Notice2025-10445
Self-Regulatory Organizations; LCH SA; Order Granting Approval of Proposed Rule Change Relating to Revisions to Its Liquidity Risk Modelling Framework
Primary source
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Published
June 10, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 110 (Tuesday, June 10, 2025)</title>
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[Federal Register Volume 90, Number 110 (Tuesday, June 10, 2025)]
[Notices]
[Pages 24444-24450]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-10445]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103192; File No. SR-LCH SA-2025-003]
Self-Regulatory Organizations; LCH SA; Order Granting Approval of
Proposed Rule Change Relating to Revisions to Its Liquidity Risk
Modelling Framework
June 4, 2025.
I. Introduction
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'' or ``SEC''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change (the ``Proposed Rule Change'') to amend its Liquidity Risk
Modelling Framework (the ``Framework''), which describes the Liquidity
Stress Testing framework that the Collateral and Liquidity Risk
Management department (``CaLM'') of LCH SA uses to ensure 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 was published for comment in the Federal Register on April 22,
2025.\3\ The Commission has not received any comments on the Proposed
Rule Change. For the reasons discussed below, the Commission is
approving the Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 102875 (April 16, 2025),
90 FR 16903 (April 22, 2025) (File No. SR-LCH SA-2025-003)
(``Notice'').
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II. Description of the Proposed Rule Change
LCH SA is a clearing agency that clears, among other things,
credit-default swaps (``CDS'').\4\ LCH SA is registered with the
Commission for clearing CDS that are security-based swaps and with the
Commodity Futures Trading Commission for clearing CDS that are swaps.
As part of its clearing business, LCH SA maintains cash and other
liquid financial resources to meet its financial obligations. The
Framework and other procedures describe how LCH SA maintains these
resources and manages its liquidity risk, meaning the risk that LCH SA
will not have enough liquid financial resources to meet its financial
obligations.\5\
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\4\ Capitalized terms used but not defined herein have the
meanings specified in the LCH SA Rule Book or Framework as
applicable.
\5\ LCH SA also manages its liquidity risk pursuant to, among
other policies and procedures, the Group Liquidity Risk Policy and
the Group Liquidity Plan. These policies apply to LCH SA as a
subsidiary of LCH Group and an indirect subsidiary of the London
Stock Exchange Group plc. See Securities Exchange Act Release No.
100470 (July 9, 2024), 89 FR 57467 (July 15, 2024) (File No. SR-LCH
SA-2023-007).
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LCH SA is proposing to (i) 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; (ii) 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 the
Framework; (iii) quantify LCH SA's liquidity needs arising from
clearing members replacing liquid resources with non-liquid resources
for liquidity needs modelling; (iv) clarify how LCH SA accounts for
clearing members switching their respective pledging arrangement for
collateral included in LCH SA's Standalone Operational Target; (v) add
descriptions of assumptions that LCH SA makes when conducting one of
its reverse stress tests; (vi) clarify descriptions of LCH SA's sources
of liquidity; and (vii) make other non-substantive changes to correct
errors and outdated information for the purposes of conformity. These
changes are discussed below according to the sections of the Framework
where they are found.
A. Section 1 Changes
Section 1 describes the scope, purpose, and use of the Framework.
In subsections 1.6.1, 1.6.1.1, and 1.6.1.3, LCH SA is updating
outdated information and references to make the Framework more accurate
and better align the Framework with LCH SA's Liquidity Plan.\6\ For
example, in subsection 1.6.1, LCH SA is removing references to
financial facilities that are no longer in place and historical
references that are outdated and no longer applicable. Specifically,
LCH SA is removing a reference to its use of cross-currency bilateral
repo contracts because LCH SA no longer uses bilateral repos for such
transactions (it uses triparty repos instead). Similarly, LCH SA is
deleting reference to a multicurrency overdraft facility and an
intraday credit line, because LCH SA no longer maintains those
facilities. Instead, LCH SA maintains an uncommitted overdraft facility
only. LCH SA is also replacing reference to ``FX spot market
transaction'' with ``FX operation'' because the revised description
more accurately reflects the process. Finally, in subsection 1.6.1.1,
LCH SA is deleting reference to an operational process having been
tested in 2016, because LCH SA tests the process every year.
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\6\ As noted, LCH SA also uses the Group Liquidity Plan to
manage its liquidity risk.
