Notice2022-27052
Self-Regulatory Organizations; LCH SA; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 2, Relating to Providing Clearing Services for Additional Index and Single Name Credit Default Swaps
Primary source
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Published
December 14, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 239 (Wednesday, December 14, 2022)</title>
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[Federal Register Volume 87, Number 239 (Wednesday, December 14, 2022)]
[Notices]
[Pages 76519-76523]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-27052]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96468; File No. SR-LCH SA-2022-007]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Amendment No. 2 and Order Granting Accelerated Approval of Proposed
Rule Change, as Modified by Amendment No. 2, Relating to Providing
Clearing Services for Additional Index and Single Name Credit Default
Swaps
December 8, 2022.
I. Introduction
On August 29, 2022, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-
4,\2\ a proposed rule change to provide clearing services for the
iTraxx Asia ex Japan Index, the Markit CDX Emerging Markets
(``CDX.EM'') Index and the single name credit default swaps (``CDS'')
that comprise each index, as well as a list of additional sovereign
single name CDS which do not constitute an index (together, the ``New
Products''). The proposed rule change was published for comment in the
Federal Register on September 12, 2022.\3\ On October 25, 2022, the
Commission designated a longer period within which to take action on
the proposed rule change, until December 11, 2022.\4\ The Commission
did not receive comments regarding the proposed rule change. On
December 2, 2022, LCH SA filed Amendment No. 1 to the proposed rule
change. On December 7, 2022, LCH SA filed Amendment No. 2 to the
proposed rule change, which replaced and superseded in their entirety
both the original filing and Amendment No. 1.\5\ The Commission is
publishing this notice to solicit comments on Amendment No. 2 from
interested persons and is approving the proposed rule change, as
modified by Amendment No. 2 (hereinafter, ``proposed rule change''), on
an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to Providing Clearing Services for
Additional Index and Single Name CDS, Exchange Act Release No. 95674
(Sep. 6, 2022); 87 FR 55872 (Sep. 12, 2022) (SR-LCH SA-2022-007)
(``Notice'').
\4\ Self-Regulatory Organizations; LCH SA; Notice of Designation
of Longer Period for Commission Action on Proposed Rule Relating To
Providing Clearing Services for Additional Index and Single Name
CDS, Exchange Act Release No. 96148 (Oct. 25, 2022); 87 FR 65629
(Oct. 31, 2022) (SR-LCH SA-2022-007).
\5\ Amendment No. 2 amends confidential Exhibit 5C, LCH SA
Methodology Services Reference Guide: CDS Margin Framework (V3.14),
to correct a non-substantive formatting error. Amendment No. 2 also
submits three exhibits to the proposed rule change, each as an
Exhibit 3. In a separate correspondence that accompanied Amendment
No. 2, LCH SA requested confidential treatment for these exhibits
(together, ``Confidential Exhibit 3''). Confidential Exhibit 3
reproduces certain information that LCH SA submitted to the
Commission in support of the proposed rule change.
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II. Description of the Proposed Rule Change
To accommodate clearing of the New Products, the proposed rule
change would amend (A) the CDS Clearing Supplement (the ``Clearing
Supplement''); (B) the Methodology Services Reference Guide: Credit
Default Swap Margin Framework (``CDSClear Risk Methodology''); and (C)
the CDS Default Fund Methodology (Guide Stress Testing) (``CDSClear
Default Fund Methodology'').
Unrelated to clearing of the New Products, the proposed rule change
also would make two other amendments to the Clearing Supplement and
would make a correction to Section 2 of the LCH SA CDS Clearing
Procedures (Margin, NPV Payment and Price Alignment) (the ``CDS
Clearing Procedures'').\6\
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\6\ This description is substantially excerpted from the Notice,
87 FR at 55872. Capitalized terms used but not defined herein have
the meanings specified in the LCH SA CDS Clearing Rule Book,
Clearing Supplement, CDSClear Risk Methodology, CDSClear Default
Fund Methodology, or the CDS Clearing Procedures, as applicable.
