[Federal Register Volume 85, Number 179 (Tuesday, September 15, 2020)]
[Notices]
[Pages 57266-57273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20253]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89793; File No. SR-LCH SA-2020-003]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change, as Modified by Amendment No. 1, Relating to LCH SA's 
Governance Arrangements

September 9, 2020.

I. Introduction

    On July 23, 2020, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4,\2\ 
a proposed rule change to adopt certain changes to its governance 
arrangements, as described below. On July 29, 2020, LCH SA filed 
Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change, as modified by Amendment No. 1 (hereafter the ``proposed rule 
change''), was published for comment in the Federal Register on August 
10, 2020.\4\ The Commission did not receive comments on the proposed 
rule change. For the reasons discussed below, the Commission is 
approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ LCH SA filed Amendment No. 1 to correct the Exhibit 5 to the 
original filing to reflect a change in Article 13 of the Terms of 
Reference of the Board of Directors of LCH SA and to correct an 
erroneous citation in the original filing.
    \4\ Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change, as Modified by Amendment No. 1, Relating to 
LCH SA's Governance Arrangements, Exchange Act Release No. 89465 
(Aug. 4, 2020), 85 FR 48295 (Aug. 10, 2020) (SR-LCH-SA-2020-003) 
(``Notice'').
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II. Description of the Proposed Rule Change

A. Background

    LCH Group Holdings Limited (``LCH Group'') \5\ is the majority-
owner and parent company of LCH SA.\6\ London Stock Exchange Group PLC 
(``LSEG'') is the majority-owner and parent company of LCH Group. LCH 
Group is also the parent company of LCH Limited, a central counterparty 
(``CCP'') authorized to offer clearing services in the European Union 
and registered with the Commodity Futures Trading Commission as a 
derivatives clearing organization.
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    \5\ This description is substantially excerpted from the Notice, 
85 FR 48295. Capitalized terms not otherwise defined herein have the 
meanings assigned to them in the LCH SA CDSClear Rule Book or the 
LCH SA governing documents, as applicable.
    \6\ LCH Group currently owns 88.9 percent of LCH SA; Euronext 
N.V. owns 11.1 percent of LCH SA. See Notice, 85 FR at 48295, n. 4.
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    In connection with its purchase of approximately 58 percent of LCH 
Group in 2013, LSEG entered into an agreement (the ``Relationship 
Agreement'') with LCH Group for the purpose of, among other things: (i) 
Establishing core operating principles to be applied in managing the 
business of LCH Group; (ii) protecting minority shareholders of LCH 
Group by requiring the approval of 80 percent of votes on certain 
matters; (iii) requiring that the Board of Directors of LCH Group and 
the Boards of LCH SA and LCH Limited be comprised of a mix of 
independent non-executive directors, executive directors, User 
Directors (as defined below), Venue Directors (as defined below), and 
LSEG representatives; and (iv) requiring LSEG, as a majority 
shareholder, to consent to certain actions, such as approval of the LCH 
Group budget.
    LCH SA represents that the Relationship Agreement is no longer 
necessary because certain contractual provisions are provided for in 
law or regulation and other provisions are historic and no longer 
relevant. Notably, since 2013, LSEG has added to its shareholdings in 
LCH Group and now owns approximately 83 percent of LCH Group. 
Therefore, the minority protection provisions noted above are no longer 
relevant as LSEG alone could approve such matters by voting its shares. 
Consequently, LCH SA states that LCH Group and LESG plan to terminate 
the Relationship Agreement. LCH Group also has determined to simplify 
its governing arrangements and to eliminate provisions in LCH Group's 
governance documents that are unnecessary and outdated. LCH SA also 
represents that LCH Group has also determined to eliminate duplication 
in decision-making between its Board of Directors and the Boards of LCH 
SA and LCH Limited by limiting the LCH Group Board to representatives 
of LSEG and LCH Group only. Further, LCH SA states that LCH Group will 
amend its Articles of Association accordingly.\7\
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    \7\ See Notice, 85 FR at 48296.
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    In response to the actions of LCH Group, LCH SA has submitted the 
proposed rule change to amend and simplify LCH SA's governance 
arrangements to reflect changes in LCH Group's governance arrangements. 
Specifically, the proposed rule change would (i) amend the Board of 
Directors of LCH SA (the ``Board'') Terms of Reference (``Board TOR''); 
(ii) adopt the Terms of Reference of the Nomination Committee of the 
Board (``Nomination Committee TOR''); (iii) amend the Terms of 
Reference of the Risk Committee of the Board (``Risk Committee TOR''); 
(iv) amend the Terms of Reference of the Audit Committee of the Board 
(``Audit Committee TOR''); and (v) amend the Terms of Reference of the 
Remuneration Committee of the Board (``Remuneration Committee TOR''). 
Independent of these amendments related to the changes at LCH Group, 
the proposed rule change would also adopt the Terms of Reference of the 
Technology, Security,

[[Page 57267]]

and Resilience Committee of the Board (``TSR Committee'' and ``TSR 
Committee TOR''). Although the proposed rule change would revise LCH 
SA's governance arrangements to reflect the changes that LCH Group is 
making to its own governance, LCH SA represents that the proposed rule 
change would not change the substance of LCH SA's current 
governance.\8\
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    \8\ See Notice, 85 FR at 48296.
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B. Board TOR

