[Federal Register Volume 82, Number 220 (Thursday, November 16, 2017)]
[Notices]
[Pages 53536-53537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24784]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82043; File No. SR-LCH SA-2017-009]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice 
Relating to Wrong Way Risk Margin

November 9, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on October 30, 2017, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change 
described in Items I, II, and III below, which Items have been prepared 
primarily by LCH SA. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    LCH SA is proposing to amend its Reference Guide: CDS Margin 
Framework (``CDSClear Margin Framework'' or ``Framework'') to adjust 
the wrong way risk (``WWR'') margin component of the Framework to more 
appropriately address offsets between currencies when calculating WWR 
margin.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, LCH SA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. LCH SA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of these statements.

A. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The WWR component of the Framework is designed to cover the 
anticipated financial contagion effect that would arise in case of a 
clearing member being declared in default. The current WWR margin 
formula acknowledges offsets as between currencies by allowing offset 
between WWR and right way risk (``RWR''). Specifically, a WWR currency 
offset is applied as the greater of: (x) the WWR amount in Euros minus 
the RWR amount in Euros, where non-Euro amounts are converted to Euros 
using a foreign exchange (``FX'') rate plus or minus a haircut; and (y) 
the WWR amount in Euros multiplied by 1 minus a factor, which 
represents the correlation between European and U.S. financial 
institutions by calculating the average historical cross correlation of 
credit spreads on credit default swaps (``CDS'') in respect of all 
pairs of European and U.S. financial institutions that are clearing 
members. Under the current calculation, if one currency has WWR and the 
other has RWR, LCH SA would compare the WWR amount as offset by the RWR 
to the WWR amount as reduced by taking the correlation factor into 
account and take the greater of the two. As a result, either the full 
amount of RWR is considered as offsetting the WWR, or only a portion of 
the WWR is taken into account without any regard to the expected amount 
of RWR.
    LCH SA believes that it is appropriate to consider the offset 
between the WWR amount and RWR amount but it would not be appropriate 
to apply the correlation factor to discount the WWR amount while also 
allowing the RWR to offset the WWR amount to its full extent. To be 
conservative, LCH SA believes that it is appropriate to apply the 
correlation factor to the RWR amount when using RWR to offset the WWR 
amount. Accordingly, LCH SA proposes to modify the WWR currency offset 
formula in the Framework to be the greater of: (i) the WWR amount in 
Euros, where such amounts are converted to Euros using an FX rate plus 
or minus a haircut, minus (ii) the RWR amount multiplied by the 10-year 
average historical correlation of credit spreads on CDS in respect of 
European and U.S. financial institutions; and zero. As of April 2016, 
the 10-year average historical correlation of credit spreads on CDS in 
respect of European and U.S. financial institutions was set to 48 
percent.
    Under this approach, RWR would never completely offset WWR and 
instead would be discounted based on the average of observed 
correlations of CDS credit spreads in respect of European and U.S. 
financial institutions. LCH SA believes that this change rationalizes 
the WWR currency offset and results in a more conservative WWR margin 
calculation.
2. Statutory Basis
    LCH SA believes that the proposed rule change is consistent with 
the requirements of Section 17A of the Securities Exchange Act of 1934 
\3\ (the ``Act'') and the regulations thereunder, including the 
standards under Rule 17Ad-22(b)(1) and (2).\4\ Specifically, in 
accordance with Section 17(A)(b)(3)(F),\5\ LCH SA believes that the 
proposed rule change will assure the safeguarding of securities and 
funds which are in the custody or control of the clearing agency or for 
which it is responsible, in that the proposed rule change is designed 
to rationalize the WWR currency offset and more conservatively 
calculate the WWR margin with respect to a clearing member. Therefore, 
LCH SA believes that the proposed rule change is consistent with the 
requirement of safeguarding securities and funds in Section 
17(A)(b)(3)(F) of the Act and the requirements of maintaining margin 
and limiting a clearing agency's exposures to potential losses from 
participants' defaults under normal market conditions in Rule 17Ad-
22(b)(1) and (2).\6\
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    \3\ 15 U.S.C. 78q-1.
    \4\ 17 CFR 240.17Ad-22(b)(1) and (2).
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
    \6\ 17 CFR 240.17Ad-22(b)(1) and (2).
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    Moreover, LCH SA believes that the proposed rule change is 
consistent with the requirements in Rule 17Ad-22(e)(6).\7\ Rule 17Ad-
22(e)(6)(i) and (v) require a covered clearing agency that provides 
central counterparty services to cover its credit exposures to its 
participants by establishing a risk-based margin system that, among 
other things, considers and produces margin levels commensurate with, 
the risks and particular attributes of each relevant product, 
portfolio, and market, and uses an appropriate method for measuring 
credit exposure that accounts for relevant product risk factors and 
portfolio effects across products.\8\ WWR is an important risk factor 
for clearing CDS products. As noted above, the proposed rule change 
rationalizes the WWR currency offset and more conservatively calculates 
WWR margin.

[[Page 53537]]

Therefore, LCH SA believes that the proposed rule change is consistent 
with Rule 17Ad-22(e)(6)(i) and (v).
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    \7\ 17 CFR 240.17Ad-22(e)(6).
    \8\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\9\ LCH SA does 
not believe that the proposed rule change would impose burdens on 
competition that are not necessary or appropriate in furtherance of the 
purposes of the Act. While the proposed rule change may result in 
higher WWR margin charges on participants, the revisions to the margin 
methodology will uniformly apply across all participants. In addition, 
as stated above, the proposed rule change is consistent with the 
applicable requirements of the Act and is appropriate in order to more 
conservatively calculate WWR margin. Therefore, LCH SA does not believe 
that the proposed rule change imposes any burden on competition that is 
not necessary or appropriate in furtherance of the purposes of the Act.
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    \9\ 15 U.S.C. 78q-1(b)(3)(I).
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C. Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. LCH SA will notify the Commission of any written 
comments received by LCH SA.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-LCH SA-2017-009 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-LCH SA-2017-009. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of LCH SA and on LCH 
SA's Web site at http://www.lch.com/asset-classes/cdsclear.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-LCH SA-2017-009 and should 
be submitted on or before December 7, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-24784 Filed 11-15-17; 8:45 am]
 BILLING CODE 8011-01-P


