Client a disclosure document containing the
following information: (i) a statement indicating that the FCM/BD's
money, securities, and property will be held in an account
maintained in accordance with the segregation requirements of
Section 4d(f) of the Commodity Exchange Act and that the FCM/BD
Client has elected to seek protections under Subchapter IV of
Chapter 7 of Title 11 of the United States Code and the rules and
regulations thereunder with respect to such money, securities, and
property; and (ii) a statement that the broker-dealer segregation
requirements of Section 15(c)(3) and Section 3E of the Exchange Act
and the rules thereunder, and any customer protections under SIPA
and the stockbroker liquidation provisions, will not apply to such
FCM/BD Client.
---------------------------------------------------------------------------
In addition to new Regulation 7, certain conforming changes will
also be made to other sections of the Regulations. In particular, in
the Definitions section of the Regulations, the definition of the LCH
Cleared Swaps Client Segregated Depository Account will be amended to
make clear that the account includes, where relevant, FCM/BD Portfolio
Margining Transactions. Similarly, the definition of the LCH SBS Client
Segregated Depository Account will be amended to make clear that the
account excludes any FCM/BD Portfolio Margining Transactions. \15\
Equivalent changes will be made to the relevant provisions of the Rule
Book and Section 3 of the Procedures by adding a reference to the new
defined term of ``FCM/BD Portfolio Margining Transaction'', where
needed.
---------------------------------------------------------------------------
\15\ Specifically, an LCH SBS Client Segregated Depository
Account will be defined in the Regulations to mean one or more
accounts at one or more Banks which are commingled for purposes of
the applicable provisions of the Exchange Act and SEC Regulations)
maintained by LCH SA for the benefit of SBS Customers of its FCM/BD
Clearing Members with a Bank, which is segregated in accordance with
the Exchange Act and SEC Regulations and contains Collateral
deposited by such FCM/BD Clearing Members on behalf of their SBS
Customers in connection with FCM/BD Cleared Transactions that are
SBS cleared for such SBS Customers by such FCM/BD Clearing Members,
excluding any FCM/BD Portfolio Margining Transactions.
---------------------------------------------------------------------------
Further, Article 6.2.1.1 (iii) of the Rule Book will be deleted.
Article 6.2.1.1(iii) establishes the terms and conditions pursuant to
which, prior to the compliance date for the final capital, margin, and
segregation requirements for security-based swap dealers and the
adoption of the SEC Portfolio Margining Order, an FCM/BD Clearing
Member that is both an FCM and a BD was authorized to clear and hold
FCM/BD Cleared Transactions that are SBS for FCM/BD Clients in the FCM/
BD Swaps Client Account Structure on a commingled basis with Cleared
Swaps.\16\ With the implementation of the more comprehensive Portfolio
Margining Program set out in Section 7 of the Regulations, Article
6.2.1.1 is unnecessary.
---------------------------------------------------------------------------
\16\ See, Order Granting Conditional Exemptions under the
Securities Exchange Act of 1934 in Connection with Portfolio
Margining of Swaps and Security-based Swaps, Exchange Act Release
No. 68433 (Dec. 12, 2012) 77 FR 75211 (Dec. 19, 2012).
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In addition, because LCH SA expects that all FCM/BD Clients will
elect to portfolio margin all of their SBS transactions rather than
maintain a separate FCM/BD SBS Client Segregated Depository
Account,\17\ Regulation 2(a) will be amended to provide that an FCM/BD
Clearing Member will maintain an FCM/BD SBS Client Segregated
Depository Account only if required,\18\ and Regulation 2(b) will be
amended to provide that LCH SA will establish an LCH SBS Client
Segregated Depository Account \19\ for an FCM/BD Clearing Member only
upon request. Finally, Regulation 2(c) will be amended to confirm that
all Collateral deposited with LCH SA by FCM/BD Clearing Members in
connection with Cleared Swaps will include Collateral deposited in
connection with FCM/BD Portfolio Margining Transactions and will be
held in an LCH Cleared Swaps Segregated Depository Account.
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\17\ The Regulations define an FCM/BD SBS Client Segregated
Depository Account to mean an omnibus account (which will consist of
one or more accounts at one or more Banks which are commingled for
purposes of the applicable provisions of the Exchange Act and SEC
Regulations) maintained by an FCM/BD Clearing Member for its SBS
Customers with a Bank, which is segregated in accordance with the
Exchange Act and SEC Regulations and contains Collateral deposited
by such SBS Customers in connection with FCM/BD Cleared Transactions
that are SBS cleared for such SBS Customers by such FCM/BD Clearing
Member, excluding any FCM/BD Portfolio Margining Transactions.
\18\ Therefore, any reference to the FCM/BD SBS Client
Segregated Depository Account in Section 3 of the Procedures will be
preceded by the condition that such account is established.
\19\ The Regulations define an LCH SBS Client Segregated
Depository Account to mean an omnibus account (which will consist of
one or more accounts at one or more Banks which are commingled for
purposes of the applicable provisions of the Exchange Act and SEC
Regulations) maintained by LCH SA for the benefit of SBS Customers
of its FCM/BD Clearing Members with a Bank, which is segregated in
accordance with the Exchange Act and SEC Regulations and contains
Collateral deposited by such FCM/BD Clearing Members on behalf of
their SBS Customers in connection with FCM/BD Cleared Transactions
that are SBS cleared for such SBS Customers by such FCM/BD Clearing
Members, excluding any FCM/BD Portfolio Margining Transactions.
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Section 3 of the Procedures will also be revised in the expectation
that all FCM/BD Clients will elect to portfolio margin their SBS
transactions. Specifically:
Section 3.3(b) will be revised to provide that LCH SA will
maintain an FCM/BD SBS Client Collateral Account to record the
Collateral held by LCH SA for the benefit of such FCM/BD Clearing
[[Page 46223]]
Member's SBS Customers with respect to SBS only where required. Any
reference to the FCM/BD SBS Client Collateral Account in Section 3 of
the Procedures will be preceded by the condition that such account is
established.
Section 3.7(a)(ii)(z) will be revised to provide that LCH
SA will maintain a TARGET2 Account to be used to make Collateral Calls
in relation to the Client Margin Requirement(s) with respect to SBS
only where required.\20\
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\20\ As defined in the Rule Book, TARGET2 is the system known as
Trans-European Automated Real-time Gross Settlement Express Transfer
2. A TARGET2 Account is an account held by a TARGET2 participant in
TARGET2 payment module with a Eurosystem Central Bank which is
necessary for such TARGET2 participant to: (i) submit payment orders
or receive payments via TARGET2; and (ii) settle such payments with
such Eurosystem Central Bank.
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Section 3.7(b) will be revised to provide that an FCM/BD
Clearing Member has an obligation to maintain a TARGET2 Account for the
purposes of the Collateral Calls in respect of its Client Margin
Requirement(s) with respect to SBS only where required. Any reference
to such TARGET2 Account in Section 3 of the Procedures will be preceded
by the condition that such account is established.
Section 3.8(b) will be revised to provide that LCH SA will
be required to maintain a USD account to credit USD Cash Collateral
which is transferred by FCM/BD Clearing Members to be recorded in their
FCM/BD SBS Client Collateral Account (the ``LCH FCM/BD SBS Client USD
Account'') only where required. Any reference to the LCH FCM/BD SBS
Client USD Account in Section 3 of the Procedures will be preceded by
the condition that such account is established.
Section 3.14 (a) will be revised to provide that LCH SA
will be required, upon request, to maintain a segregated depository
account in BNYM US' books to register BNYM US Eligible Collateral \21\
which is transferred by FCM/BD Clearing Members in connection with SBS
other than SBS that constitute FCM/BD Portfolio Margining Transactions
(the ``LCH SBS Client Depository Account''). Any reference to the LCH
SBS Client Depository Account in Section 3 of the Procedures will be
preceded by the condition that such account is established.
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\21\ ``BNYM US'' and ``BNYM US Eligible Collateral'' are defined
below.
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A new Section 3.18(b)(y) will be added to provide that the
FCM/BD Clearing Member will establish a TARGET2 Account for the
purposes of the Collateral Calls in respect of its Client Margin
Requirement(s) with respect to SBS only where required. As noted
earlier, LCH SA expects that all FCM/BD Clients will elect to portfolio
margin all of their SBS transactions rather than maintain a separate
FCM/BD SBS Client Segregated Depository Account. New Section 3.18(b)(y)
confirms that LCH SA will not establish a TARGET2 Account with respect
to SBS unless an FCM/BD Client does not elect to portfolio margin its
SBS transactions.
