Notice2025-18941
Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to LCH SA's Risk Governance Framework and Collateral, Financial, Credit, Operational and Third Party Risk Policies
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 30, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 90 Issue 187 (Tuesday, September 30, 2025)</title>
</head>
<body><pre>
[Federal Register Volume 90, Number 187 (Tuesday, September 30, 2025)]
[Notices]
[Pages 47001-47008]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-18941]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104051; File No. SR-LCH SA-2025-007]
Self-Regulatory Organizations; LCH SA; Order Approving Proposed
Rule Change Relating to LCH SA's Risk Governance Framework and
Collateral, Financial, Credit, Operational and Third Party Risk
Policies
September 25, 2025.
I. Introduction
On July 15, 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 submit for
Commission approval the following risk policies (the ``Risk
[[Page 47002]]
Policies''): (i) the Collateral Risk Policy; (ii) the Financial
Resource Adequacy Policy; (iii) the Counterparty Credit Risk Policy;
(iv) the Operational Risk Management Policy; (v) the Third Party Risk
Management Policy; and (vi) the Risk Governance Framework. The proposed
rule change was published for comment in the Federal Register on August
1, 2025.\3\ On September 15, 2025, pursuant to Section 19(b)(2) of the
Exchange Act,\4\ the Commission designated a longer period within which
to approve, disapprove, or institute proceedings to determine whether
to approve or disapprove the proposed rule change.\5\ The Commission
did not receive comments regarding the proposed rule change. For the
reasons discussed below, the Commission is approving the proposed rule
change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 103573 (July 29, 2025),
90 FR 36257 (Aug. 1, 2025) (File No. SR-LCH SA-2025-007)
(``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ Securities Exchange Act Release No. 103965 (Sept. 15, 2025),
90 FR 45063 (Sept. 18, 2025) (File No. SR-LCH SA-2025-007).
---------------------------------------------------------------------------
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 Holdings Limited (``LCH Group'').
LCH SA's ultimate parent company is London Stock Exchange Group. LCH
Group issued the Risk Policies, and, thereafter, LCH SA adopted them.
LCH SA's Risk Policies formally enact the specific risk management
requirements that govern its operations as a clearing agency. The
policies and procedures set forth therein clarify the roles and
responsibilities within LCH SA for compliance with the Risk Policies.
LCH SA's Risk Policies must ensure consistency with all relevant laws
and regulations, including the European Markets Infrastructure
Regulation (``EMIR'') and, relevant here, Section 17A of the Act \6\
and the regulations thereunder.\7\
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78q-1.
\7\ Each of the Risk Policies generally identify the relevant
provisions of law and regulation applicable to that policy.
---------------------------------------------------------------------------
A. Collateral Risk Policy
The Collateral Risk Policy (``CRP'') sets forth the LCH Group
standards for the management of collateral risk at LCH SA, how LCH SA
intends to monitor collateral risk, which personnel own the CRP, and
the internal review cycle. LCH SA's management of collateral risk is
subject to the risk appetite defined in the Risk Governance Framework
(``RGF''), which is discussed in greater detail below. Generally, the
CRP ensures LCH SA's capability to process and control the collateral
posted by its members.
With respect to managing collateral risks, the CRP applies to
collateral accepted by LCH SA to cover margin requirements and default
fund contributions.\8\ The CRP also clarifies the roles and
responsibilities within LCH SA for compliance with the CRP. The policy
owner is the LCH SA Chief Risk Officer (``CRO'').
---------------------------------------------------------------------------
\8\ Collateral accepted by LCH SA to cover risks associated with
(i) securities accepted as part of LCH SA's clearing services (e.g.,
RepoClear and Equity Clear, see note 10 infra), and (ii) secured
cash investments (reverse repurchase agreements or outright
purchases) conducted as part of LCH SA's Collateral and Liquidity
Management (``CaLM'') team's investment activities, are outside the
scope of the CRP and are covered by LCH SA's Financial Resource
Adequacy Policy and Investment Risk Policy, respectively. Notice, 90
FR 36259 at n. 7.
---------------------------------------------------------------------------
The CRP also sets forth requirements for the approval of eligible
cash and non-cash collateral. In particular, the CRP establishes that
margin requirements can be covered by a mixture of cash and eligible
non-cash collateral (i.e., traded securities and bank guarantees),
subject to the criteria set out in the policy.
LCH SA primarily, but not exclusively, accepts EUR, GBP, and USD as
the currencies for margin and default fund contributions. Further, the
policy requires default fund contributions to be met by cash \9\ in the
primary currencies designated by each Clearing Service.\10\
---------------------------------------------------------------------------
\9\ LCH SA's CRP provides that default fund contributions can
also be met by collateral equivalent to cash in the case of default
such as Central Bank Guarantees, where authorized by the LCH SA
Rulebook.
\10\ LCH SA currently maintains three separate Clearing
Services: (i) CDSClear, which provides clearing services for credit
default swaps; (ii) RepoClear SA, which provides clearing services
in respect of repo and cash transactions on Euro-denominated
government and supra-national debts across 13 markets, as well as a
basket collateral service through the Euro GC+ clearing service; and
(iii) DigitalAssetClear SA, which provides clearing services for
cash-settled Bitcoin index futures and options contracts traded on
GFO-X.
---------------------------------------------------------------------------
With regards to non-cash collateral, the CRP provides that all
traded securities must meet certain credit, liquidity and market risk
requirements to be eligible as collateral for margin.\11\ The CRP
includes a full list of traded securities that qualify as eligible non-
cash collateral. The CRP also provides that central bank guarantees are
eligible as collateral accepted as margin? if they are issued by
central banks in countries that are approved for investments LCH SA's
Collateral and Liquidity Management team (``CaLM''). Commercial bank
guarantees are not eligible.