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Subsection 1.6.1.3 contains a table that summarizes LCH SA's
potential sources for liquidity resources. These sources generally are
cash, non-cash collateral from clearing members, and collateral that
CaLM obtains through its investment activities. In this table, LCH SA
is updating the description of some of these sources to clarify whether
LCH SA includes these sources when quantifying its total liquid
resources.\7\ LCH SA is amending the table to align with the changes
made overall, as well as to remove references to facilities that are no
longer in place. For example, LCH SA is removing reference to the
Norges bank secured committed facility, because that facility is no
longer in place. Instead of the Norges bank secured committed facility,
going forward LCH SA will have access to an uncommitted credit line
with an international bank to cover overdrafts up to [euro]10mm.
Accordingly, in the part of the table describing this source of
[[Page 24445]]
liquidity, LCH SA is clarifying that this resource is uncommitted.
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\7\ The Framework describes LCH SA's liquidity in terms of
sources and needs. To model its overall liquidity, LCH SA quantifies
its liquidity resources and its liquidity needs.
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For non-Euro, non-cash collateral, LCH SA can only obtain Euro cash
if the collateral is posted in full title and LCH SA has an arrangement
to obtain Euro cash for the collateral. LCH SA has in place a cross-
currency tri-party repo arrangement, which it can use to obtain Euro
cash for non-Euro, non-cash collateral. LCH SA is clarifying that with
respect to this arrangement, CaLM must, as part of its yearly review of
LCH SA's Liquidity Plan, demonstrate to LCH SA's board of directors
that the arrangement is highly reliable even in case of extreme but
plausible market conditions.
Another potential source of liquidity is collateral that CaLM
obtains through its investment activities. This source may include
collateral that CaLM obtains via repo or reverse repo arrangements. LCH
SA is clarifying that where Clearstream is acting as the Central
Securities Depository (``CSD'') for such arrangements, the collateral
obtained by CaLM is not considered part of LCH SA's liquidity
resources. 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.
Section 1.6.2 summarizes LCH SA's liquidity needs. This section
identifies three broad categories of liquidity needs: (i) those arising
from LCH SA's business-as-usual operations, which are called
operational liquidity requirements; (ii) those arising from Clearing
Members' defaults; and (iii) those arising from the default of LCH SA's
interoperable CCP. Subsection 1.6.2.3 identifies the liquidity needs
arising from LCH SA's operational liquidity requirements. LCH SA is
revising the description of the operational liquidity requirements to
expand an existing liquidity need and identify an additional liquidity
need.
With respect to the existing liquidity need, LCH SA is revising the
description from the substitution of cash and 3G-eligible collateral to
the substitution of non-liquid resources for liquid resources. This
revised description is more accurate and complete because substitution
of cash and 3G-eligible collateral are not the only substitutions that
could create a liquidity need for LCH SA.\8\ LCH SA is also removing
references to the need arising from an increase in Central Bank
Guarantee (``CBG'') payments because, operationally speaking, clearing
members cannot substitute with CBG payments in the same manner as other
collateral.
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\8\ For example, replacement of Euro denominated, non-cash
collateral with non-Euro denominated, non-cash collateral, could
also affect LCH SA's overall liquidity.
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LCH SA is also adding to subsection 1.6.2.3 an additional, specific
operational liquidity requirement, namely, to model the switch from
collateral posted under the Full Title Transfer regime to the Pledge
regime. When a clearing member switches non-cash collateral from a Full
Title Transfer Account (``FTTA'') \9\ to a Single Pledge Account
(``SPA''), LCH SA can no longer obtain Euro cash for the collateral
from the 3G pool.\10\ This is because LCH SA cannot pledge to the 3G
pool collateral that is held in a SPA. This switch therefore reduces
LCH SA's potential sources of liquidity, and thus represents an
operational liquidity need. LCH SA is identifying this specific
liquidity need in subsection 1.6.2.3 to better explain how it accounts
for such switches when quantifying its liquidity resources and needs.
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\9\ LCH SA can obtain cash for Euro denominated, non-cash
collateral that is eligible for pledging at the ECB, by pledging
this collateral at Banque de France, in the 3G Pool. LCH SA can only
do so with respect to 3G-eligible collateral that a clearing member
has posted to LCH SA in FTTA.
\10\ LCH SA permits Clearing Members to deposit non-cash
collateral either through a FTTA or through a SPA. LCH SA maintains
FTTAs at various central securities depositories and maintains SPAs
at Euroclear Bank and Bank of New York Mellon (for U.S. Treasuries).
