Notice2024-27476
Self-Regulatory Organizations; LCH SA; Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 and Partial Amendment No. 1, Relating to the CDSClear Select Membership Model
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
November 25, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 227 (Monday, November 25, 2024)</title>
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[Federal Register Volume 89, Number 227 (Monday, November 25, 2024)]
[Notices]
[Pages 92981-92989]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27476]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101654; File No. SR-LCH SA-2024-002]
Self-Regulatory Organizations; LCH SA; Order Granting Accelerated
Approval of Proposed Rule Change, as Modified by Amendment No. 1 and
Partial Amendment No. 1, Relating to the CDSClear Select Membership
Model
November 19, 2024.
I. Introduction
On March 13, 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 its CDS Clearing Rule Book (the ``Rule Book'') and CDS Clearing
Procedures (``Procedures''). The Proposed Rule Change was published for
comment in the Federal Register on March 28, 2024.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 99847 (Mar. 22, 2024),
89 FR 21579 (Mar. 28, 2024) (File No. SR-LCH SA-2024-002)
(``Notice'').
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On May 9, 2024, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve, disapprove, or institute proceedings to determine whether to
approve or disapprove the Proposed Rule Change, until June 26, 2024.\5\
On June 21, 2024, the Commission instituted proceedings, pursuant to
Section 19(b)(2)(B) of the Exchange Act,\6\ to determine whether to
approve or disapprove the Proposed Rule Change.\7\ On September 18,
2024, the Commission designated a longer period for commission action
on proceedings to determine whether to approve or disapprove the
Proposed Rule Change, until November 23, 2024.\8\ On October 11, 2024,
LCH SA filed Amendment No. 1 to the Proposed Rule Change.\9\ On October
17, 2024, LCH SA filed Partial Amendment No. 1 to the Proposed Rule
Change.\10\ Notice of Amendment No.1 and Partial Amendment No. 1 were
published in the Federal Register on October 24, 2024.\11\ The
Commission has not received any comments on the Proposed Rule Change,
as modified by Amendment No. 1 and Partial Amendment 1. For the reasons
discussed below, the Commission is approving the Proposed Rule Change,
as modified by Amendment No. 1 and Partial Amendment No. 1 (hereinafter
defined as ``Proposed Rule Change'') on an accelerated basis.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ Securities Exchange Act Release No. 100094 (May 9, 2024), 89
FR 42515 (May 15, 2024) (File No. SR-LCH SA-2024-002).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ Securities Exchange Act Release No. 100394 (June 21, 2024),
89 FR 53685 (June 27, 2024) (File No. SR-LCH SA-2024-002).
\8\ Securities Exchange Act Release No. 101094 (Sept. 18, 2024),
89 FR 77919 (Sept. 24, 2024) (File No. SR-LCH SA-2024-002).
\9\ Amendment No. 1 modified the Proposed Rule Change to require
a Select Member to participate in competitive bidding in default
auctions and contribute end-of-day prices should its margins exceed
a predetermined threshold over a designated time. This requirement
is discussed in Part II of this Order. It also included an Exhibit
3.3 to the filing showing LCH SA's responses to an SEC request for
information related to the Select Membership model.
\10\ Partial Amendment No. 1 fixed errors in the Exhibit 1A
filed with Amendment No. 1 by replacing the Statutory Basis and
Burden on Competition sections of the amended Exhibit 1A with the
text of the Statutory Basis and Burden on Competition sections of
the amended 19b-4 narrative.
\11\ Securities Exchange Act Release No. 101383 (Oct. 18, 2024),
89 FR 84972 (Oct. 24, 2024) (File No. SR-LCH SA-2024-002) (``Amended
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.\12\ LCH SA provides these central
counterparty services to its Clearing Members.\13\ Some of these
Clearing Members provide clearing services for clients.
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\12\ What We Clear, <a href="https://www.lch.com/services/cdsclear/what-we-clear">https://www.lch.com/services/cdsclear/what-we-clear</a> (last visited Sept. 27, 2024).
\13\ Capitalized terms not otherwise defined herein have the
meanings assigned to them in the CDSClear Rule Book or CDS Clearing
Procedures, as applicable.
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LCH SA has two different types of Clearing Members, General Members
and Select Members, with different obligations to LCH SA. General
Members must participate in competitive bidding for auction packages,
must submit prices to LCH SA, and may provide client clearing services
to Affiliated Firms \14\ and non-Affiliated Firms.\15\ General Members
also must nominate representatives for the CDS Default Management
Committee and CDS Default Management Group.\16\
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\14\ The Rule Book defines an Affiliated Firm as any Affiliate
or any entity that is otherwise member to the same institutional
protection scheme (as defined in the CRR) as the Clearing Member.
The CRR is defined in the Rule Book as Regulation (EU) No. 575/2013
and certain related regulations and standards. LCH SA CDS Clearing
Rule Book Chapter 1 Article 1.1.1 An institutional protection scheme
under the CRR is a contractual or statutory liability arrangement
that protects those institutions and in particular ensures their
liquidity and solvency to avoid bankruptcy where necessary.
Regulation (EU) No 575/2013 of the European Parliament and of the
Council of 26 June 2013 on prudential requirements for credit
institutions and investment firms and amending Regulation (EU) No
648/2012, Article 113(7), available at <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013R0575">https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013R0575</a>.
\15\ Notice, 89 FR at 21579.
\16\ Id. at 21581.
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Select Members, on the other hand, must participate in competitive
bidding only for a subset of Auction Packages and may opt out of
submitting prices.\17\ Select Members also may provide client clearing
services,\18\ but only for Affiliated Firms. Finally, while Select
Members also must nominate representatives for the CDS Default
Management Committee and CDS Default Management Group,\19\ as noted,
their participation in competitive bidding is limited to a subset of
Auction Packages.\20\
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\17\ Notice, 89 FR at 21579, 81.
\18\ Select Members originally were not allowed to offer client
clearing services. See LCH SA, Self Certification Letter, Select
Membership, available at, <a href="https://www.cftc.gov/sites/default/files/filings/orgrules/16/07/rule070816lchsadco001.pdf">https://www.cftc.gov/sites/default/files/filings/orgrules/16/07/rule070816lchsadco001.pdf</a>. In 2019, the
Commission approved amendments to the Rule Book and Procedures to
allow Select Members to provide client clearing services to
Affiliated Firms. See Securities Exchange Act Release No. 86376
(July 15, 2019), 84 FR 34955, 34957 (July 19, 2019) (File No. SR-LCH
SA-2019-003). LCH SA proposed these to allow client clearing limited
in this manner because a Select Member requested the ability to
offer client clearing to an affiliate. LCH SA provided background
and analysis related to the Select Membership model in confidential
Exhibit 3.3 to the Proposed Rule Change, which LCH SA added to the
Proposed Rule change with Amendment No. 1.
\19\ Notice, 89 FR at 21581.
\20\ Currently, Select Members and General Members must nominate
representatives for the CDS Default Management Committee and CDS
Default Management Group because both Select Members and General
Members currently must participate in auctions to some extent.
Notice, 89 FR at 21581; LCH SA provided background and analysis
related to the Select Membership model in confidential Exhibit 3.3
to the Proposed Rule Change, which LCH SA added to the Proposed Rule
change with Amendment No. 1.
