[Federal Register Volume 84, Number 236 (Monday, December 9, 2019)]
[Notices]
[Pages 67325-67327]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26408]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87649; File No. SR-LCH SA-2019-011]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to Amendments to CDS Clearing Supplement 
To Reflect the ISDA NTCE Protocol and Supplement

December 3, 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 November 21, 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 
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

    Banque Centrale de Compensation, which conducts business under the 
name LCH SA (``LCH SA''), is proposing to amend its CDS Clearing 
Supplement (``Supplement'') to incorporate new terms and to make 
conforming, clarifying, and clean-up changes intended to: (1) 
Incorporate the ISDA 2019 Narrowly Tailored Credit Event Protocol (the 
``NTCE Protocol'') into the Supplement, allowing parties to amend their 
legacy transactions to incorporate the 2019 Narrowly Tailored Credit 
Event Supplement to the 2014 ISDA Credit Derivatives Definitions (the 
``NTCE Supplement''); and (2) make certain clarifications as to the 
notion of Outstanding Principal Balance, which shall always have the 
meaning set out in the ISDA 2003 and ISDA 2014 Credit Derivatives 
Definitions. Capitalized terms not defined or modified in this rule 
proposal will have the same meaning as in LCH SA's existing Rule Book, 
Supplement, or Procedures.
    The text of the proposed rule change has been annexed as Exhibit 
5.\3\
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    \3\ All capitalized terms not defined herein have the same 
definition as the Rule Book, Supplement or Procedures, as 
applicable.
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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
    LCH SA is proposing to amend its Supplement to reflect the NTCE 
Protocol, and the NTCE Supplement amending the 2014 ISDA Credit 
Derivatives Definitions addressing narrowly tailored credit events 
(``NTCEs''). NTCEs are arrangements with corporations that cause a 
credit event leading to settlement of CDS contracts while minimizing 
the impact on the corporation.
    ISDA published a statement from its Board of Directors in April 
2018 noting concerns with the impact of such events on the efficiency, 
reliability and fairness of the overall CDS market. The NTCE Protocol, 
due for implementation on 27 January 2020, incorporates the terms of 
the NTCE Supplement for legacy uncleared in-scope single name and index 
transactions to match the new trading standard. Yet, CCPs are expected 
to reflect the NTCE Protocol changes to the transactions they clear by 
an amendment to their clearing rules, and the final implementation date 
will be aligned so that the changes will go into effect for trades 
cleared at different CCPs and for uncleared trades at the same time.
    As such, LCH SA has determined to file this proposed rule change in 
order to, among other things, amend its CDS Clearing Supplement to 
reflect the changes brought by the NTCE Protocol and NTCE Supplement. 
Such changes will therefore be incorporated for new trades on corporate 
and financial Reference Entities by updating the ISDA Credit 
Derivatives Physical Settlement Matrix.
(a) Amendments To Reflect the NTCE Protocol for Cleared Transactions
    The updated CDS Clearing Rules will permit Clearing Members to 
match the new trading standard for their Index Cleared Transactions and 
their Single Name Cleared Transactions, without the need for LCH SA to 
adhere to the NTCE Protocol. To implement the ISDA NTCE Protocol and 
NTCE Supplement, the Supplement will be amended by adding new and 
amending existing provisions as described below.
    In support of the above matter, LCH SA will add new provisions to 
the Supplement in each of Part B & Part C. Each of these changes in 
these two sections are substantially similar.
    For Index Cleared Transactions and Single Name Transactions 
incorporating the 2014 ISDA Credit Derivatives Definitions:
    [ssquf] Part B, Section 1.2 Terms defined in the CDS Clearing 
Supplement--the definition of Index Cleared Transaction Confirmation 
will be updated with the date of the amended confirmation as published 
by Markit Group Limited, both for references Markit iTraxx[supreg] 
Europe Index Series 22 or above (a) and Markit CDXTM Index 
Series 23 or above (b);
    [ssquf] Part B, Section 2.2 (g) and (h) will be added to the 
Supplement--The Index Cleared Transaction Confirmation will be amended 
for NTCE Protocol covered transactions by making the notions of Credit 
Deterioration Requirement and Fallback Discounting applicable, in 
accordance with the Relevant Physical Settlement Matrix and amended 
confirmation as published by Markit Group Limited;
    [ssquf] Part B, Section 2.3 (h) and (i) will be added to the 
Supplement--The Single Name Cleared Transaction Confirmation will be 
amended for NTCE Protocol covered transactions by making the notions of 
Credit Deterioration Requirement and Fallback Discounting applicable, 
in accordance with the Relevant Physical Settlement Matrix and amended 
confirmation as published by Markit Group Limited;
    [ssquf] Part B, Section 2.4 (e) will be added to the Supplement--
The amendments brought by the NTCE Protocol and subsequent NTCE 
Supplement to the 2014 ISDA Credit Derivatives Definitions shall only 
be applicable where the Protocol Effectiveness Condition, as defined in 
the NTCE Protocol, is satisfied;
    [ssquf] Part B, APPENDIX XIII, Section 2.6 will be added to the 
Supplement--

