Notice2025-06856
Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating to Revisions to its Liquidity Risk Modelling Framework
Primary source
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Published
April 22, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 76 (Tuesday, April 22, 2025)</title>
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[Federal Register Volume 90, Number 76 (Tuesday, April 22, 2025)]
[Notices]
[Pages 16903-16912]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-06856]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102875; File No. SR-LCH SA-2025-003]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to Revisions to its Liquidity Risk
Modelling Framework
April 16, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 14, 2025, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (``Commission'') the proposed rule change
(``Proposed Rule Change'') described in Items I, II and III below,
which Items have been primarily prepared by LCH SA. The Commission is
publishing this notice to solicit comments on the Proposed Rule Change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
LCH SA is proposing to amend its Liquidity Risk Modelling Framework
(the ``Framework''), which describes the Liquidity Stress Testing
framework by which the Collateral and Liquidity Risk Management
department (``CaLM'') of LCH SA assures that LCH SA has enough cash
available to meet any financial obligations, both expected and
unexpected, that may arise over the liquidation period for each of the
clearing services that LCH SA offers (the ``Proposed Rule Change'').\3\
The text of the Proposed Rule Change is provided in Exhibit 5 [SIC].\4\
The implementation of the Proposed Rule Change will be contingent on
LCH SA's receipt of all necessary regulatory approvals.
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\3\ LCH SA, a subsidiary of LCH Group and an indirect subsidiary
of the London Stock Exchange Group plc (``LSEG''), manages its
liquidity risk pursuant to, among other policies and procedures, the
Group Liquidity Risk Policy and the Group Liquidity Plan applicable
to each entity within LCH Group. In addition to its CDSClear
service, LCH SA provides clearing services in connection with cash
equities and derivatives listed for trading on Euronext
(EquityClear), commodity derivatives listed for trading on Euronext
(CommodityClear), and tri-party Repo transactions (RepoClear). LCH
SA also maintains an interoperability link with Euronext Clearing,
formerly Cassa di Compensazione e Garanzia, in Milan, Italy.
\4\ All capitalized terms not defined herein have the same
definition as in the Framework, unless otherwise stated.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, LCH SA included statements
concerning the purpose of and basis for the Proposed Rule Change and
discussed any comments it received on the Proposed Rule Change. The
text of these statements may be examined at the places specified in
Item IV below. LCH SA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The Proposed Rule Change is being adopted to (1) enhance details
about how LCH SA models for the liquidity needs arising from the daily
settlement process in its RepoClear service related to the auto-
collateralization feature in its Framework, (2) amend how LCH SA
accounts for non-defaulting members' excess collateral in the
calculation of the Standalone Operational Target and Liquidity Coverage
Ratio (``LCR'') in its Framework, (3) quantify LCH SA's liquidity needs
arising from clearing members replacing liquid resources with non-
liquid resources for liquidity needs modelling, (4) clarify how LCH SA
accounts for clearing members switching their respective pledging
arrangement for collateral included in LCH SA's Standalone Operational
Target and (5) enhance the Framework to simulate a sovereign country
rating downgrade when computing liquidity reverse stress tests. LCH SA
is proposing to make other non-substantive changes to correct errors
and for purposes of conformity.
[[Page 16904]]
Section 1.6.1--Liquidity Sources
LCH SA is amending Section 1.6.1 by removing reference to cross-
currency bilateral repo that involved a bilateral repo and an FX
transaction (whereby LCH SA may pledge collateral denominated in one
currency for cash denominated in a different currency as a liquidity
resource to meet its liquidity resource requirement). LCH SA is making
this change because it currently only uses triparty repo to perform
cross-currency transactions under which the FX conversion is managed by
the triparty agent. This amendment will also align the Framework with
the LCH SA Liquidity Plan (the ``Liquidity Plan''). The same change
will be reflected in Appendix 6.5: ``Liquidity risk monitoring
reports'' for consistency as well as to conform with Section 1.6.1.3.
LCH SA is also replacing reference to ``FX spot market
transaction'' with ``FX operation'', which LCH SA believes more
accurately reflects the process. Finally, LCH SA is clarifying that
there is no multicurrency committed lines anymore given the removal of
the reference to the Norges bank secured committed facility. Therefore,
only an uncommitted overdraft facility with an international bank
remains in place.
Section 1.6.1.1--Collateral Transfer to 3G Pool
LCH SA is proposing an amendment to remove reference to
``successfully tested in 2016'' to clarify that the operational
effectiveness of the transfer of collateral to the 3G pool is tested on
an annual basis as part of the war games exercises (i.e., instead of
having a singular reference to 2016).
Section 1.6.1.3--Synthesis
LCH SA is proposing to amend the summary table in Section 1.6.1.3
to align with the changes made to the preceding paragraphs.
Specifically, reference to cross-currency bilateral repo transactions
will be removed because LCH SA no longer utilizes these transactions to
raise liquidity sources, and instead leverages cross currency triparty
repo transactions. Moreover, the reference to FX transactions will be
removed because the triparty cross currency repo transactions do not
entail FX transactions, and instead, the FX conversion is managed by
the triparty agent. LCH SA is also proposing to clarify that CaLM will
demonstrate to the Board these prearranged funding arrangements used to
raise euro liquidity are highly reliable even in extreme but plausible
market conditions, as part of the annual review of the Liquidity Plan.
In making this change, LCH SA is removing the historical reference to
liquidity resources raised to meet its requirements in 2021 and 2022,
as this reference is outdated and no longer applicable. For securities
received from triparty reverse repo transactions where the agent is
Clearstream as a Central Securities Depository, LCH SA is specifying
that such securities are not considered Liquid Resources because LCH SA
does not have the right to rehypothecate these securities for purposes
of raising liquidity. This updated text will substitute the previous
historical reference to the Clearstream triparty repo facility and its
exclusion from liquid resources, as LCH SA has not completed the
technical setup needed to rehypothecate such securities. LCH SA also
proposes to clarify that collateral ineligible to be pledged to the ECB
to raise liquidity via triparty repo transaction refers to USD- (U.S.
Treasuries) and GBP-denominated securities (UK Gilts) only. LCH SA is
also removing reference to a secured committed credit line with Norges
Bank as an available liquidity resource, as this facility is no longer
in place. Since LCH SA has access to an uncommitted credit line with an
international bank to cover overdrafts up to [euro]10mm, LCH SA is
clarifying that this resource is uncommitted, given removal of the
reference to the Norges bank secured committed facility. LCH SA will
also amend Section 6.3: Appendix 3 and Section 6.5: Appendix 5 to
reflect the removal of the Norges Bank facility for purposes of
conforming throughout the Framework.
