[Federal Register Volume 85, Number 204 (Wednesday, October 21, 2020)]
[Notices]
[Pages 67055-67063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23264]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90207; File No. SR-LCH SA-2020-004]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to the Clearing of Single Name Credit Default 
Swaps Referencing Monoline Insurance Companies and the Amendment of LCH 
SA's Rules in Accordance With Its Risk Policies

October 15, 2020.

I. Introduction

    On August 28, 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 as described below. The proposed rule change was 
published for comment in the Federal Register on September 10, 2020.\3\ 
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\ Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to the Clearing of Single Name Credit 
Default Swaps Referencing Monoline Insurance Companies and the 
Amendment of LCH SA's Rules in Accordance With its Risk Policies, 
Exchange Act Release No. 89760 (Sep. 3, 2020), 85 FR 55908 (Sep. 10, 
2020) (SR-LCH SA-2020-004) (``Notice'').
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II. Description of the Proposed Rule Change

    As discussed in more detail below, the proposed rule change would: 
(i) Allow LCH to clear credit default swap (``CDS'') contracts on a 
monoline insurance company (meaning an insurance company issuing 
financial guaranty insurance policies or similar financial guarantees); 
(ii) add two new types of margin and make other changes related to 
margin; (iii) apply LCH SA's stress testing to margin collateral; (iv) 
revise LCH's use of credit scores of Clearing Members; (v) enhance LCH 
SA's process for managing Clearing Member defaults; (vi) clarify the 
timeframes associated with the end of day price submission process and

[[Page 67056]]

enhance the consequences for failing to submit end of day prices; (vii) 
clarify certain aspects of the calculation of Clearing Members' 
contributions to the CDS Default Fund; and (viii) make other 
miscellaneous updates, including correcting typographical errors.\4\
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    \4\ This discussion is excerpted from the Notice, 85 FR at 
55908. Capitalized terms not otherwise defined herein have the 
meanings ascribed to them in the LCH SA CDS Clearing Rule Book, the 
LCH SA CDS Clearing Procedures, or the LCH SA CDS Clearing 
Supplement, as applicable.
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A. CDS Contracts Referencing a Monoline Insurance Company

    Currently, LCH SA clears CDS contracts on indices that contain 
monoline insurance companies as constituents, such as the CDX.NA.IG and 
CDS.NA.HY. LCH SA would now like to permit clearing of CDS contracts on 
a monoline insurance company as a single name, rather than as part of 
an index, using the additional legal provisions published by the 
International Swaps and Derivatives Association, Inc. on September 15, 
2014 (the ``Monoline Supplement''). Thus, as a result of the changes 
described below, Clearing Members would be able to clear single name 
CDS contracts on monoline insurance companies, and the Monoline 
Supplement would apply to any single name CDS contract on a monoline 
insurance company.
    To allow clearing of single name CDS contracts on monoline 
insurance companies, the proposed rule change would first amend the LCH 
SA CDS Clearing Supplement (the ``CDS Supplement''). The CDS Supplement 
specifies contractual provisions that apply to transactions among LCH, 
Clearing Members, and clients. Part B, Section 2, sets out the terms of 
cleared transactions for index CDS and single name CDS that incorporate 
the 2014 ISDA Credit Derivatives Definitions. In Part B, Section 2.3 of 
the CDS Supplement, the proposed rule change would amend paragraph (g) 
to include a reference to the Monoline Supplement. As a result of this 
change, the Monoline Supplement would apply to any single name cleared 
transaction involving a monoline insurer.
    Similarly, the proposed rule change would amend Section 2.2 of Part 
B to include a reference to the Monoline Supplement. Part B, Section 2, 
sets out the terms of cleared transactions for index CDS and single 
name CDS that incorporate the 2014 ISDA Credit Derivatives Definitions, 
and Section 2.2 of Part B applies to index CDS transactions. Although, 
as discussed above, LCH currently clears CDS contracts on indices that 
contain monoline insurance companies as constituents, LCH believes it 
is unclear whether the Monoline Supplement would apply to such index 
transactions containing monoline insurance companies. Thus, LCH is 
making this change to remove any doubt and to clarify that the Monoline 
Supplement would be applicable to each constituent of an index that is 
a monoline insurer.
    The proposed rule change also would amend Section 4 of the LCH SA 
CDS Clearing Procedures (the ``Procedures''), which specifies the 
requirements a transaction must satisfy to be eligible for clearing by 
LCH SA. The proposed rule change would modify these requirements to add 
two conditions to LCH SA's clearing of single-name CDS contracts on 
monoline insurance companies. Pursuant to these conditions, LCH SA 
would only clear a single-name CDS contract on a monoline insurance 
company where the contract type is Standard North American Corporate 
and the Monoline Supplement is specified as applicable.
    Finally, LCH represents that the proposed introduction of clearing 
single name CDS contracts on monoline insurers requires no change in 
LCH SA's margin methodology or stress testing, and thus no further 
changes are needed to begin clearing.\5\
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    \5\ See Notice, 85 FR at 55909, n.4.
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B. Changes Related to Margin

    Unrelated to the clearing of single name CDS contracts referencing 
monoline insurers, the proposed rule change would also make a number of 
changes related to LCH SA's margin requirements.
    First, the proposed rule change would add a new type of margin 
called Legal Entity Identifier Margin (``LEI Margin''). LCH SA is 
proposing this new type of margin to remedy a potential issue in how it 
treats Clearing Members and collects margin. Currently, LCH SA may, for 
operational or historical reasons, treat a single Clearing Member as 
two different Clearing Members, with separate transaction accounts and 
margin requirements. LCH SA represents that in most cases, this results 
in higher margins than should otherwise be the case, because the 
different accounts result in separate margin requirements that are not 
netted against each other (as they would be in a single account).\6\ 
LCH SA also believes, however, that this arrangement could potentially 
undercount the liquidation costs that could result from having to 
liquidate both accounts simultaneously in the event the single Clearing 
Member defaulted, which could result from potential concentration 
effects not taken into account when the accounts are considered 
separately.
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    \6\ See Notice, 85 FR at 55909.
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    To remedy this potential undercounting, the proposed rule change 
would introduce LEI Margin. The LEI Margin would calculate an 
additional, incremental margin amount based on the open positions 
registered in the margin accounts of one or more Clearing Members 
identified by the same Legal Entity Identifier (``LEI''). Thus, the LEI 
Margin would address the potential undercounting of liquidation costs 
by considering the risks posed by the Clearing Member as a whole, in 
all accounts with the same LEI.
    Second, the proposed rule change would add another additional 
margin, called Stress Test Loss Over Additional Margin/Net Capital 
Ratio Margin (``STLOAM''). The purpose of STLOAM would be to ensure 
that Clearing Members have enough capital to absorb losses that could 
materialize under an extreme but plausible market risk scenario. To 
calculate STLOAM, LCH SA would first determine a Clearing Member's 
stress risk--how much the cost of a Clearing Member's default in an 
extreme but plausible market risk scenario exceeds its margin and CDS 
Default Fund contributions already deposited with LCH SA. LCH SA would 
then charge the Clearing Member the amount needed to bring this stress 
risk to within 30 percent of the Clearing Member's net capital. In 
other words, LCH SA has determined that a Clearing Member's stress risk 
should not exceed 30 percent of its net capital, and STLOAM would 
charge to a Clearing Member the amount needed to ensure that its stress 
risk does not exceed 30 percent of its net capital.
    The proposed rule change would implement these new margins by 
adding them to the LCH SA Reference Guide: CDS Margin Framework. The 
proposed rule change would also amend the definition of ``Margin'' in 
the Section 1.1.1 of the LCH SA CDS Clearing Rule Book (the ``Rule 
Book'') to include these two new margins. Moreover, as with other 
margins, the LEI Margin and STLOAM would be calculated in accordance 
with Section 2 of the Procedures. Thus, the proposed rule change would 
add to Section 2 new language to describe these margins and how they 
are calculated.
    In addition to introducing these two new margins, the proposed rule 
change would also distinguish Vega Margin from Spread Margin. Because 
Vega Margin is currently calculated as part of Spread Margin, these 
changes would not