Section 3.18(c) will be revised to provide that an FCM/BD
Clearing Member has an obligation to hold a Bank of New York Mellon
(``BNYM'') cash account for the purposes of satisfying its Cash
Payments obligations in respect of its Client Cleared Transactions that
are SBS only where required.\22\
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\22\ In each case, the revisions also make clear that the term
``SBS'' excludes SBS that constitute FCM/BD Portfolio Margining
Transactions.
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Certain definitions set out in the Rule Book will also be revised,
in each case, to recognize that FCM/BD Portfolio Margining
Transactions, i.e., FCM/BD Cleared Transactions that are SBS and that
are held in the FCM/BD Swaps Client Account Structure pursuant to the
Portfolio Margining Program established in new FCM/BD Regulation 7,
will be treated as Cleared Swaps for all purposes and, as such,
governed by new FCM/BD Regulation 7. As with Article 6.2.1.1(iii),
discussed earlier, the current definitions were adopted to implement
the structure in place prior to the compliance date for the final
capital, margin, and segregation requirements for security-based swap
dealers and the adoption of the SEC Portfolio Margining Order, pursuant
to which an FCM/BD Clearing Member that is both an FCM and a BD is
authorized to clear and hold FCM/BD Cleared Transactions that are SBS
for FCM/BD Clients in the FCM/BD Swaps Client Account Structure on a
commingled basis with Cleared Swaps. With the adoption of new FCM/BD
Regulation 7, references to current definitions or Articles in the Rule
Book are revised to reflect the Portfolio Margining Program.\23\
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\23\ In particular, references to Article 6.2.1.1(iii) have been
removed. As noted earlier, with the implementation of the more
comprehensive Portfolio Margining Program set out in Section 7 of
the Regulations, Article 6.2.1.1 is unnecessary and is being
deleted.
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In particular:
Cleared Swap. This definition currently provides that a
Cleared Swap is an FCM/BD Cleared Transaction (i) constituting a
Cleared Swap as defined in CFTC Regulation 22.1 or (ii) constituting an
SBS that is held in the FCM/BD Swaps Client Account Structure set out
in Article 6.2.1.1(i) in pursuant to Article 6.2.1.1(iii). As revised,
subparagraph (ii) of the definition will provide that a Cleared Swap is
an FCM/BD Cleared Transaction ``constituting an FCM/BD Portfolio
Margining Transaction.''
Cleared Swaps Customer. This definition currently provides
that a Cleared Swaps Customer is (i) a Cleared Swaps Customer, as
defined in CFTC Regulation 22.1, of an FCM/BD Clearing Member with
respect to Cleared Swaps, that is an eligible contract participant as
defined in Section 1a(18) of the CEA, other than subparagraph (C)
thereof, or as may be further defined by CFTC Regulations, and (ii) a
person that would be a Cleared Swaps Customer, as defined in CFTC
Regulation 22.1, of an FCM/BD Clearing Member with respect to any
transaction constituting an SBS that is a Cleared Swap under the
definition in this Section 1.1.1, as if such transaction is a Cleared
Swap for purposes of the definition of Cleared Swaps Customer in CFTC
Regulation 22.1. As revised, subparagraph (ii) of the definition will
provide that a Cleared Swaps Customer is ``a person that is treated as
a Cleared Swaps Customer in connection with maintaining FCM/BD
Portfolio Margining Transactions in the FCM/BD Swaps Client Account
Structure of an FCM/BD Clearing Member pursuant to the Portfolio
Margining Program.
Cleared Swaps Customer Collateral. This definition
currently provides that Cleared Swaps Customer Collateral is Cleared
Swaps Customer Collateral, as defined in CFTC Regulation 22.1, with
respect to Cleared Swaps, including with respect to any transaction
constituting an SBS that is a Cleared Swap under the definition in
Section 1.1.1, as if such transaction is a Cleared Swap for purposes of
the definition of Cleared Swaps Customer Collateral in CFTC Regulation
22.1. As revised, this definition will provide that Cleared Swaps
Customer Collateral is Cleared Swaps Customer Collateral, as defined in
CFTC Regulation 22.1, with respect to Cleared Swaps, including with
respect to any transaction constituting an SBS that is an FCM/BD
Portfolio Margining Transaction.
FCM/BD Swaps Client Trade Account. This definition
currently provides that an FCM/BD Swaps Client Trade Account is an
account opened by LCH SA in the name of an FCM/BD Clearing Member for
the benefit of the Customer of such FCM/BD Clearing Member in order to
register all Cleared Swaps (including any SBS that are held
[[Page 46224]]
in the FCM/BD Swaps Client Account Structure as Cleared Swaps pursuant
to Article 6.2.1.1(iii)) in relation to such FCM/BD Client). As
revised, this definition will provide that an FCM/BD Swaps Client Trade
Account is an account opened by LCH SA in the name of an FCM/BD
Clearing Member for the benefit of the Customer of such FCM/BD Clearing
Member in order to register all Cleared Swaps (including any SBS that
constitute FCM/BD Portfolio Margining Transactions in relation to such
FCM/BD Client).
FCM/BD SBS Client Collateral Account. This definition
currently provides, in relevant part, that an FCM/BD SBS Client
Collateral Account is an account opened in the books of LCH SA to
record the Collateral held by LCH SA for the benefit of an FCM/BD
Clearing Member's SBS Customers with respect to FCM/BD Cleared
Transactions that are SBS (excluding any SBS transactions held in the
FCM/BD Swaps Client Account Structure as Cleared Swaps pursuant to
Article 6.2.1.1(iii)). As revised, this definition will provide, in
relevant part, that an FCM/BD SBS Client Collateral Account is an
account opened in the books of LCH SA to record the Collateral held by
LCH SA for the benefit of an FCM/BD Clearing Member's SBS Customers
with respect to FCM/BD Cleared Transactions that are SBS (excluding any
SBS that constitute FCM/BD Portfolio Margining Transactions).
FCM/BD SBS Client Financial Account. This definition
currently provides that an FCM/BD SBS Client Financial Account is a
segregated account opened in the books of LCH SA for an SBS Customer of
an FCM/BD Clearing Member with a view to record the Legally Segregated
Value related to SBS (excluding SBS that are held in the FCM/BD Swaps
Client Account Structure as Cleared Swaps pursuant to Article
6.2.1.1(iii)) of such FCM/BD Clearing Member's SBS Customer as
determined by LCH SA in accordance with the CDS Clearing Rules. As
revised, this definition will provide that an FCM/BD SBS Client
Financial Account is a segregated account opened in the books of LCH SA
for an SBS Customer of an FCM/BD Clearing Member with a view to record
the Legally Segregated Value related to SBS (excluding SBS that
constitute FCM/BD Portfolio Margining Transactions) of such FCM/BD
Clearing Member's SBS Customer as determined by LCH SA in accordance
with the CDS Clearing Rules.
FCM/BD SBS Client Margin Account. This definition
currently provides that an FCM/BD SBS Client Margin Account is an
account opened by LCH SA in the name of an FCM/BD Clearing Member for
the benefit of each SBS Customer of such FCM/BD Clearing Member in the
CDS Clearing System for risk management purposes, in which the SBS of
the SBS Customers (excluding SBS that are held in the FCM/BD Swaps
Client Account Structure as Cleared Swaps pursuant to Article
6.2.1.1(iii)) are netted and corresponding Open Positions are
registered, and each FCM/BD Client related SBS positions (excluding SBS
transactions that are held in the FCM/BD Swaps Client Account Structure
as Cleared Swaps pursuant to Article 6.2.1.1(iii)) corresponding to
Eligible Intraday Transactions and Irrevocable Backloading STM
Transactions pre-registered in the Account Structure of such FCM/BD
Clearing Member (if so applicable pursuant to Article 6.2.3.1) are
recorded, in order to calculate the FCM/BD Client Margin Requirement
and Client NPV Payment Requirement of such FCM/BD Clearing Member in
respect of such SBS Customer. As revised, this definition will provide
that an FCM/BD SBS Client Margin Account is an account opened by LCH SA
in the name of an FCM/BD Clearing Member for the benefit of each SBS
Customer of such FCM/BD Clearing Member in the CDS Clearing System for
risk management purposes, in which the SBS of the SBS Customers
(excluding SBS that constitute FCM/BD Portfolio Margining Transactions)
are netted and corresponding Open Positions are registered, and each
FCM/BD Client related SBS positions (excluding SBS transactions that
constitute FCM/BD Portfolio Margining Transactions) corresponding to
Eligible Intraday Transactions and Irrevocable Backloading STM
Transactions pre-registered in the Account Structure of such FCM/BD
Clearing Member (if so applicable pursuant to Article 6.2.3.1) are
recorded, in order to calculate the FCM/BD Client Margin Requirement
and Client NPV Payment Requirement of such FCM/BD Clearing Member in
respect of such SBS Customer.
