Notice2022-10613
Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to the Restructuring Notification Process for Swaptions
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Published
May 18, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 96 (Wednesday, May 18, 2022)</title>
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[Federal Register Volume 87, Number 96 (Wednesday, May 18, 2022)]
[Notices]
[Pages 30318-30321]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-10613]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94898; File No. SR-LCH SA-2022-003]
Self-Regulatory Organizations; LCH SA; Order Approving Proposed
Rule Change Relating to the Restructuring Notification Process for
Swaptions
May 12, 2022.
I. Introduction
On March 18, 2022, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend its CDS Clearing
Supplement (the ``Clearing Supplement'') and certain CDS Clearing
Procedures (the ``Procedures'').\3\ The proposed rule change was
published for comment in the Federal Register on March 30, 2022.\4\ The
Commission did not receive comments regarding the proposed rule change.
For the reasons discussed below, the 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, or
Procedures, as applicable.
\4\ Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change to Relating to the Restructuring Notification
Process for Swaptions, Exchange Act Release No. 94505 (March 24,
2022); 87 FR 18416 (March 30, 2022) (SR-LCH SA-2022-003)
(``Notice'').
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II. Description of the Proposed Rule Change
As detailed below, the amendments to the Clearing Supplement and
the Procedures would (A) establish a new delegation requirement for
Clearing Members in the case of a restructuring affecting an option to
purchase Index CDS (an ``Index Swaption''); (B) limit LCH's liability
to Clearing Members in light of this new requirement; (C) update
certain provisions related to the exercise of Index Swaptions; (D)
require Clearing Members and Clients consent to disclosure of their
contact information in connection with the restructuring or exercise of
Index Swaptions; and (E) correct typographical errors.
A. New Delegation Requirement
The proposed rule change would require that Clearing Members
delegate to their Clients the authority to send and receive certain
notices on their behalf. This new requirement would apply to a
[[Page 30319]]
Client's cleared transaction in an Index Swaption where the underlying
Index CDS is being restructured due to an event affecting one of its
reference entities. Generally, this delegation requirement would mirror
the delegation mechanism that currently applies to Clients in
exercising their Index Swaptions.\5\
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\5\ See Self-Regulatory Organizations; LCH SA; Order Approving
Proposed Rule Change Relating to Implementation of Electronic
Exercise Platform (Oct. 11, 2018), Exchange Act Release No. 84410
(Oct. 17, 2018) (SR-LCH SA-2018-004).
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To establish this new requirement, the proposed rule change would
amend Part C of the Clearing Supplement and Appendix VIII thereto. Part
C sets out the terms applicable to a cleared Index Swaption transaction
between a Clearing Member and LCH SA, while Appendix VIII sets out the
terms applicable to the corresponding Index Swaption transaction
between that Clearing Member and its Client. For example, the proposed
rule change would add to Part C new defined terms, such as
Restructuring Delegation Beneficiary (which would mean a Client
designated by a Clearing Member to send and receive Credit Event
Notices and Notices to Exercise Movement Option on its behalf). The
proposed rule change similarly would revise existing defined terms,
revise existing references to conform to new defined terms or changes
in existing defined terms, and revise existing references to take into
account the re-numbering of sections.
In addition to these revisions to defined terms and references, the
proposed rule change would set out the delegation requirement in a new
Section 5.7 of Part C. This new section would apply to Client Cleared
Transactions in Index Swaptions that are being restructured, and it
would require Clearing Members designate their Clients to act on their
behalf with respect to sending and receiving certain notices related to
the restructuring. After a Clearing Member designates its Client, LCH
SA would deem any delivery or receipt of a restructuring notice by the
designated Client to constitute the delivery or receipt of a valid
notice by the Clearing Member. LCH SA would treat any reference in the
Clearing Supplement to a notice being delivered to or by a Clearing
Member accordingly. This new section would generally mirror the
provisions of current Section 6.4, which requires that Clearing Members
designate their relevant Clients to act on their behalf with respect to
exercising and abandoning Index Swaptions that are Client Cleared
Transactions. A Clearing Member could withdraw the designation as long
as there is no Swaption Restructuring Cleared Transaction registered in
the Client Trade Account of the relevant Client.\6\
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\6\ The proposed rule change would make a similar change to
Section 6.4, which specifies when a Clearing Member may withdraw a
delegation related to exercise of Index Swaptions.
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The proposed rule change would make similar amendments to the
provisions found in Appendix VIII of Part C, which must be incorporated
into an Index Swaption transaction between a Clearing Member and its
Client (collectively, the ``Mandatory Provisions''). For example, the
proposed rule change would replace current Mandatory Provision 7 with a
new provision that would require a Clearing Member to designate its
Client in accordance with new Section 5.7 of Part C discussed above.
