[Federal Register Volume 86, Number 83 (Monday, May 3, 2021)]
[Notices]
[Pages 23445-23453]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-09025]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91676; File No. SR-LCH SA-2021-001]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to the Clearing of Single-Name Credit 
Default Swaps by U.S. Customers

April 26, 2021.
    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 April 13, 2021, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change 
described in Items I, II and III below, which Items have been prepared 
primarily by LCH SA. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    (a) Banque Centrale de Compensation, which conducts business under 
the name LCH SA (``LCH SA''), is proposing to amend its (i) CDS 
Clearing Rule Book (the ``Rule Book''), (ii) CDS Clearing Supplement 
(the ``Clearing Supplement''), (iii) some of its CDS Clearing 
Procedures (the ``Procedures''), and (iv) FCM Clearing Regulations 
(``Clearing Regulations''), to allow LCH SA to offer clearing services 
in respect of single-name credit default swaps (``CDS'') that are 
``security-based swaps'' (``SBS'') (``Single-Name CDS'') to be 
submitted by Clearing Members on behalf of their U.S. Clients for 
clearing by LCH SA.\3\ LCH SA is also proposing to revise a number of 
its rules to make additional amendments and conforming and clarifying 
amendments for consistency purposes. The text of the proposed rule 
change has been annexed as Exhibit 5. The launch of clearing Single-
Name CDS for U.S. Clients will be contingent upon LCH SA's receipt of 
all necessary regulatory approvals, including the approval by the 
Commission of the proposed rule change described herein.
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    \3\ Capitalized terms used but not defined herein shall have the 
meaning specified in the Rule Book, the Clearing Supplement, the 
Procedures and the Clearing Regulations, as applicable.
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    (b) Not applicable.
    (c) Not 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

(a) Purpose
    The purpose of the proposed rule change is to revise LCH SA's rules 
and procedures to (1) allow LCH SA to extend its clearing services in 
respect of Single-Name CDS for U.S. Clients of Clearing Members and (2) 
make additional amendments and conforming and clarifying amendments for 
consistency purposes.
(1) Amendments To Permit LCH SA To Offer Clearing Services in Relation 
to the Clearing of Single-Name CDS for U.S. Clients
    Under the derivatives regulatory regime established by Title VII of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 
the SEC was given regulatory authority over derivatives that qualify as 
``security-based swaps'' and the US Commodity Futures Trading 
Commission (``CFTC'') was given regulatory authority over derivatives 
that qualify as ``swaps.'' As a result of this division of regulatory 
responsibility, certain index CDS that are not based on a narrow-based 
security index constitute ``swaps'' subject to the regulations of the 
CFTC. On the other hand, Single-Name CDS constitute ``security-based 
swaps'' subject to the regulations of the SEC. Currently, U.S. Clients 
are permitted to clear index CDS that qualify as ``swaps'' at LCH SA 
but not Single-Name CDS.
    A Single-Name CDS is a contract based on the credit risk of a 
single issuer (a ``Reference Entity'') in which the

[[Page 23446]]

buyer of protection transfers the credit risk of the Reference Entity 
to the seller of protection without transferring the underlying 
obligation of the Reference Entity. The key terms of a Single-Name CDS 
include, among other things, (1) the identity of the Reference Entity, 
(2) the agreed upon notional amount, (3) the maturity date, (4) 
required payments by the protection buyer, (5) ``credit events'' that 
result in an obligation from the protection seller to the protection 
buyer, and (6) settlement terms. Upon the launch of clearing of Single-
Name CDS for U.S. Clients, LCH SA will provide central counterparty 
services for such Single-Name CDS that are accepted for clearing.
    The proposed changes described below would allow U.S. Clients to 
clear Single-Name CDS at LCH SA.
i. Rule Book
a. Changes to Defined Terms
    The Rule Book would be amended to add several new defined terms in 
order to accommodate the extension of LCH SA's CDS Clearing Services in 
respect of Single-Name CDS submitted to LCH SA for clearing on behalf 
of U.S. Clients. Specifically, LCH SA proposes to add a definition for 
``BD'' as a legal entity that is a ``broker'' or ``dealer'' as defined 
in Section 3(a)(4) or 3(a)(5) of the Securities Exchange Act of 1934 
(the ``Exchange Act''), respectively, and is registered in such 
capacity with the SEC and a member in good standing of FINRA (a defined 
term of ``FINRA'' would be added to the Rule Book and defined as the 
Financial Industry Regulatory Authority, Inc., or any successor 
thereto). The term ``FCM Clearing Member'' would in turn be retitled as 
``FCM/BD Clearing Member'' and would be defined as any FCM, BD, or 
legal entity that is both an FCM and BD that has been admitted as a 
clearing member. ``FCM Client'' would likewise be retitled as ``FCM/BD 
Client'' and would mean any Client that is (i) a Cleared Swaps Customer 
of an FCM/BD Clearing Member to which the FCM/BD Clearing Member 
provides CDS Client Clearing Services with respect to positions in FCM/
BD Cleared Transactions that are ``Cleared Swaps,'' or (ii) an SBS 
Customer of an FCM/BD Clearing Member to which the FCM/BD Clearing 
Member provides CDS Client Clearing Services with respect to positions 
in FCM/BD Cleared Transactions that are SBS. A defined term ``SBS 
Customer'' would be added to the Rule Book and would be defined as 
``security-based swap customer'' (as defined in Exchange Act Rule 15c3-
3) \4\ of an FCM/BD Clearing Member to which the FCM/BD Clearing Member 
provides CDS Client Clearing Services with respect to positions in FCM/
BD Cleared Transactions that are SBS in one or more accounts described 
in the FCM/BD SBS Client Account Structure.
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    \4\ 17 CFR 240.15c3-3.
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    A new defined term ``Cleared Swap'' would be added in the Rule 
Book, in order to differentiate between ``swaps'' and ``SBS'' and the 
different account structures for each (as further described below), to 
mean an ``FCM/BD Cleared Transaction'' (i) constituting a ``Cleared 
Swap'' as defined in CFTC Regulation 22.1 \5\ or (ii) constituting an 
SBS that is held in the FCM/BD Swaps Client Account Structure.\6\ A 
``Cleared Swaps Customer,'' in turn, would be defined as (i) a 
``Cleared Swaps Customer,'' as defined in CFTC Regulation 22.1, of an 
FCM/BD Clearing Member with respect to Cleared Swaps that is an 
eligible contract participant as defined in Section 1a(18) of the U.S. 
Commodity Exchange Act, other than subparagraph (C) thereof, or as may 
be further defined by CFTC Regulations, and (ii) a person that would be 
a ``Cleared Swaps Customer,'' as defined in CFTC Regulation 22.1, of an 
FCM/BD Clearing Member with respect to any transaction constituting an 
SBS that is a Cleared Swap, as if such transaction is a Cleared Swap 
for purposes of the definition of ``Cleared Swaps Customer'' in CFTC 
Regulation 22.1.\7\ ``Cleared Swaps Customer Collateral'' would be 
defined as ``Cleared Swaps Customer Collateral,'' as defined in CFTC 
Regulation 22.1, with respect to Cleared Swaps, including with respect 
to any transaction constituting an SBS that is a Cleared Swap, as if 
such transaction is a Cleared Swap for purposes of the definition of 
``Cleared Swaps Customer Collateral'' in CFTC Regulation 22.1.\8\
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    \5\ 17 CFR 22.1
    \6\ SBS held in the FCM/BD Swaps Client Account structure would 
include SBS eligible for portfolio margining as contemplated in the 
Commission's Order Granting Conditional Exemptions under the 
Securities Exchange Act of 1934 in connection with Portfolio 
Margining of Swaps and Security-Based Swaps. See Order Granting 
Conditional Exemptions Under the Securities Exchange Act of 1934 in 
Connection With Portfolio Margining of Swaps and Security-Based 
Swaps, Exchange Act Release No. 68433 (Dec. 14, 2012), 77 FR 75211 
(Dec. 19, 2012) (the ``Portfolio Margining Order'').
    \7\ 17 CFR 22.1
    \8\ 17 CFR 22.1
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    The defined terms in the Rule Book which relate to the account 
structure in which collateral for Cleared Swaps and SBS would be held 
would be revised to accommodate three account structures: (1) A 
separate account structure for Cleared Swaps, (2) a separate account 
structure for SBS, and (3) an account structure in which an FCM/BD 
Clearing Member that is both an FCM and a BD may elect to clear and 
hold margin for FCM/BD Cleared Transactions that are SBS for FCM/BD 
Clients on a commingled basis with Cleared Swaps in accordance with the 
Portfolio Margining Order. Each account structure is described in 
further detail below and the defined terms (and the changes to existing 
defined terms) with respect to those account structures would include:
     ``FCM/BD Client Account Structure'' would mean the 
accounts comprising the FCM/BD Swaps Client Account Structure and the 
FCM/BD SBS Client Account Structure set out in the Rule Book and 
registered in the CDS Clearing System in the name of an FCM/BD Clearing 
Member.
     ``FCM/BD Swaps Client Account Structure'' would mean the 
accounts comprising the FCM/BD Swaps Client Account Structure and 
registered in the CDS Clearing System in the name of an FCM/BD Clearing 
Member.
     ``FCM/BD SBS Client Account Structure'' would mean the 
accounts comprising the FCM/BD SBS Client Account Structure and 
registered in the CDS Clearing System in the name of an FCM/BD Clearing 
Member.
     ``FCM/BD Client Collateral Account'' would mean an FCM/BD 
Swaps Client Collateral Account and/or an FCM/BD SBS Client Collateral 
Account.
     ``FCM/BD Swaps Client Collateral Account'' would mean an 
account opened in the books of LCH SA to record the Collateral held by 
LCH SA for the benefit of an FCM/BD Clearing Member's FCM/BD Clients 
with respect to Cleared Swaps, the aggregate value of such Collateral 
being divided among, and recorded in: (i) The FCM/BD Swaps Client 
Financial Account; (ii) the FCM/BD Swaps Buffer Financial Account; and 
(iii) the FCM/BD Swaps Unallocated Client Collateral Financial Account.
     ``FCM/BD SBS Client Collateral Account'' would mean an 
account opened in the books of LCH SA to record the Collateral held by 
LCH SA for the benefit of an FCM/BD Clearing Member's SBS Customers 
with respect to FCM/BD Cleared Transactions that are SBS (excluding any 
SBS transactions held in the FCM/BD Swaps Client Account Structure as 
Cleared Swaps), the aggregate value of such Collateral being divided 
among, and recorded in: (i) The FCM/BD SBS Client Financial Accounts; 
(ii) the FCM/BD SBS Buffer Financial Account; and (iii) the FCM/

