Notice2024-15194
Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to the Terms of Reference of the Board and Sub Committees
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
July 11, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 133 (Thursday, July 11, 2024)</title>
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[Federal Register Volume 89, Number 133 (Thursday, July 11, 2024)]
[Notices]
[Pages 56910-56919]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-15194]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100462; File No. SR-LCH SA-2024-003]
Self-Regulatory Organizations; LCH SA; Order Approving Proposed
Rule Change Relating to the Terms of Reference of the Board and Sub
Committees
July 5, 2024.
I. Introduction
On May 6, 2024, 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 (the ``Proposed Rule Change'') to
amend the Terms of Reference (``ToR'') of its Board of Directors
(``Board'') and the ToR of the following Board subcommittees:
Technology, Security and Resilience; Audit; Risk; and Nomination. The
Proposed Rule Change was published for comment in the Federal Register
on May 23, 2024.\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. 100169 (May 17, 2024),
89 FR 45717 (May 23, 2024) (File No. SR-LCH SA-2024-003)
(``Notice'').
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II. Description of the Proposed Rule Change
LCH SA is a clearing agency registered with the Commission. Through
its CDSClear business unit, LCH SA provides central counterparty
services for security-based swaps, including credit default swaps, and
options on credit default swaps. LCH SA is an affiliate of LCH Ltd,
through common ownership by LCH Group.\4\ LCH SA's ultimate parent
company is London Stock Exchange Group (``LSEG'').\5\
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\4\ LCH SA, Comprehensive Disclosure As required by SEC Rule
17Ad-22(e)(23), Section 3.2, https://www.lch.com/system/files/
media_root/
LCH%20SA%20Comprehensive%20Disclosure%20Covered%20Clearing%20Agency%2
0standards%20-%20SEC%20-
%202020_Final%20version.pdf#:~:text=LCH%20SA%20provides%2C%20on%20its
%20website%2C%20a%20comprehensive,elements%20required%20by%20regulati
on%20EU%20N%C2%B0%20575%2F2013%20%28CRR%29.
\5\ Id.
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LCH SA's Board is responsible for LCH SA's overall management. It
determines LCH SA's business strategies and oversees their
implementation.\6\ LCH SA's Board has subcommittees that provide
opinions, proposals, and recommendations to the full Board.\7\ The ToR
of these Committees and of the Board detail their organization and
functioning.\8\
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\6\ LCH SA Terms of Reference of the Board, Article 12.
\7\ LCH SA Terms of Reference of the Board, Article 15.
\8\ LCH SA Terms of Reference of the Board, Article 1; LCH SA
Terms of Reference of the Board, Article 16; LCH SA Terms of
Reference of the Board, Article 17; LCH SA Terms of Reference of the
Board, Article 18; LCH SA Terms of Reference of the Board, Article
20.
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LCH SA proposes updating these ToR. The proposed updates fall into
six categories. The first category would rename the Technology,
Security and Resilience Committee as the Operational Resilience
Committee and expand the ambit of that committee. The second category
would update the Audit Committee's responsibilities. The third would
make additional changes to the Risk Committee's responsibilities, its
supervision of risk at LCH SA, and other matters. The fourth would
delete redundant language from the ToR. The fifth would make updates to
reflect changes to the existence of and responsibilities for certain
positions at LCH Group, which is LCH SA's intermediate parent company.
The final category would include other miscellaneous changes.
A. Operational Resilience Committee
The Proposed Rule Change would rename the Technology, Security and
Resilience Committee; expand the Committee's responsibilities; make the
Committee the representative of, and advisor to, the Board on matters
related to operational resilience; specify the Committee's relationship
with other Board committees; and revise the qualifications required for
members of the Committee.
[[Page 56911]]
Renaming the Committee
First, as noted above, the Proposed Rule Change would rename the
Technology, Security and Resilience Committee to be the Operational
Resilience Committee. To that end, the Proposed Rule Change would amend
this Committee's ToR, Articles 15 and 20 of the Board ToR, and Article
3.3.8 of the Audit Committee ToR to reflect this name change.
Additionally, to reflect the Operational Resilience Committee's new
name and to align with the Operational Resilience Committee ToR, LCH SA
proposes changing the title of Article 11 of the Risk Committee ToR
from ``Operational Risk Management'' to ``Operational Resilience
Risk.'' \9\
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\9\ Notice, 89 FR at 45720-21.
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Committee's Responsibilities
LCH SA proposes the name change to better reflect the ambit of the
Committee, which, under the Proposed Rule Change, would include
technical subjects related to information systems, technology, and
cybersecurity, as well as operational resilience.\10\ To reflect these
responsibilities, LCH SA proposes replacing references to ``technology,
security and operational resilience'' with references to ``operational
resilience'' in Articles 1.4.3, 1.6, and 1.7 of the ToR.\11\ For the
same reason, LCH SA proposes changes to Articles 4.2.1 and 4.2.6.\12\
In Article 4.2.1 of the Operational Resilience Committee ToR, LCH SA
proposes specifying that the Operational Resilience Committee's review
of LCH SA's operations and technology strategy and policies relates to
operational resilience. In Article 4.2.6 of the Operational Resilience
Committee ToR, the Proposed Rule Change would note, in part, that the
Operational Resilience Committee must review and consider, where
appropriate, LCH SA's resilience risk policies rather than its policies
regarding operations and technology risk.
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\10\ Id. at 45717.
\11\ Id. at 45718 n.5.
\12\ Id.
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The Proposed Rule Change also would make the responsibilities of
the Committee consistent with current practice and other LCH SA ToR.
For example, current Article 1.2 states that the Committee must
determine if management has put in place adequate strategies and plans
which, among other things, provide reasonable assurance that LCH SA
operates within its risk appetite. LCH SA's proposal would specify that
the risk appetite is set by the Board, in accordance with current
practice.\13\ Separately, the Proposed Rule Change would also add text
consistent with current practice to Article 1.2 of the Operational
Resilience Committee ToR, stating that the Operational Resilience
Committee will receive a regular assessment of operational resilience
risks.\14\ Article 1.5 of the Operational Resilience Committee ToR
currently provides, in part, that the Operational Resilience Committee
must keep itself informed of changes in guidance from within the
broader Group. LCH SA proposes changes to this provision requiring the
Operational Resilience Committee to keep itself informed of changes in
guidance from within the broader LCH Group and LSEG to align it with
current practice.\15\
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\13\ Id. at 45718.
\14\ Id.
\15\ Id.
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Board Representative and Advisor
Consistent with these responsibilities, the Proposed Rule Change
also would make the Operational Resilience Committee the Board's
representative and advisor on matters related to operational
resilience.\16\ Currently, Section 1.1 of the Committee ToR provides
that this Committee shall represent the interests of the Board in sound
management of technology security and operational resilience, including
cyber security, to ensure that technology security and operational
resilience strategies, investments and outcomes support the mission
values and strategic goals of LCH SA. The Proposed Rule Change would
revise this to state that the Operational Resilience Committee shall
represent the interests of the Board in the sound management of
operational resilience to ensure that technology security, cyber
security and operational resilience strategies, investments and
outcomes support the mission, values, and strategic goals of LCH SA.
