[Federal Register Volume 84, Number 209 (Tuesday, October 29, 2019)]
[Notices]
[Pages 57897-57903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23552]



[[Page 57897]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87388; File No. SR-LCH SA-2019-008]


Self-Regulatory Organizations; LCH SA; Notice of Filing of a 
Proposed Rule Change Relating to the Updated 2018 Version of the 
Recovery Plan

October 23, 2019.
    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 October 8, 2019, 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 adopt an updated recovery plan (the ``RP'') 
in accordance with Rule 17Ad-22(e)(3)(ii). The text of the proposed 
rule change has been annexed as Exhibit 5. LCH SA has requested 
confidential treatment of the material submitted 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
    On September 28, 2016, the Securities and Exchange Commission (the 
``Commission'') adopted amendments to Rule 17Ad-22 \3\ pursuant to 
Section 17A of the Securities Exchange Act of 1934 (the ``Act'') \4\ 
and the Payment, Clearing and Settlement Supervision Act of 2010 
(``Clearing Supervision Act'') \5\ to establish enhanced standards for 
the operation and governance of those clearing agencies registered with 
the Commission that meet the definition of a ``covered clearing 
agency,'' as defined by Rule 17Ad-22(a)(5) \6\ (collectively, the new 
and amended rules are herein referred to as ``CCA rules'').
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    \3\ 17 CFR 240.17Ad-22.
    \4\ 15 U.S.C. 78q.
    \5\ 12 U.S.C. 5461 et seq.
    \6\ 17 CFR 240.17Ad-22(a)(5).
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    LCH SA is a covered clearing agency under the CCA rules and 
therefore is subject to the requirements of the CCA rules, including 
Rule 17Ad-22(e)(3). The CCA rules require that covered clearing 
agencies, among other things, ``establish, implement, maintain and 
enforce written policies and procedures reasonably designed to . . . 
maintain a sound risk management framework for comprehensively managing 
legal, credit, liquidity, operational, general business, investment, 
custody, and other risks that arise in or are borne by the covered 
clearing agency, which . . . includes plans for the recovery and 
orderly wind-down of the covered clearing agency necessitated by credit 
losses, liquidity shortfalls, losses from general business risk, or any 
other losses''.\7\ As a central counterparty recognized under the 
European Market Infrastructure Regulation (``EMIR''),\8\ LCH SA is also 
subject to prudential requirements, as well as requirements regarding 
its operations and oversight. As a credit institution based in the 
European Union, LCH SA is also subject to Directive 2014/59/EU, as 
supplemented, requiring institutions to draw up and maintain recovery 
plans setting forth options for measures to be taken by the institution 
to restore its financial position following a significant deterioration 
of its financial position.
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    \7\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \8\ Regulation (EU) No 648/2012 of the European Parliament and 
of the Council of 4 July 2012 on OTC derivatives, central 
counterparties and trade repositories.
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    Specific guidance has been given on Recovery for CCP by CPMI IOSCO. 
Within the CPMI IOSCO principles for financial market infrastructures 
(PFMI) it is outlined that all systemically important FMIs should have 
a comprehensive and effective recovery plan. For this purpose, it has 
issued the report ``recovery of financial market infrastructures'' 
containing guidance on recovery plans, content of a recovery plan in 
October 2014 and a guidance relating resilience and recovery in 2017.
    Furthermore, regulations are under preparation on a European level 
outlining the Recovery and Resolution measures for CCPs.
    As described in more detail below, the purpose of the RP is to 
maintain the continuity of critical services in times of extreme stress 
and to facilitate the recovery of LCH SA agency. Among other things, 
the RP seeks to: (i) Identify if and to what level LCH SA's service are 
critical for the market and what internal or external services/systems 
are critical for the continuity of LCH SA's activity; (ii) outline the 
scenario under which recovery of the LCH SA might be necessary; (iii) 
define the early warning indicators and triggers for initiating the 
recovery measures under the RP, including the market conditions or 
events that could trigger it; (iv) define the governance framework to 
trigger these recovery measures; (v) identify the available recovery 
tools to manage crisis situations and to restore business as usual; and 
(vi) perform a quantitative and qualitative assessment if the recover 
tools meet the CPMI IOSCO criteria for recovery instruments.
    The RP also includes a detailed summary of the overall business and 
regulatory framework that LCH SA operates in, including identification 
of applicable regulations, company structure, detail regarding the LCH 
SA business lines and geographical spread, and information regarding 
the interaction between LCH SA and its parent entity (the ``Parent'').
    The RP also contains an FMI analysis, which analyses LCH SA 
relationship with other financial market infrastructure (e.g. 
settlement platforms, trade repositories, etc) and institutions used by 
LCH SA or its clearing members such a payment and settlement agents.
    The RP covers all scenarios, which may potentially prevent LCH SA 
from providing its critical services:

--The default of one or multiple Clearing Member(s) on one or several 
of its markets, where LCH SA has to re-establish the matched book and 
may have allocate any uncovered credit losses to its own capital or to 
surviving clearing members.
--Potential and actual liquidity shortfalls as result of a clearing 
member or allied clearing house default.
--The default of an investment counterparty of LCH SA or any other 
investment losses resulting from changes in the market value on the 
investments.
--A loss resulting from an operational risk event or any other event 
which impacts the critical services provided by LCH SA and particularly 
legal and operational risk (including Fraud) which finally would erode 
LCH SA's capital.