[[Page 23447]]

BD SBS Client Excess Collateral Financial Account.
     ``FCM/BD Client Financial Account'' would mean an FCM/BD 
Swaps Client Financial Account or an FCM/BD SBS Client Financial 
Account.
     ``FCM/BD Swaps Client Financial Account'' would mean a 
segregated account opened in the books of LCH SA for each Cleared Swaps 
Customer of an FCM/BD Clearing Member with a view to record the Legally 
Segregated Value related to Cleared Swaps of such Cleared Swaps 
Customer as determined by LCH SA in accordance with the CDS Clearing 
Rules.
     ``FCM/BD SBS Client Financial Account'' would mean a 
segregated account opened in the books of LCH SA for an SBS Customer of 
an FCM/BD Clearing Member with a view to record the Legally Segregated 
Value related to SBS (excluding SBS that are held in the FCM/BD Swaps 
Client Account Structure as Cleared Swaps) of such FCM/BD Clearing 
Member's SBS Customer as determined by LCH SA in accordance with the 
CDS Clearing Rules.
     ``FCM/BD Client Margin Account'' would mean an FCM/BD 
Swaps Client Margin Account or an FCM/BD SBS Client Margin Account.
     ``FCM/BD Swaps Client Margin Account'' would mean an 
account opened by LCH SA in the name of an FCM/BD Clearing Member for 
the benefit of each Cleared Swaps Customer of such FCM/BD Clearing 
Member in the CDS Clearing System for risk management purposes, in 
which the FCM/BD Cleared Transactions of such Client that are Cleared 
Swaps are netted and corresponding Open Positions are registered, and 
each FCM/BD Client related Cleared Swaps positions corresponding to 
Eligible Intraday Transactions and Irrevocable Backloading STM 
Transactions pre-registered in the Account Structure of such FCM/BD 
Clearing Member (if so applicable) are recorded, in order to calculate 
the FCM/BD Client Margin Requirement and Client NPV Payment Requirement 
of such FCM/BD Clearing Member in respect of such FCM/BD Client.
     ``FCM/BD SBS Client Margin Account'' would mean an account 
opened by LCH SA in the name of an FCM/BD Clearing Member for the 
benefit of each SBS Customer of such FCM/BD Clearing Member in the CDS 
Clearing System for risk management purposes, in which the SBS of the 
SBS Customers (excluding SBS that are held in the FCM/BD Swaps Client 
Account Structure as Cleared Swaps) are netted and corresponding Open 
Positions are registered, and each FCM/BD Client related SBS positions 
(excluding SBS transactions that are held in the FCM/BD Swaps Client 
Account Structure as Cleared Swaps) corresponding to Eligible Intraday 
Transactions and Irrevocable Backloading STM Transactions pre-
registered in the Account Structure of such FCM/BD Clearing Member (if 
so applicable) are recorded, in order to calculate the FCM/BD Client 
Margin Requirement and Client NPV Payment Requirement of such FCM/BD 
Clearing Member in respect of such SBS Customer.
     ``FCM/BD Client Trade Account'' would mean an FCM/BD Swaps 
Client Trade Account or an FCM/BD SBS Client Trade Account.
     ``FCM/BD Swaps Client Trade Account'' would mean an 
account opened by LCH SA in the name of an FCM/BD Clearing Member for 
the benefit of a Customer of such FCM/BD Clearing Member in order to 
register all Cleared Swaps (including any SBS that are held in the FCM/
BD Swaps Client Account Structure as Cleared Swaps) in relation to such 
FCM/BD Client.
     ``FCM/BD SBS Client Trade Account'' would mean an account 
opened by LCH SA in the name of an FCM/BD Clearing Member for the 
benefit of an SBS Customer of such FCM/BD Clearing Member in order to 
register all SBS cleared by such FCM/BD Clearing Member (excluding SBS 
that are held in the FCM/BD Swaps Client Account Structure as Cleared 
Swaps) in relation to such SBS Customer.
     ``FCM/BD Buffer Financial Account'' would mean an FCM/BD 
Swaps Buffer Financial Account or an FCM/BD SBS Buffer Financial 
Account.
     ``FCM/BD Swaps Buffer Financial Account'' would mean a 
segregated account opened in the books of LCH SA to record the value of 
an FCM/BD Clearing Member's FCM/BD Client Collateral Buffer with 
respect to Cleared Swaps.
     ``FCM/BD SBS Buffer Financial Account'' would mean a 
segregated account opened in the books of LCH SA to record the value of 
an FCM/BD Clearing Member's FCM/BD SBS Client Collateral Buffer.
     ``FCM/BD Client Collateral Buffer'' would mean FCM/BD 
Swaps Client Collateral Buffer or FCM/BD SBS Client Collateral Buffer.
     ``FCM/BD Swaps Client Collateral Buffer'' would mean the 
aggregate value of Collateral transferred by an FCM/BD Clearing Member 
to LCH SA, comprising such FCM/BD Clearing Member's own property, and 
recorded in such FCM/BD Clearing Member's FCM/BD Swaps Buffer Financial 
Account which may be used by LCH SA to meet obligations in respect of 
the Cleared Swaps of Cleared Swaps Customers, including for the purpose 
of satisfying the Notional and Collateral Checks performed by LCH SA in 
respect of Eligible Intraday Transactions comprising one or more Client 
Trade Leg(s).
     ``FCM/BD SBS Client Collateral Buffer'' would mean the 
aggregate value of Collateral transferred by an FCM/BD Clearing Member 
to LCH SA, comprising such FCM/BD Clearing Member's own property, and 
recorded in such FCM/BD Clearing Member's FCM/BD SBS Buffer Financial 
Account which may be used by LCH SA to meet obligations in respect of 
the FCM/BD Cleared Transactions of SBS Customers, including for the 
purpose of satisfying the Notional and Collateral Checks performed by 
LCH SA in respect of Eligible Intraday Transactions comprising one or 
more Client Trade Leg(s).
     ``FCM/BD Available Client Collateral Buffer'' would mean 
the FCM/BD Swaps Available Client Collateral Buffer or the FCM/BD SBS 
Available Client Collateral Buffer.
     ``FCM/BD Swaps Available Client Collateral Buffer'' would 
mean the portion of the FCM/BD Swaps Client Collateral Buffer which, at 
the relevant time, is not allocated to any FCM/BD Swaps Client Margin 
Account and is available to be used to enable the novation of Client 
Trade Legs.
     ``FCM/BD SBS Available Client Collateral Buffer'' would 
mean the portion of the FCM/BD SBS Client Collateral Buffer which, at 
the relevant time, is not allocated to any FCM/BD SBS Client Margin 
Account and is available to be used to enable the novation of Client 
Trade Legs.
     ``FCM/BD Swaps Client Excess Collateral'' would mean the 
amount of any FCM/BD Excess Collateral attributable to an FCM/BD Swaps 
Client Margin Account and held on an intraday basis prior to the next 
Morning Call before it is transferred to the related FCM/BD Clearing 
Member's FCM/BD Swaps Unallocated Client Collateral Financial Account.
     ``FCM/BD SBS Client Excess Collateral'' would mean the 
FCM/BD Client Excess Collateral as set out in the proposed new Article 
6.2.5.2(ii) of the Rule Book.
     ``FCM/BD SBS Client Excess Collateral Financial Account'' 
would mean a segregated account opened in the books of LCH SA to record 
the value of FCM/BD SBS Client Excess Collateral as determined by LCH 
SA.

[[Page 23448]]