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The obligations of General Members and Select Members differ
because LCH SA designed the two membership categories with different
potential members in mind. LCH SA created the
[[Page 92982]]
Select Member tier in 2016 to offer CDSClear direct membership to
institutions that met the membership criteria, but did not want to be
direct members due to the Competitive Bidding and price contribution
obligations of such members.\21\ These institutions tend to be price
takers with smaller portfolios.\22\ They prefer avoiding Competitive
Bidding as General Members because they may not have the risk-taking
capabilities to manage positions that they do not actively trade but
may win in an auction.\23\ Similarly, they prefer avoiding price
contribution as General Members because they may only actively transact
in a limited set of products, thereby making it difficult to provide
data for all of their open positions.\24\ LCH SA views price
contribution as less critical for these institutions because, as price
takers, any prices the Select Members might submit to LCH SA likely
would have already been provided to LCH SA by CDSClear General
Members.\25\
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\21\ LCH SA, Self Certification Letter, Select Membership,
available at, <a href="https://www.cftc.gov/sites/default/files/filings/orgrules/16/07/rule070816lchsadco001.pdf">https://www.cftc.gov/sites/default/files/filings/orgrules/16/07/rule070816lchsadco001.pdf</a>.
\22\ Securities Exchange Act Release No. 82076 (Nov. 14, 2017),
82 FR 55139, 55140 (Nov. 20, 2017) (File No. SR-LCH SA-2017-008);
Notice, 89 FR at 21583.
\23\ LCH SA provided background and analysis related to the
Select Membership model in confidential Exhibit 3.3 to the Proposed
Rule Change, which LCH SA added to the Proposed Rule change with
Amendment No. 1.
\24\ LCH SA provided background and analysis related to the
Select Membership model in confidential Exhibit 3.3 to the Proposed
Rule Change, which LCH SA added to the Proposed Rule change with
Amendment No. 1.
\25\ LCH SA provided background and analysis related to the
Select Membership model in confidential Exhibit 3.3 to the Proposed
Rule Change, which LCH SA added to the Proposed Rule change with
Amendment No. 1.
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Some prospective Clearing Members may wish to provide clearing
services to non-affiliated firms but they may not have the capacity to
participate in Competitive Bidding or submit Market Data.\26\ In order
to allow prospective Clearing Members that do not have the capacity to
participate in Competitive Bidding or submit Market Data to provide
clearing services to non-affiliated firms, without becoming General
Members, LCH SA proposes changes to adjust those requirements for
Select Members, and make other related changes.\27\
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\26\ Notice, 89 FR at 21579.
\27\ Id. Despite these changes, Select Members must still
satisfy the membership requirements found in Section 2.2.1 of the
LCH SA CDS Clearing Rule Book, the same as General Members. Pursuant
to Section 2.2.1, Select Members must, among other things, comply
with applicable law, be subject to supervision by competent
regulatory authorities, meet minimum capital requirements, and
satisfy a credit risk assessment. See LCH SA CDS Clearing Rule Book,
Section 2.2.1.
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Although these changes will allow some Select Members to clear for
non-affiliated firms without participating in Competitive Bidding or
submitting Market Data, these changes will not necessarily undermine
Competitive Bidding or LCH SA's collection of Market Data. This is
because Select Membership will not be overall more favorable than
General Membership due to the Proposed Rule Change. Specifically, while
Select Members will have fewer obligations than General Members and
still be able to clear for clients, LCH SA's fee grid and Risk
Management Framework, which the Proposed Rule Change does not affect,
make client clearing cheaper for General than Select Members, as
described below.
Specifically, with respect to the fee grid, currently only General
Members may subscribe to the unlimited tariff, which allows General
Members to clear an unlimited number of trades for their own account
for an annual fixed fee.\28\ Further, General Members that pay a
variable tariff will have lower fixed and variable fees than Select
Members.\29\ The Proposed Rule Change would not alter this
arrangement.\30\
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\28\ Notice, 89 FR at 21579.
\29\ Id. at 21580.
\30\ Id.
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With respect to the Risk Management Framework, General Members who
clear for clients may be able to give their clients the same liquidity
margin as other General Members. Select Members, on the other hand, may
incur a higher liquidity margin, including a liquidity concentration
charge, for large positions, including large client positions.\31\ The
Proposed Rule Change would not alter this liquidity margin or otherwise
amend the Risk Management Framework.
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\31\ Id.
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To further ensure that a sufficient number of Clearing Members
participate in Competitive Bidding and submit Market Data, as discussed
below, the Proposed Rule Change would guarantee that at least six
Clearing Member Financial Groups \32\ participate in default auctions
and submit Market Data by requiring a Select Member to participate in
those processes if the margins of its Financial Group exceed a
predetermined threshold over a designated time.\33\
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\32\ The Rule Book indicates that a Person shall belong to the
same Financial Group as (i) any entity controlled, directly or
indirectly by the Person; (ii) any entity that controls, directly or
indirectly the Person; or (iii) any entity directly or indirectly
under common control with the Person. LCH SA CDS Clearing Rule Book,
Chapter 1 Article 1.1.1. Currently, CDSClear Financial Groups
include anywhere from 1 to 4 Clearing Members. Member Search,
<a href="https://www.lseg.com/en/post-trade/clearing/membership/member-search#t-sa">https://www.lseg.com/en/post-trade/clearing/membership/member-search#t-sa</a> (last visited Oct. 25, 2024).
\33\ As described below, the Proposed Rule Change would require
Select Member participation in Competitive Bidding and submission of
Market Data when the Group Total Margin Percentage for the Select
Member's Financial Group exceeds the Participation Threshold for
sixty consecutive clearing days. The Participation Threshold is the
percentage which is equal to the lower of 5% and the sixth largest
Group Total Margin Percentage among all the Group Total Margin
Percentages calculated in respect of each Financial Group to which
one or more Clearing Members belong. As noted above, General Members
must participate in Competitive Bidding and submit Market Data.
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LCH SA's proposed changes to Select Membership can be grouped into
five categories.\34\ The first category would allow Select Members to
provide client clearing services to non-affiliated firms. The second
and third categories would relate to Select Members' ability to elect
to participate in Competitive Bidding and submission of end-of-day
prices. The fourth category would address mandatory participation in
Competitive Bidding and submission of end-of-day prices by Select
Members. The fifth category would create a new form through which
Select Members may make certain elections, including to participate in
Competitive Bidding and submit Market Data.
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\34\ LCH SA also proposes changes to correct cross-references,
grammar, and typographical errors, and provide additional
clarification.
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A. Non-Affiliated Firm Clearing for Select Members
As noted above, the Rule Book does not allow Select Members to
provide CDS Client Clearing Services to non-affiliated firms. Current
Article 5.1.1.2 of the Rule Book addresses conditions upon which CDS
Client Clearing Services may be provided by a ``CCM'' \35\ to its CCM
Clients. Article 5.1.1.2(i) indicates that if a CCM is a Select Member,
it shall not provide CDS Client Clearing Services to any CCM Client
other than its Affiliated Firms. Similarly, Article 6.1.1.2 of the Rule
Book addresses conditions upon which FCM/BD Clearing Members \36\ may
[[Page 92983]]
provide CDS Clearing Services. Article 6.1.1.2(i) states that if an
FCM/BD Clearing Member is a Select Member, it shall not provide CDS
Client Clearing Services to any FCM/BD Client other than its Affiliated
Firms. LCH SA proposes deleting Articles 5.1.1.2(i) and 6.1.1.2(i),
since these provisions limit the entities to which Select Members may
provide client clearing services to Affiliated Firms.\37\
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\35\ The Rule Book defines a CCM as any legal entity admitted as
a Clearing Member in accordance with the CDS Clearing Rules at LCH
SA and a party to the CDS Admission Agreement, including General
Members and Select Members. LCH SA CDS Clearing Rule Book Chapter 1
Article 1.1.1.