As noted, LCH SA can pledge certain of non-cash collateral--mostly
Euro-denominated securities--at Banque de France's 3G pool to obtain
Euro cash. LCH SA can only pledge collateral that is deposited
through a FTTA. LCH SA cannot pledge securities that a clearing
member deposits via a SPA, regardless of whether the securities are
otherwise eligible to be pledge to the 3G pool. See Securities
Exchange Act Release No. 100470 (July 9, 2024), 89 FR 57467, 57469
(July 15, 2024) (File No. SR-LCH SA-2023-007).
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Subsection 1.6.2.4 describes a particular operational liquidity
requirement at LCH SA related to its RepoClear service. Specifically,
if a seller of securities delivers the securities before the buyer has
provided the cash to purchase the securities, LCH SA will need to
provide cash to the seller to settle the transaction. Where the
securities are eligible for pledging at the ECB, LCH SA will use the
auto-collateralization option of ECB's Target 2 Security (``T2S'')
service to settle the transaction.\11\ LCH SA already models this
potential liquidity need in the Framework. LCH SA is revising the
description of this need to provide additional detail on how the auto-
collateralization feature works and how it leads to an operational
liquidity requirement. Moreover, LCH SA is adding an explanation as to
how certain aspects of the auto-collateralization feature affect the
amount of the operational liquidity requirement.
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\11\ With auto-collateralization, LCH SA can pledge the
securities received from the seller at the applicable CSD for those
securities. In return, LCH SA obtains cash, which it uses to settle
the transaction with the seller. To close out the transaction on its
end, LCH SA then attempts to find a legitimate buyer for those
securities. If LCH SA is not able to do so, it will transfer cash to
the CSD, and in return, the CSD will release the securities from the
pledge. LCH SA then pledges these securities at the Banque de France
in the 3G pool, receiving in return Euro cash for the value of the
securities, minus a haircut.
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First, LCH SA is proposing to add language to clarify that where
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.\12\
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\12\ As explained above, if LCH SA is not able to find a buyer
for the securities, it will transfer cash to the CSD and then
transfer the securities from the CSD to the 3G pool. If LCH SA is
not able, from an operational perspective, to transfer the
securities from the CSD to the 3G pool, then LCH SA is not able to
pledge the securities at Banque de France and obtain cash. Thus, an
operational failure to transfer the securities could effectively
result in a 100% liquidity drain.
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Second, LCH SA is proposing to add language to specify that any
changes to limits to the number of securities that LCH SA can transfer
to a CSD using the auto-collateralization feature will be automatically
reflected in its modelling of the operational liquidity requirement.
These limits are set for each pool of securities that are part of the
T2S settlement platform, per type of security. These limits reduce the
amount of securities that LCH SA can transfer to a CSD using the auto-
collateralization feature, and therefore affect the overall liquidity
need generated by LCH SA having to provide cash to a seller of
securities.
Finally, LCH SA is also proposing to add language to specify that
any changes to the ECB haircuts considered by the model will be
automatically reflected in its modelling of this liquidity need.\13\
LCH SA is specifying
[[Page 24446]]
that it models this operational liquidity requirement using the current
most conservative ECB haircut in force at the moment of the monitoring.
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\13\ As noted above, the amount of Euro cash that LCH SA obtains
when pledging the securities is reduced by an applicable haircut.
This haircut reduces the cash LCH SA receives which, as noted above,
LCH SA uses to cover the outlay needed to release the securities
from the CSD. Thus, the amount of this haircut reduces the amount of
liquidity that LCH SA can ultimately obtain and represents a part of
the liquidity need.
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Furthermore, LCH SA is also proposing to delete a table in this
section that reflects 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 from this operational liquidity requirement, as explained
above.
B. Section 4 Changes
Section 4 of the Framework, titled Model Specification, explains
how LCH SA models its liquidity sources and needs.
1. Operational Liquidity Requirements
Subsection 4.1 describes in more detail LCH SA's operational
liquidity requirements, including the sources of these requirements and
the resources that LCH SA uses to meet these requirements. LCH SA is
making changes to this subsection to conform to the proposed changes
made to Section 1 above. Specifically, LCH SA is (i) revising the
operational liquidity requirement resulting from the repayment of
excess collateral; (ii) expanding the operational liquidity requirement
resulting from the substitution of cash collateral to cover
substitutions from liquid resources to non-liquid resources; and (iii)
adding an additional, specific operational liquidity requirement to
account for members switching collateral from a FTTA to a SPA. LCH SA
is also making changes to the assumptions related to margin reduction,
to conform to these changes.
i. Excess Collateral
With respect to the repayment of excess collateral, the Framework
currently accounts for this operational liquidity need by assuming that
all excess collateral is withdrawn following a stress event. Excess
collateral is cash, or non-cash collateral eligible to be pledged at
the 3G pool, that is not needed to meet a clearing member's current
margin or default fund requirements. LCH SA currently assumes that
clearing members will withdraw 100% of such excess collateral within
three days. LCH SA is modifying this assumption. Going forward, LCH SA
will assume that clearing members withdraw excess collateral over seven
days.
