[Federal Register Volume 83, Number 201 (Wednesday, October 17, 2018)]
[Notices]
[Pages 52581-52586]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22540]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84410; File No. SR-LCH SA-2018-004]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to Implementation of Electronic Exercise Platform

October 11, 2018.

I. Introduction

    On August 24, 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 (the ``Proposed Rule Change'') to 
amend its (i) CDS Clearing Rule Book (``Rule Book''), (ii) CDS Clearing 
Supplement (``Supplement''), and (iii) CDS Clearing Procedures 
(``Procedures'') to incorporate new terms and to make conforming, 
clarifying, and clean-up changes to implement a new electronic exercise 
platform (``EEP'') for the exercise of options on index credit default 
swaps (``CDS Options'') by Clearing Members and their Clients. The 
proposed rule change was published for comment in the Federal Register 
on September 5, 2018.\3\ The Commission has not received any comments 
on the proposed rule 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. 34-83983 (Aug. 29, 
2018), 83 FR 45155 (Sept. 5, 2018) (SR-LCH SA-2018-004) 
(``Notice'').
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II. Description of the Proposed Rule Change

    The proposed rule change would create an EEP for CDS Options to 
capture and support decisions to exercise CDS Options by Clearing 
Members and their Clients.\4\ Currently, LCH SA matches a Clearing 
Member or Client holding the option to either buy or sell protection on 
the underlying index credit default swap (``CDS'') (``CDS Option 
buyer''), with a Clearing Member or Client obligated to either buy or 
sell protection, as applicable, on the underlying index CDS (``CDS 
Option seller'') (this transaction is a ``matched pair'').\5\ The 
creation of the matched pair allows the CDS Option buyer to exercise or 
abandon the CDS Option. If the CDS Option buyer exercises the CDS 
Option, the CDS Option buyer must notify the CDS Option seller manually 
via email and then inform LCH SA that the exercise notice has been 
successfully delivered. LCH SA then manually executes the exercise 
decisions and updates its risk system.
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    \4\ Capitalized terms used herein but not otherwise defined have 
the meaning set forth in the Rule Book, Supplement, and Procedures, 
which are available at https://www.lch.com/resources/rules-and-regulations/sa-rulebooks.
    \5\ For more information regarding the operation of CDS Options, 
see Exchange Act Release No. 34-82109 (Nov. 17, 2017), 82 FR 55905 
(Nov. 24, 2017) (SR-LCH SA 2017-006; SR-LCH SA-2017-007).
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    Under the proposed rule change, LCH would still create matched 
pairs to allow the exercise or abandonment of a CDS Option. The 
proposed rule change would, however, eliminate the manual notification 
process between the CDS Option buyer and CDS Option seller by 
providing, through the EEP, an electronic process for exercising CDS 
Options. Specifically, a CDS Option buyer would submit an intent 
through the EEP to either exercise or abandon the CDS Option (``Option 
Intent''). If validly submitted before the expiration date of the CDS 
Option, the Option Intent would serve as notice to the CDS Option 
seller that the CDS Option buyer is going to exercise or abandon the 
CDS Option. The proposed rule change would require Clearing Members and 
Clients to use the EEP system to exercise CDS Options. The proposed 
rule change would also require Clearing Members to delegate to Clients 
the ability to directly exercise CDS Options related to their cleared 
transactions (``Client Cleared Transactions''). The EEP would capture 
CDS Option buyers' exercise decisions in real time and notify the 
relevant CDS Option sellers in real time. In addition, the EEP would 
validate and check exercise decisions and facilitate the anonymous 
exercise of CDS Options.
    The proposed rule change would create and implement the EEP through 
amendments to LCH SA's Rule Book, Supplement, and Procedures. These 
amendments are summarized below according to how they affect: (i) The 
exercise of CDS Options directly by Clients; (ii) the operational 
process for the exercise of CDS Options in the EEP; and (iii) technical 
specifications of the EEP. The proposed rule change would also make 
other changes to the Rule Book, Supplement, and Procedures, as 
discussed below.