     ``FCM/BD Swaps Unallocated Client Collateral Financial 
Account'' would mean a segregated account opened in the books of LCH SA 
to record the value of FCM/BD Swaps Unallocated Client Excess 
Collateral as determined by LCH SA.
     ``FCM/BD Swaps Unallocated Client Excess Collateral'' 
would mean the FCM/BD Client Excess Collateral as set out in the 
proposed amended Section 6.2.5 of the Rule Book.
    Changes to the Rule Book would also be made in certain 
jurisdictional definitions to reflect that SBS would be available for 
Clearing to U.S. Clients. Specifically, ``Non-U.S. CCM'' would be 
defined, when used in the context of an Original Transaction, as a CCM 
that has its residence in, is organized under the laws of, or has its 
principal place of business located in, a jurisdiction other than the 
United States, its territories or possessions and is not a registered 
BD or FCM. A ``Non-U.S. CCM Client'' would be defined as a CCM Client 
that is not a U.S. CCM Client. A ``U.S. CCM Client'' would be defined 
as a Client of an FCM or a BD or any Client that has its residence in, 
is organized under the laws of, or has its principal place of business 
located in the United States, its territories or possessions.
    The following defined terms in Chapter 1, Section 1.1.1 would also 
include conforming changes to accommodate the clearing of Single-Name 
CDS for U.S. Clients: ``Account Structure,'' ``Affiliate,'' ``Allocated 
Client Collateral Buffer,'' ``Available Client Collateral Buffer,'' 
``Backup Clearing Member,'' ``Carrying Clearing Member,'' ``CCM,'' 
``CDS Clearing Rules,'' ``CDS Clearing Service,'' ``Cleared 
Transaction,'' ``Client,'' ``Client Account Structure,'' ``Client 
Assets,'' ``Client Collateral Account,'' ``Client Collateral Buffer,'' 
``Client Collateral Buffer Shortfall,'' ``Client Collateral Buffer 
Threshold,'' ``Client Excess Collateral,'' ''Client Margin Account,'' 
''Client Margin Requirement,'' ''Client Margin Shortfall,'' ''Client 
Termination Amount,'' ''Client Trade Account,'' ``Excess Collateral,'' 
``Excess Collateral Threshold,'' ``FCM Allocated Client Collateral 
Buffer,'' ``FCM CDS Clearing Regulations,'' ``FCM Cleared 
Transaction,'' ``FCM Client Collateral Buffer Shortfall,'' ``FCM Client 
Collateral Buffer Threshold,'' ``FCM Client Excess Collateral,'' ``FCM 
Client Margin Requirement,'' ``FCM Client Margin Shortfall,'' ``FCM 
Client Termination Amount,'' ``FCM Excess Collateral,'' ``FCM House 
Cleared Transaction,'' ``FCM House Collateral Account,'' ``FCM House 
Excess Collateral,'' ``FCM House Excess Collateral Shortfall,'' ``FCM 
House Excess Collateral Threshold,'' ``FCM House Margin Account,'' 
``FCM House Margin Requirement,'' ``FCM House Margin Shortfall,'' ``FCM 
Margin Balance,'' ``FCM Required Collateral Amount,'' ``General 
Member,'' ``House Collateral Account,'' ``House Excess Collateral,'' 
``House Excess Collateral Shortfall,'' ``House Excess Collateral 
Threshold,'' ``House Margin Account,'' ``House Margin Requirement,'' 
``House Margin Shortfall,'' ``Legally Segregated Value,'' ``Margin 
Account,'' ``Margin Balance,'' ``Notional and Collateral Check,'' 
``Porting FCM Cleared Transaction,'' ``Receiving Clearing Member,'' 
``Required Collateral Amount,'' and ``Select Member.''
    In addition to the foregoing changes, various other conforming and 
clarifying changes would be made throughout Title I (General Provisions 
& Legal Framework) to incorporate terms to accommodate Single-Name CDS 
cleared for FCM/BD Clients. Those conforming and clarifying changes are 
set forth in Articles 1.2.10.3(xix) and (xxi), 1.2.10.4(vii), (x) and 
(xi), 1.2.14.4, 1.2.14.5(iv), 1.3.1.3(vi), 1.3.1.4, 1.3.1.6 (ii)--(iv), 
1.3.1.9, and 1.3.1.10.
b. Membership and Clearing Operations
    Article 2.1.1.2 of the Rule Book would be revised to provide that, 
without prejudice to the membership requirements set out in the CDS 
Clearing Rules and applicable law, both FCMs and BDs are eligible to 
become FCM/BD Clearing Members.
    Additional conforming and clarifying changes would be made 
throughout Title II (Legal Obligations) to include terms for Single-
Name CDS and certain other clarifying changes, including in Article 
2.2.0.3, 2.2.1.1 (iv), (xxi), (xxiv), and (xxv), 2.2.1.2, 2.2.2.1, 
2.2.3.1, 2.3.4.2, 2.4.2.11, and 3.1.10.9.
c. Risk Management
    The procedures with respect to the return of collateral are set 
forth in Article 4.2.2.5 of the Rule Book and would be revised, in the 
case of an FCM/BD Clearing Member, so that if the FCM/BD Margin Balance 
of an FCM/BD Client Financial Account exceeds the relevant FCM/BD 
Client Margin Requirement prior to the Morning Call or the value of the 
Collateral attributed to the FCM/BD Buffer Financial Account exceeds 
the FCM/BD Client Collateral Buffer Threshold, then the amount of the 
excess: (1) If related to Cleared Swaps, will be reclassified as FCM/BD 
Swaps Unallocated Client Excess Collateral; and (2) if related to SBS 
(excluding SBS that are held in the FCM/BD Swaps Client Account 
Structure as Cleared Swaps (as described below)), will be reclassified 
as FCM/BD SBS Client Excess Collateral, and thereafter may be returned 
to the FCM/BD Clearing Member.
    Other conforming changes in Title IV (Risk Management) of the Rule 
Book are set forth in Article 4.2.2.1, 4.2.2.4, 4.2.2.6, 4.2.3.1, 