    As discussed above, the proposed rule change would amend the Board 
TOR in light of the planned termination of the Relationship Agreement 
and the planned amendment of the LCH Group Articles of Association. 
Specifically, the proposed rule would (i) remove provisions that are 
now unnecessary in light of the changes discussed above; (ii) establish 
consent rights for LSEG, similar to those in the Relationship 
Agreement, and consultation requirements for LCH Group; (iii) update 
the composition and operation of the Board and the committees of the 
Board; and (iv) eliminate the inclusion of Venue Directors on the 
Board.
    The proposed rule change would first remove those provisions no 
longer required as a result of the planned termination of the 
Relationship Agreement and the planned amendment of the LCH Group 
Articles of Association. In Article 2, the proposed rule change would 
remove definitions arising from the Relationship Agreement. The 
proposed rule change would also remove references to the Relationship 
Agreement in Article 4 and Article 12.
    The proposed rule change would also revise a number of provisions 
to establish consent rights for LSEG as the indirect majority owner of 
LCH SA, similar to the rights provided to LSEG in the Relationship 
Agreement. For example, the proposed rule change would amend Article 3 
to provide LSEG a representative on the Board unconditionally.\9\ The 
proposed rule change would also amend Article 12 to require that LSEG 
consent to the Board's approval of a number of matters, including among 
other things, LCH SA's annual budget and material changes thereto. 
Similarly, the proposed rule change would amend Article 13 to give LSEG 
the right to consent to the settlement of certain litigation and to 
certain investments in information technology. Finally, the proposed 
rule change would add new Article 27, which would provide that the 
Board TOR may be amended by the Board, provided that any changes to 
LSEG's rights or any changes which would otherwise have a detrimental 
effect on LSEG's rights pursuant to the Board TOR would be subject to 
LSEG's consent.
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    \9\ Article 3 currently provides that LSEG is entitled to a 
representative on the Board ``for so long as LSEG is entitled to 
exercise or control the exercise of at least 5 percent of the votes 
able to be cast on all or substantially all matters at general 
meetings in LCH Group Holdings Limited.''
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    Similar to these consent rights granted to LSEG, the proposed rule 
change would require that the CEO of LCH SA consult with LCH Group 
prior to taking certain actions. Under amended Article 13, the CEO 
would need to consult with, and obtain the approval of, the Board of 
LCH Group before taking a number of actions, including among other 
things, entering into any type of joint venture arrangement between LCH 
SA and any third party.
    To facilitate these consent and consultation requirements, the 
proposed rule change would amend a number of articles to permit LCH 
SA's sharing of information with LCH Group and LSEG. The proposed rule 
change would amend Article 13 to require the CEO of LCH SA to provide 
to LSEG audited accounts for each financial year, along with financial 
and other information as needed for reporting requirements and budget 
forecasting. Moreover, Article 14 currently prohibits a director of LCH 
SA that was nominated by a shareholder of LCH Group (i.e., LSEG) from 
sharing information with the shareholder of LCH Group that made the 
nomination without the consent of the majority of the independent of 
LCH SA. The proposed rule change would amend Article 14 to provide that 
this general prohibition would not prevent information from being 
shared with LSEG, in its capacity as an indirect shareholder of LCH SA, 
for legal, accounting, tax regulatory, or disclosure purposes. In 
addition, under new Article 26, the Board must in certain cases notify 
LSEG of proposed transactions, and receive LSEG's approval before 
entering into such transactions, where the transactions trigger certain 
requirements for LSEG as a listed company in the UK.
    Moreover, to allow further coordination and cooperation among LCH 
SA, LCH Group, and LSEG, the proposed rule change would add new 
provisions to resolve possible conflicts of interest among the 
companies. Article 25 currently imposes certain requirements on 
agreements between LCH SA and related parties, like LCH SA's directors 
and shareholders. The proposed rule change would amend Article 25 to 
provide that any contracts and agreements between LCH SA and LSEG or 
any member of the LSEG Group,\10\ will be subject to the prior approval 
of a committee of the Board consisting solely of the independent non-
executive directors of LCH SA and that approval will be given provided 
that the contract or agreement is on bona fide arm's length terms.
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    \10\ LSEG Group means London Stock Exchange Group plc and its 
subsidiaries from time to time other than those entities comprising 
the LCH Group.
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    The proposed rule change would also make a number of changes to the 
composition and operation of the Board in light of these changes. With 
respect to the composition of the Board, Article 3 currently provides 
that the Chief Risk Officer of LCH Group, along with the CEO of LCH SA 
and the CEO of LCH Group, will be the executive directors of the Board. 
The proposed rule change would amend Article 3 to provide that the 
Chief Risk Officer of LCH Group may, but is not required to, be one of 
the three executive directors of the Board. The proposed rule change 
similarly would remove the requirement that the Chairman of LCH Group 
be an independent non-executive director of the Board. Finally, the 
proposed rule change would update a reference in Article 3 to refer to 
the LCH SA Nomination Committee rather than the LCH Group Nomination 
Committee. As discussed further below, this change is necessary because 
LCH Group is disbanding its Nomination Committee.
    With respect to the operation of the Board, the proposed rule 
change would first make a technical correction to Article 6, Quorum. 
This proposed revision would clarify that the Board may validly 
deliberate if at least half of the directors are present. LCH SA 
maintains that this is the intention behind the current language of 
Article 6 but that, as currently written, the language could be 
misinterpreted to mean that the Board could not deliberate if more than 
half of the Directors are present. As discussed above, the proposed 
rule change would amend Article 12 regarding the powers of the Board to 
require that LSEG consent to the Board's approval of a number of items. 
In addition, Article 12(e) assigns to the Board a number of 
responsibilities related to risk management. These responsibilities 
include, among other things, the annual adoption of the LCH Group Risk 
Governance Framework and a number of LCH SA-specific policies, such as 
the Financial Resource Adequacy Policy. As currently drafted, however, 
Article 12(e) does not actually require that the Board approve the 
adoption of the LCH Group

[[Page 57268]]