LCH SA's proposal would also alter Section 1.2 of the Committee ToR to
require the Operational Resilience Committee to determine whether
management has put in place adequate strategies and plans which include
appropriate management of operational resilience, rather than
strategies and plans which include appropriate management of technical,
security, operational resilience and cyber risks. The Proposed Rule
Change would separately add a new Article 1.4.4 to indicate that the
Operational Resilience Committee must help the Board review LCH SA's
ongoing outsourcing and third-party risk management arrangements, since
they also relate to operational resilience.\17\
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\16\ Id. at 45717-18.
\17\ Id. at 45718.
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Other Board Committees
Just as the Committee would provide advice to the full Board on
operational resilience matters, the Committee also would provide advice
on operational resilience matters to other Board committees.\18\
Reflecting current practices to that end, the Proposed Rule Change
would add new Articles 4.2.13, 4.2.14, and 4.2.15.\19\ Article 4.2.13
would require the Committee to provide advice to LCH SA's Risk
Committee on specific operational resilience risk related matters as
appropriate. Article 4.2.14 would require the Committee to review
Detailed Operational Risk Assessments (DORAs) with significant elements
relating to technology, cyber or other operational resilience, prior to
recommending approval by the Risk Committee.\20\ Article 4.2.15 would
require that the Committee be notified of Operational Risk Assessments
(ORA) related to cloud initiatives.
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\18\ Id.
\19\ Id.
\20\ DORAs are risk assessments related to new product
initiatives, strategic projects, or significant changes. The
relevant LCH SA business line or function in charge of the
initiative, project, or change, must produce a DORA whenever the
initiative, project, or change presents operational risks that are
novel or could have the potential to impact the current operational
risk appetite assessment or platform resiliency. See Notice, 89 FR
at 45718, n.7.
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Related to the proposed addition of Article 4.2.14 of the
Operational Resilience Committee ToR, LCH SA proposes changing Article
11.3 of the Risk Committee ToR to note that the Risk Committee will
review and approve the recommendations of the Operational Resilience
Committee in relation to DORAs for significant projects and new
products and notify the Board of the same. Currently, Article 11.3
requires the Risk Committee to review DORAs for all significant
projects and new products and to make recommendations to the Board for
their approval. LCH SA also proposes adding a new Article 11.2 to the
Risk Committee ToR to require the Risk Committee to inform the Board in
a timely manner of any new risk affecting the resilience of LCH SA.
These proposed changes are meant to align the Risk Committee ToR with
the Operational Resilience Committee ToR.\21\
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\21\ Id. at 45720-21.
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To further reflect the Committee's role as advisor to the Risk
Committee on resilience risk matters, LCH SA also proposes to add a new
Article 1.3 to the
[[Page 56912]]
Operational Resilience Committee ToR.\22\ The proposed Article 1.3
requires that the Operational Resilience Committee contribute to the
review of the Technology Risk, Business Continuity Risk, Information
Security and Cyber Risk, Operational Risk, Third Party (Outsourcing)
Risk, and Physical Security Risk policies before they are presented to
the Risk Committee for review and recommendation to the Board for
approval. The Proposed Rule Change would also note in Article 1.3 that
the Operational Resilience Committee will be notified by the owner of
the policies of any breaches or waivers to those policies. To align the
Risk Committee ToR with the Operational Resilience Committee ToR, LCH
SA also proposes changes to Article 11.1 of the Risk Committee ToR.\23\
Currently, Article 11.1 requires the Risk Committee to review, on an
annual basis, LCH SA's Resilience Risk Policy, to consider proposals
for modification of those arrangements, and to make recommendations to
the Board for approval. Under the Proposed Rule Change, Article 11.1
would require the Risk Committee to review, on an annual basis, the
Company's Operational Resilience Risk Policies, following review by the
Operational Resilience Committee, and to make recommendations to the
Board for approval.
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\22\ Id. at 45718.
\23\ Id. at 45720-21.
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Relatedly, LCH SA proposes deleting from the ToR language related
to other Committees to align with the Operational Resilience
Committee's responsibilities. For example, current Article 11.2 of the
Risk Committee ToR requires the Risk Committee to review and provide
advice on any aspects of LCH SA's Operational Risk Management Framework
on request by the Audit Committee or the Board. Because it requires the
Risk Committee to take action within the ambit of the Operational
Resilience Committee,\24\ LCH SA proposes removing this Article 11.2 of
the Risk Committee ToR. Similarly, Article 1.3.6 of the Audit Committee
ToR provides that the Audit Committee must assist the Board in
fulfilling its responsibility relating to review of LCH SA's internal
control environment, including review of resilience risk matters. The
Proposed Rule Change would delete the reference to review of resilience
risk matters because those would be the Operational Resilience
Committee's responsibility.\25\ Separately, LCH SA proposes removing
current Article 3.3.6(a)(iv) of the Audit Committee ToR in its entirety
because it requires the Audit Committee to review provisions for
business continuity and disaster recovery and the assessment of the
effectiveness of the arrangements in place at least once a year. This
is also the Operational Resilience Committee's responsibility.\26\
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\24\ Id. at 45721 n.19.
\25\ Id. at 45719.
\26\ Id. See also Article 4.2.8 of the Operational Resilience
Committee ToR.
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Finally, LCH SA also proposes changes to Article 4.4 of the
Operational Resilience Committee ToR to clarify the Committee Chair's
membership on the Risk and Audit Committees.\27\ Current Article 4.4
declares the Chair of the Operational Resilience Committee to be a
member of the Audit Committee. Moreover, it allows the Risk Committee
to invite the Chair of the Operational Resilience Committee to Risk
Committee meetings on relevant matters and in a non-voting capacity.
Under Article 4.4 as revised, the Chair of the Operational Resilience
Committee would be a standing member of the Audit Committee and the
Risk Committee. To further carry out this change, LCH SA also proposes
adding a new Article 1.1.2 to the Risk Committee ToR, which would
require that the Chair of the Operational Resilience Committee be a
member of the Risk Committee.\28\
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\27\ Id. at 45718
\28\ Id. at 45718 n.9.
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Qualifications of Committee Members
LCH SA proposes additional changes to ensure members of Operational
Resilience Committee have experience consistent with the Committee's
responsibilities.\29\ Currently, Article 2.1.2 provides that members of
the Committee ideally have significant, recent and relevant experience
of the operations of LCH and its dependence on technology. The Proposed
Rule Change would revise Article 2.1.2 to require members of the
Operational Resilience Committee to have the relevant expertise
required for the Committee to function properly, as well as recent and
relevant experience of the operations of LCH Group. LCH SA also
proposes to renumber current Article 2.2 of the Operational Resilience
Committee ToR to Article 2.1.3, and amend it to provide that other
experts in IT, security, resilience matters, and more generally on
operational resilience matters, rather than merely other technology
expert individuals, may attend the meetings of the Committee on
relevant matters in a non-voting capacity.