FCM/BD SBS Client Trade Account. This definition provides
that an FCM/BD SBS Client Trade Account is an account opened by LCH SA
in the name of an FCM/BD Clearing Member for the benefit of an SBS
Customer of such FCM/BD Clearing Member in order to register all SBS
cleared by such FCM/BD Clearing Member (excluding SBS that are held in
the FCM/BD Swaps Client Account Structure as Cleared Swaps pursuant to
Article 6.2.1.1(iii)) in relation to such SBS Customer. As revised,
this definition will provide that an FCM/BD SBS Client Trade Account is
an account opened by LCH SA in the name of an FCM/BD Clearing Member
for the benefit of an SBS Customer of such FCM/BD Clearing Member in
order to register all SBS cleared by such FCM/BD Clearing Member
(excluding SBS that constitute FCM/BD Portfolio Margining Transactions)
in relation to such SBS Customer.
b. Collateral/Accounts
As noted above, in addition to the proposed changes linked to the
implementation of the Program described in paragraph a. above, the
Proposed Rule Change will also amend certain provisions of the Rule
Book and the Procedures regarding permitted Collateral (including
Eligible Collateral and Eligible Currency \24\), the Client Collateral
Buffer, and the release of Collateral to a Clearing Member. With regard
to Eligible Collateral, Section 3 of the Procedures will be amended to
replace any references to US Treasury Bills (``US T-Bills'') by
Eligible Collateral that may be held at the Bank of New York Mellon
(``BNYM US'') since there are also other securities, in addition to US
T-Bills, that could be held with BNYM US. Section 3 will refer instead
to ``BNYM US Eligible Collateral'' or ``Eligible Collateral held at
BNYM US'', where appropriate.\25\ With regard to Eligible Currency,
Section 3.5 of the Procedures will be amended to provide that the Pound
Sterling will no longer be an Eligible Currency for purposes of the
FCM/BD Client Account Structure of an FCM/BD Clearing Member since LCH
SA will not open an account for the purpose of depositing Cash
Collateral under the form of Pound Sterling on behalf of FCM/BD Clients
with a Permitted Depository as such term is defined in CFTC Regulations
22.1 and 22.4. As a
[[Page 46225]]
result, Eligible Currencies for FCM/BD Client Account Structure will be
limited to the Euro which is held in an LCH SA's TARGET 2 Account
opened with Banque de France and the U.S. Dollar (``USD'') which is
held in an LCH SA's account opened with BNYM US and Section 3.4(b) will
be also amended for this purpose by permitting the transfer of non-Euro
denominated Cash Collateral to be credited to LCH SA's accounts opened
with Euroclear Bank in respect of the House Collateral Account and any
Collateral Accounts of a CCM only (i.e. a clearing member that is not
an FCM/BD Clearing Member). Indeed, LCH SA will not allow the transfer
of Pound Sterling (included in the reference to ``non-Euro denominated
Cash Collateral'') on behalf of FCM/BD Clients to be credited to an LCH
SA's account opened with Euroclear Bank as it is not an eligible
Permitted Depository within the meaning of CFTC Regulations 22.1 and
22.4. Consequently, the provisions of Section 3.8(a) relating to the
FCM/BD Swaps Client Non Euro Account and FCM/BD SBS Client Non Euro
Account that should be opened in the name of LCH SA with Euroclear Bank
will be removed as unnecessary.
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\24\ ``Eligible Collateral'' is broadly defined in Article 1.1.1
of the Rule Book to mean such securities and other types of non-Cash
Collateral as are set out in Section 3 of the Procedures as being
acceptable by LCH SA for the purposes of satisfying a Clearing
Member's Margin Requirements; ``Eligible Currency'' is defined to
mean cash in such currencies as are set out in Section 3 of the
Procedures as being acceptable by LCH SA as Cash Collateral.
\25\ ``BNYM US Eligible Collateral is defined in Section 3.4(d)
to mean Eligible Collateral that is acceptable to LCH SA to be held
with BNYM US. Conforming changes replacing ``US T-Bills'' with
``BNYM US Eligible Collateral'' or, as the case may be, ``Eligible
Collateral held at BNYM US'', are made in Sections 3.2, 3.4, 3.7,
3.8, 3.9, 3.11, 3.14, and 3.17. Notwithstanding the above, US T-
Bills are currently the only Eligible Collateral permitted to be
deposited at BNYM US. If LCH SA determines to add additional
Eligible Collateral, it will amend the List of Eligible Securities
by publication of a Clearing Notice pursuant to Section 3.9.
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The Proposed Rule Change will also make a number of changes with
regard to rules governing the Client Collateral Buffer, including the
FCM/BD Client Collateral Buffer.\26\ The Client Collateral Buffer is
the value of Collateral recorded as Client Collateral Buffer, which
allows a Clearing Member to satisfy its margin requirements in respect
of a Client Account Structure of that Clearing Member if there is no or
insufficient Collateral held in the relevant Client Account Structure
for the purpose of clearing a client trade leg. These changes regarding
the Client Collateral Buffer first consist in revising Section 3.1 of
Section 3 of the Procedures to expand the types of Collateral permitted
to be held in the FCM/BD Client Collateral Buffer. Currently, an FCM/BD
Clearing Member and a CCM may deposit only Euro to be maintained as
Client Collateral Buffer. As amended, Section 3.1 will permit:
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\26\ The FCM/BD Client Collateral Buffer's definition includes
both the FCM/BD Swaps Client Collateral Buffer and the FCM/BD SBS
Client Collateral Buffer. The FCM/BD Swaps Client Collateral Buffer
is defined in the Rule Book to mean the aggregate value of
Collateral transferred by an FCM/BD Clearing Member to LCH SA,
comprising such FCM/BD Clearing Member's own property, and recorded
in such FCM/BD Clearing Member's FCM/BD Swaps Buffer Financial
Account which may be used by LCH SA to meet obligations in respect
of the Cleared Swaps of Cleared Swaps Customers, including for the
purpose of satisfying the Notional and Collateral Checks performed
by LCH SA in respect of Eligible Intraday Transactions comprising
one or more Client Trade Leg(s). The FCM/BD Swaps Client Collateral
Buffer is similarly defined.
--an FCM/BD Clearing Member to maintain as FCM Client Collateral Buffer
Cash Collateral, meaning Eligible Currencies which will be limited to
the Euro and USD and Eligible Collateral which is securities that can
be held at BNYM US, as set out in a list published by LCH SA on its
website, that are acceptable by LCH SA to be registered in the FCM/BD
Client Collateral Account; \27\ and
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\27\ As noted directly above, Eligible Currencies will be
limited to the Euro and the USD and Eligible Collateral to Eligible
Collateral held at BNYM US, in respect of an FCM/BD Client Account
Structure.
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--a CCM to maintain as CCM Client Collateral Buffer Cash Collateral,
meaning Eligible Currencies which will be limited to the Euro, USD and
GBP and Eligible Collateral in the form of securities that are
acceptable by LCH SA, as set out in a list published by LCH SA on its
website, that may be transferred by way of full title transfer on a
bilateral basis or pursuant to a triparty arrangement \28\ or by way of
security interest under a Belgian law pledge.
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\28\ The possibility for a CCM to provide securities pursuant to
triparty arrangement as Collateral to LCH SA is covered by a
separate proposed rule change previously submitted to the SEC under
the Filing No. SR-LCH SA-2023-004'' which is still subject to SEC's
approval. As noted above in footnote no. 1, the version of the Rule
Book and Section 3 of the Procedures which includes the Proposed
Rule Change also reflects this separate proposed rule change.
Sections 3.7(f), 3.8(f), 3.8(g), 3.10, 3.15(a) and 3.17(a) of the
Procedures, which describe how a Clearing Member may transfer each type
of Collateral to LCH SA, will also be revised to refer specifically to
the transfer of Euro-denominated cash, non-Euro denominated Cash
Collateral, USD denominated Cash Collateral, Eligible Collateral
provided with full title transfer, Pledged Eligible Collateral and BNYM
US Eligible Collateral, respectively, to be maintained as Client
Collateral Buffer, provided that such Clearing Member is permitted to
maintain that type of Collateral as Client Collateral Buffer. \29\
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\29\ Please refer to the previous paragraph which describes the
type of Collateral accepted by LCH SA to be maintained as Client
Collateral Buffer, depending on whether the Clearing Member is an
FCM/BD Clearing Member or a CCM.