Risk Governance Framework or the LCH SA-specific policies. The proposed 
rule change would clarify this by amending Article 12(e) to 
specifically require that the Board annually approve the adoption of 
the LCH Group Risk Governance Framework and policies. Finally, Article 
12(d) currently provides the Board the power to issue a report to the 
LCH SA shareholders to recommend a dividend, to be decided upon at a 
general meeting of the shareholders. The proposed rule change would 
alter this to explicitly require that the Board take into account 
certain factors prior to issuing the report. LCH SA is making this 
particular change to incorporate into Article 12(d) provisions from an 
existing LCH Group dividend policy which already has been adopted by 
LCH SA.\11\
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    \11\ See Notice, 85 FR at 48297.
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    In line with these changes, the proposed rule change would make a 
number of changes to Articles 15-20, which pertain to specific 
committees of the Board. Article 15 introduces the Committees of the 
Board and explains, in general terms, their duties and 
responsibilities. The proposed rule change would amend Article 15 to 
note the addition of the TSR Committee and to change the reference to 
the LCH Group Nomination Committee to the LCH SA Nomination Committee 
(as discussed below, LCH Group is disbanding its Nomination Committee).
    Article 16 describes in general terms the Audit Committee. The 
proposed rule change would amend Article 16 to remove the requirement 
that the Audit Committee TOR be substantially similar to the terms of 
reference of the Audit Committee of LCH Group. This change is necessary 
because, as discussed below, LCH Group is disbanding its Audit 
Committee. Moreover, the proposed rule change would amend Article 16 to 
recognize that changes in the Audit Committee TOR may be required by 
LCH SA's regulators (and not LCH Group's regulators) or any applicable 
law or regulation and to confirm that a Director representing LSEG and 
a Director representing Euronext would be a part of the Audit 
Committee.
    Article 17 describes in general terms the Risk Committee. The 
proposed rule change would amend Article 17 to confirm that a Director 
representing LSEG would be vice-chairman of the Risk Committee.
    Article 18 describes in general terms the Nomination Committee. The 
proposed rule change would amend Article 18 to remove any reference to 
the LCH Group Nomination Committee and the requirement that, in the 
event LCH SA establishes its own Nomination Committee, its term of 
reference must be substantially similar to the terms of reference of 
the LCH Group Nomination Committee. This change is necessary because, 
as discussed below, LCH Group is disbanding its Nomination Committee. 
Moreover, the proposed rule change would amend Article 18 to confirm 
that a director representing LSEG would be a member of LCH SA's 
Nomination Committee.
    Article 19 describes in general terms the Remuneration Committee. 
The proposed rule change would amend Article 19 to remove the provision 
requiring that the Remuneration Committee TOR take into account the 
remuneration policies and principles of the LCH Group Remuneration 
Committee. This change is necessary because, as discussed below, LCH 
Group is disbanding its Remuneration Committee. Moreover, the proposed 
rule change would amend Article 19 to confirm that a director 
representing LSEG would be a member of LCH SA's Remuneration Committee.
    The proposed rule change would add new Article 20 to describe in 
general terms the TSR Committee. As discussed further below, the TSR 
Committee is a new Board committee. New Article 20 would specify that 
its organization and functions would be set out in the TSR Committee 
TOR.
    The proposed rule would also specify the requirements for review 
and approval of changes to the terms of reference of the various Board 
committees. For the Risk Committee TOR, Remuneration Committee TOR, and 
Audit Committee TOR, the Board must review and approve the terms of 
reference annually and LSEG must consent to the terms of reference, in 
respect of its rights under the terms of reference for each of these 
committees. With respect to the Nomination Committee TOR, the Board 
must review and approve the terms of reference annually and LSEG must 
consent to the terms of reference. LSEG's consent right under the 
Nomination Committee TOR is thus slightly more extensive, because that 
the LCH Group Nomination Committee Terms of Reference, upon which the 
Nomination Committee TOR is based, required LSEG consent for any 
amendment, not just with respect to its rights under the terms of 
reference.\12\ The TSR Committee TOR and changes thereto would not be 
subject to the consent of LSEG because, as discussed further below, the 
TSR Committee would review, recommend, and report to the Board 
regarding technology matters but would not otherwise take action on 
behalf of the Board.
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    \12\ See Notice, 85 FR at 48298, n.16.
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    Finally, the proposed rule change would also make amendments to the 
inclusion of Venue Directors at LCH SA. Currently, the Board TOR 
provides that the Board shall include Venue Directors. Venue Directors 
are directors that (i) are nominated by a shareholder of LCH Group 
Holdings Limited that is a Venue (meaning an exchange) or (ii) are 
otherwise connected to such a shareholder by virtue of employment or 
directorship. As explained in the Notice, LCH SA represents that, with 
the exception of Euronext, there have been no Venue Directors on the 
LCH SA Board for some time.\13\ Since 2018, there has only been one 
entity (other than Euronext) that would qualify to nominate a Venue 
Director and that entity has not been interested in being represented 
on any LCH board.\14\ For that reason, the proposed rule change would 
remove the requirement for a Venue Director and would also delete the 
associated definitions in Article 2. With respect to Euronext, it is 
entitled to propose a director pursuant to certain existing contractual 
agreements.\15\ Thus, the Board TOR, as amended, would provide that 
Euronext is entitled to propose at least one of the directors to the 
Board as long as these agreements remain in force.
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    \13\ See Notice, 85 FR at 48297, n. 13.
    \14\ See Notice, 85 FR at 48297, n. 13.
    \15\ See Notice, 85 FR at 48297, n. 13.
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C. Nomination Committee TOR

    As noted above, as part of the governance changes at LCH Group, the 
Board of LCH Group will be disbanding its committees, including its 
Nomination Committee. The LCH Group Nomination Committee served the 
functions of a nomination committee for LCH SA. Therefore, in light of 
the disbanding of the LCH Group Nomination Committee, LCH SA will 
establish its own Nomination Committee. Thus, the proposed rule change 
would adopt the Nomination Committee TOR to establish, among other 
things, the purpose, duties, powers, and procedures of the LCH SA 
Nomination Committee.
    The overall purpose and background of the Nomination Committee, as 
described in Articles 1 and 2, would be to make recommendations to the 
Board for nominations of candidates for appointment as directors of the 
Board. Under Article 2, the Nomination Committee would nominate (i) an 
independent chairman of the Board (the ``Chairman''); (ii) up to four

