Notice2026-05127
Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to LCH SA's Default Management Policy, Investment Risk Policy, Liquidity Risk Policy, Settlement, Payment and Custody Risk Policy, Model Governance, Validation and Review Policy and Contract and Market Acceptability Policy
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
March 17, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 91 Issue 51 (Tuesday, March 17, 2026)</title>
</head>
<body><pre>
[Federal Register Volume 91, Number 51 (Tuesday, March 17, 2026)]
[Notices]
[Pages 12869-12876]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-05127]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104980; File No. SR-LCH SA-2025-010]
Self-Regulatory Organizations; LCH SA; Order Approving Proposed
Rule Change Relating to LCH SA's Default Management Policy, Investment
Risk Policy, Liquidity Risk Policy, Settlement, Payment and Custody
Risk Policy, Model Governance, Validation and Review Policy and
Contract and Market Acceptability Policy
March 12, 2026.
I. Introduction
On December 29, 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
Policies''): (i) the Default Management Policy; (ii) the Investment
Risk Policy; (iii) the Liquidity Risk Policy; (iv) the Settlement,
Payment and Custody Risk Policy; (v) the Model Governance, Validation
and Review Policy; and (vi) the Contract and Market Accessibility
Policy. The proposed rule change was published for comment in the
Federal Register on January 5, 2026.\3\ On January 28, 2026, pursuant
to Section 19(b)(2) of the Exchange Act,\4\ the Commission designated a
longer period within which to approve, disapprove, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change, until April 5, 2026.\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. 104529 (Dec. 30, 2025),
91 FR 315 (Jan. 5, 2026) (File No. SR-LCH SA-2025-010) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ Securities Exchange Act Release No. 104716 (Jan. 28, 2026),
91 FR 4704 (Feb. 2, 2026) (File No. SR-LCH SA-2025-010).
---------------------------------------------------------------------------
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
(``CDS'')
[[Page 12870]]
and options on CDS. 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. The Default Management Policy (``DMP'')
The Default Management Policy (``DMP'') sets forth the minimum
standards that LCH SA must meet in managing clearing member defaults.
Clearing member defaults, if not properly managed, could lead to losses
for LCH SA and its clearing members. The DMP sets out general standards
related to calling a default, managing a default, and communicating the
occurrence of a default. The DMP also sets out the relevant
responsibilities of LCH SA personnel and the review cycle of the
policy.
The default management process begins with placing a clearing
member in default, also known as calling a default. The DMP requires
that the authority for placing a clearing member in default belong to
the Chief Executive Officer (``CEO'') of LCH SA. The DMP further
requires that the CEO's grounds for default be clear and agreed to by
LCH SA's legal team.
With respect to managing a default, LCH SA has stated that the DMP
requires that LCH SA establish Default Management Guidelines
(``Guidelines'') and Default Management Procedures (``Procedures'').\8\
According to LCH SA, the DMP is part of larger multi-tiered framework,
that includes Default Management Guidelines and Default Management
Procedures.\9\ The Guidelines must comply with the principles of the
DMP and provide a specific guide for implementing LCH SA's default
management process. The Procedures must comply with the Guidelines and
specify the processes and procedures, specific to CDSClear, that LCH SA
will use in managing the default of a clearing member of CDSClear,\10\
and must be reviewed quarterly.
---------------------------------------------------------------------------
\8\ Notice, 91 FR at 315.
\9\ Id.
\10\ The Procedures are set out in Appendix 1 to the CDSClear
Rule Book. Notice, 91 FR at 315; LCH SA CDS Clearing Rule Book,
APPENDIX 1 CDS DEFAULT MANAGEMENT PROCESS, <a href="https://www.lseg.com/content/dam/post-trade/en_us/documents/lch/rulebooks/lch-sa/csdclear-rulebook-24092025.pdf">https://www.lseg.com/content/dam/post-trade/en_us/documents/lch/rulebooks/lch-sa/csdclear-rulebook-24092025.pdf</a>.
---------------------------------------------------------------------------
The DMP also requires that the LCH SA CEO (or their authorized
delegate) convene a Default Crisis Management Team (``DCMT'') and a
Default Management Group (``DMG''). As required by the DMP, DCMT is
responsible for the overall management of a default at LCH SA, while
the DMG can execute actions to manage a default, such as liquidating
positions and implanting hedging strategies. The DMP sets certain
standards the DCMT and DMG must satisfy. For example, if the DMG
includes external representation, such as other clearing member
traders, then the DMG is required to enter into a contractual agreement
with those parties to ensure their independence and outline their duty
to provide impartial advice to LCH SA. The DMG also is responsible for
documenting critical actions and decisions, and maintaining records of
all relevant documents, including emails.
The DMP sets out other requirements related to LCH SA's management
of the default of a clearing member. For example, the DMP requires that
LCH SA have a defined exit methodology for each defaulting clearing
member's portfolio. The DMP also requires that LCH SA have adequate
resources to manage a member default. LCH SA may borrow personnel from
support and operations groups to manage a default, but staffing must be
sufficient to maintain ordinary business processes. Finally, the DMP
sets out requirements regarding testing the default management process,
which LCH SA refers to as fire drills.