[[Page 57898]]

--Failure of a critical IT service provider. A special focus has been 
made on LCH Ltd as a provider of critical services to LCH SA given the 
fact that LCH Ltd is also a CCP and part of the same group.
--Poor business performance or loss of critical contracts with 
Exchanges.
--Operational or financial failure of an FMI (e.g. allied clearing 
house/(I) CSD/Trades Repository).

    The updated 2018 version of the RP includes the following main 
improvements:

--CC&G Rulebook changes: Consultation with clearing members and 
National Competent Authorities have been completed and LCH SA has 
implemented the rules relating to CC&G service closure during 2018. 
This has resolved a potential liquidity risk relating to a CC&G 
default.
--Critical service providers: LCH SA has implemented a new framework to 
manage critical service providers, this framework has been approved in 
the LCH SA Board and a new list of critical service providers has been 
put together which is part of this RP.
--Cyber scenario: The RP includes now more details on the management of 
a cyber-scenario and the Cyber Crisis Management Plan has been added as 
a new recovery tool. The purpose of this document is to provide a 
framework of procedures allowing LCH SA to respond to cyber incidents 
in case of cyber crisis. As such, the process defined is to be 
activated in case of detection of a cyber incident that could 
potentially cause a significant impact on LCH SA business objectives.
--Capital related recovery tools: The quantitative assessment section 
of the recovery plan now includes more details on the monitoring of 
capital related recovery tools like surplus capital, variable payments 
and dividend payments.
--Recovery tools for non-Euro transactions and collateral: LCH SA has 
to its disposal GMRA's to raise liquidity on USD and GBP, access to FX 
markets and can perform payments in alternative currency (EUR) as a 
last resort.
--LCH Ltd exit plan: LCH Ltd provides IT services to LCH SA and a 
practical approach on how LCH SA will manage a potential wind down of 
LCH Ltd is now included in the RP.
1. Identification of Critical Services and Operations
    With respect to the critical services that might impact the 
continuity of LCH SA's operations, the proposed RP provides that an 
assessment has been done in accordance with guidance by the Financial 
Stability Board (``FSB'') on identification of critical functions and 
shared services. LCH SA has assessed that the clearing services LCH SA 
provides to participants with respect to the markets identified in the 
RP are deemed critical for purposes of the RP. Overall the services 
provided in respect of all markets are critical because: (1) The volume 
of the activity on certain markets may be very significant, (2) most of 
the business on the relevant market is cleared through LCH SA or (3) 
the suspension of the clearing service could impact materially the 
functioning of the market; the level of global market share with 
respect to certain products is high; and LCH SA's service are used by 
significant clearing firms. Moreover, a transfer of the clearing 
activity to another CCP is technically and organizationally complex to 
perform on short notice.
    The RP also identifies those shared operations which LCH SA depends 
on to perform critical services to members, including those critical 
departments and services and systems within its corporate group and 
those provided by others. The RP identifies the main operating units 
within LCH SA that play a critical role in providing services as well 
as those enterprise systems that are critical for LCH SA's ongoing 
operations. Such systems are categorized as (i) Tier 1 Enterprise 
Critical (which is the most important category and where a failure may 
have direct impact on the continued functioning of LCH SA); (ii) Tier 2 
Business Critical (which is a category of systems where business may 
not be able to proceed as usual in the event of a failure); and (iii) 
Tier 3 Business Support (which are non-critical systems). In addition, 
the RP identifies those services provided by its affiliates (including 
its Parent) and third-party service providers through a comprehensive 
framework that are essential to LCH SA's operations as well as the 
agreements governing such relationships.
    The RP describes that LCH SA maintains comprehensive exit 
management plans should LCH Ltd initiate its own recovery and wind-down 
plan, cease to operate following a Business continuity or Cyber event, 
or notify LCH SA of its termination of services. as well as the 
corresponding recovery tools in each case.
    The RP also describes the business continuity procedures and exit 
management plans that LCH SA would initiate upon the failure of a 
critical third-party service provider including LCH Ltd. This is 
managed under relevant services agreement between LCH Ltd and LCH SA so 
that LCH SA can continue to offer its services in case of a potential 
failure.
2. Identification of Possible Stress and Recovery Scenarios
    The RP categorizes potential stress scenarios in two ways as a 
result of either: (i) Clearing member defaults and (ii) non-clearing 
member events. Clearing member defaults are identified as those losses 
that threaten LCH SA's ability to operate as a going concern through 
either uncovered credit losses or liquidity shortfalls created as a 
result of a default by one or more members. Non-clearing member 
defaults are defined as losses impacting capital adequacy arising from 
risks, including, without limitation, general business risks, 
operational events, custody and investment risks, or risks on the 
interoperability link.
    The RP then identifies, prior to implementing any of the recovery 
strategies described therein, the day-to-day risk measures in place to 
assure provision of the critical services performed where these are 
insufficient the recovery plan will be triggered.
    With respect to clearing member defaults, the LCH SA risk framework 
provides mitigations for uncovered credit losses due to a member 
default. LCH SA follows high standards to assess financial resources 
against member portfolios, including initial margin model covering the 
potential loss from any member default to a 99.7% confidence level over 
the applicable holding period, margin add-ons to deal with specific 
member portfolios risks such as concentration, liquidity risk and 
sovereign risk, and default fund sizing to cover simultaneous default 
of the 2 members having the largest stress testing losses beyond the 
99.7% confidence level. Stress tests are applied by LCH SA in order to 
assess whether financial resources are calibrated to handle systemic 
risks. In addition, a reverse stress resting procedure is used to 
ascertain adequacy of financial resources held against member 
positions. The stress testing framework is reviewed on an annual basis.
    Further, reverse stress testing exercise is conducted at least 
quarterly for each default fund and is subject to review by LCH 
Executive Risk Committee. Risk monitoring mechanisms have been 
established in order to anticipate and identify any credit or market 
risks with respect to a clearing member, including daily monitoring of 
credit watch lists by LCH SA's credit risk department.

