[Federal Register Volume 83, Number 3 (Thursday, January 4, 2018)]
[Notices]
[Pages 557-562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-28492]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82421; File No. SR-LCH SA-2017-010]


Self-Regulatory Organizations; LCH SA; Order Granting Accelerated 
Approval of a Proposed Rule Change Relating to the Implementation of 
the Markets in Financial Instruments Regulation

December 29, 2017.

I. Introduction

    On November 21, 2017, Banque Centrale de Compensation, which 
conducts business under the name LCH SA (``LCH SA''), filed with the 
Securities and Exchange Commission (``SEC'' or ``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 to 
make conforming and clarifying changes necessary to implement certain 
provisions of the European Union's Markets in Financial Instruments 
Regulation (``MiFIR'').\3\ The proposed rule change was published for 
comment in the Federal Register on December 7, 2017.\4\ The Commission 
received no comment letters regarding the proposed rule change. For the 
reasons discussed below, the Commission is approving the proposed rule 
change on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Regulation (EU) No 600/2014 of the European Parliament and 
of the Council of 15 May 2014 on markets in financial instruments 
and amending Regulation (EU) No 648/2012.
    \4\ Securities Exchange Act Release No. 34-82194 (December 1, 
2017), 82 FR 57803 (December 7, 2017) (SR-LCH-2017-010) 
(``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

a. Overview

    The principal purpose of this proposed rule change is to amend LCH 
SA's CDS Clearing Rulebook (the ``Rulebook'') and CDS Clearing 
Procedures (the ``Procedures'') to implement provisions of MiFIR that 
are applicable to central counterparties (``CCPs'') authorized under 
the European Markets Infrastructure Regulation (``EMIR'') \5\ (each 
such CCP, an ``authorized CCP'').\6\ In particular, the proposed rule 
changes are intended to implement Article 29 of MiFIR, which the 
Commission understands requires authorized CCPs to establish effective 
systems, procedures and arrangements to ensure that cleared derivatives 
transactions are submitted and accepted for clearing on a straight-
through processing (``STP'') basis,\7\ and Article 30 of MiFIR, which 
the Commission understands requires authorized CCPs to establish 
indirect clearing arrangements with respect to exchange-traded 
derivatives (``ETDs'') that are of ``equivalent effect'' to the 
corresponding requirements under EMIR.\8\
---------------------------------------------------------------------------

    \5\ Regulation (EU) No 648/2012 of the European Parliament and 
of the Council of 4 July 2012 on OTC derivatives, central 
counterparties and trade reporting.
    \6\ Capitalized terms not otherwise defined herein have the 
meanings ascribed to them in the Rulebook.
    \7\ In this context, the Commission understands STP to mean that 
an authorized CCP must have systems, procedures, and arrangements in 
place to ensure derivatives are cleared as quickly as 
technologically practicable using automated systems. Notice, 82 FR 
at 57804. The Commission understands that RTS 26 provides detailed 
additional requirements regarding the transfer of information and 
related authorized CCP rulebook requirements, as well as timelines 
for the transfer of information, among other things. See id. at 
57803 & n.5 (citing RTS 26).
    \8\ Notice, 82 FR at 57803.
---------------------------------------------------------------------------

    In addition, the Commission understands that the European 
Commission has adopted regulatory technical standards to set more 
specific requirements that authorized CCPs must meet in order to comply 
with MiFIR. The regulatory technical standards for straight-through 
processing (``RTS 26'') were adopted in 2016.\9\ More recently, the 
European Commission adopted regulatory technical standards, which align 
the indirect clearing requirements under EMIR and MiFIR (``Indirect 
Clearing RTS'').\10\ MiFIR takes effect January 3, 2018 and it is 
expected that the Indirect Clearing RTS will also take effect on the 
same date.
---------------------------------------------------------------------------

    \9\ Commission Delegated Regulation (EU) 2017/582 of 29.6.2016 
supplementing Regulation (EU) No 600/2014 of the European Parliament 
and of the Council with regard to regulatory technical standards 
specifying the obligation to clear derivatives traded on regulated 
markets and timing of acceptance for clearing.
    \10\ Commission Delegated Regulation (EU) of 22.9.2017 amending 
Commission Delegated Regulation (EU) No 149/2013 with regard to 
regulatory technical standards on indirect clearing arrangements. A 
separate, but identical, set of RTS apply to indirect clearing of 
exchange-traded derivatives. See, Commission Delegated Regulation 
(EU) of 22.9.2017 supplementing Regulation (EU) No 600/2014 with 
regard to regulatory technical standards on indirect clearing 
arrangements.
---------------------------------------------------------------------------

b. Straight-Through Processing

    The Commission understands that RTS 26 establishes the specific 
requirements with which authorized CCPs, trading venues,\11\ and 
clearing