[[Page 57269]]

independent directors that meet the standard for independence set out 
in the Nomination Committee TOR (``Independent Directors''); (iii) up 
to two directors (``User Directors'') associated with shareholders of 
LCH Group (other than LSEG) or other exchanges, trading venues, or 
trading facilities (``User Shareholders''); (iv) the director nominated 
by LSEG; and (v) the director nominated by Euronext. Moreover, the CEO 
of LCH Group, the CEO of LCH SA as proposed by the CEO of LCH Group, 
and the Chief Risk Officer of LCH Group or another executive as 
proposed by the CEO of LCH Group would serve on the Board (each an 
``Executive Director'').
    LCH SA maintains that this structure would not change the Board's 
current proportion of independent directors or number of directors 
representing members and participants.\16\ This structure would, 
however, eliminate from the Board Venue Directors because, as discussed 
above, LCH SA has determined there is no reason to continue the 
inclusion of Venue Directors on the Board.
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    \16\ See Notice, 85 FR at 48298.
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    Article 3 would provide more detail regarding the director 
nominated by LSEG, including that LSEG has the right to nominate one 
director to the Board and a replacement should that director retire. 
Article 4 would provide more detail regarding the director nominated by 
Euronext, including that Euronext has the right to nominate one 
director to the Board and a replacement should that director retire. 
Article 5 would specify that the LCH SA CEO would be responsible for 
appointing their own management team in consultation with the LCH Group 
CEO.
    Article 6 would set out the duties and powers of the Nomination 
Committee. Among other duties, the Committee would be required to (i) 
ensure that recommended candidates understand the responsibilities of 
Board membership and are able to devote the necessary time to LCH SA 
matters; (ii) ensure that recommended candidates are respected for 
their competence and are of good standing in their field of business; 
(iii) keep itself informed of any changes in law or regulations 
applicable to the composition of the Board and other matters for which 
the committee is responsible; and (iv) consult periodically with the 
nomination committee of LCH Limited to ensure that there is a 
coordinated process for the appointment of suitable directors to both 
boards.
    Article 7 would set out the procedures that the Nomination 
Committee would use to recommend candidates to be Chairman and 
Independent Directors. Moreover, Article 7 would establish the 
standards that the Nomination Committee would use to determine if a 
person is fit for appointment as Chairman or an Independent Director, 
including, among other factors, whether the person is independent in 
character and judgment. Moreover, in making recommendations with regard 
to Independent Directors, Article 7 would require that the Nomination 
Committee take into account that the Independent Directors should 
reflect: (i) A breadth of industry expertise and experience and product 
knowledge; (ii) particular expertise and experience in risk management, 
audit, clearing services and financial services; and (iii) diversity, 
including gender, age, geographical provenance, and educational and 
professional background. Finally, an Appendix to Article 7 would 
provide the procedures the Nomination Committee would use to invite 
User Shareholders to propose candidates to be User Directors, and the 
procedures the Nomination Committee would use to approve and select 
nominees from such candidates. The Appendix would further require that 
the Nomination Committee receive LSEG's approval prior to recommending 
a candidate's appointment to the Board as a User Director.
    Article 8 would set out the tenure for directors. Under Article 8, 
each director (other than the Executive Directors and User Directors) 
would have, in principle, a maximum tenure on the Board of three three-
year terms. However, the Nomination Committee would be allowed to 
nominate an Independent Director for such longer period as is necessary 
to ensure that not all such Independent Directors' appointments 
terminate at the same time. All User Directors would have a tenure on 
the Board of one three-year term, unless otherwise agreed by the Board 
to ensure that not all such User Directors' appointments terminate at 
the same time.
    The remaining articles of the Nomination Committee TOR would 
explain the membership and operation of the Nomination Committee. Under 
Article 9, the Board would appoint members to the Nomination Committee, 
which would be comprised of four to six directors, including the 
Chairman, at least two Independent Directors, one User Director and the 
LSEG Director. The Chairman of the Board, or such other Independent 
Director as the Independent Directors and LSEG may agree, would be the 
Chairman of the Nomination Committee. Article 10 would explain who 
would serve as secretary of the Nomination Committee, and Article 11 
would explain the tenure of members of the Nomination Committee. 
Articles 12 through 16 would explain the conduct of meetings of the 
Nomination Committee, including notice, timing, location, attendance, 
quorum, and keeping of minutes. Article 17 would require the Chairman 
of the Nomination Committee to report to the Board on the discussions, 
decisions, and recommendations of the Committee and further require 
that the Nomination Committee furnish to the Board for approval each 
year a summary of, among other things, its activities and certain of 
its policies. Article 18 would provide that the Nomination Committee 
TOR could be amended from time to time with Board approval, subject to 
LSEG consent (as discussed above). Finally, Article 19 would set out 
the requirements with respect to confidentiality and conflicts of 
interest, and Article 20 would cover other miscellaneous matters, such 
as access to training and resources for members of the Nomination 
Committee.

D. Risk Committee TOR

    The proposed rule change would amend the Risk Committee TOR to 
reflect the changes in the LCH Group governing arrangements but would 
not make substantive changes to the current Risk Committee TOR. For 
example, the proposed rule change would amend Article 1 to reference 
the criteria for independence set out in LCH SA's Nomination Committee 
TOR rather than in LCH Group's Nomination Committee terms of reference 
because, as discussed above, LCH Group is disbanding its Nomination 
Committee. The proposed rule change would also revise Article 16, 
regarding confidentiality and conflicts of interest, to refer to rights 
LSEG or its representatives have under the Risk Committee TOR rather 
than rights LESG had under the Relationship Agreement.
    The proposed rule change would also amend Article 1 to remove the 
provision that authorized LSEG to appoint the Vice Chairman of the 
committee only for so long as LSEG is entitled to exercise or control 
the exercise of at least 40 percent of the votes able to be cast on all 
or substantially all matters at general meetings of LCH SA. LCH SA 
considers this provision to be unnecessary because, as discussed above, 
LSEG now indirectly owns more than 40 percent of LCH SA. Under Article 
1 as revised, LSEG is entitled to appoint the Vice Chairman provided 
that the person appointed has the skills

[[Page 57270]]

and experience commensurate with such a role.
    The proposed rule change would also amend Article 17 to remove 
references to LCH LLC. Although LCH LLC is registered with the CFTC as 
a DCO, its registration is currently dormant.\17\
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    \17\ Notice, 85 FR at 48300, n. 26.
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    Finally, the proposed rule change would amend Article 20 to specify 
the provisions which the Board could only amend with LSEG's consent.