[[Page 57899]]

    The RP covers the default of one or multiple Clearing Member(s) on 
one or several of its markets, where LCH SA has to re-establish the 
matched book and may have allocate any uncovered credit losses to its 
own capital or to surviving clearing members.
    With respect to liquidity shortfalls as a result of the clearing 
member default, the existing liquidity risk management framework seeks 
to manage liquidity risk by requiring certain minimum liquidity 
coverage ratio and using reserve stress testing to identify plausible 
scenarios where the liquidity coverage ratio falls below 100%, as well 
as considering the liquidity impact as a result of the default of its 
liquidity line provider.
    LCH SA would leverage on the reserve stress testing scenarios and 
the liquidity line provider's default to define the liquidity recovery 
scenarios.
    In addition, the RP provides that LCH SA uses a set of early 
warning indicators and management actions to mitigate liquidity risk 
prior to implementing RP. To the extent a clearing member default has 
occurred, LCH SA would perform increased risk monitoring, including 
preparation of liquidity risk reports that would be produced several 
times a day.
    The RP covers the potential and actual liquidity shortfalls as 
result of a clearing member or allied clearing house default.
    For operational risks, the RP provides that on a monthly basis, 
control assessments, incident and audit recommendations are reviewed 
and adjusted as appropriate. On a yearly basis, a risk and control 
self-assessment is performed whereby all risks are reassessed. The 
operational risk department performs second line challenge on all these 
activities. In addition, all ``major'' or ``high'' incidents are 
processed through a detailed incident review to identify actions to 
further improve the control environment.
    LCH SA performs a business impact analysis where it identifies all 
critical systems and departments and has in place a global business 
continuity strategy which outlines the strategy to maintain critical 
services in case of a disaster. The RP further identifies events, 
including cyber-attacks, failure of a critical service provider, 
failure of data providers and exchanges, failure of LCH SA's Parent, 
and reputational events as potential operational risks that could 
threaten its continued functioning.
    The RP covers both a loss resulting from an operational risk event 
(for example resulting from a fraud) or any other event which impacts 
the critical services provided by LCH SA (e.g. failure in the provision 
of service by a third party, unavailability of primary place of work, 
Staff unavailability to a point where the continuity of operations may 
be compromised or the occurrence of a cyber-event).
    The most important operational exposures within SA relates to Cyber 
risk:

--Third party liability, associated damages and defense costs arising 
from the following, amongst others: Privacy and confidentiality, 
Network security, Media liability, Regulatory costs and fines, Internal 
investigation; cover combines the Civil Liability and Crime policy only 
for Third Party related Liabilities and the Cyber policy;
--Business Interruption, caused by a Cyber incident or a software 
malfunction.

    The definition of a cyber crisis involves several notions which, 
according to the ISO 27000 standard, can be described as follows:

--A security event is an identified occurrence of a system, service or 
network state indicating a possible breach of information security 
policy or failure of controls, or a previously unknown situation that 
can be security relevant
--A security incident is a single or a series of unwanted or unexpected 
information security events that have a significant probability of 
compromising business operations and threatening information security.