Section 1.6.2.3: Operational Liquidity Requirements
In Section 1.6.2, LCH SA describes the three main sources of
liquidity needs for the clearing agency as those arising from member
defaults, liquidity needs arising from interoperating CCP defaults and
needs related to operational liquidity requirements. With respect to
operational liquidity needs, LCH SA is proposing to clarify in Section
1.6.2.3 that a need may arise from the substitution of liquid resources
to non-liquid resources upon member request. The previous reference to
substitution of cash collateral by members was incomplete as all liquid
resources could be considered as a need if switched to non-liquid
resources. As part of this revision, LCH SA is removing reference to
the need arising from an increase in Central Bank Guarantee (``CBG'')
payments because there is no dual payment solution for members using
the CBG solution and therefore no possibility to switch to another
available regime of collateral if the CBG solution is used by a
counterparty. Finally, LCH SA is adding the liquidity need arising from
clearing members switching to a pledge regime (i.e., from FTT to
pledge) for collateral posted as margin. Collateral posted under the
pledge regime is not considered a component of liquid resources, but
rather an operational liquidity need, given that LCH SA does not have
rehypothecation rights to such collateral unless the member posting it
is in default.
Section 1.6.2.4: Zoom on the Settlement, its Benefits and Issues (Auto-
Collateralization Feature)
As part of its daily settlement process, LCH SA has the ability to
leverage the auto-collateralization feature for certain ECB-eligible
securities as part of the ECB's T2S service for securities settlement.
The ECB's T2S auto-collateralization service enables LCH SA to
facilitate timely settlement of a RepoClear transaction in the event of
a timing mismatch between the security delivery and the cash delivery
in the settlement platform. Specifically, should a seller deliver ECB-
eligible securities before delivery of cash by the buyer, the T2S auto-
collateralization service will allow LCH SA to pledge these securities
for cash at the applicable central security depository (``CSD''). LCH
SA is therefore able to settle the seller instructions against the
pledge of these securities as collateral for the liquidity borrowed
from the T2S service.
If LCH SA is not able to find a legitimate buyer for delivering the
securities within the end of day and to avoid any fees chargeable to
LCH SA for securities pledged overnight, LCH SA must inject the full
cash equivalent amount to release the securities from the auto-
collateralization account and subsequently transfer these securities
from the CSD to the BdF 3G Pool. In doing so, LCH SA can obtain
liquidity from the BdF after adjusting for any applicable haircuts. LCH
SA quantifies the liquidity need arising from this transaction by
multiplying a pre-defined auto-collateralization limit set by the CCP
for each Dedicated Cash Account (``DCA''), corresponding to a pool of
securities in the settlement platform, by an applicable ECB haircut for
each sovereign debt type. For the case in which multiple issuers are
assigned to the same DCA, the auto-collateralization limit is set pro
rata for each issuer based on the average daily settlement percentage
from the previous year. LCH SA takes the sum of the results of
[[Page 16905]]
potential liquidity impact for each sovereign debt issuer and reduces
by this total the assets in the numerator of the LCR, as well as the
resources to be compared against the Operational Target. All else being
equal, an increase in any one of these parameters will result in a
decrease in the LCR and Operational Target Key Risk Indicator (``KRI'')
and vice versa.
The current Framework therefore computes the auto-collateralization
liquidity need by leveraging the specific limits set up in production
and approved by LCH SA's Second Line Risk function and LCH SA
management, in addition to utilizing the current ECB haircut schedule.
The ECB assigns haircuts based on several parameters, including the
type and issuer of the debt instrument, the residual maturity and
overall credit quality. For example, the ECB as of August 2024 applies
a larger haircut to sovereign debt issued by Italy compared with France
for the same residual maturity due to the overall credit quality
difference, among other factors. For Italy, Germany, Spain and Belgium,
the current Framework applies 100% haircut for conservative reasons
because the operational effectiveness of the ``bulk'' transfer from T2S
to the 3G Pool was only recently demonstrated via a conclusive test in
June 2024.
LCH SA is proposing to amend Section 1.6.2.4 of the Framework to
provide additional clarification on the auto-collateralization feature
that was not explicit in the current version of the Framework.
Currently, the Framework lacks detail with respect to the auto-
collateralization feature, including the operational steps by which LCH
SA would utilize the feature. As such, LCH SA is proposing to add a
paragraph describing the auto-collateralization feature, including how
LCH SA will use it in the event a buyer does not deliver cash for
delivered securities. This Section will also be amended to specify the
three core steps involved should LCH SA utilize the auto-
collateralization feature. The first step includes injecting the full
amount of liquidity to unlock the pledged securities. Step two includes
transferring the securities from the CSD to the 3G Pool and step three
includes obtaining liquidity through the 3G Pool, after applying
applicable ECB haircuts. LCH SA is also clarifying that because of the
aforementioned steps, the maximum potential liquidity drain will be
equal to the ECB haircut for each debt type applied by the BdF when the
securities withdrawn from the settlement system are then pledged to the
3G Pool to source liquidity.
LCH SA is proposing to remove the following sentence because of the
inclusion of the detailed steps describing the auto-collateralization
functionality:
that enables to obtain the liquidity necessary to the finalisation
of transactions by pledging the security underlying the transaction
at the BdF to get cash.
LCH SA is also clarifying that the maximum potential liquidity
drain is modeled based on three elements: (1) the operational
effectiveness and readiness of the transfer of securities from T2S to
the 3G Pool for each issuer, as demonstrated on an annual basis through
LCH SA's War Games exercises that are validated in governance; (2)
actual limits for each debt type as defined in production and
appropriately validated by all relevant stakeholders and Second Line
Risk prior to any update as defined in a dedicated internal procedure;
and (3) the current most conservative ECB haircut of the relevant debt
category and step actually in force at the moment of the monitoring.
With respect to the first element, LCH SA is clarifying that, in the
event LCH SA is unable to effectively demonstrate the effective
transfer of securities to the 3G Pool to source central bank liquidity
as part of its War Games exercises, the haircut applied to the impacted
issuer will be set at 100% and the corresponding liquidity need
modelled will be equal to the full amount to be injected to reimburse
the auto-collateral credit at end of day. LCH SA is also amending
Section 6.5 (Appendix 5: Liquidity Risk Monitoring Reports) to provide
an example intraday liquidity report that will be used to monitor for
purposes of the second element referenced above. The previous report is
therefore deleted as not accurate anymore. In addition, LCH SA is
specifying that any changes to the ECB haircuts considered by the model
or the auto-collateralization limits will be automatically reflected in
the Framework modelling. LCH SA is also specifying that in the case of
a distinct ECB category and haircut step and/or different operational
readiness to transfer securities in bulk from T2S to the 3G Pool
between different issuers assigned to the same DCA, the allocated
portion of the limit to each issuer will be defined based on the
average daily settlement obligation per security over the last year for
purposes of computing the liquidity impact.
