Notice2021-18459
Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating to Eligible Collateral and Liquidity Risk Management
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 27, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 86 Issue 164 (Friday, August 27, 2021)</title>
</head>
<body><pre>
[Federal Register Volume 86, Number 164 (Friday, August 27, 2021)]
[Notices]
[Pages 48257-48259]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-18459]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92723; File No. SR-LCH SA-2021-002]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to Eligible Collateral and Liquidity Risk
Management
August 23, 2021.
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 August 18, 2021, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (``Commission'') the proposed rule change
(``Proposed Rule Change'') described in Items I, II and III below,
which Items have been primarily 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
(a) Banque Centrale de Compensation, which conducts business under
the name LCH SA, is proposing to expand the non-cash collateral that a
Clearing Member \3\ may post with LCH SA to meet the member's margin
requirements (the ``Eligible Collateral'') to include certain
additional non-Euro government bonds by (i) amending its CDS Clearing
Rulebook (the ``Rule Book'') to clarify that such additional non-Euro
government bonds are excluded from the Pledged Eligible Collateral, and
(ii) publishing a new Clearing Notice, in accordance with Article
4.2.6.1 of the CDS Clearing Rule Book, specifying the additional
acceptable non-Euro government bonds. LCH SA is also proposing to
expand the custodians at which Clearing Members may deposit Eligible
Collateral by adding Clearstream Banking Luxembourg as a central
securities depository for LCH SA in Section 3 of the CDS Clearing
Procedures--Collateral, Variation Margin and Cash Payment. Finally, LCH
SA is proposing to amend its Liquidity Risk Modelling Framework (the
``Framework'') to take into account the expanded list of Eligible
Collateral.
---------------------------------------------------------------------------
\3\ Capitalized terms used but not defined herein shall have the
meaning specified in the Rule Book, the Clearing Supplement, the
Procedures and the Clearing Regulations, as applicable.
---------------------------------------------------------------------------
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
The Proposed Rule Change is being adopted to expand the non-Euro
government bonds that a Clearing Member may post with LCH SA in order
to satisfy the clearing member's margin requirements. Currently, the
only non-Euro Eligible Collateral are Gilts, issued by the United
Kingdom, and Treasury Bills, issued by the United States. LCH SA is
proposing to expand the list of Eligible Collateral in response to
clearing member requests and in order to harmonize permitted Eligible
Collateral with the Eligible Collateral permitted to satisfy clearing
member margin requirements at LCH SA's affiliate LCH Limited.\4\
---------------------------------------------------------------------------
\4\ LCH Limited is a recognized central counterparty supervised
in the United Kingdom by the Bank of England and a derivatives
clearing organization registered with the Commodity Futures Trading
Commission.
---------------------------------------------------------------------------
To effect this change, LCH SA is proposing to issue a new Clearing
Notice identifying the additional non-Euro Eligible Collateral, defined
as ``New Instruments'' in the Clearing Notice.\5\ LCH SA has determined
that (i) each of the non-Euro jurisdictions whose bonds have been added
have a high credit score, and (ii) each of the New Instruments has
sufficient liquidity.\6\ However, because the European Central Bank
will not convert the additional non-Euro Eligible Collateral to Euros
and LCH SA currently does not otherwise have the operational capacity
to convert the additional non-Euro Eligible Collateral to Euros, the
Clearing Notice will also provide that non-Euro Eligible Collateral may
satisfy no more than 15 percent (15%) of a Clearing Member's total
margin requirements.
---------------------------------------------------------------------------
\5\ The additional non-Euro Eligible Collateral, identified as
``New Instruments'' in the Clearing Notice, include: (i) Australian
Treasury Bills and Government Bonds; (ii) Canadian Treasury Bills
and Government Bonds; (iii) Danish Treasury Bills and Government
Bonds; (iv) Japanese Treasury Bills, Treasury Discount Bills, and
Government Bonds; (v) Norwegian Treasury Bills and Government Bonds;
(vi) Swedish Treasury Bills and Government Bonds; and (vii) Swiss
Treasury Bills and Government Bonds. The complete list of Eligible
Collateral, together with all applicable haircuts, is also found on
LCH SA's website as set out in Paragraph 3.9 of the Procedures.
\6\ Only instruments with a minimum outstanding amount of
[euro]500 million or greater will be eligible to be posted with LCH
SA.
---------------------------------------------------------------------------
In addition, the Clearing Notice will provide that the New
Instruments will not be eligible as ``Pledged Eligible Collateral''
and, therefore, may not be pledged in accordance with a pledge
agreement entered into between LCH SA
[[Page 48258]]
and a clearing member having exercised its option to transfer Eligible
Collateral to LCH SA through a Belgian law security interest.
Accordingly, the definition of ``Pledged Eligible Collateral'' in
Section 1.1.1 of the CDS Clearing Rule Book will be revised to provide
that the term ``Pledged Eligible Collateral'' means ``Eligible
Collateral as described in a Clearing Notice which is pledged in
accordance with a Pledge Agreement.''