    The following scenarios are possible for a cyber attack:

--Attempts (either failed or successful) to gain unauthorized access to 
a system or its data
--Security breach or potential security breach
--Unauthorized scan or probe
--Unwanted disruption or denial of service
--Malicious code or virus
--Unauthorized processing or storage of data
--Networking system failure (widespread)
--Application or database failure (widespread)
--Etc.

    A crisis management plan has been developed to manage the risks 
listed above. It comprises:

--The procedure to identify the priority of an incident and decide 
whether to activate the Crisis Management Plan (Triaging Procedure);
--The procedure to notify the hierarchy (Escalation Procedure) and 
activate the Crisis Management Team (Crisis Management Team Activation 
Plan);
--The Tactical Procedures used to fuel the decision-making process, 
depending on the crisis scenario;
--The Communication Procedures used to dress the guidelines of the 
notification of the incident;
--The several contact registries necessary to swiftly notify the 
relevant contacts.

    A specific change in the plan has been to detail the case of a 
failure of LCH Ltd which provides critical IT service to LCH SA. The 
following scenarios have been identified:
    1. A Business continuity event affecting LCH Ltd. This is mitigated 
through highly resilient systems described in the business continuity 
plan.
    2. A sale of LCH SA. In this case, LCH Ltd would continue to 
provide the service over the period required to exit and described in 
detail in the exit plan. The plan states the main steps that would be 
followed.
    3. A Wind-down of LCH Ltd. In this case, LCH Ltd will have 
insufficient resources to continue as a CCP but will continue to 
provide the service for 6 months supported by its wind down capital. 
The plan describes the steps that would be followed to replicate the 
exact IT service provided by LCH Ltd on short notice.
    Business risk is managed by the relevant individual business lines 
and requires frequent monitoring of results against budget and 
financial plans, with a second line challenge performed by the risk and 
finance departments to verify if sufficient capital buffers are 
available for applicable business risks. In addition, LCH SA conducts a 
yearly review of business risk scenarios to define potential loss 
scenarios under foreseeable conditions and the LCH SA finance 
department monitors key metrics, including revenues and quarterly 
financial information. Investment risk and second line monitoring is 
also conducted with respect to interest rate risk, aggregate credit 
risk exposure, daily mark-to-market limits, and internal credit scores 
for investment counterparties.
    The RP also considers that LCH SA is connected to a broad range of 
financial market infrastructures, including central securities 
depositories, settlement platforms and interoperating central 
counterparties and identifies the types of operational or financial 
failures that could restrict LCH SA's ability to operate.
    Finally, the RP identifies a series of scenarios which, taken 
together, could

[[Page 57900]]

