[Federal Register Volume 82, Number 242 (Tuesday, December 19, 2017)]
[Notices]
[Pages 60238-60242]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27236]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82317; File No. SR-LCH SA-2017-013]


Self-Regulatory Organizations; LCH SA; Notice of Proposed Rule 
Change, Security-Based Swap Submission, or Advance Notice Relating to 
LCH SA's Wind Down Plan

December 13, 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 December 7, 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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[[Page 60239]]

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    LCH SA is proposing to adopt an updated wind down plan (the 
``WDP'') in accordance with Rule 17Ad-22(e)(3)(ii). The text of the 
proposed rule change has been annexed as Exhibit 5. LCH SA has 
requested confidential treatment of the material submitted as Exhibit 
5.

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
    On September 28, 2016, the Securities and Exchange Commission (the 
``Commission'') adopted amendments to Rule 17Ad-22 \3\ pursuant to 
Section 17A of the Securities Exchange Act of 1934 (the ``Act'') \4\ 
and the Payment, Clearing and Settlement Supervision Act of 2010 
(``Clearing Supervision Act'') \5\ to establish enhanced standards for 
the operation and governance of those clearing agencies registered with 
the Commission that meet the definition of a ``covered clearing 
agency,'' as defined by Rule 17Ad-22(a)(5) \6\ (collectively, the new 
and amended rules are herein referred to as ``CCA rules'').
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    \3\ 17 CFR 240.17Ad-22.
    \4\ 15 U.S.C. 78q-1.
    \5\ 12 U.S.C. 5461 et seq.
    \6\ 17 CFR 240.17Ad-22(a)(5).
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    LCH SA is a covered clearing agency under the CCA rules and 
therefore is subject to the requirements of the CCA rules, including 
Rule 17Ad-22(e)(3). The CCA rules require that covered clearing 
agencies, among other things: ``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 plans for the recovery and 
orderly wind-down of the covered clearing agency necessitated by credit 
losses, liquidity shortfalls, losses from general business risk, or any 
other losses.'' \7\
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    \7\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    As a central counterparty recognized under the European Market 
Infrastructure Regulation (``EMIR''), LCH SA is also required to have 
in place relevant recovery and wind down mechanisms required under 
EMIR.\8\
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    \8\ Regulation (EU) No. 152/2013 of 19 December 2012, Article 2.
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    As a credit institution based in the European Union, LCH SA is also 
subject to Directive 2014/59/EU, as supplemented, requiring 
institutions to draw up and maintain recovery plans setting forth 
options for measures to be taken by the institution to restore its 
financial position following a significant deterioration of its 
financial position.
    Accordingly, as described in more detailed below, the purpose of 
the WDP is to ensure an orderly wind down of the CCP under extreme 
circumstances and to limit market impact as much as possible, should 
the recovery plan (the ``RP'') \9\ has failed.
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    \9\ See Filing N[deg] SR-LCH SA-2017-012.
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    The WDP sets out the steps that LCH SA would follow to close its 
clearing services and shut down the company. The plan demonstrates how 
LCH SA, as it exists today, can achieve this orderly wind down within 
six (6) months.
    In addition, LCH SA holds capital, funded by equity, equal to the 
operating expenses for a six (6) month period. The WDP demonstrates 
that the wind down cost remains inferior to the necessary amount.
    The WDP would first determine the triggers for winding down and the 
relationship between Recovery, Resolution and Wind down. In these 
extreme circumstances, the CCP would first trigger the recovery plan. 
The WDP would be triggered by LCH SA if, the recovery tools having been 
exhausted and having failed, the only solutions left for LCH SA would 
be to wind down its clearing services and close the company.
    The triggers are only briefly presented in the WDP since they are 
described in detail in the RP. They consider Clearing Member Defaults 
losses well above the CCPs financial resources; Clearing Member 
Defaults creating large liquidity shortfalls and Non Clearing Members 
Defaults impacting capital adequacy or creating liquidity shortfalls. 
This could be caused by large risks such as operational events, custody 
and investment risks or large business risks. The WDP would be 
triggered by LCH SA if, the recovery tools having been exhausted and 
having failed, the only solution for LCH SA would be to wind down its 
clearing services and close the company.
    The WDP would not consider any other case such as a voluntary wind 
down not being triggered by one of the above extreme circumstances.
    The WDP would then describe the governance for triggering the plan. 
The decision to wind down would be taken by the Board and ultimately 
the shareholders' meeting upon advice of the Executive Risk Committee 
(``ERCo'') and Local Management Committee (``LMC''). The implementation 
of the WDP would be monitored by the LCH SA LMC or Default Crisis 
Management Team (``DCMT''), the executive committee in charge of the 
coordination of defaults.
    The regulatory authorities would be consulted before such a 
decision is taken and the French Autorit[eacute] de Contr[ocirc]le 
Prudentiel et de Resolution (the ``ACPR'') would have to approve such a 
decision, unless all the clearing service have already been closed. 
They would be subsequently regularly informed of the implementation of 
the plan.
    LCH SA being a credit institution, it could be subject to a 
resolution regime decided by the ACPR whilst conducting its recovery 
plan and before a wind down would be decided by the company. In that 
case, the decision to wind down as well the process to be followed 
would be decided by the resolution authority.
    The plan would then define a certain number of assumptions. It 
would firstly assume that the CCP as it stands today would be wound 
down until its full closure, although it is likely that in the phases 
preceding the plan, some businesses would have been either closed or 
scaled down. It also makes other assumptions that allows continuation 
of business for some time and proper closing such as the fact that LCH 
SA would keep its banking license and continue to have full access to 
the central bank or that suppliers, which would continue to be paid, 
would continue to offer a service.
    In line with the RP, the WDP would present a mapping of the 
functions and particularly distinguishes between the clearing 
functions, which are all considered as critical, the critical 
supporting functions and the other non-critical functions.
    The plan would then describe the closure of the clearing services. 
The closure of CDSClear is covered in Article 2.4.3.1 of CDS Clearing 
Rule book and in the Clause 8 of Appendix 1. It specifies that LCH SA 
would