The DMP sets out the roles and responsibilities within LCH SA for
managing a default, including who can initiate a default, draft the
appropriate documents, inform regulators, and make certain public
disclosures. For example, LCH SA compliance must notify regulators when
a decision is made to place a clearing member in default, while LCH SA
finance is responsible for producing the financial statement at the end
of the default management process. LCH SA legal, in conjunction with
other LCH SA personnel, is responsible for ensuring that key aspects of
the default procedures are publicly disclosed in the LCH SA CDSClear
Rulebook (``the Rulebook''). Finally, in addition to establishing the
DMG and the other responsibilities noted above, the CEO is the
executive responsible for, and the owner of, the DMP.
The DMP requires that the policy itself be reviewed annually by LCH
SA's Executive Risk Committee (``ERCo'') and Risk Committee, with any
non-compliance reported to the ERCo. Moreover, the Risk Committee must
recommend the DMP to the LCH SA Board of Directors (``Board'') for
approval. The LCH SA CEO and Chief Risk Officer (``CRO''), or their
authorized delegates, can jointly decide to override the DMP if the
application leads to results which are not in line with the intent of
the policy, such as by delaying action or increasing risk.
B. Investment Risk Policy
The Investment Risk Policy (``IRP'') sets forth standards that LCH
SA must follow for the management of investment risk. The IRP defines
investment risk as the risk of a loss arising from the investment of
cash funds to manage daily liquidity needs, either through outright
investments, cash deposits or the repo markets. The IRP applies to
investment risk from certain cash funds obtained by LCH SA in respect
to its business functions. Specifically, those funds include cash that
LCH SA receives from clearing members to satisfy margin and default
funds requirements, cash arising from settlement failures, and LCH SA's
own funds, such as capital and retained earnings. Because LCH SA
invests these funds, it is inherently exposed to investment-related
risks.
The IRP includes standards related to counterparties and issuers
with which LCH SA may invest cash and instruments in which LCH SA may
invest cash. The IRP includes, in an appendix, specific limits that
apply to LCH SA's investments and sets the process for monitoring,
changing, and approving these limits. Finally, the IRP sets out the
relevant responsibilities of LCH SA personnel and the review cycle of
the policy.
With respect to investment counterparties and issuers, the IRP's
standards are primarily based on a counterparty's internal credit score
(``ICS''). The ICS represents LCH SA's assessment of the risk of
investment with a particular counterparty or investing in a particular
issuer's
[[Page 12871]]
securities.\11\ For example, a central bank or sovereign government is
an appropriate counterparty if it has a certain minimum ICS. Certain
counterparties or issuers must meet other criteria, in addition to a
minimum ICS. Credit and financial institutions, for example, must be
authorized, regulated, and eligible for investment under the
regulations applicable to LCH SA.
---------------------------------------------------------------------------
\11\ LCH SA assigns and applies the ICS pursuant to its
Counterparty Credit Risk Policy. For more information regarding that
policy and the ICS, see 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, Exchange Act Release No. 104051 (Sep. 25,
2025), 90 FR 47001, 47004 (Sep. 30, 2025) (LCH SA-2025-007).
---------------------------------------------------------------------------
With respect to instruments in which LCH SA may invest cash, the
IRP sets out certain minimum standards for the transactions and for the
specific investments. All investment transactions must be executed in a
manner consistent with market practice, and cash investments should be
in a currency that LCH SA uses for clearing. For specific instruments,
the criteria depend on the type of investment. LCH SA can make cash
deposits, for example, with eligible central banks and overnight
deposits with acceptable credit institutions. As another example, LCH
SA may only invest in securities that, among other things, are issued
by an approved sovereign, government guaranteed institution, or
supranational institution.
The IRP also includes two annexes. These annexes specify discrete
investment limits that apply to LCH SA and its affiliated clearing
agency, LCH Ltd. For example, to avoid over exposure to certain
entities, the annex overall concentration limits on cash deposits at
central banks, and purchases of securities issued by sovereign entities
associated with central banks, with the limits set per ICS. Moreover,
the annex sets overall limits on the percentage of a particular issue
of sovereign securities that LCH SA may purchase. Similarly, the annex
sets out limits on the cash deposits, reverse repurchase, and other
transactions that LCH SA may engage in with credit and financial
institutions. These limits are set by ICS and measured in Euro
equivalent against the transaction amount. The annex contains similar
limits for other investment counterparties, overall aggregate exposure
limits, and haircuts for reverse repurchase transactions, among other
things.
The IRP further establishes how LCH SA should monitor and update
these limits. Overall, LCH SA's Second-line Collateral and Liquidity
Risk Management group (``CaLM Risk'') is the owner of the annex and is
responsible for monitoring compliance with the investment limits. If
any limits are breached, the breach must be reported to LCH SA's
Collateral and Liquidity Management group (``CaLM'') and to the CRO.