also impact the continued functioning of critical services.
3. Triggers for RP
    The RP includes a detailed list of events, which if they were to 
occur would trigger the implementation of a specific action identified 
in the RP.
    The RP provides that a clearing member default will be identified 
through credit risk monitoring and review of external information 
indicating a default. Each LCH SA business line then applies its own 
default management process under which a default management group 
identifies and manages the phases of the default management process and 
the application of the default waterfall. The possible triggers for the 
RP include: (i) A clearing member default, in which case the default 
procedures will be initiated to reestablish the matched book; (ii) 
several default events may lead to more than one replenishment of Skin 
in the Game (iii) mutualized default fund contributions per specific 
default have been consumed, in which case unfunded resources will be 
used to keep LCH SA appropriately funded.
    Each LCH SA business lines maintain its own default management 
process and waterfall, but, in general, the RP describes the tools used 
in the event of a clearing member default. The default management 
process is used to re-establish the matched book of LCH SA and return 
back to business as usual and therefore considered as a recovery tool. 
The relevant governance for the management of a default is followed as 
described in the paragraph 5.
    When covering the relevant credit losses related to a default 
event, first, LCH SA looks to the defaulting clearing member's margin. 
These amounts are already held by LCH SA and are available to manage 
the default of a clearing member and, as such, are not considered to be 
a trigger of the RP. Second, LCH SA looks to the defaulting clearing 
member's default fund contribution, which may be allocated to the 
defaulting clearing member's shortfalls. Again, this action is within 
the control of LCH SA and does not impact the capital adequacy of LCH 
SA, so is also not considered a trigger for the RP. Third, in line with 
requirements under EMIR, LCH SA is required to hold capital equivalent 
to 25 percent of LCH SA's minimum net capital requirement against which 
default losses can be applied against liquid available capital. In 
addition, excess capital is held to replenish such amount within the 
relevant EMIR deadline. Where multiple defaults occur over a longer 
time period and lead to multiple replenishments of Skin in the Game, 
this may lead to start up of the recovery plan and application of 
capital conservation measures. Fourth, should losses arising from a 
clearing member default be consumed by the defaulter's margin and 
default fund contribution and subsequently LCH SA's contribution from 
capital, LCH SA may look to non-defaulting member default fund 
contributions. Those amounts are pre-funded by members and held and 
controlled by LCH SA for the purposes of managing a default and, thus, 
the utilization of those amounts is not considered an application of 
the RP. However, LCH SA has the right to trigger an assessment of the 
defaults as to reestablish the fund to its original size, and such an 
assessment is considered to be a recovery measure under the RP. 
Finally, when it is no longer possible for LCH SA to make assessments 
and all pre-funded default fund contributions have been used, recovery 
measures under the RP, as described below, will be implemented.
    With respect to liquidity shortfall triggers, LCH SA runs a daily 
liquidity assessment and monitors key liquidity drivers. In the event 
that these fall below a specific level, the RP will be triggered. In 
addition, the occurrence of a clearing member default or the failure of 
a third-party providing settlement and payment services to clearing 
member may also result in increased monitoring, and in the event that 
LCH SA does not have sufficient liquid resources to meet liquidity 
needs, the RP would be triggered.
    With respect to non-clearing member default events, the RP 
identifies those events with more particularity and identifies the 
specific triggers for the RP with respect to such events:
    For investment losses, which are defined as losses related to the 
default of an investment counterparty or losses incurred as a result of 
extreme market conditions, the RP is triggered if losses are greater 
than the maximum regulatory capital allocated to this activity. For 
operational risk events, the RP is triggered upon any operational 
losses that consume the regulatory capital LCH SA holds against the 
relevant risks; failure of a third party which impacts the provision of 
LCH SA's services; and reputational events impacting LCH SA's 
reputation with clearing members and partners. With respect to business 
risks, the RP is triggered upon a loss that consumes the regulatory 
capital LCH SA holds against the relevant risks. The RP may also be 
triggered upon the failure of other financial market infrastructures or 
a failure in the delivery of services including a cyber-event.
4. Identification and Assessment of Recovery Tools
    The RP identifies the various recovery tools that may be applied by 
LCH SA upon the triggering of the RP, using again the same distinction 
between clearing member default events and non-clearing member events.
    For clearing member default scenarios, the existing stages of the 
LCH SA default management process have been used as the framework for 
identifying and confirming the appropriate tools to use in the event of 
a clearing member default. The RP describes the default management 
process in detail and summarizes the actions to be taken at each phase, 
including, as mentioned above, (i) reestablishing the matched book, 
(ii) default fund assessments, (iii) service continuity charges, and 
(iv) voluntary payments. To the extent that the default fund and 
assessments cannot manage the losses accumulated from the clearing 
member default and any service continuity or voluntary service 
continuity contributions received are not sufficient to cover the 
relevant losses, the service closure phase of the default management 
process is triggered and all outstanding contracts will be closed out 
as of the clearing day following such determination and all relevant 
losses are allocated to the clearing members. If the RP is triggered as 
a result of a liquidity shortfall, the RP provides that LCH SA may use 
its central bank credit line to deposited securities received on behalf 
of defaulting clearing member(s). The amounts of non-Euro liquidity are 
very low and LCH SA has appropriate liquidity lines but also has 
recovery tools in place for this for example the possibility to pay in 
alternative currency (Euro).
    Other potential tools to manage liquidity stress situation are 
limits with respect to illiquid collateral or, if necessary apply 
increased haircuts on certain types of collateral to incentivize the 
use of more liquid collateral as well or apply specific liquidity 
margins.
    The measures should assure that LCH SA has sufficient liquid 
resources at all times. As a last resort, under its rulebook, LCH SA 
could defer funding for the settlement platform for a limited period of 
time.
    As to non-clearing member events, the tool that is used under the 
RP will depend on the nature of the event, but for most investment, 
business, and operational risks, LCH SA has its capital surplus that it 
can allocate losses against. Further, LCH SA can put in place several 
measures for capital