E. Audit Committee TOR

    The proposed rule change would amend the Audit Committee TOR to 
reflect the changes in the LCH Group governing arrangements but would 
not make substantive changes to the current Audit Committee TOR. For 
example, the proposed rule change would amend Article 2 to reference 
the criteria for independence set out in LCH SA's Nomination Committee 
TOR rather than in LCH Group's Nomination Committee terms of reference 
because, as discussed above, LCH Group is disbanding its Nomination 
Committee.
    Moreover, the proposed rule change would amend Article 2 to remove 
the provision that LSEG is entitled to recommend or approve a director 
to the Audit Committee so long as it is entitled to exercise or control 
the exercise of at least 20 percent of the votes able to be cast at 
general meetings of LCH Group. As discussed above, LSEG now owns more 
than 20 percent of LCH Group. Thus, LCH SA no longer considers this 
provision to be necessary. Rather, under Article 2 as amended, LSEG 
always would be entitled to recommend or approve a director to the 
Audit Committee. The proposed rule change would also amend Article 2 to 
require that the LSEG-approved director be present at a meeting to 
establish quorum.
    Similarly, the proposed rule change would amend Article 3 to remove 
the requirement that LCH SA's Audit Committee coordinate with the Audit 
Committee of LCH Group. As discussed above, LCH Group is disbanding its 
Audit Committee. For similar reasons, the proposed rule change would 
remove the requirement that the Audit Committee respond to any requests 
from the LCH Group Audit Committee to vary LCH SA's internal audit 
program of work. Moreover, the proposed rule change would require that 
the Audit Committee consider the auditor appointed by LSEG in respect 
of the wider LSEG Group when making recommendations to the Board 
concerning the appointment, evaluation and termination of the 
engagement of the external auditors for LCH SA.
    The proposed rule change would make other updates to the 
responsibilities of the Audit Committee. To take into account the new 
TSR Committee, the proposed rule change would amend Article 3 to 
require the Audit Committee to coordinate with the TSR Committee. In 
addition, the proposed rule change would revise references in Article 3 
to external ``auditors'' rather than an ``auditor'', to recognize that 
LCH SA has more than one external auditor. Finally, the proposed rule 
change would also amend Article 3 to provide that the Committee will 
review the annual audit plan prepared by LCH SA's Internal Audit 
department after approval by the LCH SA's CEO and ahead of any 
submission of the plan to LCH SA's regulator, if requested by the 
regulator.
    The proposed rule change would also make minor amendments to the 
operation of the Audit Committee in Article 5 and Article 8. In Article 
5, the proposed rule change would add language to confirm that the 
Committee secretary will present all minutes of the proceedings and 
resolutions of all Committee meetings to the Committee for approval at 
the next following meeting. The proposed rule change would also delete 
current Article 8, which provides that the Committee will arrange for 
periodic reviews of its own performance and, at least annually, arrange 
for independent internal review of its constitution and these Terms of 
Reference. Instead, pursuant to the terms of the Board Terms of 
Reference and LCH SA's representation, the Board, along with LCH SA's 
executive management, would conduct this review.\18\ In place of 
current Article 8, the proposed rule change would add a new article on 
amendments to the Audit Committee TOR to specify the provisions which 
the Board could only amend with LSEG's consent.
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    \18\ See Notice, 85 FR at 48301.
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F. Remuneration Committee TOR

    The proposed rule change would amend the Remuneration Committee TOR 
to reflect the changes in the LCH Group governing arrangements and to 
make other updates to the process for approving the remuneration of 
certain executives of LCH SA. For example, the proposed rule change 
would delete from Article 2 the provision that LSEG is entitled to 
appoint a representative to the committee only for so long as LSEG is 
entitled to exercise or control the exercise of at least five percent 
of the votes able to be cast at general meetings of LCH Group. As 
discussed above, LSEG now owns more than five percent of LCH Group. 
Thus, LCH SA no longer considers this provision to be necessary. Under 
Article 2 as revised, LSEG always will be entitled to appoint a 
representative to the Remuneration Committee. Similarly, the proposed 
rule change would revise Article 2 to authorize the LCH Group CEO to 
attend committee meetings as an observer. Finally, the proposed rule 
change would Article 12, Confidentiality and Conflicts of Interest, to 
remove reference to any rights LSEG may have in the Relationship 
Agreement and refer, instead, to rights LSEG or its representatives 
have under the Remuneration Committee TOR.
    The proposed rule change would also revise the Remuneration 
Committee TOR to reflect some minor changes in the remuneration 
process. For example, the proposed rule change would amend Article 1, 
to provide that LCH SA's remuneration policies would apply to 
``Specified Executives'' rather than ``Executive Management.'' LCH SA 
is making this technical change to confirm that the remuneration 
policies would apply only to those executives identified in the 
Remuneration Committee TOR or otherwise specified by the Board and 
would not apply to other LCH SA executives who otherwise might be 
deemed to fall within the category of ``Executive Management'' for 
other purposes. As proposed to be revised, ``Specified Executives'' 
would mean, with respect to LCH SA, the Board Chairman, the CEO, the 
Chief Risk Officer, the Chief Compliance Officer, and any other 
personnel designated by the Board from time to time, including any 
personnel with an annual remuneration package of more than 
[euro]1,000,000 or equivalent.
    Moreover, the proposed rule change would simplify the process for 
approval of the remuneration of the CEO or any Specified Executive. 
Under the process as revised, the Remuneration Committee first would 
consult with the LCH Group CEO before making a recommendation to the 
Board for approval, rather than first consulting with the LCH Group CEO 
and the LSEG CEO. Because the LSEG Remuneration Committee must approve 
the remuneration of the CEO or any Specified Executive as the final 
step in the process anyway, LCH SA does not believe it is necessary to 
consult with the Chief Executive Officer of LSEG at the start of the 
process.\19\ The proposed

