Notice2023-19354
Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Portfolio Margining
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
September 8, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 173 (Friday, September 8, 2023)</title>
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[Federal Register Volume 88, Number 173 (Friday, September 8, 2023)]
[Notices]
[Pages 62118-62126]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-19354]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98276; File No. SR-LCH SA-2023-005]
Self-Regulatory Organizations; LCH SA; Order Approving Proposed
Rule Change Relating to Portfolio Margining
September 1, 2023.
I. Introduction
On May 30, 2023, 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 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change (``Proposed Rule Change'') to
revise its portfolio margining program (``Program'') and make other
unrelated changes. The Proposed Rule Change was published for comment
in the Federal Register on July 19, 2023.\3\ The Commission has not
received any comments on 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\ Securities Exchange Act Release No. 97888 (July 13, 2023),
88 FR 46221 (July 19, 2023) (File No. SR-LCH-2023-005) (``Notice'').
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II. Description of the Proposed Rule Change
LCH SA is a clearing agency that offers clearing of, among other
things, credit-default swaps (``CDS'').\4\ LCH SA is registered with
the Commission for clearing CDS that are security-based swaps (``SBS'')
and with the Commodity Futures Trading Commission (``CFTC'') for
clearing CDS that are swaps. As part of its CDS clearing business, LCH
offers clearing of CDS submitted by Clearing Members on behalf of their
U.S. clients. As part of this U.S. client clearing, LCH previously
proposed, and the Commission approved, certain changes to its rules and
procedures to allow for portfolio margining.\5\
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\4\ Capitalized terms used but not defined herein have the
meanings specified in the LCH SA Rule Book (``Rule Book''), CDS
Clearing Supplement (``Supplement''), CDS Clearing Procedures
(``Procedures''), and FCM/BD CDS Clearing Regulations
(``Regulations''), as applicable.
\5\ See Order Approving Proposed Rule Change to Adopt ICC's
Enhanced Margin Methodology, Exchange Act Release No. 66001 (Dec.
16, 2011).
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Portfolio margining is the practice by which transactions in SBS
are cleared and held on a commingled basis with transactions in swaps.
Under such a portfolio margining arrangement, Clearing Members are able
to maintain reduced levels of margin that are commensurate with the
risks of the portfolio based on correlations in a Clearing Member's
cleared CDS positions consisting of both swaps and SBS. LCH is required
to conduct its portfolio margining program pursuant to the terms and
conditions of an exemptive order issued by the Commission,\6\ as well
as an exemptive order issued by the Commodity Futures Trading
Commission (``CFTC'').\7\ Under these orders, LCH SA's Clearing Members
that are registered future commission merchants (``FCM'') and broker-
dealers (``BD'') are authorized to clear and hold SBS transactions a
commingled basis with cleared swaps on behalf of their clients (``FCM/
BD Clients'').
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\6\ Exchange Act Release 34-93501 Order Granting Conditional
Exemptions Under the Securities Exchange Act of 1934 in Connection
With the Portfolio Margining of Cleared Swaps and Security-Based
Swaps That Are Credit Default Swaps'', 86 FR 61357 (November 5,
2021) (``Portfolio Margining Order''). The Portfolio Margining Order
replaced a similar Commission order issued in 2012. See Order
Granting Conditional Exemptions under the Securities Exchange Act of
1934 in Connection with Portfolio Margining of Swaps and Security-
based Swaps, Exchange Act Release No. 68433 (Dec. 12, 2012) 77 FR
75211 (Dec. 19, 2012).
\7\ See Treatment of Funds Held in Connection with Clearing by
LCH SA of Single-Name Credit Default Swaps, Including Spun-Out
Component Transactions (Nov. 1, 2021), available at <a href="https://www.cftc.gov/media/6711/lchsa4dorder11022021/download">https://www.cftc.gov/media/6711/lchsa4dorder11022021/download</a>.
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The purpose of the Proposed Rule Change is to revise and update LCH
SA's portfolio margining program (the ``Program''). The Proposed Rule
Change would amend certain provisions of the Rule Book and Procedures
regarding collateral, the client collateral buffer, and the release of
collateral to a Clearing Member. The Proposed Rule Change would update
LCH SA's Liquidity Risk Modelling Framework (``LRMF'') with respect to
the liquidity resources and requirements applicable to FCM/BD Clearing
Members. Finally, The Proposed Rule Change will also make other
miscellaneous amendments to LCH SA's Rule Book and Procedures. These
miscellaneous amendments cover Time References, Real Time Session, and
Personnel Requirements.
A. Portfolio Margining Program
As discussed above, LCH first established the Program in 2021.
Currently, the basis for the Program is primarily Article 6.2.1.1 of
the Rule Book and Section 3 of the Procedures. As discussed further
below, the Proposed Rule Change would delete Article 6.2.1.1 from the
Rule Book, replace it with a new Regulation 7, and revise Section 3 of
the Procedures.
Article 6.2.1.1(iii) of the Rule Book and Regulation 7
Article 6.2.1.1(iii) currently provides that an FCM/BD Clearing
Member that is both an FCM and a BD may elect to clear and hold FCM/BD
Cleared Transactions that are SBS for FCM/BD Clients in the FCM/BD
Swaps Client Account Structure on a commingled basis with Cleared Swaps
and margin such combined positions on a portfolio basis in compliance
with Applicable Laws, provided that each FCM/BD Client is an eligible
contract participant as defined in Section 1a(18) of the Commodity
Exchange Act. As mentioned, the Proposed Rule Change would delete this
provision and replace with a new Regulation 7, as part of the FCM/BD
CDS Clearing Regulations. New Regulation 7 would maintain the
requirements currently found in Article 6.2.1.1(iii) while also
clarifying operation of the program.
Paragraph (a) of Regulation 7, In General, would define Program as
the ability of FCM/BD Clearing Members, on behalf of their FCM/BD
clients, to portfolio margin FCM/BD Cleared Transactions \8\ that are
SBS with FCM/BD Cleared Transactions that are Cleared Swaps.\9\
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\8\ The Proposed Rule Change would define the term ``FCM/BD
Portfolio Margining Transaction'' to mean an FCM/BD Cleared
Transaction that is an SBS and which is held in the FCM/BD Swaps
Client Account Structure pursuant to the Portfolio Margining
Program. The Proposed Rule Change would add references to this new
defined term, where relevant, in the Regulations, the Procedures,
and the Rule Book.
\9\ The Definitions section of the Regulations will be amended
to define the ``Portfolio Margining Program'' by making a direct
reference to Regulation 7(a) in the Regulations.
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Paragraph (b) of Regulation 7, Participation, would state that FCM/
BD Clearing Members may participate in the Program by providing LCH SA
materials that LCH SA may require from time to time.\10\ This section
would also provide that, in providing these materials to LCH SA, the
FCM/BD Clearing Member shall be deemed to represent that: (i) it is
both an FCM and a BD and neither such status has been
[[Page 62119]]
revoked; (ii) it is in compliance with the applicable requirements of
the Portfolio Margining Order and the CFTC Portfolio Margining Order;
and (iii) each relevant FCM/BD Client is an eligible contract
participant as defined in Section 1a(18) of the Commodity Exchange Act.
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\10\ A ``Clearing Member'' is defined as a general member or a
select member, as the context requires.
