Notice2025-11098
Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Collateral Concentration Limits
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Published
June 17, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 115 (Tuesday, June 17, 2025)</title>
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[Federal Register Volume 90, Number 115 (Tuesday, June 17, 2025)]
[Notices]
[Pages 25730-25732]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-11098]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103242; File No. SR-LCH SA-2025-004]
Self-Regulatory Organizations; LCH SA; Order Approving Proposed
Rule Change Relating to Collateral Concentration Limits
June 12, 2025.
I. Introduction
On April 8, 2025, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (the ``Commission''), pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (the ``Act'') \1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change to change its
collateral concentration limits. The proposed rule change was published
for comment in the Federal Register on April 28, 2025.\3\ The
Commission did not receive comments regarding 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. 102905 (Apr. 22, 2025),
90 FR 17662 (Apr. 28, 2025) (File No. SR-LCH SA-2025-004)
(``Notice'').
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II. Description of the Proposed Rule Change
LCH SA is a clearing agency registered with the Commission. Through
its CDSClear business unit, LCH SA provides central counterparty
services for security-based swaps, including credit default swaps and
options on credit default swaps. LCH SA is an affiliate of LCH Ltd,
through common ownership by LCH Group. LCH SA's ultimate parent company
is London Stock Exchange Group.
LCH SA is proposing to revise the amount of supranational and
European agency securities that clearing members may post to satisfy
initial margin requirements. According to LCH SA, it is proposing these
changes to respond to its members' need for increased collateral
concentration limits, as clearing members seek less constrained
collateral limits for high[hyphen]quality collateral. LCH SA also is
proposing to revise the current concentration limit per individual
International Securities Identification Number (``ISIN'') with respect
to the instrument's total outstanding amount.\4\
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\4\ Capitalized terms not otherwise defined herein have the
meanings assigned to them in the LCH SA CDS Clearing Rule Book or
CDS Clearing Procedures, as applicable.
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LCH SA currently allows clearing members to post, as collateral for
initial margin requirements, supranational and European agency debt
securities issued by the following entities:
<bullet> Caisse d'Amortissement de la Dette Sociale (``CADES'');
<bullet> European Financial Stability Facility (``EFSF'');
<bullet> European Investment Bank (``EIB'');
<bullet> European Stability Mechanism (``ESM'');
<bullet> European Union (``EU'');
<bullet> International Bank for Reconstruction and Development
(``IBRD'');
<bullet> Kreditanstalt f[uuml]r Wiederaufbau (``KFW''); and
<bullet> Landwirtschaftliche Rentenbank (``Rentenbank'').
LCH SA currently applies a single concentration limit calculation
across all clearing members, which is no more than the lower of (i) 50%
of the value of the clearing member's initial margin requirement and
(ii) [euro]500 million for the total amount of supranational and
European agency securities from these issuers. Any remaining initial
margin requirements must be satisfied with either cash or other
eligible securities.
Rather than apply the same concentration limit calculation across
all issuers, LCH SA proposes to apply individual limits to the above
issuers of supranational and European agency securities. LCH SA's
Collateral and Liquidity Risk Management team (``CaLM'') will establish
limits for each issuer based on a market analysis of the credit and
liquidity risk profile of each issuer. LCH SA is proposing to establish
the limit as the lower of (i) 50% of the value of the member's initial
margin requirement and (ii) the following for each issuer:
<bullet> CADES [euro]500 million.
<bullet> EFSF [euro]750 million;
<bullet> EIB [euro]1,250 million;
<bullet> ESM [euro]750 million;
<bullet> EU [euro]2,000 million;
<bullet> IBRD [euro]750 million;
<bullet> KFW [euro]1,250 million; and
<bullet> Rentenbank [euro]500 million.
As part of this revision to the supranational and European agency
securities' limits, LCH SA is also proposing to apply a more
conservative concentration limit per ISIN of each security type from
the above issuers, from the current level of 25% to 15%. LCH SA is
making this change to the concentration limit through an update to the
LCH SA Knowledge Center, which is a portion of its website only
accessible to its Clearing Members.\5\
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\5\ 90 FR 17663, FN 6.
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LCH SA uses collateral posted by a member to cover losses and
liquidity needs in case of that member's default. Concentration of
margin collateral in a particular issuer or security could jeopardize
LCH SA's ability to use collateral for that purpose, if the issuer or
security declines in value, or otherwise becomes difficult to
liquidate, following a member default. To determine the respective
limits for each security type, LCH SA assessed the Internal Credit
Score (``ICS'') of each issuer, the total amount of each issue
outstanding, and the weighted average of the yield bid-ask spread. LCH
SA then assessed the liquidation cost for each issuer's ISIN by working
with select investment counterparties to perform a hypothetical
liquidation analysis at certain portfolio amounts under stressed market
conditions. The results of this analysis were used to validate the
proposed individual limits and evaluate the associated haircuts.
Following this exercise, LCH SA determined that the limits reflected in
the proposed rule change adequately incorporate the liquidity profile
of the issue and the credit risk profile of the issuer, and that the
proposed concentration limits have appropriately
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conservative haircuts that cover both the bid price variation and the
additional liquidation costs (related to the increased concentration)
associated with each security type under stressed market conditions.
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.\6\ 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.'' \7\
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\6\ 15 U.S.C. 78s(b)(2)(C).
\7\ 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,\8\ 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.\9\ 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.\10\
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\8\ Id.
\9\ Id.