\36\ The Rule Book defines FCM/BD Clearing Members as any FCM,
BD or legal entity that is both FCM and BD that has been admitted as
a clearing member in accordance with the CDS Clearing Rules and is a
party to the CDS Admission Agreement and which has not elected to
become a CCM, provided that if such FCM/BD Clearing Member wishes to
provide CDS Client Clearing Services described in Title VI, it shall
either (i) be a General Member or (ii) provide such CDS Client
Clearing Services to its Affiliated Firms only. LCH SA CDS Clearing
Rule Book Chapter 1 Article 1.1.1.
\37\ Notice, 89 FR at 21580.
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To clarify that Select Members may offer CDS Client Clearing
Services to any client, including non-affiliates, LCH SA proposes
adjusting certain defined terms, including the definition of Select
Member.\38\ Currently, the Rule Book defines Select Member as a CCM or
FCM/BD Clearing Member that does not provide CDS Client Clearing
Services to clients other than Affiliated Firms and has been admitted
by LCH SA as a Select Member in accordance with Section 1 of the
Procedures. LCH SA proposes deleting the text from the definition,
noting that Select Members do not provide CDS Client Clearing Services
to clients other than Affiliated Firms. LCH SA also proposes deleting
certain text from the Rule Book highlighting the current status quo--
that General Members may provide client clearing services to non-
affiliated firms, while Select Members may not do so--in the
definitions of CCM and FCM/BD Clearing Member.
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\38\ Id.
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Under LCH SA's proposal to allow Select Members to provide CDS
Client Clearing Services to Clients other than Affiliated Firms, there
is no need to define the term Affiliated Firm. This term was only used
with respect to the current Select Member model.\39\ As such, LCH SA
proposes deleting the defined term Affiliated Firm from the Rule Book.
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\39\ Id.
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Similarly, LCH SA proposes updating certain references that are no
longer necessary or that can no longer exist because of its proposal to
permit Select Members to provide clearing services to any client and
the deletion of the defined term Affiliated Firm.\40\ LCH SA
accordingly proposes deleting references to Affiliated Firms in Article
5.1.1.1 of the Rule Book and in Article 4.2.7.2 of the Rule Book.\41\
As noted above, in 2019, LCH SA made several changes to its Rule Book
to allow and account for Select Members providing client clearing
services to Affiliated Firms. The proposed changes to Articles 5.1.1.1
and 4.2.7.2 eliminate these changes and work to make those provisions
consistent with LCH SA's new requirements for Select Members.
Separately, in some provisions of its Rule Book, LCH SA proposes
replacing the term Affiliated Firm with the term Affiliate \42\ rather
than deleting it entirely because in certain places, LCH SA refers to
Affiliates of a Clearing Member. Specifically, LCH SA would make this
change in the definitions of CCM Indirect Gross Segregated Account
Client, CCM Indirect Net Segregated Account Client, CCM Individual
Segregated Account Client, and FCM/BD Client as well as in Article
6.1.1.2. The proposed changes to the definitions for CCM Indirect Gross
Segregated Account client, CCM Indirect Net Segregated Account Client,
and CCM Individual Segregated Account Client reverse 2019 changes made
to account for Select Members ability to clear for Affiliated Firms.
The proposed change to Article 6.1.1.2's introduction makes that
provision consistent with Article 6.1.1.1.\43\ Further, the changes to
Article 6.1.1.2 in general account for the fact that, after changes to
its Select Member tier, without the need for the broader term
Affiliated Firm, LCH SA can revert back to the use of the term
Affiliate.
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\40\ Id. at 21580-81.
\41\ Id.
\42\ The Rule Book defines Affiliate as any entity that
controls, directly or indirectly, the Clearing Member, any entity
controlled, directly or indirectly, by the Clearing Member or any
entity directly or indirectly under common control with such
Clearing Member. Affiliated Firm is defined as any Affiliate or any
entity that is otherwise member to the same institutional protection
scheme (as defined in the CRR as the Clearing Member). LCH SA CDS
Clearing Rule Book Chapter 1 Article 1.1.1.
\43\ Article 6.1.1.1 provides that an FCM/BD Clearing Member may
not enter into Cleared Transactions for the account of an Affiliate,
unless such FCM/BD Clearing Member first provides LCH SA with an
opinion of counsel, in form and content acceptable to LCH SA,
confirming that entry into such Cleared Transactions would not be
contrary to Applicable Law. The proposed Article 6.1.1.2 would
provide that an FCM/BD Clearing Member may provide CDS Clearing
Services to a Client or, if permitted pursuant to Article 6.1.1.1 an
Affiliate, rather than an Affiliated Firm, on any terms and
conditions mutually agreed to by it and such Person.
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Finally, given the proposal to allow Select Members to clear for
non-affiliated firms as General Members can, LCH SA proposes changes to
apply certain existing requirements to both General Members and Select
Members without distinguishing between the two.\44\ In Articles
2.2.1.1(iv) and 2.2.1.1(v) of the Rule Book, LCH SA proposes changes
that would make certain conditions to becoming a Clearing Member
applicable to all Applicants wishing to provide CDS Client Clearing
Services, instead of Applicants wishing to be admitted as a General
Member or as a Select Member providing CDS Client Clearing Services to
Affiliated Firms. Similarly, LCH SA proposes changes to Article
2.2.2.1(iv) of the Rule Book that would make certain continuing
obligations of Clearing Members applicable to Clearing Members which
have elected to provide CDS Client Clearing Services generally, rather
than only to General or Select Members that have elected to provide CDS
Client Clearing Services to Affiliated Firms. LCH SA also proposes
deleting text from Article 4.2.7.2 of the Rule Book limiting Clearing
Members authorized to provide Markit LCH Settlement Prices under
certain conditions to General Members, or Select Members that opt to be
Price Contribution Participants and that provide CDS Client Clearing
Services to Affiliated Firms.\45\ After making this change, all
Clearing Members, as opposed to just a subset of Clearing Members,
would be authorized to provide Markit LCH Settlement Prices to certain
clients under certain conditions.
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\44\ Notice, 89 FR at 21580.
\45\ A Price Contribution Participant is a Select Member that
has opted for submitting Market Data in accordance with Section 5 of
the Procedures or each General Member, or in each case, its Price
Contribution Delegate. LCH SA CDS Clearing Rule Book Chapter 1
Article 1.1.1.
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B. Participation in Competitive Bidding
In the event of a Clearing Member default, LCH SA shall auction off
the defaulting Clearing Member's positions.\46\ Currently, the LCH SA
CDS Default Management Process requires all Non-Defaulting Clearing
Members, including Select Members, to participate in Competitive
Bidding during such auctions, with a few exceptions.\47\ For example, a
Select Member does not need to bid for any Auction Package if that
Auction Package contains a product that the Select Member does not
transact
[[Page 92984]]
in,\48\ as set out in that Select Member's Product Family Form.\49\
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\46\ Specifically, where there is an Event of Default with
respect to a Clearing Member, LCH SA will auction ``Auction
Packages.'' LCH SA CDS Clearing Rule Book, Appendix 1, Clause 2.1.