[[Page 558]]

members \12\ must comply in order to ensure that transactions in 
cleared derivatives are submitted and accepted for clearing ``as soon 
as technologically practicable using automated systems,'' as required 
by Article 29(2) of MiFIR. LCH SA stated that it must comply with the 
RTS 26 requirements applicable to authorized CCPs.\13\ These 
requirements can be conceptually divided as: (i) A CCP's information 
requirements; (ii) cleared derivatives transactions concluded on a 
trading venue; (iii) cleared derivatives transactions concluded 
bilaterally; (iv) resubmission of cleared derivatives transactions in 
the event of clerical error or technical problems; and (v) backloading 
transactions.
---------------------------------------------------------------------------

    \11\ The Commission understands that the term ``trading venue,'' 
as used in RTS 26, refers to EU-based venues only (i.e., regulated 
markets, multilateral trading facilities and organized trading 
facilities). LCH SA therefore represents that third-country venues 
(e.g., U.S. swap execution facilities, security-based swap execution 
facilities, designated contract markets and national securities 
exchanges) are not required to comply with the RTS 26 provisions 
applicable to trading venues. Notwithstanding this definition, LCH 
SA explains that it proposes to apply the STP amendments described 
herein with respect to all derivatives transactions concluded on 
swap execution facilities and designated contract markets registered 
with the U.S. Commodity Futures Trading Commission (``CFTC'') and 
the definition of the term ``Trading Venue'' in the Rulebook has 
been amended accordingly (See Section 1.1.1 of the Rulebook). 
Notice, 82 FR at 57803, n. 7.
    \12\ The Commission understands that the term ``clearing 
member'' is not defined in RTS 26. However, Article 29 of MiFIR 
refers to ``investment firms which act as clearing members in 
accordance with'' EMIR. LCH SA represents that the term ``investment 
firm'' refers only to those EU firms which are required to be 
authorized under the revised Markets in Financial Instruments 
Directive (``MiFID II'') and, therefore, third-country firms that 
are clearing members of authorized CCPs (e.g., SEC-registered broker 
dealers (``BDs'') and futures commission merchants (``FCM'') 
registered with the CFTC) are not required to comply with the RTS 26 
provisions applicable to clearing members. In any event, LCH SA 
proposes to apply the STP requirements discussed herein to all 
derivatives transactions submitted for clearing by any Clearing 
Member, including a Clearing Member that is a BD or FCM. Notice, 82 
FR at 57804, n. 8.
    \13\ Notice, 82 FR at 57803-04.
---------------------------------------------------------------------------

i. CCP Information Requirements
    Article 1(2) of RTS 26 requires an authorized CCP to detail in its 
rules the information it needs from trading venues and counterparties 
to clear derivatives transactions, and the format such information must 
take, in order for the authorized CCP to accept that transaction for 
clearing.\14\
---------------------------------------------------------------------------

    \14\ Id. at 57804.
---------------------------------------------------------------------------

    The Commission understands that the Rulebook currently provides 
that all clearing members must be participants of at least one Approved 
Trade Source System, i.e., a middleware provider, which receives 
Original Transaction Data relating to Intraday Transactions from the 
relevant Clearing Members or the relevant Trading Venue. The Approved 
Trade Source System is then responsible for ensuring that this data is 
then submitted to LCH SA. To give effect to the CCP information 
requirements of Article 1(2) of RTS 26, LCH SA proposed to amend 
Article 3.1.4.1 of the Rulebook to confirm that the data relating to 
such submission must be made in a format acceptable to, or required by, 
the relevant Approved Trade Source System.\15\
---------------------------------------------------------------------------

    \15\ Id.
---------------------------------------------------------------------------

ii. Cleared Derivatives Transactions Concluded on a Trading Venue
    Article 3(4) of RTS 26 requires an authorized CCP to accept or 
reject a cleared derivatives transaction concluded on a trading venue 
for clearing within 10 seconds of receipt of the relevant information 
from the trading venue.\16\ Where the authorized CCP determines to 
reject the transaction for clearing, it is required to inform the 
clearing member and the trading venue on a real-time basis.\17\
---------------------------------------------------------------------------

    \16\ LCH SA represents that as a CFTC-registered derivatives 
clearing organization, LCH SA is currently subject to this same 
requirement in connection with its CDS Clearing Service. See, 17 CFR 
39.12(b)(7); CFTC Staff Guidance of Straight-Through Processing, 
dated September 26, 2013, available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/stpguidance.pdf. Notice, 82 
FR at 57804, n. 9.
    \17\ Notice, 82 FR at 57804.
---------------------------------------------------------------------------