LCH SA's Credit Risk group assigns and maintains ICS for investment
counterparties and can update specific investment limits with a change
in ICS. Finally, the IRP gives the CRO authority to amend limits for up
to three business days, as needed to facilitate liquidity management in
exceptional circumstances.
The IRP sets out other relevant responsibilities of LCH SA
personnel. Responsibility for adherence to the IRP falls to the CRO,
who is the policy owner. The Collateral and Liquidity Management
(``CaLM'') team is responsible for investment and monitoring
activities, static data and collateral pricing, and reviewing controls
at least annually. The CaLM Risk team bears the responsibility of
assessing and monitoring investment exposure, including country and
supranational concentration, such as correlated exposure across members
or collateral in respect to a specific sovereign entity. LCH SA
Compliance is responsible for monitoring and communicating relevant
regulatory rules to internal stakeholders and for maintaining
compliance with regulations as they apply to CaLM's activities. LCH SA
Legal is responsible for preparing legal documentation and providing a
review of segregation arrangements. Finally, the IRP requires the ERCo
to review and approve new investments, counterparties and issuers, and
may even authorize exceedances to certain thresholds, such as country
concentration limits, subject to additional notification to specified
units at LCH SA.
The IRP requires that the policy itself be reviewed annually by the
ERCo and Risk Committee and be approved by the Board. Moreover, while
the Risk Committee and the Board must approve any changes to the IRP
itself, the ERCo may approve changes to the annexes, with notification
to the Risk Committee.
C. The Liquidity Risk Policy
The Liquidity Risk Policy (``LRP'') sets forth standards that LCH
SA must meet in managing liquidity risk. Liquidity risk is the risk
that LCH SA will not have sufficient liquidity to meet payment
obligations when due. LCH SA has stated that the LRP's main goal is to
ensure it has enough cash on hand to meet daily obligations.\12\ The
LRP includes standards related to determining liquidity resources and
needs, assessing LCH SA's overall liquidity position, and specific
measures and limits regarding LCH SA's liquidity position. The LRP also
sets out the relevant responsibilities of LCH SA personnel and the
review cycle of the policy.
---------------------------------------------------------------------------
\12\ Notice, 91 FR at 317.
---------------------------------------------------------------------------
The LRP describes generally LCH SA's sources of liquidity and needs
for liquidity. With respect to sources, the LRP identifies cash
deposits and investments held by LCH SA, its own non-cash unencumbered
assets, and other unencumbered assets gained either from repurchase
agreements or from defaulting members which can be readily transferred
to cash. The LRP also describes other potential sources of liquidity,
including defaulted members' non-cash margin contributions, Central
Bank loans collateralized through member deposits, and in certain
cases, assets received from non-defaulting counterparties when LCH SA
completes the obligations of defaulted members. The LRP also sets out
certain minimum standards that these sources must satisfy, such as
minimum ICS for credit institutions.
Liquidity needs are primarily categorized as operational or default
related. Operational liquidity needs include, among other requirements,
repaying excess collateral to clearing members (which can occur when a
clearing member's margin requirement decreases); replacement of cash
collateral with non-cash collateral when members substitute non-cash
assets for cash; and liquidity provided to business operations to
facilitate settlement. Default-related liquidity needs are those
arising from the default of a clearing member, such as liquidity needed
to cover a defaulting member's obligations, settle its positions, or
pay non-defaulting member counterparties variation margin. The LRP
identifies other potential liquidity needs outside of operations and
defaults, such as cash restricted by investment activities or payments
delated by operational issues at commercial and central banks.
The LRP describes how LCH SA must assess its liquidity position.
Generally, LCH SA must subtract its total liquidity requirements from
its total liquidity resources, to determine an overall excess (or
deficit) of liquidity resources. The LRP requires that LCH SA perform a
liquidity assessment daily, on all currencies, to cover a forward
period of thirty days (or less, with ERCo approval), and that intraday
assessments
[[Page 12872]]
need to be made if LCH SA has certain scheduled obligations to make.
The LRP also has requirements to ensure that the liquidity assessment
is sufficient relative to LCH SA's liquidity risk. For example, it must
factor in regulatory restrictions as they pertain to client assets and
incorporate stress scenarios under certain extreme but plausible market
conditions, which might occasionally implicate even deeper analysis. In
addition to assessing forward, LCH SA must model how the default of its
two clearing member groups with the largest liquidity requirements
would affect its liquidity position, including in executed but
plausible stress scenarios.
In addition to these minimum requirements for assessing its
liquidity position, the LRP also establishes certain minimum coverage
requirements that LCH SA must meet. For example, the LRP requires that
LCH SA determine each day its liquidity coverage ratio, which is
defined as the total available liquidity resources divided by liquidity
needs. The liquidity coverage ratio must be at least 105% on each day
during the assessment period. The LRP similarly sets out an overall
percentage limit on how much of LCH SA's liquidity resources could be
taken up by a clearing member's positions in certain circumstances.\13\
Specifically, no one clearing member may use more than 25% of available
liquidity following the default of the member that is the largest
liquidity user assuming that the repo market is fully closed.\14\
---------------------------------------------------------------------------
\13\ Notice, 91 FR at 318, n.35.