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As a consequence of the possibility to maintain Client Collateral
Buffer with other type of Collateral than Euro Cash Collateral, the
relevant provisions of the Rule Book \30\ pursuant to which the
Allocated Client Collateral Buffer shall be transferred to the relevant
CCM Client Collateral Account or, as the case may be, the relevant FCM/
BD Client Financial Account in certain circumstances will need to be
amended. Indeed, where LCH SA determines that there is insufficient
Client Excess Collateral allocated to: (i) in the case of a CCM: the
relevant CCM Client Account Structure; or (ii) in the case of an FCM/BD
Clearing Member: the relevant FCM/BD Client Margin Account, to enable
the novation of a client trade leg, an amount of the Available Client
Collateral Buffer shall be ``allocated'' to: (a) in the case of a CCM:
the relevant CCM Client Account Structure; or (b) in the case of an
FCM/BD Clearing Member: the relevant FCM/BD Client Margin Account.
Pursuant to the current provisions of the Rule Book, in the event of an
Event of Default occurring in respect of a Clearing Member, LCH SA
will: (i) if the Defaulting Clearing Member is a CCM, transfer an
amount of Cash Collateral denominated in Euro which is equal to the CCM
Allocated Client Collateral Buffer for the relevant CCM Client Account
Structure from the CCM House Collateral Account to the relevant CCM
Client Collateral Account; or (ii) if the Defaulting Clearing Member is
an FCM/BD Clearing Member, transfer an amount of Collateral which is
equal to the FCM/BD Allocated Client Collateral Buffer for the relevant
FCM/BD Client Margin Requirement from the FCM/BD Buffer Financial
Account to the relevant FCM/BD Client Financial Account. Since an
amount of Collateral equal to the value of the CCM Allocated Client
Collateral Buffer needs to be transferred from the House Collateral
Account of a Defaulting Clearing Member that is a CCM to the relevant
CCM Client Collateral Account, if the Client Collateral Buffer is to be
maintained with Collateral other than Euro Cash Collateral, LCH SA will
need first to liquidate into Euro Collateral other than Euro Cash
Collateral to be able to transfer the relevant amount denominated in
Euro from the House Collateral Account to the relevant CCM Client
Collateral Account in accordance with the proposed amended Clause
4.2.2(i) of Appendix 1 (CDS Default Management Process) of the Rule
Book. Equivalent changes need to be made to the provisions dealing with
the transfer of an amount in Euro equivalent to the CCM Allocated
Client Collateral Buffer
[[Page 46226]]
of a CCM in the event of: (a) an Early Termination Trigger Date, in
accordance with the proposed amended Clauses 8.5.2(a)(i) and (b)(i) of
Appendix 1 (CDS Default Management Process) of the Rule Book; and (b)
an LCH Default in accordance with the proposed amended Article
1.3.1.3(iv) of the Rule Book, save that under these circumstances, LCH
SA will not be permitted to liquidate any Pledged Eligible Collateral
taken into account in that CCM Client Collateral Buffer.
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\30\ Article 1.3.1.3(iv) of the Rule Book, Clauses 4.2.2(i),
8.1.3 and 8.5.2(a)(i) and (b)(i) of Appendix 1 (CDS Default
Management Process) of the Rule Book. We have taken the opportunity
to remove the description of these circumstances from Section 2.3
(c) of the Procedures as it was redundant with the afore-mentioned
provisions of the Rule Book.
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Finally, Section 2.3(d) of the Procedures will be revised to
provide that a Clearing Member may set or update its House Excess
Collateral Threshold and/or Client Collateral Buffer Threshold on the
Business Day such request will be made, instead of the next Business
Day to meet Clearing Members' expectations to be able to update their
House Excess Collateral Threshold more quickly than is currently
possible.
Further, the Proposed Rule Change will amend the Rule Book and the
provisions of the Procedures by which an FCM/BD Clearing Member may
increase the amount of Collateral held as FCM/BD Client Collateral
Buffer \31\ above the Collateral Buffer Threshold, i.e., the minimum
value of Collateral that an FCM/BD Clearing Member wishes to maintain
as FCM/BD Client Collateral Buffer in the FCM/BD Buffer Financial
Account that is part of the relevant FCM/BD Client Account Structure
opened by LCH SA. In accordance with Chapter 2 of Title VI of the Rule
Book, an FCM/BD Clearing Member may request LCH SA to open an FCM/BD
Swaps Client Account Structure in which Cleared Swaps (including SBS
that will constitute FCM/BD Portfolio Margining Transactions in
accordance with the proposed amendments described in paragraph a.
Portfolio Margining Program above) will be registered or an FCM/BD SBS
Client Account Structure in which SBS (excluding SBS that will
constitute FCM/BD Portfolio Margining Transactions in accordance with
the proposed amendments described in paragraph a. Portfolio Margining
Program above) will be registered. Each of these FCM/BD Client Account
Structures currently includes, in particular:
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\31\ The definition of ``FCM/BD Client Collateral Buffer'' is
set out in footnote no.23 above.
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an FCM/BD Client Collateral Account in which all the
Collateral held on behalf of the relevant FCM/BD Clients is registered;
a set of ``financial accounts'' in which the value of all the
Collateral registered in the FCM/BD Client Collateral Account of that
FCM/BD Client Account Structure is registered. Such set of financial
accounts currently comprises:
--an FCM/BD Swaps Client Financial Account for each Cleared Swaps
Customer, in respect of an FCM/BD Swaps Client Account Structure, in
which the Legally Segregated Value \32\ related to Cleared Swaps of
such Cleared Swaps Customer, or an FCM/BD SBS Client Financial Account
for each SBS Customer in respect of an FCM/BD SBS Client Account
Structure, in which the Legally Segregated Value related to SBS
(including SBS that will constitute FCM/BD Portfolio Margining
Transactions in accordance with the proposed amendments described in
paragraph a. Portfolio Margining Program above) of such SBS Customer;
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\32\ The Legally Segregated Value's definition is set out in
Section 1.1.1 of the Rule Book which currently provide that it is,
with respect to an FCM/BD Clearing Member, the value determined by
LCH SA, at the times and in the manner set out in Section 2.2(f) of
the Procedures, for each FCM/BD Client Margin Account of such FCM/BD
Clearing Member, based on the aggregate value of the Collateral
(excluding FCM/BD Client Collateral Buffer) transferred by such FCM/
BD Clearing Member to LCH SA to meet such FCM/BD Clearing Member's
FCM/BD Client Margin Requirement(s).
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--an FCM/BD Swaps Client Financial Account, in respect of an FCM/BD
Swaps Client Account Structure, or an FCM/BD SBS Buffer Financial
Account, in respect of an FCM/BD SBS Client Account Structure, in which
the value of the Collateral recorded as FCM/BD Client Collateral Buffer
is registered; and
--an FCM/BD Swaps Unallocated Client Collateral Financial Account, in
respect of an FCM/BD Swaps Client Account Structure in which the value
of FCM/BD Swaps Unallocated Client Excess Collateral is registered, or
an FCM/BD SBS Client Excess Collateral Financial Account, in respect of
an FCM/BD SBS Client Account Structure, in which the value of FCM/BD
SBS Client Excess Collateral is registered.
The proposed revisions regarding the possibility for an FCM/BD
Clearing Member to increase the amount of FCM/BD Client Collateral
Buffer above the FCM/BD Client Collateral Buffer Threshold are being
made to provide for the more efficient handling of Collateral held on
behalf of FCM/BD Clients. Specifically:
Article 4.2.2.3 of the Rule Book currently provides that
only a CCM Clearing Member, and not an FCM/BD Clearing Member, may
increase the amount of the Client Collateral Buffer. This Article will
be amended to confirm that an FCM/BD Clearing Member may also increase
the amount of Client Collateral Buffer above the Client Collateral
Buffer Threshold.\33\
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\33\ Article 4.2.2.3 of the Rule Book further provides that
transfers to the Client Collateral Buffer will be made in accordance
with Section 2 and Section 3 of the Procedures.
