Notice2022-09585
Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to the CDS Clearing Rule Book, Supplement, and Procedures
Primary source
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Published
May 5, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 87 (Thursday, May 5, 2022)</title>
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[Federal Register Volume 87, Number 87 (Thursday, May 5, 2022)]
[Notices]
[Pages 26792-26796]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-09585]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94821; File No. SR-LCH SA-2022-002]
Self-Regulatory Organizations; LCH SA; Order Approving Proposed
Rule Change Relating to the CDS Clearing Rule Book, Supplement, and
Procedures
April 29, 2022.
I. Introduction
On March 11, 2022, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934 (the ``Act'' or ``Exchange
Act''),\1\ and Rule 19b-4,\2\ a proposed rule change to amend the (i)
CDS Clearing Rule Book (the ``Rule Book''), (ii) CDS Clearing
Supplement (the ``Clearing Supplement''), (iii) certain CDS Clearing
Procedures (the ``Procedures''), and (iv) a Clearing Notice (``Clearing
Notice).\3\ The proposed rule change was published for comment in the
Federal Register on March 21, 2022.\4\ The Commission did not receive
comments regarding the proposed rule change. For the reasons discussed
below, the
[[Page 26793]]
Commission is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Capitalized terms used but not defined herein have the
meanings specified in the Rule Book, Clearing Supplement,
Procedures, or Clearing Notice, as applicable.
\4\ Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change to Relating to the CDS Clearing Rule Book,
Supplement, and Procedures, Exchange Act Release No. 4423 (March 15,
2022); 87 FR 16035 (March 21, 2022) (SR-LCH SA-2022-002)
(``Notice'').
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II. Description of the Proposed Rule Change
As detailed below, the changes to the Rule Book, Clearing
Supplement, Procedures, and Clearing Notice would: (i) Queue trades
received outside of the Real Time Session; (ii) backload Index
Swaptions; (iii) allow Clients to request ad-hoc compression; (iv)
revise certain provisions to conform to amended Commodity Futures Trade
Commission (``CFTC'') Rule 39.13(g)(8)(ii); \5\ (v) revise Treasury
Reports; (vi) introduce a new Trading City concept; and (vii) rename a
component of the minimum bid size formula used in default auctions.
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\5\ 17 CFR 240.39.13(g)(8)(ii).
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A. Real Time Session
The Real Time Session is the period during a Clearing Day in which
LCH SA accepts transactions for clearing. Currently Article 3.1.4.3 of
Rule Book requires that LCH SA automatically reject any Intraday
Transaction submitted outside of the Real Time Session. The proposed
rule change would revise Article 3.1.4.3 to provide instead that any
Intraday Transaction submitted outside of the Real Time Session will be
deemed to have been submitted at the Start of the Real Time Session on
the following Clearing Day. Rather than automatically rejection any
Intraday Transaction submitted outside of the Real Time Session, under
the proposed rule change LCH SA would instead queue those transactions
for submission at the Start of the Real Time Session on the following
Clearing Day. However, LCH SA would still automatically reject such
transactions if they do not successfully complete the Eligibility
Controls, Client Transaction Checks (if applicable), or the Notional
and Collateral Checks.
The proposed rule change also would give LCH SA additional
flexibility regarding the start of the Real Time Session. The Rule Book
defines the Real Time Session as the period commencing at the Start of
Real Time and ending at the End of Real Time in respect of each
Clearing Day. The Rule Book further defines the Start of Real Time as
the time specified in a Clearing Notice. Currently, Clearing Notice
2016/057 provides that the Start of Real Time for each Clearing Day is
the earlier of: (i) The time when all relevant Clearing Members have
satisfied the Morning Call and (ii) 09.05 Central European Time.
Clearing Notice 2016/057 also provides that the End of Real Time is
19.30 Central European Time on each Clearing Day.
The proposed rule change would revise Clearing Notice 2016/057. The
proposed rule change would maintain the same start and end times as
currently found in the Clearing Notice, but it would give LCH SA
flexibility to vary the start and end times. Specifically, the revised
Clearing Notice would explain that if for any reason LCH SA is not able
to start or end the Real Time Session at the specified times, or if LCH
SA is required to start or end the Real Time Session other than at
those times, then LCH SA may change the Start of Real Time and/or the
End of Real Time. In that case, LCH SA will communicate the times to
Clearing Members and the Start of Real Time and/or the End of Real Time
will be the time when LCH SA sends the relevant notification of the
opening or the closing (as applicable) of the Real Time Session.