[[Page 57901]]

conservation and LCH SA also maintains insurance coverage for specific 
operational risk events. As a last resort, LCH SA may also initiate a 
capital raising strategy in order to obtain an injection of capital to 
replenish any consumed capital.
    In order to cope with a liquidity stress situation, LCH SA has the 
possibility to use non-Euro collateral to raise liquidity. The 
repurchase agreements will then realise the required currency liquidity 
requirements needed to satisfy the outgoings resulting from the member 
default. Non-euro bonds deposited as non cash collateral by surviving 
members can be used for repo transactions and CALM should perform repo 
transactions with Gilt/T-bills as collateral in order to raise 
liquidity. CaLM has multi-currency GMRA signed with a number of 
investment banks, which will allow CaLM to do bilateral transactions. 
If liquidity is received in non-euro currencies through bilateral repo 
transaction this can be transformed into Euro through the recovery tool 
``FX markets''. CALM also has its disposal some Triparty repo agreement 
signed to do cross currency repo transactions, where liquidity is 
received directly in Euro from Gilt or USD securities.
    For any shortfall in a particular currency SA has the ability to 
enter into a FX Transaction with a range of counterparties. LCH SA also 
has the possibility to transform liquidity received through bilateral 
repo transaction of collateral in USD and GBP into Euro.
    Article 4.4.3.2 of CDSClear rulebook and instruction I.V.4-2 of the 
SA Rulebook allows LCH to convert amounts owed to members into such 
other currency or currencies, using a reasonable/prevailing rate of 
exchange. In the application of this regulation, LCH SA is therefore 
able to resolve a specific currency liquidity shortfall by completing 
the required transaction in an alternate currency than the original 
obligation.
    A ``Cyber Crisis Management Plan'' has been developed which provide 
a framework of procedures allowing LCH SA to respond to cyber incidents 
in case of cyber crisis. As such, the process defined is to be 
activated in case of detection of a cyber incident that could 
potentially cause a significant impact on LCH SA business objectives. 
Cyber incidents can develop rapidly and business impact can quickly 
escalate. The objective of this framework is to manage cyber events or 
incident in a way that:
     Limits the damage, increases the confidence in 
stakeholders and reduces recovery time and costs,
     facilitate systematic and efficient response,
     empowered decision making,
     all response activities are recognised and coordinated.
    LCH SA monitors on a monthly basis if it meets the EMIR capital 
requirements and in addition it monitors sufficient ``surplus/buffers 
capital'' is available to assure recovery of the CCP from both CMD and 
non-CMD losses under single scenarios (e.g. default of a clearing 
member on one or several services, default on an investment 
counterpart) and combined scenarios (e.g. Failure of a clearing member 
which is also acting as an investment counterparty). Associated to each 
scenario is attached one or several indicators and the capital coverage 
tools available in each case. In addition to the capital requirements 
and available headroom, LCH SA follows indicators such as the Liquidity 
Coverage Ratio, the aggregate credit risk and market risk exposure on 
its investment portfolio, operational risk and business risks 
indicators. Capital coverage instruments include prefunded capital 
surplus and buffers, limitation of credit and market risks and 
therefore of potential losses and insurance coverage. The capital and 
buffers are monitored in order to allow LCH SA to always be in a 
situation to replenish the SIG within one month, if the CCP was to face 
multiple defaults. The liquidity coverage ratio indicator ensures that 
LCH SA will always be in a situation to have access to sufficient 
liquidity provided either from its own cash or by the ECB even in very 
extreme cases as no capital coverage is possible in a liquidity stress 
scenario. The Aggregate Risk Exposure and Market Risk limits on the 
investment portfolio are in place to ensure that capital will be 
sufficient to cover any reasonable losses. Operational risk is followed 
to ensure that operational risk capital can be replenished if the 
insurance policy does not cover the loss event. Finally, business risk 
scenarios are monitored to ensure LCH SA has sufficient capital for 
replenishment if required.
    Next to the surplus capital, the LCH Board may decide to withhold 
Dividend payment and Variable bonus payment to be used as additional 
buffers.
    If an event resulted in a major disruption of its activities, LCH 
SA would initiate its business continuity strategy, which establishes 
an enterprise wide RP and response proportionate to the event which 
aims to minimize the impact of a major disruption on LCH SA's critical 
business and resources, or in case of a cyber-event LCH will trigger 
the cyber crisis management plan. For any disruption or loss of key 
third-party service provider, LCH SA would be able to exercise several 
contractual rights and maintains exit plans which are intended to 
safeguard the continuity of services. LCH SA also maintains back up 
procedures and protocols that would be initiated if there is an impact 
on critical services of FMIs, for example its ability to collect margin 
within T2 under an emergency platform. Finally, LCH SA maintains a 
crisis communication plan, which outlines the procedure for 
communicating with clearing members and partners in the event of a 
disruption.
    With respect to each recovery tool identified, the RP also seeks to 
assess that each tool possesses the following characteristics: 
Comprehensive; effective, including as to reliability, timeliness; 
transparent, provides appropriate incentives, and results in a minimum 
negative impact. To confirm that each recovery tool does, in fact, have 
these characteristics, the RP considers as to each: The barriers or 
constraints within the tool itself; the steps and time to implement (if 
not already available as a tool); the likely effectiveness of the tool; 
any risk of execution; the potential impacts on participants and 
markets generally; the sequencing of the use of the tools where 
multiple tools may be required; and the legal basis of the tool. The RP 
also includes a qualitative and quantitative assessment to provide an 
indication of the likelihood and severity of a potential recovery 
situation and whether the tools included in the RP are adequate.
5. Governance Requirements
    The creation of the RP and its approval is subject to a number of 
layers of governance approval. At a high level, the LCH SA Management 
Committee is responsible for the preparation of the RP and 
implementation of the monitoring and the recovery tools set forth in 
the RP. Before submission to the LCH SA Risk Committee, the RP is 
reviewed and validated by the Executive Risk Committee of LCH Group. 
The LCH SA Risk committee, which includes independent directors, then 
reviews, challenges (if needed), and recommends the RP for approval by 
the LCH SA board. Final approval of the RP rests with the LCH SA Board.
    At a more granular level, the RP identifies the groups and 
individuals within LCH SA that are responsible for the various aspects 
of the RP.
    A clearing member default will be managed in accordance with the 
relevant procedures. The Default Management Group (``DMG'') is 
responsible for the management of the default while all critical 
decisions are

