[Federal Register Volume 82, Number 245 (Friday, December 22, 2017)]
[Notices]
[Pages 60781-60782]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27563]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82345; File No. SR-LCH SA-2017-009]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to Wrong Way Risk Margin

December 18, 2017.

I. Introduction

    On October 30, 2017, Banque Central de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change (SR-LCH SA-2017-009) to amend its 
Reference Guide: CDS Margin Framework (``CDSClear Margin Framework'' or 
``Framework'') to adjust the manner in which the wrong way risk 
(``WWR'') margin component of the Framework addresses offsets between 
currencies when calculating WWR margin. The proposed rule change was 
published for comment in the Federal Register on November 16, 2017.\3\ 
The Commission received no comment letters regarding the proposed 
change. For the reasons discussed below, the Commission is approving 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-82043 (November 9, 
2017), 82 FR 53536 (November 16, 2017) (SR-LCH-SA-2017-009) 
(``Notice'').
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II. Description of the Proposed Rule Change

    LCH SA has proposed to amend its CDSClear Margin Framework to 
adjust the manner in which the WWR margin component of the Framework 
addresses offsets between currencies when calculating WWR margin. 
According to LCH SA, 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 provides for offsets between currencies by allowing 
offset between WWR and right way risk (``RWR''). Specifically, under 
the current approach, a WWR currency offset is applied as the greater 
of: (x) The WWR amount in Euros minus the RWR amount in Euros \4\; and 
(y) the WWR amount in Euros multiplied by 1 minus a factor representing 
the correlation between European and U.S. financial institutions by 
calculating the average historical cross correlation of credit spreads 
on credit default swaps (``CDS'') with respect to all pairs of European 
and U.S. financial institutions that are clearing members of LCH SA.\5\ 
Under this approach, 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, which is reduced by scaling the WWR by 1 minus the correlation 
factor, and take the greater of these two amounts.\6\ As a result, 
either the full amount of RWR is allowed to offset the WWR, or only a 
portion of the WWR is taken into account without any regard to the 
amount of RWR.\7\
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    \4\ Amounts not denominated in Euros are converted to Euros 
using a foreign exchange rate plus or minus a haircut. See, Notice, 
82 FR at 53536.
    \5\ Id.
    \6\ Id.
    \7\ Id.
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    LCH SA proposed to revise this approach by amending the WWR 
currency offset formula in the Framework to set the WWR margin 
component of Framework as the greater of: (i) The WWR amount in Euros, 
minus 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 (ii) zero. Thus, under the proposed 
approach, RWR would never completely offset WWR, but rather would 
offset WWR after discounting it based on the average of observed 
correlations of CDS credit spreads with respect to European and U.S. 
financial institutions.\8\
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    \8\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\9\ Section 17A(b)(3)(F) of the Act \10\ requires, among 
other things, that the rules of a registered clearing agency 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 and 
control of the clearing agency or for which it is responsible, and to 
protect investors and the public interest. Rule

[[Page 60782]]

17Ad-22(b)(2) requires, in relevant part, a registered clearing agency 
that performs central counterparty services to establish, implement, 
maintain and enforce written policies and procedures that are 
reasonably designed to use margin requirements to limit its credit 
exposures to participants under normal market conditions and use risk-
based models and parameters to set margin requirements.\11\ Rules 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.\12\
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    \9\ 15 U.S.C. 78s(b)(2)(C).
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22(b)(2).
    \12\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A(b)(3)(F) of the Act and the relevant provisions of 
Rule 17Ad-22 thereunder. Specifically, the Commission believes that the 
proposed rule change will enhance LCH SA's assessment of the risks 
associated with clearing products that may exhibit WWR, and thereby 
collect an appropriate level of resources, which in turn will improve 
LCH SA's ability to withstand the default of a Clearing Member. As a 
result, the Commission believes that the proposed rule change will 
augment LCH SA's ability to safeguard the securities and funds which 
are in its custody and control. Therefore, the Commission finds that 
the proposed rule change is consistent with the requirements of Section 
17A(b)(3)(F) of the Act.
    Moreover, the Commission believes that WWR is a relevant factor 
when considering the risks associated with clearing securities 
products, including CDS products, and when developing margin models to 
cover credit exposures associated with providing clearance and 
settlement services for such products. By ensuring that it will take 
into consideration both WWR and RWR as proposed, LCH SA will have 
margin that more accurately measures the level of risk, and should 
therefore produce margin requirements that are commensurate with such 
risks, as well as the attributes of the products it clears. 
Accordingly, the Commission finds that the proposed rule change is 
consistent with the requirements of Rule 17Ad-22(b)(2) and Rule 17Ad-
22(e)(6)(i) and (v).

IV. Conclusion

    It Is Therefore Ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-LCH SA-2017-009) be, and hereby is, 
approved.\13\
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    \13\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-27563 Filed 12-21-17; 8:45 am]
 BILLING CODE 8011-01-P