[[Page 67057]]

result in a new or additional margin requirement. Rather, these changes 
would separate and distinguish Vega Margin from Spread Margin, with the 
goal of providing additional detail and clarity to Clearing Members 
regarding their amounts of Vega Margin. The proposed rule change would 
make this distinction by: Adding a new definition for Vega Margin in 
Section 1.1.1 of the Rule Book; amending the definition of Margin in 
Section 1.1.1 to include Vega Margin; and adding in Section 2 of the 
Procedures references to Vega Margin and new language to describe Vega 
Margin.
    Finally, the proposed rule change would make two organizational 
changes with respect to defined terms related to margin. First, the 
proposed rule change would delete the defined term Margin Account 
Uncovered Risk from Section 1.1.1 of the Rule Book because this defined 
term is no longer used in the Rule Book. Rather, the term is currently 
only used in Section 6 of the Procedures when discussing the 
calculation of the CDS Default Fund. The proposed rule change would 
replace references to Margin Account Uncovered Risk in Section 6 of the 
Procedures with references to the defined term Group Member Uncovered 
Risk instead. The definition of Group Member Uncovered Risk is the same 
as the definition of Margin Account Uncovered Risk, except that the 
Group Member Uncovered Risk applies to a Clearing Member and its 
affiliates rather than just a Clearing Member. Thus, the Group Member 
Uncovered Risk covers the Margin Account Uncovered Risk, and, as such, 
there is no need to separately refer to the Margin Account Uncovered 
Risk.
    Second, the proposed rule change would rearrange the order in which 
the various types of margin are listed in the definition of Margin in 
Section 1.1.1 of the Rule Book and in paragraph 2.2(a) of Section 2 of 
the Procedures to be consistent with the order of description of the 
margins in paragraph 2.7 of Section 2 of the Procedures. LCH SA is 
making this change to ensure consistency.\7\
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    \7\ See Notice, 85 FR at 55910.
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C. Stress Testing

    The proposed rule change also would amend LCH SA's stress testing 
to apply it to margin collateral. The proposed rule change would amend 
Appendix 4 of the LCH Group Financial Resource Adequacy Policy (the 
``FRAP''). Appendix 4 contains a glossary of defined terms related to 
stress testing. The proposed rule change would amend the definition of 
Stress Test Loss so that the definition includes the profit and loss 
amount determined from LCH stress test scenarios to a Clearing Member's 
margin collateral. Currently, the definition of Stress Test Loss only 
includes the profit and loss amount determined from LCH stress test 
scenarios to a Clearing Member's portfolio. By including the profit and 
loss amount to a Clearing Member's margin collateral, as well as its 
portfolio, this proposed change would assure that LCH SA includes a 
Clearing Member's non-cash collateral in a stress test. LCH SA is 
making this change to implement a recommendation from a regulator that 
LCH SA better monitor the risks associated with Clearing Members 
posting non-cash collateral, including sovereign debt.\8\
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    \8\ See Notice, 85 FR at 55910.
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    The proposed rule change would make three other changes to further 
carry out this change. First, the proposed rule change would amend the 
LCH Group Collateral Risk Policy to describe the Stress Test Loss as 
the profit and loss amount determined from LCH stress test scenarios to 
a Clearing Member's portfolio and margin collateral. Second, the 
proposed rule change would amend the definition of ``Group Member 
Uncovered Risk'' in Section 1.1.1 of the Rule Book to add a reference 
to the stress-tested potential loss that would be incurred in relation 
to collateral. Third, the proposed rule change would amend the LCH SA 
CDSClear Default Fund Methodology to reflect the inclusion of a 
Clearing Member's margin collateral in stress tests.
    Finally, the proposed rule change would amend the FRAP to specify 
that the Stress Testing Regime must be independently validated and 
reviewed at least annually in consultation with the LCH SA Risk 
Committee.

D. Credit Scores

    Next, the proposed rule change would make amendments related to the 
use of Internal Credit Scores (``ICS'') of Clearing Members. The ICS is 
the credit score that LCH SA assigns to a Clearing Member based on its 
assessment of the Clearing Member's credit risk. LCH SA uses a Clearing 
Member's ICS as an input in determining various margins, such as the 
Default Fund Additional Margin. The proposed rule change would amend 
Appendix 4 of the FRAP to clarify that where a Clearing Member is part 
of a group of affiliated Clearing Members, each having a different ICS, 
then LCH SA would consider the ICS of the affiliate having the largest 
exposure to LCH SA.
    Moreover, the proposed rule change would amend the LCH Group 
Counterparty Credit Risk Policy to clarify that where there is a change 
in a Clearing Member's ICS, LCH SA's Executive Risk Committee must 
approve the change. Currently, the policy only requires that a changed 
ICS be sent to the Executive Risk Committee for notification.