An Auction Package is defined as a portfolio of Auction Transactions
reflecting one or more Cleared Transactions registered in the name
of the Defaulting Clearing Member, together with any connected
hedging trades that have been concluded by LCH SA through Hedging.
LCH SA CDS Clearing Rule Book, Appendix 1, Clause 1.1.
\47\ These exceptions are described in Clause 5.4.1 of the CDS
Default Management Process in the Rule Book.
\48\ Specifically, a Select Member does not need to engage in
Competitive Bidding for Auction Packages containing any Cleared
Transaction that does not belong to any Product Family as set out in
that Select Member's Product Family Form. The Rule Book defines
Product Family as each category of CDS or Index Swaption for which
LCH SA provides CDS Clearing Services and that may be selected by a
Select Member in its Product Family Form. LCH SA CDS Clearing Rule
Book, Chapter 1 Article 1.1.1.
\49\ The Rule Book defines Product Family Form as, in respect of
a Select Member, the form referencing the Product Families that a
Select Member intends to clear through LCH SA, as amended from time
to time in accordance with Section 5 of the Procedures. Id.
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Even with this exception, LCH SA has found that some Select Members
may not have the operational capacity to participate in default
auctions.\50\ LCH SA believes that it does not need certain Select
Members to participate in Competitive Bidding because Select Members
have had minimal impact on winning bids during previously conducted
fire drills.\51\ Accordingly, LCH SA is now proposing to make
participation in Competitive Bidding optional for Select Members,
subject to a minimum participation requirement, as discussed below.\52\
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\50\ Notice, 89 FR at 21579. Specifically, LCH SA notes that
Select Members have historically required assistance managing
default files and have routinely requested assistance addressing
questions during fire drill exercises. Id. at 21582 n19.
\51\ LCH SA provided background and analysis related to past
firedrill bidding in confidential Exhibit 3.2 and background and
analysis related to the Select Membership model in confidential
Exhibit 3.3 to the Proposed Rule Change. Confidential Exhibit 3.2
was a part of the originally filed Proposed Rule Change.
Confidential Exhibit 3.3 was added to the Proposed Rule Change with
Amendment No. 1.
\52\ As discussed In Section D below, LCH SA recognizes that
changes to its membership tiers require that LCH SA maintains
sufficient participation in Competitive Bidding and the price
contribution process. See Amended Notice, 89 FR at 84975.
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Specifically, LCH SA proposes to revise current Article 2.2.0.5 of
the Rule Book to alter which Select Members are required to participate
in Competitive Bidding. Further, these revisions will clarify that a
Select Member, under circumstances where it is not required to
participate in Competitive Bidding as described in Section D below, may
opt to participate in Competitive Bidding pursuant to Clause 5 of the
CDS Default Management Process, subject to Article 2.2.1.1(xi) of the
Rule Book.\53\ Related to this change, LCH SA will also clarify that a
Select Member that elects, or is required, to participate in
Competitive Bidding will be subject to the provisions of the CDS
Clearing Documentation that apply to any Non-Defaulting Clearing Member
that must participate in Competitive Bidding for each Auction Package,
as a General Member will be.
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\53\ As is noted in footnote 59, the Proposed Rule Change would
delete current Article 2.2.0.4. Thus, current Article 2.2.0.5 and
proposed Article 2.2.0.4 are the same provision.
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To further effectuate this change, LCH SA also proposes revisions
to Clause 5.4.1(ii) of the CDS Default Management Process, which is
found in Appendix 1 to the Rule Book. Clause 5.4.1 identifies
exceptions to the requirement that all Non-Defaulting Clearing Members
participate in Competitive Bidding. The Proposed Rule Change would add
an exception from the Competitive Bidding requirement for Select
Members that are not required to participate in Competitive Bidding
under proposed Article 2.2.0.4, and that also have not elected to
participate in Competitive Bidding by following the requirements of
proposed Article 2.2.0.4 within one hour of the declaration of an Event
of Default by LCH SA.\54\
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\54\ As noted above, under the LCH SA's proposal, a Select
Member that voluntarily chooses to participate in Competitive
Bidding must abide by its obligations under Article 2.2.1.1(xi) and
elect to participate in Competitive Bidding in order to opt into
Competitive Bidding.
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LCH SA proposes to revise certain other provisions--specifically,
those related to conditions on Applicants wishing to be admitted as
Clearing Members--to reflect that Competitive Bidding will be elective
for Select Members going forward, subject to the minimum participation
requirement described below. Article 2.2.1.1(xi) of the Rule Book
currently requires a Clearing Member Applicant to participate in the
implementation of the CDS Default Management Process or demonstrate
that it has an associated entity or an LCH Approved Outsourcing Agent
that can successfully do so.\55\ It also requires a Clearing Member
Applicant to participate in (and satisfy LCH SA's requirements with
respect to the carrying out of) regular fire drills run by LCH SA from
time to time in accordance with the Rule Book, or demonstrate that it
has an associated entity or an LCH Approved Outsourcing Agent that can
successfully do so. The proposed rule change would add language to
Article 2.2.1.1(xi) specifying that it applies to an Applicant seeking
to be admitted as a General Member, or as a Select Member that will
elect to participate in Competitive Bidding. Relatedly, the proposed
rule change would amend Section 1.1(d) of the Procedures to note that
an Applicant must accept that, during the review process, LCH SA is
entitled to request that the Applicant applying to be a Select Member
and wishing to participate in Competitive Bidding must pass LCH SA-
administered tests to ensure that the Applicant can successfully
participate in Competitive Bidding.
---------------------------------------------------------------------------
\55\ Associated entities under Article 2.2.1.1(xi) would include
affiliated Clearing Members or alternatively a non-clearing member
Affiliate that clears through the Clearing Member.
---------------------------------------------------------------------------
Because certain Select Members will no longer be required to
participate in Competitive Bidding, they also will no longer be
required to use the Product Family Form. The Product Family Form is
used by Select Members to identify the Product Families that a Select
Member intends to clear through LCH SA.\56\ A form identifying the
Product Families that a Select Member intends to clear through LCH SA
is currently necessary because Select Members only must participate in
Competitive Bidding for Auction Packages if the Cleared Transactions in
the Auction Package all belong to Product Families set out in the
Select Member's Product Family Form.\57\ Under the Proposed Rule
Change, because Select Members are no longer required to participate in
Competitive Bidding, subject to the minimum participation requirement
discussed below, there is no longer a need for Select Members to use
the Product Family Form.\58\ As such, LCH SA proposes deleting the
defined terms Product Family and Product Family Form from the Rule
Book, and proposes deleting references to the terms Product Family and
Product Family Form in Articles 2.2.0.4,\59\ 3.1.6.2(ii),\60\ 3.1.6.5,
and Appendix 1 Clauses 5.4.1(ii) \61\ and 6.1 of the Rule Book.\62\
---------------------------------------------------------------------------
\56\ LCH SA CDS Clearing Rule Book Chapter 2 Article 2.2.0.4.
\57\ Notice, 89 FR at 21580.
\58\ Id.