4.2.6.3, 4.2.6.4, 4.2.6.6, 4.3.1.3, 4.3.2.3(i), (x), (xv) and (xix), 
4.3.2.4, 4.3.2.7, 4.3.3.1(i), 4.3.3.2, and 4.3.3.4.
d. CDS Client Clearing Services Provided by a CCM
    Article 5.1.1.2, which relates to the provision of CDS Client 
Clearing Services and sets limitations on the scope of services that 
may be provided by a Clearing Member that is a CCM, previously 
provided, in clause (v), that a Non-U.S. CCM shall not provide CDS 
Client Clearing Services to any U.S. CCM Client with respect to an 
Original Transaction that is SBS and that a U.S. CCM shall not provide 
any CDS Client Clearing Services to any U.S. CCM Client with respect to 
an Original Transaction that is SBS. Clause (v) of Article 5.1.1.2 
would be deleted in its entirety. Separately, clause (vi) would be re-
numbered as clause (v) and would provide that a CCM shall not provide 
CDS Client Clearing Services to any U.S. CCM Client with respect to an 
Original Transaction (which would include any SBS) unless such CCM is 
an FCM and/or BD.
e. CDS Client Clearing Services Provided by an FCM/BD Clearing Member
    Article 6.1.1.2(vi) previously provided that an FCM shall not 
provide CDS Client Clearing Services to any FCM Client with respect to 
SBS; it would be revised to delete that restriction.
    Article 6.2.1.1 sets forth the required account structure for FMC/
BD Clearing Members. Article 6.2.1.1(i) would set forth the required 
account structure for an FCM (which may also be a BD) with respect to 
any Cleared Swaps, which would entail:
     An FCM/BD Swaps Client Trade Account for each Cleared 
Swaps Customer.
     An FCM/BD Swaps Client Margin Account for each Cleared 
Swaps Customer.
     An FCM/BD Swaps Client Financial Account for each Cleared 
Swaps Customer.
     An FCM/BD Swaps Unallocated Client Collateral Financial 
Account.
     An FCM/BD Swaps Buffer Financial Account.
     An FCM/BD Swaps Client Collateral Account.

[[Page 23449]]

    For an FCM/BD Clearing Member that is a BD (which may also be an 
FCM), with respect to SBS (excluding SBS that are permitted to be held 
in an account with Cleared Swaps), Article 6.2.1.1(ii) would require 
the following account structure:
     An FCM/BD SBS Client Trade Account for each SBS Customer. 
\9\
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    \9\ Article 6.2.2.1, which relates to the establishments of 
trade accounts, would be revised to provide for the establishment of 
FCM/BD SBS Client Trade Accounts for SBS Customers.
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     An FCM/BD SBS Client Margin Account for each SBS 
Customer.\10\
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    \10\ Article 6.2.3.1, which relates to the establishment of 
client margin accounts, would be revised to provide for the 
establishment of FCM/BD SBS Client Margin Accounts for SBS 
Customers. Article 6.2.3.2 would be revised to provide that FCM/BD 
Cleared Transactions (i) registered in an FCM/BD Swaps Client Trade 
Account for a Cleared Swaps Customer will be allocated to the 
corresponding FCM/BD Cleared Swaps Client Margin Account and (ii) 
registered in an FCM/BD SBS Client Trade Account for an SBS Customer 
will be allocated to the corresponding FCM/BD SBS Client Margin 
Account, for the purpose of the determination of the Open Positions 
and NPV Payment Requirements attributable to such FCM/BD Client.
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     An FCM/BD SBS Client Financial Account for each SBS 
Customer.\11\
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    \11\ Article 6.2.4.1, which relates to the establishment of 
Client Financial Accounts, would be revised to include a new clause 
(ii) (a) setting forth the establishment of an FCM/BD SBS Client 
Financial Account for each SBS Customer, in which LCH SA will record 
the value of Collateral provided by the FCM/BD Clearing Member in 
respect of such SBS Customer's Open Positions in SBS.
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     An FCM/BD SBS Client Excess Collateral Financial 
Account.\12\
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    \12\ Article 6.2.4.1(ii)(c) would be added to provide that LCH 
SA shall open an FCM/BD SBS Client Excess Collateral Financial 
Account, in which LCH SA will record the value of FCM/BD SBS Client 
Excess Collateral. Article 6.2.5.2 (ii) would provide that an FCM/BD 
Clearing Member is not permitted to maintain any FCM/BD Client 
Excess Collateral on a day-to-day basis with respect to SBS, but may 
hold FCM/BD Client Excess Collateral on an intraday basis and that 
LCH SA shall transfer the value of any FCM/BD Client Excess 
Collateral that is reflected in any FCM/BD SBS Client Financial 
Account of the FCM/BD Clearing Member prior to the Morning Call to 
the FCM/BD Clearing Member's FCM/BD SBS Client Excess Collateral 
Financial Account. In addition, Article 6.2.5.2(iv) would provide 
that LCH SA shall hold FCM/BD SBS Client Excess Collateral in the 
FCM/BD SBS Client Excess Collateral Financial Account for the 
benefit of FCM/BD Clearing Member's FCM/BD Clients that are SBS 
customers as a class in accordance with SEC regulations and 
Applicable Law and that upon the request of an FCM/BD Clearing 
Member, LCH SA will return FCM/BD SBS Client Excess Collateral to 
such FCM/BD Clearing Member.
---------------------------------------------------------------------------