A. Exercise of CDS Options Directly by Clients

    The proposed rule change would add new provisions to allow for the 
exercise of CDS Options in the EEP directly by Clients.\6\ 
Specifically, with respect to those CDS Options transactions that are 
Client Cleared Transactions, new Section 6.4 of the Supplement would 
require Clearing Members to designate their relevant Clients to act on 
their behalf via the EEP.\7\ The Client so designated would be the 
Exercise Delegation Beneficiary. Moreover, the proposed rule change 
would amend the Rule Book to require that Clearing Members delegate to 
their Clients sufficient power to act on their behalf via the EEP and 
to ensure that their Clients have created an account in the LCH Portal 
for use of the EEP (``Client Portal Account'') before delegating such 
power.\8\ Finally, the proposed rule change would amend the Rule Book 
to require Clients to exercise their delegated power only through their 
Client Portal Account unless the EEP is or will be unavailable for the 
exercise of CDS Options (an ``EEP Failure Event'').\9\
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    \6\ The proposed rule change would also apply these provisions 
to FCM Clearing Members who clear credit-default swaps and CDS 
Options for their Clients. Notice, 83 FR at 45156.
    \7\ Notice, 83 FR at 45158.
    \8\ Notice, 83 FR at 45156.
    \9\ Id.
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    The proposed rule change would add similar provisions to Appendix 
VIII of the Supplement. Appendix VIII provides mandatory provisions 
that are incorporated into transactions between a Clearing Member and 
its Client. Changes to Appendix VIII are necessary to incorporate the 
conditions described above directly into the terms of the transaction 
between a Clearing Member and its Client. Specifically, the proposed 
rule change would add new Section 5, which would provide that the 
Clearing Member and its Client agree that the Clearing Member will 
designate

[[Page 52582]]

its Client as its Exercise Delegation Beneficiary with respect to 
Client Cleared Transactions.\10\ Moreover, new Section 5 would specify 
the conditions upon which an Option Intent submitted by an Exercise 
Delegation Beneficiary with respect to a Client Cleared Transaction 
will be deemed a valid notice to exercise or abandon a CDS Option.\11\ 
Specifically, such an Option Intent will be deemed valid if (i) the 
Client submits the Option Intent through its Client Portal Account; 
(ii) the Option Intent is submitted prior to 4.00 p.m. (London time) on 
the expiration date of the CDS Option; and (iii) LCH SA completes the 
steps necessary to make the intent available for viewing in the EEP, 
including validation of the EEP Controls (these controls are described 
further below in subsection C as part of the technical specifications 
of the EEP).\12\
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    \10\ Notice, 83 FR at 45161.
    \11\ Id.
    \12\ Notice, 83 FR at 45161. The proposed rule change would 
define the term ``EEP Controls'' as the controls that LCH SA 
performs immediately following the submission of an Option Intent. 
These controls are described in Section 5 of the Procedures. If an 
Option Intent does not pass these controls it is not made available 
for viewing in the EEP by the Option Seller, and thus will not be 
deemed a valid notice to exercise or abandon a CDS Option.
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    The proposed rule change would also limit LCH SA's liability 
associated with Clients using the EEP to exercise their CDS Options. 
The proposed rule change would amend the Rule Book to eliminate LCH 
SA's liability for (i) any damage caused to a Clearing Member by its 
Client exercising or not exercising a CDS Option in the EEP and (ii) 
any improper use or disclosure by a third party, including a Client, of 
information made available at the request of a Clearing Member.\13\ The 
proposed rule change would add a new Section 13(b) to the Supplement to 
eliminate LCH SA's liability to a Clearing Member for any cost or 
expense arising out of any failure of an Exercise Delegation 
Beneficiary to perform its obligations in relation with a delegation or 
in connection with the exercise or abandonment of a CDS Option.\14\ 
Additionally, the proposed rule change would amend Section 13(d), which 
currently provides that LCH SA will have no responsibility to verify 
the contents of any notice received by it from any Clearing Member 
under the terms of any Cleared Transaction.\15\ The proposed rule 
change would amend Section 13(d) to clarify that this limitation on 
responsibility also applies to any notice received from an Exercise 
Delegation Beneficiary of a Clearing Member.
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    \13\ Notice, 83 FR at 45156.
    \14\ Notice, 83 FR at 45160.
    \15\ Notice, 83 FR at 45160.
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B. Operational Process for the Exercise of CDS Options in the EEP