LCH SA is also proposing to delete the table reflecting the limits
by settlement platform and activity as of March 30, 2022, and the
associated footnotes. This table and related footnotes are primarily
being removed because LCH SA will instead apply a more dynamic approach
to determining the maximum liquidity drain that could occur by
following the steps referenced above. An example of liquidity reporting
is provided in Appendix 6.5 for informational purposes only and
specifying that the model may utilize updated figures (to be defined in
accordance with the specifications outlined in Section 1.6.2.4). The
reference to applying an 11% haircut to ECB securities is being
removed, as LCH SA will instead apply the current most conservative ECB
haircut of the relevant category and step. LCH SA is also proposing to
delete reference to the specific previous War Games exercises performed
to demonstrate operational effectiveness for purposes of pledging
securities to the 3G Pool in 2019 and 2021. This reference is now
covered by the first element specified above regarding how LCH SA will
determine operational effectiveness and readiness for issuers moving
forward (i.e., through its War Games exercises performed each year).
Collectively, these changes to the auto-collateralization feature
described in the Framework do not directly impact the Framework
methodology for calculating the LCR or the Operational Target. The
respective formulas will remain the same, but instead when
incorporating the liquidity need deriving from the auto-collateral
functionality, the formulas will utilize dynamic input data (rather
than static values defined in the LRMF), such as the most recent ECB
haircuts and the actual auto-collateralization limits set up in
production at the time of monitoring and according with the specific
methodology described above. The purpose of the revisions to Section
1.6.2.4 is to enhance the clarity of the Framework by describing more
explicitly the general steps considered by the CCP when modelling the
potential liquidity need arising from the auto-collateralization
functionality in the settlement platforms.
Section 4.1.2: Model Inputs and Variable Selection
As part of determining its overall liquidity needs on an ongoing
basis, LCH SA models for its operational liquidity needs as part of the
Framework. The operational liquidity requirement is valued through the
Operational Target in the daily liquidity stress tests. The requirement
represents the amount of liquidity required to satisfy the liquidity
needs borne from the ongoing operational management of LCH SA in a
stressed environment. This
[[Page 16906]]
requirement is therefore not related to a clearing member default. LCH
SA specifies this liquidity requirement drivers it models in the
Framework in Section 4.1.2. LCH SA is proposing to amend certain
provisions of this Section by revising the statement related to the
repayment of excess cash and excess ECB-eligible securities posted by
members as a liquidity need to state the ``partial'' repayment of
excess. As part of the Proposed Rule Change, LCH SA is adjusting how it
models for the treatment of excess collateral and this change is being
made to align for the revised treatment of excess collateral throughout
the Framework (see Section 4.1.5 below). The clarification of liquid
resources-eligible securities is being made to reflect that a liquidity
need arises from the withdrawal of liquidity resources and thus the
reduction in available liquidity. An amendment to note 16 is also being
made to clarify that non-euro cash and CBGs are excluded as liquidity
resources because LCH SA does not consider USD and GBP cash posted by
members as liquid resources for conservative reasons, and for CBG, LCH
SA does not have the ability to use such assets for liquidity purposes
unless such member is in default. To align with the clarification made
regarding liquidity needs that may arise from clearing member
substitution of liquid resources to non-liquid resources (see the
proposed changes to Section 4.1.5.(e) below), LCH SA is amending
Section 4.1.2(e) to clarify that the substitution refers to liquid
resources (not just cash or ECB-eligible collateral) to non-liquid
resources.
Moreover, a new liquidity need in Section 4.1.2(j) is being added
to specify that in the calculation of the Operational Target there will
be a provision to model the switch from collateral posted under FTT,
and therefore included in liquid resources, to collateral posted under
the pledge regime, and therefore considered as non-liquid resources if
the member posting the collateral is not in default. This conforms with
the change made to Section 1.6.2.3.
Section 4.1.4: Mathematical Formula, Derivation and Algorithm, and
Numerical Approximation
Finally, to conform with the changes made to Section 1.6.2.3, LCH
SA will add as a liquidity requirement captured in the Framework (as
Section 4.1.2(j)), the switch from collateral posted under FTT to the
pledge regime. Because of the addition of the needs arising from the
switch from FTT to pledge, LCH SA will add to Section 4.1.4 the needs
arising from the switch as an input to the Operational Liquidity
Requirements. Specifically, LCH SA's Operational Liquidity Requirements
now comprise all items referenced in Section 4.1.2 (including Section
4.1.2(j)).
Section 4.1.5: Model Assumptions (Treatment of Excess Collateral)
LCH SA is also proposing to amend how it models for the treatment
of excess collateral of non-defaulting clearing members in its
Operational Target calculation of the Framework. Currently under LCH
SA's cover 2 Framework, LCH SA considers that in a default, non-
defaulting members will withdraw all their excess collateral following
a stress event. In contrast, excess collateral is considered a
liquidity resource for defaulting members.
LCH SA is proposing to modify the assumption that all excess
collateral is withdrawn immediately following a stress event in its
Framework. Specifically, LCH SA would like to revise the assumption
that all excess collateral will be withdrawn following the declaration
of default in the LCR or during the non-default market stress scenario
of the Operational Target standalone calculation. This proposed change
would refine the Framework by more closely aligning it with current
clearing member behaviors and with the appropriate liquidity horizon
period (currently modeled at seven days), while at the same time
maintaining a conservative assumption. To facilitate this change, LCH
SA is proposing to model for a partial withdrawal of excess collateral
based on an indicator calibrated with empirical clearing member data.
The partial withdrawal will be based on the second worst observed
relative variation experienced over seven days, capped at the biggest
historical reduction in excess collateral over the liquidity horizon,
utilizing up to ten years of historical data, initiating in 2018.
The rationale for considering the second highest observed
historical relative excess decrease is that it represents a confidence
level of 99.9% related to a stress event compared to the standard 99.7%
used for margin computation in LCH SA. Moreover, as the value will be
automatically integrated in the daily Operation Target as part of a
dedicated monitoring, it allows ample time for LCH SA's Second Line
Risk team to investigate any data issues or any data outliers without
an immediate direct impact on production.