[[Page 60240]]

publish a notice to clearing members notifying that a wind down event 
has occurred and to the extent possible the date on which transactions 
shall cease to be accepted on the CDS Clearing service. LCH SA would 
publish the clearing notice as far in advance of the Early Termination 
Trigger Date as it is reasonably possible. The plan would indicated 
that, in a non-default situation and more generally in a situation 
where the corresponding business line is not suffering, LCH would give 
some time for a maximum of trades to settle naturally and for the 
clearing members to close their longer positions and switch to another 
CCP.
    The closing of the business would be done through cash settlement 
and the repayments amounts would be paid by LCH SA and the clearing 
members on the business following notification.
    The WDP would then describe how critical supporting functions would 
be closed. The treasury function would close once all clearing services 
have been terminated and all monies paid by LCH SA and/or the clearing 
members. Once wind down is decided, cash would not be invested anymore 
but deposited at the central bank or possibly invested in same day 
repos. Operations, IT production, and Risk teams would be kept until 
all positions are closed. At that moment, the majority of staff in 
these areas would not be required any more.
    It has to be noted that the WDP would list all contracts with 
external providers, including venues and IT companies to which LCH SA 
has outsourced services. They contain wind down provisions, enabling 
LCH SA to exit these contracts under specific conditions.
    Non critical support functions such as Finance, Compliance, Audit 
etc. would start being scaled down immediately after the decision is 
taken to wind down. The path at which each department is expected to 
reduce its workforce is specified in the plan. Consultation with the 
LCH SA's staff representatives (works council) would start immediately 
in order to ensure a proper departure of permanent staff in line with 
French law and regulations and those of the countries in which LCH SA 
has branches/representative offices. Staff approach for winding down 
would be described in more detail in the WDP.
    The WDP would contain an overall timeline of the full wind down 
process. This plan shows that LCH SA would be in a position to close 
the company within six (6) months as required by applicable 
regulations.
    The WDP would also contain an appendix describing into more details 
the communication processes that would be followed both internal and 
external. It specifies that the wind down notice would be published on 
the LCH SA website and the teams within LCH SA and the LSEG group that 
would be responsible for each type of communications.
    Separately from the WDP, but in line with the processes and 
timeline described in the WDP, LCH SA calculates the costs required for 
a wind down. It encompasses staff salaries, indemnities for staff 
departure, cost to be paid to suppliers during notice periods and more 
generally all foreseeable costs that would be due in case of a wind 
down event. The final figure is reported in the WDP and shows that 
overall costs is significantly below the liquid assets held by LCH SA 
for that purpose and corresponding to six (6) months of operational 
expenses.
    The first version of the WDP was adopted in 2014 and is reviewed on 
an annual basis. It is approved by the LCH SA Risk Committee, LMC and 
the Board.
    The WDP, which was approved by the Board on November 22nd 2017, has 
been annexed as Exhibit 5. LCH SA has requested confidential treatment 
of the plan as Exhibit 5, however the main characteristics are 
described above and a self comprehensive disclosure, as required by SEC 
Rule 17AD-22(e)(23), has been published on the LCH website in April 