[[Page 57902]]

escalated and submitted to the LCH SA Default Crisis Management Team 
(``DCMT''). All decision which may lead to the triggering of recovery 
measures are subject to discussion in the DCMT and approval of the LCH 
SA CEO.
    With respect to non-clearing member events, the management of those 
events will depend on the nature of the event. For example, investment 
losses and liquidity shortfalls are managed from a first line of 
defense, which attempts to control risks within the risk appetite 
parameters set by the Board, and then are escalated as appropriate. 
Operational risks are managed in accordance with the operational risk 
policy approved by the Board and reporting and second line challenges 
are performed by the operational risk department. Business risk is 
managed by individual business lines and requires frequent monitoring 
of results against budget and financial plans, with a second line 
challenge performed by the risk and finance departments to verify if 
sufficient capital buffers are available for the applicable business 
risks.
    Upon the occurrence of a clearing member default, the recovery 
measures that will apply are clearly set forth in LCH SA's rulebook and 
LCH SA's CEO has the authority to trigger the different stages in the 
waterfall process, but will consult with DCMT and regulators prior to 
taking any action. In addition, the RP provides that the LCH SA will 
also activate an emergency board meeting for approval (if reasonably 
possible). Upon receipt of information relevant to a scenario causing 
non-default losses, the LCH SA management committee will consider 
whether a recommendation to formally invoke the RP should be made to 
the LCH SA Board. Upon receipt of a recommendation for action, the LCH 
SA Board will consider the information presented to determine if the RP 
should be formally invoked.
6. Plan Testing and Maintenance
    The RP requires that LCH SA conduct testing and review of member 
default rules and associated procedures through the running of periodic 
``fire drills'' which simulate member default scenarios. According to 
the RP, the fire drills are intended to simulate all aspects of a 
member default, including the auctioning of the defaulting members 
portfolio to non-defaulting members (where appropriate) and involves 
the participation of members and relevant functions within the LCH SA 
organization. Further, because one of the main scenarios contemplated 
under the RP is a clearing member default, the testing of this element 
(i.e. the tools to recover from uncovered credit losses or liquidity 
shortfalls arising from a member default) will be incorporated into 
each relevant fire drill cycle. As noted in the RP, LCH SA performs an 
annual multi-service fire drill and service specific fire drills are 
performed at least annually and testing for non-default events are 
incorporated into the fire drill regime as well. Should either the 
periodic testing or other change within LCH SA result in the need to 
amend the RP, the RP will be revised in accordance with the governance 
requirements identified above.
(b) Statutory Basis
    LCH SA believes that the proposed rule change is consistent with 
the requirements of Section 17A of the Act and the regulations 
thereunder, including the standards under Rule 17Ad-22.\9\
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    \9\ 17 CFR 240.17Ad-22.
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    Section 17A(b)(3)(F) of the Act \10\ 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 to 
assure 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. LCH SA believes 
that the RP will permit it to initiate recovery upon the occurrence of 
certain trigger events to maintain continuity of critical services or 
orderly wind down in accordance with the applicable requirements of 
Rule 17Ad-22 \11\ and LCH SA's rules. The RP is designed to formalize 
and set out the risk framework and measures that LCH SA will use to 
ensure its stability and recovery in the event of a crisis in order to 
be able to maintain its critical business processes and operations. 
Specifically, the RP would describe the LCH SA risk framework and 
process applicable to identify measure, monitor and manage the risks 
faced by LCH SA in the provision of clearing, settlement and risk 
management services when a crisis event occurs. The RP would serve as a 
means of addressing, credit risk, market risk, general business risk, 
operational risk, and other risks that may otherwise threaten the 
viability of LCH SA. The RP would also support the stability of LCH SA 
as a clearing house that is part of the broader financial markets and 
seeks to promote the protection of market participants from the risk of 
default by a clearing member of LCH SA or an unforeseen operational or 
business event that impacts LCH SA's continued functioning. The RP also 
facilitates the prompt clearance and settlement of the securities as it 
will enable LCH to levy additional resources to match the positions, 
limit the volume of fails and more generally avoid the market 
disruption that would be caused by the default of the CCP. The 
objective of the RP is to maintain the viability of the CCP and bring 
back the company to normal business, thereby ensuring that the 
securities and funds that the members have deposited as guarantees be 
fully returned to the market participants. In that regard, LCH SA 
believes that the RP supports the public interest, in line with Section 
17A(b)(3)(F) \12\ of the Act.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22.
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    The RP would also be consistent with the specific relevant 
requirements of Rule 17Ad-22, including under 17Ad-22(e)(2) and (3) 
\13\. Rule 17Ad-22(e)(2) \14\ provides that a covered clearing agency 
shall have governance arrangements that are clear and transparent and 
clearly prioritize the safety and efficiency of the covered clearing 
agency, to support the public interest requirements in Section 17A of 
the Act applicable to clearing agencies, and the objectives of owners 
and participants. LCH SA believes that the RP is consistent with these 
requirements. The RP includes extensive governance requirements that 
clearly identify the lines of responsibility with respect to the RP. As 
described above, at a high level, the LCH SA Management Committee is 
responsible for the preparation of the RP and implementation of the 
monitoring and the recovery tools set forth in the RP. The LCH SA Risk 
committee, which includes clearing member representatives, then 
reviews, challenges (if needed), and recommends the RP for approval by 
the LCH SA board. Final approval of the RP rests with the LCH SA Board, 
which includes, among other categories, non-executive Chair, 
independent directors and user directors. At a more granular level, the 
RP identifies the groups and individuals within LCH SA that are 
responsible for the various aspects of the RP. Therefore, LCH SA 
believes that the RP contains governance arrangements that are clear 
and transparent and clearly prioritize the safety and efficiency of the 
covered clearing agency, to support the public interest requirements 
and the objectives of owners and participants, and is,