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Paragraph (c) of Regulation 7, Operation, would provide that,
following the portfolio margining start date, all FCM/BD Cleared
Transactions that are SBS for the relevant FCM/BD Client will be
treated as FCM/BD Portfolio Margining Transactions and will be held
(along with any associated collateral) in the FCM/BD Swaps Client
Account Structure on a commingled basis with FCM/BD Cleared
Transactions that are Cleared Swaps for such FCM/BD client. Further,
all such FCM/BD Portfolio Margining Transactions will constitute
Cleared Swaps for purposes of the CDS Clearing Rules and the resulting
combined positions will be margined on a portfolio basis in respect of
the relevant FCM/BD Client. Finally, this section would provide that
the relevant FCM/BD Client shall be deemed to acknowledge and agree
that any property used to margin, guarantee or secure the FCM/BD
Portfolio Margining Transactions will not receive customer protection
treatment under the Exchange Act or Securities Investor Protection Act
of 1970 and will instead receive customer protection treatment under
the commodity broker liquidation provisions of the U.S. Bankruptcy Code
and the rules and regulations promulgated thereunder.
In addition to new Regulation 7, the Proposed Rule Change would
amend other sections of the Regulations to make conforming amendments.
In the definitions section, the Proposed Rule Change would add, among
other things, add defined terms for Portfolio Margining Program, SEC
Portfolio Margining Order, and FCM/BD Portfolio Margining
Transaction.\11\ The Proposed Rule Change also would amend the
definition of the LCH Cleared Swaps Client Segregated Depository
Account to include FCM/BD Portfolio Margining Transactions.\12\
Similarly, the Proposed Rule Change would amend the definition of the
LCH SBS Client Segregated Depository Account to exclude any FCM/BD
Portfolio Margining Transactions.\13\
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\11\ As mentioned above, the term ``FCM/BD Portfolio Margining
Transaction'' would mean an FCM/BD Cleared Transaction that is an
SBS and which is held in the FCM/BD Swaps Client Account Structure
pursuant to the Portfolio Margining Program. The Proposed Rule
Change would add references to this new defined term, where
relevant, in the Regulations, the Procedures, and the Rule Book. See
supra note 8.
\12\ Cleared Swaps Client Segregated Depository account is
defined as the omnibus account (which will consist of one or more
accounts at one or more permitted depositories which are commingled
for purposes of the applicable provisions of the Commodity Exchange
Act and Commodity Future Trading Commission (``CFTC'') regulations)
maintained by LCH SA for the benefit of cleared swaps customers of
its FCM/BD Clearing Members.
\13\ LCH SBS Client Segregated Depository Account will be
defined in the Regulations to mean one or more accounts at one or
more Banks which are commingled for purposes of the applicable
provisions of the Exchange Act and SEC Regulations) maintained by
LCH SA for the benefit of SBS customers of its FCM/BD Clearing
Members with a bank, which is segregated in accordance with the
Exchange Act and Commission Regulations and contains collateral
deposited by such FCM/BD Clearing Members on behalf of their SBS
customers in connection with FCM/BD Cleared Transactions that are
SBS cleared for such SBS customers by such FCM/BD Clearing Members,
excluding any FCM/BD portfolio margining transactions.
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The Proposed Rule Change also would amend Regulation 2, which
covers depository accounts. Going forward, LCH SA will assume that all
FCM/BD clients will elect to portfolio margin all their SBS
transactions in an FCM/BD Cleared Swaps Client Segregated Depository
Account rather than a separate FCM/BD SBS Client Segregated Depository
Account. The Proposed Rule Change therefore would amend Regulation 2(a)
so that FCM/BD Clearing Members would establish and maintain an FCM/BD
SBS Client Segregated Depository Account only if required. The Proposed
Rule Change also would amend Regulation 2(b) to similarly provide that
LCH SA would only establish and maintain an LCH SBS Client Segregated
Depository Account \14\ for an FCM/BD Clearing Member upon request.
Finally, the Proposed Rule Change would amend Regulation 2(c) to
confirm that all Collateral deposited with LCH SA by FCM/BD Clearing
Members in connection with cleared swaps will include collateral
deposited in connection with FCM/BD Portfolio Margining Transactions
and will be held in an LCH cleared swaps segregated depository account.
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\14\ The Regulations define an LCH SBS Client Segregated
Depository Account to mean an omnibus account (which will consist of
one or more accounts at one or more Banks which are commingled for
purposes of the applicable provisions of the Exchange Act and SEC
Regulations) maintained by LCH SA for the benefit of SBS Customers
of its FCM/BD Clearing Members with a Bank, which is segregated in
accordance with the Exchange Act and SEC Regulations and contains
Collateral deposited by such FCM/BD Clearing Members on behalf of
their SBS Customers in connection with FCM/BD Cleared Transactions
that are SBS cleared for such SBS Customers by such FCM/BD Clearing
Members, excluding any FCM/BD Portfolio Margining Transactions.
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The Procedures
Section 3 of the Procedures covers Collateral, Variation Margin,
and Cash Payments. The Proposed Rule Change would revise Section 3 in
the expectation that all FCM/BD clients will elect to portfolio margin
their SBS transactions.
To that end, the Proposed Rule Change would amend Section 3 so that
LCH SA would establish and maintain SBS-related accounts only when
required. Specifically, LCH SA would maintain the following accounts
only when required: (i) an FCM/BD SBS Client Collateral Account to
record the Collateral held by LCH SA for the benefit of such FCM/BD
Clearing Member's SBS customers with respect to SBS; (ii) a TARGET2
Account \15\ used to make Collateral calls in relation to the Client
Margin Requirements with respect to SBS; (iii) a U.S. Dollar (``USD'')
account to credit USD Cash Collateral which is transferred by FCM/BD
Clearing Members to be recorded in their FCM/BD SBS Client Collateral
Account; and (iv) a segregated depository account in the Bank of New
York Mellon (``BNYM'') US to register BNYM eligible collateral \16\
which is transferred by FCM/BD Clearing Members in connection with SBS
other than SBS that constitute FCM/BD Portfolio Margining Transactions.
Going forward, any reference to these accounts would be preceded by the
condition that such account is established.
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\15\ As defined in the Rule Book, TARGET2 is the system known as
Trans-European Automated Real-time Gross Settlement Express Transfer
2. A ``TARGET2 Account'' is an account held by a TARGET2 participant
in TARGET2 payment module with a Eurosystem Central Bank.
\16\ ``BNYM US'' and ``Eligible Collateral'' are defined below.
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Similarly, the Proposed Rule Change would amend Section 3 so that
FCM/BD Clearing Members would establish and maintain SBS-related
accounts only when required. Specifically, FCM/BD Clearing Members
would maintain the following accounts only when required: (i) a TARGET2
Account for the purposes of the Collateral Calls in respect of its
Client Margin Requirements with respect to SBS; (ii) a BNYM cash
account for the purposes of satisfying its Cash Payments obligations in
respect of its Client Cleared Transactions that are SBS. Going forward,
any reference to these accounts would be preceded by the condition that
such account is established.