2017.
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 
\10\ (the ``Act'') and the regulations thereunder.
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    \10\ 15 U.S.C. 78q-1.
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    Specifically, in accordance with the requirement in Rule 17Ad-
22(e)(3)(ii), LCH SA has established a WDP which describes the 
scenarios and events that may threaten its ability to continue to 
provide critical \11\ clearing services and the processes that LCH SA 
would follow to manage an orderly wind down of the CCP.
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    \11\ The CPSS-IOSCO Report states that `Critical' refers to the 
importance of the services to the Financial Market Infrastructures 
(FMIs) participants, other FMIs, and to the smooth functioning of 
the markets the FMI serves and in particular, the maintenance of 
financial stability.
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    LCH SA has an obligation to guarantee the continuous performance of 
critical service towards the market and, as such, will not request to 
enact a wind down without an important triggering event that would 
cause a failed recovery or a resolution situation. Scenarios have been 
categorised into the following for the purposes of assessing the 
effectiveness of the recovery tools and to identify the actions 
required for the WDP:
     Member default losses resulting in uncovered credit losses 
or liquidity shortfalls;
     Non-default losses that threaten LCH SA's solvency, 
arising from general business risks, custody and investment risks, any 
other large operational risks caused by caused by a human or system 
failure and
     Uncovered liquidity shortfall associated to these risks.
    LCH SA has adopted a Recovery Plan (``RP'') with an updated version 
submitted separately to the SEC.\12\ The WDP assumes that all recovery 
and resolution tools have been exhausted, have failed, and thus require 
LCH SA to wind down its clearing services. The reasons for these losses 
are described in more detail in the RP.
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    \12\ See Supra note 9.
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    The plan describes the governance for triggering the wind down and 
the approval steps required. The triggering of the plan will have to be 
decided by LCH SA and LCH Group Boards as well as by a shareholders' 
meeting. It will have to be approved by ACPR unless LCH SA has already 
closed down all its clearing activities.
    It is to be noted that the plan could be also triggered by the 
resolution authorities as part of the resolution toolkit if LCH SA has 
been put into resolution.
    From a legal point of view, the WDP would be supported by the 
Article 2.4.3.1 of the CDS Clearing Rule Book, clause 8 and 8.7 of 
Appendix 1 of the CDS Clearing Rule Book. It is also supported by 
similar clauses in the Fixed Income and Cash and Derivatives RuleBook 
for these business lines. All agreements concluded by LCH SA, 
particularly with its suppliers and trading venue include wind down 
clauses.
    From an operational point of view, the WDP is supported by detailed 
procedures where required. They have however not been attached to the 
plan as they are not specific to wind down. They are tested during 
default fire drills, to verify their applicability and ensure regular 
training of staff.
    From a financial point of view, the WDP is supported by highly 
liquid assets equivalent to 6 months' worth of Operational expenses. 
The plan would show that the cost of closure is inferior to that 
amount.
    The plan would take into account the fact that a closure of the CCP 
could be very disruptive for the market, therefore, in a non member 
default situation and