E. CDS Default Management

    In addition to the changes discussed above, LCH SA proposes to make 
a number of changes to its Rule Book and Procedures to enhance its 
process for managing Clearing Member defaults. These proposed 
enhancements are a result of lessons learned from fire drills--
simulated tests of LCH SA's default management process.\9\ These 
changes fall into two groups: Changes to Article 4.3.3.1 of the Rule 
Book and changes to Appendix 1 of the Rule Book. In addition to these 
two groups of changes, the proposed rule change would also amend 
Article 5.1.1.3 of the Rule Book, relating to the default of a client's 
Clearing Member.
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    \9\ See Notice, 85 FR at 55910.
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    Article 4.3.3.1 generally identifies certain resources available to 
LCH SA for recourse following the default of a Clearing Member. 
Paragraph (i)(b) of Article 4.3.3.1 identifies the resources that LCH 
SA may use to reduce or cover any Damage that it incurs from the 
liquidation of non-ported transactions of a Defaulting Clearing Member 
in any client account. The proposed rule change would amend paragraph 
(i)(b) of Article 4.3.3.1 to add to these resources any remaining 
collateral posted by a Defaulting Clearing Member as margin in respect 
of a proprietary account in connection with another LCH SA clearing 
service where (i) LCH SA has declared the Defaulting Clearing Member to 
be in default and (ii) to the extent such collateral has not been 
applied in such other clearing service.
    Specifically, this new provision would generally mirror current 
Article 4.3.3.1(i)(b)(y). Current Article 4.3.3.1(i)(b)(y) provides LCH 
SA recourse to any collateral posted by a defaulting Clearing Member 
for a CCM Individual Segregated Account Client in connection with 
another LCH SA clearing service in certain conditions. The proposed 
rule change would add to the existing conditions in Article 
4.3.3.1(i)(b)(y) the additional condition that LCH SA has declared the 
Clearing Member to be in default. LCH SA is making this change to 
mirror the conditions in the new resource discussed immediately above, 
thus

[[Page 67058]]

maintaining consistency between these two provisions.\10\
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    \10\ See Notice, 85 FR at 55910.
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    Finally, the proposed rule change would renumber the sub-paragraphs 
of paragraph (i)(b) of Article 4.3.3.1, consistent with these changes 
and additions.
    The second group of changes would amend Appendix 1 of the Rule 
Book. Appendix 1 contains the provisions that govern LCH SA's default 
management process for its CDS service. Clause 4 of Appendix 1 
describes the default management process for client clearing. Article 
4.3 of Clause 4 sets out the process that LCH SA would use to transfer 
a client's open positions to a backup Clearing Member following the 
default of the client's primary Clearing Member. The proposed rule 
change would amend Article 4.3 to add references to a clearing notice 
which would be published by LCH SA. The clearing notice would explain 
how a client would inform LCH SA of the identity of its backup Clearing 
Member and how the backup Clearing Member would confirm to LCH SA its 
willingness to serve as the backup.
    Clause 8 of Appendix 1 sets out the process for closure of LCH SA's 
CDS service. Service closure is the last step in the default management 
process following a Clearing Member's default. As part of the service 
closure process, LCH SA calculates the value of a Clearing Member's 
transactions and the value of a Clearing Member's collateral. LCH SA 
nets these values together to produce an amount that LCH SA owes to the 
Clearing Member or that the Clearing Member owes to LCH SA. The 
proposed rule change would reorganize the provisions relating to these 
calculations to better reflect how LCH SA makes the calculations in 
practice, with LCH SA first calculating the value of transactions and 
the value of collateral before netting the two together.\11\
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    \11\ See Notice, 85 FR at 55911.
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    Moreover, the proposed rule change would amend Clause 8 of Appendix 
1 to reflect the value in Euro of collateral. Specifically, where LCH 
SA determines the value of a Clearing Member's transactions and this 
amount is negative (meaning the Clearing Member owes a payment to LCH 
SA), LCH SA would take into consideration, when determining the value 
of that Clearing Member's collateral, the value of Euro denominated 
cash collateral and any amount resulting from the liquidation in Euro 
of the collateral other than cash collateral denominated in Euro. Where 
LCH SA determines the value of a Clearing Member's transactions and 
this amount is positive (meaning LCH SA owes a payment to the Clearing 
Member), LCH SA would take into consideration, when determining the 
value of that Clearing Member's collateral, the value of Euro 
denominated cash collateral. In this case LCH SA would not take into 
consideration the amount resulting from the liquidation in Euro of 
collateral other than Euro cash collateral because LCH SA would return 
that non-cash collateral to the Clearing Member, rather than 
liquidating it.
    Finally, the proposed rule change would make three other 
miscellaneous changes to Clause 8. First, Article 8.3 of Clause 8 
describes the sources of prices that LCH would use to determine the 
value of a Clearing Member's transactions, as discussed above. Article 
8.3 lists these sources in order of priority. The proposed rule change 
would reorganize this list of sources to reflect the priority in which 
LCH SA would access these sources in practice. Second, the proposed 
rule change would amend Article 8.6 regarding the time period by which 
LCH SA must notify a Clearing Member of the amounts which LCH SA will 
pay to the Clearing Member or which the Clearing Member must pay to LCH 
SA. Currently, LCH SA must notify a Clearing Member by 15:00 on the 
Early Termination Trigger Date or on the first Business Day following 
the Early Termination Trigger Date. LCH SA determined that this 
deadline was not feasible in practice because the values which it uses 
to determine the amount payable to or receivable from a Clearing Member 
are based on prices determined as at the end of the first Business Day 
following the Early Termination Trigger Date.\12\ Thus, the proposed 
rule change would revise Article 8.6 to require instead that LCH SA 
notify a Clearing Member by no later than the end of the second 
Business Day following the Early Termination Trigger Date. Finally, the 
proposed rule change would amend Article 8.7 to specify the deadline by 
which LCH SA would repay or redeliver collateral to Clearing Members.
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    \12\ See Notice, 85 FR at 55911.
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    Finally, the proposed rule change also would amend Article 5.1.1.3 
of the Rule Book. Article 5.1.1.3 sets out the provisions that apply to 
a client of a Clearing Member receiving clearing services from that 
Clearing Member. Among other things, Article 5.1.1.3 provides that LCH 
SA will rely on the latest documentation and information received from 
the Clearing Member for the purpose of making certain payments to the 
client upon the default of the client's Clearing Member. The proposed 
rule change would expand this provision to specify that LCH SA may rely 
on the latest documentation and information received from the Clearing 
Member on the client for that purpose or for any other purpose. LCH SA 
is making this change to account for the possibility that it may need 
to rely on this documentation for other purposes upon the default of a 
client's Clearing Member, such as communicating with the client 
regarding the transfer of the client's positions to a backup Clearing 
Member.\13\
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    \13\ See Notice, 85 FR at 55912.
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F. Price Submissions

