[Federal Register Volume 85, Number 136 (Wednesday, July 15, 2020)]
[Notices]
[Pages 42959-42962]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15205]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89268; File No. SR-LCH SA-2020-002]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change, as Modified by Amendment No. 1, Relating to 
Introduction of Clearing of the New Markit iTraxx MSCI ESG Screened 
Europe Index Contracts

July 9, 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 June 26, 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. On July 8, 2020, LCH SA filed Amendment No. 1 to 
the proposed rule change. The Commission is publishing this notice to 
solicit comments on the proposed rule change as modified by

[[Page 42960]]

Amendment No. 1 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 the Amendment 1 to the filing 
LCH SA-2020-002 in order to (i) explain the few minor clarifications 
made below with respect to both sections 3.2 and 3.8 and also remove 
(ii) the non-relevant change made to the Legal Entity Identifier Margin 
in section 6.2 of its Reference Guide: CDS Margin Framework.
    LCH SA is proposing to amend its Reference Guide: CDS Margin 
Framework to permit the clearing of iTraxx MSCI ESG Screened Europe 
index contracts. As further detailed below, LCH SA is also making a 
number of other minor changes unrelated to the clearing of iTraxx MSCI 
ESG Screened Europe index CDS transactions.
    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 Reference Guide: CDS Margin 
Framework in order to introduce clearing of the iTraxx MSCI ESG 
Screened Europe index CDS transactions.
    Markit launched the iTraxx MSCI ESG Screened Europe Index (``iTraxx 
ESG Index'') on March 20th, 2020. This index is a subset of the iTraxx 
Europe Main index. The constituents of the iTraxx MSCI ESG Screened 
Europe index must meet various Corporate Responsibility Criteria. The 
first series that launched on March 20th, 2020 (Series 33) has 81 
constituents, all are constituents of the iTraxx Europe Main index 
Series 33.
    To permit participants to submit for clearing iTraxx ESG Index 
contracts, LCH SA needs to modify its Reference Guide: CDS Margin 
Framework.
    In this regard, LCH SA has made the following changes to the 
Reference Guide: CDS Margin Framework:

    (i) Removing references to specific indices in the document and 
replacing them with a generic reference to an index in sections 
2.3.3, and 3.8.1.3,
    (ii) removing the fixed 24% value and changing the spread shock 
formula for it to be applicable more generically to both iTraxx Main 
index and any of its sub index including financial Single Names.

    Clearing of the new iTraxx ESG Index contracts will not require any 
other changes to LCH SA CDSClearing Rule Book or risk management 
framework or other policies and procedures constituting rules within 
the meaning of the Securities Exchange Act of 1934 (``Act'').
    LCH SA is also taking this opportunity to make the following 
changes which are unrelated to the clearing of iTraxx MSCI ESG Screened 
Europe index CDS transactions;

    (i) removing the list of Dealers in section 2.3.3 as LCH SA may 
contact a broader list of Dealers than that currently listed in this 
section;
    (ii) correction in section 3.2 of a typing error to confirm the 
relevant application of the Wrong Way Risk Margin to Options;
    (iii) correction of the worst 5 day P&L value per date and the 
worst P&L value aggregated per date formulae in section 3.5.6. to 
reflect the fact that the same date is selected to calculate the 
portfolio P&L for all contracts in the portfolio;
    (iv) the 9M curve has been removed from the Interest Rate Risk 
Margin calculation in section 3.6, reflecting the change of interest 
rate curve imposed by ISDA within the framework of the risk-free 
rate benchmark review;
    (v) clarification under section 3.8 that the short charge is 
covering the risk that at least one entity defaults;
    (vi) the Wrong Way Risk formulae in section 3.8.1 were 
incomplete, the second value ``0'' to be used to derive the maximum 
resulting from these formulae has been added.

    At the request of LCH SA Risk Model Validation team so that the 
CDSClear risk framework can be better assessed, LCH SA is making the 
relevant clarifications specified under the below subsections (vii) to 
(xii):