    LCH SA noted that it has traditionally imposed a series of controls 
on Intraday Transactions, including the following:
     Eligibility Controls, which verify the completeness of the 
information relating to the Original Transaction and to determine 
whether the Original Transaction meets LCH SA's Eligibility 
Requirements;
     Client Transaction Checks, which verify whether, in 
respect of an Original Transaction that is a Client Transaction, the 
relevant Clearing Member has consented to the registration of the trade 
on behalf of its Client; and
     Notional and Collateral Checks, which verify whether 
accepting the trade for clearing would exceed the relevant Clearing 
Member's Maximum Notional Amount and/or whether the Clearing Member has 
sufficient collateral available to satisfy the margin requirement 
associated with clearing the trade.\18\
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

    LCH SA proposed to amend Section 5.3 of the Procedures to confirm 
that, in accordance with Article 3(4) of RTS 26, the relevant Clearing 
Member(s) are not required to provide their consent to the acceptance 
of a Trading Venue Transaction for clearing.\19\ LCH SA noted that it 
will, however, apply the Notional and Collateral Checks to Trading 
Venue Transactions.\20\ LCH SA also proposed to amend Article 3.1.4.5 
of the Rulebook to make clear that all stages of the intraday clearing 
process must occur within the timeframe required by Applicable Law, 
meaning that LCH SA must perform the Notional and Collateral Checks 
within the 10 second time-frame prescribed by Article 3(4) of RTS 
26.\21\
---------------------------------------------------------------------------

    \19\ Id.
    \20\ Id.
    \21\ Id.
---------------------------------------------------------------------------

    Finally, LCH SA proposed to amend Article 3.1.5.1 of the Rulebook 
to clarify that notice of a Rejected Transaction will be provided to 
the relevant Trading Venue and/or Approved Trade Source System in 
accordance with Applicable Law.\22\
---------------------------------------------------------------------------

    \22\ Id.
---------------------------------------------------------------------------

iii. Cleared Derivatives Transactions Concluded Bilaterally
    The Commission understands that Article 4(2) of RTS 26 requires an 
authorized CCP to send information concerning a cleared derivatives 
transaction concluded bilaterally between counterparties it receives 
from such counterparties to the relevant clearing member(s) within 60 
seconds of receipt of such information. Moreover, LCH SA stated that 
Article 4(3) of RTS 26 requires the authorized CCP to accept or reject 
such a bilateral transaction for clearing within 10 seconds of receipt 
of the acceptance or non-acceptance by such clearing member(s), and 
where the authorized CCP determines to reject the transaction for 
clearing it is required to inform the clearing member on a real-time 
basis.\23\
---------------------------------------------------------------------------

    \23\ Id.
---------------------------------------------------------------------------

    LCH SA proposed to amend Section 5.3 of the Procedures to clarify 
that cleared derivatives transactions concluded bilaterally will be 
subject to the Client Transaction Checks referred to above. In 
particular, LCH SA proposed that, upon successful completion of the 
Eligibility Controls, it will send a Consent Request to the relevant 
Clearing Member(s). Pursuant to Article 3.1.4.5 of the Rulebook, LCH SA 
is required to send each such Consent Request in accordance with the 
timeframe required by Applicable Law (i.e., 60 seconds).\24\
---------------------------------------------------------------------------

    \24\ Id.
---------------------------------------------------------------------------

    Once LCH SA has delivered a Consent Request, a Clearing Member then 
has a choice regarding how to respond. It may opt for a so-called 
``Automatic Take-Up Process,'' whereby the Clearing Member effectively 
pre-approves specific Clients for automatic acceptance of Consent 
Requests; in such circumstances, the Clearing Member will not be 
required to

[[Page 559]]

respond to the Consent Request.\25\ A Clearing Member may also opt for 
a ``Manual Take-Up Process,'' whereby it must affirmatively respond 
within the time frame required by Applicable Law (i.e., 60 seconds) or 
otherwise by the end of the real-time clearing session on that day, as 
set forth in the amendments proposed by LCH SA.\26\ The proposed 
changes would then require LCH SA to accept or reject the trade, and 
make the relevant notifications, within the timeframe required under 
Applicable Law.\27\
---------------------------------------------------------------------------

    \25\ Id.
    \26\ Id.
    \27\ Id.
---------------------------------------------------------------------------

    Finally, LCH SA proposed to amend Article 3.1.5.1 of the Rulebook 
to clarify that notice of a Rejected Transaction will be provided to 
the relevant Clearing Member and/or Approved Trade Source System in 
accordance with Applicable Law.\28\
---------------------------------------------------------------------------