    The proposed rule change would make a number of amendments to the 
Rule Book and Supplement to further specify the operational process for 
the exercise of CDS Options in the EEP.
    First, the proposed rule change would add defined terms to the Rule 
Book and Supplement relevant to the creation and implementation of the 
EEP.\16\ Moreover, the proposed rule change would amend existing 
defined terms both to account for exercise of CDS Options through the 
EEP and to correct typographical errors.\17\
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    \16\ For an explanation of the definition of each of these 
terms, see Notice, 83 FR at 45156-45157.
    \17\ Notice, 83 FR at 45156-45157.
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    Second, the proposed rule change would make a number of 
modifications and additions to Section 6 to provide for the operation 
of the new EEP. The proposed rule change would facilitate the anonymous 
exercise of CDS Options by removing the requirement that LCH SA notify 
the CDS Option buyer and CDS Option seller of their respective 
identifies.\18\ Instead, LCH SA would keep the identities and contact 
information of the CDS Option buyer and CDS Option seller in a 
protected report (the ``Protected Exercise Matched Pair Report''), and 
it would provide access to this report only during an EEP Failure 
Event, as discussed below.\19\
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    \18\ Notice, 83 FR at 45157.
    \19\ The proposed rule change would add a new Section 5.8 to 
Appendix VIII of the Supplement to require Clients to consent to the 
disclosure of their address, fax number, telephone number, contact 
email address (and any other applicable notice details) by their 
Clearing Members to LCH SA and by LCH SA in any Protected Exercise 
Matched Pair Report. Notice, 83 FR at 45162.
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    The proposed rule change would also describe the circumstances in 
which LCH SA would consider the exercise of a CDS Option via the EEP to 
be valid in new Section 6.3. Specifically, the proposed rule change 
would provide that an Option Intent is a valid notice to exercise or 
abandon a CDS Option if the CDS Option buyer submits the Option Intent 
prior to 4.00 p.m. (London time) and LCH SA has completed those steps 
necessary to make such Option Intent available for viewing in the EEP, 
including validation of the EEP Controls (discussed below).\20\
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    \20\ Notice, 83 FR at 45157-45158.
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    The proposed rule change would also provide procedures for exercise 
of CDS Options during an EEP Failure Event.\21\ Specifically, new 
Section 6.5 would require LCH SA to notify Clearing Members and their 
Exercise Delegation Beneficiaries of the EEP Failure Event and the 
subsequent resolution of the event.\22\ Following the occurrence of the 
EEP Failure Event, Clearing Members (or their Exercise Delegation 
Beneficiaries, as applicable) would be authorized to access the 
information contained in the Protected Exercise Matched Pair Report 
regarding the identity and contact information of the other Clearing 
Member (or Exercise Delegation Beneficiary) within the matched 
pair.\23\ During an EEP Failure Event, exercise or abandonment of CDS 
Options would fall back to the existing manual delivery process using 
the contact information from the Protected Exercise Matched Pair 
Report. For an exercise or abandonment to be effective, a Clearing 
Member (or its Exercise Delegation Beneficiary) would be required to 
notify LCH SA of such exercise of abandonment by no later than 5.00 
p.m. (Central European Time) on the expiration date of the CDS 
Option.\24\
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    \21\ The proposed rule change would also amend Appendix VIII of 
the Supplement, regarding mandatory terms that are incorporated into 
transactions between a Clearing Member and its Client, to add 
provisions that mirror these procedures.
    \22\ Notice, 83 FR at 45158.
    \23\ Notice, 83 FR at 45158.
    \24\ Id.
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    The proposed rule change would also address the circumstances under 
which a CDS Option transaction will be terminated taking into account 
implementation of the EEP. Specifically, the proposed rule change would 
terminate a CDS Option where the CDS Option buyer elects to abandon the 
CDS Option or fails to submit an Option Intent by the expiration date 
of the CDS Option.\25\ Moreover, the proposed rule change would allow 
LCH SA to terminate a CDS Option if the CDS Option buyer does not 
submit an Option Intent by the expiration date of the CDS Option or if 
there is an EEP Failure Event and LCH SA does not receive a notice of 
exercise or abandonment by 5.00 p.m. (Central European Time) on the 
expiration date.\26\
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    \25\ Id.
    \26\ If there is an EEP Failure Event and LCH SA does not 
receive a notice of exercise or abandonment by 5.00 p.m. (Central 
European Time) on the expiration date, the proposed rule change 
would provide that LCH may, in its sole discretion, give effect to 
the terms of the notice if LCH determines that the notice was in 
fact delivered and would have been effective. If LCH SA determines 
that it is not possible to give effect to the terms of such notice, 
then the relevant Clearing Members in a matched pair (or their 
Exercise Delegation Beneficiaries, as applicable) would have rights 
against each other for settlement payment as though parties to a 
bilateral credit default swap transaction on the terms of the 
relevant underlying index. Notice, 83 FR at 45158-45159.