LCH SA is proposing to calibrate this indicator daily, thereby
incorporating each new daily data point. In order to be consistent with
the Framework, LCH SA is also proposing to align the withdrawal over a
seven-day period (i.e., the liquidity horizon), rather than the current
three-day period. Finally, LCH SA is proposing to implement an
enhancement of the daily back testing, specific to this change, to
ensure any changes in the partial withdrawal scenario are flagged to
senior management. Any new extreme (i.e., second biggest seven days
relative margin reduction or seven days biggest absolute cap amount)
will automatically be integrated in the Framework the following day and
will be shared with the Head of Market Risk and the Chief Risk Officer.
In addition, a deep analysis will be performed to assess the level of
excess reduction modelled each intermediary day of the liquidity
horizon considering the drivers of the new peak. Results of this
exercise may lead to a review of the split of excess collateral
reduction modelled in the intermediary days within the liquidity
horizon and any change to the Framework would therefore require review
and approval by the ERCo.
To reflect this methodological change in the Framework, LCH SA is
proposing to amend Section 4.1.5(d) by clarifying the description of
how the withdrawal of excess collateral is modelled. Specifically, LCH
SA is proposing to state that a portion of excess collateral is
withdrawn over the seven-day liquidity horizon period, with the target
estimated excess collateral amount assessed based on historical data
dating back to 2018. LCH SA is also proposing to specify that the
calibration of this amount will be updated daily as new data becomes
available and up to a ten-year lookback period. As part of this change,
Section 4.1.5 will also be amended to add that the relative reduction
in excess collateral will correspond to the second worst observed
relative decrease of excess collateral over a seven-day period, with a
cap of the highest absolute reduction amount observed over seven days.
LCH SA will provide additional details in Section 4.1.5 in the form of
a specific formula as well as the list of assumptions made to clarify
how the reduction in excess collateral will be applied. Previous
references to the assumptions of excess collateral withdrawal on day T,
day T+1 and day T+2 will be removed and replaced with the following
clarifications:
<bullet> The overall compounded excess reduction over the liquidity
horizon will correspond to the second worst relative rate observed over
seven days excess reduction, over the calibration period capped at the
highest absolute reduction amount observed;
[[Page 16907]]
<bullet> The biggest reduction relative rate observed on a single
day will be applied the first day;
<bullet> In each intermediary day, the compounded excess reduction
is above the 99.7% percentile confidence interval within the historical
window observed;
<bullet> LCH SA assumes that it will not observe any increase of
excess from members over the liquidity horizon; and
<bullet> The assumptions will be monitored daily, such that if a
new second worst relative rate is observed, it will automatically be
reflected in the computation of the metric.
LCH SA is also proposing to amend note 18 to add that, in addition
to DKK, NOK, SEC, AUD, CAD, CHF and JPY securities, collateral
belonging to FCM/BD clients and Portuguese and Finnish securities
deposited through a triparty arrangement are excluded from liquidity
assets in excess collateral. LCH SA will also exclude non-euro cash and
CBGs. This last change is being made for purposes of accuracy and does
not represent a change in the methodology of the Framework or
procedures of LCH SA.
Also, a new note 19 will be added to reference the member
behavioral analysis documented in Section 6.2 ``Appendix 2''. Section
6.2 will be revised to clarify and provide additional evidence about
the methodology detailed in Section 4.1.5. Specifically, in the bullet
points summarizing the risk drivers, the phrase ``Excess withdrawn''
will be replaced by the phrase ``Partial excess withdrawal'' for
purposes of clarity and to conform with similar changes made to the
Framework.
Moreover, LCH SA is proposing to state it will assume that a
portion of the amount of excess collateral will be withdrawn over seven
days and this will substitute the current wording that states that the
full amount is assumed to be withdrawn over three days. Moreover, the
excess reduction will be based on the second worst relative downward
reduction of excess, capped to an absolute amount corresponding to the
highest absolute reduction amount observed in the lookback period. To
support the change, LCH SA is proposing to add an example of how the
intermediary daily excess reductions are modelled by the proposed
methodology and included in a table reflecting the margin reduction
rate, the cumulative reduction and the absolute value of the capped
amount over each day of the seven-day period. LCH SA will also clarify
that the figures presented in the example table are for informational
purposes only and that the current model will utilize the most recent
figures in accordance with Section 4.1.5.
LCH SA is also proposing to make a small amendment to Section 6.3
``Appendix 3: Reminder of SA's sources of liquidity and related risk
drivers'' with respect to excess collateral. That is, LCH SA is
proposing to create a new category '' Excess Collateral'' and to state
that the source of liquidity considered is the excess posted by member
and add the text ``Partial withdrawal of excess.'' LCH SA is further
removing the specific reference to excess cash collateral, as the
proposed wording is more aligned to the methodology presented in
Section 4.1.5(d). LCH SA is also proposing to amend Section 6.4 ``6.4
Appendix 4: Liquidity risk drivers synthesis by reports''.
Specifically, the column labelled ``Excess'' under ``BAU'' will be
amended to reflect that instead of 100 percent of excess collateral
being withdrawn, LCH SA will utilize the second worst relative withdraw
of excess collateral capped at the highest reduction amount observed,
for each Operational Target, LCR Cover 2 for non-defaulting members and
LCR Euronext Clearing. Changes to Sections 6.3 and 6.4 will be made to
align with the changes made to Section 4.1.5.
To accurately account for the switch of liquid resources to non-
liquid resources in the assumptions of the Framework, LCH SA is
proposing to amend Section 4.1.5(e) to include details on the new
proposed calculation and underlying assumptions. To align with changes
performed in 4.1.2, LCH SA clarifies that the substitution refers to
liquid resources (and not only cash or ECB-eligible collateral as
reported in the header of the section 4.1.5(e) in the previous version
of the Framework) to non-liquid resources. The result of the
calculation represents the target estimated switch over a liquidity
horizon of seven days and is based on historical data calibrated daily.