    \28\ Id.
---------------------------------------------------------------------------

iv. Resubmission
    Where the non-acceptance of a cleared derivatives transaction for 
clearing is due to a clerical or technical error, Article 5(3) of RTS 
26 permits the trade to be resubmitted within one hour, provided the 
original counterparties to the trade agree to such resubmission.\29\ 
Accordingly, LCH SA proposed to amend Article 3.1.5.1 of the Rulebook 
to state that a Rejected Transaction may be resubmitted for clearing in 
accordance with Applicable Law.
---------------------------------------------------------------------------

    \29\ Id. at 57805.
---------------------------------------------------------------------------

v. Treatment of Backloading Transactions
    The Commission understands that STP requirements apply to ``cleared 
derivatives transactions,'' which are defined in Article 29(2) of MiFIR 
to include derivatives that are concluded on an EU-regulated market, 
all OTC derivatives that are subject to an EMIR mandatory clearing 
requirement, and all other derivatives which are agreed by the relevant 
counterparties to be cleared.\30\ LCH SA proposed to amend the Rulebook 
to designate Backloading Transactions as outside of the scope of 
MiFIR's STP requirements. Specifically, Article 3.1.6.3 would be 
amended to provide that LCH SA is entitled to assume that any 
Backloading Transaction submitted for clearing by LCH SA was either 
entered into prior to the effective date of MiFIR (i.e., January 3, 
2018) or is otherwise not subject to an EMIR mandatory clearing 
requirement and that the parties to the Backloading Transaction did not 
agree at the time of execution for the Backloading Transaction to be 
subject to clearing.\31\
---------------------------------------------------------------------------

    \30\ Id.
    \31\ Id.
---------------------------------------------------------------------------

c. Indirect Clearing Arrangements
i. Indirect Clearing RTS
    The Commission understands that Article 4(3) of EMIR requires that 
indirect clearing arrangements should not increase counterparty risk 
and ensure protections that are of ``equivalent effect'' to the 
protections for client clearing set out in Articles 39 and 48 of 
EMIR.\32\ For these purposes, the term ``indirect clearing 
arrangement'' refers to a set of relationships--also called a 
``chain''--where at least two intermediaries are interposed between an 
end-client and the relevant authorized CCP. The most basic indirect 
clearing chain therefore involves the following four entities: An 
authorized CCP; a clearing member of the authorized CCP; the client of 
the Clearing Member that is itself an intermediary (``Direct Client''); 
and the client of such Direct Client (``Indirect Client''). The 
Commission also understands that longer chains are permitted in certain 
circumstances. \33\
---------------------------------------------------------------------------

    \32\ Id.
    \33\ Id.
---------------------------------------------------------------------------

    LCH SA noted that the majority of the obligations under the 
Indirect Clearing RTS fall to Clearing Members and Direct Clients, but 
that authorized CCPs must comply with certain new requirements relating 
to account structures, default management, and risk management.\34\ 
Because indirect clearing was a concept introduced in EMIR, LCH SA 
stated that its Rulebook already had a number of features implementing 
the initial set of indirect clearing requirements. LCH SA proposed the 
following conforming amendments to reflect the updated requirements of 
the Indirect Clearing RTS.\35\
---------------------------------------------------------------------------

    \34\ LCH SA represented that the indirect clearing arrangements 
for OTC derivatives described herein, in particular, the 
requirements relating to account structures and default management, 
generally will not be applicable to Clearing Members that are FCM 
Clearing Members or U.S. Clearing Members, i.e., BDs. LCH SA further 
represented that, in connection with the CDS Clearing Service, FCM 
Clearing Members will continue to be required to maintain cleared 
swaps customer accounts in accordance with the segregation 
requirements set out in Section 4d(f) of the Commodity Exchange Act 
and Part 22 of the CFTC's rules, 17 CFR 22.1 et seq. Similarly, LCH 
SA explained that a U.S. Clearing Member that is not also an FCM 
Clearing Member will be required to maintain customer security-based 
swap accounts in accordance with 17 CFR 240.15c3-3. See Notice, 82 
FR at 57805.
    \35\ Notice, 82 FR at 57805.
---------------------------------------------------------------------------

ii. Indirect Client Account Structures
    An authorized CCP must permit a clearing member to open and 
maintain at least the following two types of accounts for its Direct 
Client(s) that have Indirect Client(s):
     One omnibus segregated account for all Indirect Clients of 
all such Direct Clients (``CCP OSA''); and
     one gross (position and margin) segregated account per 
Direct Client for all Indirect Clients of that Direct Client that 
choose gross segregation (a ``CCP GOSA'').
    Therefore, an authorized CCP is expected to maintain at least: (i) 
One CCP OSA per clearing member; plus (ii) the requisite number of 
Direct Client-specific CCP GOSAs per clearing member.\36\
---------------------------------------------------------------------------

    \36\ Id.
---------------------------------------------------------------------------

