[Federal Register Volume 83, Number 32 (Thursday, February 15, 2018)]
[Notices]
[Pages 6915-6917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03111]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82675; File No. SR-LCH SA-2018-001]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice 
Relating to Self-Referencing Transactions

February 9, 2018.
    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 January 31, 2018, 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 CDS Clearing Supplement and 
Section 4 of the CDS Clearing Procedures in order to allow acceptation 
of client's self-referencing transactions on their clearing broker. The 
text of the proposed rule change has been annexed 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
    In connection with the clearing of single name CDS referencing 
banks which are clearing members of CDSClear, LCH SA proposes to modify 
its eligibility requirements to allow for the clearing of clients 
``self-referencing transactions'' on their clearing broker.
    A ``self-referencing transaction'' refers to a single name CDS 
referencing a reference entity which is:

--In the case of a house transaction, either the clearing member itself 
or an affiliate of the clearing member;
--In the case of a client transaction, either the client itself or an 
affiliate of the client, or the clearing broker of the client or an 
affiliate of the clearing broker.

    Currently, clearing of both house and client self-referencing 
transactions are prohibited by LCH SA whereas clients commonly trade 
single name CDS referencing banks in the uncleared world (as they face 
directly their counterparty). Not allowing for the clearing of those 
transactions as a consequence of the intermediation of a clearing 
member required for clients to clear would thus impact their ability to 
continue trading the financial CDS single name market, as well as 
restrict their choice for clearing brokers.
    LCH SA is proposing to allow clients self-referencing transactions 
when the reference entity referenced by the single name CDS is either 
the client's clearing broker or an affiliate of the client's clearing 
broker.
    The risk arising from clients self-referencing transactions on 
their clearing broker would be captured by the existing framework and 
more specifically by the Self-Referencing Margin which charges the 
minimum between zero and the net Profit and Loss resulting from a 
credit event of the self-referenced name across all index, single name 
and index swaption transactions using a Recovery Rate of 0%. The net 
Profit and Loss calculation allows for netting of the exposures arising 
from index, index swaption and single name CDS transactions if they 
reference the same contractual definition and transaction type.
    The proposed rule change will consist in amending the following 
provisions of the CDS Clearing Supplement and Section 4 of the 
Procedures:

--The eligibility requirement in respect of single names in Section 4 
of the Procedures (paragraph 4.1(c)(iii)(B)(11)) to make the 
distinction between house and clients self-referencing transactions so 
as to allow clients to clear single name CDS transactions referencing 
their clearing broker or one of their affiliates but neither clients 
self-referencing transactions referencing the client itself nor house 
self-referencing transactions; and

[[Page 6916]]

--the provisions on the self referencing transactions in Part A and B 
of the CDS Clearing Supplement (Sections 1.2 and 9 and Appendix XIII of 
Parts A and B) to make a distinction between the remedies for house and 
client self-referencing transactions. More specifically, following the 
occurrence of a house self-referencing transaction, the clearing member 
shall notify LCH SA and the affected transactions could be auctioned 
and liquidated, whereas following the occurrence of a client self-
referencing transaction, the clearing broker of such client shall only 
notify LCH SA when it is a self-referencing transaction on the client 
itself (or one of its affiliates) in which case the positions could be 
auctioned and liquidated, but if the self-referencing transactions 
reference the clearing broker, then no specific action is required from 
the clearing broker.


    LCH SA is also taking this opportunity to make the following minor 
amendments to the CDS Clearing Supplement:

--Adding a missing reference to the Standard European Financial 
Corporate transaction types (Section 2.3 of Part B); and
--adding a reference to the Standard European Senior Non Preferred 
Financial Corporate transaction type (Section 2.3 of Part B) for which 
no change is needed in LCH SA's risk methodology as the specific risks 
arising from adding Senior Non Preferred transactions will be captured 
by the exact same framework developed when HoldCo entities were added; 
and
--clarifying that the underlying index transaction of an index swaption 
is an LCH cleared index transaction (Sections 1.2 and 7.1 of Part C).
2. Statutory Basis
    LCH SA believes that the proposed rule change in connection with 
the clearing of clients self-referencing transactions referencing the 
clearing broker 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.\4\
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    \3\ 15 U.S.C. 78q-1.
    \4\ 17 CFR 240.17Ad-22.
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    Specifically, Section 17(A)(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 derivative agreements, contracts, and transactions and 
to assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.\5\ As noted above, the current risk management framework 
and more specifically the Self-Referencing Margin, already 
appropriately manages the risk arising from the clearing of clients 
self-referencing transactions on their clearing broker such that the 
proposed rule change will have no impact on the safeguarding of 
securities and funds under control of LCH SA.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    LCH SA believes that the proposed change satisfies the requirements 
of Rule 17Ad-22(b)(2), (b)(3), (e)(1), (e)(4), and (e)(6).\6\
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    \6\ 17 CFR 240.17Ad-22(b)(2), (b)(3), (e)(1), (e)(4), and 
(e)(6).
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    Rule 17Ad-22(b)(2) requires a clearing agency to use margin 
requirements to limit its credit exposures to participants under normal 
market conditions and to use risk-based models and parameters to set 
margin requirements.\7\ Rule 17Ad-22(b)(3) requires each clearing 
agency acting as a central counterparty for security-based swaps to 
maintain sufficient financial resources to withstand, at a minimum, a 
default by the two participant families to which it has the largest 
exposure in extreme but plausible market conditions (the ``cover two 
standard''). Rule 17Ad-22(e)(4) requires a covered clearing agency to 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those arising from its payment, clearing and 
settlement processes by maintaining sufficient financial resources,\8\ 
and Rule 17Ad-22(e)(6) requires 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 meets 
certain minimum requirements.\9\
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    \7\ 17 CFR 240.17Ad-22(b)(22) [sic].
    \8\ 17 CFR 240.17Ad-22(e)(4)(i).
    \9\ 17 CFR 240.17Ad-22(e)(6)(i).
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    As described above, the Self-Referencing Margin in LCH SA current 
risk framework captures the worst potential Profit and Loss impact on a 
clearing member client portfolio resulting from the default of such 
clearing member which implies that the margin requirements set by LCH 
SA and use of such margin requirements limit LCH SA's credit exposures 
to participants in clearing clients self-referencing transactions 
referencing their clearing broker under normal market conditions, 
consistent with Rule 17Ad-22(b)(2). LCH SA also believes that its 
current risk-based margin methodology, including the Self-Referencing 
Margin) takes into account, and generates margin levels commensurate 
with, the risks and particular attributes of clients self-referencing 
transactions on their clearing broker at the product and portfolio 
levels, appropriate to the relevant market it serves, consistent with 
Rule 17Ad-22(e)(6)(i) and (v). In addition, LCH SA believes that the 
margin calculation under the current CDSClear margin framework would 
sufficiently account for the 5-day liquidation period for house account 
portfolio and 7-day liquidation period for client portfolio and 
therefore, is reasonably designed to cover LCH SA's potential future 
exposure to participants in the interval between the last margin 
collection and the close out of positions following a participant 
default, consistent with Rule 17Ad-22(e)(6)(iii).
    Further, Rule 17Ad-22(b)(3) requires a clearing agency acting as a 
central counterparty for security-based swaps to establish policies and 
procedures reasonably designed to maintain the ``cover two 
standard''.\10\ Similarly, Rule 17Ad-22(e)(4)(ii) requires a covered 
clearing agency that provides central counterparty services for 
security-based swaps to maintain financial resources additional to 
margin to enable it to cover a wide range of foreseeable stress 
scenarios that include, but are not limited to, meeting the cover two 
standard.\11\ LCH SA believes that its current Default Fund methodology 
will appropriately incorporate the risk of clearing clients self-
referencing transactions on their clearing broker, as together with the 
existing CDSClear margin framework (and more specifically the Self-
Referencing Margin), will be reasonably designed to ensure that LCH SA 
maintains sufficient financial resources to meet the cover two 
standard, in accordance with Rule 17Ad-22(b)(3) and (e)(4)(ii).\12\
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    \10\ 17 CFR 240.17Ad-22(b)(3).
    \11\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \12\ 17 CFR 240.17Ad-22(b)(3) and (e)(4)(ii).
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    LCH SA also believes that the proposed rule change is consistent 
with Rule 17Ad-22(e)(1), which requires each covered clearing agency's 
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.\13\ As 
described above, the proposed rule change would make a clear 
distinction on the clearing eligibility and remedies for house versus

[[Page 6917]]

clients self-referencing transactions. LCH SA believes that this change 
would provide for a clear and transparent legal basis for CDSClear 
clearing eligibility requirements, consistent with Rule 17Ad-22(e)(1).
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    \13\ 17 CFR 240.17Ad-22(e)(1).
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    For the reasons stated above, LCH SA believes that the proposed 
rule change is consistent with the requirements of prompt and accurate 
clearance and settlement of securities transactions and derivatives 
agreements, contracts and transactions, and assuring the safeguarding 
of securities and funds in the custody or control of the clearing 
agency or for which it is responsible, in accordance with Rule 
17A(b)(3)(F) of the Act.\14\
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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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.\15\ 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.
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    \15\ 15 U.S.C. 78q-1(b)(3)(I).
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    Indeed, firstly the proposed rule change would apply equally to all 
CDSClear members and clients, and secondly it would give clients access 
to clearing of the same universe of products irrespective of their 
clearing broker.
    Further, the proposed rule change does not adversely affect the 
ability of such clearing members or other market participants generally 
to engage in cleared transactions or to access clearing services 
offered by LCH SA.
    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-2018-001 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-2018-001. 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 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-2018-001 and should 
be submitted on or before March 8, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-03111 Filed 2-14-18; 8:45 am]
BILLING CODE 8011-01-P