[[Page 67326]]

Mirroring the Part B, Section 2.4 (e) mentioned above, this addition 
ensures that the amendments brought by the NTCE Protocol and subsequent 
NTCE Supplement to the 2014 ISDA Credit Derivatives Definitions shall 
only be applicable to CCM Client Transactions where the Protocol 
Effectiveness Condition, as defined in the NTCE Protocol, is satisfied.
    For Credit Index Swaptions:
    [ssquf] Part C, Section 1.2 Terms defined in the CDS Clearing 
Supplement--the definition of iTraxx[supreg] Europe Untranched 
Transactions Swaption Standard Terms Supplement will be updated with 
the date of the amended iTraxx[supreg] Europe Untranched Transactions 
Swaption Standard Terms Supplement as published by Markit Indices 
Limited;
    [ssquf] Part C, Section 2.2 (f) and (g) will be added to the 
Supplement--The Index Swaption Cleared Transaction Confirmation will be 
amended for NTCE Protocol covered transactions by making the notions of 
Credit Deterioration Requirement and Fallback Discounting applicable, 
in accordance with the Relevant Physical Settlement Matrix;
    [ssquf] Part C, Section 2.3 (b) will be added to the Supplement--
The amendments brought by the NTCE Protocol and subsequent NTCE 
Supplement to the 2014 ISDA Credit Derivatives Definitions shall only 
be applicable where the Protocol Effectiveness Condition, as defined in 
the NTCE Protocol, is satisfied;
    [ssquf] Part C, APPENDIX VIII, Section 1 will be updated with the 
date of the amended iTraxx[supreg] Europe Untranched Transactions 
Swaption Standard Terms Supplement as published by Markit Indices 
Limited;
    [ssquf] Part C, APPENDIX VIII, Section 2.4 will be added to the 
Supplement--Mirroring the Part C, Section 2.3 (b) mentioned above, this 
addition ensures that the amendments brought by the NTCE Protocol and 
subsequent NTCE Supplement to the 2014 ISDA Credit Derivatives 
Definitions shall only be applicable to CCM Client Transactions where 
the Protocol Effectiveness Condition, as defined in the NTCE Protocol, 
is satisfied
(b) Amendments To Harmonize the Use and Definition of Outstanding 
Principal Balance
    LCH has noticed that the term ``Outstanding Principal Balance'' 
appears throughout the Supplement using both small and capitalized 
letters. The entire Supplement will be harmonized in that sense that 
any reference to an Outstanding Principal Balance shall be with 
capitalized letters, so as to refer to the Outstanding Principal 
Balance defined, for Part A of the Supplement, in the ISDA 2003 Credit 
Derivatives Definitions, and for Parts B & C, in the ISDA 2014 Credit 
Derivatives Definitions.
2. Statutory Basis
    LCH SA believes that the proposed rule change in connection with 
the ISDA NTCE Protocol and NTCE Supplement is consistent with the 
requirements of Section 17A of the Securities Exchange Act of 1934 \4\ 
(the ``Act'') and the regulations thereunder, including the standards 
under Rule 17Ad-22 \5\. In particular, Section 17(A)(b)(3)(F)6 of the 
Act requires, among other things, that the rules of a clearing agency 
be designed to promote the prompt and accurate clearance and settlement 
of securities transactions and derivatives agreements, contracts, and 
transactions cleared and to assure the safeguarding of securities and 
funds which are in the custody or control of the clearing agency or for 
which it is responsible and the protection of investors and the public 
interest.\6\
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    \4\ 15 U.S.C. 78q-1.
    \5\ 17 CFR 240.17Ad-22.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    Further, Rule 17d-22(e)(1) requires a covered clearing agency to 
provide for a well-founded, clear, transparent and enforceable legal 
basis for each aspect of its activities in all relevant jurisdictions. 
Rule 17d-22(e)(iii) also requires to support the objectives of 
participants.
    The ISDA 2019 NTCE Protocol and Supplement are a wide industry's 
response to the concerns raised by both market participants and 