    The principal indirect clearing-related amendment to the Rulebook 
that LCH SA proposed is the introduction of two new account structures 
that are putatively designed to reflect the requirements of the 
Indirect Clearing RTS. Specifically, LCH SA proposed to introduce a new 
CCM Indirect Client Net Segregated Account Structure (i.e., a CCP OSA) 
as well as a new CCM Indirect Client Gross Segregated Account Structure 
(i.e., a CCP GOSA), collectively referred to as CCM Indirect Client 
Segregated Account Structures.\37\
---------------------------------------------------------------------------

    \37\ Id.
---------------------------------------------------------------------------

    LCH SA also proposed to amend Title V, Chapter 2 of the Rulebook to 
specify the circumstances in which such Account Structures may be 
opened. In particular, Article 5.2.1.3 would be amended to clarify that 
a given CCM Client that provides indirect clearing services to CCM 
Indirect Clients must be allocated to one CCM Indirect Client Net 
Segregated Account Structure but may, upon request, be allocated to one 
CCM Indirect Client Gross Segregated Account Structure.\38\
---------------------------------------------------------------------------

    \38\ Id. at 57805-06.
---------------------------------------------------------------------------

iii. Default Management
    LCH SA noted that the Indirect Clearing RTS primarily addresses a 
Clearing Member's default management of an insolvent Direct Client and 
therefore does not specifically address an authorized CCP's treatment 
of CCP OSAs and CCP GOSAs in the event of a Clearing Member default. 
Nevertheless, LCH SA stated that it believes that these accounts should 
be held, to the extent possible, in accordance with the requirements of 
EMIR Articles 39 and 48.\39\ As a result, LCH SA proposed the following 
amendments to the Rulebook to address the treatment of CCM Indirect 
Client Segregated Account Structures in the

[[Page 560]]

event of the default of the CCM, the CCM Client and of LCH SA itself:
---------------------------------------------------------------------------

    \39\ Id. at 57806.
---------------------------------------------------------------------------

CCM Default
     In the event of a CCM default, Clause 4.3 of the CDS 
Default Management Process would be amended to provide that LCH SA will 
attempt, in the first instance, to port the Client Cleared Transactions 
of a CCM Indirect Gross Segregated Account Client to a single Backup 
Clearing Member, provided that certain conditions are met, including 
that the Backup Clearing Member has unconditionally agreed to act as 
Backup Clearing Member and that the instruction is received within the 
prescribed timeframe--referred to as the ``Porting Window''--
established by LCH SA for this purpose. If these conditions are not 
met, LCH SA proposed to liquidate the existing Client Cleared 
Transactions and re-establish them with the Backup Clearing Member. LCH 
SA also proposed, upon instruction, to transfer the associated 
Collateral to the Backup Clearing Member.
     In respect of Client Cleared Transactions in a CCM 
Indirect Client Net Segregated Account Structure (or where porting is 
not achieved in respect of Client Cleared Transactions in a in a CCM 
Indirect Client Gross Segregated Account Structure), LCH SA proposed to 
amend Clause 4.4.3 of the CDS Default Management Process, which 
requires LCH SA to calculate an amount--called the ``CDS Client 
Clearing Entitlement''--equal to: (1) The pro rata share of the 
liquidation of the Non-Ported Cleared Transactions; plus (2) the pro 
rata share of the liquidation value of the Client Assets recorded in 
the relevant Client Collateral Account; minus (3) the pro rata share of 
the costs of any hedging undertaken; minus (4) the pro rata share of 
the costs, expenses and liabilities of LCH SA in implementing the CDS 
Client Default Management Process, in each case where such pro rata 
share is attributable to a given CCM Indirect Client to reference 
Indirect Client Segregated Account Structures.
     Upon a CCM default, LCH SA proposed to amend Article 
4.3.3.1 of the Rulebook to clarify that CCM Indirect Clients belonging 
to a CCM Indirect Client Gross Segregated Account Structure bear no 
fellow-customer risk: Only the value of the Collateral referable to a 
given CCM Indirect Client--called the ``CCM Indirect Client Gross 
Account Balance''--will be available to satisfy any Damages 
attributable to the liquidation of any Non-Ported Cleared Transactions 
referable to such CCM Indirect Client.\40\
---------------------------------------------------------------------------

    \40\ Id.
---------------------------------------------------------------------------