\14\ Notice, 91 FR at 318. To ensure that member cash stay below
this threshold, LCH SA requires that members give it advance notice
when they want to replace cash with non-cash margin, and LCH SA may
limit the return of a member's cash margin. Id.
---------------------------------------------------------------------------
As noted above, the LRP also requires that LCH SA model how the
default of the two clearing member groups with the largest liquidity
needs would affect its liquidity position, including in extreme but
plausible stress scenarios. The LRP sets out general standards for this
modeling and the stress scenarios that LCH SA must use when conducting
the modeling. Moreover, the LRP requires that LCH SA review the models
through reverse stress testing at least monthly, and that it reports
its conclusions to various stakeholders, including the CRO, ERCo, and
the Risk Committee. Moreover, the LRP requires that the model be
subject to an annual validation.
The LRP also sets out the relevant responsibilities of LCH SA
personnel. The LCH SA CRO is the owner of the policy. CaLM is
responsible for maintaining a liquidity plan,\15\ including testing of
that plan and managing daily liquidity. LCH SA's CaLM Risk must monitor
and measure the adequacy of LCH SA's cash in light of its operations
and report to CaLM when issues arise. Finally. LCH SA's Operations team
is given responsibility for operational processes and controls related
to intraday liquidity flows.
---------------------------------------------------------------------------
\15\ The liquidity plan supplements the LRP by setting out the
principles and procedures for liquidity management that are specific
to LCH SA. See Self-Regulatory Organizations; LCH SA; Notice of
Filing of Proposed Rule Change Relating to the Liquidity Risk Model
Framework, Exchange Act Release No. 96694 (Jan. 18. 2023), 88 FR
4227, 4228 (Jan. 24, 2023).
---------------------------------------------------------------------------
The LRP requires that the policy itself be reviewed annually by LCH
SA's ERCo and Risk Committee and then approved by the Board. Moreover,
the model used by LCH SA to consider the impact of the default of the
two clearing member groups with the largest liquidity needs is subject
to an annual validation by LCH SA's Model Validation team.
D. Settlement, Payment and Custody Risk Policy
The Settlement, Payment and Custody Risk Policy (``CRP'') sets
standards that LCH SA must meet in for managing risk to LCH SA from
using intermediaries for settlement, payment, and custody
activities.\16\ These risks could be realized from the default or
operational failure of an intermediary, which could expose LCH SA and
its clearing members to losses and result in delayed access to funds
and payments. The standards consist of minimum criteria that
intermediaries must satisfy. Moreover, the CRP explains how LCH SA must
monitor counterparties for compliance with these criteria. Finally, the
CRP sets out the relevant responsibilities of LCH SA personnel and the
review cycle of the policy.
---------------------------------------------------------------------------
\16\ The intermediaries covered by the CRP include: (i) central
banks; (ii) settlement platforms; (iii) international or domestic
central securities depositories (ICSDs and CSDs); (iv) settlement
agents; (v) custodians and sub-custodians; (vi) concentration banks;
(vii) protected payment system (PPS) banks; and (viii) other
intermediaries which give rise to settlement, payment or custody
risks.
---------------------------------------------------------------------------
The standards for counterparties consist of minimum criteria that
all counterparties must satisfy, as well as more specific criteria for
certain counterparties. For example, all intermediaries must have an
assigned ICS and be subject to due diligence by LCH SA's operations
team. The due diligence must provide certainty that the intermediary
will segregate, identify, and make available assets belonging to LCH SA
or its clearing members. In addition to these general requirements, the
CRP sets out more specific requirements for certain intermediaries. For
example, payment systems specifically must have controls in place to
validate all payment amounts and receipts, which LCH SA must
independently test annually.
The CRP requires that LCH SA monitor compliance with these criteria
and its exposures to intermediaries. LCH SA must monitor its overnight
direct credit exposure to intermediaries resulting from settlement,
payment, and custody activities. LCH SA must also monitor its intraday
unsecured exposure to commercial concentration banks as a result of
concentration and investment activities. An appendix to the CRP
contains precise limits on these exposures. With respect to the
intraday limit in particular, the CRP provides that intraday limit
usage is monitored by LCH SA Collateral Operations team and any
breaches must be reported to LCH SA Credit Risk, CaLM, and CaLM Risk
immediately. The report should contain details regarding usage,
breaches, explanation and remediation.
If an intermediary no longer meets LCH SA's criteria, the CRP sets
out procedures and internal escalation, including additional due
diligence, to assess its capabilities or prohibit the intermediary from
offering services to other clearing members doing business with LCH SA.
LCH SA is also required to cease operating with the intermediary, with
certain allowances for transition. LCH SA must monitor these
limitations, and an escalation protocol exists in the case of breaches,
explanations, and remediation.