The CRP also addresses changes to collateral eligibility, providing
that for new currencies and new issuers within an approved collateral
type to be accepted as collateral, discretionary approval from the LCH
SA Executive Committee (``ERCo'') is required.\12\ New types of
collateral that pose new or novel risk features, or that require a
change to existing risk controls, require additional scrutiny from the
LCH SA Risk Committee and LCH SA Board approval. Where the ERCo and/or
Risk Committee promulgate new collateral guidance, the CRP requires,
where possible, that LCH SA provide a notice period to its clearing
members to allow them sufficient time to adjust the portfolio of
collateral lodged.
---------------------------------------------------------------------------
\12\ In addition, the CRP requires appropriate regulatory
approval to be obtained prior to LCH SA accepting new currencies.
The ERCo may also request that new issuers be reviewed by the LCH SA
Risk Committee and approved by the LCH SA Board.
---------------------------------------------------------------------------
The CRP also establishes a framework for monitoring market, credit,
concentration/liquidity, wrong way and FX risks. Such risks are covered
by baseline haircuts, haircut add-ons, limits, and/or price
adjustments, as detailed in the policy. The policy provides that the
ability of LCH SA to realize the value of collateral lodged by its
member within the assumed holding period is affected by the
collateral's market liquidity and the size of the position to be
liquidated.
The CRP further provides that the ERCo may impose haircut add-ons
and/or impose new limits or price adjustments on certain types of non-
cash collateral based on their market liquidity, and, in particular,
CaLM's ability to realize the value of the securities in the event of a
default. In addition, the ERCo has the discretion to assess haircut
add-ons on clearing members, based on their exposures, domicile, or
portfolio of collateral posted, to protect LCH SA's financial resources
and liquidity position. Collateral haircuts are subject to daily stress
testing with any exceptions to be notified to the ERCo.\13\
---------------------------------------------------------------------------
\13\ Under the CRP, the Stress Resting Regime must include the
following elements: (i) historical risk factor moves beyond the
99.7% level; (ii) theoretical scenarios which are extreme but
plausible are to be used to complement the historical scenarios and
provide better coverage of the tail losses of collateral portfolios.
To the extent that similar securities are cleared by LCH SA, the
same stress test scenarios applied on the clearing positions may be
used to stress test collateral haircuts.
---------------------------------------------------------------------------
[[Page 47003]]
The Executive Responsible for the CRP is the Chief Executive
Officer (``CEO''), and the CRP policy owner is the Chief Risk Officer
(``CRO''). The CRO's responsibilities include, in part, ensuring the
monthly review of published collateral haircuts,\14\ and of changes
which the CRO must submit to the ERCo for approval. Under the CRP, the
LCH SA Risk Committee must be notified of any material changes.
Moreover, members must be informed of changes to collateral haircuts in
a timely manner through the issuance of a circular, an email or a
website notification. Changes are required to be notified to the
regulators, where appropriate. In addition, the policy requires that
the LCH SA Risk Committee and the ERCo annually review the
appropriateness of the CRP.\15\ Moreover, the LCH SA Board must approve
the CRP annually. To that end, the application of the CRP is subject to
review by LCH SA Internal Audit, the results of which must be reported
to the Board.
---------------------------------------------------------------------------
\14\ In addition, the CRO also must ensure that monthly reviews
are submitted to LCH SA CRO and/or the ERCo; quarterly reviews are
submitted to the ERCo for approval; and more frequent reviews are
conducted (and submitted to the ERCo)? where appropriate.
\15\ In the Notice LCH SA states that line with SEC Rule 17ad-
22(e)(5), the sufficiency of collateral haircuts and concentration
limits is performed no less than annually. Notice, 90 FR at 36259
n.30.
---------------------------------------------------------------------------
B. Financial Resource Adequacy Policy
The Financial Resource Adequacy Policy (``FRAP'') sets forth the
standards governing the assessment of financial resources (i.e.,
initial margins, margin add-ons, and default funds) against Latent
Market Risks \16\ in clearing member portfolios at LCH SA. In addition,
the FRAP identifies the personnel responsible for discharging the FRAP
and its internal review cycle. The FRAP requires additional
(discretionary) margins to be held to cover member specific portfolio
risks arising from house and client activity of the following types:
(i) concentration/liquidity risk; (ii) sovereign risk; (iii) wrong way
risk; and (iv) counterparty credit risk.
---------------------------------------------------------------------------
\16\ Latent Market Risk is defined in the FRAP as the risk that
the exposure to a clearing member's portfolio value increases due to
the impact of changing market factors on the valuation of the
portfolio. LCH SA describes this risk as latent because LCH SA is
only exposed in the event of the member's default.
---------------------------------------------------------------------------
The FRAP also details the standards for addressing procyclicality
in the risk frameworks and models used by the LCH CCPs. According to
LCH SA, the Board's appetite for both Latent Market Risk and
Procyclicality Risk is low.\17\
---------------------------------------------------------------------------
\17\ Notice, 90 FR at 36259.
---------------------------------------------------------------------------
The FRAP requires LCH SA to impose, call, and collect margins at
least daily on each day when its Clearing Services are open and
operating in order to limit its credit exposures \18\ to its clearing
members and, where relevant, from Central Clearing Counterparties
(``CCPs'') with which it has interoperability arrangements.\19\ The
FRAP also sets forth LCH SA's standards for initial margin, margin add-
ons, intraday margins, and variation margin. Among other things, the
FRAP requires that LCH SA's initial margin models by calibrated to the
99.7% confidence level, be monitored daily, and meet the validation
standards in the Model Governance, Validation & Review Policy. The FRAP
further states that each service is expected to monitor intraday margin
levels and have the capability to call for margin intraday should it be
necessary to address any issues with member exposure.