[[Page 57271]]

rule change would also amend Article 1 to require the Committee to 
review annually the ongoing appropriateness of any individual's 
remuneration and to review and recommend for approval by the Board the 
design of all incentive plans and performance related pay schemes, 
including performance targets to be used, that are designed by and 
received from the LSEG remuneration committee.
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    \19\ With regard to the remuneration of directors, the proposed 
rule change would also amend Article 1 to provide that the 
Remuneration Committee will consult from time to time with the 
remuneration committee of LSEG and the remuneration committee of LCH 
Limited to ensure that there is a coordinated approach to the 
remuneration of directors on the Board and the board of directors of 
LCH Limited.
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    The proposed rule change would also amend Article 9 to require that 
minutes be presented to the Remuneration Committee for approval at the 
next meeting and Article 10 to specify the provisions that the Board 
could only amend with LSEG's consent.

G. TSR Committee TOR

    Independent of the changes that LCH SA is making to reflect the 
changes to the governance of LCH Group, LCH SA has also proposed to 
create the TSR Committee of the Board and adopt the TSR Committee TOR. 
As set forth in the TSR Committee TOR, the overall purposes of the TSR 
Committee would be to represent the interests of the Board in the sound 
management of technology security and operational resilience, including 
cyber security and to ensure that technology security and operational 
resilience strategies, investments and outcomes support the mission, 
values, and strategic goals of LCH SA. To that end, the TSR Committee 
would be responsible for, among other things, review of LCH SA's 
operations and technology strategy and investments in technology in 
support of that strategy. To carry out its responsibilities, the TSR 
Committee would have full access to management and employees, as well 
as systems and records, and would be authorized to obtain independent 
professional advice. The Chairman of the TSR Committee would report its 
discussions and findings to the Board, but the TSR Committee would have 
not executive powers other than making findings and recommendations.
    The TSR Committee TOR would also describe the composition and 
operation of the TSR Committee, including the conduct and attendance of 
meetings, requirements to establish quorum, and the confidentiality of 
matters considered by the TSR Committee.

III. Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the 
organization.\20\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Sections 17A(b)(3)(C) 
\21\ and 17A(b)(3)(F) of the Act \22\ and Rule 17Ad-22(e)(2)(i), (iv), 
(v), and (vi) thereunder.\23\
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    \20\ 15 U.S.C. 78s(b)(2)(C).
    \21\ 15 U.S.C. 78q-1(b)(3)(C).
    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ 17 CFR 240.17Ad-22(e)(2)(i), (iv), (v), (vi).
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A. Consistency With Section 17A(b)(3)(C) of the Act

    Section 17A(b)(3)(C) of the Act requires that the rules of LCH SA 
assure a fair representation of its shareholders (or members) and 
participants in the selection of its directors and administration of 
its affairs.\24\ The Exchange Act does not define fair representation 
or establish particular standards of representation. The Commission has 
stated that, ``at a minimum, fair representation requires that the 
entity responsible for nominating individuals for membership on the 
board of directors should be obligated by by-law or rule to make 
nominations with a view toward assuring fair representation of the 
interests of shareholders and a cross-section of the community of 
participants.'' \25\ The Commission believes that the proposed rule 
change is consistent with the fair representation requirement.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78q-1(b)(3)(C).
    \25\ Exchange Act Release No. 20221 (Sept. 23, 1983), 48 FR 
45167, 45172 (Oct. 3, 1983).
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    First, as discussed in Part II.B above, the proposed rule change 
would provide LCH SA's indirect majority shareholder, LSEG, a 
representative on the Board and would require LSEG's consent prior to 
the Board's approval of a number of matters, including amendments to 
the Board TOR that would affect LSEG's rights. Similarly, the proposed 
rule change would require that the LCH SA CEO consult with, and obtain 
the approval of, the Board of LCH Group, LCH SA's direct majority 
shareholder, before taking a number of actions. To facilitate these 
consent and consultation requirements, the proposed rule change also 
would amend the Board TOR to permit LCH SA's sharing of information 
with LCH Group and LSEG and to resolve possible conflicts of interest 
among the companies. Moreover, with respect to specific committees of 
the Board, the proposed rule change would ensure some form of 
representation for LSEG on the Nomination Committee, Risk Committee, 
Audit Committee, and Remuneration Committee. Similarly, the proposed 
rule change would require LSEG's consent to changes to the terms of 
reference of a number of Board committees. With these changes, the 
Commission believes the proposed rule change should assure a fair 
representation of LCH SA's shareholders in the selection of its 
directors and administration of its affairs.
    Second, as discussed in Part II.B above, the proposed rule change 
would remove from the Board TOR the requirement that the Board include 
a Venue Director. Based on LCH SA's representation, the Commission 
understands that, with the exception of Euronext, currently only one 
entity would qualify to nominate a Venue Director and that such entity 
has not shown an interest in representation on the Board.\26\ With 
respect to Euronext, the proposed rule change would provide that 
Euronext is entitled to propose at least one of the directors to the 
Board as long as certain contractual agreements remain in force. 
Moreover, under the Board TOR and Nomination Committee TOR, as 
discussed in the Part II.B and Part II.C above, the Board would include 
up to two directors nominated by User Shareholders. Given the inclusion 
of representation for Euronext as well as User Shareholders on the 
Board, the Commission believes the proposed rule change should assure a 
fair representation of LCH SA's participants in the selection of its 
directors and administration of its affairs, even with the removal of 
the requirement for specific representation of Venues other than 
Euronext.
---------------------------------------------------------------------------