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A. Clearing Supplement
The proposed rule change would amend certain defined terms in the
Clearing Supplement and amend the Index Cleared Transaction
Confirmation to accommodate clearing of the New Products. The proposed
rule change also would amend Section 4, which relates to certain events
affecting reference entities, and Section 6, which relates to physical
settlement, to apply to the New Products.
With respect to defined terms, the proposed amendments would take
into account the New Products. For example, the proposed rule change
would revise the definitions of ``Compression Cut-off Date'' and
``Novation Cut-off Date'' to include two additional credit events.
These credit events are the ``Obligation Acceleration Credit Event''
and the ``Repudiation/Moratorium Credit Event.'' While both of these
Credit Events are standard for the 2014 Credit Derivatives Definitions
published by the
[[Page 76520]]
International Swaps and Derivatives Association (``ISDA''), they do not
apply to any of the products that LCH SA currently clears. These Credit
Events do apply to certain sovereign CDS that are included in the New
Products, however, so the proposed rule change would add these Credit
Events to accommodate clearing of these products.
For a similar reason, the proposed rule change would amend the term
``Transaction Business Day.'' Currently, ``Transaction Business Day''
means a Business Day, as defined in the Index Cleared Transaction
Confirmation or the Single Name Cleared Transaction Confirmation, as
applicable. The proposed rule change would add to this definition a
qualification. If the relevant Index Cleared Transaction Confirmation
or Single Name Cleared Transaction Confirmation defines such term
differently depending upon its use, then such distinction shall also
apply to the use of the term ``Transaction Business Day'' in the terms
of the cleared transaction. The proposed rule change would add this
provision to account for the situation where such confirmations could
include different definitions of the term ``Business Day'' depending on
the circumstances. This would apply, for example, when LCH SA clears
certain of the New Products related to the iTraxx Asia ex Japan index.
The proposed rule change would amend the definition of ``Index
Cleared Transaction Confirmation'' as well as how LCH SA modifies the
Index Cleared Transaction Confirmation when it accepts a transaction
for clearing. The Index Cleared Transaction Confirmation is the
document that sets out the contractual terms that govern a transaction
in an index CDS. The Index Cleared Transaction Confirmation in turn
incorporates certain standard terms set out in a document known as a
standard terms supplement, and the content of the standard terms
supplement varies depending on the type of index involved and the
series number of the index.
In LCH SA's Clearing Supplement, the defined term ``Index Cleared
Transaction Confirmation'' determines which standard terms supplement
applies to a transaction based on the index type and series number. For
example, for a transaction in Markit iTraxx[supreg] Europe Index Series
22 or above, the Index Cleared Transaction Confirmation is the form of
confirmation that incorporates the iTraxx[supreg] Europe Untranched
Standard Terms Supplement. The proposed rule change would amend the
definition of ``Index Cleared Transaction Confirmation'' to accommodate
clearing of the iTraxx Asia ex Japan Index and the CDX.EM Index. For
transactions in the iTraxx Asia ex Japan Index Series 27 or above, the
Index Cleared Transaction Confirmation would be the form of
confirmation that incorporates the iTraxx[supreg] Asia/Pacific
Untranched Standard Terms Supplement. For transactions in the CDX.EM
Index Series 27 or above, the Index Cleared Transaction Confirmation
would be the form of confirmation that incorporates the CDX Emerging
Markets Untranched Transactions Standard Terms Supplement.
The Clearing Supplement also modifies the terms of the standard
terms supplement in certain minor respects. For example, Section 2.2 of
the Clearing Supplement replaces the standard names for parties to the
transaction (``Party A'' and ``Party B'') with ``LCH SA'' and
``Clearing Member.'' The proposed rule change would amend Section 2.2
to make it applicable to the clearing of the New Products. The proposed
rule change would do so by adding to Section 2.2 references to the
iTraxx Asia ex Japan Index and the CDX.EM Index.