Separately, LCH SA is proposing to revise Section 3 of its CDS
Clearing Procedures--Collateral, Variation Margin and Cash Payment, in
several places to add Clearstream Banking Luxembourg as a central
securities depository for LCH SA.\7\ Finally, as noted above, LCH SA is
also proposing to amend the Framework to take into account the expanded
list of Eligible Collateral. The Framework is one of several policies
and procedures that LCH SA maintains to manage its liquidity risk,
i.e., the risk that LCH SA will not have enough cash available, in
extreme but plausible circumstances, to settle margin payments or
delivery obligations when they become due, in particular upon the
default of a clearing member. The Framework describes the Liquidity
Stress Testing framework by which the Collateral and Liquidity Risk
Management department (``CaLRM'') of LCH Group Holdings Limited (``LCH
Group'') assures that LCH SA has enough cash available to meet any
financial obligations, both expected and unexpected, that may arise
over the liquidation period for each of the clearing services that LCH
SA offers.\8\
---------------------------------------------------------------------------
\7\ See, Paragraph 3.4(d)(i); Paragraph 3.10(a), (b) and (c);
and Paragraph 3.12(b) of Section 3 of the CDS Clearing Procedures.
\8\ In addition to its CDSClear service, LCH SA provides
clearing services in connection with cash equities and derivatives
listed for trading on Euronext (EquityClear), commodity derivatives
listed for trading on Euronext (CommodityClear), and triparty and
bilateral Repo transactions (EuroGC+ and RepoClear).
---------------------------------------------------------------------------
In particular, because the European Central Bank will not convert
the additional non-Euro Eligible Collateral to Euros and LCH SA
currently does not otherwise have the operational capacity to convert
the additional non-Euro Eligible Collateral to Euros, LCH SA is
proposing to amend Section 4.1.3 and Section 4.1.4 of the Framework to
make clear that the additional non-Euro Eligible Collateral will be
excluded from the calculation of LCH SA's liquidity resources.\9\
---------------------------------------------------------------------------
\9\ See, also, Section 5.2.1.1, Assumptions, footnotes 20 and 2;
Section 5.3.5, LCR Calculation, footnote 26; and Section 5.4.3, CC&G
LCR Calculation.
---------------------------------------------------------------------------
Unrelated to the expansion of non-Euro Eligible Collateral, LCH SA
is also proposing to amend the Framework to clarify certain Sections
and update certain tables and formula. In this regard:
<bullet> Section 4.1.1, Description of sources of liquidity, will
be revised to clarify that, with limited exceptions,\10\ LCH SA
generally receives Collateral on a full title transfer basis, which
permits LCH SA to use such collateral, to offset it with all related
claims and to consider such Collateral available for liquidity
purposes.
---------------------------------------------------------------------------
\10\ The two exceptions are: (i) Collateral deposited under the
regime of pledge; and (ii) Collateral deposited through a central
bank guarantee.
---------------------------------------------------------------------------
<bullet> Section 4.1.3, Assessment of assets' liquidity, will be
revised to clarify that Collateral deposited under the pledge regime
may be used for liquidity purposes only if the clearing member pledging
such Collateral has defaulted.\11\
---------------------------------------------------------------------------
\11\ This clarification is repeated in Section 4.1.4, Synthesis.
---------------------------------------------------------------------------
<bullet> Section 4.2.1.4, Update of the figures of the liquidity
injected in the settlement system to smooth settlement activity.
Figures are updated periodically in line with the flow observed on the
CSD and ICSD.
<bullet> Section 5.1.1, Overview of the Monitoring liquidity, will
be revised to clarify that LCH SA has a group policy that allows LCH SA
to perform an extraordinary margin call if liquidity deteriorates.
<bullet> Section 5.3.1, Liquidity Coverage Ratio (LCR), Overview,
will be revised to explain that the LCR is an internal ratio similar,
but not equivalent, to the banking metric defined in the Basel III
framework and is used to ensure compliance with EMIR.
<bullet> Section 5.3.1.1, Liquidity requirements Assumptions per
clearing services RepoClear, will be revised to update the formula for
calculating market risk in RepoClear transactions.
<bullet> Section 5.3.1.3, Cash Equity, will be revised to clarify
the treatment of settlement risk to account for early exercise of
American-style options.
<bullet> Sections 5.3.1.4, Listed derivatives, 5.3.1.5, Credit
Default Swaps, and 5.3.4, Cover 2 selection, will be revised to clarify
that the calculation of LCR liability components include spread shifts
and implied volatility shifts.
<bullet> Section 5.3.4, Clarification that for cover 2 selection
the calculation of stressed VM for Cash Equity and Listed Derivatives
includes scenario based on price shifts and implied volatility shifts.
<bullet> Section 5.3.5, A note will be added to specify that the
new non cash securities will be excluded from the LCR assets, in line
with amendment in section 4.1.3.
<bullet> Section 5.4.3, A will be added to specify that in line
with general Cover 2 LCR also for the CC&G LCR the new non euro
securities will be excluded from the liquid assets, in line amendments
in sections 4.1.3. and 5.3.5.