    Next, the proposed rule change would amend Section 5 and Section 8 
of the Procedures with respect to the submission of end of day prices 
by Clearing Members. The proposed rule change would first amend 
paragraph 5.18.3 of Section 5. Paragraph 5.18.3 details the procedures 
for Clearing Members to submit prices to LCH SA. Currently, paragraph 
5.18.3 provides that files listing the open positions for which 
Clearing Members are required to submit prices will be available at 
certain specified times. Current paragraph 5.18.3 separately lists the 
times for CDS and options on index CDS even though the actual times are 
the same. Because these times are the same, the proposed rule change 
would combine the separately listed times, listing one time for both 
CDS and options on index CDS. The proposed rule change would make the 
same change to paragraph 5.18.5. Moreover, paragraph 5.18.3 notes that 
the files may be available at earlier times, as notified in advance by 
LCH SA, preceding certain holidays that are listed in paragraph 5.18.3. 
The proposed rule change would replace the list of holidays and instead 
specify that the files may be available at earlier times as notified in 
advance by LCH SA. LCH SA is making both of these changes to simplify 
the drafting of paragraph 5.18.3, and thereby reduce the possibility 
for confusion or error.\14\
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    \14\ See Notice, 85 FR at 55912.
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    The proposed rule change would next amend paragraphs 5.18.3, 
5.18.4, and 5.18.5 to clarify that the existing references in those 
paragraphs to options on index CDS are options with a CDS contractual 
currency in Euro.
    The proposed rule change would also replace the reference to 
``Clearing Day'' in paragraph 5.18.5(d) with a reference to ``Price 
Contribution Day''. Paragraph 5.18.5(d) specifies certain deadlines 
associated with the price submission

[[Page 67059]]

process for transactions with a contractual currency in Euro and for 
those with a contractual currency in US dollars. The definition of 
Price Contribution Day makes a distinction between transactions with a 
contractual currency in Euro and those with a contractual currency in 
US dollars, while the definition of Clearing Day does not. Thus, given 
the application of paragraph 5.18.5(d) to transactions with a 
contractual currency in Euro and those with one in US dollars, using 
the term Price Contribution Day is more appropriate and precise.\15\
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    \15\ See Notice, 85 FR at 55913.
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    Finally, throughout Section 5 of the Procedures, the proposed rule 
change would replace reference to the ``Operations department'' with a 
reference to the ``CDSClear Operations Department''.
    Section 8 of the Procedures governs LCH SA's discipline of Clearing 
Members that breach their obligations. Among other things, these 
disciplinary procedures provide the measures that LCH SA will take 
where a Clearing Member fails to submit complete end of day prices. 
Currently, paragraph 8.3 gives the LCH SA CEO or the CDSClear CEO the 
ability to impose a fine on a Clearing Member who is alleged to have 
failed to submit complete prices as required. Under paragraph 8.3 as 
proposed to be revised, the LCH SA CEO or the CDSClear CEO would still 
be able to impose a fine on a Clearing Member who is alleged to have 
failed to submit complete prices as required. The proposed rule change 
would also, in certain circumstances, give the LCH SA CEO or the 
CDSClear CEO the ability to increase a Clearing Member's Contribution 
Requirement for the next monthly calculation by an amount equal to the 
aggregate amount of fines incurred for such failure to submit complete 
prices. With this change, rather than just fining a Clearing Member, 
LCH SA would be able to collect the amount of the fine each month as 
part of a Clearing Member's Contribution Requirement, which is a 
Clearing Member's required contribution to the CDS Default Fund. To 
further facilitate this change, the proposed rule change would amend 
Article 4.4.1.3 of the Rule Book, which deals with the calculation of a 
Clearing Member's Contribution Requirement, to reference actions taken 
by LCH SA under Section 8 of the Procedures. LCH SA represents that the 
failure to submit prices is not an issue among Clearing Members 
currently, but it is making the amendment to anticipate potential 
failures by Clearing Members admitted as their number grows and to 
assure that LCH SA has the authority to discipline a Clearing Member 
that repeatedly fails to provide timely and accurate pricing data.\16\
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    \16\ See Notice, 85 FR at 55911.
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G. Amendments to Default Fund Contributions

    Currently, LCH SA calculates a Clearing Member's contribution to 
the CDS Default Fund based on its initial margins calculated with 
respect to the Clearing Member's account over the last sixty clearing 
days, as provided in Article 4.4.1.3 of the Rule Book. The proposed 
rule change would not amend this provision, but it would add additional 
language to clarify that if there is less than sixty Clearing Days of 
initial margin calculations for a Clearing Member's account, then LCH 
SA would base the Clearing Member's contribution on the initial margin 
calculations of all of the available clearing days. LCH SA is making 
this change to facilitate the possible transfer of positions of 
Clearing Members to accounts at LCH SA. In that case LCH SA may not 
have sixty clearing days of initial margin calculations on which to 
base the calculation of the contribution.\17\
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    \17\ See Notice, 85 FR at 55911.
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    Next, the proposed rule change would amend Article 4.4.1.8 of the 
Rule Book. Currently, 4.4.1.8 provides that LCH SA may recalculate a 
Clearing Member's required contribution to the default fund outside of 
the normal monthly cycle in certain circumstances, such as a material 
change in the Clearing Member's business. Article 4.4.1.8 also 
provides, however, that nothing shall permit LCH SA to increase the 
contribution of a Clearing Member whose aggregate amount of initial 
margin has not increased. The proposed rule change would delete this 
provision, thus allowing LCH SA to recalculate and increase a Clearing 
Member's required contribution to the default fund outside of the 
normal monthly cycle in certain circumstances, even where the Clearing 
Member's aggregate amount of initial margin has not increased. LCH SA 
is making this change because it has found that there may be 
circumstances where a change in a Clearing Member's positions has 
increased its risk, and thus should increase its required default fund 
contribution, even though the Clearing Member's initial margin has not 
increased.\18\
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    \18\ See Notice, 85 FR at 55911.
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    Finally, the proposed rule change would amend Section 6 of the 
Procedures, which concerns calculating the size of, and making 
contributions to, the CDS Default Fund. The proposed changes would 
clarify that a Clearing Member, if required to make an additional 
contribution, must submit the contribution through the TARGET2 payment 
system. The proposed rule change also would clarify the deadlines for 
submitting the additional contribution, which would depend on when LCH 
SA sends out the request for additional contribution.