\59\ LCH SA proposes deletion of this entire provision. This
provision discusses the use of the Product Family Form and updating
the Product Family Form. From this point forward references to
Article 2.2.0.4 will be to the proposed Article 2.2.0.4/current
Article 2.2.0.5 of the Rule Book.
\60\ LCH SA proposes deletion of text noting that LCH SA will
inform relevant Clearing Members of, in respect of a Select Member,
any cleared Transaction, as a result of the novation process
pursuant to Article 3.1.6.1, that does not belong to any of the
Product Families indicated in the Product Family Form of that Select
Member.
\61\ LCH SA proposes the deletion of text in this provision
indicating that a Non-Defaulting Clearing Member is not required to
participate in Competitive Bidding for an Auction Package containing
any Cleared Transaction that does not belong to any Product Family
as set out in that Select Member's Product Family Form in force on
the Business Day immediately preceding the CDS Post Default Period.
\62\ LCH SA proposes the deletion of text in this provision
highlighting circumstances under which and how a Product Family Form
will be updated. With the deletion of this text there is also no
need for the references to General Members and Select Members in
Clause 6.1.2(ii)(a) which acknowledge the differences between Select
Members and General Members under the current Rule Book. Notice, 89
FR at 21580. Thus, LCH SA proposes to delete references to the terms
General Member and Select Member in Clause 6.1.2(ii)(a).
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[[Page 92985]]
For a similar reason, the Proposed Rule Change would delete Article
3.1.6.8 of the Rule Book. This provision is no longer needed because it
describes how LCH SA would deal with situations where LCH SA registers
a Cleared Transaction, in respect of a Select Member, which does not
belong to any of the Product Families indicated in the Select Member's
Product Family Form.\63\
---------------------------------------------------------------------------
\63\ Notice, 89 FR at 21580.
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Finally, because Select Members' obligations with respect to
Competitive Bidding would change and therefore, their perspective would
provide less added value with respect to the design of LCH SA's
liquidation strategy than it did in the past, Select Members also will
no longer be required to nominate representatives to the CDS Default
Management Committee or Group.\64\
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\64\ LCH SA provided background and analysis related to the
Select Membership model in confidential Exhibit 3.3 to the Proposed
Rule Change, which LCH SA added to the Proposed Rule Change with
Amendment No. 1.
---------------------------------------------------------------------------
The CDS Default Management Committee meets at least quarterly,
primarily to ensure continued preparedness for an Event of Default. The
Default Management Committee's duties include participating in regular
fire drills in relation to the CDS Default Management Process, keeping
under review the terms of reference for both the CDS Default Management
Committee and the CDS Default Management Group, determining the
provisions of the CDS Default Management Guidance Manual that will
supplement the principles set out in the CDS Default Management
Process, and assisting the members of the CDS Default Management Group
in implementing the CDS Default Management Process.\65\ Appendix 1,
Clause 10.2 of the Rule Book indicates that the CDS Default Management
Committee shall consist of representatives nominated by each of the
Clearing Members.
---------------------------------------------------------------------------
\65\ LCH SA CDS Clearing Rule Book Appendix 1 Clause 10.1.
---------------------------------------------------------------------------
The CDS Default Management Group meets as soon as reasonably
practicable following notification by LCH SA that a Clearing Member is
the subject of an Event of Default. This group assists LCH SA in the
implementation of the CDS Default Management Process.\66\ Appendix 1,
Clause 11.2.2 of the Rule Book notes that each Clearing Member is
required to notify LCH SA of at least two representatives that can be
called upon to participate as a member of the CDS Default Management
Group.
---------------------------------------------------------------------------
\66\ LCH SA CDS Clearing Rule Book Appendix 1 Clause 11.1.
---------------------------------------------------------------------------
LCH SA proposes changes to current Article 2.2.0.5 (proposed
Article 2.2.0.4) to give Select Members the option to nominate
representatives to the CDS Default Management Committee and to the CDS
Default Management Group. LCH SA proposes conforming changes to
Appendix 1, Clauses 10.2.1 and 11.2.2 of the Rule Book, to clarify that
going forward Select Members may, but are not required to, nominate
representatives to the Committee and Group. LCH SA proposes these
changes to make Select Members' obligations with respect to nominating
these representatives consistent with the ability to opt out of
Competitive Bidding.\67\
---------------------------------------------------------------------------
\67\ Notice, 89 FR at 21581.
---------------------------------------------------------------------------
C. Submission of Market Data
Unlike Competitive Bidding, under LCH SA's Rule Book, participation
in the end of day price contribution process is currently optional for
Select Members. As described in Section D below, the Proposed Rule
Change would require some Select Members to submit Market Data, while
continuing to give other Select Members the option to submit Market
Data. LCH SA also proposes two changes to Select Members' price
submissions, if they choose to do so. First, the Proposed Rule Change
would note that Select Members elect to receive Price Requirement Files
\68\ for relevant Trading Cities.\69\ Second, LCH SA proposes a change
so that, with respect to the Price Requirement Files received for
relevant Trading Cities only, Select Members that elect to be Price
Contribution Participants are bound by all obligations of a Price
Contribution Participant as set out in the Rule Book and Section 5 of
the Procedures, including the obligation to submit Market Data.
---------------------------------------------------------------------------
\68\ Price Requirement Files are files listing the Open
Positions in respect of which Price Contribution Participants are
required to submit Market Data. LCH SA CDS Clearing Procedures,
Section 5.18.3.
\69\ A Trading City is the city in which a CDS or Index Swaption
is typically traded, as published on the website. LCH SA CDS
Clearing Rule Book Chapter 1 Article 1.1.1.
---------------------------------------------------------------------------
As noted, Select Members already may opt to submit Market Data. As
such, they have the choice to become Price Contribution Participants.
However, under current Article 2.2.0.5, even when a Select Member
elects to be a Price Contribution Participant it may choose not to
submit Market Data. This differs from General Members, who must act as
Price Contribution Participants and submit Market Data. Given that
potential Select Members may lack the capacity to submit Market Data,
LCH SA's proposed revisions to select membership will still allow
certain Select Members to choose whether they would like to submit
Market Data.\70\
---------------------------------------------------------------------------
\70\ Id. at 21579.
---------------------------------------------------------------------------
D. Mandatory Competitive Bidding and Submission of Market Data
As part of the changes to make Competitive Bidding and price
contribution optional for Select Members, LCH SA also will require
certain Clearing Members to participate in these processes, regardless
of whether they are General or Select Members. LCH SA proposes these
changes to guarantee that it has enough participants for those
processes.\71\
---------------------------------------------------------------------------
\71\ Amended Notice, 89 FR at 84975.
---------------------------------------------------------------------------
As noted above, Select Members currently must participate in
Competitive Bidding for Auction Packages containing Cleared
Transactions that belong to any Product Family as set out in that
Select Member's Product Family Form. Select Members also currently may
choose whether to submit Market Data. The Proposed Rule Change would
add text to proposed Article 2.2.0.4, requiring that Select Members
submit Market Data for all the Trading Cities and participate in
Competitive Bidding when the Group Total Margin Percentage calculated
for its Financial Group exceeds the Participation Threshold for sixty
consecutive Clearing Days. Additionally, LCH SA's proposal provides
that this obligation ends when the Group Total Margin Percentage
remains one percentage point below the Participation Threshold for
sixty consecutive Clearing Days. LCH SA's proposed changes further
indicate that if LCH SA reasonably believes that a Select Member will
be required to participate in Competitive Bidding and the price
contribution process under proposed Article 2.2.0.4, LCH SA may request
for that Select Member to carry out such tests as LCH SA may reasonably
require to assess its ability to participate in Competitive Bidding.