---------------------------------------------------------------------------
\18\ The FRAP requires that such margins be sufficient to cover
potential exposures that LCH SA estimates will occur until the
liquidation of the relevant positions.
\19\ The FRAP also requires LCH SA to assess certain risks prior
to entering any interoperating arrangements.
---------------------------------------------------------------------------
Similarly, the FRAP also specifies the standards for LCH SA's
default fund arrangements. Among other things, LCH SA's default funds
must meet the ``cover-2'' standard, i.e., the potential losses from a
close-out in an extreme event of the largest two (2) member portfolios
and all clients of both members. LCH SA must also contribute to its
default funds, known as ``skin in the game.'' Finally, the FRAP further
states that LCH SA must apply a daily limit on clearing member
exposures, with the primary limit being that no one member's stress
test loss over additional margin cannot exceed 45% of the default fund.
The FRAP allows, in addition, offsets or reductions in the required
margin, subject to certain conditions being met (e.g., the economic
offset must be demonstrably resilient during stressed market conditions
and must be subject to the stress test regime). The FRAP also sets the
standards to be applied to sources of procyclicality and requirements
that were set out in LCH SA's Procyclicality Policy.\20\ Specifically,
the FRAP discusses how LCH SA manages the trade-off between increasing
clearing member margins following a market stress event, with the
potential resulting liquidity drain, which may be disruptive to the
market. LCH SA states that it will address such procyclicality risks by
employing specific standards for each of its clearing services to
comply with.
---------------------------------------------------------------------------
\20\ As explained in the Notice, as part of its annual review
process, LCH SA moved the contents of its Procyclicality Policy into
the FRAP and decommissioned the Procyclicality Policy. Section 9 of
the FRAP therefore includes detail on how LCH SA manages
procyclicality risk, including by assessing changes in margin
requirements, collateral haircuts, Clearing Member credit scoring
and how LCH SA may assess Clearing Members for additional default
fund contributions. Notice, 90 FR at 36260.
---------------------------------------------------------------------------
The FRAP sets forth the limit framework for clearing exposures at
the member and member group level, with the primary limit being that no
one member or member group can use more than 45% of the default fund;
lower credit quality members may be subject to more stringent limits.
The FRAP requires that LCH SA monitor these limits daily for each
member in each Default Fund.
To address the risk that LCH SA may also have exposure to clearing
members as investment counterparties, LCH SA imposes a concentration
limit framework at the counterparty level. The FRAP defines a Capital
at Risk (``CAR'') amount for each member or member group which,
together with the aggregate risk exposure of that member or member
group, must not be greater than 30% of the entire LCH SA capital.
The FRAP further requires that LCH SA run liquidity stress
tests,\21\ collateral stress tests,\22\ exposure stress testing,\23\
and reverse stress testing,\24\ and sets out the review requirements
for such testing.\25\ In addition to this testing, per Appendix 6 to
the FRAP, LCH SA will conduct a sensitivity analysis of its margin
models and a review of its parameters and assumptions for back-testing
on at least a monthly basis and consider modifications to ensure its
back-testing practices are appropriate for determining the adequacy of
margin resources.\26\ LCH SA will bring the
[[Page 47004]]
results of this analysis through internal governance to evaluate the
adequacy of its margin methodology, model parameters, and any other
relevant aspects of its margin framework.\27\
---------------------------------------------------------------------------
\21\ These stresses are detailed in the Liquidity Risk Policy
and must be run daily and reviewed at least quarterly or when there
is a sudden change in liquidity conditions.
\22\ These stresses are described in the Collateral Risk Policy
and must be run daily. Collateral haircuts must be reviewed at least
quarterly.
\23\ This is the stress testing regime carried out in the
default fund sizing described above in the FRAP, which ensures that
the ``cover 2'' standard is being met relative to extreme but
plausible scenarios above the service initial margin confidence
level. These stress tests must be run daily.
\24\ Through reverse stress testing, LCH SA identifies scenarios
which can lead to its financial resources being insufficient to
cover LCH SA's needs.
\25\ For example, the FRAP requires that LCH SA run liquidity
stress tests daily and review them quarterly or when there is a
sudden change in liquidity conditions.
\26\ The FRAP also requires LCH SA to conduct a sensitivity
analysis of its margin models and a review of its parameters and
assumptions for back-testing more frequently than monthly during
periods of time when the products cleared or markets served display
high volatility or become less liquid, or when the size or
concentration of positions held by the participants increases or
decreases significantly.
\27\ Notice, 90 FR at 36261.
---------------------------------------------------------------------------
The Executive Responsible for the FRAP is the LCH SA CEO, and the
policy is owned by the Chief Risk Officer. The FRAP is also subject to
oversight by both the LCH Ltd and LCH SA board Risk Committees. The
FRAP's appropriateness is reviewed annually by the ERCo; any
significant findings must be reported to the Risk Committee and Boards.
C. Counterparty Credit Risk Policy
The Counterparty Credit Risk Policy (``CCRP'') describes how LCH SA
assesses and manages counterparty credit risk, including the processes
it uses to manage that risk, responsible personnel, and the review
cycle for the policy. The CCRP defines counterparty credit risk as the
risk that a counterparty, including members and all intermediaries
where there is exposure through payment, clearing and settlement
processes, will be unable to fully meet its financial obligations when
due, or at any time in the future.