H. Miscellaneous Amendments

    In addition to the specific amendments discussed above, the 
proposed rule change would update references and correct typographical 
errors in the Supplement, the Rule Book, and the Procedures. The 
proposed rule change would also make a number of miscellaneous updates 
to the Supplement, the Rule Book, and the Procedures, as discussed 
below.
    With respect to the Supplement, the proposed rule change would 
amend Part A and Part B. Sections 4.8 in both Part A and Part B refer 
to a Cleared Transaction Portfolio Report. The proposed rule change 
would replace the specific references to the Cleared Transaction 
Portfolio Report with general references to the reports referred to in 
Section 5 of the Procedures. Other parts of the Supplement refer 
generally to the reports referred to in Section 5 of the Procedures 
rather than specific reports. Thus, LCH SA is making this change to be 
consistent with the approach taken in other parts of the Supplement. 
This change will also increase flexibility as it would avoid the need 
for modifying the Supplement if there is a change in the name of the 
reports provided for in Section 5 of the Procedures.\19\
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    \19\ See Notice, 85 FR at 55912.
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    Moreover, the proposed rule change would remove unnecessary 
language from Paragraph (c) of Sections 9.1 of Parts A and B of the 
Supplement. Currently, those sections refer to the risks resulting from 
a Clearing Member being party to a Self Referencing Transaction where 
the Reference Entity is that Clearing Member. Because Section 9.1 only 
applies to Self Referencing Transactions where the Reference Entity is 
the Clearing Member, LCH SA does not believe this additional language, 
specifying that the Self Referencing Transaction is one where the 
Reference Entity is that Clearing Member, is necessary.\20\ Thus, the 
proposed rule change would delete the phrase ``where the Reference 
Entity is that Clearing Member'' from

[[Page 67060]]

Paragraph (c) of Sections 9.1 of Parts A and B of the Supplement.
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    \20\ See Notice, 85 FR at 55912.
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    With respect to the Rule Book, the proposed rule change would amend 
Section 1.2.2. Section 1.2.2 provides procedures that LCH SA must 
follow when modifying the CDS Clearing Documentation (which includes, 
among other things, the Rule Book and the Procedures). These procedures 
include, among other things, consultation with the appropriate legal, 
risk, operational and other forums established by LCH SA. Article 
1.2.2.1 of Section 1.2.2 provides that LCH SA may only amend the CDS 
Clearing Documentation in accordance with Section 1.2.2. Article 
1.2.2.1 further provides that Section 1.2.2 does not apply to LCH SA's 
issuance of clearing notices. The proposed rule change would amend this 
exception such that it does not apply to Article 1.2.2.8 and Article 
1.2.2.9. Thus, while Section 1.2.2 does not generally apply to LCH SA's 
issuance of clearing notices, under Article 1.2.2.1 as proposed to be 
amended, Article 1.2.2.8 and Article 1.2.2.9 of Section 1.2.2 would 
apply to LCH SA's issuance of clearing notices. Both of those articles 
set out specific procedures and requirements with respect to LCH SA's 
issuance of clearing notices. Thus, both Article 1.2.2.8 and Article 
1.2.2.9 should apply to the issuance of clearing notices and the 
general exception in Article 1.2.2.1 should not be read to override 
these more specific articles. LCH SA is therefore making this change to 
clarify the applicability of Article 1.2.2.8 and Article 1.2.2.9.\21\
---------------------------------------------------------------------------

    \21\ See Notice, 85 FR at 55912.
---------------------------------------------------------------------------

    The proposed rule change also would make a number of updates to 
defined terms in the Rule Book and rearrange the terms for alphabetical 
order. First, the proposed rule change would delete the defined term 
``LCH Settlement Price'' from the Rule Book. The proposed rule change 
would likewise remove any reference to that defined term from the Rule 
Book, including in Section 4.2.7, Article 5.1.1.3, and Article 6.1.1.3. 
Currently, Section 4.2.7 of the Rule Book uses two terms to refer to 
settlement prices: For options on index CDS there is the LCH Settlement 
Price, and for index and single name CDS there is the Markit LCH 
Settlement Price. The proposed rule change would amend Section 4.2.7 to 
use, instead, only the term Markit LCH Settlement Price for index CDS, 
single name CDS, and options on index CDS. Thus, with this change, 
there is no need for the term LCH Settlement Price, and, accordingly, 
the proposed rule change would delete that term and references to it.
    Next, the proposed rule change would amend the definition of ``CDS 
Contractual Currency'' from Section 1.1.1 of the Rule Book. CDS 
Contractual Currency means the currency required under the terms of any 
Cleared Transaction. The proposed rule change would amend this 
definition to specify that, for an option on an index CDS, it means the 
currency required under the terms of the Underlying Index Transaction. 
Relatedly, the proposed rule change would add to Section 1.1.1 of the 
Rule Book the defined term Underlying Index Transaction, which will 
have the meaning given to it in Part C of the Supplement (where it is 
defined as the index CDS subject to the option).
    Moreover, the proposed rule change would delete the terms ``CDS 
Intraday Transaction'' and ``Index Swaption Intraday Transaction'' from 
Section 1.1.1 of the Rule Book and consolidate them together in the 
defined term ``Intraday Transaction.'' LCH SA maintains that it 
established a distinction between CDS and Index Swaption intraday 
transactions because, for a time, the weekly backloading service was 
only available to CDS transactions.\22\ Because the weekly backloading 
service is now available to Index Swaption transactions as well, LCH SA 
believes this distinction is no longer necessary.\23\ The proposed rule 
change would accordingly update references to these defined terms in 
the Rule Book and the Procedures.
---------------------------------------------------------------------------

    \22\ See Notice, 85 FR at 55912.
    \23\ See Self-Regulatory Organizations; LCH SA; Order Approving 
Proposed Rule Change Relating to Extension of Weekly Backloading 
Cycle to Index Swaptions, Exchange Act Release No. 87296 (Oct. 11, 
2019), 84 FR 55992 (Oct. 18, 2019) (SR-LCH-SA-2019-006).
---------------------------------------------------------------------------

    The proposed rule change also would amend the definitions of ``FCM 
Client Margin Requirement'' and ``FCM House Margin Requirement'' to 
clarify that the types of margin referred to in those definitions do 
not include Variation Margin. Because LCH SA does not calculate 
Variation Margin for FCM Clearing Members, neither of those definitions 
should include Variation Margin. Thus, LCH SA is making this change to 
clarify the scope of these definitions and ensure they are consistent 
with current practice.\24\
---------------------------------------------------------------------------

    \24\ See Notice, 85 FR at 55912.
---------------------------------------------------------------------------