Rule Book
The Proposed Rule Change would amend certain definitions set out in
the Rule Book to recognize that FCM/BD Portfolio Margining Transactions
will be treated as Cleared Swaps and governed by new FCM/BD Regulation
7. As with
[[Page 62120]]
Article 6.2.1.1(iii), discussed earlier, the current definitions
implement portfolio margining as adopted by LCH SA in 2021. With the
adoption of new FCM/BD Regulation 7, the Proposed Rule Change would
revise references to current definitions or Articles in the Rule Book
to reflect the new Portfolio Margining Program.\17\
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\17\ In particular, the Proposed Rule Change would remove
references to Article 6.2.1.1(iii). As noted earlier, with the
implementation of the more comprehensive Portfolio Margining Program
set out in Section 7 of the Regulations, the Proposed Rule Change
would delete Article 6.2.1.1(iii) as unnecessary.
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The Proposed Rule Change first would amend the defined term Cleared
Swap. Currently, Cleared Swap is defined as an FCM/BD cleared
transaction (i) constituting a Cleared Swap as defined in CFTC
Regulation 22.1 or (ii) constituting an SBS that is held in the FCM/BD
swaps client account structure set out in Article 6.2.1.1(i) in
pursuant to Article 6.2.1.1(iii). The Proposed Rule Change would delete
most of (ii) and replace with a reference to FCM/BD Portfolio Margining
Transaction.\18\ Under the Proposed Rule Change, a Cleared Swap would
be an FCM/BD cleared transaction (i) constituting a Cleared Swap as
defined in CFTC Regulation 22.1 or (ii) constituting an FCM/ND
Portfolio Margining Transaction.
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\18\ The Proposed Rule Change would add a definition for FCM/BD
Portfolio Margining Transaction to the Rule Book. That term would
have the same meaning as set out in the Regulations. As discussed
above, under the Regulations, an FCM/BD Portfolio Margining
Transaction is an FCM/BD Cleared Transaction that is an SBS and
which is held in the FCM/BD Swaps Client Account Structure pursuant
to the Portfolio Margining Program.
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The Proposed Rule Change next would the defined term Cleared Swaps
Customer. Cleared Swaps Customer is currently defined as (i) a Cleared
Swaps Customer, as defined in CFTC Regulation 22.1, of an FCM/BD
Clearing Member with respect to Cleared Swaps, that is an eligible
contract participant, and (ii) a person that would be a Cleared Swaps
Customer of an FCM/BD Clearing Member with respect to any transaction
constituting an SBS that is a Cleared Swap. The Proposed Rule Change
would amend (ii) to include a person that is treated as a Cleared Swaps
Customer in connection with maintaining FCM/BD Portfolio Margining
Transactions. Under the Proposed Rule Change, a Cleared Swaps Customer
would be (i) a Cleared Swaps Customer, as defined in CFTC Regulation
22.1, of an FCM/BD Clearing Member with respect to Cleared Swaps, that
is an eligible contract participant, and (ii) a person that is treated
as a Cleared Swaps Customer in connection with maintaining FCM/BD
Portfolio Margining Transactions in the FCM/BD Swaps Client Account
Structure of an FCM/BD Clearing Member pursuant to the Portfolio
Margining Program.
The Proposed Rule Change would likewise amend the definition of
Cleared Swaps Customer Collateral. Currently, Cleared Swaps Customer
Collateral is Cleared Swaps Customer Collateral, as defined in CFTC
Regulation 22.1, with respect to Cleared Swaps, including with respect
to any transaction constituting an SBS that is a Cleared Swap, as if
such transaction is a Cleared Swap for purposes of the definition of
Cleared Swaps Customer Collateral in CFTC Regulation 22.1. As revised,
this definition will provide that Cleared Swaps Customer Collateral is
Cleared Swaps Customer Collateral, as defined in CFTC Regulation 22.1,
with respect to Cleared Swaps, including with respect to any
transaction constituting an SBS that is an FCM/BD Portfolio Margining
Transaction.
The Rule Book also contains definitions related to the accounts
associated with customer transactions in SBS and Swaps. Among others,
these include the FCM/BD SBS Client Collateral Account, FCM/BD Swaps
Client Collateral Account, FCM/BD SBS Client Financial Account, FCM/BD
Swaps Client Financial Account, FCM/BD SBS Client Margin Account, FCM/
BD Swaps Client Margin Account, FCM/BD SBS Client Trade Account, and
FCM/BD Swaps Client Trade Account. With respect to these defined terms,
the Proposed Rule Change would (i) remove references to Article
6.2.1.1(iii) (which is being deleted, as discussed above) and (ii) add
references to the new defined term FCM/BD Portfolio Margining
Transaction.
Finally, the Proposed Rule Change would add a new defined term for
Portfolio Margining Program. That term would have the same meaning as
set out in the Regulations.
B. Collateral and Accounts
The Proposed Rule Change would also amend provisions of the Rule
Book and the Procedures regarding permitted Collateral (including
Eligible Collateral and Eligible Currency \19\), the Client Collateral
Buffer, and the release of collateral to a Clearing Member.
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\19\ The term ``Eligible Collateral'' is defined as securities
and other types of non-Cash Collateral as set out in Section 3 of
the Procedures accepted by LCH SA for the purposes of satisfying a
Clearing Member's Margin Requirements or novating Original
Transaction; the term ``Eligible Currency'' is defined to mean cash
in such currencies as set out in Section 3 of the Procedures
accepted by LCH SA as Cash Collateral. The term ``Collateral'' is
defined as Eligible Collateral and/or Cash Collateral. The term
``Cash Collateral'' is defined as any cash provided in an Eligible
Currency which is transferred to LCH SA by way of full title
transfer for the purpose of satisfying a Clearing Member's Margin
Requirements and/or its Contribution Requirement and/or novating
Original Transactions, as the case may be.
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Eligible Collateral and Eligible Currency
With regard to Eligible Collateral, the Proposed Rule Change would
amend Section 3 of the Procedures to replace certain references to US
Treasury Bills (``US T-Bills''). Specifically, the Proposed Rule Change
would delete references to US T-Bills recorded in an FCM/BD Clearing
Member's FCM/BD Client Collateral Account. The Proposed Rule Change
would refer instead to BNYM US Eligible Collateral. This new defined
term would mean Eligible Collateral to be held in LCH SA's segregated
depository account opened in the books BNYM US. LCH SA is making this
particular change because there are also other securities, in addition
to US T-Bills, that could be held with BNYM.
With regard to Eligible Currency, the Proposed Rule Change would
amend the definition to provide that Pound Sterling is only eligible in
certain circumstances. Going forward, Pound Sterling will no longer be
an Eligible Currency for purposes of the FCM/BD Client Account
Structure of an FCM/BD Clearing Member. As a result, Eligible
Currencies for FCM/BD Client Account Structure will be limited to the
Euro and USD. Practically speaking, this means going forward CCM
Clearing Members \20\ can deposit Pound Sterling with respect to their
Clients while FCM/BD Clearing Members cannot. LCH is making this change
to comply with certain regulatory requirements applicable to client
collateral.\21\
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\20\ A CCM is a Clearing Member of LCH SA and party to the CDS
admission agreement. If a CCM wishes to provide CDS CCM client
clearing services, it must either (i) be a general member or (ii)
provide such CDS CCM client clearing services to its affiliated
firms only. A Clearing Member cannot be admitted as a CCM and an
FCM/BD Clearing Member at the same time. See Notice, 88 FR at 46229.
The Proposed Rule Change would update the definition of CCM in the
Rule Book to replace an incorrect reference to FCM/BD Clearing
Member.