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[[Page 52583]]

    The proposed rule change would address situations where 
communications failures at Clearing Members and their Clients prohibit 
access to the EEP.\27\ Specifically, new Section 6.10 would provide 
that if a Clearing Member or its Exercise Delegation Beneficiary 
experiences a significant communications or information technology 
failure resulting in it being impossible or impracticable to use EEP (a 
``Clearing Member Communications Failure Event''), such Clearing Member 
or its Exercise Delegation Beneficiary shall deliver notices to, and 
receive notices from, LCH SA using the existing manual exercise 
process.\28\ New Section 6.10 would further specify that upon receipt 
of such notice, LCH SA will submit the notice to the EEP system for 
processing by submitting an Option Intent in respect of such notice. 
New Section 6.10 would further specify the conditions in which such a 
notice would be deemed valid, including submission of the Option Intent 
prior to 4.00 p.m. (London time) and LCH SA has completed those steps 
necessary to make such Option Intent available for viewing in the EEP, 
including validation of the EEP Controls (discussed below).\29\
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    \27\ The proposed rule change would also amend Appendix VIII of 
the Supplement, regarding mandatory terms that are incorporated into 
transactions between a Clearing Member and its Client, to add 
provisions that mirror these procedures. Notice, 83 FR at 45161.
    \28\ Notice, 83 FR at 45159.
    \29\ Id.
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    New Section 6.10 would further require a Clearing Member or 
Exercise Delegation Beneficiary affected by a Clearing Member 
Communications Failure Event to notify LCH SA of the occurrence of the 
communications failure event using the form notice set out in the 
Appendix of the Supplement.\30\ Similarly, section 6.10 would require 
an affected Clearing Member or Exercise Delegation Beneficiary to 
notify LCH SA as soon as reasonably practicable when no longer subject 
to a communications failure event, in which case the requirement to use 
the EEP would resume.\31\
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    \30\ Notice, 83 FR at 45159.
    \31\ Id.
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    Finally, new Section 6.10(e) would require a Clearing Member or 
Exercise Delegation Beneficiary subject to a Clearing Member 
Communications Failure Event to use reasonable efforts to (i) mitigate 
the operational impact on other Clearing Members and LCH SA of any such 
event; (ii) cure such event as soon as reasonably practicable; and 
(iii) ensure that the circumstances which caused such event do not 
recur.\32\
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    \32\ Notice, 83 FR at 45159.
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    Third, the proposed rule change would also make various changes to 
Section 8 of the Supplement regarding delivery of notices. The proposed 
rule change would first amend Section 8.1(a) to make clear that Section 
8.1(a) is subject to new Section 6.3.\33\ Section 8.1(a) provides 
general conditions for the effectiveness of notices delivered in 
respect of cleared transactions, and Section 6.3, as discussed above, 
provides specific conditions for the effectiveness of notices delivered 
via the EEP. The proposed rule change would next amend Section 8.1(b) 
to implement certain conforming changes regarding notices from or to 
LCH SA in the EEP, including with respect to the occurrence of an EEP 
Failure Event.\34\ Additionally, the proposed rule change would amend 
Section 8.1(c) to provide that notices shall be given to the name and 
address provided in the Protected Exercise Matched Pair Report.\35\
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    \33\ Notice, 83 FR at 45160.
    \34\ Id.
    \35\ Notice, 83 FR at 45160.
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    The proposed rule change would also renumber Section 8.2 as new 
Section 8.3. The proposed rule change would then delete the existing 
Section 8.3 as well as the existing Section 8.4.\36\ Both of these 
sections would no longer be applicable after the implementation of EEP. 
The proposed rule change would renumber Section 8.5 as new Section 8.2 
and make certain conforming changes to account for the delivery of the 
Protected Exercise Matched Pair Report.\37\ The proposed rule change 
would also describe the procedures to be used if LCH SA does not 
provide the Protected Exercise Matched Pair Report. In such a case, 
clearing members may deliver notices to exercise or abandon CDS Options 
directly to LCH SA and vice versa.\38\
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    \36\ Id.
    \37\ Id.
    \38\ Id.
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    Fourth, the proposed rule change would add a new Appendix VI to 
serve as the form to be used by a Clearing Member or Client to notify 
LCH SA that it is subject to a Clearing Member Communications Failure 
Event and a new Appendix VII to serve as the form to notify LCH SA that 
it is no longer subject to such an event.\39\
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    \39\ Id.
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C. Technical Specifications of the EEP

