[Federal Register Volume 85, Number 43 (Wednesday, March 4, 2020)]
[Notices]
[Pages 12814-12816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04391]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88297; File No. SR-LCH SA-2020-001]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to Amendments to the Wind Down Plan

February 27, 2020.
    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 February 24, 2020, 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

    Banque Centrale de Compensation, which conducts business under the 
name LCH SA (``LCH SA''), is proposing to adopt an updated wind down 
plan (the ``WDP''). The text of the proposed rule change has been 
annexed as Exhibit 5.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, LCH SA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. LCH SA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of these statements.

A. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    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-1.
    \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\
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    \7\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    As a central counterparty recognized under the European Market 
Infrastructure Regulation (``EMIR''), LCH SA is also required to have 
in place relevant recovery and wind down mechanisms required under 
EMIR.\8\
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    \8\ Regulation (EU) No. 152/2013 of 19 December 2012, Article 2.
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    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.
    The purpose of the WDP is to ensure an orderly wind down of the CCP 
under extreme circumstances and to limit market impact as much as 
possible, should the recovery plan (the ``RP'') \9\ or the resolutions 
measures that could have been taken by the authorities have failed to 
allow the CCP to obtain the resources required to a return to business 
as usual conditions.
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    \9\ See LCH SA File No. SR-LCH SA-2019-008.
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    The WDP sets out the steps that LCH SA would follow to close its 
clearing services and shut down the company. The plan demonstrates how 
LCH SA, as it exists today, can achieve this orderly wind down within 
six (6) months.
    In addition, in order to ensure the feasibility of the plan, LCH SA 
holds capital, funded by equity, equal to the operating expenses for a 
six (6) month period. LCH SA has estimated the amount required to wind 
down and ensures that it remains inferior to the level of capital set 
aside.
    Although, it is only required to update the wind down plan when a 
significant change has occurred, LCH SA has decided to review its wind 
down plan on an annual basis or more frequently if required. The 
objective of this annual review is to update the overall cost to wind 
down in order to ensure it remains under the amount of capital held for 
that purpose, update the assessment of key contract termination 
provisions, align with the recovery plan if need be and more generally 
complete the plan with any areas for improvement which could have been 
detected during the year. In 2018, LCH SA conducted a review of the 
wind down and identified two areas that needed to be addressed.
    The revised version of the plan clarifies the fact that, in 
accordance with its banking status and with its rules, LCH SA could not 
decide to wind down by itself but that, if the CCP is no longer deemed 
viable by its authorities, the ACPR could require LCH SA to start to 
wind down. This requirement could be made while the CCP is operating 
under its current governance or once it has been put under resolution 
by the

[[Page 12815]]

ACPR. Only in the case where all business lines have been previously 
closed and the CCP has no longer any clearing activity, could it decide 
to wind down alone. The corresponding paragraphs related to the 
triggers, discussions with the regulators, the governance process and 
the assumptions have also been clarified accordingly.
    Wind down clauses have been added to the contract, which governs 
the staff redundancy processes. It now formally stipulates that the 
conditions of this contract would not apply in case of wind down and 
only legal conditions, which are less demanding for the CCP, would be 
applicable.
    The other changes are of a secondary nature. The wind down costs 
have been updated. They remain significantly lower to what LCH SA holds 
as liquid resources corresponding to 6 months of expenses as required 
by regulation. The assessment of key exchange and IT contract 
termination provisions has also been updated. The contracts with 
platforms recently connected to LCH SA have been added as well as the 
agreement governing the staff redundancy processes.
    The WDP, which was approved by the Board of Directors on May 14th 
2019, has been annexed as Exhibit 5. LCH SA has requested confidential 
treatment of the plan as Exhibit 5, however the main changes are 
described above.
2. Statutory Basis
    Rule 17Ad-22(e)(3)(ii) requires a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ensure that it establishes plans for 
the orderly wind-down of the covered clearing agency necessitated by 
credit losses, liquidity shortfalls, losses from general business risk, 
or any other losses. The proposed revised version of the plan does not 
bring any material change to the currently approved plan, however the 
annual review ensures that it is appropriately maintained and continues 
to be operational should it have to be triggered.
    Changing the wording in the plan with respect to the role of ACPR 
will clarify the responsibilities in the triggering of the plan and 
avoid any misunderstanding with LCH SA's governance.
    Integrating the redundancy contract concluded between the 
management and the Unions and which governs the laying off staff in the 
wind down plan and adding wind down clauses to it, has reduced legal 
uncertainties regarding the management of staff redundancies. By adding 
two new contracts with recently connected platforms, LCH SA made sure 
that these contracts contained wind down provisions.
    Rule 17Ad-22(e)(15)(i) requires a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to determine the amount of liquid net 
assets funded by equity based upon its general business risk profile 
and the length of time required to achieve a recovery or orderly wind-
down, as appropriate, of its critical operations and services if such 
action is taken.
    LCH SA has updated the cost of wind down noted in the plan. This 
amount remains significantly under the amount of capital, funded by 
equity, equal to the six months of operating expenses that the CCP 
holds for that purpose. LCH SA bases its calculation on the latest 
audited expenses.
    Rule 17Ad-22(e)(15)(ii) requires a clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for holding liquid net assets funded by 
equity equal to the greater of either six months of its current 
operating expenses or the amount determined by the board of directors 
to be sufficient to ensure a recovery or orderly wind-down of critical 
operations and services of the covered clearing agency, as contemplated 
by the plans established under Rule 17Ad-22(e)(3)(ii).
    LCH SA believes that its proposed WDP meets this requirement given 
the demonstration that LCH SA can achieve an orderly wind down within 
six (6) months. The calculation of the overall cost of winding down has 
been updated. It is very substantially lower that the six (6) months of 
Operational expenses that the CCP holds in cash or highly liquid 
securities. The regular review and reassessment of the plan ensures 
that it remains up to date and relevant.

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.\10\
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    \10\ 15 U.S.C. 78q-1(b)(3)(I).
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    LCH SA does not believe the proposed rule change would impact or 
impose any burden on competition as it mainly relates to clarification 
and updates and no fundamental change is made to the plan. The proposed 
rule change would maintain LCH SA's WDP up to date in accordance with 
and for the purposes of the CCA rules and would continue to ensure its 
applicability.

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-2020-001 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-LCH SA-2020-001. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the

[[Page 12816]]

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-2020-001 and should 
be submitted on or before March 25, 2020.
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    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04391 Filed 3-3-20; 8:45 am]
 BILLING CODE 8011-01-P