To implement this change, LCH SA proposes several new defined terms
for its Rule Book. The Participation Threshold for determining when a
Select Member must participate in Competitive Bidding and the price
contribution process would be defined as the percentage as determined
by LCH SA, which is equal to the lower of five percent (5%) and the
sixth largest Group Total Margin Percentage among all the
[[Page 92986]]
Group Total Margin Percentages calculated in respect of each Financial
Group to which one or more Clearing Members belong. LCH SA's proposal
would define Group Total Margin Percentage as, in respect of a
Financial Group to which one or more Clearing Members belong and in
respect of any Clearing Day, the ratio of its Average Group Total
Margin divided by the Average CDSClear Total Margin. LCH SA proposes to
define Average CDSClear Total Margin as the average over the last sixty
Clearing Days of the sum of all the Margins (excluding Variation
Margins) calculated by LCH SA in respect of the Account Structures of
all the Clearing Members. The Proposed Rule Change would define Average
Group Total Margin as the average over the last sixty Clearing Days of
the sum of all the Margins (excluding Variation Margins) calculated by
LCH SA in respect of all the Account Structure(s) of the Clearing
Members belonging to the same Financial Group.
Finally, the Proposed Rule Change would make a few edits to account
for the possibility that Select Members will need to participate in the
price contribution process.\72\ In proposed Article 2.2.0.4, LCH SA
would delete language suggesting that a Select Member would never have
any obligation to submit Market Data. LCH SA also proposes language for
the definition of Price Contribution Participant, which would broaden
the definition's application to include Select Members that are
required to submit Market Data in addition to Select Members that have
opted to submit Market Data.
---------------------------------------------------------------------------
\72\ Id. at 84976.
---------------------------------------------------------------------------
In practice, this will mean that any Clearing Member that is part
of the top six Financial Groups at LCH SA will be required to
participate in Competitive Bidding and provide prices, even if that
Clearing Member is a Select Member.
E. Select Member Form
Finally, the Proposed Rule Change would create a new Select Member
Form, through which Select Members would make the elections described
above. Specifically, Select Members would use this form to elect to
participate in Competitive Bidding, submit Market Data, and nominate
representatives to the Default Management Committee and Default
Management Group. The Proposed Rule Change would carry out this change
by creating a new definition for Select Member Form, editing certain
aspects of its rules to note the use of the Select Member Form,
deleting references to the obsolete Product Family Form, and
establishing a process for Select Members to obtain and update the
form.
First, to provide a definition for this form, LCH SA proposes a new
defined term.\73\ LCH SA's proposal would define Select Member Form as
the form referencing the elections made by a Select Member, in
accordance with Article 2.2.0.4, as amended from time to time in
accordance with Section 5 of the Procedures.
---------------------------------------------------------------------------
\73\ Id. at 21580.
---------------------------------------------------------------------------
Second, LCH SA proposes changes that would provide that Select
Members choose certain parameters of their membership through the
Select Member Form. Currently, Select Member Price Contribution
Participants may choose to receive Price Requirement Files in
accordance with the conditions set out in Section 1 of the Procedures.
The Proposed Rule Change would edit current Article 2.2.0.5 so that it
indicates that a Select Member shall notify LCH SA of its elections
with respect to Competitive Bidding, submission of Market Data, and
nomination of representatives to the Default Management Committee and
Default Management Group by providing a duly completed and signed
Select Member Form in the conditions and manner set out in Section 1 of
the Procedures. Similarly, LCH SA proposes to add text to current
Article 2.2.0.5 to explain that a Select Member may change these
elections by providing LCH SA with a copy of a duly signed updated
Select Member Form, in accordance with the conditions set out in
Section 5 of the Procedures. With the process for opting to submit
Market Data being described in current Article 2.2.0.5 (proposed
Article 2.2.0.4), LCH SA proposes clarifying the definition of Price
Contribution Participant to include Select Members that have opted, or
are required, to submit Market Data in accordance with Article 2.2.0.4,
rather than Section 5 of the Procedures.
Additionally, because there is no longer a need to use the Product
Family Form, the Proposed Rule Change would replace references to this
form and other references no longer needed with references to the new
Select Member Form. The Proposed Rule Change would delete the term
Product Family Form from Section 1.1 of the Procedures and replace it
with the newly created term, Select Member Form.\74\ As such, an
Applicant that wishes to be admitted as a Select Member shall provide
LCH SA with the Select Member Form completed by the Select Member as
opposed to the Product Family Form. Likewise, LCH SA proposes to edit
Section 5.11(c) of the Procedures to focus on updating the Select
Member Form rather than the Product Family Form. The proposal would
delete references to the Product Family Form, replacing those
references with the term Select Member Form where relevant, and delete
references to provisions that focus on the Product Family Form.
Further, instead of noting that a Select Member is entitled to add or
remove any Product Family indicated in its Product Family Form via
email in accordance with Article 2.2.0.4 (2.2.0.5 of the currently
effective Rule Book), LCH SA proposes that the provision specify that a
Select Member is entitled to change any of its election(s) by email.
The Proposed Rule Change also replaces the term Product Family Form
with Select Member Form in the Rule Book definition of CDS Clearing
Documentation.
---------------------------------------------------------------------------
\74\ Id. at 21580.
---------------------------------------------------------------------------
Certain other proposed changes delete text that is no longer
relevant due to the introduction of the Select Member Form.
Specifically, because LCH SA proposes using the Select Member Form for
making elections, it would delete a paragraph from Section 5.18.1 of
the Procedures that describes the current process for choosing to
receive or to stop receiving Price Requirement Files.\75\
---------------------------------------------------------------------------
\75\ Id. at 21581.
---------------------------------------------------------------------------
Finally, LCH SA proposes to add additional text related to
obtaining and updating the Select Member Form. First, LCH SA proposes
to add language to Section 1.1 of the Procedures, clarifying that the
Select Member Form is made available by LCH SA's CDS Clear Business
Development and Relationship Management team. LCH SA also proposes to
add language to Section 5.11(c) of the Procedures to note that updates
to the Select Member Form may require the Select Member to provide LCH
SA with additional information, or take and pass tests that LCH SA may
require. The Proposed Rule Change would add text to Section 5.11(c) of
the Procedures to clarify that, in situations where a Select Member
elects to stop taking part in Competitive Bidding, the election is not
effective until the eighth Clearing Day following the Clearing Day on
which the updated Select Member Form is received. This would ensure
that a Select Member will be required to participate in Competitive
Bidding if there is an Event of Default with respect to a separate
Clearing Member at the same time LCH SA receives the new Select Member
Form.\76\ To clarify this point, LCH SA proposes to add a final
[[Page 92987]]
paragraph to Section 5.11(c) to indicate that, until the Select Member
Form update is effective, the Select Member will continue to be subject
to the provisions of the CDS Clearing Documentation applying to any
Non-Defaulting Clearing Member required to participate in Competitive
Bidding for each Auction Package.
---------------------------------------------------------------------------
\76\ Id.
---------------------------------------------------------------------------
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.\77\ 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.'' \78\
---------------------------------------------------------------------------
\77\ 15 U.S.C. 78s(b)(2)(C).