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\29\ Id. at 45718.
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B. Audit Committee
The Proposed Rule Change would make various updates to the Audit
Committee's responsibilities. For example, current Article 1.3.5
provides that the Audit Committee will review Enterprise Risk Reports.
Because LCH SA is expanding the detail provided in these reports, the
Proposed Rule Change would rename them as the Resilience and Enterprise
Risk Management reports.\30\
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\30\ Id. at 45719.
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The Proposed Rule Change also would amend Article 3.3.4, which sets
out the Audit Committee's responsibilities for reviewing LCH SA's
compliance with regulations. The Proposed Rule Change would add to
Article 3.3.4 a requirement that the Committee approve the compliance
policies and be informed of any breaches. LCH SA is making this change
to document an existing practice of the Audit Committee.\31\
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\31\ Id.
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Similarly, current Article 3.3.5 requires that the Audit Committee,
among other things, review the process for annual model validations and
breaches of LCH SA's Risk Governance Framework. The proposed rule
change would add a requirement that the Committee be notified of
outside appetite financial and resilience risks. LCH SA proposes this
change to make the Audit Committee better informed as it carries out
its responsibilities.\32\
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\32\ Id. at 45719.
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Finally, current Article 3.3.6(a)(iii) requires that the Committee
receive annual reports required by a 2014 order of its national
regulators related to internal controls.\33\ To ensure that the Audit
Committee receives reports required by all applicable laws and
regulations, rather than the reports required by those specific
articles, LCH SA proposes deleting the reference to the specific order.
Instead, Article 3.3.6(a)(iii) would require that the Audit Committee
receive annual reports required by law or regulation from time to
time.\34\
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\33\ Id.
\34\ Id.
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C. Risk Committee
The proposed rule change also would change the Risk Committee ToR
with respect to the Committee's responsibilities, the Committee's
supervision of risk at LCH SA, reporting by the Committee,
responsibilities of LCH SA's Chief Risk Officer, and membership of the
Committee.
[[Page 56913]]
Responsibilities
With respect to the responsibilities of the Committee, the Proposed
Rule Change first would add a new Article 6.4. Article 6.4 would
provide that the Risk Committee should be notified of the outcome of
the annual independent validation of the counterparty credit scoring
model, in accordance with the Model Governance Validation and Review
Policy. LCH SA is making this change to be consistent with its current
practice.\35\
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\35\ Id. at 45720.
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Current Article 7.4 requires that the Committee review LCH SA's
risk policy on the eligibility of new products. Since this policy is
now called the Contract and Market Acceptability Policy, LCH SA
proposes reflecting this name change in Article 7.4 of the Risk
Committee ToR.\36\
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\36\ Id. at 45720 n.15.
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LCH SA also proposes a new Article 7.5 in the Risk Committee ToR.
This new article would require that the Committee review annually a
report outlining the compliance of all markets and products against the
criteria defined in the Contract and Market Acceptability Policy. LCH
SA is making this change to be consistent with its current
practice.\37\
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\37\ Id.
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Further, for the same reason, LCH SA proposes revising renumbered
Article 7.7.1. Current Article 7.7.1 clarifies that the CEO of LCH SA
may be given authority to approve clearing of certain new contracts or
products, without prior approval by the Risk Committee, subject to
notifying the Committee. The Proposed Rule Change would add to this
provision approval of trade venues, in addition to contracts or
products.\38\
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\38\ Id.
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Articles 8 and 9 of the Risk Committee ToR contain additional
proposed changes to the Committee's responsibilities, which LCH SA is
making to reflect current practice.\39\ Current Article 8.2 requires
that the Committee review initial margin policies and consider
amendments to those policies. The Proposed Rule Change would amend
Article 8.2 to reflect that the initial margin policies that the Risk
Committee currently reviews are contained within the Financial Resource
Adequacy Policy. LCH SA would also add a new Article 8.4. This new
article would require the Risk Committee to be notified of the outcome
of the annual independent validation of all margin models in accordance
with the Model Governance, Validation and Review Policy.
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\39\ Id.
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Proposed revisions to Article 9 would clarify the Committee's
responsibilities related to LCH SA's default procedures, again to be
consistent with current practice.\40\ Current Article 9.1 requires that
the Committee, in certain circumstances, review the adequacy of LCH
SA's default funds on the basis of stress testing. The Proposed Rule
Change would revise this slightly, to clarify that the Committee's
review would be on the basis of stress testing and reverse stress
testing reports.
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\40\ Id.
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LCH SA also proposes to add new Articles 9.4 and 9.7 to reflect
current practice.\41\ Article 9.4 would provide that the Risk Committee
should be notified of the outcome of the annual independent validation
of all stress testing models used to size the default funds in
accordance with the Financial Resource Adequacy Policy, while Article
9.7 would note that the Risk Committee reviews default management fire
drill exercise reports to assess the Company's default management
process.
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\41\ Id.
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Moreover, LCH SA proposes several new provisions and revisions in
Article 10 of the Risk Committee ToR to reflect current practices
related to liquidity risk management.\42\ First, the Proposed Rule
Change would add new Articles 10.3, 10.4, and 10.6. Article 10.3 would
provide that the Risk Committee reviews annually (or more frequently if
deemed necessary) the LCH SA Liquidity Plan detailing how the standards
contained in the Liquidity Risk Policy are applied, to consider
proposed changes, and to make recommendations to the Board for
approval. New Article 10.4 would require that the Committee be notified
of the outcome of the annual independent validation of the liquidity
risk model, in accordance with the Liquidity Risk Policy. New Article
10.6 would require that the Committee be notified of the outcome of the
annual independent validation of the collateral haircut model, in
accordance with the Collateral Risk Policy. Further, the Proposed Rule
Change would add a sentence to renumbered Article 10.5 noting that the
Risk Committee should consider the addition of new collateral types and
associated risk controls, and recommend them to the Board for approval.
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\42\ Id.
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The Proposed Rule Change would also add a new Article 12 to the
Risk Committee ToR, titled Model Governance and Procyclicality. Under
new Article 12.1, the Risk Committee would review annually (or more
frequently if deemed necessary) the Company's Model Governance,
Validation and Review Policy, to consider proposals for modification of
those arrangements, and to make recommendations to the Board for
approval. Under proposed Article 12.2, the Risk Committee would review,
at least annually and upon material change, reports prepared by
independent model experts confirming the ongoing suitability of LCH
SA's financial risk models, in accordance with the Model Governance,
Validation and Review Policy. Proposed Article 12.3 would require the
Committee to review annually (or more frequently if deemed necessary)
LCH SA's Procyclicality Risk Policy, to consider proposals for
modification of those arrangements and to make recommendations to the
Board for approval. The Committee also would review, at least annually,
reports confirming that LCH SA's risk models do not operate in a
procyclical manner under proposed Article 12.4. Consistent with LCH
SA's overall current practice, these changes would help ensure that the
LCH SA Risk Committee ToR mirror the corresponding ToR of its
affiliated company, LCH Limited.\43\
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\43\ Id. at 45721.