    Similarly, the proposed rule change would clarify the definition of 
``Procedures'' by specifying that such documents are issued by LCH SA 
and entitled ``CDS Clearing Procedures.''
    Finally, the proposed rule change would delete a redundant defined 
term. The defined term ``Converting Clearing Member'' is currently 
defined in both Article 3.1.10.8 and Section 1.1.1 of the Rule Book. 
The proposed rule change would delete the term from Article 3.1.10.8, 
leaving just the definition in Section 1.1.1.
    With respect to the Procedures, the proposed rule change would 
remove all of the Appendices from Section 5 of the Procedures. The 
Appendices are template forms that are used to transfer client 
transactions from one Clearing Member to another. LCH SA is making this 
change so it can keep the contact information and other parts of the 
forms updated without having to amend Section 5 of the Procedures.\25\
---------------------------------------------------------------------------

    \25\ See Notice, 85 FR at 55913.
---------------------------------------------------------------------------

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.\26\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act,\27\ Section 17A(b)(3)(G) of the Act,\28\ and Rules 17Ad-
22(e)(1), (e)(4)(v), (e)(4)(vi)(A), (e)(6)(i), (e)(6)(iv), and (e)(13) 
thereunder.\29\
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78s(b)(2)(C).
    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 15 U.S.C. 78q-1(b)(3)(G).
    \29\ 17 CFR 240.17Ad-22(e)(1), (e)(4)(v), (e)(4)(vi)(A), 
(e)(6)(i), (e)(6)(iv), and (e)(13).
---------------------------------------------------------------------------

A. 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 promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions and to 
assure the safeguarding of securities and funds which are in the 
custody or control of LCH SA or for which it is responsible.\30\
---------------------------------------------------------------------------

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

    The Commission believes the changes discussed in Part II.A above 
should facilitate LCH SA's clearance of single name CDS contracts on 
monoline insurance companies by allowing LCH SA to accept such 
contracts for clearing. Moreover, LCH is adding these particular 
contracts to its existing rules, which the Commission has determined 
generally to promote the prompt and accurate clearance and settlement 
of

[[Page 67061]]

derivatives transactions.\31\ The Commission believes this aspect of 
the proposed rule change should promote the prompt and accurate 
clearance and settlement of derivatives contracts, i.e., single name 
CDS contracts on monoline insurance companies, consistent with Section 
17A(b)(3)(F) of the Act.\32\
---------------------------------------------------------------------------

    \31\ See Self-Regulatory Organizations; LCH SA; Order Granting 
Application for Registration as a Clearing Agency and Request for 
Exemptive Relief, Exchange Act Release No. 79707 (Dec. 29, 2016), 82 
FR 1398, 1408 (Jan. 5, 2017) (finding that ``LCH SA is so organized 
and has the capacity to facilitate the prompt and accurate clearance 
and settlement and has rules designed to promote these same goals, 
in accordance with Sections 17A(b)(3)(A) and 17A(b)(3)(F) of the 
Act'' and further that ``LCH SA's rules, policies and procedures 
meet the requirements of Sections 17A(b)(3)(A) and 17A(b)(3)(F) of 
the Exchange Act'').
    \32\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes the changes discussed in Part II.B above 
should facilitate LCH SA's collection of two additional margins: LEI 
Margin and STLOAM. Moreover, the Commission believes the changes 
discussed in Part II.B above should clarify the margin that LCH SA 
currently collects by distinguishing Vega Margin from Spread Margin, 
eliminating the no-longer used defined term Margin Account Uncovered 
Risk, and re-organizing the defined term Margin. The Commission 
believes all of these changes should improve LCH SA's collection of 
margin, thereby improving LCH SA's ability to use margin to protect 
against potential losses. Because such potential losses could impede 
LCH SA's ability to promptly and accurately clear and settle 
transactions and safeguard securities and funds, the Commission 
believes that the changes discussed in Part II.B above, in improving 
LCH SA's ability to use margin to protect against such potential 
losses, should be consistent with Section 17A(b)(3)(F) of the Act.\33\
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes the changes discussed in Part II.C above 
should improve LCH SA's stress testing by including a Clearing Member's 
collateral in stress testing, thereby expanding the coverage of such 
testing, and clarifying that stress testing would need to be 
independently validated. Because LCH SA uses stress testing to ensure 
it has additional financial resources to cover the default of the two 
Clearing Member families that would potentially cause the largest 
aggregate credit exposure for LCH SA in extreme but plausible market 
conditions (and, therefore, to meet their regulatory requirements under 
Rule 17Ad-22(e)(4)(ii)), the Commission believes that this aspect of 
the proposed rule change should help to ensure that LCH SA's financial 
resources are adequate and cover the potential losses resulting from 
Clearing Member collateral. Because such potential losses could impede 
LCH SA's ability to promptly and accurately clear and settle 
transactions and safeguard securities and funds, the Commission 
believes that the changes discussed in Part II.C above, in improving 
LCH SA's stress testing, should be consistent with Section 17A(b)(3)(F) 
of the Act.\34\
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes the changes discussed in Part II.D above 
should improve LCH SA's use of credit scores by better describing how 
LCH SA would determine credit scores for an affiliated group of 
Clearing Members and by explicitly requiring LCH SA's Executive Risk 
Committee to approve a change in credit score. The Commission believes 
these changes should improve LCH SA's ability to determine accurate 
credit scores for Clearing Members and groups of Clearing Members, 
thereby improving its ability to determine the financial risk 
associated with transacting with such Clearing Members. Moreover, 
because, as discussed in Part II.D above, LCH SA uses credit scores as 
a component in calculating certain margins, the Commission believes 
these changes should improve LCH SA's ability to calculate and collect 
those margins. The Commission thus believes these aspects of the 
proposed rule change should better enable LCH SA to manage the 
potential risks and losses associated with transacting with Clearing 
Members. Because such losses could impede LCH SA's ability to promptly 
and accurately clear and settle transactions and safeguard securities 
and funds, the Commission believes that the changes discussed in Part 
II.D above, in improving LCH SA's use of credit scores, should be 
consistent with Section 17A(b)(3)(F) of the Act.\35\
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes the changes discussed in Part II.E above 
should improve LCH SA's ability to manage Clearing Member defaults by 
providing an additional resource for recourse in certain circumstances. 
In giving LCH SA flexibility to specify in a clearing notice how 
clients would notify LCH SA of backup Clearing Members to be used in 
case of a default of their primary Clearing Members, the Commission 
believes the proposed rule change should improve the ability of clients 
to continue clearing through backup Clearing Members. Moreover, the 
Commission believes the changes discussed above regarding closure of 
the CDS clearing service should improve the process for such closure by 
better organizing and explaining how LCH SA would calculate payments 
owed to Clearing Members or owed by Clearing Members to it; allowing 
LCH SA to consider the liquidation value in Euro of non-cash collateral 
where Clearing Members owe payments to LCH SA; clarifying the order in 
which LCH SA would consider sources or prices; and clarifying timelines 
for payment and return of collateral. The proposed rule change should 
also allow LCH SA to rely on information provided by a Clearing Member 
with respect to its client for purposes of default management, 
including for purposes of making certain payments. The Commission 
believes that all of these changes should improve LCH SA's ability to 
manage the repercussions of a Clearing Member's default, including 
possible closure of LCH SA's CDS clearing service. In doing so, the 
Commission believes this aspect of the proposed rule change should help 
LCH SA avoid potential losses arising from such a default, thereby 
helping to maintain LCH SA's ability to promptly and accurately clear 
and settle transactions and safeguard securities and funds, consistent 
with Section 17A(b)(3)(F) of the Act.\36\
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes the changes discussed in Part II.F above 
should improve LCH SA's ability to collect end of the day prices from 
Clearing Members by clarifying the timelines associated with price 
collection and updating references. Moreover, by giving the LCH SA CEO 
and the CDSClear CEO the ability to increase a Clearing Member's 
Contribution Requirement for the next monthly calculation by an amount 
equal to the aggregate amount of fines incurred for such Clearing 
Member's failure to submit complete prices, the Commission believes 
that the proposed rule change should give LCH SA a tool to incentivize 
Clearing Members to submit complete prices. Because LCH SA uses prices 
as an input in calculating margin requirements, the Commission believes 
that these aspects of the proposed rule change, like the changes 
related to margin discussed above, should improve LCH SA's ability to 
use margin to protect against potential losses that could impede LCH 
SA's ability to promptly and accurately clear and settle transactions 
and safeguard securities and funds, consistent with Section 
17A(b)(3)(F) of the Act.\37\
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes the changes discussed in Part II.G above 
should better allow LCH SA to adjust contributions to the CDS Default 
Fund