The CRP establishes the responsibilities within LCH SA for
compliance purposes, with LCH SA CaLM, CaLM Risk, Operations, Clearing
Services, and Legal all having defined roles and working in conjunction
with each other. For example, CaLM Risk is responsible for the ongoing
monitoring of compliance with the policy and is regularly updated by
Operations as to current liquidity facilities and by LCH SA Clearing
Services as to changes to clearing facilities. When necessary, CaLM
must also organize and establish investment-related liquidity
facilities, sponsor investment-related intermediaries, and LCH SA Legal
ensuring that all legal documentation is appropriately accounted for.
The CRO is the owner of the policy. Finally, Credit Risk is responsible
for assigning and maintaining for each intermediary an ICS.
The CRP requires that the policy itself be reviewed annually by
ERCo and the Risk Committee and then approved by
[[Page 12873]]
the Board. Changes to the policy require the approval of the Risk
Committee and the Board. Changes to the appendix require approval by
ERCo, with notification to the Board Risk Committee.
E. Model Governance, Validation and Review Policy
The Model Governance, Validation and Review Policy (``MGVRP'') sets
standards that govern LCH SA's development, maintenance, and validation
of its models. The overall goal of the MGVRP is to help mitigate model
risk, which is the risk that LCH SA's models fail, perform
inadequately, or are subject to inadequate governance or monitoring.
Failure of LCH SA's models could lead to under-estimation of margin,
default fund, and other requirements that LCH SA uses to mitigate risks
arising from providing clearing services. The MGVRP applies to models
that have certain features, such as reliance on historical data, use of
inputs and assumptions, and a methodology or algorithm that turns
inputs into estimates.\17\
---------------------------------------------------------------------------
\17\ The MGVRP provides examples of the models subject to the
policy, and these include, among others: (i) a margin model that
estimates market risk under certain conditions or assumptions; (ii)
a stress testing framework used for default fund sizing; and (iii) a
credit scoring model providing an assessment of the creditworthiness
of a CCP's counterparties. See Notice, 91 FR at 320.
---------------------------------------------------------------------------
The MGVRP requires that LCH SA maintain certain documentation for
its models, including an overall model inventory; follow a set
governance process when changing an existing model or establishing a
new model; and review the performance of its models, including by
conducting an independent model validation. Finally, the MGVRP sets out
the relevant responsibilities of LCH SA personnel and the review cycle
of the policy.
The MGVRP requires that LCH SA maintain a model framework governing
the development, validation, approval and ongoing monitoring of
quantitative models used to measure financial risk, in a way that is
consistent with regulatory requirements. The MGVRP further requires
that LCH SA establish and maintain a model inventory, which will be
used to track each model's owner, classification, and status of the
validation process.
The MGVRP requires that LCH SA classify each model as either of
high or low importance, based on the expected financial impact if the
model is incorrect. Models are classified as high importance if an
error in the model could lead to certain outcomes, like a shortfall in
total margin requirements for a class of cleared instruments greater
than ten percent, and models are classified as low important if an
error would not lead to such outcomes. The MGVRP requires certain risk
review when LCH SA creates a new model or materially changes one with
high importance. The review includes, among other steps, consultations
with members, independent validation, and approval by the ERCo. Models
ranked as low importance need only review and approval by the LCH SA
Financial Risk Working Group and ERCo. The materiality of a change to a
model is determined by the potential effect of the change. For example,
a change to a model that would lead to substantial change in outcomes,
including a reduction in coverage, would be considered material.\18\
---------------------------------------------------------------------------
\18\ A change also would be classified as material if it affects
a key parameter of a model that could lead to a substantial change
in outcome, alters the theoretical or empirical underpinning of a
model, or leads to modification of a risk policy.
---------------------------------------------------------------------------
In addition to maintaining documentation and setting out a
governance process with respect to models, the MGVRP also establishes
requirements related to the monitoring of model performance. With
respect to margin models, on a daily basis LCH SA must perform
backtesting on actual portfolios to determine the performance of the
model. Where backtesting shows numerous breaches or a model falling
below the target confidence level, LCH SA must take remedial steps,
including a further investigation to determine the reason for the
model's underperformance. Results of these investigations could lead
LCH SA to take additional steps affecting margin or additional reviews.
Finally, LCH SA must independently validate all models at least
annually to determine if the models are performing adequately. The
independent validator must have the relevant knowledge and experience
to perform this task and will not be involved in any way in the model
building and testing process. The model validation must evaluate the
conceptual and practical soundness of the models and consider all
relevant data, recorded during the validation period, which provides an
indication of model performance. Where stress testing is concerned,
such validation assesses the framework under extreme but plausible
conditions, includes an analysis of risks within the stress testing
environment itself, and evaluates the stress testing framework and
outcomes, all to ensure that the stress testing is adequately
correlated to the appropriate risk factors.
The MGVRP also sets out the relevant responsibilities of LCH SA
personnel. While relevant model owners are responsible for the
initiation, development, implementation, documentation and maintenance
of the respective models, CaLM Risk is responsible for overseeing the
design, approval, performance monitoring, and modification of margin
and related pricing models. The Head of Market Risk/Credit Risk can
delegate monitoring and some oversight responsibilities, particularly
those concerning development and change, to an LCH SA model working
group. The LCH SA Model Validation team must also validate each model
yearly, though this can likewise be outsourced to a qualified
independent third party, with the relevant knowledge and experience,
and who has not been previously involved in the building and testing of
the model subject to validation.