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Article 4.2.2.5 of the Rule Book currently provides that
in the event the FCM/BD Margin Balance of an FCM/BD Client Financial
Account exceeds the relevant FCM/BD Client Margin Requirement prior to
the Morning Call or the value of the Collateral attributed to the FCM/
BD Buffer Financial Account exceeds the FCM/BD Client Collateral Buffer
Threshold, such amount of the excess, if related to Cleared Swaps, is
reclassified as FCM/BD Swaps Unallocated Client Excess Collateral, as
defined in Article 6.2.5.1 of the Rule Book, or, if related to SBS is
reclassified as FCM/BD SBS Client Excess Collateral, and thereafter may
be returned to the FCM/BD Clearing Member, or (y) recorded in the
relevant FCM/BD Buffer Financial Account and further reclassified as
FCM/BD Client Collateral Buffer, in each case in accordance with
Section 3 of the Procedures and Section 6.2.5 of the Rule Book. The
proposed amendments to Article 4.2.2.5 will consist in: (i) removing
the reclassification of any value of the Collateral above the FCM/BD
Client Collateral Buffer Threshold as FCM/BD Swaps Unallocated Client
Excess Collateral, or FCM/BD SBS Client Excess Collateral, where
appropriate, and (ii) providing the FCM/BD Clearing Member with the
alternative of requesting the transfer of any FCM/BD Swaps Unallocated
Client Excess Collateral, or FCM/BD SBS Client Excess Collateral, where
appropriate, to the FCM/BD Buffer Financial Account and its
reclassification as FCM/BD Client Collateral Buffer.
Article 6.2.5.1(iv)(d) of the Rule Book currently provides
that if a FCM/BD Clearing Member delivers Collateral to LCH SA on
behalf of one or more FCM/BD Clients in an amount that would cause an
FCM/BD Swaps Client Financial Account to contain FCM/BD Swaps Client
Excess Collateral, then LCH SA may (i) reject the deposit, (ii)
transfer the excess back to the Clearing Member, or (iii) accept the
deposit and transfer the excess to the FCM/BD Swaps Unallocated Client
Collateral Financial Account. In order to provide for more efficient
handling of FCM/BD Swaps Client Excess Collateral and to place
responsibility for the handling of
[[Page 46227]]
such Collateral with the FCM/BD Clearing Member, Article 6.2.5.1(iv)(d)
will be revised to provide that, upon the request of an FCM/BD Clearing
Member, LCH SA will either (x) return FCM/BD Swaps Unallocated Client
Excess Collateral to such FCM/BD Clearing Member, in accordance with
the conditions set out in Section 3 of the Procedures; or (y)
reclassify such FCM/BD Swaps Unallocated Client Excess Collateral as
FCM/BD Swaps Client Collateral Buffer and record the value of such
Collateral to the relevant FCM/BD Swaps Buffer Financial Account.\34\
If the FCM/BD Clearing Member requests LCH SA to reclassify such FCM/BD
Swaps Unallocated Client Excess Collateral as FCM/BD Swaps Client
Collateral Buffer and record the value of such Collateral to the
relevant FCM/BD Swaps Buffer Financial Account, the FCM/BD Clearing
Member will be deemed to represent to LCH SA that such request reflects
the true characterization of the Collateral held by LCH SA, including
in particular that the Collateral is the property of the FCM/BD
Clearing Member.\35\ A reference to this request for reclassification
will be added to Article 6.2.5.1(iv)(c) for consistency purposes.
Article 6.2.5.1(iii)(c) will provide that any excess FCM/BD Swaps
Client Collateral Buffer will be returned to the relevant FCM/BD
Clearing Member upon request.
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\34\ Article 6.2.5.1(iv)(d) of the Rule Book further provides
that, upon making any request the FCM/BD Clearing Member will be
deemed to represent and warrant that such request complies with CFTC
Regulations and has been made by an authorized individual.
In this regard, LCH SA notes that, in accordance CFTC Rule 22.2,
17 CFR 22.2, an FCM/BD Clearing Member is permitted to commingle in
a single account all Cleared Swaps Customer Collateral that it
receives from, for, or on behalf of multiple Cleared Swaps Customers
and, further, is required to maintain such portion of its own funds
as may be necessary to assure that the assets of one Cleared Swaps
Customer are not used to meet the obligations of another Cleared
Swaps Customer. (This amount is known as the FCM/BD's residual
interest.) By requesting LCH SA to reclassify FCM/BD Swaps
Unallocated Client Excess Collateral as FCM/BD Swaps Client
Collateral Buffer, the FCM/BD would be representing that such amount
is a part of the FCM/BD's residual interest.
\35\ The FCM/BD Clearing Member must further agree to provide
such additional information as LCH SA may reasonably request for
purposes of effecting the requested return or reclassification.
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Article 6.2.5.1(ii) of the Rule Book will be revised to
provide that FCM/BD Swaps Unallocated Client Excess Collateral also
includes any amounts transferred to the FCM/BD Swaps Unallocated Client
Collateral Financial Account in accordance with Article 6.2.4.4(i).
Further, in the event an FCM/BD Clearing Member delivers Collateral to
LCH SA on behalf of one or more FCM/BD Clients in an amount that would
cause an FCM/BD Swaps Client Financial Account to contain FCM/BD Swaps
Client Excess Collateral, LCH SA will accept the deposit and
immediately transfer the amount of such excess to the FCM/BD Clearing
Member's FCM/BD Swaps Buffer Financial Account, whereupon it shall also
become FCM/BD Swaps Client Collateral Buffer. The Article currently
provides that LCH SA may also (a) reject the deposit or (b) immediately
transfer the entire deposit or the amount of such excess back to the
FCM/BD Clearing Member.
Article 6.2.5.2 of the Rule Book establishes a procedure
with regard to FCM/BD SBS Excess Collateral or FCM/BD SBS Client
Collateral Buffer that parallels the procedures in Article 6.2.5.1
above with regard to FCM/BD Swaps Client Collateral. That is, if a FCM/
BD Clearing Member delivers Collateral to LCH SA on behalf of one or
more SBS Customers in an amount that would cause an FCM/BD SBS Client
Financial Account to contain FCM/BD SBS Client Excess Collateral, the
current rule provides that LCH SA may (i) reject the deposit, (ii)
transfer the excess back to the Clearing Member, or (iii) accept the
deposit and transfer the excess to the FCM/BD SBS Unallocated Client
Collateral Financial Account. In order to provide for more efficient
handling of FCM/BD SBS Client Excess Collateral and to place
responsibility for the handling of such Collateral with the FCM/BD
Clearing Member, Article 6.2.5.2(ii) will be revised to provide that
LCH SA will accept the deposit and immediately transfer the amount of
such excess to the FCM/BD Clearing Member's FCM/BD SBS Buffer Financial
Account, whereupon it shall also become FCM/BD SBS Client Collateral
Buffer.
The Proposed Rule Change will also amend various provisions of
Section 3 of the Procedures to clarify the process by which a Clearing
Member may request the return of Collateral. In particular:
Section 3.7(g) of the Procedures currently describes the
manner in which an FCM/BD Clearing Member may request the return of
FCM/BD Swaps Unallocated Client Excess Collateral in the form of Euro-
denominated Cash Collateral to the FCM/BD Clearing Member's Client
Collateral Financial Account. This Article will be revised to establish
the process by which an FCM/BD Clearing Member may request the release
of Euro denominated Cash Collateral recorded in the FCM/BD Client
Collateral Account and will provide that such Collateral may be
released only if LCH SA determines that it will continue to hold
Collateral sufficient to cover the FCM/BD Client Requirement for each
FCM/BD Client Margin Account and to satisfy the FCM/BD Clearing
Member's Client Collateral Buffer Threshold.\36\
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\36\ Section 3.8(i) and Section 3.17(b) set out a similar
process by which an FCM/BD Clearing Member may request the release
of USD denominated Cash Collateral and Eligible Collateral held at
BNYM US, respectively, recorded in the FCM/BD Client Collateral
Account.
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Section 3.8(h) and Section 3.15 (b) of the Procedures
extends the process by which a CCM may request the return of non-Euro
denominated Cash Collateral to the return of non-Euro denominated Cash
Collateral and Pledged Eligible Collateral, respectively, recorded as
CCM Client Collateral Buffer in its CCM House Collateral Account.\37\
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\37\ Because Section 3.5 of the Procedures will be amended to
provide that the Pound Sterling will no longer be an Eligible
Currency for purposes of the FCM/BD Client Account Structure of an
FCM/BD Clearing Member, the provisions of Section 3.8(h) relating to
the re-calculation of the Non-Euro Cash Collateral Value of an FCM/
BD Swaps Unallocated Client Collateral recorded in the FCM/BD Swaps
Unallocated Client Collateral Financial Account and the re-
calculation of the Non-Euro Cash Collateral Value of an FCM/BD SBS
Client Excess Collateral recorded in the FCM/BD SBS Client Excess
Collateral Financial Account will be removed as unnecessary.