[[Page 67062]]

by basing contributions on initial margin for all available clearing 
days if less than 60 clearing days are available; allowing LCH SA to 
recalculate a Clearing Member's contribution outside of the normal 
monthly cycle in certain circumstances even though the Clearing 
Member's aggregate amount of initial margin has not increased; and 
clarifying the deadlines and method for submitting an additional 
contribution to the CDS Default Fund. The Commission believes that 
these changes should enable LCH SA to ensure that the CDS Default Fund 
remains properly sized in accordance with the potential losses 
presented by Clearing Members' portfolios. Because LCH SA uses the CDS 
Default Fund to cover the default of the two Clearing Member families 
that would potentially cause the largest aggregate credit exposure for 
LCH SA in extreme but plausible market conditions, the Commission 
believes that this aspect of the proposed rule change should help to 
ensure that LCH SA's financial resources are adequate and cover the 
potential losses resulting from Clearing Member collateral. Because 
such potential losses could impede LCH SA's ability to promptly and 
accurately clear and settle transactions and safeguard securities and 
funds, the Commission believes that the changes discussed in Part II.G 
above, in improving LCH SA's ability to adjust Clearing Member 
contributions to the CDS Default Fund, should be consistent with 
Section 17A(b)(3)(F) of the Act.\38\
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Finally, the Commission believes the changes discussed in Part II.H 
above should clarify and improve the readability of the Rule Book and 
the Procedures by updating references and correcting typographical 
errors; clarifying the applicability of Article 1.2.2.8 and Article 
1.2.2.9; deleting the unused defined term LCH Settlement Price; making 
other updates to defined terms in the Rule Book; and removing the 
appendices from Section 5 of the Procedures. In doing so, the 
Commission believes that these aspects of the proposed rule change 
should help to ensure that the Rule Book and the Procedures are applied 
consistently with reduced chances for error or mistakes. For these 
reasons, the Commission believes these aspects of the proposed rule 
change should be consistent with Section 17A(b)(3)(F) of the Act.\39\
---------------------------------------------------------------------------

    \39\ 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.\40\
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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

    Section 17A(b)(3)(G) of the Act requires, among other things, that 
the rules of LCH SA provide that its participants shall be 
appropriately disciplined for violation of any provision of the rules 
of LCH SA by expulsion, suspension, limitation of activities, 
functions, and operations, fine, censure, or any other fitting 
sanction.\41\ The Commission believes the changes discussed in Part 
II.F above, by giving the LCH SA CEO and the CDSClear CEO the ability 
to increase a Clearing Member's Contribution Requirement for the next 
monthly calculation by an amount equal to the aggregate amount of fines 
incurred for such Clearing Member's failure to submit complete prices, 
should give LCH SA a tool to collect fines and discipline Clearing 
Members for failing to submit complete prices, in violation of LCH SA's 
rules. For this reason, the Commission finds this aspect of the 
proposed rule change is consistent with Section 17A(b)(3)(G) of the 
Act.\42\
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78q-1(b)(3)(G).
    \42\ 15 U.S.C. 78q-1(b)(3)(G).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(1)

    Rule 17Ad-22(e)(1) requires that LCH SA establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to provide for a well-founded, clear, transparent, and 
enforceable legal basis for each aspect of its activities in all 
relevant jurisdictions.\43\ The Commission believes the changes 
discussed in Part II.A above should establish the legal basis for LCH 
SA's clearance of single name CDS contracts on monoline insurance 
companies by amending the CDS Supplement to establish the legal terms 
for such transactions and amending the Procedures to allow LCH SA to 
accept such contracts for clearing. Moreover, the Commission believes 
the changes discussed in Part II.H above should make the Rule Book and 
the Procedures more clear by updating references and correcting 
typographical errors; clarifying the applicability of Article 1.2.2.8 
and Article 1.2.2.9; deleting the unused defined term LCH Settlement 
Price; making other updates to defined terms in the Rule Book; and 
removing the appendices from Section 5 of the Procedures. For these 
reasons, the Commission finds these aspects of the proposed rule change 
are consistent with Rule 17Ad-22(e)(1).\44\
---------------------------------------------------------------------------

    \43\ 17 CFR 240.17Ad-22(e)(1).
    \44\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

D. Consistency With Rule 17Ad-22(e)(4)(v)

    Rule 17Ad-22(e)(4)(v) requires that LCH SA establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to effectively identify, measure, monitor, and manage its 
credit exposures to participants and those arising from its payment, 
clearing, and settlement processes, including by maintaining the 
financial resources required under Rule 17Ad-22(e)(4)(ii) in combined 
or separately maintained clearing or guaranty funds.\45\ The Commission 
believes the changes discussed in Part II.G above would improve LCH 
SA's ability to maintain the CDS Default Fund, which consists of the 
financial resources required under Rule 17Ad-22(e)(4)(ii), by giving 
LCH SA the ability to base contributions on initial margin for all 
available Clearing Days; the ability to recalculate a Clearing Member's 
contribution outside of the normal monthly cycle in certain 
circumstances even though the Clearing Member's aggregate amount of 
initial margin has not increased; and clarifying the deadlines and 
method for submitting an additional contribution to the CDS Default 
Fund. For these reasons, the Commission finds these aspects of the 
proposed rule change are consistent with Rule 17Ad-22(e)(4)(v).\46\
---------------------------------------------------------------------------