[[Page 57903]]

therefore, consistent with the requirements of Rule 17Ad-22(e)(2).
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    \13\ 17 CFR 240.17Ad-22(e)(2) and (3).
    \14\ 17 CFR 240.17Ad-22(e)(2).
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    Rule 17Ad-22(e)(3) \15\ requires that a covered clearing agency 
maintain a sound risk management framework for comprehensively managing 
legal, credit, liquidity, operational, general business, investment, 
custody, and other risks that arise in or are borne by the covered 
clearing agency, which must include plans for the recovery and orderly 
wind-down of the covered clearing agency necessitated by credit losses, 
liquidity shortfalls, losses from general business risk, or any other 
losses. The RP is designed to maintain the continuity of critical 
services in times of extreme stress and to facilitate the recovery of 
LCH SA in the event of extreme (loss) scenarios, as part of LCH SA's 
comprehensive risk management framework. As described above, the RP 
seeks to identify those services which could impact the continuity of 
LCH SA's operations, implement early warning indicators to identify 
potential recovery scenarios and define the triggers for initiating the 
RP, and clearly identify the recovery tools available under the RP. 
Accordingly, LCH SA believes the RP is consistent with Rule 17Ad-
22(e)(3).\16\
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    \15\ 17 CFR 240.17Ad-22(e)(3).
    \16\ 17 CFR 240.17Ad-22(e)(3).
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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.\17\ LCH SA does 
not believe the proposed rule change would impact or impose any burden 
on competition. The proposed rule change would establish and maintain 
LCH SA's RP in accordance with the CCA rules. The RP would not affect 
clearing member's access to services offered by LCH SA or impose any 
direct burden on clearing members. To the contrary, the RP seeks to 
identify the key risks and to establish appropriate recovery measures 
to ensure LCH SA's ability to operate in the event of an extreme loss. 
Accordingly, the proposed rule change would not unfairly inhibit market 
participants' access to LCH SA's services or disadvantage or favor any 
particular user in relationship to another user. 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.
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    \17\ 15 U.S.C. 78q-1(b)(3)(I).
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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.

D. Extension of Time Period for Commission Action

    LCH SA does not consent to the extension of the time period listed 
in Section 19(b)(2) of the Securities Exchange Act of 1934 for 
Commission action.

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 rule-comments@sec.gov. Please include 
File Number SR-LCH SA-2019-008 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-2019-008. 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 https://www.lch.com/resources/rules-and-regulations/proposed-rule-changes-0. All comments received will be posted without change. Persons 
submitting comments arecautioned 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-2019-008 and should 
be submitted on or before November 19, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-23552 Filed 10-28-19; 8:45 am]
BILLING CODE 8011-01-P