---------------------------------------------------------------------------
Section 3.10.1(c) of the Procedures and Section 3.10.2(d)
set out a similar process by which a CCM may request the return of
Eligible Collateral transferred with full title, on a bilateral basis
and pursuant to a triparty arrangement, respectively, recorded as CCM
Client Collateral Buffer in its CCM House Collateral Account.
The Proposed Rule Change will also revise Section 3.18(b) and (c)
of the Procedures to clarify the use of TARGET2 Accounts by LCH SA and
its Clearing Members for satisfying Cash Payment obligations and/or
Variation Margin Collateral Transfer obligations \38\ in Euro, and the
use of BNYM Accounts by LCH SA and its Clearing Members with regard to
Cash Payments and/or the transfer of Variation Margin Collateral in
USD. With regard to
[[Page 46228]]
TARGET2 Accounts, Section 3.18(b) will be revised to provide that, for
the purpose of making or receiving Cash Payments in Euro, LCH SA will
use: (a) the LCH House TARGET2 Account to satisfy Cash Payments and/or
Variation Margin Collateral Transfer obligations in Euro with respect
to all relevant House Cleared Transactions of each Clearing Member; and
(b) the LCH CCM Client TARGET2 Account for satisfying Cash Payments
and/or Variation Margin Collateral Transfer obligations in Euro with
respect to all relevant Client Cleared Transactions of each Clearing
Member.
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\38\ A Cash Payment obligation is broadly defined in Section
1.1.1 of the Rule Book to mean any payment due by a Clearing Member
to LCH SA, or due to be received by a Clearing Member from LCH SA.
For FCM/BD Clearing Members, such Cash Payments include variation
margin payments (because variation margin payments are treated as
settlement). Variation Margin Collateral Transfer obligations are
only relevant to CCM Clearing Members that treat variation margin as
collateral rather than settlement. Section 3.18(a) of the Procedures
further provides for a list of Cash Payment and Variation Margin
Type which includes: CDS or Index Swaption-related payments (Initial
Payment Amount, Fixed Amounts or as the case may be, Premium, cash
amounts due upon the occurrence of Credit Events and cash amounts
due in connection with an MTM change), Variation Margin, Price
Alignment Interest, NPV Payment, Price Alignment Amount, Clearing
House Adjustments, Fees and remuneration.
---------------------------------------------------------------------------
Section 3.18(b) will be further revised to provide that, with
regard to an FCM/BD's Clearing Member's Client Cleared Transactions,
LCH SA will use: (a) the FCM/BD Clearing Member's TARGET2 Account
established for the purposes of the Collateral Calls in respect of its
Client Margin Requirement(s) with respect to Cleared Swaps and FCM/BD
Client Collateral Buffer Threshold will be used for the debits and
credits made out the LCH CCM Client TARGET2 Account for the purposes of
satisfying Cash Payments obligations regarding all relevant Client
Cleared Transactions of that FCM/BD Clearing Member that are Cleared
Swaps; and (b) the FCM/BD Clearing Member's TARGET2 Account established
for the purposes of the Collateral Calls in respect of, where required,
its Client Margin Requirement(s) with respect to SBS (excluding SBS
that constitute FCM/BD Portfolio Margining Transactions) and FCM/BD
Client Collateral Buffer Threshold will be used for the debits and
credits made out the LCH CCM Client TARGET2 Account for the purposes of
satisfying Cash Payments obligations regarding all relevant Client
Cleared Transactions of that FCM/BD Clearing Member that are SBS
(excluding SBS that constitute FCM/BD Portfolio Margining
Transactions).
Section 3.7(d)(iii) will be amended to provide that, in respect of
the FCM/BD Client Account Structure of an FCM/BD Clearing Member, there
will be no aggregation of payments between Euro denominated Cash
Payments and Euro denominated Cash Collateral transfers through TARGET2
since Euro denominated Cash Payments will be made by using the LCH CCM
Client TARGET2 Account whereas the transfer of Euro denominated Cash
Collateral will be made by using the LCH FCM/BD Swaps Client TARGET2
Account or, as the case may be, the LCH FCM/BD SBS Client TARGET2
Account. Further, and for the avoidance of doubt, with regard to the
FCM/BD Clearing Members' Client Cleared Transactions: (x) the FCM/BD
Clearing Member's TARGET2 Account established for the purposes of the
Collateral Calls in respect of its Client Margin Requirement(s) with
respect to Cleared Swaps and FCM/BD Client Collateral Buffer Threshold
will be used for the debits and credits made out the LCH CCM Client
TARGET2 Account for the purposes of satisfying Cash Payments
obligations regarding all relevant Client Cleared Transactions of that
FCM/BD Clearing Member that are Cleared Swaps; and (y) the FCM/BD
Clearing Member's TARGET2 Account established for the purposes of the
Collateral Calls in respect of, where required, its Client Margin
Requirement(s) with respect to SBS (excluding SBS that constitute FCM/
BD Portfolio Margining Transactions) and FCM/BD Client Collateral
Buffer Threshold will be used for the debits and credits made out the
LCH CCM Client TARGET2 Account for the purposes of satisfying Cash
Payments obligations regarding all relevant Client Cleared Transactions
of that FCM/BD Clearing Member that are SBS (excluding SBS that
constitute FCM/BD Portfolio Margining Transactions).
With regard to BNYM Accounts,\39\ Section 3.18(c) will be revised
to provide that, for the purpose of making or receiving Cash Payments
and/or the transfer of Variation Margin Collateral in USD, LCH SA will
maintain only two BNYM Accounts. One account will be used to debit or
credit USD to satisfy Cash Payments and/or Variation Margin Collateral
Transfer obligations in USD with respect to all relevant House Cleared
Transactions of each Clearing Member (the ``LCH House BNYM Account'');
the second account will be used to debit or credit USD to satisfy Cash
Payments and/or Variation Margin Collateral Transfer obligations in USD
with respect to all relevant Client Cleared Transactions of each
Clearing Member (the ``LCH Client BNYM Account''). The provisions of
Section 3.18(c) that currently require LCH SA to maintain (x) a cash
account used to debit or credit USD to satisfy Cash Payments and/or
Variation Margin Collateral Transfer obligations in USD with respect to
all relevant Client Cleared Transactions of each CCM (the ``LCH CCM
Client BNYM Account''); (y) a cash account used to debit or credit USD
to satisfy Cash Payments obligations in USD with respect to all
relevant Client Cleared Transactions of each FCM/BD Clearing Member
that are Cleared Swaps (the ``LCH FCM/BD Swaps Client BNYM Account'');
and (z) a cash account used to debit or credit USD to satisfy Cash
Payments and/or Variation Margin Collateral Transfer obligations in USD
with respect to all relevant Client Cleared Transactions of each FCM/BD
Clearing Member that are SBS (excluding SBS that are held in the FCM/BD
Swaps Client Account Structure) (the ``LCH FCM/BD SBS Client BNYM
Account'') will be removed.\40\
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\39\ As noted above, USD is the only Eligible Currency and US
Treasury bills are the only Eligible Collateral held in BNYM
accounts.
\40\ As discussed above, LCH SA expects that all FCM/BD Clients
will elect to portfolio margin their SBS transactions. Therefore,
LCH SA does intend to maintain SBS related Client Accounts only if
required.
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The references to the former time slot for the Cash Payments in
respect of Client Variation Margin Requirements of an FCM/BD Clearing
Member that is no longer exists will be deleted from Section 3.18(d)
and Section 5.5 (step no.10) of the Procedures.
c. Miscellaneous Amendments
i. Time Reference
Article 1.2.8.1 of the Rule Book currently provides that where
reference is made in the CDS Clearing Documentation to a time or
deadline, it shall be understood to mean Central European Time (CET),
unless otherwise stipulated in the CDS Clearing Documentation. For the
sake of clarity and avoid any confusion on the time zone that LCH SA
will follow, especially when Central European Summer Time (CEST)
applies, this Section will be revised to provide that where reference
is made in the CDS Clearing Documentation to a time or deadline, it
shall be understood to mean Paris Time, unless otherwise stipulated in
the CDS Clearing Documentation. As a result, all references to CET in
the Procedures will be removed and Section 1.4 (Timing) of Parts A, B
and C of the CDS Clearing Supplement to remove the reference to Central
European Time and provide that any reference to a time of day herein
shall be deemed to be a reference to the time zone as set out in
Section 1.2.8 (Time reference) of the Rule Book unless otherwise
provided herein.
Section 5.18 of the Procedures will be also amended to remove the
provisions pursuant to which references to times and deadlines in this
paragraph 5.18 are to London local time (being Greenwich Mean Time
(GMT) or British Summer Time (BST) as applicable) unless otherwise
specified because these provisions are not used in the absence of any
reference to times or deadlines in this paragraph.