CCM Client Default
    In the event of the default of a CCM Client that has CCM Indirect 
Clients, LCH SA's normal default management arrangements for CCMs will 
not apply. Instead, LCH SA proposed that the defaulting CCM Client will 
be default managed by the CCM, which will determine whether to 
liquidate the Client Cleared Transactions registered in the relevant 
CCM Indirect Client Segregated Account Structures or to attempt to port 
the Client Cleared Transactions of the CCM Indirect Clients belonging 
to a CCM Indirect Client Gross Segregated Account Structure to a Backup 
Client. LCH SA also proposed amendments that provide that porting may 
occur on a consolidated basis, i.e., where all the CCM Indirect Clients 
appoint a single Backup Client, or on a per-CCM Client Trade Account 
basis, i.e., where a given CCM Indirect Client appoints a single Backup 
Client specific to that CCM Indirect Client. LCH SA proposed to amend 
Article 5.4.1.3 of the Rulebook to provide that LCH SA will make the 
relevant transfers in its records at the instruction of the CCM 
undertaking the default management of its defaulting CCM Client.\41\
---------------------------------------------------------------------------

    \41\ Id.
---------------------------------------------------------------------------

LCH SA Default
    LCH SA proposed to amend Article 1.3.1.9 of the Rulebook to clarify 
that, following a default by LCH SA, CCMs shall calculate a separate 
CCM Client Termination Amount in respect of each CCM Indirect Client 
Net Segregated Account Structure and each CCM Indirect Client Gross 
Segregated Account Structure it holds with LCH SA.\42\
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

iv. Miscellaneous
    The Commission understands that Article 3(3) of the Indirect 
Clearing RTS requires an authorized CCP to identify, monitor and manage 
any ``material risks'' arising from the provision of indirect clearing 
services that may affect the resilience of the authorized CCP to 
adverse market developments, and Article 2(3) of the Indirect Clearing 
RTS states that an authorized CCP may not ``prevent the conclusion of'' 
indirect clearing arrangements that are entered into on reasonable 
commercial terms.\43\ Based on these requirements, LCH SA proposed to 
amend Article 5.1.3.1 of the Rulebook to clarify that a CCM may permit 
its CCM Clients to offer clearing services to their CCM Indirect 
Clients, provided certain conditions are met. Specifically, the 
proposed amendments would clarify that the contractual terms of the 
indirect clearing arrangements must comply with the relevant 
requirements of EMIR and MiFIR and must further provide for the 
establishment of CCM Indirect Client Segregated Account Structures 
(described in greater detail above), in accordance with the wishes of 
the relevant CCM Indirect Clients.\44\
---------------------------------------------------------------------------

    \43\ Id.
    \44\ Id.
---------------------------------------------------------------------------

    Furthermore, LCH SA proposed to amend Article 5.2.1.1 of the 
Rulebook to include an express recognition that a given CCM Client may 
be acting in the capacity of clearing its own proprietary transactions 
as well as in the capacity of providing clearing services to its CCM 
Indirect Clients. Finally, LCH SA proposed amendments to Title V, 
Chapter 3 of the Rulebook to provide for non-default transfers of all 
Client Cleared Transactions in a given CCM Indirect Client Segregated 
Account Structure (accompanied by the associated Client Assets upon 
request) or partial transfers of Client Cleared Transactions in a given 
CCM Indirect Client Segregated Account Structure (without the 
associated Client Assets) to the relevant accounts of a Receiving 
Clearing Member.\45\
---------------------------------------------------------------------------

    \45\ Id. at 57806-07.
---------------------------------------------------------------------------

d. Certain Clarifying Amendments
    LCH SA also proposed certain clarifying revisions to the Rulebook, 
Procedures, and Clearing Notice as described below.
i. Auction Member Representation
    LCH SA proposed amendments to various provisions of the CDS Default 
Management Process (Annex 1 of the Rulebook) to clarify the 
responsibilities between a Non-Defaulting Clearing Member and the 
Auction Member Representative appointed by the Non-Defaulting Clearing 
Member to act in such Clearing Member's place in the competitive 
bidding process as described in Clause 5.4 of the CDS Default 
Management Process.\46\
---------------------------------------------------------------------------

    \46\ Id. at 57807.
---------------------------------------------------------------------------

ii. Member Uncovered Risk
    LCH SA proposed to replace the definition of ``Member Uncovered 
Risk'' with ``Group Member Uncovered Risk'' to take into account the 
relevant LCH Group Risk Policy, which considers whether Clearing 
Members belong to the same group for purposes of the relevant

[[Page 561]]

risk calculations, including calculation of margin and Default Fund 
requirements. The proposed revisions are set out in Section 4.4.1.2 and 
Section 4.4.1.8 of the Rulebook and Sections 2.12, 2.16, and 6.4 of the 
Procedures.\47\
---------------------------------------------------------------------------