The proposed rule change would next amend Section 4. Section 4
applies to certain events that affect the reference entity covered by a
CDS, such as a credit event, a succession, or a rename. Section 4.1
prohibits LCH SA and a Clearing Member from sending certain notices
during restructurings following such events. Specifically, the proposed
rule change would add a ``Repudiation/Moratorium Extension Notice'' to
the types of notices that neither LCH SA nor a clearing member is
entitled to deliver with regard to an M(M)R Restructuring in accordance
with the terms of any Restructuring Cleared Transaction. While these
types of notices do not apply to any of the products that LCH SA
currently clears, they do apply to certain sovereign CDS that are
included in the New Products. Accordingly, the proposed rule change
would add these notices to accommodate clearing of these products.
The proposed rule change also would amend Section 6. Section 6
describes how LCH SA would implement physical settlement, which could
apply as a fallback method to certain cleared transactions. Section 6.5
sets out details related to providing notices related to physical
settlement. The proposed rule change would add to Section 6.5 a
``Package Observable Bond'' to the types of asset packages that can be
identified in a Notice of Physical Settlement (``NOPS'') or a NOPS
Amendment Notice. While the Package Observable Bond does not apply to
any of the products that LCH SA currently clears, it does apply to
certain sovereign CDS that are included in the New Products.
Accordingly, the proposed rule change would add the Package Observable
Bond to Section 6.5 to accommodate clearing of these products.\7\
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\7\ For the same reason, the proposed rule change would make a
similar amendment to Section 5 of Appendix XIII of Part B of the
Clearing Supplement. Appendix XIII of Part B of the Clearing
Supplement sets out the terms of transactions between a Clearing
Member and its Client with respect to client clearing.
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Finally, and for a similar reason, the proposed rule would add to
Section 6.8 a new subsection (c). New Section 6.8(c) would clarify the
application of the ``60 Business Day Cap on Settlement'' under the ISDA
2014 Credit Derivatives Definitions. This provision would be relevant
to transactions in the CDX.EM Index. Accordingly, the proposed rule
change would add these notices to accommodate clearing of this
product.\8\
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\8\ For the same reason, the proposed rule change would make a
similar amendment to Sections 7.8 and 7.18 of Appendix XIII of Part
B of the Clearing Supplement. Appendix XIII of Part B of the
Clearing Supplement sets out the terms of transactions between a
Clearing Member and its Client with respect to client clearing.
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B. CDSClear Risk Methodology
The CDSClear Risk Methodology describes LCH SA's pricing and margin
methodologies for single-name CDS, CDS indices, and CDS Index Options.
Section 3.4.5 of the CDSClear Risk Methodology describes portfolio
margining, which is a reduction in overall margin that results from a
Clearing Member holding offsetting positions in its portfolio. European
Union regulations applicable to LCH SA limit how much LCH SA can reduce
overall margin due to portfolio margining. There is an exception to
this limitation for an index basis package, which is a term that
describes a Clearing Member portfolio containing an index and a basket
of single-name constituents of the index that perfectly offsets the
position in the index. Section 3.4.5 lists various combinations of
products that together can constitute an index basis package. The
proposed rule change would update this list to include the iTraxx Asia
ex Japan Index and its single-name constituents, as well as the CDX.EM
Index and its single-name constituents.
Section 3.5 of the CDSClear Risk Methodology describes the Short
Charge aspect of margin. The Short Charge covers the cost of
liquidating a defaulting Clearing Member's portfolio where one or more
of the reference entities in the portfolio has gone into default.
Section 3.5 begins with a
[[Page 76521]]
general description of the Short Charge and notes that in determining
the Short Charge, LCH SA considers the worst consecutive defaults
within the applicable holding periods for all eligible products across
Europe and the US. The proposed rule change would add ``Asia'', in
addition to Europe and the US, to account for the iTraxx Asia ex Japan
Index and related single-name constituents.
As part of the Short Charge, LCH SA considers the recovery rate,
which is used to calculate an estimate of the amount that could be
recovered in a default. Section 3.5.1 lists recovery rates for
categories of reference entities, like insurers and banks. The proposed
rule change would add a recovery rate for state-owned enterprises. This
change would account for the additional sovereign single names that LCH
SA will clear as part of the new products. Relatedly, the proposed rule
change would add a new Section 3.5.2 \9\ to explain how LCH SA would
treat a Clearing Member's positions in a state-owned enterprise and its
sovereign entity. If those positions are not risk reducing, and the
sovereign entity owns more than 50% of the state-owned enterprise, then
LCH SA would default the two entities jointly. New Section 3.5.2 also
would explain that LCH SA would calculate exposures for state-owned
enterprises with a fixed 70% recovery rate.