\21\ LCH SA explained in the Notice that it LCH SA will not
allow the transfer of Pound Sterling on behalf of FCM/BD Clients to
be credited to an LCH SA's account opened with Euroclear Bank
because Euroclear Bank is not an eligible Permitted Depository
within the meaning of CFTC Regulations 22.1 and 22.4. See Notice, 88
FR at 46225.
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Further to this point, the Proposed Rule Change would delete from
Section 3.8 provisions that currently require LCH SA to open certain
bank accounts. LCH SA uses these bank accounts to
[[Page 62121]]
credit non-Euro, non-USD Cash Collateral which is transferred by an
FCM/BD Clearing Member to be recorded in its FCM/BD Swaps Client
Collateral Account or FCM/BD SBS Client Collateral Account. Because LCH
SA will only treat Euro and USD as Eligible Currency for FCB/BD Clients
going forward, LCH SA would no longer need to establish these accounts.
The Proposed Rule Change would also make this same change to Client
Collateral Buffer, including the FCM/BD Client Collateral Buffer.\22\
The Client Collateral Buffer is the value of Collateral transferred by
a Clearing Member to LCH SA, which is the Clearing Member's own
property, and which allows that Clearing Member to satisfy margin
requirements in respect of a Client's account. The Clearing Member
could use the buffer, for example, to satisfy the Notional and
Collateral Checks performed by LCH SA in respect of Eligible Intraday
Transactions comprising one or more Client Trade Legs.
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\22\ The FCM/BD Client Collateral Buffer's definition includes
both the FCM/BD Swaps Client Collateral Buffer and the FCM/BD SBS
Client Collateral Buffer. The FCM/BD Swaps Client Collateral Buffer
is defined in the Rule Book to mean the aggregate value of
Collateral transferred by an FCM/BD Clearing Member to LCH SA,
comprising such FCM/BD Clearing Member's own property, and recorded
in such FCM/BD Clearing Member's FCM/BD Swaps Buffer Account which
may be used by LCH SA to meet obligations in respect of the Cleared
Swaps of Cleared Swaps Customers, including for the purpose of
satisfying the notional and collateral checks performed by LCH SA in
respect of eligible intraday transactions. The FCM/BD Swaps Client
Collateral Buffer is similarly defined.
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Currently, LCH SA accepts as Client Collateral Buffer only Euro-
denominated Cash Collateral. Under the Proposed Rule Change, LCH SA
would accept (i) Cash Collateral \23\ or Eligible Collateral as CCM
Client Collateral Buffer and (i) Cash Collateral or Eligible Collateral
as being acceptable by LCH SA to be registered in the FCM/BD Client
Collateral Account, as FCM/BD Client Collateral Buffer. As discussed
above, Pound Sterling would no longer be an Eligible Currency for
purposes of the FCM/BD Client Account Structure of an FCM/BD Clearing
Member going forward. Thus, this change would mean in effect that LCH
SA would accept Pound Sterling as CCM Client Collateral Buffer but not
as FCM/BD Client Collateral Buffer.
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\23\ Cash Collateral is defined in the Rule Book as any cash
provided in an Eligible Currency which is transferred to LCH SA by
way of full title transfer in accordance with Section 3 of the
Procedures for the purpose of satisfying a Clearing Member's Margin
Requirements and/or its Contribution Requirement and/or novating
Original Transactions, as the case may be.
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Section 3 of the Procedures addresses how Clearing Members may
transfer Collateral to LCH SA. The Proposed Rule Change would amend
these provisions to effectuate the distinction between Pound Sterling
as collateral, and Euros/USD. Specifically, the Proposed Rule Change
would amend Sections 3.7(f), 3.8 (f), 3.8(g), 3.10, 3.15(a), and
3.17(a) to refer specifically to the transfer of Euro-denominated cash,
non-Euro denominated Cash Collateral, USD-denominated Cash Collateral,
Eligible Collateral provided with full title transfer, Eligible
Collateral, and BNYM Eligible Collateral, respectively, to be
maintained as Client Collateral Buffer, provided that such Clearing
Member is permitted to maintain that type of Collateral as Client
Collateral Buffer.
Finally, the Proposed Rule Change would amend Appendix 1 of the
Rule Book to effectuate the distinction between Pound Sterling as
collateral, and Euros/USD. Appendix 1 of the Rule Book describes LCH
SA's default management process for its CDS business. Under Appendix 1
currently, in the event of an Event of Default occurring in respect of
a Clearing Member, LCH SA will: (i) if the Defaulting Clearing Member
is a CCM, transfer an amount of Cash Collateral denominated in Euro
which is equal to the CCM Allocated Client Collateral Buffer for the
relevant CCM Client Account Structure from the CCM House Collateral
Account to the relevant CCM Client Collateral Account; or (ii) if the
Defaulting Clearing Member is an FCM/BD Clearing Member, transfer an
amount of Collateral which is equal to the FCM/BD Allocated Client
Collateral Buffer for the relevant FCM/BD Client Margin Requirement
from the FCM/BD Buffer Financial Account to the relevant FCM/BD Client
Financial Account. Since an amount of Collateral equal to the value of
the CCM Allocated Client Collateral Buffer needs to be transferred from
the House Collateral Account of a Defaulting Clearing Member that is a
CCM to the relevant CCM Client Collateral Account, and since the Client
Collateral Buffer for CCMs could be maintained in Pounds as well as
Euro, LCH SA would need first to liquidate into Euro any Cash
Collateral that is not Euro. The Proposed Rule Change would make
equivalent changes to the provisions dealing with the transfer of an
amount in Euro equivalent to the CCM Allocated Client Collateral Buffer
of a CCM in the event of: (i) an early termination trigger date, in
accordance with Article 8.5.2 (a)(i) and (b)(i) of Appendix 1 of the
Rule Book and (ii) an LCH Default in accordance with the Article
1.3.1.3 (iv) of the Rule Book, save that under these circumstances, LCH
SA would not be permitted to liquidate any pledged Eligible Collateral
taken into account in that CCM Client Collateral Buffer.
Client Collateral Buffer Threshold and Return of Excess Collateral
Currently, LCH SA allows Clearing Members to set a minimum value of
Collateral to maintain as Client Collateral Buffer. This amount is
known as the ``Client Collateral Buffer Threshold.'' Currently, if the
value of the Collateral attributed to the FCM/BD Buffer Financial
Account exceeds the FCM/BD Client Collateral Buffer Threshold, the
amount of the excess, if related to Cleared Swaps, will be reclassified
as FCM/BD Swaps Unallocated Client Excess Collateral and, if related to
SBS will be reclassified as FCM/BD SBS Client Excess Collateral. The
Proposed Rule Change would update how Clearing Members can update or
increase the amount of the threshold, as well as revise the treatment
of Collateral that exceeds the threshold.
With respect to the amount of the threshold, currently Section
2.3(d) of the Procedures provides that a Clearing Member looking to
change the Client Collateral Buffer Threshold or House Excess
Collateral Threshold \24\ must submit a request to LCH on the business
day before the intended change. Thus, the change is not implemented
until the next business day. The Proposed Rule Change would revise
Section 2.3(d) to allow Clearing Members to set or update these
thresholds on the business day such request is made, instead of the
next business day. LCH SA is making this change to meet Clearing
Members' expectations to be able to update their thresholds more
quickly than is currently possible.
---------------------------------------------------------------------------
\24\ The House Excess Collateral Threshold is The minimum value
of Collateral, that a CCM or FCM/BD Clearing Member wishes to
maintain as House Excess Collateral in its House Collateral Account.