    \47\ Id.
---------------------------------------------------------------------------

iii. Calculation of Contributed Prices
    LCH SA proposed amendments to Section 5.18.2 of the Procedures to 
reflect changes made to the methodology with regard to the application 
of the bid-ask restraint in the calculation of contributed prices. In 
addition, LCH SA proposed to remove the references to a particular time 
in the Rulebook regarding the price contribution process. Consequently, 
the definition of ``End of Day'' would be removed from the Rulebook. 
LCH SA proposed to amend Article 4.2.7.7 of the Rulebook and Section 
5.18.5 (b) and (d) of Procedure 5 accordingly.\48\
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

iv. New Approved Trade Source System
    LCH SA proposed to amend Clearing Notice no. 2017/064 regarding the 
Approved Trade Source Systems to add a new Approved Trade Source 
System, Bloomberg Trade Facility Ltd.\49\
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

III. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    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.\50\ Section 17A(b)(3)(F) of the Act requires, among other 
things, that the rules of a clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and, in general, to protect investors and the public interest.\51\ Rule 
17Ad-22(e)(1) requires that each covered clearing agency establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for a well-founded, clear, transparent, 
and enforceable legal basis for each aspect of its activities in all 
relevant jurisdictions.\52\ Rule 17Ad-22(e)(4) requires, in relevant 
part, that each covered clearing agency establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
effectively identify, measure, monitor, and manage its credit exposures 
to participants.\53\ Rule 17Ad-22(e)(6) requires, in relevant part, a 
covered clearing agency that provides central counterparty services to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market.\54\ For the reasons discussed below, the Commission finds 
that the proposed rule change is consistent with Section 17A of the Act 
and Rule 17Ad-22(e) thereunder.
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78s(b)(2)(C).
    \51\ 15 U.S.C. 78q-1(b)(3)(F).
    \52\ 17 CFR 240.17Ad-22(e)(1).
    \53\ 17 CFR 240.17Ad-22(e)(4).
    \54\ 17 CFR 240.17Ad-22(e)(6).
---------------------------------------------------------------------------

a. Straight-Through Processing

    The Commission understands that MiFIR and RTS 26 require LCH SA to 
implement the provisions described above regarding STP. By so amending 
its Rulebook and Clearing Procedures, LCH SA indicated that it will be 
able to better ensure that transactions are submitted, accepted, and 
cleared without undue delay. As a result, the Commission finds that the 
proposed rule change regarding STP promotes the prompt and accurate 
clearance and settlement of securities transactions consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.\55\ Moreover, the 
Commission further finds the proposed rule change protects investors 
and the public interest, consistent with Section 17A(b)(3)(F) of the 
Act \56\ because the expeditious processing of transactions in cleared 
derivatives reduces the possibility of those transactions being 
disrupted by intervening events, such as a technological breakdown or a 
reduction in the financial condition of one of the counterparties.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78q-1(b)(3)(F).
    \56\ Id.
---------------------------------------------------------------------------

    In addition, because these amendments will maintain the consistency 
of LCH SA's Rulebook and Procedures with MiFIR and RTS 26, the 
Commission finds the provisions with regard to STP will help ensure 
that LCH SA's policies and procedures provide for a well-founded, 
clear, transparent, and enforceable legal basis for each aspect of its 
activities in all relevant jurisdictions, consistent with Rule 17Ad-
22(e)(1).

b. Indirect Clearing

    The Commission similarly finds that the portions of the proposed 
rule change that seek to implement MiFIR and the Indirect Clearing RTS 
are consistent with Rule 17Ad-22(e)(1). As noted above, the Commission 
understands that MiFIR and the Indirect Clearing RTS require LCH SA to 
implement provisions regarding indirect clearing, which include 
establishing two types of indirect clearing accounts and establishing 
the process for handling the assets of indirect clearing clients in the 
event of the default of the CCM, the CCM Client, or LCH SA. 
Furthermore, as noted above, LCH SA has clarified the changes relating 
to indirect client clearing will not be applicable to LCH SA's FCM 
Clearing Members or its U.S. Clearing Members, i.e. broker-dealers 
registered with the Commission. LCH SA has explained that FCM Clearing 
Members ``will continue to be required to maintain cleared swaps 
customer accounts in accordance with the segregation requirements set 
out in Section 4d(f) of the Commodity Exchange Act and Part 22 of the 
CFTC's rules, 17 CFR 22.1 et seq.'' \57\ Similarly, LCH SA explained 
that a U.S. Clearing Member that is not also an FCM Clearing Member 
will be required to maintain customer security-based swap accounts in 
accordance with Commission Rule 15c3-3.\58\ The Commission relies on 
these particular representations and explanations by LCH SA, and notes 
that it does not expect LCH SA to create CCP OSAs or CCP GOSAs for its 
FCM Clearing Members or U.S. Clearing Members. Instead, accounts for 
LCH SA's FCM Clearing Members or U.S. Clearing Members will be subject 
to the applicable provisions of the Commodity Exchange Act and the 
rules and regulations promulgated thereunder and/or the Act and the 
rules and regulations promulgated thereunder.
---------------------------------------------------------------------------