    \45\ 17 CFR 240.17Ad-22(e)(4)(v). Rule 17Ad-22(e)(4)(ii) 
requires that LCH SA 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 LCH SA in extreme but plausible market 
conditions.
    \46\ 17 CFR 240.17Ad-22(e)(4)(v).
---------------------------------------------------------------------------

E. Consistency With Rule 17Ad-22(e)(4)(vi)(A)

    Rule 17Ad-22(e)(4)(vi)(A) requires that LCH SA establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to effectively identify, measure, monitor, and 
manage its credit exposures to participants and those arising from its 
payment, clearing, and settlement processes, including by testing the 
sufficiency of its total financial resources available to meet the 
minimum financial resource requirements under Rules 17Ad-22(e)(4)(i) 
through (e)(4)(iii), as applicable, by conducting stress testing of its 
total financial resources once each day using standard predetermined

[[Page 67063]]

parameters and assumptions.\47\ The Commission believes the changes 
discussed in Part II.C above should improve LCH SA's stress testing by 
including margin collateral in stress testing, thereby expanding the 
coverage of such testing, and clarifying that stress testing would need 
to be independently validated. The Commission therefore believes this 
aspect of the proposed rule change should improve the conduct of LCH 
SA's daily stress testing required by Rule 17Ad-22(e)(4)(vi)(A).\48\ 
Thus, the Commission finds these aspects of the proposed rule change 
are consistent with Rule 17Ad-22(e)(4)(vi)(A).\49\
---------------------------------------------------------------------------

    \47\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
    \48\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
    \49\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
---------------------------------------------------------------------------

F. Consistency With Rule 17Ad-22(e)(6)(i)

    Rule 17Ad-22(e)(6)(i) requires that LCH SA establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to cover its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum considers, 
and produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio, and market.\50\ The 
Commission believes the changes discussed in Part II.B above, by 
facilitating LCH SA's collection of LEI Margin and STLOAM, should help 
to ensure that LCH SA's risk-based margin system considers, and 
produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio, and market. Moreover, 
the Commission believes the other changes discussed in Part II.B above, 
by distinguishing Vega Margin from Spread Margin, eliminating the no-
longer used defined term Margin Account Uncovered Risk, and re-
organizing the defined term Margin, should clarify the margin LCH SA 
collects and should thereby help ensure the consistent operation of LCH 
SA's risk-based margin system. Finally, because, as discussed in Part 
II.D above, LCH SA uses credit scores as a component in calculating 
certain margins, the Commission believes the changes discussed above 
with respect to credit scores should improve LCH SA's ability to 
calculate and collect those margins. For these reasons, the Commission 
finds these aspects of the proposed rule change are consistent with 
Rule 17Ad-22(e)(6)(i).\51\
---------------------------------------------------------------------------

    \50\ 17 CFR 240.17Ad-22(e)(6)(i).
    \51\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

G. Consistency With Rule 17Ad-22(e)(6)(iv)

    Rule 17Ad-22(e)(6)(iv) requires that LCH SA establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to cover its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum uses 
reliable sources of timely price data and uses procedures and sound 
valuation models for addressing circumstances in which pricing data are 
not readily available or reliable.\52\ The Commission believes the 
changes discussed in Part II.F above should improve LCH SA's ability to 
obtain end of the day prices from Clearing Members by clarifying the 
timelines associated with price collection, updating references, and 
improving the ability of LCH SA to hold accountable Clearing Members 
that do not make complete price submissions. The Commission believes 
these aspects of the proposed rule change should help to ensure that 
LCH SA's risk-based margin system, which uses end of day prices 
submitted by Clearing Members to calculate margin, uses reliable 
sources of timely price data and uses procedures and sound valuation 
models for addressing circumstances in which pricing data are not 
readily available or reliable. Thus, the Commission finds these aspects 
of the proposed rule change are consistent with Rule 17Ad-
22(e)(6)(iv).\53\
---------------------------------------------------------------------------

    \52\ 17 CFR 240.17Ad-22(e)(6)(iv).
    \53\ 17 CFR 240.17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------

H. Consistency With Rule 17Ad-22(e)(13)

    Rule 17Ad-22(e)(13) requires that LCH SA establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to, among other things, ensure LCH SA has the authority and 
operational capacity to take timely action to contain losses and 
liquidity demands.\54\ The Commission believes the changes discussed in 
Part II.E above should improve LCH SA's ability to take timely action 
to contain losses and liquidity demands in managing Clearing Member 
defaults by providing an additional resource for recourse in certain 
circumstances. Moreover, in giving LCH SA flexibility to specify in a 
clearing notice how clients would notify LCH SA of backup Clearing 
Members to be used in case of a default of their primary Clearing 
Members, the Commission believes this change should improve clients' 
ability to designate a backup Clearing Member and thereby continue 
clearing in case of the default of a primary Clearing Member. The 
Commission further believes this should, in turn, reduce the 
possibility for losses resulting from the default of the primary 
Clearing Member. Finally, the Commission believes the changes discussed 
in Part II.E above regarding closure of the CDS clearing service should 
improve the process for such closure which should, in turn, help to 
ensure that LCH SA has the authority and operational capacity to take 
timely action to contain losses and liquidity demands resulting from 
such a closure. Thus, the Commission finds these aspects of the 
proposed rule change are consistent with Rule 17Ad-22(e)(13).\55\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.17Ad-22(e)(13).
    \55\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

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 Section 17A(b)(3)(F) of the 
Act,\56\ Section 17A(b)(3)(G) of the Act,\57\ and Rules 17Ad-22(e)(1), 
(e)(4)(v), (e)(4)(vi)(A), (e)(6)(i), (e)(6)(iv), and (e)(13) 
thereunder.\58\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78q-1(b)(3)(F).
    \57\ 15 U.S.C. 78q-1(b)(3)(G).
    \58\ 17 CFR 240.17Ad-22(e)(1), (e)(4)(v), (e)(4)(vi)(A), 
(e)(6)(i), (e)(6)(iv), and (e)(13).
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\59\ that the proposed rule change (SR-LCH SA-2020-004) be, and hereby 
is, approved.\60\
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78s(b)(2).
    \60\ 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).
    \61\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\61\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23264 Filed 10-20-20; 8:45 am]
BILLING CODE 8011-01-P