    (vii) Adding a note in section 3.8.1.2 that clarifies that the 
recovery rate for a Senior Unsecured Debt (Corporate/Financial)/
Foreign Currency Sovereign Debt (Government) (SNRFOR) and Senior 
Loss Absorbing Capacity (SNRLAC) seniorities are considered as if 
they were two different instruments;
    (viii) adding a note in section 3.8.2 to explicit the 
calibration of the shocks displayed in the table;
    (ix) adding a note in section 4.1.3.1 to describe the parameters 
used in the formula;
    (x) the Average Liquidity Score formula has been amended and a 
note inserted in order to clarify which days are used to compute the 
Average Liquidity Score;
    (xi) the net notional for the index basis product p, tenor t 
used in the formula for the sum of the 5Y equivalent notional has 
been amended to an absolute value;
    (xii) in view of the upcoming supervisory/regulatory transition 
from the Euro Overnight Index Average (EONIA) to the new Euro Short-
Term Rate (ESTER or [euro]STR) and the Fed Funds to the Secured 
Overnight Financing Rate (SOFR), references to the interest rate 
applied to the Price Alignment Interest in section 5.2 have been 
removed.
2. Statutory Basis
    LCH SA has determined that Proposed Rule Change is consistent with 
the requirements of Section 17A of the Securities Exchange Act 
(``Act'') \4\ and regulations thereunder applicable to it. Section 
17A(b)(3)(F) of the Act requires, inter alia, that the rules of a 
clearing agency ``assure the safeguarding of securities and funds that 
are in its custody or control or for which it is responsible . . . and, 
in general, to protect investors and the public interest.'' \5\
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    \4\ 15 U.S.C. 78q-1.
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    LCH SA believes that acceptance of the new iTraxx ESG Index 
contracts, on the terms and conditions set out in the Rules, is 
consistent with the prompt and accurate clearance and settlement of 
securities transactions and derivative agreements, contracts and 
transactions cleared by LCH SA, the safeguarding of securities and 
funds in the custody or control of LCH SA or for which it is 
responsible, and the protection of investors and the public interest, 
within the meaning of Section 17A(b)(3)(F) of the Act. Indeed, the new 
iTraxx ESG Index contracts proposed for clearing are similar to the 
other European Indices contracts currently cleared by LCH SA CDSClear, 
and will be cleared pursuant to LCH SA's existing clearing arrangements 
and related financial safeguards, protections and risk management 
procedures.
    Clearing of the iTraxx ESG Index contracts will also satisfy the 
relevant requirements of Rule 17Ad-22,\6\ as set forth in the following 
discussion.
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    \6\ 17 CFR 240.17Ad-22.
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    Margin Requirements. Rule 17Ad-22(e)(4) \7\ requires LCH SA to 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and

[[Page 42961]]

those arising from its payment, clearing, and settlement processes. In 
terms of financial resources, LCH SA will apply its existing margin 
methodology--including its Wrong Way Risk margin framework--to the new 
iTraxx ESG Index, which are similar to the European indices currently 
cleared by LCH SA. LCH SA believes that this model will provide 
sufficient margin requirements to cover its credit exposure to its 
clearing members from clearing such contracts, consistent with the 
requirements of Rule 17Ad-22(e)(4).
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    \7\ 17 CFR 240.17Ad-22(e)(4).
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    Financial Resources. Rule 17Ad-22(e)(4)(i) \8\ requires LCH SA to 
maintain sufficient financial resources to cover its credit exposure to 
each participant fully with a high degree of confidence and to the 
extent not already maintained pursuant to paragraph (e)(4)(i), Rule 
17Ad-22(e)(4)(ii) \9\ requires LCH SA to maintain additional financial 
resources at the minimum to enable it to cover a wide range of 
foreseeable stress scenarios that include, but are not limited to, the 
default of the two participant families that would potentially cause 
the largest aggregate credit exposure for the covered clearing agency 
in extreme but plausible market conditions. LCH SA believes its Default 
Fund, under its existing methodology, will, together with the required 
margin, provide sufficient financial resources to support the clearing 
of the iTraxx ESG Index contracts, consistent with the requirements of 
Rule 17Ad-22(e)(4).
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    \8\ 17 CFR 240.17Ad-22(e)(4)(i).
    \9\ 17 CFR 240.17Ad-22(e)(4)(ii).
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    Operational Resources. Rule 17Ad-22(e)(3) \10\ requires LCH SA 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. LCH SA believes that its existing operational and 
managerial resources will be sufficient for clearing of the iTraxx ESG 
Index contracts, consistent with the requirements of Rule 17Ad-
22(e)(3), as this new index contract is substantially the same from an 
operational perspective as the existing index contracts.
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    \10\ 17 CFR 240.17Ad-22(e).
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    LCH SA will also apply its existing default management policies and 
procedures for the iTraxx ESG Index contracts. LCH SA believes that 
these procedures allow for it to take timely action to contain losses 
and liquidity pressures and to continue meeting its obligations in the 
event of clearing member insolvencies or defaults in respect of the 
additional single names, in accordance with Rule 17Ad-22(e)(13).
    The proposed change regarding the transition from EONIA which does 
not comply with the recently introduced EU Benchmarks Regulation to 
ESTER is intended to comply with this European Central Bank (ECB) 
initiative supported by regulators. Rule 17Ad-22(e)(1) \11\ 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 17Ad-22(e)(2)(iii) \12\ 
also requires to support the objectives of participants.
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    \11\ 17 CFR 240.17Ad-22 (e)(1).
    \12\ 17 CFR 240.17Ad-22(e)(iii).
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    For all these reasons, 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.

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.\13\ The iTraxx 
ESG Index contracts will be available to all LCH SA's CDSClear 
participants for clearing. The clearing of these new iTraxx ESG Index 
contracts by LCH SA does not preclude the offering of the iTraxx ESG 
Index contracts for clearing by other market participants. Accordingly, 
LCH SA does not believe that clearance of the new iTraxx ESG Index 
contracts will impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \13\ 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.

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-2020-002 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-2020-002. 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

[[Page 42962]]

to make available publicly. All submissions should refer to File Number 
SR-LCH SA-2020-002 and should be submitted on or before August 5, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15205 Filed 7-14-20; 8:45 am]
BILLING CODE 8011-01-P