LCH SA is updating subsection 4.1.5 (``Model Assumptions'') to add
new language in a new subpart d, titled ``Partial repayment of Excess
posted by members.'' LCH SA proposes to model for a partial withdrawal
of excess collateral based on an indicator calibrated with empirical
clearing member data. LCH SA is removing previous references to the
assumptions of excess collateral withdrawal over three days. LCH SA is
basing the partial withdrawal on the second worst observed relative
withdrawal of excess observed during a ten-year historical period,
capped at the biggest observed reduction in excess collateral. For this
purpose, LCH SA is utilizing up to ten years of historical data, with
the data starting in 2018. LCH SA is applying the overall biggest
reduction on the first day, and in each intermediary day, applying the
compounded excess reduction that is above the 99.7% percentile
confidence interval within the historical period. Finally, LCH SA is
assuming no increase of any excess collateral from clearing members
over the liquidity horizon.
LCH SA is proposing to monitor and update the calibration of this
amount daily as new data becomes available, up to a ten-year period.
LCH SA is also proposing to implement an enhancement of the daily back
testing to ensure any changes in the partial withdrawal scenario are
flagged to senior management. Any new extreme 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 LCH SA's
Executive Risk Committee.
As part of the discussion of withdrawal of excess collateral, the
Framework contains a footnote that explains certain collateral is not
considered excess collateral when modelling this liquidity requirement.
Specifically, securities denominated in Danish Krone, Norwegian Krone,
Swedish Krona, Japanese Yen, Swiss Franc, Canadian Dollar, and
Australian Dollar are not eligible for pledge at the 3G pool, and
therefore are not considered liquidity resources. Because such
securities are not liquidity resources, LCH SA does not include them
when modelling the effect of the withdrawal of excess collateral. To
clarify current practice, LCH SA is proposing to add to this footnote
that non-Euro cash and CBGs are excluded as well. LCH SA does not
consider non-Euro cash to be liquidity resources, and LCH SA cannot use
a central bank guaranty for liquidity unless the clearing member that
posted the guaranty is in default. For these reasons, LCH SA does not
treat those items as liquidity resources and therefore does not include
them when modelling the effect of the withdrawal of excess collateral.
Finally, to conform with the changes in this subsection, LCH is
updating the appendices in Section 6, as discussed further below.
ii. Substitutions From Liquid Resources to Non-Liquid Resources
As noted above, LCH SA currently considers the liquidity needs
arising from the substitution of non-cash collateral for cash and non-
3G-eligible collateral for 3G-eligible collateral. LCH SA is expanding
this liquidity need by updating subsection 4.1.5 to add new language in
a new subpart e, titled ``Substitution from liquid resources to non-
liquid resources.'' Like the withdrawal of excess collateral, LCH SA
will assume clearing members switch to non-liquid resources over seven
days.
To accurately account for the switch of liquid resources to non-
liquid resources in the assumptions of the Framework, LCH SA will
include details on the new proposed calculation and underlying
assumptions. To align with these changes, LCH SA will clarify that the
substitution refers to liquid resources (and not only cash or ECB-
eligible collateral) 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 will build the time series of data utilized in the calculation
until it reaches a maximum lookback period of 10 years, beginning with
data from 2022. LCH SA will assume clearing members will not switch
non-liquid collateral for liquid collateral over the liquidity horizon
and will apply 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, LCH SA
will set the compounded net substitution amount above the 99.7%
percentile confidence interval within the historical window observed.
[[Page 24447]]
Finally, LCH SA will monitor the assumptions underlying the calculation
of the switch amount daily and will compare these assumptions against
the parameters set up in production according to the described
methodology with new extrema automatically reflected in metric
calculations.\14\
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\14\ 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.
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As part of this change, LCH SA also is proposing to add language
clarifying that it assumes 3G-eligible securities can be pledged within
the same day for cash. LCH SA must test and validate this assumption
annually as part of the testing of its 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. LCH SA will delete the current reference to
testing this assumption during its War Games Q3 2022, as this reference
is now outdated.