LCH SA is proposing to build the time series of data utilized in the
calculation until it reaches a maximum lookback period of 10 years
(beginning in 2022). This revision also corresponds to the extension of
the offering of securities in DKK, NOK, SEK, CAD, AUD, JPY, and CHF as
eligible collateral. LCH SA is proposing a conservative assumption to
this calculation by assuming clearing members will not switch non-
liquid collateral with liquid collateral over the liquidity horizon and
by applying the largest absolute net substitution amount historically
observed on a single day over the lookback period, on the first day of
the liquidity horizon. For each subsequent day, the compounded net
substitution amount will be set above the 99.7% percentile confidence
interval within the historical window observed. LCH SA will choose the
overall compounded switch value over the liquidity horizon that
corresponds to the second worst absolute observed seven-day
substitution over the period (the ``net substitution amount''). The net
substitution amount is calculated for each date and collateral account
and is based on a multi-step process that includes the calculation of
two metrics: a negative substitution amount, or an amount that reflects
a clearing member switching liquid resources with non-liquid resources,
and a positive substitution amount, or an amount that reflects a
clearing member switching from non-liquid to liquid resources. The net
substitution amount represents the difference between the negative
substitution amount and the positive substitution amount. LCH SA
chooses the aggregate cumulative sum over each day of the liquidity
horizon. Consequently, all the references to the former methodology and
the related assumptions are proposed to be removed as the substitution
is not performed anymore on the maximum historical substitution
observed over the last 7 days. To complement this proposed change, LCH
SA is adding in Appendix 6.2 (``Members Behaviour Analysis'') an
illustrative example of the cumulative switch amounts from liquid
resources to non-liquid resources over the seven-day liquidity horizon
and reference in a new note 20. LCH SA will also clarify that the
figures presented in the example table are for informational purposes
only and that the current model will utilize the most recent figures in
accordance with Section 4.1.5. The updated text replaces the previous
paragraph in the previous version of the Framework that described the
substitution methodology and gave an overall description of LCH SA's
collateral composition and in particular the split between the ECB
eligible EUR non cash collateral and non EUR collateral, which is now
outdated as the collateral composition is a function of members'
activity and the proposed new methodology adequately captures it more
dynamically. In addition, the reference to reverse stress test results
and concentration limits applied on non-cash collateral is being
removed as this reference is no longer relevant for the description of
the new methodology, as it calibrates substitution amount on the basis
of actual data observed over the lookback period. For the purpose of
providing accuracy, the first bullet point in Appendix 6.2, where the
risks driven
[[Page 16908]]
are summarized as ``Substitution cash to non cash (Banks keeping their
cash)'' will be replaced by ``Substitution from Liquid Resources to
non-Liquid Resources''.
For the avoidance of doubt, LCH SA is also clarifying in Section
4.1.5(e) that the assumptions underlying the calculation of the switch
amount will be monitored daily and compared against the parameters set
up in production according to the described methodology with new
extrema automatically reflected in metric calculations (amounts
presented in Appendix 2 represent minimum values and may therefore
fluctuate daily). Moreover, LCH SA is specifying that the net
substitution amount is determined using allocated collateral. To
enhance the clarity of the Framework, note 21 will be added to specify
which collateral type is excluded from the computation of the
substitution quantity, either because it is already considered in
different provisions of the Framework, or because the substitution from
Liquid Resources to non-Liquid Resources is not possible for the
specific collateral type.
LCH SA is also proposing to amend Section 6.4 ``6.4 Appendix 4:
Liquidity risk drivers synthesis by reports''. Specifically, the column
labelled ``Substitution'' under ``BAU'' will be amended to align with
Section 4.1.5(e) by reflecting that the Operational Target, the LCR
Cover 2 and the LCR Euronext Clearing will all consider partial
substitution to non-Liquid resources equal to the second worst
substitution historically observed.
In addition, in Section 4.1.5(e), LCH SA is proposing to clarify
that ECB eligible securities can be pledged to the central bank within
the same day and the readiness must be tested and validated annually as
part of the Liquidity Plan. That is, LCH SA will demonstrate its
ability to perform the necessary activities for purposes of meeting its
regulatory obligations related to ensuring access to liquidity.
Furthermore, the new language replaces the current reference to War
Games Q3 2022 results, given these results are outdated.
Finally, the previously applied methodology for tracking asset
switches from cash or ECB eligible securities to non-euro securities,
equity lodging, and the use of central bank guarantees are no longer
relevant and have been removed. These methodologies, which relied on
observed maximum daily switches over a seven-day period, conservative
equity lodging and the specific assumption about CBG usage are outdated
and not relevant anymore. Instead, a more comprehensive and holistic
methodology has been introduced as described above to ensure a more
accurate and dynamic approach to liquidity management.
Section 4.1.5(g) is being modified to specify that in alignment
with Sections 4.1.5(d) and 4.1.5(e) the assumptions used to estimate
the margin reduction in the Operational Target are monitored daily and
in case of new extreme, this will be automatically reflected in the
computation of the metric. Moreover, note 24 is being modified to state
that the lookback used to calibrate the assumption of margin reduction
does not end in 2022 because it is instead updated daily. The same
amendment will be reflected in Appendix 6.2 (``Members Behaviour
Analysis''), with the addition of the sentence specifying that the
numbers reported in the example (which reflect the split on each day of
the margin reduction) are provided for informational purposes only and
that the model may utilize updated figures, which will be defined in
accordance with the specifications outlined in Section 4.1.5(g). A new
Section 4.1.5(j) is being added to provide details on how LCH SA models
for the scenario where clearing members switch the regime of how
collateral is posted to the clearing agency (i.e., FTT to pledge). The
Framework will model this behavior by comparing the second biggest
historical pledged amount observed over a 10-year lookback period with
the actual observed pledge collateral amount starting in 2022. The
difference between these two components will correspond to the amount
LCH SA will include in its daily liquidity requirements and is above
the 99.7% percentile. Like the calculation for the switch from liquid
to non-liquid resources, LCH SA will implement additional daily
monitoring and recalibrate the calculation of this metric as necessary
if a new maximum is observed.
In Appendix 6.2 (``Members Behaviour Analysis''), LCH SA will add
the bullet ``Substitution to pledge regime'' among the list of the risk
drivers and will conform with Section 4.1.5(j), such that the provision
will be equivalent to the difference between the second biggest
historical amount of pledge observed and the actual observed pledge
collateral amount.
LCH SA will also amend the risk mitigation measure referenced in
Section 6.3: Appendix 3 as it pertains to pledged securities as
collateral. Specifically, LCH SA will clarify that the risk related to
clearing members moving away from FTT in favor of the pledge regime is
accounted for in the modelling of the LCR and the Standalone
Operational Target. This element is not a change in the current
practice with respect to the LCR computation but an alignment with the
introduction of the modelling of the switch from FTT to the Pledge
regime in 4.1.5(j).
LCH SA is also proposing to amend Section 6.4 ``6.4 Appendix 4:
Liquidity risk drivers synthesis by reports''. Specifically, the column
labelled ``Substitution'' under ``BAU'' will be amended to reflect that
for the Operational Target, a provision to model the switch to the
pledge regime according to Section 4.1.5(j) will be included, while for
the LCR Cover 2 and LCR Euronext Clearing calculations, the pledge
collateral will be set to the maximum limit allowed as described in
Section 4.2.5.2.4 of the Framework. Language indicating the
substitution would be the historical max including an increase of CBG
payments would be deleted from each of these rows to reflect the
different changes performed in section 4.1.5.(e) and (j) and the
methodology described in Section 4.2.5.2.4 of the Framework. The
reference to Central Bank Guarantee is outdated and not relevant
anymore and it is replaced by the updated methodology described herein.
