[Federal Register Volume 83, Number 55 (Wednesday, March 21, 2018)]
[Notices]
[Pages 12447-12448]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05648]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82883; File No. SR-LCH SA-2018-001]


Self-Regulatory Organizations; LCH SA; Order Granting Approval on 
an Accelerated Basis of Proposed Rule Change Relating to Self-
Referencing Transactions

March 15, 2018.

I. Introduction

    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''), 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-2018-
001) to amend its CDS Clearing Supplement and its CDS Clearing 
Procedures in order to allow for the clearance and settlement of client 
transactions referencing the client's clearing broker, as well as to 
amend its Clearing Supplement to provide for the clearance of the 
Standard European Senior Non Preferred Financial Corporate Transaction 
type, and to make certain clarifying amendments.\3\ The proposed rule 
change was published for comment in the Federal Register on February 
15, 2018.\4\ The Commission did not receive comments on the proposed 
rule change. For the reasons discussed below, the Commission is 
approving the proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Capitalized terms used in this order, but not defined 
herein, have the same meaning as in the LCH SA Rules, CDS Clearing 
Supplement, or CDS Clearing Procedures.
    \4\ Securities Exchange Act Release No. 34-82675 (February 9, 
2018), 83 FR 6915 (February 15, 2018) (SR-LCH SA-2018-001) 
(``Notice'').
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II. Description of the Proposed Rule Change

    As currently constructed, LCH SA's rules prohibit certain ``self-
referencing'' transactions. Specifically, LCH SA prohibits, in the case 
of a house transaction,\5\ the clearing of single-name credit default 
swap (``SN CDS'') transactions where the reference entity underlying 
the SN CDS is the Clearing Member, or an affiliate of the Clearing 
Member, that is clearing the transaction. In the case of a client 
transaction, LCH SA currently prohibits clearing of a transaction in 
which the reference entity underlying the SN CDS is the client (or an 
affiliate of the client), or the clearing broker (or affiliate of the 
clearing broker) of the client that is clearing the CDS transaction.\6\
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    \5\ A house transaction is any Cleared Transaction registered in 
the House Trade Account of a Clearing Member. A House Trade Account, 
in turn, is an account opened by LCH SA at the request and in the 
name of a Clearing Member within the Account Structure of the 
Clearing Member in the CDS Clearing System in order to register 
Cleared Transactions cleared by such Clearing Member for its own 
account. See Section 1.1.1, Terms defined in the CDS Clearing Rule 
Book, LCH SA CDS Clearing Rule Book, 4 January 2018.
    \6\ Notice, 83 FR at 6915.
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    Under the proposed rule change, LCH SA would permit the clearing of 
client transactions where the reference entity underlying the SN CDS is 
the clearing broker, or an affiliate of the clearing broker, of the 
client clearing the transaction. Specifically, LCH SA would amend 
Section 4 of its CDS Clearing Procedures to revise the eligibility 
requirement for SN CDS to make a distinction between house and client 
self-referencing transactions in order to permit clients to clear CDS 
where the underlying reference entity is the client's clearing broker 
or an affiliate

[[Page 12448]]