LCH SA manages and monitors counterparty credit risk primarily
through internal credit scores (``ICS''). The CCRP requires that LCH SA
assign an ICS to all clearing members and the sovereign of their
country of risk (and that of their parent, if different); LCH SA's
Credit Risk Team assigns and maintains ICS for each counterparty. The
CCRP also requires that all applicable counterparties be subject to a
formal documented ICS assessment before on-boarding, and then at least
once a year.
On the front end, the CCRP contemplates preliminary vetting of a
member applicant's credit profile. Specifically, LCH SA performs a
Credit Assessment Review and provides an ICS recommendation for all new
clearing member applications, including the sovereign credit
assessment, and an ICS recommendation of the prospective clearing
member and its parent jurisdiction. The CCRP sets out certain minimum
ICS that prospective clearing members must meet before approval. The
LCH SA ERCo has the discretion to reject any clearing member
application regardless of that prospective member's ICS.
The CCRP also sets out thresholds that LCH SA uses to limit its
exposure to counterparties and explains how LCH SA monitors these
thresholds; the LCH SA Credit Risk Team assigns, maintains, and
monitors applicable limits. Each clearing member and clearing member
group is subject to an uncovered stress losses/net capital threshold,
as detailed in Annex I of the CCRP. Clearing members are also subject
to a ratio of initial margin to net capital and an overall credit
tolerance. LCH SA must monitor these thresholds daily.
Under the CCRP, if a clearing member's credit profile deteriorates,
or a clearing member otherwise breaches a threshold, LCH SA may, on a
discretionary basis, modify the member's margin requirements. LCH SA
has stated that the aim of additional margin is to ensure that as a
clearing member's credit quality deteriorates below its entry
requirement, it can progressively call upon additional resources to
mitigate stress losses with eligible resources.\28\ Likewise, LCH SA
Credit Risk Team and the first line business personnel may agree to
separate procedures to apply additional margin to client accounts on a
discretionary basis. Finally, any breaches of membership criteria
listed in the LCH SA rulebook could result in suspension or termination
of clearing member status, which, under the CCRP, the ERCo must also
approve.
---------------------------------------------------------------------------
\28\ Notice, 90 FR at 36261.
---------------------------------------------------------------------------
LCH SA monitors all thresholds daily and applies credit tolerances
daily.
The CRO is the owner of the CCRP.
ERCo must review the appropriateness of the CCRP annually.
Following ERCo's review, the LCH SA Risk Committee will review the
appropriateness of the CCRP and recommend approval by the LCH SA Board.
Finally, ERCo must approve, and notify the LCH SA Risk Committee of,
changes to the annexes of the CCRP.\29\
---------------------------------------------------------------------------
\29\ The annexes set out factors used in determining a
counterparty's ICS, applicable thresholds, and limits.
---------------------------------------------------------------------------
D. Operational Risk Management Policy
The Operational Risk Management Policy (``ORMP'') describes how LCH
SA manages operational risk, including the processes it uses to manage
that risk, how LCH SA monitors that risk, the responsible personnel,
and the review cycle for the policy. The ORMP defines operational risk
as the risk of loss arising from inadequate or failed internal
processes, people and systems, or from external events. The ORMP
applies to all operations within LCH SA, including all LCH SA
employees, regardless of the basis or term of their employment. The
OMRP also applies where business functions are outsourced to any third
party.
Per the ORMP, LCH SA uses the three lines of defense model to
manage and mitigate operational risk. All services and functions
responsible for business as usual and change activities are considered
the First Line of Defence. The First Line of Defence is responsible for
ensuring adherence to all aspects of the ORMP and are accountable for
identifying, assessing, monitoring, mitigating and managing operational
risk. The LCH SA Risk Department is the Second Line of Defence, and it
is responsible for providing oversight, support and challenge to the
First Line, ensuring that the ORMP is aligned to the Board risk
appetite, and for providing appropriate training to all relevant LCH SA
staff. Internal Audit is the Third Line of Defence, and it is
responsible for validating that the control environment is operating in
alignment with the Board's risk appetite and the policies approved by
the Board. The First Line of Defence also uses a risk taxonomy to
identify applicable operational risks. LCH SA business and department
heads also complete a self-assessment of the risk and control profile,
which is reviewed and challenged by the Second Line of Defence.
Finally, the First Line of Defence must have processes to assess
whether the controls they use to mitigate operational risk are
adequately designed and operating effectively.
The ORMP also accounts for risk contingencies, detailing the
process to be followed when the following risk events occur triggering
a re-assessment of risks and controls: (i) incidents and actual losses;
\30\ (ii) audit \31\ or risk and compliance issues, and external
reviews; \32\ (iii) key risk and control indicator breaches; \33\ (iv)
control
[[Page 47005]]
weakness; (v) other internal events including process changes or
restructuring; \34\ and (vi) external events arising outside of LCH SA
and LCH Group's control (e.g., natural disasters, pandemics, political
changes, etc.).
---------------------------------------------------------------------------
\30\ A process must be in place to monitor and manage all types
of incidents including IT system failures, failure or delays in key
business processes, in order to minimize interruptions to business
services. The ORMP requires all incidents to be classified in
accordance with their materiality under Annex B and recorded in an
appropriate system to facilitate the immediate escalation and
resolution of the incident.
\31\ Any audit issue rated `critical' or `significant' may
impact the risk profile of the business/function and the risk must
be re-assessed accordingly.
\32\ LCH SA's regulators or management can initiate external
reviews where a third party is engaged to perform a specific review,
and such reviews will include, for example, management
recommendations arising as part of the annual external audit
process.
\33\ Key Risk Indicators (``KRI'') and Key Control Indicators
(``KCI'') are metrics with thresholds designed for management to use
in order to effectively identify, assess and monitor their current
and emerging risks against risk appetite. All businesses and
functions must implement them based on the operational risk library
and control guidance.