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\9\ LCH would move the contents of current Section 3.5.2 to a
new Section 3.5.3.
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Section 3.8 of the CDSClear Risk Methodology describes the Wrong
Way Risk aspect of margin. Wrong Way Risk accounts for the risk that
exposure to a given counterparty increases when that counterparty
defaults. This could occur, for example, when a Clearing Member sells
protection on a CDS index of which it is a constituent. LCH SA
calculates Wrong Way Risk by, among other things, considering the risk
in certain geographic regions because historical data shows
correlations among defaults in these regions. The proposed rule change
would expand these regions to include Asia, to account for the iTraxx
Asia ex Japan Index and related single-name constituents.
Section 4.1 of the CDSClear Risk Methodology describes the
Liquidity and Concentration Charge aspect of margin. The Liquidity and
Concentration Charge covers the cost of liquidating a defaulting
Clearing Member's portfolio that contains a very concentrated or
illiquid position. To estimate this cost, LCH SA mimics the liquidation
procedure used in its default management process. The first step in
this process is to macro-hedge a portfolio to reduce the impact of
market risk. As part of the macro-hedge, LCH SA divides portfolios into
separate indices and their components. Section 4.1.2 lists these
different indices, which are the indices that LCH SA clears. Thus, the
proposed rule change would add to this list in Section 4.1.2 the iTraxx
Asia ex Japan Index and CDX.EM Index. Moreover, the proposed rule
change would move from Section 4.1.2 to Section 4.1.1 language to note
that the liquidation cost of a sub-portfolio composed of a single year
position in the principal on the run index is simply the sum of the
macro hedging costs, and add to Section 4.1.1 a note that single names
without a parent index are considered a sub-portfolio for which LCH SA
charges the cost of unwinding a non-hedged sub-portfolio.
Finally, in Section 4.1.7 the proposed rule change would make
certain updates related to clearing the New Products. Specifically, the
proposed rule change would update the existing thresholds and include
more cleared indexes in the table for volume thresholds. The proposed
rule change also would add a dedicated liquidity grid for sovereign
single names.
C. CDSClear Default Fund Methodology
The CDSClear Default Fund Methodology describes how, during extreme
but plausible circumstances, LCH ensures its financial resources are
enough to cover the potential losses from a close-out of the largest
two groups of members' portfolios and all clients of both of these
groups of members. Section 2 of the CDSClear Default Fund Methodology
describes the stress-testing framework that LCH SA uses to assess the
potential impact of the default of one or more clearing members under
stressed market conditions in excess of the initial margin that LCH SA
has collected for those clearing members. This stress testing aims to
identify a total stress test loss over initial margin under extreme but
plausible scenarios. Section 2.2 provides an overview of how LCH treats
single-name CDS and CDS indices in these extreme but plausible
scenarios. The proposed rule change would amend this description to
include the iTraxx Asia ex Japan Index and CDX.EM Index, as well as the
iTraxx Australia Indices.\10\
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\10\ Although LCH SA added clearing of the iTraxx Australia
Indices in a prior rule change, that prior rule change did not add
the iTraxx Australia Indices to this description. Thus, the proposed
rule change would correct this error and add the iTraxx Australia
Indices to Section 2.2. See Notice, 87 FR at 55874; Self-Regulatory
Organizations; LCH SA; Order Approving Proposed Rule Change Relating
to the Clearing of Markit iTraxx[supreg] Australia Indices and the
Associated Single-Name Constituents and Remediation of WWR Margin
Instability, Exchange Act Release No. 95503 (Aug. 16, 2022), 87 FR
51471 (Aug. 22, 2022) (SR-LCH SA-2022-004).