[[Page 60241]]

more generally in a situation where the Business line is not suffering 
clearing losses, a notice will be given to clearing members in order to 
give them time to terminate their trades before reaching the early 
termination trigger.
    Moreover, Rule 17Ad-22(e)(15)(i) requires a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to determine the amount of liquid net 
assets funded by equity based upon its general business risk profile 
and the length of time required to achieve a recovery or orderly wind-
down, as appropriate, of its critical operations and services if such 
action is taken.
    LCH SA believes that the proposed rule change is consistent with 
this requirement as the plan demonstrates how LCH can achieve an 
orderly wind down within six (6) months. LCH holds capital, funded by 
equity, equal to the operating expenses for the six month period 
required to wind down. The capital is invested in cash or highly liquid 
securities which could be easily mobilised, even in extreme 
circumstances. LCH bases its calculation on the latest audited 
expenses.
    The cost to wind down is inferior to this amount. It would take 
into account the salaries to be paid to staff until they leave the 
company and include termination costs. Similarly, it takes into account 
the costs that would have to be paid to external service providers 
until the service is no longer required. Each contract contains wind 
down clauses which limit the exit costs that SA would have to pay. 
Where they exist, they are included in the overall wind down costs. 
Legal costs that LCH would face in such extreme circumstances cannot be 
evaluated and have not been included. However, the current overall cost 
of winding down is very significantly under the 6 months equivalent of 
Operational Expenses and therefore could accommodate unforeseen costs.
    Rule 17Ad-22(e)(15)(ii) requires a clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for holding liquid net assets funded by 
equity equal to the greater of either six months of its current 
operating expenses or the amount determined by the board of directors 
to be sufficient to ensure a recovery or orderly wind-down of critical 
operations and services of the covered clearing agency, as contemplated 
by the plans established under Rule 17Ad-22(e)(3)(ii).
    LCH SA believes that its proposed WDP meet this requirement given 
the demonstration that LCH SA can achieve an orderly wind down within 
six (6) months and at a cost lower than the six (6) months of 
Operational expenses that it holds in cash or highly liquid securities.
    Reviews of the WDP take place annually and where appropriate are 
aligned to existing annual market exercise regimes (e.g., annual 
firedrills) in order to simulate the implications of executing the 
Recovery and/or Wind Down Plans to ensure they remain relevant. 
Additionally, where the underlying business model of LCH SA is amended, 
the change framework in place ensures the implication of the change to 
the business model is considered with reference to the WDP and the 
necessary updates made. The WDP is approved by LCH SA ERCo, Risk 
Committee and Board.

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.\13\ LCH SA does 
not believe that the proposed rule change would impose burdens on 
competition.
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    \13\ 15 U.S.C. 78q-1(b)(3)(I).
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    The proposed rule change would establish and maintain LCH SA's WDP 
in accordance with and for the purposes of the CCA rules. The Plan 
would not affect clearing member's access to services offered by LCH SA 
or impose any direct burden on clearing members.
    In the extreme case in which LCH SA would have to wind down, and 
the business line is not suffering clearing losses, the same amount of 
time would be given to all the Clearing Members to close their 
positions at LCH SA. In addition, the plan determines that the clearing 
services would be closed globally, all members being treated 
identically.
    Accordingly, the proposed rule change would not unfairly inhibit 
market participant's access to LCH SA's services or disadvantage or 
favor any particular user in relationship to another user.
    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.

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-2017-013 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-2017-013. 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 website (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

[[Page 60242]]

those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website 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 website 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-2017-013 and should 
be submitted on or before January 9, 2018.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27236 Filed 12-18-17; 8:45 am]
 BILLING CODE 8011-01-P