Finally, the proposed rule change would amend Section 5.5(a) of the
Procedures to replace a reference to the specific start and end times
of the Real Time Session with a general reference to the Real Time
Session. This change would resolve a potential conflict from Section
5.5(a) of the Procedures, which could have arisen if LCH SA diverged
from the times specified in the Clearing Notice.
B. Backload Index Swaptions
Currently LCH SA allows Clearing Members and Clients to backload
CDS transactions, but not Index Swaptions (meaning options to purchase
index CDS). Backloading is the process of clearing a transaction that
the buyer and seller have held for some time after completion of the
trade without submitting it to clearing. The proposed rule change would
extend the backloading process to allow Clearing Members and Clients to
backload Index Swaptions, in addition to CDS.
To do so, the proposed rule change would amend the definition of CM
Backloading Transaction and Client Backloading Transaction. The
proposed rule change would add Index Swaptions to both definitions.
These changes would allow a Clearing Member, in the case of a CM
Backloading Transaction, and a Client, in the case of a Client
Backloading Transaction, to backload Index Swaptions.
The proposed rule change also would make a conforming change to the
Procedures. In Section 5.2(c), the proposed rule change would specify
that either a CDS or an Index Swaption may be submitted for clearing
through the Daily Backloading Cycle.
C. Ad-Hoc Compression Requests
Compression is the process of reducing the number of trades in
portfolios by offsetting positions. It simplifies the management of
positions and reduces the capital that Clearing Members and Clients
need to hold against their positions. LCH SA provides compression
automatically or through ad-hoc requests. Currently, LCH SA allows
Clearing Members to request compression, either for their own
transactions or for transactions of their Clients. Clearing Members may
request compression ad-hoc or may request automatic compression in
certain circumstances.
The proposed rule change would allow Clients to submit requests for
ad-hoc compression directly to LCH SA, rather than having Clearing
Members submit such requests on their behalf. To do so, the proposed
rule change would amend Articles 3.3.1.1, 3.3.1.2, 3.3.1.4 and 3.3.1.5
of the Rule Book to allow Clients to submit ad-hoc compression
requests. The proposed rule change also would make conforming
amendments in Section 5 of the Procedures and the Clearing Supplement.
These changes would allow Clients to submit compression requests on an
ad-hoc basis only; Clients would not be able to request automatic
compression.
In addition to these changes, the proposed rule change would amend
Section 5.5(a) of the Procedures to make certain changes to the
operation of compression requests. Under the proposed rule change, the
Ad-Hoc Compression Order File would no longer define the resulting
Clearing Transaction, as is currently specified. Moreover, Section
5.5(a) currently provides that a Clearing Notice will specify how to
submit the Ad-Hoc Compression Order File. The proposed rule change
would eliminate the use of a Clearing Notice and provide instead that
LCH SA's website will specify the means of submission. LCH SA is making
this particular change because Clearing Members and Clients will submit
their requests through the LCH Portal on LCH SA's website.
D. Amended CFTC Rule 39.13(g)(8)(ii)
Currently Section 2.2(e) of the Procedures requires that an FCM/BD
Clearing Member collect additional Collateral from an FCM/BD Client in
respect of a Client Cleared Transaction in an amount that is 10% above
what LCH SA would normally require for such Client Cleared Transaction.
This requirement applies to any Client Cleared Transaction registered
in a FCM/BD Client Trade Account that is of
[[Page 26794]]
a ``non-hedging nature'', as such term is used in Part 39 of the CFTC
regulations.
LCH SA represents that this requirement was intended to comply with
CFTC Rule 39.13(g)(8)(ii).\6\ LCH SA further represents that it needs
to update Section 2.2(e) to comply with a recent amendment to the CFTC
rule.\7\
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\6\ 17 CFR 240.39.13(g)(8)(ii); Notice, 87 FR at 16037.
\7\ Notice, 87 FR at 16037.
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As amended, Section 2.2(e) would no longer impose a single, uniform
additional margin requirement. Rather, FCM/BD Clearing Members would
identify categories of FCM/BD Clients with heightened risk profiles and
collect additional Collateral from the FCM/BD Clients at a level that
exceeds what LCH SA would normally require, commensurate with the risk
presented in each account.
In addition to the amendment to Section 2.2(e), the proposed rule
change would amend Article 6.2.6.1 of the Rule Book. As amended,
Article 6.2.6.1 would refer to FCM/BD Clients with heightened risk
profiles, as required in Section 2 of the Procedures.