Finally, LCH SA is deleting the previously applied methodology for
tracking asset switches from cash or 3G-eligible securities, equity
lodging, and the use of CBGs, as they are no longer relevant in light
of the revisions described above. Instead, a more comprehensive and
holistic methodology has been introduced as described above to ensure a
more accurate and dynamic approach to liquidity management.
iii. Switching Collateral From a FTTA to a SPA
Additionally, FCH SA is updating subsection 4.1.5 to add new
language in new subparts j and k, to specify that in the calculation of
the Operational Target there will be a provision to model the switch
from collateral posted under FTTAs, which is included in liquid
resources, to collateral posted under SPAs, which is considered as non-
liquid resources if the member posting the collateral is not in
default.\15\
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\15\ This is the case because, as noted above, LCH SA can obtain
liquidity for certain collateral using the Banque de France's 3G
pool, but only if that collateral is posted under a FTTA. Thus, when
a clearing member moves collateral to a SPA, LCH SA can no longer
obtain liquidity for that collateral, unless the clearing member is
in default.
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LCH SA will model this switch 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 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.
Finally, to conform with the changes in this subsection, LCH SA is
updating the appendices in Section 6, as discussed further below.
iv. Margin Reduction
As part of its operational liquidity requirements, LCH SA also
considers the potential reduction in margin requirements of non-
defaulting clearing members in a stressed environment. This aspect of
the liquidity is discussed in subsection 4.1.5(g) of the Framework. LCH
SA is amending subsection 4.1.5(g) to note that the assumptions used to
estimate the margin reduction are monitored daily and in case of a new
extreme, will be automatically reflected in the computation of the
metric.
Moreover, as is currently explained in subsection 4.1.5(g), LCH SA
uses ten years of data to assess the accuracy of its estimate and
assumptions for the margin reduction. Footnote 24 currently states that
this ten-year lookback period ended in April 2022. LCH SA is deleting
the reference to April 2022. Rather than ending in April 2022, LCH SA
uses a rolling ten-year lookback, and updates the data series daily.
LCH SA is making these changes to conform to how it monitors other
aspects of its operational liquidity requirements, like excess
collateral and switches discussed above.
2. LCR
Subsection 4.2 describes how LCH SA calculates its liquidity
coverage ratio, or ``LCR.'' LCH SA uses LCR to determine if it has
enough liquidity in case of the default of the two largest clearing
member groups. In determining the LCR, LCH SA integrates its
operational liquidity requirements, as described in subsection 4.1 of
the Framework. In doing so, LCH SA modifies slightly some of the
assumptions it uses in calculating its operational liquidity
requirements. Specifically, in modelling switches from FTTAs to SPAs,
for purposes of the LCR, LCH SA assumes clearing members that have SPAs
will switch the maximum amount of collateral allowed, rather than
modeling the switch over seven days. LCH SA is making edits to
subsection 4.2.5.2.1 (``Operational target'') to note this difference
in assumption and to revise the reference to repayment of excess cash.
Consistent with the changes described above, LCH SA instead is
referencing repayment of excess, given the modelling will no longer be
limited to withdrawals of excess cash. Finally, LCH SA is revising the
description of the LCR in subsection 4.2.5.2.1 from ``LCR'' to ``LCR
liabilities,'' to better account for how it considers the requirements
associated with the LCR.
3. LCR Euronext Clearing
Subsection 4.3 describes how LCH SA calculates its LCR with respect
to its interoperable CCP, Euronext Clearing. LCH SA uses the Euronext
LCR to determine if it has enough liquidity in case of the default of
Euronext. As with the LCR for the default of clearing members, in
determining the Euronext LCR LCH SA integrates its operational
liquidity requirements, as described in subsection 4.1 of the
Framework. In doing so, LCH SA will modify the assumptions it uses in
calculating its operational liquidity requirements. Specifically, in
modelling switches from FTTAs to SPAs, for purposes of the Euronext LCR
LCH SA assumes clearing members that have SPAs will switch the maximum
amount of collateral allowed, rather than modeling the switch over
seven days. LCH SA is making edits to subsection 4.3.5.4 to note this
difference in assumption.
Moreover, in subsection 4.3.2, LCH SA is correcting a typo and
revising the previous name of the interoperable CCP, ``CC&G'' to the
current name, ``Euronext Clearing.''