\10\ 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 finds that the proposed rule change is consistent with the
requirements of the 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,\11\ and Rule 17Ad-22(e)(5).\12\
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ 17 CFR 240.17Ad-22(e)(5).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of LCH SA be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of LCH SA or for which it is responsible.\13\
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
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As discussed above, LCH SA is proposing to establish collateral
concentration limits for supranational and European agency securities
from the issuers listed above. The revised limits are the lesser of (i)
50% of the value of the member's initial margin requirement and (ii) a
specific overall amount for each issuer. LCH SA based its decision, in
part, on the liquidation cost for each issuer in certain stressed
market conditions. These changes would help maintain sufficient
liquidity and should help to ensure that LCH SA is able to continue
clearing and settling securities transactions and safeguarding
securities and funds in the face of stressed market conditions.
As noted above, the limits LCH SA is proposing to establish will
help ensure that collateral posted by a member is not overly
concentrated in an issuer or security. LCH SA uses collateral posted by
a member to cover losses and liquidity needs in case of that member's
default. Concentration of margin collateral in a particular issuer or
security could jeopardize LCH SA's ability to use collateral for that
purpose, if the issuer or security declines in value, or otherwise
becomes difficult to liquidate, following a member default. Because
losses and liquidity demands can hinder LCH SA's ability to clear and
settle transactions, the proposed collateral concentration limits
described above would reduce concentration risk to margin collateral,
which would help ensure the prompt and accurate clearance and
settlement of transactions at LCH SA. Moreover, decreasing the
likelihood that the value of a defaulting clearing member's margin
collateral is affected by concentration risk helps assure the
safeguarding of non-defaulting clearing members' assets by reducing the
likelihood that LCH SA would be forced to charge losses to its default
fund, which would then be mutualized among clearing members.
Accordingly, the proposed rule change promotes the prompt and
accurate clearance and settlement of transactions at LCH SA, and
assures the safeguarding of securities and funds which are in the
custody or control of LCH SA or for which it is responsible, consistent
with Section 17A(b)(3)(F) of the Act.\14\
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\14\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(5)
Rule 17Ad-22(e)(5) requires that LCH SA establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to, among other things, set and enforce appropriately
conservative haircuts and concentration limits for the collateral it
collects to manage its credit risk.\15\ LCH SA is proposing to revise
its concentration limits for the amount of supranational and European
agency securities clearing members may post to satisfy initial margin
requirements by establishing individual concentration limits per
issuer, rather than a single concentration limit across all issuers.
LCH SA is also revising the concentration limit that applies to each
ISIN of the above issuers, from the current level of 25% to 15%.
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\15\ 17 CFR 240.17Ad-22(e)(5).
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LCH SA currently allows clearing members to post supranational and
European agency debt securities as collateral for initial margin
requirements. The current concentration limit for these issuers is the
lower of (i) 50% of a clearing member's initial margin requirement and
(ii) [euro]500 million. Going forward, it will be the lower of (i) 50%
of a clearing member's initial margin requirement and (ii) an upper
limit, ranging from [euro]500 million to [euro]2 billion. Because the
limit is the lower of the two, a clearing member's initial margin
requirement will determine the limit available to that clearing member.
A clearing member can only post more than the current limit ([euro]500
million) if a clearing member's initial margin requirement is large
enough that 50% of that amount is greater than [euro]500 million. For
example, under the proposed rule change, clearing member A can post
[euro]501 million of EFSF only if clearing member A's initial margin
requirement is over [euro]1 billion; otherwise, 50% of the initial
margin requirement is the lower of the two amounts.
LCH SA has determined to enhance its clearing members' ability to
post such non-cash collateral, because the members have sought
increased collateral concentration limits for high-quality collateral.
The Commission has reviewed the confidential materials \16\ provided by
LCH SA and the proposed rule change, and has determined that,
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given the limits will continue to be based on 50% of a clearing
member's initial margin requirement, only a small number of clearing
members would have an initial margin requirement large enough to use
the new, higher collateral limits.
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\16\ As confidential exhibits to the filing, LCH SA provided
responses to the Commission's request for information (Exhibit 3.1),
and a quantitative analysis of the margin collateral limit increases
(Exhibit 3.2).
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As such, setting collateral concentration limits based on
individual securities--with a lower limit based on the initial margin
requirement--will help LCH SA establish appropriately conservative
concentration limits, while at the same time meeting the needs of
clearing members that seek less constrained collateral limits for
high[hyphen]quality collateral. Accordingly, rather than expand the
composition of eligible collateral that clearing members may post, LCH
SA is proposing to establish individual limits for each supranational
and European agency security type following an analysis in accordance
with its Collateral Risk Management Policy. As noted above, this
approach will generally increase the amount of supranational and
European agency securities that clearing members may post as
collateral, but also will allow LCH SA to tailor limits per individual
issuer rather than applying the same limit calculation to all the above
issuers. Doing so should enable LCH SA to establish appropriately
conservative concentration limits on an individual basis per issuer,
while still providing less constrained collateral limits for clearing
members with high[hyphen]quality collateral. At the same time,
establishing a lower per ISIN concentration limit of 15% helps ensure
an overall conservative concentration limit for each security of the
issuer.
Accordingly, the proposed rule change is consistent with Rule 17Ad-
22(e)(5).\17\
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\17\ 17 CFR 240.17Ad-22(e)(5).
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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, with the requirements of Section 17A(b)(3)(F) of the
Act,\18\ and Rule 17Ad-22(e)(5),\19\ thereunder.
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\18\ 15 U.S.C. 78q-1(b)(3)(F).
\19\ 17 CFR 240.17Ad-22(e)(5).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\20\ that the proposed rule change (SR-LCH SA-2025-004) be, and hereby
is, approved.\21\
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\20\ 15 U.S.C. 78s(b)(2).
\21\ In approving the proposed rule change, the Commission
considered the proposal's impact 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.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2025-11098 Filed 6-16-25; 8:45 am]
BILLING CODE 8011-01-P
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