     An FCM/BD SBS Buffer Financial Account.\13\
---------------------------------------------------------------------------

    \13\ Article 6.2.4.1(ii)(b) would be added to provide that LCH 
SA shall open an FCM/BD SBS Buffer Financial Account, in which LCH 
SA will record the value of Collateral provided as FCM/BD SBS Client 
Collateral Buffer.
---------------------------------------------------------------------------

     An FCM/BD SBS Client Collateral Account.\14\
---------------------------------------------------------------------------

    \14\ Article 6.2.4.1(ii)(d) would be added to provide that LCH 
SA shall open an FCM/BD SBS Client Collateral Account in which LCH 
SA will record the Collateral held by LCH SA recorded in the 
foregoing accounts.
---------------------------------------------------------------------------

    A new Article 6.2.1.1(iii) would also be added to provide that an 
FCM/BD Clearing Member that is both an FCM and a BD may elect to clear 
and hold margin for FCM/BD Cleared Transactions that are SBS for FCM/BD 
Clients in the FCM/BD Swaps Client Account Structure on a commingled 
basis with Cleared Swaps and margin such combined positions on a 
portfolio basis in compliance with Applicable Laws, provided that each 
FCM/BD Client participating in the portfolio margining shall be an 
eligible contract participant as defined in Section 1a(18) of the 
Commodity Exchange Act. Upon such election, FCM/BD Cleared Transactions 
that are SBS will be included as ``Cleared Swaps'' and maintained in 
the FCM/BD Swaps Client Account Structure.
    Articles 6.1.1.1, 6.1.1.2, 6.1.1.3, 6.1.1.4, 6.1.1.5, 6.2.1.2, 
6.2.1.3, 6.2.1.4, 6.2.2.1, 6.2.2.2, 6.2.3.1, 6.2.3.2, 6.2.3.3, 6.2.4.1, 
6.2.4.2, 6.2.4.3, 6.2.4.4, 6.2.5.1, 6.2.5.2, 6.2.6.1, 6.2.6.2, 6.3.1.1, 
6.3.2.1, 6.3.3.1, 6.3.4.1, 6.3.4.2, 6.3.5.1, 6.3.5.2, 6.4.1.1, and 
6.4.1.3 would also include certain conforming and clarifying changes.
f. Default Management
    Appendix I of the Rule Book (CDS Default Management Process), 
Clause 1.1 which provides for the definition of ``Transaction 
Categories'' would be amended to provide that different categories of 
Cleared Transactions will include ``Single Name Cleared Transactions'' 
for consistency purposes. Clause 3.3 of Appendix I would also be 
amended to provide that the CDS Default Management Process shall be 
carried out in a manner consistent with the requirements of the SIPC 
(which is the Securities Investor Protection Corporation or any 
successor thereto in accordance with the proposed definition of new 
defined term of ``SIPC'' in Section 1.1.1 of the Rule Book), Exchange 
Act and SEC Regulations. Clause 5.4 of Appendix I, which relates to the 
Competitive Bidding Process, would be revised to provide in Clause 
5.4.1, that a Non-Defaulting Clearing Member that is a BD but not an 
FCM is not required to participate in Competitive Bidding for an 
Auction Package containing any Cleared Swaps and that a Non-Defaulting 
Clearing Member that is an FCM but not a BD is not required to 
participate in Competitive Bidding for an Auction Package containing 
any SBS.
    Other conforming changes in Appendix I are set forth in Clauses 
3.3, 4.2.1, 4.2.2, 4.2.3, 4.2.5, 4.2.8, 4.3.1, 4.4.3, 4.5.2, 8.1.4, 
8.5, 8.7 and 8.9.
ii. Clearing Supplement
    Various clarifying and conforming changes would be made to the 
Clearing Supplement to account for the clearing of SBS for FCM/BD 
Clients. Specifically, certain references to ``FCM'' therein would be 
replaced with ``FCM/BD.'' Those changes are set forth in Sections 1.7 
and 9.2(c) of Parts A and B of the Clearing Supplement and in Sections 
1.7 and 6.10(b) and (d) of Part C of the Clearing Supplement.
iii. Procedures
    Section 2 of the Procedures (Margin, NPV Payment and Price 
Alignment) would include conforming changes in Sections 2.2, 2.3, 2.5, 
and 2.16.
    Section 3 of the Procedures (Collateral, Variation Margin and Cash 
Payment) would be amended, in Section 3.3(b), which relates to the 
Collateral Account structure, to add a reference to the FCM/BD SBS 
Client Collateral Account to record the collateral held by LCH SA for 
the benefit of an FCM/BD Clearing Member's SBS Customers with respect 
to SBS (excluding SBS that are held in an account in the FCM/BD Swaps 
Client Account Structure), the aggregate value of such Collateral being 
divided amongst, and recorded in: the FCM/BD SBS Client Financial 
Account; the FCM/BD SBS Buffer Financial Account; and the FCM/BD SBS 
Client Excess Collateral Financial Account.
    Section 3.7(a) would be amended to provide that with respect to the 
Clients of a Clearing Member, LCH SA will perform Collateral Calls, in 
respect of SBS, with a ``TARGET2 Account'' used to make Collateral 
Calls in relation to the Client Margin Requirements with respect to SBS 
(excluding SBS held in the FCM/BD Swaps Client Account Structure) and 
FCM/BD Client Collateral Buffer Threshold of each FCM/BD Clearing 
Member, which for the avoidance of doubt would form part of the LCH SBS 
Client Segregated Depository Account. Section 3.7(b) would also be 
amended to provide that an FCM/BD Clearing Member must hold three 
``TARGET2 Accounts,'' for purposes of Collateral Calls in respect of 
(i) its FCM/BD House Margin Requirement and FCM/BD House Excess 
Collateral Threshold, (ii) its Client Margin Requirement(s) with 
respect to Cleared Swaps and FCM/BD Client Collateral Buffer Threshold 
and (iii) its Client Margin Requirement(s) with respect to SBS 
(excluding SBS that are held in the FCM/BD Swaps Client