thereof.\7\ House transactions where the underlying reference entity is 
the Clearing Member clearing the transaction would remain prohibited. 
In addition, client transactions where the underlying entity is the 
client clearing the transaction (or an affiliate of the client) will 
continue to be prohibited.\8\
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    \7\ Id.
    \8\ Id.
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    LCH SA also proposed to amend provisions in its Clearing Supplement 
that address self-referencing transactions to provide that a clearing 
broker would not be required to notify LCH SA when a client transaction 
occurs where the underlying reference entity is the clearing broker of 
the client clearing the transaction, but would continue to be required 
to notify LCH SA when a client transaction occurs where the underlying 
reference entity is the client that is clearing the transaction.\9\
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    \9\ Id. at 6915-16.
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    In addition to the changes regarding self-referencing transactions 
described above, LCH SA proposed amendments to the CDS Clearing 
Supplement to add (i) a reference to the Standard European Senior Non 
Preferred Corporate transaction type, (ii) to add a missing reference 
to the Standard European Financial Corporate transaction type, and 
(iii) to make certain clarifying edits regarding the underlying index 
transaction of a cleared index swaption transaction.\10\ LCH SA stated 
that no changes would need to be made to its risk methodology in 
connection with the addition of a reference to the Standard European 
Senior Non Preferred Corporate transaction type, as the risks specific 
to this transaction type would be captured by the framework developed 
for HoldCo entities that LCH SA previously implemented.\11\
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    \10\ Id. at 6916.
    \11\ 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.\12\ For the reasons given below, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the Act.
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    \12\ 15 U.S.C. 78s(b)(2)(C).
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    Section 17A(b)(3)(F) of the Act 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, 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 and, in general, to protect investors and the public 
interest.\13\ For the reasons stated below, the Commission finds that 
the proposed rule change is consistent with the requirements of Section 
17A(b)(3)(F) of the Act.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission has reviewed the terms and conditions of the 
contracts that LCH SA intends to clear pursuant to the proposed rule 
change and has determined that they are substantially similar to other 
contracts currently cleared by LCH SA, the key difference being, with 
respect to the Standard European Senior Non Preferred Corporate 
transaction type, that the reference obligation underlying such 
contracts represent a new debt class. In the case of the client ``self-
referencing'' transactions, the key difference will be that the 
underlying reference entity will be the clearing broker, or an 
affiliate of the clearing broker, of the client clearing the 
transaction.
    Based on a review of the Notice, LCH SA's Clearing Procedures and 
Clearing Supplement, the Commission believes that LCH SA's existing 
clearing arrangements and related financial safeguards, protections and 
risk management procedures will apply to these new transaction types on 
a substantially similar basis as other contracts currently cleared by 
LCH SA. In addition, the Commission believes that, as a result of 
accepting client transactions where the underlying reference entity is 
the clearing broker (or affiliate of the clearing broker) of the 
client, such transactions, which are currently executed in the 
bilateral market and uncleared, will now be eligible to be cleared and 
benefit from the operational efficiencies and risk management 
protections available in connection with central clearing.
    Therefore, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 17A(b)(3)(F) of the act 
regarding the prompt and accurate clearance and settlement of 
securities transactions and, to the extent applicable, derivative 
agreements, contracts, and transactions, the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible and, in general, to protect investors and 
the public interest.
    Section 19(b)(2)(C)(iii) of the Act allows the Commission to 
approve a proposed rule change earlier than 30 days after the date of 
publication of the notice of the proposed rule change where the 
Commission finds good cause for so doing and publishes the reason for 
the finding.\14\ The Commission finds good cause, pursuant to Section 
19(b)(2)(C)(iii) of the Act, for approving the proposed rule change on 
an accelerated basis prior to the 30th day after the date of 
publication of the notice in the Federal Register in order to 
facilitate the clearing of the Standard European Senior Non-Preferred 
Financial Corporate transaction type, which the Commission understands 
market participants will commence trading beginning on March 20, 2018 
\15\ and which are tied to European capital and resolution regulations.
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    \14\ 15 U.S.C. 78s(b)(2)(C)(iii).
    \15\ See IHS Markit iTraxx Europe Rule Announcement, February 6, 
2018 (stating that for iTraxx Europe Series 29, for French bank 
OpCos that qualify for inclusion in the index, the senior non-
preferred reference obligations will be selected if available).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \16\ and 
the applicable rules and regulations thereunder.
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    \16\ 15 U.S.C. 78q-1.
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\17\ that the proposed rule change (SR-LCH SA-2018-001) be, and hereby 
is, approved on an accelerated basis.\18\
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ 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.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-05648 Filed 3-20-18; 8:45 am]
 BILLING CODE 8011-01-P