The MGVRP requires that the policy itself be reviewed annually by
LCH SA's ERCo and Risk Committee and then approved by the Board.
Changes to the policy require the approval of the Risk Committee and
the Board. Changes to the appendix require approval by ERCo, with
notification to the Risk Committee.
F. Contract and Market Acceptability Policy (``CMAP'')
The Contract and Market Acceptability Policy (``CMAP'') describes
the principles and factors that LCH SA applies when assessing new
markets, financial products, and contracts. The CMAP is designed to
create a standard, consistent approach to LCH SA's assessment of new
contracts and markets, with the goal of, among other things,
identifying and managing any new risks which may be posed by the new
contracts and markets. The CMAP sets out certain principles that all
new contracts and markets must meet, a governance process for
onboarding new contracts and markets, and factors that LCH SA must
consider when onboarding new contracts and markets. Finally, the CMAP
sets out the relevant responsibilities of LCH SA personnel and the
review cycle of the policy.
The CMAP first establishes general principles that apply to all
contracts and markets that LCH SA clears. Overall, when determining
whether to clear a new contract or market, LCH SA must ensure that it
could close out a clearing member's positions in that contract or
market, if that clearing member were to default. Moreover, LCH SA must
ensure there is sufficient price discovery to determine a reliable
market value for a contract. Finally, LCH SA must ensure
[[Page 12874]]
that its risk measures and margin are in line with the risks of a new
contract market. The CMAP further requires that markets and products be
reviewed on an ongoing basis to ensure they comply with this criteria,
with an annual summary and statement presented to the Risk Committee by
the CRO.
In addition to these general principles, the CMAP includes a
specific governance process to follow when accepting new contracts and
markets for clearing and includes factors that LCH SA should consider
when determining whether to accept a new contract or market. The
governance process is determined by the riskiness of the contract or
market. A contract or market that exhibits novel risk features or
requires significant changes to existing risk controls must be approved
by LCH SA's Risk Committee and the Board, with some exceptions
dependent on the type of market and the risk exposure. A contract or
market that does not exhibit novel risk features or require significant
changes to existing risk controls may be approved by LCH SA's ERCo,
with notification to the Board Risk Committee. Moreover, ERCo has
delegated to LCH SA's Operations group authority to approve contracts
that (i) arise from the normal course of business and that meet the
criteria set out in the appendix to the CMAP \19\ and (ii) LCH SA has
contractually agreed to clear within a pre-determined framework. With
respect to the factors to consider when accepting a new contract or
market, the CMAP requires that LCH SA consider various potential risks
and features, such as (i) membership or counterparty risk; (ii)
standardization of products; (iii) pricing; and (iv) product liquidity.
---------------------------------------------------------------------------
\19\ The appendix to the CMAP contains specific acceptance
criteria for various products, organized by type of product (such as
equity, bond, CDS contract, etc.). Notice, 91 FR at 321-322.
---------------------------------------------------------------------------
The CMAP also sets out the relevant responsibilities of LCH SA
personnel. LCH SA's ERCo is responsible for reviewing and making
decisions on the suitability of any new contract and market. The
relevant LCH SA business line is responsible for preparing and
evaluating requests with respect to clearing new contracts and markets
and for ensuring ongoing compliance with the CMAP.
The CMAP requires that the policy itself be reviewed annually by
ERCo and the Risk Committee and then approved by the Board.
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.\20\ 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.'' \21\
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78s(b)(2)(C).
\21\ 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,\22\ 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.\23\ 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.\24\
---------------------------------------------------------------------------
\22\ Id.
\23\ Id.
\24\ 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,\25\ and Rules 17ad-22(e)(2)(i), 17ad-
22(e)(2)(v), 17ad-22(e)(3)(i), 17ad-22(e)(4)(vii), 17ad-22(e)(7)(i),
17ad-22(e)(13), 17ad-22(e)(16), and 17ad-22(e)(17)(i) thereunder, as
described in detail below.\26\
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78q-1(b)(3)(F).
\26\ 17 CFR 240.17ad-22(e)(2)(i), (e)(2)(v), (e)(3)(i),
(e)(4)(vii), (e)(7)(i), (e)(13), (e)(16), and (e)(17)(i).
---------------------------------------------------------------------------
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.\27\
---------------------------------------------------------------------------
\27\ 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, default risk, investment
risk, liquidity risk, settlement and custodial risk, model risk, and
the risks associated with clearing a new contract or market. The
corresponding Risk Policies consist of detailed risk management
requirements that govern LCH SA's clearing agency operations as they
relate to managing, mitigating, and monitoring these risks.