New Mandatory Provision 7 also would require Clients to deliver Credit
Event Notices or Notices to Exercise Movement Option directly to its
counterparty, and would explain what would happen if the Client does
not provide the notification within the required timeframe.
In addition to the changes to Part C and Appendix VIII of the
Clearing Supplement, the proposed rule change would amend Section 5 of
the Procedures to specify how Clearing Members would notify LCH SA of
the delegation. The proposed rule change would do so by amending 5.19,
which currently sets out the process for delegations related to
exercise of Index Swaptions, so that it applies to delegations related
to restructuring as well. Under amended Section 5.19, a Clearing Member
must notify LCH SA of the delegation by sending a completed
notification form, and a Clearing Member may withdraw the delegation
only if no Swaption Restructuring Cleared Transaction is registered in
the Client Trade Account of the relevant Restructuring Delegation
Beneficiary.
B. Limitation of Liability
To complement the new delegation requirement, the proposed change
would add new Section 13(c) to Part C of the Clearing Supplement. Under
new Section 13(c), LCH SA would have no liability to a Clearing Member
for any loss, cost or expense arising out of any failure of a Client to
perform its obligations or in connection with the delivery of notices
related to a restructuring. Section 13(c) would mirror existing Section
13(b), under which LCH SA has no liability to a Clearing Member for any
loss, cost or expense arising out of any failure of a Client to perform
its obligations in connection with a delegation of authority to
exercise Index Swaptions.
C. Exercise Provisions
Unrelated to the new delegation requirement, the proposed rule
change also would amend certain existing provisions found in Section 6
of Part C. Section 6 of Part C describes the process for exercising
Index Swaptions and the sending and receiving of notices related to
exercise. The purchaser of an Index Swaption exercises it through an
Exercise Matched Pair, which consists of a buyer and seller paired by
LCH SA. Section 6.1(a) requires that, upon the creation of an Exercise
Matched Pair, LCH SA notify the buyer and seller, but it prohibits LCH
SA from providing any detail with respect to their identities. The
proposed rule change would delete this prohibition as duplicative in
light of existing Section 6.1(b). That section dictates the
circumstances in which LCH SA may provide the buyer and seller details
about each other's identity. LCH SA may only do so through a Protected
Exercise Matched Pair Report, and it may only provide access to this
report when there is a failure of LCH SA's electronic platform for
exercising Index Swaptions. Finally, the proposed rule change would add
at the end of 6.1 a new paragraph to state that a Clearing Member
expressly consents to the disclosure of its information in accordance
with this section through the Protected Exercise Matched Pair Report.
Section 6.5 describes the actions that LCH SA would take when there
is a failure of LCH SA's electronic platform for exercising Index
Swaptions. As mentioned above, where there is such a failure, LCH SA
would provide access to the Protected Exercise Matched Pair Report. The
proposed rule change would move from Section 6.1 to Section 6.5
language that requires LCH SA to provide contact information to Index
Swaption buyers and sellers comprised within an Exercise Matched Pair.
As a result of this change, where there is a failure of LCH SA's
electronic platform for exercising Index Swaptions, LCH SA would
provide each Clearing Member (or Client to whom the Clearing Member has
delegated authority to exercise) with the other's address, fax number,
telephone number, and contact email. LCH SA would provide this
information in addition to providing access to the Protected Exercise
Matched Pair Report. Finally, as part of this change, the proposed rule
change would amend references to the Protected Exercise Matched Pair
Report throughout Part C. LCH is making this change to accommodate
differences in how it
[[Page 30320]]
stores Clearing Members' and Clients' contact information as required
by applicable law.
D. Consents to Disclosure of Contact Information
As part of the amendments to the Clearing Supplement, the proposed
rule change also would add provisions that state expressly that
Clearing Members and Clients consent to the disclosure of their contact
information in connection with providing notices related to the
restructuring of Index Swaptions and the exercise of Index Swaptions.
These provisions would help to ensure that LCH SA is able to disclose
this information under applicable law.
E. Correcting Typographical Errors
Finally, the proposed rule change would correct typographical
errors in Part C of the Clearing Supplement and the Mandatory
Provisions found in Appendix VIII.
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.\7\ For the reasons discussed below, the Commission finds
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \8\ and Rule 17Ad-22(e)(17) thereunder.\9\
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\7\ 15 U.S.C. 78s(b)(2)(C).
\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ 17 CFR 240.17Ad-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.\10\
Based on its review of the record, and for the reasons discussed below,
the Commission believes the proposed changes to the Clearing Supplement
and the Procedures are consistent with the promotion of the prompt and
accurate clearance and settlement of transactions at LCH SA.