---------------------------------------------------------------------------
[[Page 62122]]
Relatedly, the Proposed Rule Change would amend Article 4.2.2.3 of
the Rule Book. It currently provides that only a CCM Clearing Member,
and not an FCM/BD Clearing Member, may increase the amount of the
Client Collateral Buffer. The Proposed Rule Change would amend this
article to confirm that an FCM/BD Clearing Member may also increase the
amount of Client Collateral Buffer above the Client Collateral Buffer
Threshold.\25\ LCH SA is making the proposed revisions regarding the
possibility for an FCM/BD Clearing Member to increase the amount of
FCM/BD Client Collateral Buffer above the FCM/BD Client Collateral
Buffer Threshold to provide for the more efficient handling of
Collateral held on behalf of FCM/BD Clients.
---------------------------------------------------------------------------
\25\ Article 4.2.2.3 of the Rule Book further provides that
transfers to the Client Collateral Buffer will be made in accordance
with Section 2 and Section 3 of the Procedures.
---------------------------------------------------------------------------
Given that, under the Proposed Rule Change, Clearing Members would
be allowed to increase the Collateral Buffer Threshold, the Proposed
Rule Change also would revise how LCH treats Collateral deposited in
excess of that threshold. Currently, under Article 4.2.2.5, where (i)
the FCM/BD Margin Balance of an FCM/BD Client Financial Account exceeds
the relevant FCM/BD Client Margin Requirement prior to the Morning Call
or (ii) the value of the Collateral attributed to the FCM/BD Buffer
Financial Account exceeds the FCM/BD Client Collateral Buffer
Threshold, LCH SA treats such excess as FCM/BD Swaps Unallocated Client
Excess Collateral or FCM/BD SBS Client Excess Collateral.\26\ An FCM/BD
Clearing Member may then request the return of such excess collateral,
subject to the conditions set out in Section 3 of the Procedures and
Article 6.2.5 of the Rule Book.
---------------------------------------------------------------------------
\26\ ``Client Excess Collateral'' is defined as the CCM Client
Excess Collateral or the FCM/BD Client Excess Collateral, as the
context requires.
---------------------------------------------------------------------------
The proposed amendments to Article 4.2.2.5 would remove the
reclassification of any value of the Collateral above the FCM/BD Client
Collateral Buffer Threshold as FCM/BD Swaps Unallocated Client Excess
Collateral, or FCM/BD SBS Client Excess Collateral, where appropriate.
Instead, if the value of the Collateral attributed to the FCM/BD Buffer
Financial Account exceeds the FCM/BD Client Collateral Buffer
Threshold, the FCM/BD Clearing Member may request to have such excess
returned to it, subject to the conditions set out in Section 3 of the
Procedures and Article 6.2.5 of the Rule Book. Moreover, Article
4.2.2.5 as amended would also give FCM/BD Clearing Members the
alternative of requesting the transfer of any FCM/BD Swaps Unallocated
Client Excess Collateral, or FCM/BD SBS Client Excess Collateral, where
appropriate, to the FCM/BD Buffer Financial Account and its
reclassification as FCM/BD Client Collateral Buffer.
Article 6.2.5.1(ii) of the Rule Book currently states that if a
FCM/BD Clearing Member delivers Collateral to LCH SA on behalf of one
or more FCM/BD clients in an amount that would cause an FCM/BD Swaps
Client Financial Account to contain FCM/BD Swaps Client Excess
Collateral, then LCH SA may (i) reject the deposit, (ii) transfer the
excess back to the Clearing Member, or (iii) accept the deposit and
transfer the excess to the FCM/BD Swaps Unallocated Client Collateral
Financial Account. The Proposed Rule Change would revise Article
6.2.5.1(ii) so that LCH SA would accept the deposit and treat the
excess as FCM/BD Swaps Client Collateral Buffer. Under 6.2.5.1(iii)(c)
as amended, the FCM/BD Clearing Member could then request the return of
any amount of excess FCM/BD Swaps Client Collateral Buffer, in
accordance with Section 3 of the Procedures.
Finally, the Proposed Rule Change would amend 6.2.5.1(iv)(d) to
reflect the ability of an FCM/BD Clearing Member to increase the FCM/BD
Swaps Client Collateral Buffer and treat excess collateral as Buffer,
as discussed above. Currently, Article 6.2.5.1(iv)(d) states that upon
the request of an FCM/BD Clearing Member, LCH SA will return FCM/SBS
Swaps Unallocated Client Excess Collateral to the Clearing Member. In
doing so, the FCM/BD Clearing Member represents that the request
complies with CFTC regulations and that the returned Collateral will
remain segregated as required by CFTC regulations and LCH SA's Rule
Book. As amended, an FCM/BD Clearing Member could request LCH SA to (i)
return FCM/BD Swaps Unallocated Client Excess Collateral to it in
accordance Section 3 of the Procedures or (ii) reclassify such FCM/BD
Swaps Unallocated Client Excess Collateral as FCM/BD Swaps Client
Collateral Buffer and record the value of such Collateral to the
relevant FCM/BD Swaps Buffer Financial Account. In doing so, the FCM/BD
Clearing Member would represent and warrant that the request complies
with CFTC Regulations and has been made by an individual who is
properly authorized to make the request. If an FCM/BD Clearing Member
requests that LCH SA return FCM/BD Swaps Unallocated Client Excess
Collateral to it, the Clearing Member would further represent to LCH SA
that the Collateral will remain segregated as by CFTC Regulations and
LCH SA's CDS Clearing Rules. If an FCM/BD Clearing Member requests that
LCH SA reclassify such FCM/BD Swaps Unallocated Client Excess
Collateral as FCM/BD Swaps Client Collateral Buffer and record the
value of such Collateral to the relevant FCM/BD Swaps Buffer Financial
Account, the Clearing Member would further represent to LCH SA that the
request reflects the true characterization of the Collateral, including
in particular that the Collateral is the property of the FCM/BD
Clearing Member. The FCM/BD Clearing Member would also be required to
provide such additional information as LCH SA may reasonably request.
Article 6.2.5.2 of the Rule Book addresses FCM/BD SBS Excess
Collateral and FCM/BD SBS Client Collateral Buffer. Article 6.2.5.2
applies to the FCM/BD SBS Client Account Structure, which LCH SA would
only establish if required, as discussed above. Article 6.2.5.2
parallels the procedures in Article 6.2.5.1 above with regard to FCM/BD
Swaps Client Collateral. The Proposed Rule Change would make the same
amendments to Article 6.2.5.2 as it is making to 6.2.5.1.
Return of Collateral
The Proposed Rule Change would also amend certain provisions of
Section 3 of the Procedures to clarify the process by which a Clearing
Member may request the return of Collateral. Specifically, the Proposed
Rule Change would make these changes to Section 3.7, 3.8, and 3.15.
Section 3.7 applies to the return Euro-denominated Cash Collateral.