These risks, if not properly managed, could disrupt LCH SA's
clearing services and its ability to safeguard 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 helping 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.\28\
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
B. Rules 17ad-22(e)(2)(i) and (v)
Rules 17ad-22(e)(2)(i) and (v) require that each covered clearing
agency 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.\29\ 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 IRP, which
itself assigns responsibilities to other units within LCH SA. LCH SA
Credit Risk, for instance, assigns and maintains internal credit scores
for the counterparties
[[Page 12875]]
wherein LCH SA places its investments, as well as counterparty limits
to manage exposure. The CaLM team, among other responsibilities,
oversees investment and monitoring activities, while CaLM Risk assesses
and monitors investment exposure, and Compliance and Legal are
responsible for regulatory and legal matters, respectively. Each of the
Risk Policies likewise detail the relevant responsibilities, including
the various team interdependencies and management oversight, in a
manner that is transparent, specify unique roles, and mandate clear
supervisory notifications and approvals, including, where relevant,
those by LCH SA's Board, consistent with the rules.
---------------------------------------------------------------------------
\29\ 17 CFR 240.17ad-22(e)(2)(i) and (v).
---------------------------------------------------------------------------
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of Rules 17ad-22(e)(2)(i) and (v).\30\
---------------------------------------------------------------------------
\30\ 17 CFR 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.\31\
---------------------------------------------------------------------------
\31\ 17 CFR 240.17ad-22(e)(3)(i).
---------------------------------------------------------------------------
Taken together, the Risk Policies establish a risk management
framework responsive to the various risks that LCH SA faces as a
covered clearing agency and central counterparty for CDS. As stated
above, the Risk Policies identify key risks faced by LCH SA and set out
the roles and responsibilities within LCH SA for managing these risks.
For example, the CRP was created to address the custody risk that LCH
SA assumes when it relies on third parties to hold its cash. As a
further example, the IRP sets forth standards for LCH SA to follow when
managing its investment risk. Finally, the Risk Policies are subject to
review on a specified basis and subject to Board approval, consistent
with the rule.
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of Rule 17ad-22(e)(3)(i).\32\
---------------------------------------------------------------------------
\32\ 17 CFR 240.17ad-22(e)(3)(i).
---------------------------------------------------------------------------
D. Rule 17ad-22(e)(4)(vii)
Rule 17ad-22(e)(4)(vii) 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, performing a model validation for its credit
risk models not less than annually or more frequently as may be
contemplated by the covered clearing agency's risk management
framework.\33\ As discussed in Section II, the MGVRP requires that LCH
independently validate all models at least annually to determine if the
models are performing adequately. The MGVRP specifically applies to LCH
SA's margin models, which LCH SA uses to manage the credit risk arising
from clearing CDS. The LCH SA Validation team, or an external,
qualified party with the relevant knowledge and experience and who is
not involved in the model building and testing, would perform the
independent validation. Thus, the MGVRP establishes the requirement
that LCH SA perform a model validation of its credit risk models,
consistent with the rule.
---------------------------------------------------------------------------
\33\ 17 CFR 240.17ad-22(e)(4)(vii).
---------------------------------------------------------------------------
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of Rule 17ad-22(e)(4)(vii).\34\
---------------------------------------------------------------------------
\34\ 17 CFR 240.17ad-22(e)(4)(vii).
---------------------------------------------------------------------------
E. Rule 17ad-22(e)(7)(i)
Rule 17ad-22(e)(7)(i) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to effectively measure, monitor, and
manage the liquidity risk that arises in or is borne by the covered
clearing agency, including measuring, monitoring, and managing its
settlement and funding flows on an ongoing and timely basis, and its
use of intraday liquidity by, at a minimum, 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.\35\
---------------------------------------------------------------------------
\35\ 17 CFR 240.17ad-22(e)(7)(i).
---------------------------------------------------------------------------
As stated above, the LRP is the policy that LCH SA uses to manage
liquidity risk. The LRP describes LCH SA's sources of liquidity and its
liquidity needs. The LRP also requires that LCH SA assess its liquidity
position, and describes how LCH SA must do so, including by determining
on a daily basis its liquidity coverage ratio. It requires that LCH SA
measure whether it has enough liquidity, or available cash, both for
daily and intraday purposes, including the default of the two member
groups with the largest liquidity requirements. These requirements
generally would help LCH SA to measure, monitor, and manage the
liquidity risk and maintain sufficient liquid resources, consistent
with the rule.
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of Rule 17ad-22(e)(7)(i).\36\
---------------------------------------------------------------------------
\36\ 17 CFR 240.17ad-22(e)(7)(i).
---------------------------------------------------------------------------
F. Rule 17ad-22(e)(13)
Rule 17ad-22(e)(13) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure the covered clearing agency
has the authority and operational capacity to take timely action to
contain losses and liquidity demands and continue to meet its
obligations by, at a minimum, requiring the covered clearing agency's
participants and, when practicable, other stakeholders to participate
in the testing and review of its default procedures, including any
close-out procedures, at least annually and following material changes
thereto.\37\
---------------------------------------------------------------------------
\37\ 17 CFR 240.17ad-22(e)(13).