[[Page 46229]]
ii. Real Time Session
The Rule Book defines ``Real Time Session'' to mean the period
commencing at the Start of Real Time and ending at the End of Real Time
in respect of each Clearing Day. Start of Real Time (SoRT), in turn, is
defined as the time as specified in a Clearing Notice. LCH SA will
adopt a new Clearing Notice, which will provide that, unless notified
otherwise:
``Start of Real Time (SoRT)'' means on each Clearing Day,
the earlier of: (i) the time when all relevant Clearing Members have
satisfied the Morning Call; and (ii) 09.05 (Paris time); and
``End of Real Time'' means 16.30 (New York time) on each
Clearing Day.
Further, LCH SA may decide to change the Start of Real Time and/or
the End of Real Time to a different time for operational or other
reasons (including, but not limited to, on a Clearing Day that is a
holiday in the United States). In such circumstances, the Clearing
Members will be informed of the amended Start of Real Time and/or
amended End of Real Time through service notification.\41\ LCH SA will
publish any amendments or modifications to the content of the Clearing
Notice in an updated Clearing Notice.
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\41\ This paragraph currently provides: If for any reason LCH SA
is not able to start or end the Real Time Session at the times
indicated above, or is required to start or end the Real Time
Session otherwise than at the times indicated above, LCH SA may
decide to change the Start of Real Time and/or the End of Real Time
to a different time that will be communicated to the Clearing
Members. In such exceptional case, the Start of Real Time and/or the
End of Real Time shall be the time where the relevant service
notification of the opening or the closing (as applicable) of the
Real Time Session is sent.
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iii. Opening Hours
Article 2.3.3.5 of the Rule Book will be revised to provide that
each Clearing Member shall ensure that appropriate personnel are
available for communications with LCH SA during the Real Time Session,
instead of Opening Hours. An equivalent change will be made to Section
5.1(c) of the Procedures pursuant to which LCH SA is open during the
Real Time Session and the operations team of LCH SA will be available
during the Real Time Session. The opening hours applicable to the
customer technical helpdesk will be also removed from this Section.
Consequently, the defined term ``Opening Hours'' will be removed from
the definitions section of the Rule Book since it will be no longer
used.
Finally, other minor amendments made for consistency purposes, or
the sake of clarity, will be made to the Rule Book, the Procedures and
the Regulations. For instance, the definition of CCM in the Rule Book
will be updated to replace the incorrect reference to FCM/BD Clearing
Member by FCM/BD since a Clearing Member cannot be admitted as a CCM
and an FCM/BD Clearing Member at the same time and the purpose of the
reference to an FCM/BD in the definition of a CCM is to explain how an
entity registered as an FCM and as a BD may be admitted as a CCM under
the CDS Clearing Rules.
d. Amendments to Liquidity Risk Modelling Framework
LCH SA is required to maintain certain levels of liquidity but
given the CFTC segregation requirements applicable to derivative
clearing organizations (DCOs), FCM/BD Clients' funds should be
considered segregated as they are not available resources to LCH SA in
a default management context unless the liquidity requirement is driven
by the FCM/BD Clearing Member of such FCM/BD Clients. As part of the
effective coming onboarding process of FCM/BD Clearing Members, LCH SA
will reflect these requirements by making a number of updates and
adjustments to its Liquidity Risk Modelling Framework mainly specifying
that resources received from FCM/BD Clearing Members on behalf on their
FCM/BD Clients or securities resulting from investment of FCM/BD
Clients' funds are excluded from liquidity resources available unless
the liquidity requirement is driven by the FCM/BD Clearing Member of
such FCM/BD clients. Moreover, LCH SA is also updating its Liquidity
Risk Modelling for the sake of clarity; such amendments are not
strictly related to the FCM/BD related initiative.
In this regard:
Section 1.1.1 (Reminder of SA's activities) will be
updated in respect of the description of product scope of CDSClear to
provide that clearing activities relate to the clearing of US,
Australia, Asia and sovereign index and single names CDS negotiated on
OTC markets as well. This amendment has been made for the sake of
clarity and it is not linked to the FCM/BD related initiative itself.
Section 1.6.1 (Liquidity Sources) will provide that cash
collateral posted by FCM/BD Clearing Members on behalf of their FCM/BD
Clients or excess cash for FCM/BD Clients of FCM/BD Clearing Member(s)
that can be generated on an intraday basis, as well as securities
resulting from the investment of that cash are excluded from the
available liquidity resources unless the liquidity need is generated by
the FCM/BD Clearing Member of such FCM/BD Clients. Moreover, it will be
clarified that LCH SA has the right to consider available for liquidity
purposes all the resources collected if deposited under the full title
transfer regime. Since Collateral deposited by FCM/BD Clearing Members
on behalf of their FCM/BD Clients is subject to a security interest, a
footnote, which currently provides for the list of Collateral which is
not transferred by way of full title transfer, will be amended to add a
reference to Collateral received from FCM/BD Clients.
Section 1.6.1.1 (Collateral transfer to the 3G pool) will
be updated to reflect the fact that non-cash collateral deposited via a
Single Pledged Account is a way to post Collateral for activities not
limited to CDS related activities only and to provide that USD
securities received from FCM/BD Clients would not be deposited via Full
Title Transfer Accounts.
Section 1.6.1.2 (Assessment of assets' liquidity) will
provide that LCH SA cannot rehypothecate non cash collateral collected
from FCM/BD Clients to raise liquidity unless the FCM/BD Clearing
Member of such FCM/BD clients is in default. The same treatment will
also apply to securities resulting from FCM/BD Clients' cash which has
been invested.
Section 1.6.1.3 (Synthesis) which consists in a table
summarizing the liquidity sources, will be amended as follows:
[cir] Cash and US non cash collateral received from FCM/BD Clearing
Members on behalf of their FCM/BD Clients and excess cash for FCM/BD
clients of FCM/BD clearing member(s) that can be generated on an
intraday basis are excluded unless the liquidity requirement is driven
by the FCM/BD Clearing Member of such FCM/BD Clients.
[cir] Securities resulting from investment of FCM/BD Clients' money
cannot be used for liquidity purposes unless the liquidity requirement
is driven by the FCM/BD Clearing Member of such FCM/BD Clients.
The description of the liquidity need ``Repayment of
excess cash by members'' in Section 4.1.2 (Model inputs and Variable
selection) will be amended by adding a footnote specifying that Non
Euro non cash securities in DKK, NOK, SEK, JPY, CHF, CAD, AUD are
excluded from the liquidity resources to be consistent with the
description in section 4.1.5. These amendments are made for consistency
purposes and are not linked to the FCM/BD related initiative.
[[Page 46230]]
Sections 4.1.2 (Model inputs and Variable selection) and 4.1.5
(Model assumptions) will be amended to provide that, when calculating
the liquid resources available to be compared against the Operational
Target \42\ the cash received from the FCM/BD Clearing Members on
behalf of their FCM/BD Clients is excluded. An equivalent change to the
footnotes is made when computing the liquidity requirement relating to
margin reduction and repayment of excess collateral for which the FCM/
BD Clients' resources are excluded. Moreover in Section 4.1.5,
paragraph c., a typographical error in the penultimate sentence will be
amended.
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\42\ The Operational Target represents the amount of liquidity
to be held to satisfy the liquidity needs related to the operational
management of the CCP in a stressed environment that does not lead
to a member's default.
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Sections 4.2.2 (Model inputs and Variable selection) and
4.2.4 (Mathematical formula, derivation and algorithm, and numerical
approximation) will be amended to provide that in the calculation of
the Liquidity Coverage Ratio (LCR) of the CCP the resources of FCM/BD
Clients must be considered segregated and therefore unavailable for
liquidity purposes unless the relevant FCM/BD Clearing Member is among
the Cover 2 members assumed to be in default in the LCR. Also, in the
case where an FCM/BD Clearing Member is among the Cover 2 the
possibility to use the resource held on behalf of FCM/BD Clients for
liquidity purposes is capped to the obligations of the FCM/BD Client.
Sections 4.2.5.3 (Stress scenario selection) will be
amended to refer to CDSClear rather than CDS when describing the market
stress scenario considered in the LCR. The amendment is made for
consistency purposes and is not linked to the FCM/BD related
initiative.
Sections 4.3.2 (Model inputs and Variable selection) and
4.3.4 (Mathematical formula, derivation and algorithm, and numerical
approximation) will specify that, in the calculation of the Liquidity
Coverage Ratio (LCR) for the interoperable CCP, the resources held on
behalf of FCM/BD Clients must be considered segregated and therefore
unavailable for liquidity purposes.