<bullet> Section 5.5, A duplicated sentence was deleted.
<bullet> Section 5.5.1, will be revised to clarify that Non Euro
non cash collateral are not European Central Bank eligible assets and
that when considering multiple defaults the clearing members with the
worst credit quality are assumed defaulting first.
<bullet> Appendix 3 and 5 will be updated to add of the overdraft
facility in place with Citibank that allows the CCP to source non Euro
currencies in case of liquidity needs.
2. Statutory Basis
LCH SA has determined that the Proposed Rule Change is consistent
with the requirements of Section 17A of the Act \12\ and regulations
thereunder applicable to it. Section 17A(b)(3)(F) of the Act requires,
inter alia, that the rules of a clearing agency should be designed to
``assure the safeguarding of securities and funds that are in its
custody or control or for which it is responsible.'' \13\ In addition,
Regulation 17Ad-22(e)(4)(ii) 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 to
effectively ``measure, monitor, and manage its credit exposures from
its payment, clearing and settlement processes'' to assure that it
maintains additional financial resources to enable it to cover a wide
range of stress scenarios that include the default of two participant
family clearing members that would potentially cause the largest
aggregate liquidity exposure for the CCP in extreme but plausible
market conditions.\14\ Further, Regulation 17Ad-22(e)(5) requires a CCP
to limit the assets that it accepts as collateral ``to those with low
credit, liquidity and market risks and enforce appropriately
conservative haircuts and concentration limits''.\15\
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78q-1.
\13\ 15 U.S.C. 78q-1(b)(3)(F).
\14\ 17 CFR 240.17Ad-22(e)(4)(ii).
\15\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------
The additional non-Euro Eligible Collateral that LCH SA is
proposing to permit clearing members to post with
[[Page 48259]]
LCH SA to satisfy the clearing member's margin requirements is limited
to sovereign debt that is issued by jurisdictions that have a high
credit score and subject to conservative haircuts. Further, LCH SA has
determined that non-Euro Eligible Collateral may be taken into account
to satisfy no more than 15 percent (15%) of a clearing member's total
margin requirements and, importantly, will be excluded from the
calculation of LCH SA's liquidity resources.\16\ As such, the
amendments to Section 3 of the CDS Clearing Procedures and, in
particular, the Framework continue to assure that LCH SA (i) maintains
additional financial resources to enable it to cover a wide range of
stress scenarios, and (ii) limits the assets that it accepts as
collateral to those with low credit, liquidity and market risks and
appropriately conservative haircuts and concentration limits.
Therefore, the amendments are consistent with the requirements of
Section 17A(b)(3)(F) of the Act and Regulation 17Ad-22(e)(4)(ii) and
Regulation 17Ad-22(e)(5).
---------------------------------------------------------------------------
\16\ Because non-Euro Eligible Collateral may be taken into
account to satisfy no more than 15 percent (15%) of a clearing
member's total margin requirements, LCH SA has determined that
specific concentration limits are unnecessary.
---------------------------------------------------------------------------
As noted above, Section 17A(b)(3)(F) of the Act requires, inter
alia, that the rules of a clearing agency ``assure the safeguarding of
securities and funds that are in its custody or control or for which it
is responsible.'' \17\ The amendments to the Framework unrelated to the
expansion of non-Euro Eligible Collateral clarify certain Sections and
update certain tables and formula. As such, the clarifications set out
in the amended Framework enhance LCH SA's ability to assure the
safeguarding of securities and funds that are in its custody or control
or for which it is responsible. For example, the amendments clarify
that: (i) LCH SA generally receives Collateral on a full title transfer
basis, which permits LCH SA to use such collateral, to offset it with
all related claims and to consider such Collateral available for
liquidity purposes; (ii) Collateral deposited under the pledge regime
may be used for liquidity purposes only if the clearing member pledging
such Collateral has defaulted; (iii) LCH SA is able to perform an
extraordinary margin call if liquidity deteriorates; and (iv) the
calculation of LCR liability components include spread shifts and
implied volatility shifts. The amendments to the Framework, therefore,
are consistent with the requirements of Section 17A(b)(3)(F) of the
Act.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\18\ 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 or have any impact on the competition among
central counterparties. LCH SA operates an open access model, and the
Proposed Rule Change will have no effect on this model.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
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:
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>) or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#b6c4c3dad39bd5d9dbdbd3d8c2c5f6c5d3d598d1d9c0"><span class="__cf_email__" data-cfemail="7301061f165e101c1e1e161d0700330016105d141c05">[email protected]</span></a>. Please include
File Number SR-LCH SA-2021-002 on the subject line.
Paper Comments
<bullet> 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-2021-002. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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 such filings will also be available for inspection
and copying at the principal office of LCH SA and on LCH SA's website
at <a href="https://www.lch.com/resources/rulebooks/proposed-rule-changes">https://www.lch.com/resources/rulebooks/proposed-rule-changes</a>.
All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-LCH SA-2021-002 and should
be submitted on or before September 17, 2021.
---------------------------------------------------------------------------
\19\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-18459 Filed 8-26-21; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on August 27, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.