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Proposed changes to renumbered Articles 13 and 20 of the Risk
Committee ToR also would reflect LCH SA's current practices.\44\ LCH SA
proposes a new Article 13.2 reflecting the current practice that the
Risk Committee reviews, on an annual basis (or more frequently if
deemed necessary), LCH SA's Recovery Plan and Wind Down Plan, considers
proposals for modification of those arrangements, and makes
recommendations to the Board for approval. Current Article 12.2
requires that the Committee consider any issue relating to the
outsourcing of functions which may impact the risk management of LCH
SA. The Proposed Rule Change would renumber this article to 13.3 and
would add language to clarify that it applies to any issue or new
arrangement relating to the outsourcing of functions which may impact
the risk management of the LCH SA, rather than only issues.
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\44\ Id.
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LCH SA's proposal would also correct renumbered Article 20.2 to
reflect how the Risk Committee currently may assess the remuneration
structure's impact on LCH SA's risk profile.\45\ The
[[Page 56914]]
current article, in part, requires that the Risk Committee have access
to: (i) the risk management department (to assess how the remuneration
structure affects the risk profile of LCH SA); (ii) the human resource
department, (iii) the compliance department, and (iv) the internal
audit department. The Proposed Rule Change would revise renumbered
Article 20.2 to delete text giving the Risk Committee access to the
risk management department. Instead, under revised Article 20.2, the
Committee would have access to (i) the human resource department (to
assess how the remuneration structure affects the risk profile of LCH
SA), (ii) the compliance department, and (iii) the internal audit
department. LCH SA is making this correction to reflect how the Risk
Committee currently considers this remuneration risk.\46\
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\45\ Id.
\46\ Id.
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Supervision of Risk
The Proposed Rule Change would make several changes to the Risk
Committee ToR related to the Committee's supervision of risk, including
through the information reported to the Committee. One such proposed
change would add a new Article 3.2 clarifying that the risks within the
current scope of the LCH SA Risk Committee are financial and model
risks and operational resilience risks. LCH SA proposes this change to
strengthen the Risk Committee's supervision of certain information
technology and resilience risk matters.\47\ As noted above, while the
Operational Resilience Committee would also have responsibilities
related to operational resilience risks, that committee's role is one
of review, and it would be required to provide advice to LCH SA's Risk
Committee on specific operational resilience risk-related matters as
appropriate.
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\47\ Id. at 45720.
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LCH SA also proposes a change in Article 4.2 of the Risk Committee
ToR. Current Article 4.2 provides that the Risk Committee will receive
a detailed report from the Executive Risk Committee which includes,
among other things, the risk profile of LCH SA on a monthly basis. The
Proposed Rule Change would clarify that this report would cover the
risks defined within the scope in Article 3.2 of the Risk Committee
ToR.\48\ Moreover, current Article 4.2 provides that this report will
cover LCH SA and LCH Group. Due to a change in corporate structure, LCH
SA's proposal would indicate in Article 4.2 that this report would
include the risk profile of only LCH SA, rather than LCH SA and LCH
Group.\49\
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\48\ Id.
\49\ Id. at 45720 n.13.
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Reporting by the Risk Committee
In addition to revising the reporting to the Risk Committee, the
Proposed Rule Change would revise the reporting by the Risk Committee.
Specifically, LCH SA proposes that the Risk Committee Secretary no
longer make available all minutes to the Chair of the Audit Committee
of the LCH Group Board under Article 2.9 of the Risk Committee ToR.
Instead, Article 2.9 would only require the Risk Committee Secretary to
make those minutes available to the LCH SA Board and the Chair of the
LCH SA Audit Committee. LCH SA proposes this change because the LCH
Group Board does not usually consider discussions, decisions, and
recommendations of the Risk Committee. Instead, discussions, decisions,
and recommendations of the Risk Committee are reported to the LCH SA
Board.\50\
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\50\ Id. at 45720.
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Chief Risk Officer
The Proposed Rule Change would also amend the Risk Committee ToR as
it relates to certain responsibilities of LCH SA's Chief Risk Officer
(``CRO''). First, the Proposed Rule Change would delete Article 2.10 of
the Risk Committee ToR in its entirety. This provision requires that
the CRO report to the LCH Group Board on the discussions, decisions,
and recommendations of the Risk Committee to formally ratify those
decisions and recommendations that affect the Group. LCH SA is deleting
this provision because, as noted, the LCH Group Board does not usually
consider discussions, decisions, and recommendations of the Risk
Committee.\51\
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\51\ Id.
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Article 10.7.4 currently requires either the CRO or the Head of
Collateral and Liquidity Management (``CaLM'') to sign off on breaches
of the limits or restrictions detailed in the Collateral Risk Policy
and/or the Investment Risk Policy. Since the CRO is responsible for
these policies, including signing off on them as part of their second
line function, LCH SA proposes requiring sign-off by only the CRO.\52\
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\52\ Id.
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The Proposed Rule Change would also clarify the responsibilities of
the CRO in renumbered Article 16 (current Article 15) by editing
renumbered Article 16 of the Risk Committee ToR to simplify the
description of the information provided to the Committee by the CRO.
Current Article 15.1 provides that the Committee will consider and
review regular reports prepared by the Risk Management Department of
LCH SA, which covers recent developments in at least the areas listed
in current Articles 15.1.1 through 15.1.8, such as membership and
operations. LCH proposes changing this Article's number to 16.2 and
deleting the list of areas to be covered. Instead, a new Article 16.1
would state that the Risk Committee receives management information
from the CRO of LCH SA on the assessment of all financial, model and
operational resilience risks, and informs the Board in a timely manner
of any new significant risk change affecting the resilience of the
Company. New Article 16.1 also would state that this report will
include any breaches or waivers granted. Proposed Article 16.2 would
indicate that the management information will cover recent developments
and material issues related to Financial, Model, and Operational
Resilience Risks. This revised Article would still require the CRO
report to the Committee on all risks, but would not list the specific
areas covered, as currently found in Article 15.1.
Membership
LCH SA also would amend the Risk Committee ToR as it relates to
members of the Committee. Current Article 1.1 provides that the Risk
Committee must include representatives of clients as required by law or
regulation from time to time. Article 1.1 further explains that no
client representatives on the Committee may be employees of LCH Group.
The Proposed Rule Change would revise this slightly, to provide that
these client representatives may not be employees of any LCH Group
company, meaning LCH Group Holdings Limited and its subsidiaries. This
change is proposed to conform the Risk Committee ToR to LCH Group
requirements.\53\
---------------------------------------------------------------------------
\53\ Id. at 45719.