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Moreover, one component of the stress test loss over initial margin
is the stressed short charge, which considers the jump to default risk
under stress conditions. With respect to the sovereign single names
that LCH SA will clear, the proposed rule change would amend Sections
2.4.1 and 2.4.2 to describe how LCH SA would add State-Owned Entities'
exposures to the stressed short charge. The proposed rule change also
would amend Sections 2.4.3 and 2.7.2 to describe the same with
mathematical formulas instead of with plain text.
Finally, in Section 2.6, which discusses how LCH SA treats index
options in default scenarios, the proposed rule change would add a
description of how LCH SA would consider the stressed short charge for
sovereigns<INF>.</INF>
D. Unrelated Changes
Unrelated to clearing the New Products, the proposed rule change
would make two other amendments to the Clearing Supplement. First, the
proposed rule change would modify Section 2.2 to provide an additional
term for each Index Cleared Transaction Confirmation. This new term
would specify that the applicable Physical Settlement Matrix is the
version of the Physical Settlement Matrix that is in force on the
Clearing Day on which the Index Cleared Transaction is registered by
LCH SA. LCH explains that this amendment would ensure that the
Additional Provisions for Certain Russian Entities published by ISDA on
March 25, 2022 will apply to the relevant cleared trades.\11\
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\11\ See Notice, 87 FR at 55873. For additional detail on these
provisions and how compliance with them would facilitate the
clearance of transactions in CDS contracts (or components thereof)
for which the Russian Federation is a reference entity, see Self-
Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing and
Order Granting Accelerated Approval of Proposed Rule Change Relating
to the ICC Clearing Rules, Exchange Act Release No. 94784 (Apr. 22,
2022), 87 FR 25324 (Apr. 28, 2022) (SR-ICC-2022-005).
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Next, the proposed rule change would make a correction in Section 7
of Appendix XIII of Part B of the Clearing Supplement. Appendix XIII of
Part B sets out the terms of transactions between a Clearing Member and
its Client. The proposed rule change would remove from Section 7.15 and
Section 7.17 of Appendix XIII the phrase ``for the purposes of the
Matched Contracts of the related Settlement Matched Pair.'' This phrase
is applicable to transactions
[[Page 76522]]
between LCH SA and a Clearing Member. Because Appendix XIII applies to
transactions between a Clearing Member and its Client, this phrase is
unnecessary.
Finally, the proposed rule change would make a correction to
Section 2.7 of the CDS Clearing Procedures. Specifically, the first
sentence of Section 2.7(c) currently states that, where a Clearing
Member is acting as a CDS Seller, Short Charge Margin will be required
to cover the risk that the Clearing Member is subject to an event of
default at the same time that a credit event occurs ``with respect to a
Reference Entity.'' To acknowledge that a credit event may occur with
respect to more than one Reference Entity, the proposed rule change
would revise this sentence to read ``one or more Reference Entities.''
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\12\ Based on its review of the record, including the
supporting information provided in Confidential Exhibit 3, and for the
reasons given below, the Commission finds that the proposed rule change
is consistent with Section 17A(b)(3)(F) of the Act \13\ and Rules 17Ad-
22(e)(4)(ii) and 17Ad-22(e)(6)(i).\14\
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\12\ 15 U.S.C. 78s(b)(2)(C).
\13\ 15 U.S.C. 78q-1(b)(3)(F).
\14\ 17 CFR 240.17Ad-22(e)(4)(ii) and 17Ad-22(e)(6)(i).
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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.\15\
Based on its review of the record, including the supporting information
provided in Confidential Exhibit 3, and for the reasons discussed
below, the Commission believes the proposed changes are consistent with
the promotion of the prompt and accurate clearance and settlement of
securities transactions at LCH SA.
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\15\ 15 U.S.C. 78q-1(b)(3)(F).
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As discussed above, the proposed rule change would amend the
Clearing Supplement, the CDSClear Risk Methodology, and the CDSClear
Default Fund Methodology to accommodate clearing of the New Products.