\34\ Changes such as process redesign or organizational
restructuring may impact the risk profile and require re-assessment
of relevant risks, as could a threat assessment triggered by senior
management or the LCH SA Board.
---------------------------------------------------------------------------
The CRO is the responsible executive for the ORMP, and the LCH SA
Chief Risk Officer is the policy owner. Moreover, the LCH SA Board is
responsible for: (i) determining LCH SA's ``risk appetite'' regarding
operational risk; (ii) overall compliance with the risk management
framework; and (iii) ensuring that management maintains an adequate
system of internal controls appropriate to LCH SA and the risks to
which it is exposed.\35\
---------------------------------------------------------------------------
\35\ The OMRP sets out the LCH SA Board's expectations,
including that (i) risks be identified, assessed, monitored and
managed in a proactive manner to minimize the impact to the LCH
Group; (ii) risk assessments be carried out using the risk severity
matrix contained in Annex A to the ORMP; and (iii) each operational
risk be identified as either `outside appetite', `near limit (within
appetite)' or `within appetite'. Where risks are assessed as near or
outside appetite, or where control weaknesses are identified, the
First Line of Defence must develop solutions and implementation
plans with clear interim milestones to address the weaknesses and
bring the risks back to within appetite. The policy requires issues
and actions to be raised at least for all risks assessed as near or
outside appetite.
---------------------------------------------------------------------------
The Chief Risk Officer is the ORMP's policy owner. Changes to, and
annual reviews of, the ORMP require approval by the LCH SA Risk
Committee, the LCH SA Operational Resilience Committee, and the LCH SA
Board. Changes to the annexes to the ORMP require approval of the LCH
SA CRO and notification to the relevant governance committees.
E. Third Party Risk Management Policy
The Third Party Risk Management Policy (``TPRMP'') describes how
LCH SA manages risks while contracting with a third party, including
how LCH SA manages and monitors this risk, the responsible personnel,
and the review cycle for the policy. The TPRMP applies to all types of
third parties, including internal and external service providers.
The TPRMP and the associated TPRMP Standard set forth in the RGF
set out LCH Group's minimum requirements for managing potential risks
when entering into and managing all third party relationships. LCH SA's
third party relationships consist of what LCH SA identifies in the
TPRMP as the ``Third Party lifecycle.'' The Third Party Lifecycle
consist of four (4) phases: (i) identify the need to leverage third
party services and select the most appropriate third party provider
(``Plan and Select''); \36\ (ii) set the conditions for the third party
relationship (``Contract and Onboard''); \37\ (iii) ensure that the
service, relationship and risks are effectively managed (``Manage and
Monitor''); \38\ and (iv) ensure orderly exit and transition at the
completion of an engagement or an early termination (``Terminate and
Exit'').\39\
---------------------------------------------------------------------------
\36\ As described in the Plan and Select section of the TPRMP,
LCH SA must complete a risk assessment on all new third party
engagements and details the contents of that risk assessment.
\37\ As described in the Contract and Onboard section of the
TPRMP, LCH SA must have appropriate written agreements with Third
Parties. This section further explains what those agreements should
consider and the review process for those agreements.
\38\ As described in the Manage and Monitor section of the
TPRMP, LCH SA must establish and maintain a register of all
relationships with third parties and all outsourcing arrangements.
This section also explains how LCH SA must monitor these
arrangements.
\39\ As described in the Terminate and Exit section of the
TPRMP, LCH SA must plan for both a stressed and an unstressed exit
from its Third Party arrangements.
---------------------------------------------------------------------------
The TPRMP also sets out the roles and responsibility within LCH SA
for implementing the standards undergirding the four phases identified
above.\40\ In this regard, LCH Group follows the aforementioned Three
Lines of Defence model, with LCH SA's Third Party Management Risk and
Procurement team as first line,\41\ the LCH SA Risk Department as
second line,\42\ and Internal Audit as third.\43\
---------------------------------------------------------------------------
\40\ Further detail on these roles and responsibilities can be
found in Appendix E of the TPRMP.
\41\ As the first line, these teams are responsible for
identifying, assessing, monitoring, and managing third party risk
and ensuring there are appropriate controls designed, implemented
and assessed to ensure LCH SA can operate within the agreed risk
appetite.
\42\ As second line, the Risk Department is responsible for the
oversight, support, and challenge.
\43\ As third line, Internal Audit is responsible for developing
and delivering a program of assurance aimed at validating that the
control environment is operating in alignment with the LCH SA
Board's risk appetite and the policies approved by the LCH SA Board.
---------------------------------------------------------------------------
Finally, the TPRMP sets out the key principles that underpin LSEG's
approach to managing third party engagements, such as understanding and
reducing concentration risk.
The LCH SA Chief Risk Officer is the Policy Owner. The LCH SA Chief
Risk Officer must review the TPRMP on an annual basis, with approval by
the LCH SA Chief Operating Officer. In addition, the LCH SA Board
Operational Resilience Committee and Risk Committee must approve any
material changes to the TPRMP.
F. Risk Governance Framework
Unlike the other Risk Policies, the Risk Governance Framework
(``RGF'') does not focus on any specific risk at LCH SA. Rather, the
RGF identifies and assesses five categories of Key Risks that LCH SA
faces in its operations: (i) financial and model risks associated
directly with clearing activities; (ii) risks relating to operational
resilience; (iii) strategic risks; (iv) people and culture risks; and
(v) regulatory compliance, legal and corporate disclosure risks. In
assessing the magnitude each of these Key Risks, the RGF establishes a
hierarchical taxonomy comprising of levels zero (0), one (1) and two
(2).