---------------------------------------------------------------------------
Moreover, Article 1.1 also currently provides that the Risk
Committee must include representatives of LCH SA's Clearing Members as
required by law or regulation from time to time and who have
significant experience in market, credit, or liquidity risk management.
The Proposed Rule Change would add operational risk management to this
list of subject matters in respect of which such Committee members
should have significant expertise and experience. This would be
consistent with the overall scope of responsibility of the Committee,
as discussed above. This
[[Page 56915]]
change is proposed to conform the Risk Committee ToR with LCH Group
requirements.\54\
---------------------------------------------------------------------------
\54\ Id.
---------------------------------------------------------------------------
LCH SA also proposes changes related to permitted conduct by
External Committee Members of the Risk Committee. Current Article 1.5
defines External Committee Members as those members of the Risk
Committee that are not independent directors of LCH SA, who attend
meetings as risk experts and represent Clearing Members and clients.
Currently, under Article 1.6 of the Risk Committee ToR, External
Committee Members may consult with other individuals within their
organization, prior to Risk Committee meetings, where expertise other
than the specialty of the external member is required. LCH SA's
proposed changes specify that External Committee Members' consultations
with other individuals within their organization, under Article 1.6,
are subject to restrictions set out in the confidentiality agreements
signed by the External Committee Members.
Finally, the Proposed Rule Change would amend the list of
individuals that can attend meetings of the Committee in a non-voting
capacity. Currently, Article 1.2 lists individuals that may do so,
including the Head of Financial Risk of LSEG, or their nominated
delegate (under 1.2.6). LCH SA proposes revising current Article 1.2.6
to replace the Head of Financial Risk of LSEG, or their nominated
delegate, with the Chief Risk Officer of LSEG, or their nominated
delegate. LCH SA believes this proposed change would ensure that the
Risk Committee has appropriate oversight of all risks, including those
risks that affect its ultimate parent company, LSEG.\55\
---------------------------------------------------------------------------
\55\ Id. at 45719.
---------------------------------------------------------------------------
Similarly, under current Article 1.2.8, such other individuals
within the Group, as considered appropriate by the Committee, may
attend in a non-voting capacity. The Proposed Rule Change would replace
the reference to ``individuals within the Group'' with LCH SA
employees. LCH SA proposes this change because it believes LCH SA
employees would ostensibly have the expertise and background necessary
to participate in Risk Committee meetings.\56\ Moreover, under the
Proposed Rule Change, the Committee Chair rather than the entire
Committee would determine whether it is appropriate for LCH SA
employees to receive an invitation to a Risk Committee meeting, because
such invitations would be limited to a particular agenda item and in a
non-voting capacity.\57\
---------------------------------------------------------------------------
\56\ Id.
\57\ Id.
---------------------------------------------------------------------------
D. Deletion of Redundant Language
LCH SA proposes several changes that would delete redundant
language, and make related updates as needed, in the ToR of the Audit,
Operational Resilience, and Risk committees.
In the Audit Committee ToR, current Article 1.4 requires that the
Committee keep itself informed of changes to laws and regulations
applicable to the audit policy of LCH SA and matters for which the
Audit Committee is responsible. The Proposed Rule Change would remove
from Article 1.4 reference to the audit policy of LCH SA because the
``matters for which the Audit Committee is responsible'' includes the
audit policy.\58\ Similarly, LCH SA proposes replacing a reference to
its audit policy in Article 1.5 with a reference to ``matters listed
above.'' As revised, Article 1.5 would provide that nothing in the
Audit Committee ToR will diminish the responsibility of the Board to
maintain ongoing review of the matters listed above. A specific
reference to audit policy in Article 1.5 is unnecessary because current
Article 1.3, which describes the responsibilities of the Audit
Committee, is broad enough to include audit policy.\59\ The Proposed
Rule Change would also delete current Article 2.3.2 in its entirety.
This article indicates that the LCH SA Audit Committee Chair may also
be appointed as the Chair of the LCH Limited Audit Committee. Article
2.2.2 of the ToR of the Audit Committee for LCH Limited already notes
that the same person can chair both committees.\60\ Finally, LCH SA
would remove current Article 3.3.4(e), which requires the Audit
Committee to review the performance of LCH SA's Chief Compliance
Officer. LCH SA is removing this provision because it covers
responsibilities held by the Remuneration Committee.\61\
---------------------------------------------------------------------------
\58\ Id. at 45719.
\59\ Id.
\60\ Id.
\61\ Id.
---------------------------------------------------------------------------
LCH SA also proposes a change in part to eliminate redundant
language in the Operational Resilience Committee ToR. Current Article
4.2.10 of the Operational Resilience Committee ToR provides that the
Operational Resilience Committee reviews and receives reports as
appropriate, on operations and agreed metrics in conjunction with the
Audit Committee. Since current Article 4.2.9 of the Operational
Resilience Committee ToR already provides that the Operational
Resilience Committee receives reports, as appropriate, from the Audit
Committee regarding the results of reviews and assessments of LCH SA's
operations and technology functions, LCH SA views Article 4.2.10 as
redundant.\62\ Therefore, LCH SA proposes to delete it. With the
deletion of current Article 4.2.10, current Article 4.2.11 would become
new Article 4.2.10 with some proposed revisions. Specifically, new
Article 4.2.10 (former Article 4.2.11) would require the Operational
Resilience Committee to review and receive reports in relation to
ongoing technology outsourcing rather than on technology outsourcing.
---------------------------------------------------------------------------
\62\ Id. at 45718. LCH SA also proposes this change because it
would help prevent the Operational Resilience Committee's
responsibilities from overlapping with the Audit Committee's
Responsibilities. Id.
---------------------------------------------------------------------------
Moreover, LCH SA's proposal would remove Article 7.3 of the
Operational Resilience Committee ToR in its entirety. This provision
notes that any disagreement within the Board, including disagreement
between the Committee's members and the rest of the Board, should be
resolved at the Board level. Further, it notes that where disagreements
between the Committee and the Board cannot be resolved, the Committee
has the right to report the issue to the shareholders through the
Company's annual report. LCH SA proposes to remove this provision
because it is applicable only to the Audit Committee ToR.\63\
---------------------------------------------------------------------------
\63\ Id.
---------------------------------------------------------------------------
Finally, the Proposed Rule Change would make a similar change to
the Risk Committee ToR to remove a redundant provision. Specifically,
the Proposed Rule Change would delete Article 1.2.5 of the Risk
Committee ToR in its entirety. This provision allows the Chief
Executive Officer of LCH Group to be invited ex officio to attend Risk
Committee meetings in a non-voting capacity. LCH SA proposes deleting
Article 1.2.5 because the Chief Executive Officer of LCH SA is already
listed as the appropriate ex officio non-voting party under Article
1.2.2 of the Risk Committee ToR.