For example, the proposed rule change would amend the Clearing
Supplement to, among other things, introduce new defined terms and
revise the Index Cleared Transaction Confirmation to accommodate
clearing of the New Products. The proposed rule change also would amend
the CDSClear Risk Methodology and the CDSClear Default Fund Methodology
to consider the New Products in calculating certain components of
margin and in calculating the stress test loss over initial margin. The
Commission believes that the amendments to the Clearing Supplement
would help to ensure that LCH SA has in place rules to appropriately
govern the clearing of the New Products. The Commission also believes
that the amendments to the CDSClear Risk Methodology and the CDSClear
Default Fund Methodology would help to ensure that LCH SA's risk
management system considers the risks of clearing the New Products. The
Commission believes that these changes, taken together in consideration
with the supporting information provided in Confidential Exhibit 3,
would promote the prompt and accurate clearance and settlement of
transactions in the New Products at LCH SA.
The Commission similarly believes that the unrelated changes
discussed in Part II.D above would promote the prompt and accurate
clearance and settlement of transactions at LCH SA. Specifically, the
Commission believes specifying that the Physical Settlement Matrix is
the version in force on the Clearing Day on which the Index Cleared
Transaction is registered would help to ensure the application of the
Additional Provisions for Certain Russian Entities published by ISDA on
March 25, 2022. In doing so, the Commission believes this change would
help facilitate LCH SA's clearance and settlement of transactions to
which these additional provisions would apply.\16\ Moreover, the
Commission believes that removing an inapplicable phrase from Appendix
XIII of Part B of the Clearing Supplement would correct a potential
error that could hinder the consistent application of Appendix XIII to
cleared transactions. Finally, the Commission believes that correcting
``Reference Entity'' to ``Reference Entities'' in Section 2 of the CDS
Clearing Procedures would help to ensure that LCH SA applies Section 2
to multiple Reference Entities, as intended, should ever a credit event
occur for more than one Reference Entity.
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\16\ For additional detail on these provisions and how
compliance with them would facilitate the clearance of transactions
in CDS contracts (or components thereof) for which the Russian
Federation is a reference entity, see Self-Regulatory Organizations;
ICE Clear Credit LLC; Notice of Filing and Order Granting
Accelerated Approval of Proposed Rule Change Relating to the ICC
Clearing Rules, Exchange Act Release No. 94784 (Apr. 22, 2022), 87
FR 25324 (Apr. 28, 2022) (SR-ICC-2022-005).
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Therefore, the Commission finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act.\17\
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4)(ii)
Rule 17Ad-22(e)(4)(ii) requires that LCH SA establish, implement,
maintain and enforce written policies and procedures reasonably
designed to maintain, to the extent not already maintained pursuant to
Rule 17Ad-22(e)(4)(i),\18\ additional financial resources at the
minimum to enable it to cover a wide range of foreseeable stress
scenarios that include, but are not limited to, the default of the two
participant families that would potentially cause the largest aggregate
credit exposure for LCH SA in extreme but plausible market
conditions.\19\
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\18\ 17 CFR 240.17Ad-22(e)(4)(i).
\19\ 17 CFR 240.17Ad-22(e)(4)(ii).
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As discussed above, the proposed rule change would amend the
CDSClear Default Fund Methodology to accommodate clearing of the New
Products. Among other things, these changes would revise the
description of the stress scenarios and of the calculation of stress
test loss over initial margin to consider the New Products. LCH SA
sizes its default fund to cover the highest two exposures arising from
the stress test loss over initial margin calculation under extreme but
plausible stress scenarios. Considering the New Products in these
calculations would help to ensure that LCH SA, while clearing the New
Products, continues to maintain financial resources to cover the
default of the two participant families that would potentially cause
the largest aggregate credit exposure for LCH SA in extreme but
plausible market conditions.
Therefore, the Commission finds that this aspect of the proposed
rule change is consistent with Rule 17Ad-22(e)(4)(ii).\20\
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\20\ 17 CFR 240.17Ad-22(e)(4)(ii).
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C. Consistency With Rule 17Ad-22(e)(6)(i)
Rule 17Ad-22(e)(6)(i) requires that LCH SA establish, implement,
maintain and enforce written policies and procedures reasonably
designed to cover
[[Page 76523]]
its credit exposures to its participants by establishing a risk-based
margin system that, at a minimum, considers, and produces margin levels
commensurate with, the risks and particular attributes of each relevant
product, portfolio, and market.\21\
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\21\ 17 CFR 240.17Ad-22(e)(6)(i).