    The technical specifications of the EEP would be set out in 
amendments to Section 5 of the Procedures. Specifically, the proposed 
rule change would add a definition of ``LCH Portal'' to Section 5.3(f). 
``LCH Portal'' would be defined as a single sign-on solution for 
various LCH SA applications to which Clearing Members may have access 
over secured internet.\40\ The proposed rule change would revise 
Section 5.16 to add a new paragraph entitling a Clearing Member to 
request that all or part of the reports provided under Section 5.16 be 
made available on the Client Portal Account.\41\
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    \40\ Notice, 83 FR at 45162.
    \41\ Id.
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    The proposed rule change would also amend Section 5.16(a)(i)(J) to 
replace all references to ``Cleared Transaction Exercise Report'' with 
``Protected Exercise Matched Pairs Report'' to reflect the new 
reporting structure in EEP.\42\ The proposed rule change would further 
specify the timing for ICEEU's preparation of the Protected Exercise 
Matched Pairs Report and that such report will only be made accessible 
following the occurrence of an EEP Failure Event.\43\
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    \42\ Id.
    \43\ Id.
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    The proposed rule change would delete the current Section 
5.16(c)(ii), regarding reports of open interest in CDS Options, because 
such a report would no longer be applicable after the proposed rule 
change.\44\ The proposed rule change would renumber current Section 
5.16(c)(iii) as a new Section 5.16(c)(ii) and current Section 
5.16(c)(iv) as a new Section 5.16(c)(iii).
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    \44\ Id.
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    The proposed rule change would add a new Section 5.19 to require 
Clearing Members to notify LCH SA when they delegate power to exercise 
or abandon CDS Options to their Clients by sending a completed and 
signed notification form to LCH SA via email.\45\
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    \45\ Notice, 83 FR at 45162.
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    The proposed rule change would add a new Section 5.19.2 to describe 
the EEP Controls that LCH SA will use to determine that an Option 
Intent is validly submitted. Specifically, upon a submission of an 
Option Intent in the EEP, LCH SA will carry out logicality controls to 
identify an intent which could have been submitted in the EEP in 
error.\46\ The controls will be based on the relative position or the 
price of the exercise compared to reference prices provided in the 
EEP.\47\ LCH SA will not register in the EEP any intent which does not 
pass such controls, and LCH SA will inform the applicable Clearing 
Member or Exercise Delegation Beneficiary. The Clearing Member or

[[Page 52584]]

Exercise Delegation Beneficiary may then choose to re-submit such 
intent or make a ``Force Submission.'' \48\ A Force Submission occurs 
when the Clearing Member or its Exercise Delegation Beneficiary elects 
to bypass the controls by specifying ``Confirm'' or ``Force'' when 
submitting the Option Intent.\49\ LCH SA will not carry out controls on 
such an Option Intent.\50\
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    \46\ Id.
    \47\ Id.
    \48\ Id.
    \49\ Id.
    \50\ Id.
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    New Section 5.19.2 would further specify that, before registering 
any Option Intent, LCH SA will ensure that such intent (i) is submitted 
by a user who (a) is connected with the proper user ID and password and 
(b) based on such ID and password, is duly authorized to exercise or 
abandon, as applicable, the relevant CDS Options; (ii) has not already 
been submitted in the EEP (other than as a partial Exercise); and (iii) 
passes the logicality controls or is a Force Submission.\51\
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    \51\ Notice, 83 FR at 45162.
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D. Other Changes