C. Model Performance Testing and Ongoing Monitoring
Section 5 describes how LCH SA conducts ongoing monitoring and
testing of its liquidity requirements. Subsection 5.3 describes LCH
SA's reverse stress tests. As part of its ongoing monitoring of the
Framework, LCH SA performs independent reverse stress tests for certain
risk factors that could result in LCH SA not having enough liquidity.
One of these independent reverse stress tests considers the effects of
downgrades to the ratings of countries that are core and peripheral to
the Eurozone. LCH SA assumes that such a situation would lead to an
increase in ECB haircuts. As
[[Page 24448]]
noted above, an increase to these haircuts decreases the amount of
liquidity LCH SA can obtain using the 3G pool. LCH SA is maintaining
this scenario but revising some of the associated assumptions, which
are described in subsection 5.3.1 (``Independent stress of various risk
factors''). LCH SA is noting that the magnitude of the downgrade is
based on the maximum simultaneous downgrade over seven days, aggregated
per type of debt. 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 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 making updates to the description of the
macro-economic scenario stress test in subsection 5.3.2.3 to align with
the changes in subsection 5.3.1. Moreover, LCH SA is adding a note in
5.3.2.3 that a particular table is for illustrative purposes only.
D. Appendix
Section 6 contains appendices to the Framework that provide further
detail on certain operational processes and analyses used in the
Framework. They also summarize certain aspects of the Framework and
present examples of reports that LCH SA uses to monitor its liquidity.
To conform with the changes in the Framework, LCH SA is also making
conforming changes to this section.
1. Members Behaviour Analysis
Appendix 2 (subsection 6.2) analyzes the expected behavior of LCH
SA's clearing members during a period of stress, with a focus on how
non-defaulting clearing members may act during the default of a
clearing member. LCH SA proposes to make updates to Appendix 2 to
conform to the changes and assumptions discussed above, such as the
assumptions related to withdrawal of excess collateral, switches from
liquid resources to non-liquid resources, and switches from FTTAs to
SPAs.
2. Reminder of SA's Sources of Liquidity and Related Risk Drivers
Appendix 3 (subsection 6.3) summarizes LCH SA's various sources of
liquidity, risks that could reduce the amount of liquidity available
from those sources, and the associated scenario or metric related to
LCH SA's use of those sources, like operational or LCR. LCH SA proposes
to make changes to Appendix 3 to conform to the changes discussed
above. For example, LCH SA is renaming a discussion of withdrawal of
excess cash to withdrawal of excess collateral and noting that the
withdrawal could be characterized as ``partial,'' because LCH SA
assumes it occurs over seven days.
3. Liquidity Risk Drivers Synthesis by Reports
Appendix 4 (subsection 6.4), titled ``Liquidity risk drivers
synthesis by reports,'' summarizes certain reports that LCH SA uses to
monitor its liquidity. LCH SA proposes to make changes to Appendix 4 to
conform to the changes discussed above. For example, LCH SA is adding a
provision related to switches from FTTAs to SPAs.
4. Liquidity Risk Monitoring Reports
Appendix 5 (subsection 6.5) presents a sample daily liquidity
monitoring report. LCH SA is updating Appendix 5 to include a current
version of this report, updated for the changes discussed above.
5. Stress Scenarios List
Appendix 7 (subsection 6.7) is a list of the scenarios that LCH SA
uses in stress testing its liquidity resources. LCH SA proposes to add
language clarifying 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, the list in Appendix 7 currently identifies
the stress scenarios by name and assigns each stress scenario an
identification number. LCH SA is removing the identification numbers,
as LCH SA believes they are no longer needed.
E. Operating Model and Main Data Source Used To Run Liquidity Metrics
To address an independent Model Validation recommendation, LCH SA
is adding a new section 7 to the Framework. Section 7 is a new appendix
that will show 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 its methodology or the Framework.
F. New Procedure: LCR Metric Compliant With SEC Rules and U.S.
Established Practices
To complement the changes to the Framework, LCH SA is also adopting
a new procedure. The new procedure describes how LCH SA establishes a
LCR for purposes of complying with the Commission's liquidity
requirements.\16\ The procedure will detail the resources that LCH SA
includes when calculating this LCR, the specific methodology for this
LCR, the escalation process for any potential breaches in this LCR, the
frequency of LCH SA's review of this methodology, and the controls in
place regarding the calculation and ongoing review of this LCR metric.
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\16\ 17 CFR 240.17ad-22(e)(7).