    \26\ See Notice, 85 FR at 48297, n. 13.
---------------------------------------------------------------------------

    Taking these reasons together, the Commission finds that the 
proposed rule change is consistent with 17A(b)(3)(C) of the Act.\27\
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

B. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of LCH SA be designed to assure the safeguarding of 
securities and funds which are in the custody or control of LCH SA or 
for which it is responsible.\28\
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As discussed above, the proposed rule change would make numerous 
changes to LCH SA's governance arrangements to clarify and amend those 
governance arrangements in light of the anticipated termination of the 
Relationship Agreement and the anticipated changes to LCH Group's 
governance. The Commission believes that, as a general

[[Page 57272]]

matter, these changes should help ensure that LCH SA has governance 
arrangements that support its ability to promptly and accurately offer 
clearance and settlement services to its clearing members and the 
markets LCH SA serves, and effectively manage the range of risks that 
arise in the course of providing such services. Moreover, the 
Commission believes that the proposed rule change should provide 
greater accessibility and clarity to LCH SA shareholders and 
participants to better understand LCH SA's governance arrangements. For 
both of these reasons, the Commission believes that the proposed rule 
change is consistent with the prompt and accurate clearance and 
settlement of securities transactions, and, accordingly, with Section 
17A(b)(3)(F) of the Act.\29\
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Moreover, as discussed in Part II.B above, the proposed rule change 
would clarify the wording in Article 12(e) of the Board TOR to 
specifically require the Board to annually approve the adoption of the 
LCH Group Risk Governance Framework and a number of LCH SA-specific 
policies, such as the Financial Resource Adequacy Policy. The 
Commission believes that Board approval of this framework and policies 
should help to ensure that they are sufficient and kept up-to-date. 
Because the LCH Group Risk Governance Framework and other LCH SA-
specific policies, such as the Financial Resource Adequacy Policy, 
should collectively ensure that LCH SA is able to access and secure its 
securities and funds, the Commission believes that this aspect of the 
proposed rule change should help to assure the safeguarding of 
securities and funds which are in the custody or control of LCH SA or 
for which it is responsible, consistent with Section 17A(b)(3)(F) of 
the Act.\30\
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Taking these reasons together, the Commission finds that the 
proposed rule change is consistent with 17A(b)(3)(F) of the Act.\31\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(2)(i), (iv), (v), and (vi)

i. Rule 17Ad-22(e)(2)(i)
    Rule 17Ad-22(e)(2)(i) requires that LCH SA establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to provide for governance arrangements that are clear and 
transparent.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 240.17Ad-22(e)(2)(i).
---------------------------------------------------------------------------

    The Commission believes that the proposed amendments discussed 
above to reflect planned changes to the LCH Group governance 
arrangements and the planned termination of the Relationship Agreement 
would enhance the clarity of LCH SA's governance arrangements. In 
particular, the Commission believes that removing certain provisions 
from, and updating references in, the terms of reference of the various 
Board committees in light of the anticipated changes to the LCH Group 
governance arrangements and the anticipated termination of the 
Relationship Agreement, as well as removing the requirements that the 
terms of reference be substantially similar to those of LCH Group (as 
discussed in Parts II.B, II.D, II.E, and II.F above), should reduce the 
possibility for confusion, increasing readability, and promoting 
consistency. Similarly, in eliminating the requirement that LCH SA's 
Audit Committee coordinate with the Audit Committee of LCH Group, as 
discussed in Part II.E above, the proposed rule change should remove a 
provision that if left unchanged, could cause confusion as LCH Group is 
disbanding its audit committee.
    Similarly, the Commission believes that the changes discussed above 
regarding the Board would bring clarity to its operation. Specifically, 
in making a technical correction to Article 6 of the Board TOR to 
clarify that the Board may validly deliberate if at least half of the 
directors are present (as discussed in Part II.B above) the proposed 
rule change should reduce the possibility of confusion regarding when 
the Board has a quorum.
    Finally, the Commission believes that, in adopting and updating the 
terms of reference for certain committees of the Board, the proposed 
rule change should clarify the operation of these committees. In 
specifying, among other things, the conduct of meetings, quorum, 
powers, and confidentiality of proceedings of the Nomination Committee 
(as discussed in Part II.G above); how the Audit Committee and 
Remuneration Committee would keep and approve meeting minutes (as 
discussed in Part II.E and Part II.F above); and how the Remuneration 
Committee would approve the remuneration of the LCH SA CEO and 
Specified Executives (as discussed in Part II.F above) the proposed 
rule change should provide clarity to how these committees would 
operate and carry out their responsibilities.
ii. Rule 17Ad-22(e)(2)(iv)
    Rule 17Ad-22(e)(2)(iv) requires that LCH SA establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to provide for governance arrangements that establish that the 
board of directors and senior management have appropriate experience 
and skills to discharge their duties and responsibilities.\33\
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    \33\ 17 CFR 240.17Ad-22(e)(2)(iv).
---------------------------------------------------------------------------