    The proposed rule change would make a number of other changes 
related to CDS Options. First, the proposed rule change would make a 
number of amendments regarding restructuring of CDS Options following a 
credit event in respect of an entity referenced by the index underlying 
the CDS Option.\52\ The proposed rule change would maintain the 
existing manual notification process for transactions in restructured 
CDS Options. To that end, the proposed rule change would delete a 
number of provisions from Section 8 of the Supplement, which currently 
contains the manual notification process, and reinstate them in Section 
5, which sets out the procedures for restructured CDS Options.\53\ 
Similarly, the proposed rule change would make changes to Section 7 of 
the Supplement regarding settlement of restructured CDS Options. The 
proposed rule change would also amend Section 7.2 of the Supplement to 
incorporate the term ``Auction Final Price Determination Date'' in 
order to correct an inaccurate reference in the current version of the 
Supplement.\54\ Additionally, the proposed rule change would amend 
Section 7.3(b)(ii) of the Supplement to clarify that a valid Credit 
Event Notice must be delivered or deemed to be delivered in respect for 
subsections (x) and (y) of Section 7.3(b)(ii) to apply.\55\ Finally, 
the proposed rule change would correct typographical errors in Sections 
7.3 and 7.4(a) of the Supplement.\56\
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    \52\ Notice, 83 FR at 45157.
    \53\ Id.
    \54\ Notice, 83 FR at 45160.
    \55\ Notice, 83 FR at 45160.
    \56\ Id.
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    Second, the proposed rule change would update Section 9 of the 
Supplement, regarding the creation of matched pairs. The proposed rule 
change would delete Sections 9.1(c) and (d) to remove the requirement 
that, to the extent possible, each matched pair of a CDS Option have an 
amount which is an integral multiple of Euro 1,000,000 subject to a 
maximum of Euro 100,000,000.\57\ Although this change is unrelated to 
the implementation of EEP, LCH SA does not believe this condition is 
necessary any longer, so the proposed rule change would update the 
Supplement accordingly.
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    \57\ Id.
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    Finally, the proposed rule change would make typographical 
corrections, update conforming references, and revise numbering 
throughout the Rule Book, Supplement, and Procedures, as necessary.

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.\58\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \59\ and Rules 17Ad-22(e)(1), (e)(17)(i)-(ii), and (e)(18) 
thereunder.\60\
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    \58\ 15 U.S.C. 78s(b)(2)(C).
    \59\ 15 U.S.C. 78q-1(b)(3)(F).
    \60\ 17 CFR 240.17Ad-22(e)(1), (e)(17)(i)-(ii), and (e)(18).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of LCH SA 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 or control of LCH SA or for which it is responsible, and, in 
general, to protect investors and the public interest.\61\
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    \61\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that by eliminating the existing manual 
notification process and replacing it with an electronic one, the EEP, 
in general, would promote the efficient and effective exercise of CDS 
Options. The EEP would eliminate the possible delays, errors, and 
miscommunications that can result from manual notification via email. 
In doing so, the Commission believes the EEP would promote the prompt 
and accurate clearance and settlement of CDS Options transactions by 
providing a means for the efficient exercise of CDS Options. Moreover, 
in reducing the likelihood of delays, errors, and miscommunications as 
compared to the existing manual notification process, the Commission 
believes that the EEP would reduce the likelihood of disputes over the 
exercise of CDS Options and the possibility that LCH SA may not 
accurately capture a CDS Option buyer's intent to abandon or exercise a 
CDS Option. In this regard, the Commission believes the EEP would help 
assure the safeguarding of securities and funds relating to CDS Options 
which are in the custody or control of LCH SA or for which it is 
responsible by helping LCH SA to avoid disruptions to its operations 
which could, in turn, impede access to securities and funds required in 
connection with the exercise or abandonment of CDS Options. For both of 
these reasons, the Commission also believes that the EEP, in general, 
would protect investors and the public interest. Thus, the Commission 
believes that the EEP, in general, would be consistent with Section 
17A(b)(3)(F) of the Act.\62\
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    \62\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission further believes that the specific aspects of the 
proposed rule change that would facilitate the operation of the EEP 
would also be consistent with Section 17A(b)(3)(F).\63\ Specifically, 
the Commission believes that in (i) adding new defined terms (and 
modifying existing defined terms accordingly); (ii) defining the 
circumstances in which LCH SA would consider the exercise of a CDS 
Option via the EEP to be valid; (iii) providing the circumstances in 
which LCH SA would terminate a CDS Option; and (iv) establishing the 
enforceability of notices delivered via the EEP, the proposed rule 
change would provide the legal basis for operation of the EEP. 
Similarly, by providing the technical specifications of the EEP 
(including defining the applications and reports associated with the 
EEP) and establishing the controls LCH SA would use to determine if an 
Option Intent was submitted correctly and by an authorized user, the 
Commission believes the proposed rule change would provide the 
technological basis for operation of the EEP. The Commission believes 
that these aspects of the proposed rule change would