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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.\17\ 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.'' \18\
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\17\ 15 U.S.C. 78s(b)(2)(C).
\18\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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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,\19\ 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.\20\ 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.\21\
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\19\ Id.
\20\ Id.
\21\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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After carefully considering the Proposed Rule Change, the
Commission
[[Page 24449]]
finds that the Proposed Rule Change is consistent with the requirements
of the Exchange Act and the rules and regulations thereunder applicable
to LCH SA. More specifically, for the reasons given below, the
Commission finds that the Proposed Rule Change is consistent with
Section 17A(b)(3)(F) of the Act,\22\ Rule 17Ad-22(e)(7)(i), and Rule
17Ad-22(e)(7)(vi)(B).\23\
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\22\ 15 U.S.C. 78q-1(b)(3)(F).
\23\ 17 CFR 240.17ad-22(e)(7)(i) and 17 CFR 240.17ad-
22(e)(7)(vi)(B).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
LCH SA's rules be designed to promote the prompt and accurate clearance
and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions.\24\
Based on review of the record, and for the reasons discussed below, LCH
SA's changes are consistent with the prompt and accurate clearance and
settlement of securities transactions because they improve LCH SA's
management of its liquidity risk.
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\24\ 15 U.S.C. 78q-1(b)(3)(F).
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LCH SA relies on the Framework to support its management of
liquidity risk arising from a potential Clearing Member default,
default of Euronext Clearing, and operational liquidity requirements.
Managing such risks, such as through the maintenance of liquid
resources sufficient to meet payment obligations, reduces the
likelihood that LCH SA would fail to make payments when due, thereby
avoiding disruptions to the settlement of transactions for which such
payments are due. Thus, the Framework, as a rule of LCH SA, supports
the prompt and accurate clearance and settlement of the derivatives
transactions LCH SA clears, including security-based swaps.
As described above, LCH SA is amending the Framework to clarify the
description of certain sources of liquidity. Specifically, with respect
to a cross-currency tri-party repo arrangement that LCH SA can use to
obtain Euro cash for non-Euro, non-cash collateral, every year CaLM
must demonstrate to LCH SA's Board that the arrangement is highly
reliable even in case of extreme but plausible market conditions.
Moreover, with respect to collateral that CaLM obtains via repo or
reverse repo arrangements, where Clearstream is CSD, the collateral
obtained by CaLM is not considered part of LCH SA's liquidity
resources. These changes will make the Framework more accurate by
clarifying circumstances in which certain sources should not be counted
as part of LCH SA's liquidity resources.
LCH SA also is amending the Framework to clarify details about how
it models for the liquidity needs arising from the daily settlement
process and how it accounts for non-defaulting members withdrawing
excess collateral. Specifically, LCH SA is modifying the previous
assumption that 100 percent of excess collateral is withdrawn
immediately following a stress event, to more closely align with
current empirical clearing member behaviors and with the appropriate
liquidity horizon period. LCH SA is also adding to the calculation of
operational liquidity requirements the needs arising from switches to
non-liquid resources from liquid resources and to SPAs from FTTAs.
These changes will make the Framework more accurate, by making LCH SA's
assumptions about the withdrawal of excess collateral more closely
match how clearing members have withdrawn excess collateral and
including additional liquidity needs presented by switches to non-
liquid resources and to SPAs.
LCH SA also is amending the Framework to provide additional detail
about how it utilizes auto-collateralization to settle transactions in
its RepoClear service. As described above, using auto-collateralization
and pledging to the 3G pool allows LCH SA to settle transactions where
a buyer of securities has failed to perform. LCH SA can obtain cash to
settle the transaction while potentially limiting the reduction in its
liquidity to the haircut charged at the 3G pool. Describing this
process in detail will make the Framework more informative and help
establish a consistent process for settling RepoClear transactions
using auto-collateralization, when needed.
LCH SA is also enhancing the Framework to better describe aspects
of one of its reverse stress tests, correct errors, and update outdated
information. These changes, like the other changes discussed above,
make the Framework more accurate and clearer, improving the
effectiveness of the Framework as a tool supporting LCH SA's management
of liquidity risk arising from a potential member default, default of
Euronext Clearing, and operational liquidity requirements, which
facilitates prompt and accurate clearance and settlement.