E. Positions at LCH Group
The Proposed Rule Change also would make updates regarding changes
to certain positions at LCH Group. As noted above, LCH Group is LCH
SA's intermediate parent company.
The Proposed Rule Change would update the Nomination Committee,
Board, and Risk Committee ToR to reflect the retirement of the LCH
Group Chief Risk Officer position. Current Article 2.3 of the
Nomination
[[Page 56916]]
Committee ToR provides that the LCH SA Board will comprise the Chief
Executive Officers of LCH Group; LCH SA, as proposed by the Group CEO;
and the Chief Risk Officer of LCH Group, as proposed by the Group CEO
or such other LCH executive as may be proposed by the Group CEO.
Current Article 2.3 defines these individuals as Executive Directors.
Since the LCH Group Chief Risk Officer position has been retired, the
Proposed Rule Change would remove this position from Article 2.3 of the
Nomination Committee ToR.\64\ Instead, the Chief Risk Officer of London
Stock Exchange Group, rather than LCH Group, as proposed by the CEO of
LCH Group, will be a member of the Board. The Proposed Rule Change also
would add to Article 2.3 that an LSEG executive, as may be proposed by
the LCH Group CEO, will also be a member of the Board. Finally, under
revised Article 2.3, the term Executive Director would be defined as
either the Chief Executive Officer of LCH SA or LCH Group.
---------------------------------------------------------------------------
\64\ Id. at 45719 n.12.
---------------------------------------------------------------------------
Similarly, LCH SA proposes changes to Article 3 of the ToR of the
Board to account for the retirement of the LCH Group Chief Risk Officer
position. Currently, Article 3 provides that the Board includes, as a
category of directors, Executive Directors which includes the LCH SA
CEO, the LCH Group CEO, and an additional LCH executive, who may be but
shall not be limited to the Chief Risk Officer of LCH Group. LCH SA
proposes deleting reference to the LCH Group Chief Risk Officer from
this provision and including only the LCH SA CEO and LCH Group CEO as
Executive Directors. Additionally, LCH SA proposes including as a
separate category of Director an additional LCH or LSEG executive, who
may be but shall not be limited to the chief risk officer of LSEG, as
proposed by the CEO of LCH Group. Like the changes to Article 2.3 of
the Nomination Committee ToR, these revisions would replace the Chief
Risk Officer of LCH Group with the Chief Risk Officer of LSEG.
Finally, LCH SA also proposes updating the Risk Committee ToR to
reflect the retirement of the Group CRO. Specifically, the Proposed
Rule Change would delete Article 1.2.4 from the Risk Committee ToR
because it indicates that the Chief Risk Officer of LCH Group may be
invited to attend Risk Committee meetings in a non-voting capacity.\65\
---------------------------------------------------------------------------
\65\ Id. at 45719.
---------------------------------------------------------------------------
Separately, current Article 10.7.4 of the Risk Committee ToR
provides that if any of the limits or restrictions detailed in LCH SA's
Collateral Risk Policy and/or Investment Risk Policy are breached, that
breach must be, among other things, reported to the Risk Committee, the
Audit Committee, the Executive Risk Committee, and the CEOs of LCH SA
and LCH Group. The Proposed Rule Change would delete the reference to
the CEO of LCH Group. LCH SA is making this change because LCH Group's
CEO does not usually consider breaches of those policies. Therefore, it
is no longer necessary to report such breaches to LCH Group's CEO.\66\
---------------------------------------------------------------------------
\66\ Id.
---------------------------------------------------------------------------
F. Miscellaneous Changes
The Proposed Rule Change also would make updates to defined terms
across the various ToR and make other non-substantive changes, as
described below.
With respect to the defined terms, the Proposed Rule Change would
replace the term Chairman with Chair in the ToR of the Operational
Resilience Committee, Audit Committee, and Risk Committee.\67\ LCH SA
also proposes changes that would specify that Group means LCH Group in
Article 5.1 of the Operational Resilience Committee ToR and Article 2.5
of the Risk Committee ToR.\68\ The Proposed Rule change also would
replace the term Group with LCH in Articles 14.1 and 16.4 of the Risk
Committee ToR in order to be consistent with LCH Group terminology.\69\
---------------------------------------------------------------------------
\67\ Id. at 45717.
\68\ Id.
\69\ Id.
---------------------------------------------------------------------------
In the ToR of the Board, LCH SA proposes removing the requirement
that meeting minutes be translated to French before being presented to
the Board because this is now unnecessary based on the composition of
the Board.\70\ The Proposed Rule Change would also edit Article 12(e)
of the ToR of the Board to align it with LCH SA's internal procedures,
which require that the Board approve LCH SA's Wind Down Plan.\71\ Under
current Article 12(e), the Board approves LCH SA's Business Continuity
Policy and Disaster Recovery Plan. LCH SA proposes that Article 12(e)
require the Board to approve LCH SA's Business Continuity Policy,
Disaster Recovery Plan, and Wind Down Plan.
---------------------------------------------------------------------------
\70\ Id. at 45721.
\71\ Id.
---------------------------------------------------------------------------
Finally, the Proposed Rule Change would renumber various provisions
because of the changes described above as well as make a number of non-
substantive clarifying changes.
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.\72\ Under the Commission's Rules of Practice, the
``burden to demonstrate that a proposed rule change is consistent with
the Exchange Act and the rules and regulations issued thereunder . . .
is on the self-regulatory organization [`SRO'] that proposed the rule
change.'' \73\
---------------------------------------------------------------------------
\72\ 15 U.S.C. 78s(b)(2)(C).
\73\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
---------------------------------------------------------------------------
The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\74\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\75\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\76\
---------------------------------------------------------------------------
\74\ Id.
\75\ Id.
\76\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------
After carefully considering the Proposed Rule Change, the
Commission finds that the Proposed Rule Change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to LCH SA. More specifically, for the reasons
given below, the Commission finds that the Proposed Rule Change is
consistent with Sections 17A(b)(3)(C) \77\ and 17A(b)(3)(F) of the Act
\78\ and Rule 17Ad-22(e)(2)(v).\79\
---------------------------------------------------------------------------
\77\ 15 U.S.C. 78q-1(b)(3)(C).
\78\ 15 U.S.C. 78q-1(b)(3)(F).
\79\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(C) of the Act
Under Section 17A(b)(3)(C) of the Act, LCH SA's rules must ``assure
fair representation of its shareholders (or members) and participants
in the selections of its directors and administration of its affairs.''