E. Treasury Reports
The proposed rule change would amend Section 5.16 of the
Procedures, which detail certain treasury collateral management
reports. The amendments would re-name the reports, update certain
details, and make the reports machine-readable.
F. Trading City
The proposed rule change would introduce to the Rule Book the new
concept of a Trading City. The Trading City would be the city in which
a CDS or Index Swaption is typically traded, as determined by LCH SA
and published on the LCH website.
Use of the Trading City concept would allow LCH SA to tie certain
deadlines and requirements to the specific calendar and business hours
of that Trading City. For example, under Section 5.18.5 of the
Procedures, LCH SA requires Clearing Members to enter into transactions
with one another in certain circumstances. LCH SA requires such
transactions as a way of validating the prices that Clearing Members
submit. Currently, the timelines associated with such transactions are
set out in Central European Time for products denominated in Euro and
New York City local time for products denominated in US dollar.
Under the proposed rule change, these deadlines would instead refer
to the local time associated with the Trading City for the product.
Thus, to the extent that LCH SA clears CDS or Index Swaptions typically
traded in cities outside of Central European Time or New York City
local time, use of the Trading City concept would allow these deadlines
to conform to the local time zones where those products are typically
traded.
The proposed rule change therefore would add a definition to the
Rule Book for Trading City and the associated terms Latest Contributed
Price Time and Latest Cross Trade Execution Time. The proposed rule
change also would amend Section 5.18 of the Procedures to incorporate
these terms.
G. Clearing Day
The proposed rule change would amend the definition of Clearing Day
in the Rule Book. Currently, the Rule Book defines Clearing Day as any
day that is: (i) A Business Day and (ii) a day on which commercial
banks in London are open for business. The Rule Book defines the term
Business Day as any day that is not a holiday in the TARGET2 calendar.
The proposed rule change would amend the Rule Book so that the term
Clearing Day would instead mean any day on which LCH SA is open for
business as set forth on the website and in member notifications from
time to time. This change therefore would give LCH SA flexibility to
define its Clearing Day, rather than relying on the calendars for
TARGET2 and London commercial banks.
H. Minimum Bid Size
Finally, the proposed rule change would amend Appendix 1 of the
Rule Book to correct the description of a term used to determine the
minimum bid size in default auctions. Currently, LCH SA calculates the
minimum bid size using a formula set out in Appendix 1. The formula
includes a variable that is currently known as the Minimum Bid Size
Denominator. The proposed rule change would change the name of this
variable to the Minimum Bid Size Multiplier. LCH SA maintains that this
variable is actually a multiplier and not a denominator, so renaming
the variable would make the formula more clear and consistent.\8\
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\8\ Notice, 87 FR at 16037.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\9\ For the reasons given below, the Commission finds that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act,\10\ and Rules 17Ad-22(e)(13) and (e)(17) thereunder.\11\
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\9\ 15 U.S.C. 78s(b)(2)(C).
\10\ 15 U.S.C. 78q-1(b)(3)(F).
\11\ 17 CFR 240.17Ad-22(e)(13) and 17Ad-22(e)(17).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of LCH SA be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, and, in
general, to protect investors and the public interest.\12\ Based on its
review of the record, and for the reasons discussed below, the
Commission believes the proposed changes are consistent with the
promotion of the prompt and accurate clearance and settlement of
transactions at LCH SA.
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\12\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission believes that the proposed changes to LCH SA's real
time session would promote the prompt and accurate clearance and
settlement of transactions at LCH SA. Queuing Intraday Transactions
submitted outside of the Real Time Session for submission at the Start
of the Real Time Session on the following Clearing Day, rather than
automatically rejecting those transactions, would allow Clearing
Members to submit transactions outside of the Real Time Session, thus
expanding the period of time in which Clearing Members can submit
transactions to LCH SA. The Commission believes that doing so could
provide Clearing Members more opportunity to submit transactions and
would therefore promote the submission of Intraday Transactions to LCH
SA, consistent with the promotion of the prompt and accurate clearance
and settlement of transactions. Moreover, the Commission believes that
giving LCH SA flexibility to vary the start and end times of the Real
Time Session should help to ensure that LCH SA is able to operate the
Real Time Session even in the face of operational delays, and therefore
clear and settle transactions. Finally, the Commission believes that
amending Section 5.5(a) of the Procedures to replace a reference to the
specific start and end times of the Real Time Session with a general
reference to the Real Time Session should ensure LCH SA is able to vary
[[Page 26795]]
the start and end of the Real Time Session as needed.