\78\ 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,\79\ 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.\80\ 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.\81\
---------------------------------------------------------------------------
\79\ Id.
\80\ Id.
\81\ 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
Section 17A(b)(3)(F) of the Act \82\ and Rules 17Ad-22(e)(13) \83\ and
(e)(18) \84\ thereunder, as described in detail below.
---------------------------------------------------------------------------
\82\ 15 U.S.C. 78q-1(b)(3)(F).
\83\ 17 CFR 240.17Ad-22(e)(13).
\84\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------
A. 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 . . . .'' \85\ Based on the Commission's
review of the record, and for the reasons discussed below, LCH SA's
changes are consistent with Section 17A(b)(3)(F) of the Act because
they may help to expand LCH SA's provision of clearing services,
contribute to the smooth operation of LCH SA's default auctions, help
LCH SA better contain losses, and clarify the process Select Members
use to make elections.
---------------------------------------------------------------------------
\85\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Proposed Rule Change would potentially improve access to
clearing for clients. Currently, Select Members may only provide
clearing services to Affiliated Firms. The Proposed Rule Change would
allow Select Members to provide clearing services to non-affiliated
firms as well. Assuming Select Members begin offering clearing services
to clients that are not Affiliated Firms, this change could expand the
clearing services available to firms that seek to clear transactions as
clients. Additionally, as noted above, certain potential Clearing
Members are not positioned to provide Market Data or bids on products
in default auctions, as currently required under LCH SA's Rule Book for
General Members. These requirements could potentially act as barriers
to these potential Clearing Members becoming Clearing Members. As such,
LCH SA's proposed changes allowing Select Members to choose not to
submit Market Data or participate in Competitive Bidding if their
Financial Group's Group Total Margin Percentage remains below the
Participation Threshold potentially may allow firms to join LCH SA as
Select Members or current Select Members to provide clearing services
for clients. This may also work to expand clearing services available
to clients, which in turn potentially allows LCH SA to clear more
trades. Importantly, the Proposed Rule Change does not alter LCH SA's
fee grid, Risk Management Framework,\86\ or any other membership
standards for Select Members.\87\ By foregoing changes to its tariffs
(specifically the unlimited tariff and variable tariff) and liquidity
margining, and thereby maintaining the current structure whereby a
General Member may clear for its own account and its clients at less
cost than a Select Member, LCH SA provides incentive for its twenty-two
CDSClear General Members \88\ to remain General Members even though,
under the proposed change, Select Members can clear for non-affiliated
firms too. Further, under the Proposed Rule Change, a General Member
would likely still have to participate in Competitive Bidding and
submit Market Data due to its Group Total Margin Percentage.\89\ As
such, these changes would promote the prompt and accurate clearance and
settlement of securities transactions.
---------------------------------------------------------------------------
\86\ Notice, 89 FR at 21580.
\87\ For example, Select Members must still satisfy the
membership requirements found in Section 2.2.1 of the LCH SA CDS
Clearing Rule Book, the same as General Members. Pursuant to Section
2.2.1, Select Members must, among other things, comply with
applicable law relating to their status as a Clearing Member and the
performance of their obligations pursuant to the CDS Clearing
Documentation, be subject to supervision by Competent Authorities,
meet minimum capital requirements, and satisfy a credit risk
assessment. See LCH SA CDS Clearing Rule Book, Section 2.2.1.
\88\ In total, CDSClear has twenty-seven members, five of which
are Select Members. LCH, Member Search, <a href="https://www.lch.com/membership/member-search">https://www.lch.com/membership/member-search</a>.
\89\ LCH SA provided background and analysis related to the
Select Membership model in confidential Exhibit 3.3 to the Proposed
Rule Change, which LCH SA added to the Proposed Rule Change with
Amendment No. 1.
---------------------------------------------------------------------------
LCH SA also proposes changes that would contribute to the smooth
operation of LCH SA's default auctions. As noted above, if there is an
Event of Default, LCH SA shall auction off the defaulting Clearing
Member's positions.\90\ Select Members currently must participate in
these auctions to the extent the Cleared Transactions in the Auction
Packages all belong to the Product Families set out in that Select
Member's Product Family Form. However, sometimes Select Members do not
actively trade in the Product Families selected on their Product Family
Form, or they may not have the operational capacity to take part in
default auctions. In LCH SA's experience, Select Members have required
assistance managing default files and routinely request assistance
addressing questions during fire drill exercises.\91\ The proposed
changes allow some Select Members to choose whether they would like to
participate in Competitive Bidding without regard to the content of
Auction Packages and eliminate the concepts of Product Families and the
Product Family Form. These proposed changes should allow LCH SA's
default auction process to function more efficiently. The efficiency of
these auctions potentially impacts LCH SA's ability to limit losses
resulting from a Clearing Member default. Because losses from a
Clearing Member default could disrupt LCH SA's ability to operate, this
aspect of the Proposed
[[Page 92988]]
Rule Change also helps promote LCH SA's operations and therefore the
prompt and accurate clearance and settlement of transactions.
---------------------------------------------------------------------------
\90\ LCH SA CDS Clearing Rule Book, Appendix 1, Clause 2.1.
\91\ Notice, 89 FR at 21582.
---------------------------------------------------------------------------
At the same time, the Proposed Rule Change would require certain
Select Members to participate in Competitive Bidding because of their
Financial Group's Group Total Margin Percentage. This makes it more
likely that LCH SA will have sufficient participation in its default
auctions to successfully offload Auction Packages and ultimately
continue operation through a Clearing Member default. By establishing a
minimum level of participation, these proposed changes therefore would
promote the efficiency of LCH SA's default auctions without necessarily
undermining the efficacy of those auctions, thus promoting LCH SA's
operations and therefore the prompt and accurate clearance and
settlement of transactions.
LCH SA's proposed changes related to price submissions by Select
Members also help promote the prompt and accurate clearance and
settlement of securities transactions. The Proposed Rule Change would
allow some Select Members to choose whether to receive Price
Requirement Files for relevant Trading Cities and become bound, in
respect of the Price Requirement Files received for relevant Trading
Cities only, to submit market data. Under the Proposed Rule Change,
other Select Members would have to submit Market Data as a result of
their Financial Group's Group Total Margin Percentage. By permitting
and requiring Select Members to submit market data under certain
circumstances, this aspect of the Proposed Rule Change could enhance
the Market Data that LCH SA receives. Enhanced Market Data could, in
turn, improve the accuracy of LCH SA's end-of-day prices, which could
contribute to the accuracy of LCH SA's outputs, including margin
amounts, resulting from these prices. LCH SA uses this Market Data to
determine margin amounts and manage the risks associated with clearing
and settling securities transactions. These risks, if not properly
managed, could cause losses to LCH SA that compromise its ability to
operate. As such the proposed changes related to participation in price
contribution also promote the prompt and accurate clearance and
settlement of transactions.
LCH SA's proposed changes also clarify the process Select Members
use to make elections through the Select Member Form. For example, the
Proposed Rule Change notes that, under certain circumstances, Select
Members may elect to submit Market Data and participate in Competitive
Bidding through the Select Member Form. They can also nominate certain
representatives through the Select Member Form. Relatedly, LCH SA's
proposal would indicate how a Select Member could change its elections.