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission believes that the changes to implement the new
delegation requirement, as discussed in Part II.A above, should promote
the prompt and accurate clearance and settlement of Index Swaptions at
LCH SA. Under the delegation requirement, a Client would send and
receive notices related to a restructuring affecting one of its Index
Swaptions directly, rather than relying on its Clearing Member. The
Commission believes these changes therefore would reduce the
operational burden on Clearing Members in clearing Index Swaptions for
their Clients. The Commission believes reducing the operational burden
on Clearing Members in clearing Index Swaptions for their Clients could
in turn encourage more Clearing Members to offer such clearing service
to their Clients, and therefore could promote the prompt and accurate
clearance and settlement of Index Swaptions at LCH SA.
For similar reasons, the Commission believes that the changes
discussed in Parts II.B and II.D above should promote the prompt and
accurate clearance and settlement of Index Swaptions at LCH SA. The
Commission believes that limiting LCH SA's liability in connection with
the new delegation requirement should reduce the risk to LCH SA in
relying on Clients to satisfy their obligations under the delegation.
The Commission believes that doing so should enable LCH SA to implement
the new delegation requirement. The Commission similarly believes that
having Clearing Members and Clients consent to the disclosure of their
contact information in connection with providing notices related to the
restructuring of Index Swaptions should enable LCH SA to implement the
new delegation requirement. The Commission believes such consent would
enable LCH SA to disclose the contact information and that LCH SA may
need to disclose such information in order for Clients to send notices
related to a restructuring directly to other Clearing Members and
Clients. The Commission therefore believes that both of these changes
should facilitate LCH SA's ability to implement the new delegation
requirement, which, for the reasons discussed above, the Commission
believes should promote the prompt and accurate clearance and
settlement of Index Swaptions transactions at LCH SA.
The Commission further believes that the changes related to the
exercise of Index Swaptions, including having Clearing Members and
Clients consent to the disclosure of their contact information in
connection with exercise, as discussed in Parts II.C and II.D above,
should promote the prompt ad accurate clearance and settlement Index
Swaptions at LCH SA. The Commission believes that the changes described
in Part II.C above would help to clarify the content of the Exercise
Matched Pair Report and that having Clearing Members and Clients
consent to the disclosure of their contact information, as described in
Part II.D above, should enable LCH SA to provide contact information,
including through the Exercise Matched Pair Report. The Commission
believes that where there is a failure of LCH SA's electronic platform
for exercising Index Swaptions, Clearing Members and Clients could use
the information in the Exercise Matched Pair Report, and the other
contract information provided by LCH SA, to send notices related to
exercise. The Commission therefore believes these changes should help
to ensure that buyers of Index Swaptions are able to exercise their
positions even where there is a failure of LCH SA's electronic exercise
platform. The Commission believes that doing so should promote the
prompt and accurate clearance and settlement of Index Swaptions at LCH
SA.
Finally, the Commission believes that correcting typographical
errors, as discussed in Part II.E above, should help to ensure the
clarity and accuracy of the Clearing Supplement, and therefore should
promote the prompt and accurate clearance and settlement of
transactions using the Clearing Supplement.
Therefore, the Commission finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act.\11\
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
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B. 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 operational
reliability.\12\ The Commission believes that the new delegation
requirement would increase the resiliency of the restructuring process
for Index Swaptions. The Commission believes that making each Client
responsible for sending and receiving notices related to exercise would
delegate to Clients a responsibility that is currently concentrated in
Clearing Members. Each Client would send and receive notices, rather
than one Clearing Member bearing this responsibility for all of its
Clients. As a result, the Commission believes this aspect of the
proposed rule change should reduce the potential disruption that could
result from a
[[Page 30321]]
Clearing Member's operational failure, and therefore should increase
the operational reliability of the restructuring process for Index
Swaptions.
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\12\ 17 CFR 240.17Ad-22(e)(17).
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The Commission further believes that the changes discussed in Parts
II.C and II.D above should enable LCH SA to provide contact
information, including through the Exercise Matched Pair Report, where
there is a failure of LCH SA's electronic exercise platform. The
Commission therefore believes that these changes should help to ensure
that buyers of Index Swaptions are able to exercise their positions
even where there is a failure of LCH SA's electronic exercise platform,
and accordingly, these aspects of the proposed rule should increase the
operational reliability of the exercise process for Index Swaptions.
Therefore, the Commission finds that these aspects of the proposed
rule change are consistent with Rule 17Ad-22(e)(17).\13\
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\13\ 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 \14\ and Rule 17Ad-22(e)(17) thereunder.\15\
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\14\ 15 U.S.C. 78q-1(b)(3)(F).
\15\ 17 CFR 240.17Ad-22(e)(17).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\16\ that the proposed rule change (SR-LCH SA-2022-003) be, and hereby
is, approved.\17\
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\16\ 15 U.S.C. 78s(b)(2).
\17\ 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.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10613 Filed 5-17-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on May 18, 2022.
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