[[Page 52585]]

thereby promote the use and operation of the EEP for executing CDS 
Options transactions and therefore would promote the prompt and 
accurate clearance and settlement of such transactions, consistent with 
Section 17A(b)(3)(F).\64\
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    \63\ 15 U.S.C. 78q-1(b)(3)(F).
    \64\ 15 U.S.C. 78q-1(b)(3)(F).
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    Similarly, the Commission believes that the provisions of the 
proposed rule change facilitating the exercise of CDS Options in the 
EEP directly by Clients would promote the prompt and accurate clearance 
and settlement of CDS Options. The Commission believes that if Clients 
were not able to exercise their CDS Options directly in the EEP they 
would have to rely on Clearing Members to do so on their behalf, which 
would require communicating their intentions to Clearing Members 
accurately and with sufficient time to allow Clearing Members to act 
before expiration of the CDS Options. In contrast, allowing Clients to 
exercise their CDS Options directly in the EEP should be more efficient 
than, and avoid possible delays and miscommunications associated with, 
Clearing Members exercising CDS Options on behalf of Clients. As a 
result, the Commission believes the proposed rule change would promote 
the prompt and accurate clearance and settlement of CDS Option 
transactions by providing Clients a more efficient means for the 
exercise of their CDS Options.
    Finally, the Commission believes that the other changes discussed 
above are consistent with Section 17A(b)(3)(F) of the Act.\65\ 
Specifically, by consolidating provisions regarding delivery of notices 
with provisions regarding restructuring of CDS Options and making other 
updates regarding restructuring of CDS Options, the Commission believes 
the proposed rule change would allow the existing notification process 
for restructuring of CDS Options to continue after implementation of 
the EEP. This would allow LCH SA to continue clearing and settling 
restructured CDS Options outside of the EEP, thereby helping to promote 
the prompt and accurate clearance and settlement of restructured CDS 
Options. Moreover, the Commission believes that updating Section 9 of 
the Supplement to remove the inapplicable provisions regarding the 
creation of matched pairs would help ensure that LCH SA continues to 
create matched pairs consistently, which is necessary to pair CDS 
Option buyers and CDS Option sellers for purposes of executing or 
abandoning CDS Options. The Commission therefore believes that these 
aspects of the proposed rule change would promote the prompt and 
accurate clearance and settlement of CDS Option transactions.
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    \65\ 15 U.S.C. 78q-1(b)(3)(F).
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    Therefore, for all of the above reasons the Commission finds that 
the proposed rule change would promote the prompt and accurate 
clearance and settlement of CDS Options transactions, assure the 
safeguarding of securities and funds in LCH SA's custody and control, 
and, in general, protect investors and the public interest, consistent 
with the Section 17A(b)(3)(F) of the Act.\66\
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    \66\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1) of the Act

    Rule 17Ad-22(e)(1) requires that LCH SA 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.\67\
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    \67\ 17 CFR 240.17Ad-22(e)(1).
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    As discussed above, the Commission believes that the proposed rule 
change would provide the legal basis for operation of the EEP by (i) 
adding new defined terms (and modifying existing defined terms 
accordingly); (ii) establishing the circumstances in which LCH SA would 
consider the exercise of a CDS Option via the EEP to be valid; and 
(iii) defining the circumstances in which LCH SA would terminate a CDS 
Option. Moreover, the Commission believes the proposed rule change, in 
making typographical corrections, updating conforming references, and 
revising numbering throughout the Rule Book, Supplement, and 
Procedures, would help ensure the consistency and accuracy of the Rule 
Book, Supplement, and Procedures after implementation of the EEP, 
thereby further helping to establish the legal basis for operation of 
the EEP.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(e)(1).\68\
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    \68\ 17 CFR 240.17Ad-22(e)(1).
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C. Consistency With Rules 17Ad-22(e)(17)(i)-(ii) of the Act