Finally, LCH SA is establishing a new procedure to detail how it
establishes a LCR that specifically complies with the Commission's
liquidity requirements. This new procedure will describe the resources
that LCH SA includes when calculating this LCR, the specific
methodology for this LCR, the escalation process for any potential
breaches, and the ongoing review of this LCR. This new procedure will
help establish a clear and consistent methodology for demonstrating
compliance with the Commission's liquidity requirements.
These changes, taken together, would improve LCH SA's ability to
determine the amount of its liquidity needs and the amount of its
resources to satisfy those liquidity needs. More accurately determining
the amount of LCH SA's liquidity needs and resources would thereby
improve LCH SA's ability to control and quantify its liquidity risk.
Control over and accurate measurement of liquidity risk is necessary to
ensure that LCH SA's liquidity needs do not exceed its resources so
that LCH SA can meet its payment obligations on time without disrupting
settlement. Thus, the proposed changes to the Framework promote prompt
and accurate clearance and settlement.
Based on the foregoing, the Proposed Rule Change is consistent with
the requirements of Sections 17A(b)(3)(F) of the Act.\25\
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\25\ Id.
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B. Consistency With Rules 17Ad-22(e)(7)(i) and 17Ad-22(e)(7)(vi)(B)
Under the Act
Rules 17Ad-22(e)(7)(i) and (e)(7)(vi)(B) require LCH SA 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 LCH SA,
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:
<bullet> maintaining 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;
\26\ and
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\26\ 17 CFR 240.17ad-22(e)(7)(1).
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<bullet> determining the amount and regularly testing the
sufficiency of the liquid resources held for purposes of meeting the
minimum liquid resource requirement under 17Ad-22(e)(7)(i) by, at a
minimum, conducting a
[[Page 24450]]
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 LCH SA's identified liquidity needs and resources in
light of current and evolving market conditions.\27\
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\27\ 17 CFR 240.17ad-22(e)(7)(vi)(B).
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As discussed above, LCH SA is proposing to clarify certain aspects
of the Framework, such as when certain potential sources are included
in its liquidity resources, the extent of certain liquidity needs, and
how it uses auto-collateralization to settle transactions in its
RepoClear business line. LCH SA is also adding, as operational
liquidity requirements, the needs arising from switches to non-liquid
resources from liquid resources and to SPAs from FTTAs. LCH SA is also
modifying how it assumes non-defaulting clearing members withdraw
excess collateral. Finally, LCH SA is adding a new procedure to
describe the methodology it uses for demonstrating compliance with the
Commission's liquidity requirements. These changes will improve the
Framework by more accurately determining the amount of LCH SA's
liquidity needs and resources. In doing so, the Proposed Rule Change
will help ensure that the Framework is designed to effectively measure,
monitor, and manage the liquidity risk that arises in or is borne by
LCH SA and that LCH SA maintains sufficient liquid resources consistent
with Rule 17Ad-22(e)(7)(i).\28\
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\28\ 17 CFR 240.17ad-22(e)(7)(i).
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As also discussed above, LCH SA will monitor daily the assumptions
related to certain of its liquid needs. Specifically, LCH SA will
monitor daily the assumptions related to how it models the withdrawal
of excess collateral, switches from liquid to non-liquid resources,
margin reduction rate, and switches from FTTAs to SPAs. Moreover, LCH
SA will monitor and report daily the specific LCR that it uses to
demonstrate compliance with the Commission's liquidity requirements.
These changes will help ensure that LCH SA conducts comprehensive
analysis on at least a monthly basis of the underlying parameters and
assumptions used in evaluating its liquidity needs consistent with Rule
17Ad-22(e)(7)(vi)(B).\29\
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\29\ 17 CFR 240.17ad-22(e)(7)(vi)(B).
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Based on the foregoing, the Proposed Rule Change is consistent with
the requirements of Rules 17Ad-22(e)(7)(i) and (e)(7)(vi)(B) under the
Act.\30\
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\30\ 17 CFR 240.17ad-22(e)(7)(i) and (e)(7)(vi)(B).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act,
and in particular, Section 17A(b)(3)(A) of the Act \31\ and Rules 17Ad-
22(e)(7)(i) and (e)(7)(vi)(B) under the Act.\32\
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\31\ 15 U.S.C. 78q-1(b)(3)(A).
\32\ 17 CFR 240.17ad-22(e)(7)(i) and (e)(7)(vi)(B).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the Proposed Rule Change (SR-LCH SA-2025-003) be, and hereby is,
approved.\33\
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\33\ 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.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Stephanie Fouse,
Assistant Secretary.
[FR Doc. 2025-10445 Filed 6-9-25; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on June 10, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.