With respect to these Key Risks, the RGF sets out: (i) the LCH SA
Board's ``risk appetite'' across the Key Risks; (ii) the taxonomy of
the Key Risks (including the rated level of each Key Risk and the
Board's risk appetite for that risk); (iii) the roles and
responsibilities within LCH SA for managing each identified Key Risk;
(iv) the standards to be met by LCH SA when managing its business
activities within the determined risk appetite; and (v) the indicators
and tolerance thresholds by which each Key Risk is meant to be measured
and reported.
The RGF again establishes the ``Three Lines of Defence'' model for
managing and monitoring these Key Risks. Like the ORMP, LCH SA Function
Heads and Business Heads (excluding the CRO, LCH SA Chief Compliance
Officer, and Head of Internal Audit) manage the risks of all LCH SA's
business activities and therefore constitute the First Line of Defence.
The CRO,\44\ as part of the Second Line of Defence, is responsible for:
(i) measuring, monitoring and reporting the risks identified in the RGF
and ORMP and (ii) setting policies consistent with the standards
identified in the RGF. Under the RGF, LCH SA Human Resources,
Compliance, Finance and Legal are responsible for corporate risks and
for setting policies consistent with the RGF and for the management,
monitoring and reporting of any policy noncompliance within their
specific areas. Internal Audit is the Third Line of Defence.
---------------------------------------------------------------------------
\44\ The CRO has a dual reporting line to the LCH SA Chief
Executive Officer (``CEO'') and to the Chair of the LCH SA Risk
Committee. For compliance and regulatory risks, the CCO is
responsible for the second-line risk function, supported by the CRO.
---------------------------------------------------------------------------
The RGF also discusses the following: (i) the LCH SA Board's risk
appetite and standards; (ii) relevant risk indicators and tolerance
thresholds to assist with
[[Page 47006]]
the assessment of whether each risk should be assessed as `within',
`near' or `outside' appetite; \45\ (iii) the internal LCH SA
stakeholders responsible for each risk and associated policy; and (iv)
the LCH SA policy detailing how the LCH SA Board standards are applied
across the business.
---------------------------------------------------------------------------
\45\ Holistically, at each level, such risk status assessment
will also take account of qualitative factors, tolerance thresholds,
policies and culture.
---------------------------------------------------------------------------
The RGF is reviewed and signed off by the LCH SA Board at least
annually. In LCH SA's view, annual review of the RGF provides assurance
that all risks continue to be appropriately identified and mapped, that
the statement of risk appetite is clear and defined at the appropriate
level of granularity, that ownership and responsibilities are clear,
and that there is an appropriate process for monitoring and reporting
on all risks against LCH SA's appetite.\46\
---------------------------------------------------------------------------
\46\ Notice, 90 FR at 36265.
---------------------------------------------------------------------------
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.\47\ 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.'' \48\
---------------------------------------------------------------------------
\47\ 15 U.S.C. 78s(b)(2)(C).
\48\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
---------------------------------------------------------------------------
The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\49\ 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.\50\ 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.\51\
---------------------------------------------------------------------------
\49\ Id.
\50\ Id.
\51\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
---------------------------------------------------------------------------
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,\52\ and Rules 17ad-22(e)(2)(i), 17ad-
22(e)(2)(v), 17ad-22(e)(3)(i), 17ad-22(e)(4)(ii), 17ad-22(e)(4)(v),
17ad-22(e)(4)(vi)(A), 17ad-22(e)(5),17ad-22(e)(6)(i), 17ad-
22(e)(6)(ii), 17ad-22(e)(18)(ii), and 17ad-22(e)(18)(iii).\53\
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78q-1(b)(3)(F).
\53\ 17 CFR 240.17ad-22(e)(2)(i), (e)(2)(v), (e)(3)(i),
(e)(4)(ii), (e)(4)(v), (e)(4)(vi)(A), (e)(5), (e)(6)(i), (e)(6)(ii),
(e)(18)(ii), and (e)(18)(iii).
---------------------------------------------------------------------------
A. Section 17A(b)(3)(F)
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.\54\
---------------------------------------------------------------------------
\54\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As discussed above, LCH SA's Risk Policies formally enact the
specific risk management requirements that govern its day-to-day
operations as a clearing agency. The policies and procedures set forth
therein clarify the roles and responsibilities within LCH SA for
compliance with the Risk Policies. To that end, LCH SA has identified
specific risks areas that may compromise its business operations. Such
risk areas include, but are not limited to, collateral risk, Latent
Market Risks, counterparty credit risk, third party risk, other ``Key
Risks,'' as discussed above, and operational risk. The corresponding
risk policies consist of detailed risk management requirements that
govern LCH SA's clearing agency operations.
These risks, if not properly managed, could disrupt LCH SA's
clearing services and its ability to safeguard funds. For example,
corruption of LCH SA's data or other technological disruption could
interpret LCH's clearing services and its safeguarding of funds. Thus,
the risks addressed by the Risk Policies, if not managed or mitigated,
could prevent LCH SA from promptly and accurately clearing and settling
transactions and safeguarding funds. The Risk Policies, in turn, help
LCH SA to manage and mitigate these risks, are therefore consistent
with the prompt and accurate clearance and settlement of securities
transactions and the safeguarding of securities and funds which are in
the custody or control of LCH SA or for which it is responsible.
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of Section 17A(b)(3)(F) of the
Act.\55\
---------------------------------------------------------------------------
\55\ Id.
