[Federal Register Volume 85, Number 211 (Friday, October 30, 2020)]
[Notices]
[Pages 68935-68937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-24022]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90270; File No. SR-LCH SA-2020-006]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to the Amendments of LCH SA Risk 
Liquidity Modeling Framework

October 26, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on October 20, 2020, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change 
described in Items I, II and III below, which Items have been prepared 
primarily by LCH SA. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    Banque Centrale de Compensation, which conducts business under the 
name LCH SA (``LCH SA''), is proposing to amend its Liquidity Risk 
Modeling Framework (the ``Framework'') in order to address more 
accurately the liquidity requirements in the event of the assignment 
and exercise of equity American options (the ``Proposed Rule Change'').

[[Page 68936]]

    The text of the proposed rule change has been annexed as Exhibit 
5.\3\
---------------------------------------------------------------------------

    \3\ All capitalized terms not defined herein have the same 
definition as in the CDS Clearing Rule Book, Supplement or 
Procedures, as applicable.
---------------------------------------------------------------------------

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

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

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

1. Purpose
    On December 3, 2019, 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''),\4\ 
and Rule 19b-4 thereunder \5\ the filing LCH SA-2019-007 to amend its 
Framework. This proposed rule change was duly approved by the 
Commission on January 24, 2020.\6\
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4
    \6\ Self-Regulatory Organizations; LCH SA; Order Approving 
Proposed Rule Change Relating to Amendments to LCH SA's Liquidity 
Risk Modelling Framework; Exchange Act Release No. 88039 (Jan. 24, 
2020), 85 FR 5489 (Jan. 30, 2020) (LCH SA-2019-007).
---------------------------------------------------------------------------

    LCH SA is now proposing to amend the Framework in order to address 
one recommendation made by the independent model validation team during 
the 2018/2019 review.
    The purpose of the enhancement is to include, from a liquidity 
perspective, the funding risk arising from the physical settlement 
linked to the exercise of American options under stressed liquidity 
conditions prior to expiry. This is an extension of the scope as 
American and European options exercise at expiry is already covered by 
the current approved Framework.
    Because equity American options can be exercised before expiry, 
there is a risk of assignment and exercise of Equity American options 
at any time before expiry when the 2 largest clearing members in terms 
of liquidity needs for the covered clearing agency (Cover2 members) may 
start facing liquidity issues. During that period, the covered clearing 
agency could, as a result, observe an increase in the liquidity needs 
linked to the settlement of equity American options. This concern needs 
to be modelled and tackled within the liquidity coverage ratio 
(``LCR'') which is the ratio of assets available over the liabilities 
of LCH SA under the stressed scenario of the default of the 2 largest 
clearing members (in terms of liquidity needs).
    This means that on a daily basis the LCR will identify all the 
potential positions that are in the money or at the money on the day of 
the computation and on the next business day as well. Then, given the 
potential option exercise, it will generate a liquidity need.
    In practice, the daily process will work as follows:
     Computation of the liquidity needs coming from the equity 
American options that are in the money or at the money, by applying no 
market stress.
     Computation of the liquidity needs coming from the options 
that are in the money or at the money, by applying a stress scenario to 
the equities.
     We will select the positions consistent with the 2 largest 
clearing members in terms of liquidity needs for both modes described 
above and will retain the most punitive one.
     This amount will then be added to the current cash equity 
settlement amount in the LCR.
    A six month back test from May to November 2019 showed the impact 
on the LCH SA LCR is less than 0.5% with the largest impact being 0.86% 
and occurred on the 13th of November 2019. LCR is an internal indicator 
computed at the clearing house level and there is no specific impact on 
any particular Clearing Member.
    In order to introduce the Proposed Rule Change, LCH SA will need to 
slightly modify the Framework. The term ``expiry'' will be replaced by 
``exercise'' in both sections 5.3.1.3 and 5.3.4 and the term ``at 
expiry'' will be replaced by ``anytime by defaulting members in order 
to raise liquidity'' in the paragraph Option Expiry of section 5.3.1.3.
(b) Statutory Basis
    LCH SA believes that the Proposed Rule Change is consistent with 
the requirements of Section 17A of the Securities Exchange Act of 1934 
\7\ (the ``Act'') and the regulations thereunder, including the 
standards under Rule 17Ad-22.\8\ In particular, Section 17(A)(b)(3)(F) 
\9\ of the Act requires, among other things, that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and derivative 
agreements, contracts, and transactions and to assure the safeguarding 
of securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible.\10\ As described above, 
LCH SA is proposing to amend the Framework to address specifically LCH 
SA's liquidity requirements in the event of the assignment and exercise 
of equity American options involving a Defaulting Clearing Member 
during any liquidation of such clearing member. The proposed amendment 
will assist LCH SA in defining more accurately its liquidity 
requirements by assuring that LCH SA will maintain appropriate levels 
of liquidity in the event of the assignment and exercise of such 
American options involving a Defaulting Clearing Member. By 
anticipating and ensuring that LCH SA meets its liquidity needs in such 
case, the proposed rule change would help ensure that LCH SA is able to 
meet its financial obligations and would allow LCH SA to continue to 
meet its obligation to promptly and accurately clear and settle 
securities transactions in such situations. By taking into account the 
funding risk that may arise prior to expiry of American options, the 
Proposed Rule Change is also helping to safeguard the securities and 
funds in LCH SA's control and maintain an effective liquidity risk 
management. For these reasons, LCH SA believes that the Proposed Rule 
Change is consistent with Section 17A(b)(3)(F) of the Act.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1.
    \8\ 17 CFR 240.17Ad-22.
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Further, Rule 17Ad-22(e)(7) requires a covered clearing agency to 
``effectively measure, monitor, and manage the liquidity risk that 
arises in or is borne by the covered clearing agency, including 
measuring, monitoring, and managing its settlement and funding flows on 
an ongoing and timely basis, and its use of intraday liquidity''.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