For clarify, LCH SA notes that contrary to the LCR, the Standalone
Operational Target assumptions do not imply clearing member defaults,
thus justifying the difference of modelling the pledge regime.
Section 4.2.5.2.1: Operational Target (Considered in LCR Cover 2)
The LCR assumes the default of the biggest 2 groups in term of
liquidity while the Standalone Operational Target assumes a market
stress event not leading to a default. Therefore, when integrating the
Standalone Operational Target into the computation of the LCR, it is
adjusted to be more conservative and align with different assumptions
taken in the LCR. LCH SA is proposing to make certain clarifying
changes with respect to how the Standalone Operational Target is
calculated for its LCR under a cover 2 approach. LCH SA will substitute
the text ``Repayment of Excess cash posted by members'' with
``Repayment of Excess posted by members'' to align with what is
described in section 4.1.5(d). Moreover, LCH SA is clarifying that it
will utilize a more conservative assumption regarding how it models for
the switch from FTT to pledge, whereby the pledged collateral will be
set to the maximum limit allowed as described in Section 4.2.5.2.4 of
the Framework.
[[Page 16909]]
LCH SA will make a conforming change in Section 4.3.5.4 related to
the Standalone Operational Target in the LCR calculation for a Euronext
Clearing default to align with this change of Section 4.2.5.2.1, as the
described change applies to both LCR cover 2 and LCR Euronext Clearing.
In addition, the sentence: ``The margin outflows calculated in the
operational target and related to the cover 2 is removed for LCR since
the CCP will fully use the collateral of the defaulters'' will be
reworded to ``The margin outflows calculated in the operational target
and related to the cover 2 is removed from LCR liabilities since the
CCP will fully use the collateral of the defaulters''. This change is
being made to add more clarity regarding how LCH SA calculates LCR
liabilities.
In Section 4.3.2: ``Model inputs and Variable selection'' (related
to LCR Euronext Clearing), LCH SA will correct a typo and revise the
previous name of the interoperable CCP, ``CC&G'' to the current name,
``Euronext Clearing''.
Section 5.3.1: Independent Stress of Various Risk Factors
As part of its ongoing monitoring of the Framework, LCH SA performs
independent reverse stress tests for certain risk factors that could
result in a liquidity shortfall. One of these independent reverse
stress tests involves a Eurozone downgrade of peripheral and core
countries that triggers an increase in ECB haircuts, whereby the value
of liquidity resources decreases by an amount resulting in a liquidity
deficit. LCH SA is proposing to review the assumptions underpinning the
stress scenario by noting that the simulated downgrade will be based on
the maximum simultaneous downgrade notches that occurred over seven
days for each of the four rating agencies acknowledged by the ECB,
aggregated per type of debt (i.e., Core/Peripheral). After computing
the downgraded rating, LCH SA will use the rules defined by the central
bank to assign each issuer a haircut category and a haircut step in
order to apply the parameter aligned with the updated rating with a cap
to step 3 (which is considered the most conservative haircut category
applied by the ECB before collateral becomes ineligible for pledge).
LCH SA notes that because of the historical measures taken by ECB
during stressed periods (e.g., Eurozone crisis) and the high quality of
non-cash collateral, the ineligibility of issuers to pledge to the ECB
is not considered a plausible scenario. LCH SA is also proposing
additional conforming edits to align with the clarifications made in
Section 5.3.1 (e.g., Section 5.3.2.3 ``Macroeconomic Scenario'' will be
amended to align the assumptions made in Section 5.3.1) with the
removal of the former assumptions that simulated a fixed effect on core
and peripheral countries independently of a historical downgrade. LCH
SA is making these changes to sovereign downgrade assumptions to
address a Model Validation recommendation.
In addition, LCH SA will clarify in Section 5.3.2.3 that the table
presented is an example of the aggregation of exposure for a member
group during the combined reverse stress test that includes multiple
defaults and is presented for illustrative purposes only.
Finally, LCH SA will also revise Appendix 6.2: ``Members behaviour
analysis'', by removing the two charts and the global wording related
to discussion around increase of margins and the specific case of
Brexit. This reference is being removed as it is outdated and these
elements are no longer part of the Framework methodology.
Appendix 6.7--Stress Scenarios List
LCH SA will clarify that the scenario list disclosed is for
informational purposes only and represents the list of scenarios at the
time of drafting the current version of the Framework. The actual
computation of liquidity metrics is dependent on the actual scenarios
used to calibrate the default fund for LCH SA's different services and
thus may differ. Moreover, only the scenario labels will be left in the
Framework, as this is more applicable for scenario identification than
scenario numbers.
Appendix 7--Operating Model and Main Data Source Used To Run Liquidity
Metrics
To address an independent Model Validation recommendation, a new
section will be integrated to disclose a high-level functional workflow
regarding the computation of liquidity metrics. The chart will be
disclosed for informational purposes only, such that any revision will
be made if LCH SA amends the methodology or the Framework.
New Procedure: LCR Metric Compliant With SEC Rules and Established
Practices
To complement the changes to the Framework, LCH SA is also
proposing to create a new procedure for the purposes of describing the
Liquidity Resources including in its LCR calculation for the purposes
of complying with the SEC's cover 1 liquidity requirements. The
procedure will detail the specific LCR methodology, the escalation
process for any potential breaches in the specific cover 1 metric, the
frequency of LCH SA's review of the LCR methodology and the controls in
place regarding the calculation and ongoing review of the LCR metric
compliant with the SEC's cover 1 liquidity requirements and established
practices.
2. Statutory Basis
LCH SA believes the Proposed Rule Change is consistent with the
requirements of Section 17A of the Act \5\ and regulations thereunder
applicable to it. Section 17A(b)(3)(F) of the Act requires, inter alia,
that the rules of a clearing agency should be designed to ``promote the
prompt and accurate clearance and settlement of securities 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[.]'' \6\
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78q-1.