---------------------------------------------------------------------------
B. Rule 17ad-22(e)(2)(i) and (v)
Rules 17ad-22(e)(2)(i) and (v) \56\ require that each covered
clearing agency must establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide for
governance arrangements that are clear and transparent and specify
clear and direct lines of responsibility. As discussed in Section II,
each of the Risk Policies describe in detail the roles and
responsibilities of the various personnel at LCH SA for implementing
and ensuring compliance with the policy. For example, the CRO is the
owner of the CCRP, and the CCRP assigns responsibilities to the LCH SA
Credit Risk Team, such as determining and maintaining an ICS for each
counterparty. As another example, the ORMP, TPRMP, and RGF each use the
three lines of defence model, describe the LCH SA personnel that are
part of each line of defence, and assign responsibilities to each line
of defence. The Risk Policies are clear and transparent in specifying
direct lines and degrees of responsibility regarding the Risk Policies.
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of Rule 17ad-22(e)(2)(i) and (v).\57\
---------------------------------------------------------------------------
\57\ 17 CF 240.17ad-22(e)(2)(i) and (v).
---------------------------------------------------------------------------
C. Rule 17ad-22(e)(3)(i)
Rule 17ad-22(e)(3)(i) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to maintain a sound risk management
framework for comprehensively managing legal, credit, liquidity,
operational, general business, investment, custody, and other risks
that arise in or are borne by the covered clearing agency, which
includes risk management policies, procedures, and systems designed to
identify, measure, monitor, and manage the range of risks that arise in
or are borne by the covered clearing agency, that are subject to review
on a specified periodic basis and approved by the LCH SA Board
annually.\58\
---------------------------------------------------------------------------
\58\ 17 CFR 240.17ad-22(e)(3)(i).
---------------------------------------------------------------------------
[[Page 47007]]
LCH SA's RGF adequately sets forth necessary written policies and
procedures establishing a risk management framework responsive to the
various risks that a covered clearing agency must anticipate. As stated
above, the RGF, which the LCH SA Board reviews and re-approves
annually, identifies and categorizes Key Risks faced by LCH SA, sets
out the roles and responsibilities within LCH SA for managing each
identified Key Risk, provides the standards to be met by LCH SA when
managing its business activities within the determined risk appetite,
and establishes the indicators and tolerance thresholds by which each
Key Risk is meant to be measured and reported. The RGF is designed to
comprehensively manage identified Key Risks.
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of Rule 17ad-22(e)(3)(i).\59\
---------------------------------------------------------------------------
\59\ 17 CFR 240.17ad-22(e)(3)(i).
---------------------------------------------------------------------------
D. Rules 17ad-22(e)(4)(ii), (v), and (vi)(A)
Rule 17ad-22(e)(4)(ii) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes, including
by maintaining financial resources at the minimum to enable it to cover
a wide range of foreseeable stress scenarios that include, but are not
limited to, the default of the two participant families that would
potentially cause the largest aggregate credit exposure for the covered
clearing agency in extreme but plausible market conditions.\60\ Rule
17ad-22(e)(4)(v) requires that such financial resources be maintained
in combined or separately maintained clearing or guarantee funds.\61\
Finally, rule 17ad-22(e)(4)(vi)(A) \62\ requires a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes, including
by, among other things, testing the sufficiency of its total financial
resources available to meet its minimum financial resource requirements
by conducting stress testing of its total financial resources once each
day using standard predetermined parameters and assumptions.\63\
---------------------------------------------------------------------------
\60\ 17 CFR 240.17ad-22(e)(4)(ii).
\61\ 17 CFR 240.17ad-22(e)(4)(v).
\62\ 17 CFR 240.17ad-22(e)(4)(vi)(A).
\63\ Id.
---------------------------------------------------------------------------
LCH SA addresses maintaining financial resources in the FRAP, which
describes the standards governing the assessment of financial resources
(e.g., initial margins, margin add-ons and default funds) against
``Latent Market Risks'' in LCH SA clearing portfolios. As discussed
above, the FRAP generally sets forth: (i) the requirements for LCH SA
to impose, call and collect daily margins; (ii) the methodology for
stress testing; and (iii) the allocation of financial resources per
clearing member.
The FRAP's stress testing protocols adequately address both LCH
SA's capacity to mitigate credit exposure risks and its ability to meet
its minimum financial resource requirements. Specifically, the FRAP
requires LCH SA to run liquidity stress tests, collateral stress tests,
and exposure stress testing (i.e., to ensure LCH SA is meeting the
cover 2 standard). LCH SA must run these stress tests daily. In
addition, LCH SA also conducts reverse stress testing to ascertain the
adequacy of financial resources held against its members' positions;
these tests are run at least quarterly.
The FRAP also establishes standards maintaining LCH SA's default
fund, including requiring that LCH SA meet the ``cover-2'' standard.
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of Rules 17ad-22(e)(4)(ii),\64\ 17ad-
22(e)(4)(v),\65\ and 17ad-22(e)(4)(vi)(A).\66\
---------------------------------------------------------------------------
\64\ 17 CFR 240.17ad-22(e)(4)(ii).
\65\ 17 CFR 240.17ad-22(e)(4)(v).
\66\ 17 CFR 240.17ad-22(4)(vi)(A).
---------------------------------------------------------------------------
E. Rule 17ad-22(e)(5)
Rule 17ad-22(e)(5) \67\ requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to limit the assets it accepts as
collateral to those with low credit, liquidity, and market risks, and
set and enforce appropriately conservative haircuts and concentration
limits if the covered clearing agency requires collateral to manage its
or its participants' credit exposures.
---------------------------------------------------------------------------
\67\ 17 CFR 240.17ad-22(e)(5).