[[Page 23450]]

Account Structure) and FCM/BD Client Collateral Buffer Threshold. 
Section 3.7(g) would be amended to provided that, in respect of an FCM/
BD SBS Client Excess Collateral Financial Account, the FCM/BD Clearing 
Member may request LCH SA to return some or all FCM/BD SBS Client 
Excess Collateral in the form of Euro denominated Cash Collateral 
provided that the requested amount does not exceed the FCM/BD SBS 
Client Excess Collateral recorded in its FCM/BD SBS Client Collateral 
Account.
    Section 3.8(a)-(b) of the Procedures would be amended to provide 
that with respect to Clients of a Clearing Member, LCH SA would open 
(i) a multi-currency account used to credit non-Euro, non-USD Cash 
Collateral which is transferred by an FCM/BD Clearing Member to be 
recorded in its FCM/BD SBS Client Collateral Account, which would form 
part of the LCH SBS Client Segregated Depository Account for purposes 
of the FCM/BD CDS Clearing Regulations and (ii) an account used to 
credit USD Cash Collateral which is transferred by FCM/BD Clearing 
Members to be recorded in their FCM/BD SBS Client Collateral Account, 
which would also form part of the LCH SBS Client Segregated Depository 
Account for purposes of the FCM/BD CDS Clearing Regulations. With 
respect to excess collateral, Section 3.8(h) and (i), which relate to 
the return of collateral would be amended to provide for the return of 
excess collateral in respect of SBS. Section 3.18(c) would be amended 
to provide that LCH SA will open a cash account used to debit or credit 
USD to satisfy Cash Payments and/or Variation Margin Collateral 
Transfer obligations in USD with respect to all relevant Client Cleared 
Transactions of each FCM/BD Clearing Member that are SBS (excluding SBS 
that are held in the FCM/BD Swaps Client Account Structure). Other 
conforming changes in Section 3 of the Procedures are included in the 
recital and Sections 3.2, 3.3, 3.4, 3.7(a), (d), (f) and (g), 3.8(a), 
(b), (c), (f), (g), (h) and (i), 3.9(d) and (e), 3.10(b), 3.14, 3.17 
and 3.18.
    Section 4 of the Procedures (Eligibility Requirements) would be 
amended to delete the provision in Section 4.1 which previously 
provided that (i) in respect of an FCM Client, a U.S. CCM Client of a 
Non-U.S. CCM or a CCM Client of a U.S. CCM, the Original Transaction 
may not be a Single Name CDS or any other SBS identified as such in a 
Clearing Notice; and (ii) in respect of a Non-U.S. CCM Client, the 
Original Transaction may not be a Single Name CDS or any other SBS 
identified as such in a Clearing Notice unless such transaction is 
cleared through a Non-U.S. CCM.
    Section 5 of the Procedures (CDS Clearing Operations) would be 
revised to include conforming changes in Sections 5.6 and 5.11.
iv. Clearing Regulations
    The Clearing Regulations, currently titled as ``FCM CDS Clearing 
Regulations,'' would be retitled as the ``FCM/BD CDS Clearing 
Regulations.''
    Various defined terms in the Clearing Regulations would be updated 
to accommodate the extension of LCH SA's clearing services in respect 
of Single-Name CDS to U.S. Clients. The defined term ``FCM Cleared 
Swaps Client Segregated Depository Account'' would be retitled as the 
``FCM/BD Cleared Swaps Client Segregated Depository Account'' and 
references in that definition to ``FCM Clients'' would be replaced with 
``Cleared Swap Customers.'' Similarly, the references in the defined 
term ``LCH Cleared Swaps Client Segregated Depository Account'' to 
``FCM Clients'' would be replaced with ``Cleared Swaps Customers'' and 
references to ``Cleared Transactions'' therein would refer to Cleared 
Transactions that are ``Cleared Swaps.'' A new defined term ``LCH SBS 
Client Segregated Depository Account'' would be added and would mean an 
omnibus account maintained by an FCM/BD Clearing Member for its SBS 
Customers with a Bank, which is segregated in accordance with the 
Exchange Act and SEC Regulations and contains collateral deposited by 
such SBS Customers in connection with FCM/BD Cleared Transactions that 
are SBS cleared for such SBS Customers by such FCM/BD Clearing Member, 
excluding any SBS held in the FCM/BD Swaps Client Account Structure 
that are permitted to be held in an account with Cleared Swaps as 
defined in CFTC Regulation 22.1 under Applicable Law. A new defined 
term for ``Bank'' would also be added, to refer to a ``Bank'' as 
defined in Section 3(a)(6) of the Exchange Act. Finally, the defined 
term ``LCH Cleared Swaps Proprietary Depository Account'' would be 
replaced with the general term of ``LCH Proprietary Depository 
Account''.
    Regulation 1 of the Clearing Regulations (Governing Law and 
Jurisdiction) would be updated to replace references to ``FCM'' with 
``FCM/BD'' and to provide that the Clearing Regulations shall also be 
construed in accordance with the Exchange Act.
    Regulation 2 (Depositary Accounts) of the Clearing Regulations 
would be revised to provide for the relevant accounts for SBS. Each 
FCM/BD would be required to establish and maintain an FCM/BD SBS Client 
Segregated Depository Account on behalf of its SBS Customers in 
accordance with applicable provisions of the Exchange Act and SEC 
regulations, including but not limited to Section 3E and Section 15(c) 
of the Exchange Act \15\ and Exchange Act Rule 15c3-3.\16\ The Clearing 
Regulations would require that the SBS Client Segregated Depository 
Account be maintained with a Bank in accordance with the Exchange Act 
and SEC Regulations. The FCM/BD SBS Client Segregated Depository 
Account maintained by each FCM/BD Clearing Member would be designated 
as a ``Special Reserve Bank Account for the Exclusive Benefit of the 
Cleared Security-Based Swap Customers'' of the FCM/BD Clearing Member 
as provided in Exchange Act Rule 15c3-3(p).\17\ LCH SA would be 
required to open an LCH SBS Client Segregated Depository Account on 
behalf of the SBS Customers of FCM/BD Clearing Members in accordance 
with applicable provisions of the Exchange Act and SEC Regulations. 
This account shall be maintained with a Bank and shall contain no 
assets other than Collateral deposited by FCM/BD Clearing Members in 
connection with the clearing of SBS held in the FCM/BD SBS Client 
Account Structure on behalf of their SBS Customers. The LCH SBS Client 
Segregated Depository Account maintained by LCH SA shall be designated 
as a ``Special Clearing Account for the Exclusive Benefit of the 
Cleared Security-Based Swaps Customers'' of the FCM/BD Clearing Member 
for purposes of the Exchange Act and SEC Regulations.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78c-5, 78o(c).
    \16\ 17 CFR 240.15c3-3.
    \17\ 17 CFR 240.15c3-3(p).
---------------------------------------------------------------------------