    \57\ See supra note 34.
    \58\ 17 CFR 240.15c-3-3.
---------------------------------------------------------------------------

    The Commission further understands that the proposed amendments to 
LCH SA's Rulebook and Procedures will bring LCH SA into compliance with 
the indirect clearing requirements of MiFIR and the related Indirect 
Clearing RTS while at the same time leaving unmodified the account 
structure used for LCH SA's FCM Clearing Members and its U.S. Clearing 
Members. Therefore, the Commission finds the provisions with regard to 
STP will help ensure that LCH SA's policies and procedures provide for 
a well-founded, clear, transparent, and enforceable legal basis for 
each aspect of its activities in

[[Page 562]]

all relevant jurisdictions, consistent with Rule 17Ad-22(e)(1).\59\
---------------------------------------------------------------------------

    \59\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

c. Other Provisions

    With respect to the proposed rule change replacing the definition 
of ``Member Uncovered Risk'' with ``Group Member Uncovered Risk,'' the 
Commission believes the proposed changes will improve LCH SA's ability 
to identify and measure the risks associated with clearing processes by 
taking into account the relevant LCH Group Risk Policy and considering 
whether Clearing Members belong to the same group for purposes of the 
relevant risk calculations As a result, the Commission believes that 
LCH SA will be better situated to collect the level of resources 
commensurate with the risks associated with affiliated Clearing Members 
and will thereby be able to more appropriately cover its credit 
exposures to its participants. Therefore, the Commission finds that the 
proposed rule change regarding the definition of Group Member Uncovered 
Risk will further the protection of investors and the public interest, 
consistent with Section 17A(b)(3)(F) of the Act.\60\ For the same 
reasons, the Commission also finds that the proposed rule change 
regarding the definition of Group Member Uncovered Risk is consistent 
with the applicable requirements of Rules 17Ad-22(e)(4) and (e)(6).\61\
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 78q-1(b)(3)(F).
    \61\ 17 CFR 240.17Ad-22(e)(4) and (6).
---------------------------------------------------------------------------

    The proposed rule change also revises LCH SA's CDS Default 
Management Process to clarify the responsibilities between a Non-
Defaulting Clearing Member and the Auction Member Representative 
appointed by the Non-Defaulting Clearing Member to act in such Clearing 
Member's place in the competitive bidding process. In doing so, the 
Commission finds the proposed rule change facilitates LCH SA's CDS 
Default Management Process, thereby enabling LCH SA to limit its 
exposures to potential losses from defaults by its participants and the 
exposures of non-defaulting participants to losses that they cannot 
anticipate or control. As a result, the Commission finds that the 
proposed rule change regarding the responsibilities between a Non-
Defaulting Clearing Member and the Auction Member Representative 
appointed by the Non-Defaulting Clearing Member further the protection 
of investors and the public interest consistent with Section 
17A(b)(3)(F) of the Act.\62\
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In its filing, LCH SA requested that the Commission grant 
accelerated approval of the proposed rule change pursuant to Section 
19(b)(2)(C)(iii) of the Exchange Act.\63\ Under Section 
19(b)(2)(C)(iii) of the Act,\64\ the Commission may grant accelerated 
approval of a proposed rule change if the Commission finds good cause 
for doing so. LCH SA believes that accelerated approval is warranted 
because the proposed rule change is required as of January 3, 2018 in 
order to comply with the requirements of MiFIR.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78s(b)(2)(C)(iii).
    \64\ Id.
---------------------------------------------------------------------------

    The Commission finds good cause, pursuant to Section 
19(b)(2)(C)(iii) of the Act,\65\ for approving the proposed rule change 
on an accelerated basis, prior to the 30th day after the date of 
publication of notice in the Federal Register, because the proposed 
rule change is required as of January 3, 2018 in order to facilitate 
LCH SA's efforts to comply with MiFIR, RTS 26, and the Indirect 
Clearing RTS. Additionally, the Commission notes that the proposed 
changes regarding indirect clearing do not apply to U.S. customers, and 
that LCH SA has represented that amending its Rulebook and Procedures 
to comply with requirements regarding indirect clearing do not impede 
compliance with relevant U.S. law, including Section 17A(b)(3)(F) of 
the Act.
---------------------------------------------------------------------------

    \65\ Id.
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \66\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\67\ that the proposed rule change (SR-LCH SA-2017-010) be, and hereby 
is, approved on an accelerated basis.\68\
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78s(b)(2).
    \68\ 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.\69\
---------------------------------------------------------------------------

    \69\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-28492 Filed 1-3-18; 8:45 am]
 BILLING CODE 8011-01-P