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As discussed above, the proposed rule change would amend the
CDSClear Risk Methodology to accommodate clearing of the New Products.
These changes would revise the descriptions of the Short Charge, Wrong
Way Risk, and Liquidity and Concentration Charge to cover clearing of
the New Products. Because LCH SA uses the Short Charge, Wrong Way Risk,
and Liquidity and Concentration Charge to calculate initial margin
along with the other components discussed in the CDSClear Risk
Methodology, and based on the Commission's review of the proposed rule
change, including the supporting information provided in Confidential
Exhibit 3, the Commission believes these changes will help to ensure
that LCH SA's margin system identifies the risks of clearing the New
Products.
Therefore, the Commission finds that these aspects of the proposed
rule change are consistent with Rule 17Ad-22(e)(6)(i).\22\
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\22\ 17 CFR 240.17Ad-22(e)(6)(i).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 2, is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
<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#addfd8c1c880cec2c0c0c8c3d9deeddec8ce83cac2db"><span class="__cf_email__" data-cfemail="d0a2a5bcb5fdb3bfbdbdb5bea4a390a3b5b3feb7bfa6">[email protected]</span></a>. Please include
File Number SR-LCH SA-2022-007 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-2022-007. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<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 the filing also will 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-2022-007 and should
be submitted on or before January 4, 2023.
V. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment No. 2
Under Section 19(b)(2)(C)(iii) of the Act,\23\ the Commission may
grant accelerated approval of a proposed rule change if the Commission
finds good cause for doing so. For the reasons discussed below, the
Commission finds good cause, pursuant to Section 19(b)(2)(C)(iii) of
the Act,\24\ for approving the proposed rule change on an accelerated
basis prior to the 30th day after the date of publication of notice of
Amendment No. 2 in the Federal Register.
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\23\ 15 U.S.C. 78s(b)(2)(C)(iii).
\24\ 15 U.S.C. 78s(b)(2)(C)(iii).
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Amendment No. 2, which replaced and superseded in their entirety
both the original filing and Amendment No. 1, does not substantively
alter the proposed rule change. Rather, it corrects a non-substantive
formatting error and includes as Confidential Exhibit 3 certain
information that LCH SA submitted to the Commission in support of the
proposed rule change. By correcting a non-substantive formatting error
in the Confidential Exhibit 5C, Amendment No. 2 should help to ensure
that the LCH SA Methodology Services Reference Guide: CDS Margin
Framework (V3.14) is accurate, free from error, and therefore can be
used and applied consistently by LCH SA personnel. Because LCH SA uses
its CDS Margin Framework in clearing transactions, the Commission
believes correcting this error would be consistent with the prompt and
accurate clearance and settlement of transactions.
Moreover, as noted above, Amendment No. 2 includes Confidential
Exhibit 3, which reproduces certain information that LCH SA submitted
to the Commission in support of the proposed rule change. The
Commission considered this information as part of its review of the
record for the proposed rule change and believes this information
supports the findings discussed in Part III above. The Commission
therefore believes that amending the proposed rule change to include
Confidential Exhibit 3 would be consistent with its findings discussed
above.
The Commission therefore finds good cause, pursuant to Section
19(b)(2)(C)(iii) of the Act,\25\ for approving the proposed rule change
on an accelerated basis prior to the 30th day after the date of
publication of notice of Amendment No. 2 in the Federal Register.
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\25\ 15 U.S.C. 78s(b)(2)(C)(iii).
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VI. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A(b)(3)(F) of the
Act \26\ and Rules 17Ad-22(e)(4)(ii) and 17Ad-22(e)(6)(i).\27\
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\26\ 15 U.S.C. 78q-1(b)(3)(F).
\27\ 17 CFR 240.17Ad-22(e)(4)(ii) and (e)(6)(i).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\28\ that the proposed rule change, as modified by Amendment No. 2 (SR-
LCH SA-2022-007), be, and hereby is, approved.\29\
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\28\ 15 U.S.C. 78s(b)(2).
\29\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-27052 Filed 12-13-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on December 14, 2022.
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.