The Proposed Rule Change would also provide details related to the
timing of the effectiveness of updates to the Select Member Form under
certain circumstances. By clarifying the process through which Select
Members can make elections through the Select Member Form, LCH SA gives
effect to its other proposed changes, which as described above, expand
LCH SA's provision of clearing services, contribute to the smooth
operation of LCH SA's default auctions, and help enhance Market Data
that LCH SA receives. As such, the proposed changes related to the
introduction of the Select Member Form promote the prompt and accurate
clearance and settlement of transactions.
Therefore, the Proposed Rule Change is consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\92\
---------------------------------------------------------------------------
\92\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(13) Under the Act
Rule 17Ad-22(e)(13) requires covered clearing agencies to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to ensure the covered clearing agency
has the authority and operational capacity to take timely action to
contain losses and liquidity demands and continue to meet its
obligations by, at a minimum, requiring the covered clearing agency's
participants and, when practicable, other stakeholders to participate
in the testing and review of its default procedures, including any
close-out procedures, at least annually and following material changes
thereto.\93\
---------------------------------------------------------------------------
\93\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------
As discussed above, the Proposed Rule Change would make
participating in Competitive Bidding and default management drills
elective for certain Select Members. At the same time, certain Select
Members would still be required to participate in Competitive Bidding,
specifically if their Financial Group's Group Total Margin Percentage
exceeds the specified threshold. As discussed above, in practice, this
means that any Clearing Member that is part of the top six Financial
Groups at LCH SA will be required to participate in Competitive Bidding
and provide Market Data, even if that Clearing Member is a Select
Member. This will help ensure that LCH SA will have sufficient
participation in its default auctions to successfully offload Auction
Packages and ultimately continue operation through a Clearing Member
default. By establishing a minimum level of participation, these
proposed changes therefore ensure LCH SA has the authority and
operational capacity to take timely action to contain losses and
liquidity demands and continue to meet its obligations.
Additionally, under the Proposed Rule Change, certain Clearing
Members and Applicants would still be required to participate in
default management drills. Specifically, a Clearing Member Applicant
seeking Select Membership and seeking to elect to participate in
Competitive Bidding would be required to participate in (and satisfy
LCH SA's requirements with respect to the carrying out of) regular fire
drills run by LCH SA from time to time in accordance with the Rule
Book, or demonstrate that it has an associated entity or an LCH
Approved Outsourcing Agent that can successfully do so. Similarly,
Select Members that LCH SA reasonably believes will breach the
Participation Threshold for sixty consecutive Clearing Days will also
need to participate in testing to assess their capacity and ability to
participate in Competitive Bidding. Ultimately, this will provide LCH
SA with the information it needs to ensure it has the operational
capacity to take timely action to contain losses and liquidity demands
and continue to meet its obligations through its default management
process.
Proposed changes that improve a clearing agency's ability to
conduct a successful auction have been found to be consistent with Rule
17Ad-22(e)(13). For example, a proposed change to except an auction
participant from a minimum bid requirement when the auction participant
does not have the operational capacity to clear contracts in the
relevant auction lot is consistent with the Act, because it improved
the clearing agency's auction process by helping to ensure that bids
received in an auction are provided by members most able to value and
risk manage the defaulter's portfolio.\94\ As discussed above, the
Proposed Rule change would allow certain Select Members to choose to
participate in Competitive Bidding and would require those Select
Members participating in Competitive Bidding to undergo default
management drills. This change would allow certain Select Members who
do not have the
[[Page 92989]]
operational capacity to participate in the default auction process to
choose not to participate in an auction rather than requiring them to
place a bid.\95\ It would also work to identify, manage, and avoid
issues LCH SA has encountered with its Select Members in navigating
fire drill exercises.\96\ Thus, these aspects of the Proposed Rule
Change would work to improve LCH SA's auction process.
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\94\ Securities Exchange Act Release No. 98147 (Aug. 16, 2023),
88 FR 57164, 57165-66 (Aug. 22, 2023) (File No. SR-ICC-2023-009)
(``Order'').
\95\ Notice, 89 FR at 21579.
\96\ Id. at 21582.
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Therefore, the Proposed Rule Change is consistent with the
requirements of Rule 17Ad-22(e)(13) under the Act.\97\
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\97\ 17 CFR 240.17Ad-22(e)(13).
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C. Consistency With Rule 17Ad-22(e)(18) Under the Act
Rule 17Ad-22(e)(18) requires covered clearing agencies to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to establish objective, risk-based, and
publicly disclosed criteria for participation, which permit fair and
open access by direct and, where relevant, indirect participants and
other financial market utilities.\98\ As noted above, the Proposed Rule
Change would expand access to LCH SA and facilitate fair and open
access to LCH SA by indirect participants by allowing Select Members to
provide clearing services to non-affiliated firms rather than just to
Affiliated Firms. The Proposed Rule Change also would establish
objective and publicly-disclosed criteria for participation by
Applicants wishing to be Select Members, with respect to participation
in competitive bidding, as discussed above.
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\98\ 17 CFR 240.17Ad-22(e)(18).
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Therefore, the Proposed Rule Change is consistent with the
requirements of Rule 17Ad-22(e)(18) under the Act.\99\
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\99\ 17 CFR 240.17Ad-22(e)(18).
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IV. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1 and Partial Amendment No. 1
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Exchange Act,\100\ to approve the Proposed Rule Change prior to the
30th day after the date of publication of notice of the filing of
Amendment No. 1 and Partial Amendment No. 1 in the Federal Register. As
discussed above, Amendment No. 1 added a requirement that a Select
Member participate in Competitive Bidding in default auctions and
contribute end-of-day prices should its Financial Group's margins
exceed a predetermined threshold over a designated time, and Partial
Amendment No. 1 fixes certain errors in Amendment No. 1. These
amendments do not otherwise change the purpose of or statutory basis
for the Proposed Rule Change.
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\100\ 15 U.S.C. 78s(b)(2).
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For the reasons discussed above, the Commission finds that Proposed
Rule Change, as modified by Amendment No. 1 and Partial Amendment No.
1, is consistent with the requirement that LCH SA's rules be designed
to promote the prompt and accurate clearance and settlement of
securities transactions under Section 17A(b)(3)(F) of the Exchange
Act.\101\ Accordingly, the Commission finds good cause, pursuant to
Section 19(b)(2) of the Exchange Act,\102\ to approve the Proposed Rule
Change, as modified by Amendment No.1 and Partial Amendment No. 1, on
an accelerated basis, pursuant to Section 19(b)(2) of the Exchange
Act.\103\
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\101\ 15 U.S.C. 78q-1(b)(3)(F).
\102\ 15 U.S.C. 78s(b)(2).
\103\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change, as modified by Amendment No. 1 and Partial
Amendment No. 1, is consistent with the requirements of the Act, and in
particular, Section 17A(b)(3)(F) of the Act \104\ and Rules 17Ad-
22(e)(13) \105\ and (e)(18) thereunder.\106\
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\104\ 15 U.S.C. 78q-1(b)(3)(F).
\105\ 17 CFR 240.17Ad-22(e)(13).
\106\ 17 CFR 240.17Ad-22(e)(18).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the Proposed Rule Change, as modified by Amendment No. 1 and
Partial Amendment No. 1 (SR-LCH SA-2024-002), be, and hereby is,
approved on an accelerated basis.\107\
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\107\ 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.\108\
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\108\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27476 Filed 11-22-24; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on November 25, 2024.
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