---------------------------------------------------------------------------
As discussed in Section II, the DMP requires that LCH SA establish
Guidelines and Procedures for managing the default of a clearing
member. The DMP also requires that the LCH SA CEO establish the DMG,
who will be responsible for managing the default. The DMP further sets
out standards regarding calling and communicating a default and sets
out relevant responsibilities of LCH SA personnel for managing a
default. These requirements should help LCH SA to have the authority
and operational capacity to take timely action to contain losses and
liquidity demands during a default, consistent with the rule.
Accordingly, the Commission finds that the proposed rule change is
[[Page 12876]]
consistent with the requirements of Rule 17ad-22(e)(13).\38\
---------------------------------------------------------------------------
\38\ 17 CFR 240.17ad-22(e)(13).
---------------------------------------------------------------------------
G. Rule 17ad-22(e)(16)
Rule 17ad-22(e)(16) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to safeguard the covered clearing
agency's own and its participants' assets, minimize the risk of loss
and delay in access to these assets, and invest such assets in
instruments with minimal credit, market, and liquidity risks.\39\
---------------------------------------------------------------------------
\39\ 17 CFR 240.17ad-22(e)(16).
---------------------------------------------------------------------------
As discussed in Section II, the IRP sets out standards that LCH SA
must follow to manage investment risk, meaning the risk of loss arising
from its investment of cash funds. The IRP includes minimum standards
with respect to investment counterparties, issuers, investment
transactions, and instruments in which LCH SA may invest. The IRP also
sets out limits on investments and a process for monitoring and
following these limits. These requirements should help LCH SA to invest
its assets in instruments with minimal credit, market, and liquidity
risks, consistent with the rule.
Moreover, as discussed in Section II, the CRP sets out standards
that LCH SA must follow to manage risks that arise from the
intermediaries used for settlement, payment and custody activities.
These standards consist of minimum criteria that intermediaries must
satisfy. The CRP also requires that LCH SA conduct due diligence on
such intermediaries and comply with limits on its exposure to these
intermediaries. The CRP further explains how LCH SA must monitor
counterparties for compliance with these criteria and limits and sets
out the relevant responsibilities of LCH SA personnel with respect to
applying these criteria and limits. These requirements should help LCH
SA to safeguard its own and its participants' assets, and minimize the
risk of loss and delay in access to these assets, by limiting LCH SA's
custodians and similar intermediaries to those that are well
established, reliable, and demonstrate an ability to segregate,
identify, and make available LCH SA's assets, consistent with the rule.
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of Rule 17ad-22(e)(16).\40\
---------------------------------------------------------------------------
\40\ 17 CFR 240.17ad-22(e)(16).
---------------------------------------------------------------------------
H. Rule 17ad-22(e)(17)(i)
Rule 17ad-22(e)(17)(i) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to manage the covered clearing agency's
operational risks by, among other things, identifying the plausible
sources of operational risk, both internal and external, and mitigating
their impact through the use of appropriate systems, policies,
procedures, and controls.\41\
---------------------------------------------------------------------------
\41\ 17 CFR 240.17ad-22(e)(17)(i).
---------------------------------------------------------------------------
As discussed in Section II, the CMAP sets out a process that LCH SA
must follow when accepting a new contract or market for clearing,
including certain core principles that any new contract or market must
satisfy. Among other things, before accepting any new contract or
market for clearing, LCH SA must determine that it could close out a
clearing member's positions therein; that there is sufficient price
discovery for LCH SA to determine a reliable market price for a
contract; and that LCH SA's risk measures and margin are appropriate
for the risks presented by the contract. Finally, the CMAP establishes
a governance process for accepting new contracts or markets for
clearing and assigns authority to relevant LCH SA personnel. In doing
so, the CMAP should help LCH SA to identify potential operational risks
that could arise from clearing a new contract or market consistent with
the rule. The CMAP should also help LCH SA to mitigate those risks by
applying its existing risk management system or modifying its risk
management system to accommodate the new contract or market, consistent
with the rule.
Accordingly, the Commission finds that the proposed rule change is
consistent with the requirements of Rule 17ad-22(e)(17)(i).\42\
---------------------------------------------------------------------------
\42\ 17 CFR 240.17ad-22(e)(17)(i).
---------------------------------------------------------------------------
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 with Section 17A(b)(3)(F)
of the Act,\43\ and Rules 17ad-22(e)(2)(i), 17ad-22(e)(2)(v), 17ad-
22(e)(3)(i), 17ad-22(e)(4)(vii), 17ad-22(e)(7)(i), 17ad-22(e)(13),
17ad-22(e)(16), and 17ad-22(e)(17)(i).\44\
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78q-1(b)(3)(F).
\44\ 17 CFR 240.17ad-22(e)(2)(i), (e)(2)(v), (e)(3)(i),
(e)(4)(vii), (e)(7)(i), (e)(13), (e)(16), and (e)(17)(i).
---------------------------------------------------------------------------
It is therefore ordered pursuant to Section 19(b)(2) of the Act
\45\ that the proposed rule change (SR-LCH SA-2025-010) be, and hereby
is, approved.\46\
---------------------------------------------------------------------------
\45\ 15 U.S.C. 78s(b)(2).
\46\ 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).
\47\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-05127 Filed 3-16-26; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on March 17, 2026.
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.