Section 3.7(g)(iv) currently describes how an FCM/BD Clearing Member
may request the return of FCM/BD Swaps Unallocated Client Excess
Collateral that is Euro-denominated Cash Collateral. Section 3.7(g)(v)
currently describes how an FCM/BD Clearing Member may request the
return of FCM/BD SBS Client Excess Collateral that is Euro-denominated
Cash Collateral. In either case, the Clearing Member may request the
return of excess collateral provided the amount requested does not
exceed the amount of collateral in the account. The Proposed Rule
Change would combine 3.7(g)(iv) and (v) into single provision that
would apply to any Euro-denominated Cash Collateral recorded in a
Clearing Member's FCM/BD Client Collateral Account. As defined in the
Rule Book, FCM/BD Client Collateral Account means an
[[Page 62123]]
FCM/BD Swaps Client Collateral Account and/or an FCM/BD SBS Client
Collateral Account. Thus, this new provision would apply to both Swaps
and SBS. Under this new provision, LCH SA would return Euro-denominated
Cash Collateral recorded in a Clearing Member's FCM/BD Client
Collateral Account if LCH SA determines that it will continue to hold
Collateral sufficient to cover the FCM/BD Client Margin Requirement for
each FCM/BD Client Margin Account and to satisfy the FCM/BD Clearing
Member's Client Collateral Buffer Threshold.
Section 3.8 applies to the return of non-Euro-denominated cash
collateral. Here the Proposed Rule Change would carry forward the
distinction between Pound Sterling as collateral, and Euros/USD
discussed above. For example, the Proposed Rule Change would add a
provision to explain how a CCM could request the return of non-Euro
denominated Cash Collateral recorded as CCM Client Collateral Buffer.
The Proposed Rule Change also would revise 3.8(i), which describes how
an FCM/BD Clearing Member may request the return of USD-denominated
Cash Collateral recorded in its FCM/BD Client Account. Under the
revised provision, LCH SA would return USD-denominated Cash Collateral
recorded in the FCM/BD Client Account if it holds sufficient Collateral
(other than that which is to be returned) to cover the FCM/BD Client
Margin Requirement for each FCM/BD Client Margin Account and to satisfy
the FCM/BD Clearing Member's obligation in respect of its FCM/BD Client
Collateral Buffer Threshold. These revisions are a result of CCM
Clearing Members being able to use Pound Sterling in their Client
Collateral going forward but not FCM/BD Clearing Members.
Like this change to Section 3.8, the Proposed Rule Change would
amend Section 3.10.1(c) and Section 3.10.2(d) to set out the same
process by which a CCM may request the return of Eligible Collateral
transferred with full title, on a bilateral basis, and pursuant to a
triparty arrangement, respectively. The Proposed Rule Change would
amend Section 3.15(b) in the same way, to set out the process by which
a CCM may request the release of Pledged Eligible Collateral.
Type of Accounts
The Proposed Rule Change would also amend Section 3 of the
Procedures to clarify the use of TARGET2 and BNYM accounts by LCH SA
and its Clearing Members.
With regard to TARGET2 accounts, the Proposed Rule Change would
specify in 3.18(b) the TARGET2 accounts that LCH SA would use for
making or receiving payments in Euro. The Proposed Rule Change also
would specify in 3.18(b) the TARGET2 accounts that would be used for
satisfying FCM/BD Clearing Members' cash payment obligations with
respect to Client Cleared Transactions. Relatedly, the Proposed Rule
Change would amend Section 3.7(d)(iii) to provide that, in respect of
the FCM/BD client account structure of an FCM/BD Clearing Member, there
will be no aggregation of payments between Euro-denominated cash
payments and Euro-denominated Cash Collateral transfers through TARGET2
because Euro-denominated cash payments will be made by using the LCH
CCM Client TARGET 2 Account whereas the transfer of Euro-denominated
Cash Collateral will be made by using the LCH FCM/BD swaps client
TARGET2 account or the LCH FCM/BD SBS Client TARGET2 Account.
With regard to BNYM accounts,\27\ the Proposed Rule Change would
amend Section 3.18(c) to consolidate the number of accounts that LCH SA
maintains. Currently, LCH SA maintains separate accounts for Client
transactions in Swaps and Client transactions in SBS. The Proposed Rule
Change would remove the separate accounts and consolidate them into one
Client account. Thus, going forward, LCH SA will maintain only two BNYM
accounts, each for the purpose of debiting or crediting USD to satisfy
Cash Payments and/or Variation Margin Collateral Transfer obligations.
One account will be for a Clearing Member's own transactions, and the
other will be for the transactions of the Clearing Member's Clients.
LCH SA is consolidating these accounts in the expectation that all FCM/
BD clients will elect to portfolio margin their SBS transactions.
---------------------------------------------------------------------------
\27\ As noted above, USD is the only Eligible Currency and US
Treasury bills are the only Eligible Collateral held in BNYM
accounts.
---------------------------------------------------------------------------
Finally, the Proposed Rule Change would delete from the Procedures
references to the former time slot for the cash payments in respect of
Client Variation Margin requirements of an FCM/BD Clearing Member given
that time slot no longer exists.
C. Miscellaneous Amendments
i. Time Reference
Article 1.2.8.1 of the Rule Book currently provides that, where
reference is made in the CDS Clearing Documentation to a time or
deadline, it will mean Central European Time (``CET''), unless
otherwise stipulated. The Proposed Rule Change would revise this
Article to provide that where reference is made in the CDS Clearing
Documentation to a time or deadline, it will be understood to mean
Paris Time, unless otherwise stipulated in the CDS Clearing
Documentation. The Proposed Rule Change would remove all references to
CET from the Procedures and the Supplement. With respect to the
Supplement in particular, the Proposed Rule Change would provide
instead that any reference to a time of day shall be deemed to be a
reference to the time zone as set out in Section 1.2.8 of the Rule Book
unless otherwise provided.
The Proposed Rule Change also would amend Section 5.18 of the
Procedures in this regard. Section 5.18 currently states that all
references to times and deadlines in Section 5.18 are to London local
time unless otherwise specified.
ii. Real Time Session
LCH SA's ``Real Time Session'' is, in essence, its operating hours.
For example, Article 3.1.4.1 of the Rule Book provides that an Intraday
Transaction may be submitted to LCH SA during the Real Time Session on
any Clearing Day, and Article 3.1.4.3 states that if an Intraday
Transaction is received for clearing by LCH SA outside of the Real Time
Session, it will be deemed to have been submitted at the Start of the
Real Time Session on the following Clearing Day. Currently, the Rule
Book defines ``Real Time Session'' to mean the period commencing at the
Start of Real Time and ending at the End of Real Time in respect of
each Clearing Day.\28\ Moreover, the Rule Book defines ``Start of Real
Time'' as the time as specific in a Clearing Notice. The Proposed Rule
Change would not alter these definitions, but it would adopt a new
clearing notice. This new clearing notice would provide that, unless
notified otherwise, ``Start of Real Time (SoRT)'' would mean on each
clearing day, the earlier of: (i) the time when all relevant Clearing
Members have satisfied the morning call; and (ii) 09.05 (Paris time).
Moreover, the new clearing notice would provide that End of Real Time
means 16.30 (New York time) instead of 19.30 CET.
---------------------------------------------------------------------------
\28\ ``Start of Real Time'' and ``End of Real Time'' are defined
as the time as specified in a clearing notice.
---------------------------------------------------------------------------
Relatedly, the Proposed Rule Change would amend Article 2.3.3.5 of
the Rule Book. Article 2.3.3.5 requires each Clearing Member to ensure
that appropriate personnel are available for communications with LCH SA
during
[[Page 62124]]
Opening Hours on each Business Day. The Proposed Rule Change would
instead require each Clearing Member to have appropriate personnel
available for communications with LCH SA during the Real Time Session,
instead of only at opening hours.