The Commission has stated that ``at a
[[Page 56917]]
minimum, fair representation requires that the entity responsible for
nominating individuals for membership on the Board should be obligated
by law or rule to make nominations with a view toward assuring fair
representation of the interests of shareholders and a cross section of
the community of participants.'' \80\ Based on its review of the record
and for the reasons discussed below, the Commission believes that LCH
SA's changes are consistent with Section 17A(b)(3)(C).\81\
---------------------------------------------------------------------------
\80\ Securities Exchange Act Release No. 20221 (Sept. 23, 1983),
48 FR 45167, 45172 (Oct. 3, 1983).
\81\ 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------
First, the proposed changes would not alter the number of directors
that represent LCH SA's participants, which are User Directors.\82\ The
Commission approved the current version of the LCH SA Board ToR.\83\
Under the ToR, User Directors are currently a category of Director on
LCH SA's Board. A User Director means a director who is nominated by a
shareholder of LCH Group which is a User or who is otherwise connected
to such User shareholder by virtue of his employment or directorship.
The Proposed Rule Change would not alter the inclusion of User
Directors on the Board.
---------------------------------------------------------------------------
\82\ Notice, 89 FR at 45722.
\83\ Securities Exchange Act Release No. 89793 (Sept. 9, 2020),
85 FR 57266 (Sept. 15, 2020) (File No. SR-LCH SA-2020-003).
---------------------------------------------------------------------------
Second, the Proposed Rule Change would work to enhance LCH SA's
owners' representation in the administration of LCH SA's affairs. LCH
SA has one shareholder, LCH Group,\84\ and LCH SA's ultimate parent
company is LSEG. As the Commission previously found, LCH SA's ToR
ensure LSEG's and LCH Group's ability to participate in LCH SA's
affairs through provisions that would, for example, provide LSEG with a
seat on the LCH SA Board or require LCH SA to seek LCH Group approval
to take action.\85\ The Proposed Rule Change would enhance LSEG's
representation in the administration of LCH SA's affairs by, for
example, replacing LCH Group's Chief Risk Officer with LSEG's Chief
Risk Officer as a potential member of the Board in the ToR of the Board
and the Nomination Committee. Representation of LSEG is important
because LSEG is LCH SA's ultimate shareholder. At the same time,
despite shifts in LCH Group's representation in some respects--for
example, the LCH Group CEO would no longer be invited to Risk Committee
Meetings--its representation in the administration of LCH SA's affairs
would remain significant. For example, under LCH SA's proposal, the CEO
of LCH Group would still be an Executive Director of LCH SA.
---------------------------------------------------------------------------
\84\ LCH Group Holdings Limited Report and Consolidated
Financial Statements for the year ended 31 December 2023, <a href="https://www.lch.com/system/files/media_root/lch-group-holdings-limited-financial-statements.pdf">https://www.lch.com/system/files/media_root/lch-group-holdings-limited-financial-statements.pdf</a>.
\85\ Securities Exchange Act Release No. 89793, 85 FR at 57271.
---------------------------------------------------------------------------
For the foregoing reasons the Proposed Rule Change is consistent
with the requirements of Section 17A(b)(3)(C) of the Act.\86\
---------------------------------------------------------------------------
\86\ 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------
B. Consistency With Section 17A(b)(3)(F) of the Act
Under Section 17A(b)(3)(F) of the Act, LCH SA's rules, among other
things, must be ``designed to promote the prompt and accurate clearance
and settlement of securities transactions . . . derivative agreements,
contracts, and transactions . . . and to assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.'' \87\ Based on its
review of the record, and for the reasons discussed below, the
Commission believes that LCH SA's changes are consistent with Section
17A(b)(3)(F) of the Act.\88\
---------------------------------------------------------------------------
\87\ 15 U.S.C. 78q-1(b)(3)(F).
\88\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Proposed Rule Change makes the ambit of the Technology,
Security and Resilience Committee and the Risk Committee clearer. For
example, under the proposal, the Technology, Security and Resilience
Committee's purpose would be changed to represent the interests of the
Board in the sound management of operational resilience to ensure that
technology security, cyber security and operational resilience
strategies, investments and outcomes support the mission, values, and
strategic goals of LCH SA. To reflect this change in scope, LCH SA
proposes renaming the Committee the Operational Resilience Committee.
LCH SA also proposes a new Article 3.2 of the Risk Committee ToR
clarifying that the risks within the scope of the LCH SA Risk Committee
are financial and model risks and operational resilience risks.
Further, the Proposed Rule Change would more clearly identify
responsibilities and maintain consistency between those
responsibilities and the scope of certain Committees. For example, LCH
SA proposes adding Articles 4.2.13 through 4.2.15 to the ToR of the
Operational Resilience Committee to require the Operational Resilience
Committee to review certain matters and provide advice to the Risk
Committee. Relatedly, proposed changes to Article 11.3 of the ToR of
the Risk Committee would require the Risk Committee to review and
approve recommendations of the Operational Resilience Committee for
certain matters. LCH SA's proposal would also add a new Article 1.3 to
the Operational Resilience Committee ToR requiring that the Operational
Resilience Committee help with the review of a number of different
policies. Further, LCH SA proposes deleting language from certain ToR
to ensure its Committees do not encroach on one another's
responsibilities. To that end, along with other provisions, LCH SA
proposes removing Article 11.2 of the Risk Committee ToR, which
requires the Risk Committee to review and provide advice on any aspects
of LCH SA's operational risk management framework on request by the
Audit Committee or the Board. LCH SA also proposes adding a new Article
3.3.4(a) to the Audit Committee ToR requiring the Audit Committee to
approve the Compliance policies and be informed of any breaches. To
make sure that the Risk Committee has appropriate oversight of all
risks, LCH SA proposes replacing the Head of Financial Risk of LSEG, or
their nominated delegate, with the Chief Risk Officer of LSEG, or their
nominated delegate, in current Article 1.2.6 as an ex officio party to
be invited to Risk Committee meetings in a non-voting capacity from
time to time.\89\
---------------------------------------------------------------------------
\89\ Notice, 89 FR at 45719.
---------------------------------------------------------------------------
The proposed changes would also help clarify and simplify LCH SA's
ToR by deleting redundant text. For example, the proposal would remove
redundant references to the Audit Policy from Articles 1.4 and 1.5 of
the Audit Committee ToR. Likewise, the proposed deletion of Article
2.3.2 from the Audit Committee ToR would eliminate a duplicative
provision that indicates that the LCH SA Audit Committee Chair may also
be appointed as the Chair of the LCH Limited Audit Committee. A
provision in the ToR of the Audit Committee for LCH Limited already
notes the same person can be Chair of both committees.
LCH SA also proposes changes making the ToR clearer by improving
their accuracy, renaming items, and identifying where to find
information. For example, the Proposed Rule Change would make a number
of changes related to the retirement of the LCH Group Chief Risk
Officer position. Additionally, LCH SA proposes changing the name of
reports identified in Article 1.3.5 of the Audit Committee ToR in line
with additional details
[[Page 56918]]
contained in the reports. LCH SA also proposes noting that initial
margin policies that the Risk Committee must review are located in the
Financial Resource Adequacy Policy.