The Commission believes that the proposed changes to allow Clearing
Members and Clients to backload Index Swaptions also should promote the
prompt and accurate clearance and settlement of transactions at LCH SA.
The Commission believes that allowing Clearing Members and Clients to
submit Index Swaptions as part of the Daily Backloading Cycle should
give Clearing Members and Clients an opportunity of clearing Index
Swaptions that could not be submitted during the intraday clearing
process. The Commission believes that this should overall increase the
availability of clearing services for Index Swaptions at LCH SA, and
the Commission believes this should promote the prompt and accurate
clearance and settlement of these transactions.
The Commission further believes that the proposed changes to permit
Clients to submit ad-hoc compression requests directly to LCH SA should
promote the prompt and accurate clearance and settlement of
transactions at LCH SA. As discussed above, compression simplifies the
management of positions and reduces capital needs by offsetting
positions. The Commissions believes that compression should therefore
make clearing transactions through LCH SA more efficient and
attractive. The Commission believes that allowing Clients to submit ad-
hoc compression requests directly to LCH SA should improve the
efficiency of such compression, by eliminating the need to send
requests through Clearing Members. The Commission believes this change
should therefore promote the use of compression by Clients. The
Commission similarly believes that the amendments to Section 5.5(a) of
the Procedures discussed above should make compression more efficient
by allowing Clearing Members and Clients to submit their compression
requests through the LCH Portal. The Commission believes that all of
these changes, taken together, should promote the use of compression at
LCH SA, and by doing so should promote the prompt and accurate
clearance and settlement of transactions at LCH SA.
The Commission believes that the proposed changes to conform to
amended CFTC Rule 39.13(g)(8)(ii) \13\ should, in general, be
consistent with the protection of investors and the public interest.
The Commission believes that these changes, as represented by LCH
SA,\14\ should help ensure that LCH SA complies with amended CFTC Rule
39.13(g)(8)(ii).\15\ The Commission believes that LCH SA's compliance
with CFTC's regulations and other legal requirements is generally
consistent with the protection of investors and the public interest.
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\13\ 17 CFR 240.39.13(g)(8)(ii).
\14\ Notice, 87 FR at 16037.
\15\ 17 CFR 240.39.13(g)(8)(ii).
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The Commission believes that the proposed changes to rename and
update the Treasury Reports also should promote the prompt and accurate
clearance and settlement of transactions at LCH SA. Among other things,
the updates would make the reports machine-readable. The Commission
believes doing so should allow LCH SA to use the reports more
efficiently, and that this change therefore should increase the overall
efficiency of LCH SA's clearance and settlement operations and should
thereby promote the prompt and accurate clearance and settlement of
transactions at LCH SA.
The Commission believes the new Trading City concept also should
promote the prompt and accurate clearance and settlement of
transactions at LCH SA. The Commission believes that, as discussed
above, use of the Trading City concept should allow LCH SA to tie
certain deadlines and requirements to the specific calendar and
business hours of that Trading City. Doing so should make it easier for
LCH SA to introduce for clearing products that typically trade in
cities outside of Central European Time or New York City local time.
The Commission therefore believes that this change should facilitate
LCH SA's ability to clear additional products and transactions,
promoting the prompt and accurate clearance and settlement of
transactions at LCH SA.
The Commission further believes that providing LCH SA additional
flexibility with respect to the definition of Clearing Day should
promote the prompt and accurate clearance and settlement of
transactions at LCH SA. As discussed above, the Rule Book currently
defines Clearing Day with reference to the TARGET2 Calendar and
business days of London commercial banks, both of which are outside the
control of LCH SA. The Commission believes changing the definition of
Clearing Day to one that is set by LCH SA should therefore give it
control over its Clearing Days. The Commission believes this change
therefore should promote the overall reliability of LCH SA's operations
and in doing so should promote the prompt and accurate clearance and
settlement of transactions at LCH SA.
Finally, the Commission believes that correcting the description of
the Minimum Bid Size Multiplier should help to ensure the accuracy and
clarity of LCH SA's default auction process. The Commission further
believes that a more accurate and clear default auction process should
help to ensure that LCH SA is able to manage a Clearing Member default
through an auction and that LCH SA is able to continue providing
clearing services in the face of such a default. The Commission
therefore believes this change would promote the prompt and accurate
clearance and settlement of transactions at LCH SA.