The Proposed Rule Change would make an equivalent change to Section
5(c) of the Procedures. Currently, Section 5(c) specifies LCH SA's
opening hours, provides that the LCH SA operations team is available
during those hours, and further provides the hours of availability for
LCH SA's technical helpdesk. The Proposed Rule Change would replace
these different times with one, under which LCH SA would be open during
the Real Time Session and its operations team would be available during
the Real Time Session. As a result of these changes, the Proposed Rule
Change would remove defined term ``Opening Hours'' from the definitions
section of the Rule Book since it would no longer be used.\29\
---------------------------------------------------------------------------
\29\ ``Opening Hours'' is currently defined as 8:00 to 19:30
each business day.
---------------------------------------------------------------------------
iii. Other Changes
Finally, the Proposed Rule Change would make other minor amendments
for consistency or clarity to the Rule Book, the Procedures, and the
Regulations.
D. Amendments to Liquidity Risk Modelling Framework
The Proposed Rule Change would amend LCH SA's LRMF. As discussed
below, these amendments would for the most part clarify that FCM/BD
clients' funds are segregated. As such, they are not available
resources to LCH SA in a default management context unless the
liquidity requirement is driven by the FCM/BD Clearing Member of such
FCM/BD Clients. LCH SA is making these changes to comply with
applicable regulations. The Proposed Rule Change also would make a few
amendments to the LRMF to add clarity, as discussed below.
The Proposed Rule Change would first make a clarifying update to
Section 1.1.1. Section 1.1.1 explains that the CDS business line
gathers clearing activity for a wide selection of Euro index and single
names. The Proposed Rule Change would update this description to
include clearing activities related to the clearing of US, Australia,
and Asia sovereign index and single names. This change would reflect
the current composition of LCH SA's CDS business line.
The Proposed Rule Change would amend Section 1.6.1, which addresses
Liquidity Sources. The Proposed Rule Change would clarify that LCH SA
has the right to consider available for liquidity purposes cash posted
by Clearing Members to meet margin requirements and their excess cash,
except cash received from FCM/BD clearing member(s) on behalf of their
FCM/BD clients or excess cash for FCM/BD Clients. That cash would be
excluded unless the liquidity requirement is driven by the relevant
FCM/BD clearing member.
The proposed amendment to 1.6.1 also would clarify that LCH SA has
the right to consider available for liquidity purposes all the
resources collected if deposited under the full title transfer regime.
Collateral deposited by FCM/BD Clearing Members on behalf of their FCM/
BD Clients would not be deposited under the full title transfer regime.
Instead, such Collateral would be subject to a security interest.
Accordingly, the Proposed Rule Change would update a footnote, which
currently provides a list of Collateral which is not transferred by way
of full title transfer, to add a reference to Collateral received from
FCM/BD Clients.
The Proposed Rule Change next would update Section 1.6.1.1, which
addresses Collateral transfer to the 3G pool, to reflect the fact that
non-cash collateral deposited via a single pledged account is a way to
post Collateral for activities not limited to CDS related activities
only and to provide that USD securities received from FCM/BD Clients
would not be deposited via full title transfer accounts.
The Proposed Rule Change would amend Section 1.6.1.2, which
addresses assessment of assets' liquidity, to prohibit LCH SA from re-
hypothecating non-cash collateral collected from FCM/BD clients. LCH SA
would not be able to use such cash for liquidity unless the FCM/BD
Clearing Member of such FCM/BD clients is in default. The Proposed Rule
Change would apply the same treatment to securities resulting from FCM/
BD Clients' cash which LCH SA invested.
Section 1.6.1.3 contains a table that summarizes LCH SA's liquidity
sources. The Proposed Rule Change would add to this table explanations
to exclude the following from consideration as liquidity sources: (i)
Collateral received from FCM/BD Clearing Members on behalf of FCM/BD
Clients; (ii) excess cash for FCM/BD Clients that can be generated on
an intraday basis; and (iii) securities resulting from investment of
FCM/BD Clients' cash. As mentioned above, these sources would only be
available if the liquidity requirement is driven by the FCM/BD Clearing
Member of such FCM/BD Clients.
The Proposed Rule Change next would amend the description of the
liquidity need ``repayment of excess cash by members'' in Section
4.1.2, which covers Model inputs and Variable selection. The Proposed
Rule Change would provide that, when calculating the liquid resources
available to be compared against the Operational Target,\30\ the cash
received from the FCM/BD Clearing Members on behalf of their FCM/BD
Clients is excluded. In two associated footnotes, the Proposed Rule
Change would specify that Securities in DKK, NOK, SEC, AUD, CAD, CHF,
JPY are excluded from liquidity assets as well as collateral belonging
to FCM/BD clients.
---------------------------------------------------------------------------
\30\ The Operational Target represents the amount of liquidity
to be held to satisfy the liquidity needs related to the operational
management of the CCP in a stressed environment that does not lead
to a member's default.
---------------------------------------------------------------------------
Section 4.1.5 describes certain assumptions that LCH SA makes when
the Operational Target as well as certain sources of liquidity that LCH
SA uses when calculating the target. One the sources of liquidity is
LCH SA's cash deposit at Banque de France overnight. The Proposed Rule
Change would specify that this cash deposit does not include cash from
FCM/BD Clients. Moreover in Section 4.1.5, paragraph c., the Proposed
Rule Change would correct a typographical error in the penultimate
sentence.
The Proposed Rule Change would amend Sections 4.2.2, which covers
model inputs and variable selection, and 4.2.4, which covers
mathematical formula, derivation and algorithm, and numerical
approximation, to explain that when LCH SA calculates its liquidity
coverage ratio, the resources of FCM/BD clients are segregated and
unavailable. LCH SA would only consider these resources to be available
where the relevant FCM/BD Clearing Member is assumed to be in default.
Even in that case, the possibility to use the resource held on behalf
of FCM/BD clients for liquidity purposes would be capped to the
obligations of the FCM/BD Client.
The Proposed Rule Change would next amend Section 4.2.5.3, which
covers stress scenario selection. Here the Proposed Rule Change would
correct a minor typographical error. It would refer to CDSClear rather
than CDS when describing the market stress scenario considered in the
LCR. The amendment is made for consistency purposes and is not linked
to the FCM/BD related initiative.
[[Page 62125]]
In Section 4.3.2, which covers model inputs and variable selection,
and 4.3.4, which covers mathematical formula, derivation and algorithm,
and numerical approximation, the Proposed Rule Change would specify
that, in the calculation of the LCR for the interoperable CCP, the
resources held on behalf of FCM/BD clients must be considered
segregated and therefore unavailable for liquidity purposes.