By making the ambit of the Committees clearer, more clearly
identifying Committee responsibilities, and maintaining consistency
between Committee responsibilities and Committee scopes, LCH SA reduces
the potential for confusion by Committees or individuals as to whether
they have a specific responsibility. By deleting redundant text, LCH SA
lowers the chance that it could have contradictory text within its
rules, which would also create confusion. By correcting inaccurate
text, LCH SA makes it less likely that there is confusion as to what
the ToR require. By renaming items to better match their contents and
identifying where to find information LCH SA improves the chances that
individuals can find accurate information when referring to their ToR
and thereby reduces the likelihood there will be confusion. Reducing
the potential for confusion could help ensure that Committees complete
their responsibilities in timely manner. To the extent Committees, such
as the Operational Resilience Committee or the Risk Committee, do not
complete their responsibilities, they may fail to identify certain
changes in risk and therefore fail to initiate processes that could
minimize those risks. Ultimately, failure to minimize risks could
result in LCH SA not having sufficient funds in place to recover from a
Clearing Member default, which could in turn result in a disruption of
clearing services. Thus, by making the ambit of the Committees and
their responsibilities clearer, maintaining consistency between
Committee responsibilities and Committee scopes, eliminating redundant
text, improving the ToR accuracy, renaming items, and identifying where
to find information, LCH SA promotes the prompt and accurate clearance
and settlement of securities transactions and assures the safeguarding
of securities and funds which are in the custody or control of it or
for which it is responsible.
Multiple proposed changes would also ensure that qualified
individuals participate in LCH SA decision making. For example, LCH SA
proposes that Article 2.1.2 of the ToR of the Operational Resilience
Committee be revised to require that members of the Operational
Resilience Committee have the relevant expertise required for the
Committee to function properly as well as recent and relevant
experience of the operations of LCH Group. LCH SA also proposes changes
to its definition of User Risk Committee members in Article 1.1.3 of
the Risk Committee ToR which would add operational risk management to
the list of subject matters in respect of which such Committee members
should have significant expertise and experience. Additionally, LCH
SA's proposal would allow CEO of LCH SA to approve trade venues which
present no novel risk features and require no amendment of risk
controls subject to the Risk Committee being notified of such
approvals. The Proposed Rule Change would also strengthen or maintain
the ability of Committees to carry out their responsibilities by
ensuring that the appropriate Committees and individuals receive notice
of certain reviews. For example, new Article 6.4 to the Risk Committee
ToR would require the Risk Committee to be notified of the outcome of
the annual independent validation of the counterparty credit scoring
model in accordance with the Model Governance, Validation and Review
Policy. Likewise, new Article 8.4 of the Risk Committee ToR would
specify that the Risk Committee must be notified of the outcome of the
annual independent validation of all margin models in accordance with
the Model Governance, Validation and Review Policy.
Additionally, the Proposed Rule Change would strengthen the ability
of Committees to carry out their responsibilities because the proposed
change would protect confidential information and thereby would afford
the Risk Committee the ability to obtain information. In proposed
Article 1.6 of the Risk Committee ToR, LCH SA would specify that
external Risk Committee members' consultations with other individuals
within their organization under Article 1.6 are subject to restrictions
set out in confidentiality agreements signed by the external member. By
protecting confidential information in this instance, the proposed rule
change would enhance and improve the information and recommendations
provided to the Risk Committee by its external members.
Ensuring that the individuals making decisions related to the
administration of a clearing agency are qualified to make those
decisions, receive relevant information from important notices, and
receive quality information and informed recommendations from external
stakeholders helps decrease the chance of those decisions being
misinformed or wrong, which in turn helps decrease the chance that a
misinformed or wrong decision increases the possibility of a Clearing
Member default or interruption to the clearing agency's functions. As
such, by ensuring that qualified individuals participate in LCH SA
decision making, that notices are received, and that external members
are able to consult with other individuals in their organizations under
certain circumstances, LCH SA promotes the prompt and accurate
clearance and settlement of securities transactions and assures the
safeguarding of securities and funds which are in the custody or
control of it or for which it is responsible.
The Proposed Rule Change would also delete text from Article 10 of
the ToR of the Board requiring meeting minutes to be translated to
French. This requirement is now unnecessary due to the Board's
composition. Board members would still approve the minutes, as required
by the Board ToR, which will help ensure that they continue to carry
out their responsibilities to ensure that the minutes accurately
reflect meetings of the Board, which in turn will help LCH SA continue
to ensure that LCH SA and its Board continue to comply with applicable
rules and regulations and have accurate information to address
potential defaults, trading disruptions, and other issues that could
affect LCH SA's ability to support the prompt and accurate clearance
and settlement of securities transactions and the safeguarding of
securities and funds which are in the custody or control of LCH SA or
for which it is responsible.
For the foregoing reasons, the Commission finds that the Proposed
Rule Change is consistent with the requirements of Section 17A(b)(3)(F)
of the Act.\90\
---------------------------------------------------------------------------
\90\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(2)(v) Under the Act
Rule 17Ad-22(e)(2)(v) requires covered clearing agencies to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to specify clear and direct lines of
responsibility.\91\ Based on its review of the record, and for the
reasons discussed below, the Commission believes that LCH SA's changes
are consistent with Section 17Ad-22(e)(2)(v) of the Act.\92\
---------------------------------------------------------------------------
\91\ 17 CFR 240.17Ad-22(e)(2)(v).
\92\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------
Several of LCH SA's proposed changes specify clear and direct lines
of responsibility. Proposed Article 1.3 of the Operational Resilience
Committee ToR would require that the Operational Resilience Committee
contribute to the review of certain Operational Resilience
[[Page 56919]]
policies, including the Technology Risk Policy and the Information
Security and Cyber Risk Policy. Proposed Article 9.7 of the Risk
Committee ToR would require the Risk Committee to review default
management fire drill exercise reports to assess LCH SA's default
management process. Proposed Article 3.3.4(a) of the Audit Committee
ToR would require the Audit Committee to approve the compliance
policies and be informed of any breaches. Proposed Article 12(e) of the
ToR of the Board would require the Board to approve LCH SA's Wind Down
plans. Numerous additional examples can be found throughout LCH SA's
proposal.
The Commission finds, therefore, that the Proposed Rule Change is
consistent with the requirements of Rule 17Ad-22(e)(2)(v) under the
Act.\93\
---------------------------------------------------------------------------
\93\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------
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, Sections 17A(b)(3)(C) \94\ and 17A(b)(3)(F) of the
Act \95\ and Rule 17Ad-22(e)(2)(v).\96\
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\94\ 15 U.S.C. 78q-1(b)(3)(C).
\95\ 15 U.S.C. 78q-1(b)(3)(F).
\96\ 17 CFR 240.17Ad-22(e)(2)(v).
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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-2024-003) be, and hereby is,
approved.\97\
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\97\ 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.\98\
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\98\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-15194 Filed 7-10-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on July 11, 2024.
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