\6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Framework is being amended primarily to enhance details about
how LCH SA models for the liquidity needs arising from the daily
settlement process in its RepoClear service related to the auto-
collateralization feature in its Framework and amend how LCH SA
accounts for non-defaulting members' excess collateral in the
calculation of the Standalone Operational Target as well as the LCR in
its Framework. The proposed changes to the Framework regarding the
auto-collateralization feature will allow LCH SA to utilize dynamic
input data, including the most recent ECB haircuts and the actual auto-
collateralization limits set up in production at the time of
monitoring. In addition, the Framework will be amended to provide a
more targeted auto-collateralization limit, such that the allocated
portion of the limit for each issuer, in the case where there is a
distinct ECB category and haircut step and/or different operational
readiness to transfer securities in bulk from T2S to the 3G Pool
between different issuers assigned to the same DCA, will be defined
based on the average daily settlement obligation per security over the
last year for purposes of computing the liquidity impact. The proposed
changes to the treatment of excess collateral in the Framework will
allow LCH SA to modify the previous assumption that 100 percent of
excess collateral is withdrawn immediately following a stress event in
its Framework, to more closely align it with
[[Page 16910]]
current empirical clearing member behaviors and with the appropriate
liquidity horizon period. Collectively, these change would strengthen
LCH SA's ability to comprehensively manage its liquidity risks by
ensuring it maintains sufficient liquid resources to facilitate the
prompt and accurate clearance and settlement of securities transactions
and assure the safeguarding of securities and funds in its control,
consistent with Section 17A(b)(3)(F) of the Act.\7\
---------------------------------------------------------------------------
\7\ Id.
---------------------------------------------------------------------------
Regulation 17Ad-22(e)(7)(i) \8\ requires a covered clearing agency
to establish, implement, maintain, and enforce written policies and
procedures reasonably designed to effectively measure, monitor, and
manage the liquidity risk that arises in or is borne by the covered
clearing agency, including measuring, monitoring, and managing its
settlement and funding flows on an ongoing and timely basis, and its
use of intraday liquidity by, at a minimum, . . . [m]aintaining
sufficient liquid resources at the minimum in all relevant currencies
to effect same-day and, where appropriate, intraday and multiday
settlement of payment obligations with a high degree of confidence
under a wide range of foreseeable stress scenarios that includes, but
is not limited to, the default of the participant family that would
generate the largest aggregate payment obligation for the covered
clearing agency in extreme but plausible market conditions.\9\
---------------------------------------------------------------------------
\8\ 17 CFR 240.17Ad-22(e)(7)(i).
\9\ Id.
---------------------------------------------------------------------------
LCH SA is proposing to provide additional specificity in its
Framework to more accurately reflect how it models liquidity needs
arising from the daily settlement process in its RepoClear service
related to the auto-collateralization feature. Specifically, LCH SA is
proposing to detail the operational steps by which LCH SA would utilize
the auto-collateralization feature, as this information is not
currently in the Framework. LCH SA is also proposing to amend the
Framework to more accurately reflect real-time information, including
the current ECB haircut schedule for sovereign debt securities and the
limits determined through real-time monitoring for each debt type. In
addition to the proposed changes related to the auto-collateralization
feature, the proposed changes to the treatment of excess collateral
would modify how LCH SA quantifies the liquidity drain related to
Clearing Member withdrawal behaviors in a stress event. Under the
Proposed Rule Change, the withdrawal of excess collateral would be
modeled based on Clearing Member historical behavior and aligned with
the seven-day liquidity horizon. That is, LCH SA will model for the
partial withdrawal of excess collateral that is based on the second
worst observed relative variation experienced over seven days, capped
at the biggest historical reduction in excess collateral over the
liquidity horizon. This process would utilize up to ten years of
historical data and the result will be automatically integrated in the
Operation Target on a daily basis and form the basis of a dedicated
monitoring process. The Proposed Rule Change will also clarify that LCH
SA will monitor how excess collateral is modelled in the intermediary
days within the liquidity horizon and that any change to the
assumptions in the Framework will require approval by the ERCo.
LCH SA is also proposing to create a new procedure to describe its
process for calculating the Liquidity Resources included in its LCR
calculation to comply with the SEC's cover 1 liquidity requirements,
detail the specific LCR cover 1 methodology, how it will escalate
breaches in the daily review of the specific cover 1 metric, the
frequency of LCH SA's review of the LCR methodology more broadly and
the controls in place for how LCH SA will calculate and monitor the LCR
metric to ensure ongoing compliance with the SEC's cover 1 liquidity
requirements and established practices.
Based on the foregoing, LCH SA believes the Proposed Rule Change
will allow it to more effectively measure, monitor, and manage its
liquidity risk, including by maintaining sufficient liquid resources in
all relevant currencies to effect same-day and, where appropriate,
intraday and multiday settlement of payment obligations consistent with
Regulation 17Ad-22(e)(7)(i).\10\
---------------------------------------------------------------------------
\10\ Id.
---------------------------------------------------------------------------
Regulation 17Ad-22(e)(7)(ii) \11\ requires a covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to effectively measure, monitor, and
manage the liquidity risk that arises in or is borne by the covered
clearing agency, including measuring, monitoring, and managing its
settlement and funding flows on an ongoing and timely basis, and its
use of intraday liquidity by, at a minimum, . . . [h]olding qualifying
liquid resources sufficient to meet the minimum liquidity resource
requirement under paragraph (e)(7)(i) \12\ of [the SEC's liquidity
rules] in each relevant currency for which the covered clearing agency
has payment obligations owed to clearing members.\13\ In addition,
regulation 17Ad-22(e)(7)(vi)(A) \14\ requires a covered clearing agency
to establish, implement, maintain, and enforce written policies and
procedures reasonably designed to effectively measure, monitor, and
manage the liquidity risk that arises in or is borne by the covered
clearing agency, including measuring, monitoring, and managing its
settlement and funding flows on an ongoing and timely basis, and its
use of intraday liquidity by, at a minimum, . . . [d]etermining the
amount and regularly testing the sufficiency of the liquid resources
held for purposes of meeting the minimum liquid resource requirement
under [the SEC's liquidity rules] by . . . [c]onducting stress testing
of its liquidity resources at least once each day using standard and
predetermined parameters and assumptions.\15\
---------------------------------------------------------------------------
\11\ 17 CFR 240.17Ad-22(e)(7)(ii).
\12\ 17 CFR 240.17Ad-22(e)(7)(i).
\13\ 17 CFR 240.17Ad-22(e)(7)(ii).
\14\ 17 CFR 240.17Ad-22(e)(7)(vi)(A).
\15\ Id.
---------------------------------------------------------------------------
To address a regulatory examination observation and for purposes of
simplifying how this information is presented in the Framework, LCH SA
is making clarifying changes to how it calculates liquidity resources
for purposes of meeting the minimum liquid resource requirements under
Exchange Act rule 17Ad-22(e)(7).\16\ In addition to adding detail on
the composition of liquid resources and to address an independent Model
Validation observation and a regulatory examination finding, LCH SA is
proposing to amend how it models for the substitution of liquid
resources to non-liquid resources in its Framework. In doing so, LCH SA
will quantify this substitution via a proxy by calibrating over the
seven-day liquidity horizon using historical observations. To ensure
this value remains accurate in the calculation of liquid resources, LCH
SA will perform daily monitoring and calibrate the value should results
reflect different assumptions and document this process in a procedure.