regulators regarding NTCEs and their potential market on the CDS 
markets.
    ISDA has expressed concern that ``narrowly tailored defaults . . . 
could negatively impact the efficiency, reliability and fairness of the 
overall CDS market.'' Regulators have also expressed concern with 
narrowly tailored or manufactured credit events, including a joint 
statement by the heads of the Commission, the Commodity Futures Trading 
Commission and the UK Financial Conduct Authority that such strategies 
``may adversely affect the integrity, confidence and reputation of the 
credit derivatives markets, as well as markets more generally. These 
opportunistic strategies raise various issues under securities, 
derivatives, conduct and antifraud laws, as well as policy concerns.'' 
\7\
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    \7\ Securities and Exchange Commission, Commodity Futures 
Trading Commission and UK Financial Conduct Authority, Joint 
Statement on Opportunistic Strategies in the Credit Derivatives 
Markets (June 24, 2019); see also Update to June 2019 Joint CFTC-
SEC-FCA Statement on Opportunistic Strategies in the Credit 
Derivatives Market (Sept. 19, 2019).
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    It was understood that the heads of the Commission, the Commodity 
Futures Trading Commission and the UK Financial Conduct Authority have 
stated that they welcome the efforts to implement the amendments set 
out in the NTCE Supplement and NTCE Protocol.\8\
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    \8\ Update to June 2019 Joint CFTC-SEC-FCA Statement on 
Opportunistic Strategies in the Credit Derivatives Markets (Sept. 
19, 2019).
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    So, as all CCPs, LCH SA is expected to modify its rules so that the 
NTCE Supplement's terms will also apply to all cleared CDS transactions 
entered into after the implementation date.
    The LCH SA CDSClear proposed rule change is fully consistent with 
the amendments of the ISDA credit derivatives documentation and 
incorporates changes to the standard terms of CDS Contracts widely 
adopted by market participants.
    For all the reasons above, LCH SA believes that the proposed rule 
change is consistent with the requirements of Section 17A of the 
Securities Exchange Act of 1934 \9\ (the ``Act'') and the regulations 
thereunder, including the standards under Rule 17Ad-22\10\.
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    \9\ 15 U.S.C. 78q-1.
    \10\ 17 CFR 240.17Ad-22.
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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.\11\
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    \11\ 15 U.S.C. 78q-1(b)(3)(I).
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    As mentioned above, the LCH SA CDSClear proposed rule change is 
reflecting the ISDA 2019 NTCE Protocol and Supplement that is an 
industry response and initiative applicable to all CDS market 
participants.
    The proposed rule change would apply equally to all Clearing 
Members and their Clients and would not adversely affect the ability of 
such members or other market participants generally to engage in 
cleared transactions or to access LCH SA's clearing services.
    Therefore, LCH SA does not believe that the proposed rule change 
would impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

[[Page 67327]]

C. Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others
    Written comments relating to the proposed rule change have not been 
solicited or received. LCH SA will notify the Commission of any written 
comments received by LCH SA.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-LCH SA-2019-011 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-2019-011. 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 are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-LCH SA-2019-011 and should 
be submitted on or before December 30, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-26408 Filed 12-6-19; 8:45 am]
 BILLING CODE 8011-01-P