    Regulation 3 (Collateral) of the Clearing Regulations would be 
updated to provide that securities or cash deposited will be subject to 
a security interest and held in either an LCH Cleared Swaps Client 
Segregated Depository Account or an LCH SBS Client Segregated 
Depository Account, as applicable. Regulation 3 would also be updated 
to provide that no collateral deposited in an FCM/BD Clearing Member's 
LCH Cleared Swaps Client Segregated Depository Account or LCH SBS 
Client Segregated Depository Account shall be applied on or in respect 
of payment or satisfaction of any of the FCM/BD Clearing Member's 
liabilities to LCH SA as recorded in any

[[Page 23451]]

of the FCM/BD Clearing Member's Proprietary Accounts.
    Regulation 4 (Transfer) of the Clearing Regulations would be 
amended to provide that if an FCM/BD Clearing Member is a Defaulting 
Clearing Member, any action taken by LCH SA pursuant to the CDS 
Clearing Rule Book (including the CDS Default Management Process 
appended thereto) would be taken in compliance with the U.S. Commodity 
Exchange Act or the Exchange Act and SEC Regulation, as applicable, and 
applicable bankruptcy laws regarding the liquidation or transfer of 
Cleared Swaps carried by an FCM on behalf of its Cleared Swaps 
Customers or SBS carried by a BD on behalf of its SBS Customers.
    Regulation 5 (Security Interest) of the Clearing Regulations would 
be revised to specify that each FCM/BD Clearing Member grants LCH SA a 
first security interest in and a first priority and unencumbered first 
lien upon any and all cash, securities, receivables, rights and 
intangibles and any other Collateral or assets deposited with or 
transferred to LCH SA, or otherwise held by LCH SA, including all 
property deposited in an LCH SBS Client Segregated Depository Account. 
Regulation 5 would also clarify that notwithstanding such security 
interest, in no event shall LCH SA's security interest in the 
Collateral in an LCH SBS Client Segregated Depository Account held on 
behalf of the FCM/BD Clearing Member's Clients be exercised to satisfy 
any obligations or liabilities of such FCM/BD Clearing Member other 
than in connection with obligations or liabilities relating to Cleared 
Swaps cleared by such FCM/BD Clearing Member on behalf of its Cleared 
Swaps Customers or relating to SBS cleared by such FCM/BD Clearing 
Member on behalf of its SBS Customers.
    Additional clarifying and conforming changes in the Clearing 
Regulations would be set forth in the Clearing Regulations, including 
the use of new defined terms such as FCM/BD Clearing Members, FCM/BD 
Cleared Transactions, FCM/BD Clients, Cleared Swaps, Cleared Swaps 
Customers, FCM/BD Swaps Client Financial Account.
(2) Additional Amendments
    Appendix I of the Rule Book (CDS Default Management Process) would 
be amended to provide that each Non-Defaulting Clearing Member would 
never be required to bid for more than 100% of the relevant Auction 
Package. Therefore, Clause 5.4.4, which relates to the calculation of 
the Minimum Bid Size for each Non-Defaulting Clearing Member required 
to bid for an Auction Package, is revised by repealing and replacing 
the current calculation formula applied by LCH SA to determine the 
Minimum Bid Size with the following one: MBS = min ([A/B] x C; 100%). 
An equivalent amendment is proposed to be made to Clause 5.9.1, which 
deals with the Recalculated Minimum Bid Size to be determined in the 
context of a second round of Competitive Bidding, to ensure that each 
Non-Defaulting Clearing Member will not be required to bid for more 
than 100% of the relevant Residual Auction Package by adding a 
reference to the ``maximum value for the Bid Credit of the Minimum Bid 
Size'' at the end of indent (i).
    Clause 8.1.1 of Appendix 1 of the Rule Book would be amended to 
remove a reference to the Early Termination Trigger Date at the end of 
the paragraph for consistency purpose since all payment and delivery 
obligations in the context of the Early Termination process will be 
made at the date and times as set out in the following provisions of 
Clause 8.
    Regulation 6 (Rules Relating to FCM/BD Cleared Swaps Client 
Segregated Accounts) of the Clearing Regulations would be also modified 
to implement CFTC Letter No 19-17 of July 10, 2019 (``Advisory and 
Time-Limited No-Action Relief with Respect to the Treatment of Separate 
Accounts by Futures Commission Merchants'') pursuant to which a 
Derivatives Clearing Organization may permit the Futures Commission 
Merchant to treat the separate accounts of a customer as accounts of 
separate entities subject to a number of conditions provided for in 
that letter. Therefore, Regulation 6(e) would be amended to allow FCM/
BD Clearing Members to benefit from this no-action relief regarding the 
withdrawal of the Cleared Swaps Customer funds by providing that 
references to ``Cleared Swaps Customer'' shall include all Cleared 
Swaps Customers for the same beneficial owner, unless the FCM/BD 
Clearing Member complies with the relevant conditions set out in CFTC 
Letter No. 19-17 of July 10, 2019. Other technical and conforming 
changes to Regulation 6 are included in Regulation 6(a) and 6(e).
    In addition to the foregoing changes, the amendments to the Rule 
Book, Clearing Supplement, Procedures and Clearing Regulations also 
contain typographical corrections, cross-references corrections, clean-
up changes, and similar technical corrections as well as various 
conforming references to the new or revised defined terms.

(b) Statutory Basis

    LCH SA believes that the proposed rule change and the extension of 
the CDSClear Service in respect of Single-Name CDS for FCM/BD Clients 
is consistent with the requirements of Section 17A of the Exchange Act 
\18\ and the regulations thereunder, including the standards under 
Exchange Act Rule 17Ad-22.\19\ Section 17A(b)(3)(F) of the Exchange Act 
\20\ 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. As noted above, the proposed rule change is designed to 
provide for the clearing of Single-Name CDS to FCM/BD Clients. From a 
financial risk management and margin requirements and an operational 
point of view, clearing Single-Name CDS would not require changes to 
the existing operational procedures as Single-Name CDS transactions are 
already cleared by LCH SA for Clearing Members admitted as CCMs for 
their own account and for the account of their Non U.S. Clients. 
Therefore, LCH SA believes that the clearing of Single-Name CDS for 
U.S. Clients and the related changes described herein are consistent 
with the prompt and accurate clearance and settlement of securities 
transactions and derivative agreements, contracts and transactions, in 
accordance with Section 17A(b)(3)(F) of the Exchange Act.\21\
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78q-1.
    \19\ 17 CFR 240.17Ad-22.
    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In addition, the proposed amendments also satisfy the relevant 
requirements of Exchange Act Rule 17Ad-22 (e)(1), (4), (13), (14), (17) 
and (18).\22\ Exchange Act Rule 17Ad-22(e)(1) \23\ requires that a 
covered clearing agency 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. The proposed 
rule change would modify LCH SA's existing rules and procedures to 
clearly define the requirements for Single-Name CDS and establish a 
legal framework for LCH SA to clear Single-Name CDS on behalf of U.S. 
Clients. The proposed rule change would also make certain clarifying 
and conforming changes in the Rule Book. LCH SA therefore