    The Commission believes the changes with respect to the 
establishment of the Nomination Committee discussed in Part II.C above 
should help to ensure consistency with this requirement. Specifically, 
the Commission believes that, in establishing standards the Nomination 
Committee would use in nominating candidates for appointment to the 
Board, the proposed rule change should help to ensure that directors 
have the experience and skills needed to comply with their 
responsibilities. Similarly, the Commission believes that, in 
establishing the procedures that the Nomination Committee would use to 
recommend candidates to be Chairman, Independent Directors, and User 
Directors, and the standards that the Nomination Committee would use to 
determine to select and recommend such candidates, the proposed rule 
change should help to ensure that the Chairman, Independent Directors, 
and User Directors have the experience and skills needed to comply with 
their responsibilities as such. Moreover, in establishing the tenure 
for directors and allowing the Nomination Committee to nominate 
Independent Directors and User Directors for a longer period as needed 
to ensure that not all terms end at the same time, the proposed rule 
change should help to prevent a sudden loss of experience that could 
negatively affect the Board's ability to carry out its duties. Finally, 
in specifying that the Chief Risk Officer of LCH Group may, but is not 
required to, be one of the three executive directors of the Board and 
removing the requirement that the Chairman of LCH Group be a non-
executive director of the Board, as discussed in Part II.B above, the 
proposed rule change should clarify the composition of the Board, and 
therefore the Board's potential experience and responsibilities.
iii. Rule 17Ad-22(e)(2)(v)
    Rule 17Ad-22(e)(2)(v) requires that LCH SA establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to provide for governance arrangements that specify clear and 
direct lines of responsibility.\34\
---------------------------------------------------------------------------

    \34\ 17 CFR 240.17Ad-22(e)(2)(v).
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    The Commission believes a number of the changes discussed in Part 
II.B above should establish clear and direct lines of responsibility 
for the Board. For

[[Page 57273]]

example, in amending the Board TOR to specifically require the Board to 
annually approve the adoption of the LCH Group Risk Governance 
Framework and a number of LCH SA-specific policies, the proposed rule 
change should clarify this responsibility of the Board. Similarly, by 
amending the Board TOR to require that the Board take into account 
certain factors from an existing LCH Group policy (which has been 
adopted by LCH SA) prior to issuing a report to the LCH SA shareholders 
to recommend a dividend, the proposed rule change should clarify the 
factors the Board must consider when exercising this responsibility. 
Finally, in making the Board responsible for reviewing and approving 
the Nomination Committee TOR, Risk Committee TOR, Remuneration 
Committee TOR, Audit Committee TOR, and TSR Committee TOR annually, the 
proposed rule change should clarify the Board's responsibility with 
respect to these terms of reference.
    The Commission likewise believes a number of the changes discussed 
above should establish clear and direct lines of responsibility for 
committees of the Board. In adding a reference to the TSR Committee in 
the Board TOR and adopting the TSR Committee TOR, the proposed rule 
change would establish the TSR Committee and should clearly assign the 
TSR Committee certain responsibilities and duties, as discussed in Part 
II.G above. Similarly, the proposed rule change should clearly assign 
the Nomination Committee certain responsibilities and duties, as 
specified in the Nomination Committee TOR discussed in Part II.C above. 
Finally, the proposed rule change should clarify the Audit Committee's 
responsibilities by updating references to recognize that LCH SA has 
more than one external auditor, requiring consideration of the auditor 
appointed by LSEG in respect of the wider LSEG Group when making 
recommendations to the Board regarding external auditors for LCH SA, 
and requiring review of LCH SA's annual audit plan in certain 
circumstances, as discussed in Part II.E above.
iv. Rule 17Ad-22(e)(2)(vi)
    Rule 17Ad-22(e)(2)(vi) requires that LCH SA establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to provide for governance arrangements that consider the 
interests of participants' customers, securities issuers and holders, 
and other relevant stakeholders of LCH SA.\35\
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    \35\ 17 CFR 240.17Ad-22(e)(2)(vi).
---------------------------------------------------------------------------

    As discussed above, the proposed rule change would make a number of 
changes to ensure representation of the interests of LCH Group and 
LSEG. For example, the proposed rule change would establish in the 
Board TOR certain representation, consent, and consultation rights 
similar to what LSEG has in the Relationship Agreement, including 
representation on the Board and certain Board committees and rights to 
consent with respect to certain actions of the Board and amendment to 
the Board TOR, as discussed in Part II.B above. Similarly, with respect 
to Board committees, as discussed in Part II.C through II.F above, the 
proposed rule change would grant LSEG representation and the right to 
consent to certain amendments to the terms of reference. Moreover, the 
proposed rule change would give the LCH Group CEO the right to attend 
Remuneration Committee meetings as an observer and would require the 
CEO of LCH SA to consult with LCH Group prior to taking certain 
actions, as discussed in Part II.B above. The proposed rule change 
would also authorize LCH SA's sharing of information with LCH Group and 
LSEG and would add provisions to resolve possible conflicts of interest 
among the companies, as discussed in Part II.B above. The Commission 
believes that all of these changes, taken together, should help to 
ensure LCH SA's consideration of the interests of LSEG and LCH Group, 
which as discussed above, are LCH SA's indirect and direct majority 
shareholders.
    Similarly, the Commission believes that, in providing Euronext the 
right to propose at least one of the director to the Board so long as 
certain contractual agreements remain in force, as discussed in Part 
II.B above, the proposed rule change should help to ensure LCH SA's 
consideration of the interests of Euronext, which as discussed above, 
is a stakeholder in LCH SA.
    For these reasons, the Commission finds that the proposed rule 
change is consistent with Rule 17Ad-22(e)(2)(i), (iv), (v), and 
(vi).\36\
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    \36\ 17 CFR 240.17Ad-22(e)(2)(i), (iv), (v), (vi).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular, with the requirements of Sections 17A(b)(3)(C) \37\ 
and 17A(b)(3)(F) of the Act \38\ and Rule 17Ad-22(e)(2)(i), (iv), (v), 
and (vi) thereunder.\39\
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    \37\ 15 U.S.C. 78q-1(b)(3)(C).
    \38\ 15 U.S.C. 78q-1(b)(3)(F).
    \39\ 17 CFR 240.17Ad-22(e)(2)(i), (iv), (v), (vi).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\40\ that the proposed rule change, as modified by Amendment No. 1 (SR-
LCH-SA-2020-003), be, and hereby is, approved.\41\
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    \40\ 15 U.S.C. 78s(b)(2).
    \41\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-20253 Filed 9-14-20; 8:45 am]
BILLING CODE 8011-01-P