Finally, in Appendix 6.3 (Reminder of LCH SA's Sources of Liquidity
and Related Risk Drivers), the Proposed Rule Change would add two
footnotes to specify that cash held on behalf of FCM/BD clients
(allocated and in excess) is excluded unless the liquidity requirement
is driven by the relevant FCM/BD Clearing Member. With respect to the
source of liquidity coming from Non-Euro non-cash collateral posted in
full title transfer, the Proposed Rule Change would specify in a
footnote that securities in DKK, NOK, SEK, CAD, AUD, CHF and JPY are
excluded from the liquidity resources. This amendment is not linked to
the FCM/BD related initiative but made for consistency purposes. With
respect to the liquidity source coming from the collateral of
investment activity, the Proposed Rule Change would add a footnote to
specify that securities coming from FCM/BD clients investment shall be
excluded unless the relevant FCM/BD Clearing Member is in default.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act requires the Commission to approve a
Proposed Rule Change of a self-regulatory organization if it finds that
the Proposed Rule Change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to the
organization.\31\ For the reasons given below, the Commission finds
that the Proposed Rule Change is consistent with Section 17A(b)(3)(F)
of the Act,\32\ Rule 17Ad-22(e)(21),\33\ and Rule 17Ad-22(e)(1) \34\
thereunder.
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\31\ 15 U.S.C. 78s(b)(2)(C).
\32\ 15 U.S.C. 78q-1(b)(3)(F).
\33\ 17 CFR 240.17Ad-22(e)(21)
\34\ 17 CFR 240.17Ad-22(e)(1).
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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, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of LCH SA or for which it is responsible.\35\ As
discussed in more detail below, the Commission finds that the Proposed
Rule Change is consistent with Section 17A(b)(3)(F) of the Act.\36\
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78q-1(b)(3)(F).
\36\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The proposed changes to the Procedures would require that LCH SA
and Clearing Members establish and use certain accounts to hold and
transfer cash and other collateral for satisfying margin requirements
in connection with client positions in SBS and establish procedures for
the return of excess collateral related to client positions in SBS. In
requiring the establishment and use of certain accounts to hold and
transfer cash and other collateral for satisfying margin requirements,
and in establishing procedures for the return of excess collateral
related to client positions in SBS, these proposed changes would help
to assure the safeguarding of securities and funds in LCH SA's custody
and control.
As part of the Portfolio Margining Program, The Proposed Rule
Change also would amend the definition of the LCH Cleared Swaps Client
Segregated Depository Account to include FCM/BD Portfolio Margining
Transactions. Similarly, under the Proposed Rule Change LCH would, upon
request, maintain a segregated depository account in BNYM to register
BNYM eligible collateral. These requirements should help safeguard
client funds by ensuring the funds are held in a segregated account.
The Proposed Rule Change also would amend the Rule Book to require
Clearing Members to have appropriate personnel available for
communications with LCH SA. It also would amend time references in the
CDS clearing documentation to clarify they mean CET, unless otherwise
stipulated. Having personnel available should help to ensure that LCH
SA can promptly communicate with Clearing Members as needed to clear
and settle transactions. Similarly, clarifying references to time
should help ensure prompt and accurate settlement.
Therefore, for the reasons discussed above, the Commission finds
that the Proposed Rule Change is consistent with the Section
17A(b)(3)(F) of the Act.\37\
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(21) Under the Act
Rule 17Ad-22(e)(21) requires covered clearing agencies to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to be efficient and effective in meeting
the requirements of its participants and the markets it serves, and
have the covered clearing agency's management regularly review the
efficiency and effectiveness of its clearing and settlement
arrangements.\38\ In adopting Rule 17Ad-22(e)(21), the Commission
provided guidance as to what a covered clearing agency generally should
consider in establishing and maintaining policies and procedures that
address efficiency and effectiveness.\39\
---------------------------------------------------------------------------
\38\ 17 CFR 240.17Ad-22(e)(21).
\39\ See Standards for Covered Clearing Agencies, Securities
Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR 70786, 70841
(Oct. 13, 2016).
---------------------------------------------------------------------------
The Proposed Rule Change, in revising the Program, would give FCM/
BD Clearing Members the ability, on behalf of their FCM/BD clients, to
portfolio margin FCM/BD Cleared Transactions that are SBS with FCM/BD
Cleared Transactions that are Cleared Swaps. Under the Program,
Clearing Members and their Clients are able to maintain reduced levels
of margin that are commensurate with the risks of the portfolio based
on correlations in a Clearing Member's cleared CDS positions consisting
of both swaps and SBS. This allows Clearing Members to have increased
efficiency by using margin from swaps and SBS by reducing costs for
Clearing Members and their Clients.
Additionally, as discussed above, LCH SA also proposes to allow
Clearing Members to set or update its house excess Collateral threshold
or Client Collateral Buffer Threshold on the business day such request
will be made, instead of the next business day. This allows Clearing
Members to update Collateral faster, which should allow for more
efficient exchange of Collateral.
The Proposed Rule Change would require each Clearing Member to have
appropriate personnel available for communications with LCH SA during
the Real Time Session, instead of only at opening hours. This change
would allow for faster communication between Clearing Members and LCH
SA by ensuring there is no delay because of lack of personnel.
The Commission believes, therefore, that the Proposed Rule Change
is consistent with the requirements of Rule 17Ad-22(e)(21) under the
Act.\40\
---------------------------------------------------------------------------
\40\ 17 CFR 240.17Ad-22(e)(21).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(1)
Rule 17Ad-22(e)(1) requires that LCH SA establish, implement,
maintain, and
[[Page 62126]]
enforce written policies and procedures reasonably designed to provide
for a well-founded, clear, transparent, and enforceable legal basis for
each aspect of its activities in all relevant jurisdictions.\41\
---------------------------------------------------------------------------
\41\ 17 CFR 240.17Ad-22(e)(1).
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The Commission believes that the other changes related to the
Default Management Process, as discussed above, would help to ensure
that the legal basis for LCH SA's activities is well-founded and clear.
LCH SA proposes to amend Article 4.2.2 regarding the stages of defaults
where a Clearing Member is a CCM. Specifically, LCH SA proposes to add
additional conditions regarding the transfer of Collateral. This helps
to ensure clarity in the CDS Default Management Process.
LCH SA is amending its Procedures and Rule book to create a
standard to create an enforceable legal basis for its portfolio
margining is the practice by which transactions in SBS are cleared and
held on a commingled basis with transactions in swaps. This standard is
based on the Portfolio Margining Order and the CFTC Portfolio Margining
Order. This Program creates a clear and well-founded legal basis based
on the guidance from both the CFTC and the Commission.
As discussed above, LCH SA proposes to make clarifying amendments
to its Liquidity Risk Modeling Framework. For example, as discussed
above, the Proposed Rule Change would amend the description of the
liquidity need repayment of excess cash by members. The Proposed Rule
Change would provide that, when calculating the liquid resources
available, the cash received from the FCM/BD Clearing Members on behalf
of their FCM/BD Clients is excluded. This helps ensure LCH SA has clear
standards when calculating liquid resources available.
Thus, the Commission finds that these aspects of the Proposed Rule
Change are consistent with Rule 17Ad-22(e)(1).\42\
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\42\ 17 CFR 240.17Ad-22(e)(1).
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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, 17A(b)(3)(F) of the Act,\43\ Rule 17Ad-
22(e)(21),\44\ and Rule 17Ad-22(e)(1) \45\ thereunder.
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\43\ 15 U.S.C. 78q-1(b)(3)(F).
\44\ 17 CFR 240.17Ad-22(e)(21)
\45\ 17 CFR 240.17Ad-22(e)(1).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the Proposed Rule Change (SR-LCH SA-2023-005) be, and hereby is,
approved.\46\
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\46\ In approving the Proposed Rule Change, the Commission
considered the proposal's impacts 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.\47\
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\47\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-19354 Filed 9-7-23; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on September 8, 2023.
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.