In Appendix 6.3 (Reminder of SA's sources of liquidity and related
risk drivers), two footnotes have been added to specify that cash held
on behalf of FCM/BD Clients (allocated and in excess) is excluded
unless the liquidity requirement is driven by the relevant FCM/BD
Clearing Member. With respect to the source of liquidity coming from
Non-Euro non-cash collateral posted in full title transfer, a footnote
have been added to specify that securities collateral collected from
FCM/BD Clients is excluded unless the liquidity requirement is driven
by an the relevant FCM/BD Clearing Member; the footnote has also been
expanded by specifying that securities in DKK, NOK, SEK, CAD, AUD, CHF
and JPY are excluded from the liquidity resources, which is an
amendment not linked to the FCM/BD related initiative but made for
consistency purposes. In the end, with respect to the liquidity source
coming from the collateral of investment activity, a footnote will be
added to specify that securities coming from FCM/BD Clients investment
shall be excluded unless the relevant FCM/BD Clearing Member is in
default.
With the exception of the above Proposed Rule Changes, no other
change are required.
2. Statutory Basis
LCH SA has determined that the Proposed Rule Change is consistent
with the requirements of Section 17A of the Act \43\ and regulations
thereunder applicable to it. In particular, Section 17A(b)(3)(F) of the
Act provides, inter alia, that the rules of a clearing agency must be
designed: (a) to promote the prompt and accurate clearance and
settlement of derivative agreements, contracts, and transactions; (b)
to assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible; (c) and, in general, to protect investors and the public
interest.\44\ Further, Commission Rule 17Ad-22(e)(21) requires a
central counterparty (``CCP'') that is involved in activities with a
more complex risk profile, e.g., that provides CCP services for
security-based swaps, to maintain and enforce written policies and
procedures reasonably designed, inter alia, to be efficient and
effective in meeting the requirements of its participants and the
markets it serves.\45\
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\43\ 15 U.S.C. 78q-1.
\44\ 15 U.S.C. 78q-1(b)(3)(F).
\45\ 17 CFR 240.17Ad-22(e)(21).
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As discussed above, the provisions of the Proposed Rule Change
implementing the Portfolio Margining Program will authorize LCH SA to
offer FCM/BD Clearing Members, on behalf of their FCM/BD Clients, the
ability to elect to portfolio margin FCM/BD Cleared Transactions that
are SBS with FCM/BD Cleared Transactions that are Cleared Swaps. The
Regulations implementing the Program are designed to ensure that the
Program complies with the terms and conditions set out in the SEC
Portfolio Margining Order and the CFTC Portfolio Margining Order. Among
other requirements, these Orders ensure that all funds deposited with
an FCM/BD Clearing Member to margin Portfolio Margin Transactions will
be segregated in accordance with the requirements of Section 4d(f) of
the Commodity Exchange Act \46\ and the rules of the Commodity Futures
Trading Commission thereunder.\47\ Further, FCM/BD Clearing Members
that provide FCM/BD Clients the ability to portfolio margin FCM/BD
Cleared Transactions that are SBS with FCM/BD Cleared Transactions that
are Cleared Swaps must acknowledge that, in accordance with the SEC
Portfolio Margining Order, they have provided FCM/BD Clients a written
disclosure to ensure that such FCM/BD Clients are aware that the funds
deposited with FCM/BD Clearing Member to margin Portfolio Margining
Transactions will not be held in accordance with the broker-dealer
segregation requirements of Section 15(c)(3) and Section 3E of the Act
\48\ and the rules thereunder, and any customer protections under SIPA
and the stockbroker liquidation provisions, will not apply.
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\46\ 7 U.S.C. 6d(f).
\47\ 17 CFR 22.2, 22.3.
\48\ 15 U.S.C. 78o, 78c-5.
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By implementing a Portfolio Margining Program that complies with
the terms and conditions of the SEC Portfolio Margining Order and the
CFTC Portfolio Margining Order, the Regulations set out in the Proposed
Rule Change will: (a) promote the prompt and accurate clearance and
settlement of derivative agreements, contracts, and transactions by
encouraging FCM/BD Clients to clear more transactions at LCH SA; (b)
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible by allowing LCH SA to margin an FCM/BD Client's positions
collectively rather than separately; (c) and, in general, protect
investors and the public interest by accommodating the portfolio
margining needs of market participants who must react quickly to
dynamic market conditions, risk management and hedging requirements,
and evolving portfolio compositions. As such, the Regulations are
reasonably designed to be efficient and effective in meeting the
requirements of LCH SA's participants and the markets it serves, within
the meaning of Section 17A(b)(3)(F) of the Act and Commission Rule
17Ad-22(e)(21).
[[Page 46231]]
Other provisions of the Proposed Rule Change will: (a) amend the
definition of Eligible Collateral to provide that the Pound Sterling
will no longer be an Eligible Currency for purposes of the FCM/BD
Client Account Structure of an FCM/BD Clearing Member; (b) expand the
types of Collateral permitted to be held in the FCM/BD Client
Collateral Buffer; (c) set out the process by which an FCM/BD Clearing
Member may increase the amount of Collateral held in the FCM/BD Client
Collateral Buffer above the Collateral Buffer Threshold; (d) set out
the process by which a Clearing Member may request the return of
Collateral; and (e) clarify the use of TARGET2 Accounts for satisfying
Cash Payment obligations and/or Variation Margin Collateral Transfer
obligations in Euro, and the use of BNYM Accounts with regard to Cash
Payments and/or the transfer of Variation Margin Collateral in USD. The
greater detail provided by these amendments will similarly: (x) promote
the prompt and accurate clearance and settlement of derivative
agreements, contracts, and transactions by allowing FCM/BD Clearing
Members to exercise greater and more flexible control over Collateral
in general and the Collateral Buffer specifically, which will better
assure that the Clearing Member always have sufficient Collateral at
LCH SA to meet its obligations; (y) assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible; (z) and, in general,
protect investors and the public interest. These amendments, therefore,
are reasonably designed to be efficient and effective in meeting the
requirements of LCH SA's participants and the markets it serves, within
the meaning of Section 17A(b)(3)(F) of the Act and Commission Rule
17Ad-22(e)(21).
As discussed above, LCH SA is also proposing to amend its Liquidity
Risk Modelling Framework to address the CFTC segregation requirements
applicable to FCMs and customers.\49\ Specifically, the amended
Liquidity Risk Modelling Framework will anticipate the effective
onboarding process of FCMs and will permit LCH SA to take into account,
in its liquidity monitoring process, the specific segregation
requirements to ensure the customers funds protection of this category
of clearing members which is fully consistent with the requirements of
Section 17A(b)(3)(F) of the Act providing, inter alia, that the rules
of a clearing agency must be designed: (b) to assure the safeguarding
of securities and funds which are in the custody or control of the
clearing agency or for which it is responsible; (c) and, in general, to
protect investors and the public interest.\50\
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\49\ 17 CFR 1.20.
\50\ 15 U.S.C. 78q-1(b)(3)(F).
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LCH SA also believes that this proposed change is consistent with
Exchange Act Rule 17Ad-22(e)(1) \51\ that requires a covered clearing
agency to 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 Rule Change will be (i) ensuring that the Program complies
with the terms and conditions set out by the CFTC and SEC in the US
jurisdiction and (ii) taking into account the CFTC segregation
requirements and investment restrictions applicable to FCMs' customer
funds which constitutes a relevant and appropriate legal framework
consistent with the requirements of Exchange Act Rule 17Ad-
22(e)(1).\52\
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\51\ 17 CFR 240.17Ad-22(e)(1).
\52\ 17 CFR 240.17Ad-22(e)(1).
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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.\53\ LCH SA does
not believe the Proposed Rule Change would have any impact, or impose
any burden, on competition. The Proposed Rule Change does not address
any competitive issue. LCH SA operates an open access model, and the
Proposed Rule Change will have no effect on this model.
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\53\ 15 U.S.C. 78q-1(b)(3)(I).
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C. Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments relating to the proposed rule change have not been
solicited or received. LCH SA will notify the Commission of any written
comments received by LCH SA.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-LCH SA-2023-005 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-LCH SA-2023-005. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than 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. Do not include personal identifiable information in
submissions; you should submit only information that you wish to make
available publicly. We may redact in part or
[[Page 46232]]
withhold entirely from publication submitted material that is obscene
or subject to copyright protection. All submissions should refer to
File Number SR-LCH SA-2023-005 and should be submitted on or before
August 9, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
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\54\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-15257 Filed 7-18-23; 8:45 am]
BILLING CODE 8011-01-P