    Regulation 17dA-22(e)(4)(ii) also requires a covered clearing 
agency that is involved in activities with a more complex risk profile, 
e.g., that provides clearing services for security-based swaps, to 
maintain and enforce written policies and procedures reasonably 
designed to effectively ``measure, monitor, and manage its credit 
exposures from its payment, clearing and settlement processes'' to 
assure that it maintains additional financial

[[Page 68937]]

resources to enable it to cover a wide range of foreseeable stress 
scenarios that include the default of the two participant family 
clearing members that would potentially cause the largest aggregate 
credit exposure for the covered clearing agency in extreme but 
plausible market conditions.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 240.17Ad-22(e)(4)(ii).
---------------------------------------------------------------------------

    As noted above, the amended Framework is designed to enhance LCH 
SA's to measure, monitor, and manage the liquidity risk that may arise 
in connection with its activities as a covered clearing agency. As such 
the amendments to the Framework regarding LCH SA's liquidity 
requirements in the event of the assignment and exercise of equity 
American options involving a defaulting clearing member so that LCH SA 
can also maintain sufficient liquid resources at the minimum in all 
relevant currencies to effect the relevant settlement process of 
payment obligations with a higher degree of confidence are consistent 
with the requirements of Regulation 17dA-22(e)(4)(ii) and 17dA-
22(e)(7).\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 240.17Ad-22(e)(4)(ii) and 17dA-22(e)(7).
---------------------------------------------------------------------------

    Regulation 17dA-22(e)(4)(i) and (vi)(A) requires a clearing agency 
to maintain and enforce written policies and procedures reasonably 
designed to conduct stress testing of its total financial resources 
once each day using standard predetermined parameters and assumptions 
to assure that it has sufficient financial resources to cover its 
credit exposure to each participant fully with a high degree of 
confidence.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 240.17Ad-22(e)(4)(i) and (vi)(A).
---------------------------------------------------------------------------

    As discussed above, by clarifying the daily process for computation 
of the liquidity needs coming from the physical settlement linked to 
the exercise of equity American options under stressed liquidity 
conditions, the proposed amendments enhance LCH SA's written policies 
and procedures with regard to stress testing practices and thereby 
assures that LCH SA maintains sufficient additional financial resources 
to enable it to cover a wide range of stress scenarios that include the 
default of the two participant family clearing members that would 
potentially cause the largest aggregate credit exposure for LCH SA in 
extreme but plausible market conditions. As such, therefore, the 
proposed amendments, therefore, are consistent with the requirements of 
Regulation 17dA-22(e)(4)(i) and (vi)(A).\15\
---------------------------------------------------------------------------

    \15\ Id.
---------------------------------------------------------------------------

B. Clearing Agency's Statement on Burden on Competition.

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\16\ LCH SA does 
not believe the Proposed Rule Change would have any impact, or impose 
any burden, on competition. The Proposed Rule Change does not address 
any competitive issue or have any impact on the competition among 
central counterparties. LCH SA operates an open access model, and the 
Proposed Rule Change will have no effect on this model for any clearing 
member.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

C. Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. LCH SA will notify the Commission of any written 
comments received by LCH SA.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-LCH SA-2020-006 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-LCH SA-2020-006. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of LCH SA and on LCH SA's website 
at: https://www.lch.com/resources/rules-and-regulations/proposed-rule-changes-0.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-LCH SA-2020-006 and should 
be submitted on or before November 20, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-24022 Filed 10-29-20; 8:45 am]
BILLING CODE 8011-01-P