Therefore, the Commission finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act.\16\
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\16\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(13)
Rule 17Ad-22(e)(13) requires that LCH SA establish, implement,
maintain and enforce written policies and procedures reasonably
designed to ensure LCH SA has the authority and operational capacity to
take timely action to contain losses and liquidity demands and continue
to meet its obligations by, at a minimum, requiring LCH SA's
participants and, when practicable, other stakeholders to participate
in the testing and review of its default procedures, including any
close-out procedures, at least annually and following material changes
thereto.\17\ The Commission believes that renaming the Minimum Bid Size
Multiplier should help to ensure the accuracy and clarity of LCH SA's
default auction process. The Commission believes that a more accurate
and clear default auction process should help to ensure that LCH SA has
the authority and operational capacity to take timely action to contain
losses in the case of a Clearing Member default. Therefore, the
Commission finds that this aspect of the proposed rule change is
consistent with Rule 17Ad-22(e)(13).\18\
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\17\ 17 CFR 240.17Ad-22(e)(13).
\18\ 17 CFR 240.17Ad-22(e)(13).
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C. Consistency With Rule 17Ad-22(e)(17)
Rule 17Ad-22(e)(17) requires that LCH SA establish, implement,
maintain and enforce written policies and procedures reasonably
designed to manage its operational risks by, among other things,
ensuring that systems have a high degree of resiliency and operational
reliability.\19\
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\19\ 17 CFR 240.17Ad-22(e)(17).
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The Commission believes that a number of the changes discussed
above should help to ensure that LCH SA's systems have a high degree of
resiliency
[[Page 26796]]
and operational reliability. For example, the Commission believes
queuing Intraday Transactions submitted outside of the Real Time
Session for submission at the Start of the Real Time Session on the
following Clearing Day should allow Clearing Members to submit
transactions whenever they are best able to do so. Thus, if a Clearing
Member is not able to submit an Intraday Transaction during the Real
Time Session due to operational issues, the Clearing Member could still
submit after the end of the Real Time Session if it is able to do so,
with the knowledge that LCH SA would queue the transaction for the
submission at the Start of the Real Time Session on the following
Clearing Day. The Commission thus believes this change should increase
the availability and reliability of LCH SA's clearing operations.
Moreover, permitting Clients to submit ad-hoc compression requests
directly to LCH SA should help to ensure that LCH receives such
requests even when Clearing Members are unable to transmit them on
behalf of their Clients, and the Commission believes this should
increase the operational reliability of this aspect of LCH SA's
operations. Similarly, the proposed changes to re-name and update the
Treasury Reports would make the reports machine-readable, and the
Commission believes this should help to ensure that such reports are
easier to use and operationally reliable.
Finally, the Commission believes the new Trading City concept and
the change to the definition of Clearing Day should help to increase
the resiliency of LCH SA's operations. The Trading City concept would
allow LCH SA to tailor certain deadlines and requirements, such as
those related to end-of-day price submissions, to the time zone where
Clearing Members typically trade. The Commission believes this should
help increase the resiliency of LCH SA's operations by tying deadlines
and requirements to the local time zones in which Clearing Members are
operating, rather than forcing Clearing Members to operate according to
European Central or New York local time. Similarly, the Commission
believes that providing LCH SA additional flexibility with respect to
the definition of Clearing Day should eliminate the reliance on the
TARGET2 Calendar and the operations of London commercial banks. The
Commission believes this change should therefore help increase the
resiliency of LCH SA's operations by giving LCH SA the ability to
determine its Clearing Days based on its own schedule and operations.
Therefore, the Commission finds that these aspects of the proposed
rule change are consistent with Rule 17Ad-22(e)(17).\20\
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\20\ 17 CFR 240.17Ad-22(e)(17).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A(b)(3)(F) of the
Act,\21\ and Rules 17Ad-22(e)(13) and (e)(17) thereunder.\22\
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\21\ 15 U.S.C. 78q-1(b)(3)(F).
\22\ 17 CFR 240.17Ad-22(e)(13) and (e)(17).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\23\ that the proposed rule change (SR-LCH SA-2022-002) be, and hereby
is, approved.\24\
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\23\ 15 U.S.C. 78s(b)(2).
\24\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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J. Matthew,
DeLesDernier Assistant Secretary.
[FR Doc. 2022-09585 Filed 5-4-22; 8:45 am]
BILLING CODE 8011-01-P
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