In the case of any liquidity shortfalls, LCH SA will escalate to senior
management to take any necessary actions.
---------------------------------------------------------------------------
\16\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------
In addition, LCH SA is also proposing to amend how it models excess
collateral withdrawal by leveraging the historical behavior of its
membership and using a lookback period that
[[Page 16911]]
includes times of stress. LCH SA s also proposing to include in the
calculation of the Operation Target standalone a provision to model the
potential switch of collateral from the full title transfer regime to
the pledge regime calibrated on the historical behavior of its
membership. This change will to be applied to the LCR, whereby this
currently assumes more conservatively that all members that can pledge,
will do so up to the maximum capacity possible.
Finally, LCH SA proposes to update its Framework for independent
reverse stress tests by revising the assumptions underlying its
simulated Eurozone downgrade scenario, including the use of maximum
downgrade notches from recognized rating agencies and recalibration of
haircut categories per central bank rules. LCH SA is making these
changes to the sovereign downgrade assumptions to address a Model
Validation recommendation.
LCH SA is also clarifying that it will only include non-cash
resources in its liquidity resources under a cover 1 scenario after
performing a comprehensive analysis and presenting to the Board not
less than annually to ensure such prearranged funding arrangements are
deemed highly reliable even in extreme but plausible market
conditions.\17\ This clarification will align with LCH SA's Liquidity
Plan and Liquidity Risk Management Policy and LCH SA therefore believes
that the Proposed Rule Change is consistent with Regulation 17Ad-
22(e)(7)(ii) \18\ for purposes of holding sufficient liquid resources
and Regulation 17Ad-22(e)(7)(vi)(A) \19\ for purposes of adequately
modelling liquidity stress testing parameters and assumptions.
---------------------------------------------------------------------------
\17\ Id.
\18\ 17 CFR 240.17Ad-22(e)(7)(ii).
\19\ 17 CFR 240.17Ad-22(e)(7)(vi)(B).
---------------------------------------------------------------------------
Finally, Regulation 17Ad-22(e)(7)(vi)(B) \20\ requires a covered
clearing agency to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to effectively measure,
monitor, and manage the liquidity risk that arises in or is borne by
the covered clearing agency, including measuring, monitoring, and
managing its settlement and funding flows on an ongoing and timely
basis, and its use of intraday liquidity by, at a minimum determining
the amount and regularly testing the sufficiency of the liquid
resources held for purposes of meeting the minimum liquid resource
requirement under Regulation 17Ad-22(e)(7)(i), by at a minimum, . . .
conducting a comprehensive analysis on at least a monthly basis of the
existing stress testing scenarios, models, and underlying parameters
and assumptions used in evaluating liquidity needs and resources, and
considering modifications to ensure they are appropriate for
determining the clearing agency's identified liquidity needs and
resources in light of current and evolving market conditions.\21\
---------------------------------------------------------------------------
\20\ Id.
\21\ Id.
---------------------------------------------------------------------------
As part of the process to assess the sufficiency of liquid
resources held to meet the minimum liquid resource requirement set
forth in Regulation 17Ad-22(e)(7)(i),\22\ LCH SA identified the need to
enhance details about how it models for the liquidity needs arising
from the daily settlement process in its RepoClear service related to
the auto-collateralization feature in its Framework and amend how it
accounts for non-defaulting members' excess collateral in the
calculation of the operational target in its Framework. With respect to
the auto-collateralization feature described in the Framework, LCH SA
identified a need to:
---------------------------------------------------------------------------
\22\ 17 CFR 240.17ad-22(e)(7)(i).
---------------------------------------------------------------------------
(1) add detail with respect to the auto-collateralization feature,
including the operational steps by which LCH SA would utilize the
feature;
(2) clarify that the maximum potential liquidity drain modelled is
based on the operational effectiveness and readiness of the transfer of
securities from T2S to the 3G Pool for each issuer, as demonstrated on
an annual basis through LCH SA's War Games exercises,
(3) specify how the actual limits for each debt type are determined
and validated by internal stakeholders;
(4) clarify that the most conservative ECB haircut of the relevant
debt category and step currently in force will apply when determining
the maximum liquidity drain; and
(5) make other updates and conforming changes to align with
proposed revisions in (1) through (4) above.
LCH SA also identified a need to modify how LCH SA accounts for
non-defaulting members' excess collateral in the calculation of the
Standalone Operational Target as well as LCR in its Framework.
Specifically, LCH SA identified the need to modify the Framework to
quantify the withdrawal of excess collateral over a seven-day liquidity
horizon based on the second worst observed relative variation
experienced over seven days, capped at the biggest historical reduction
in excess collateral, utilizing up to ten years of historical data, and
implement daily back testing to ensure any changes in the partial
withdrawal scenario are flagged to senior management, such that any new
extreme would automatically be integrated in the Framework the
following day. LCH SA is also proposing additional updates and
confirming changes to the Framework for consistency. LCH SA believes
the Proposed Rule Change is therefore appropriate for determining its
liquidity needs and resources in light of current and evolving market
conditions, consistent with Regulation 17Ad-22(e)(7)(vi)(B).\23\
---------------------------------------------------------------------------
\23\ 17 CFR 240.17ad-22(e)(7)(vi)(B).
---------------------------------------------------------------------------
B. Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\24\ LCH SA does
not believe the Proposed Rule Change would have any impact, or impose
any burden, on competition. The Proposed Rule Change does not address
any competitive issue or have any impact on the competition among
central counterparties. LCH SA operates an open access model, and the
Proposed Rule Change will have no effect on this model.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
C. Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments relating to the Proposed Rule Change have not been
solicited or received. LCH SA will notify the Commission of any written
comments received by LCH SA.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
[[Page 16912]]
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>);
or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#84f6f1e8e1a9e7ebe9e9e1eaf0f7c4f7e1e7aae3ebf2"><span class="__cf_email__" data-cfemail="2052554c450d434f4d4d454e5453605345430e474f56">[email protected]</span></a>. Please include
file number SR-LCH SA-2025-003 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to file number SR-LCH SA-2025-003. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>). Copies of the
submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
Copies of the filing also will be available for inspection and copying
at the principal office of LCH SA and on LCH SA's website at: <a href="https://www.lch.com/resources/rulebooks/proposed-rule-changes">https://www.lch.com/resources/rulebooks/proposed-rule-changes</a>.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-LCH SA-2025-003 and
should be submitted on or before May 13, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
---------------------------------------------------------------------------
\25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-06856 Filed 4-21-25; 8:45 am]
BILLING CODE 8011-01-P
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