    Rule 17Ad-22(e)(17)(i)-(ii) requires that LCH SA establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to manage its operational risks by identifying the 
plausible sources of operational risk, both internal and external, and 
mitigating their impact through the use of appropriate systems, 
policies, procedures, and controls and ensuring that systems have a 
high degree of security, resiliency, operational reliability, and 
adequate, scalable capacity.\69\
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    \69\ 17 CFR 240.17Ad-22(e)(17)(i), (ii).
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    The Commission believes that, in replacing the existing manual 
notification process, the EEP would reduce LCH SA's operational risks 
associated with clearing and settling CDS Options. For example, the EEP 
would check whether an Option Intent was erroneous based on the 
relative position or the price in the Option Intent compared to 
reference prices provided in the EEP. Such validity checks are not a 
feature of the current notification process, and the Commission 
believes that these checks would reduce the likelihood that an Option 
Intent is submitted in error or otherwise miscommunicated. This, in 
turn, would reduce the risk to LCH SA that it does not accurately 
capture or execute a Clearing Member's or a Client's intent in 
exercising or abandoning a CDS Option. Moreover, under the EEP, if a 
CDS Option buyer submits an Option Intent before the exercise deadline 
and it passes the EEP validation checks, the notice of exercise or 
abandonment would be deemed legally delivered by LCH SA to the CDS 
Option seller on a real time basis. The Commission believes that this 
feature of the EEP would help reduce the possibility that LCH SA could 
fail to carry out a Clearing Member's or a Client's intent in 
exercising a CDS Option, further reducing LCH SA's operational risks in 
clearing and settling CDS Option transactions.
    The proposed rule change would establish procedures for the 
exercise of CDS Options in the case of the EEP not being operational or 
a Clearing Member or Client being unable to access the EEP due to a 
Clearing Member Communications Failure Event. In addition, the proposed 
rule change would require Clearing Members and Clients to (i) mitigate 
the impact of a Clearing Member Communications Failure Event; (ii) cure 
such event as soon as reasonably practicable; and (iii) ensure that the 
circumstances which caused such event do not recur. The Commission 
believes that these procedures, which would fall back on the existing 
manual notification process in place of the EEP, would provide a 
reasonable alternative in circumstances where the EEP is unavailable or 
inaccessible. The Commission further believes that these procedures, in 
providing another means to exercise CDS Options, would help mitigate 
the impact to Clearing Members and Clients from a malfunction of the 
EEP or a

[[Page 52586]]

communications failure. Thus, the Commission believes that these 
alternative procedures would help ensure the resiliency and operational 
reliability of the EEP by providing a means to exercise CDS Options 
where the EEP is unavailable or inaccessible.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rules 17Ad-22(e)(17)(i)-
(ii).\70\
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    \70\ 17 CFR 240.17Ad-22(e)(17)(i)-(ii).
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D. Consistency With Rule 17Ad-22(e)(18)

    Rule 17Ad-22(e)(18) requires that LCH SA establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to establish objective, risk-based, and publicly disclosed 
criteria for participation, which permit fair and open access by direct 
and, where relevant, indirect participants and other financial market 
utilities, require participants to have sufficient financial resources 
and robust operational capacity to meet obligations arising from 
participation in the clearing agency, and monitor compliance with such 
participation requirements on an ongoing basis.\71\
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    \71\ 17 CFR 240.17Ad-22(e)(18).
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    The Commission believes that by allowing Clients to exercise CDS 
Options in the EEP directly, the proposed rule change would establish 
objective and publicly disclosed criteria for Clients to participate in 
the EEP. Specifically, the proposed rule change would, as discussed 
above, require Clearing Members to designate their relevant Clients to 
act on their behalf via the EEP with respect to those CDS Options 
transactions that are Client Cleared Transactions. The proposed rule 
change would also require that Clearing Members delegate to their 
Clients sufficient power to act on their behalf via the EEP and require 
Clients to exercise that power through their Client Portal Account on 
the EEP. Finally, the proposed rule change would add provisions to 
Appendix VIII of the Supplement to incorporate these conditions 
directly into the terms of the transaction between a Clearing Member 
and its Client. The Commission believes that these aspects of the 
proposed rule change would establish the objective and public criteria 
that Clients must follow to directly access the EEP and participate in 
exercising CDS Options at LCH SA. Moreover, the Commission believes 
these aspects of the proposed rule change would permit fair and open 
access by Clients by requiring Clearing Members to designate their 
relevant Clients to act on their behalf in exercising their CDS 
Options.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(e)(18).\72\
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    \72\ 17 CFR 240.17Ad-22(e)(18).
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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, Section 17A(b)(3)(F) of the Act \73\ and Rules 17Ad-
22(e)(1), (e)(17)(i)-(ii), and (e)(18) thereunder.\74\
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    \73\ 15 U.S.C. 78q-1(b)(3)(F).
    \74\ 17 CFR 240.17Ad-22(e)(1), (e)(17)(i)-(ii), (e)(18).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-LCH SA-2018-004) be, and hereby is, 
approved.\75\
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    \75\ In approving the proposed rule change, the Commission 
considered the proposal's impacts 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.\76\
Eduardo A. Aleman,
Assistant Secretary.
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    \76\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-22540 Filed 10-16-18; 8:45 am]
 BILLING CODE 8011-01-P