---------------------------------------------------------------------------
LCH SA's CRP sets forth acceptance criteria (e.g., limits on
accepted currency for cash or use of a defined haircut methodology for
non-cash collateral) for all collateral posted by its members. The CRP
identifies the process by which CaLM and ErCo can consider collateral
eligibility. For example, new collateral that poses new or novel
features or requires a change to LCH SA's risk controls must be
submitted by CaLM to ERCo and the Risk Committee. Likewise, LCH SA
retains discretion to further consider necessary base haircuts, haircut
add-ons, limits and/or price adjustments. These features of the CRP
help ensure that LCH SA limits the assets it accepts as collateral to
those with low credit, liquidity, and market risks, and that LCH SA
establishes and maintains appropriately conservative haircuts for that
collateral.
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of Rule 17ad-22(e)(5).\68\
---------------------------------------------------------------------------
\68\ Id.
---------------------------------------------------------------------------
F. Rule 17ad-22(e)(6)(i) and (ii)
Rules 17ad-22(e)(6)(i) and (ii) \69\ require a covered clearing
agency to, among other things, establish, implement, maintain and
enforce written policies and procedures reasonably designed to cover,
if the covered clearing agency provides central counterparty services,
its credit exposures to its participants by establishing a risk-based
margin system that, at a minimum: (i) considers, and produces margin
levels commensurate with, the risks and particular attributes of each
relevant product, portfolio, and market and (ii) marks participant
positions to market and collects margin, including variation margin or
equivalent charges if relevant, at least daily and includes the
authority and operational capacity to make intraday margin calls in
defined circumstances.
---------------------------------------------------------------------------
\69\ 17 CFR 240.17ad-22(e)(6)(i) and (ii).
---------------------------------------------------------------------------
The FRAP requires LCH SA to impose, call and collect daily margin.
Stated otherwise, the FRAP details LCH SA's standards by which
financial resources should be assessed against member exposure--this
includes variation margins, initial margins, margin add-ons for
liquidity risk, among other resources. To that end, the FRAP permits
for Clearing Services to call for intraday margin, where necessary,
consistent with Rule 17ad-22(e)(6)(ii).\70\ The FRAP further details
the methods and procedures under which LCH SA's clearing services: (i)
monitor margin levels intraday and clarifies that each service must
delineate exposure thresholds that trigger an intraday margin call, if
necessary; (ii) calculate variation margin; and (iii) determine
[[Page 47008]]
offsets or reductions in required margin, consistent with Rule 17Ad-
22(e)(6)(i).\71\
---------------------------------------------------------------------------
\70\ 17 CFR 240.17ad-22(e)(6)(ii).
\71\ 17 CFR 240.17ad-22(e)(6)(i).
---------------------------------------------------------------------------
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of 17ad-22(e)(6)(i) and (ii).\72\
---------------------------------------------------------------------------
\72\ 17 CFR 240.17ad-22(e)(6)(i) and (ii).
---------------------------------------------------------------------------
G. Rule 17ad-22(e)(18)(ii) and (iii)
Rules 17ad-22(e)(18)(ii) and (iii) \73\ require a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to establish objective, risk-based,
and publicly disclosed criteria for participation, which, inter alia:
(i) require participants to have sufficient financial resources and
robust operational capacity to meet obligations arising from
participation in the clearing agency \74\ and (ii) monitor compliance
with such participation requirements on an ongoing basis.\75\
---------------------------------------------------------------------------
\73\ 17 CFR 240.17ad-22(e)(18)(ii) and (iii).
\74\ 17 CFR 240.17ad-22(e)(18)(ii).
\75\ 17 CFR 240.17ad-22(e)(18)(iii).
---------------------------------------------------------------------------
LCH SA addresses these requirements in its CCRP, which describe how
it manages and assesses counterparty credit risk via an ICS and limit
frameworks. To that end, LCH SA assigns every clearing member an ICS
and goes on to describe in detail the exposure monitoring threshold and
the limits and tolerance applied to each clearing member. By providing
for the assignment, maintenance and monitoring of an ICS applied to
each counterparty that LCH SA interacts with, as well as the monitoring
of related counterparty credit risk thresholds, including clearing
members, the CCRP is consistent with Rules 17ad-22(e)(18)(ii) and
(iii).\76\
---------------------------------------------------------------------------
\76\ 17 CFR 240.17ad-22(e)(18)(ii) and (iii).
---------------------------------------------------------------------------
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of 17ad-22(e)(18)(ii) and (iii).\77\
---------------------------------------------------------------------------
\77\ 17 CFR 240.17ad-22(e)(18)(ii) and (iii).
---------------------------------------------------------------------------
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,\78\ and Rules 17ad-22(e)(2)(i), 17ad-22(e)(2)(v), 17ad-
22(e)(3)(i), 17ad-22(e)(4)(ii), 17ad-22(e)(4)(v), 17ad-22(e)(4)(vi)(A),
17ad-22(e)(5), 17ad-22(e)(6)(i), 17ad-22(e)(6)(ii), 17ad-22(e)(18)(ii),
and 17ad-22(e)(18)(iii).\79\
---------------------------------------------------------------------------
\78\ 15 U.S.C. 78q-1(b)(3)(F).
\79\ 17 CFR 240.17ad-22(e)(2)(i), (e)(2)(v), (e)(3)(i),
(e)(4)(ii), (e)(4)(v), (e)(4)(vi)(A), (e)(5), (e)(6)(i), (e)(6)(ii),
(e)(18)(ii), and (e)(18)(iii).
---------------------------------------------------------------------------
IT IS THEREFORE ORDERED pursuant to Section 19(b)(2) of the Act
\80\ that the proposed rule change (SR-LCH SA-2025-007) be, and hereby
is, approved.\81\
---------------------------------------------------------------------------
\80\ 15 U.S.C. 78s(b)(2).
\81\ 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.\82\
---------------------------------------------------------------------------
\82\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-18941 Filed 9-29-25; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on September 30, 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.