[[Page 23452]]

believes that the proposed rule change is consistent with the 
requirements of Exchange Act Rule 17Ad-22(e)(1).\24\
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    \22\ 17 CFR 240.17Ad-22(e)(1), (4), (13), (14), (17) and (18).
    \23\ 17 CFR 240.17Ad-22(e)(1).
    \24\ 17 CFR 240.17Ad-22(e)(1).
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    Exchange Act Rule 17Ad-22(e)(4) \25\ requires that a covered 
clearing agency 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. 
Exchange Act Rule 17Ad-22(e)(14) \26\ requires that a covered clearing 
agency establish, implement, maintain and enforce written policies and 
procedures reasonably designed to enable, when the covered clearing 
agency provides central counterparty services for SBS or engages in 
activities that the Commission has determined to have a more complex 
risk profile, the segregation and portability of positions of a 
participant's customers and the collateral provided to the covered 
clearing agency with respect to those positions and effectively protect 
such positions and related collateral from the default or insolvency of 
that participant. Further, Exchange Act Rule 17Ad-22(e)(13) \27\ 
requires a covered clearing agency to establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
ensure the covered clearing agency has the authority and operational 
capacity to take timely action to contain losses and liquidity demands 
and continue to meet its obligations, by, at a minimum, requiring the 
covered clearing agency's participants and, when practicable, other 
stakeholders to participate in the testing and review of its default 
procedures, including any close-out procedures, at least annually and 
following material changes thereto. Finally, Exchange Act Rule 17Ad-
22(e)(17) \28\ requires that a covered clearing agency establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to manage the covered clearing agency's operational 
risks by, among other things, identifying the plausible sources of 
operational risk, both internal and external, and mitigating their 
impact through the use of appropriate systems, policies, procedures, 
and controls.
---------------------------------------------------------------------------

    \25\ 17 CFR 240.17Ad-22(e)(4).
    \26\ 17 CFR 240.17Ad-22(e)(14).
    \27\ 17 CFR 240.17Ad-22(e)(13).
    \28\ 17 CFR 240.17Ad-22(e)(17).
---------------------------------------------------------------------------

    Consistent with Exchange Act Rule 17Ad-22(e)(4),\29\ LCH SA will 
apply its existing practices, policies, and procedures with respect to 
the identification, measuring, monitoring, and management of its credit 
exposures to Clearing Members for Single-Name CDS being cleared on 
behalf of U.S. Clients, and which, among other things, give LCH SA the 
discretion to suspend a Clearing Member or required Credit Quality 
Margin to be paid where LCH SA deems it necessary to contain its 
exposure.
---------------------------------------------------------------------------

    \29\ 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------

    LCH SA will apply its existing margin methodology, segregation 
requirements and existing default management policies and procedures 
for Single Name CDS to be cleared on behalf of U.S. Clients, including 
the procedures for participation in a competitive auction process for a 
Defaulting Clearing Member's transactions and the appointment of at 
least five Clearing Members to be part of the CDS Default Management 
Group, to allow LCH SA to take timely action to contain losses and 
liquidity demands, in accordance with Exchange Act Rule 17Ad-
22(e)(13).\30\ Similarly, in providing clearing for Single-Name CDS on 
behalf of U.S. Clients, LCH SA will apply its existing practices, 
policies, and procedures with respect to the portability of accounts, 
including as to the portability of accounts from Defaulting Clearing 
Members to an appointed Backup Clearing Member, allowing the protection 
of collateral from Clearing Member default or insolvency consistent 
with Exchange Act Rule 17Ad-22(e)(14).\31\ LCH SA will also apply its 
existing practices, policies, and procedures with respect to the 
management of operational risk in providing clearing for Single-Name 
CDS on behalf of U.S. Clients and consistent with Exchange Act Rule 
17Ad-22(e)(17).\32\ Finally, Exchange Act Rule 17Ad-22(e)(18) requires 
a covered clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to establish 
objective, risk-based, and publicly disclosed criteria for 
participation, which permit fair and open access by direct, and where 
relevant, indirect participants and other financial market utilities, 
require participants to have sufficient financial resources and robust 
operational capacity to meet obligations arising from participation in 
the clearing agency, and monitor compliance with such participation 
requirements on an ongoing basis. As noted above, the proposed rule 
change would extend existing participation requirements to persons 
proposing to enter into Single-Name CDS on behalf of their FCM/BD 
Clients and make clear that such persons must have operational capacity 
and the applicable regulatory registrations in respect of Single-Name 
CDS on behalf of their FCM/BD Clients. Therefore, LCH SA believes that 
the proposed rule change is consistent with the requirements of 
Exchange Act Rule 17Ad-22(e)(18).\33\ Further, the membership 
requirements applicable to persons proposing to enter into Single-Name 
CDS on behalf of their FCM/BD Clients are designed to identify persons 
with sufficient operational capacity and expertise in relation to 
Single-Name CDS; such requirements or criteria apply to every and all 
persons applying to enter into Single-Name CDS clearing service equally 
and, as such, are not designed to permit unfair discrimination in the 
admission of participants or among participants in the use of LCH SA, 
in accordance with Section 17A(b)(3)(F) of the Exchange Act.\34\
---------------------------------------------------------------------------

    \30\ 17 CFR 240.17Ad-22(e)(13).
    \31\ 17 CFR 240.17Ad-22(e)(14).
    \32\ 17 CFR 240.17Ad-22(e)(17).
    \33\ 17 CFR 240.17Ad-22(e)(18).
    \34\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Exchange 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.\35\ LCH SA does 
not believe that its clearing of Single-Name CDS on behalf of FCM/BD 
Clients will adversely affect competition in the trading market for 
those contracts or CDS generally. By allowing LCH SA to clear Single-
Name CDS for FCM/BD Clients, market participants will have additional 
choices on where to clear and which products to use for risk management 
purposes, which, in turn, will promote competition and further the 
development of CDS for risk management. In addition, LCH SA will apply 
its existing fair and open access criteria to the clearing of Single-
Name CDS on behalf of FCM/BD Clients and will apply the same criteria 
to every person who proposes to enter into the clearing of Single-Name 
CDS on behalf of their Clients. Such criteria are designed to identify 
persons with sufficient operational capacity and expertise in relation 
to Single-Name CDS as part of the membership requirements that are 
necessary and appropriate for LCH SA to manage the risk arising from 
allowing persons to transact in Single-Name CDS. Accordingly, LCH SA 
does not believe that the proposed rule change will

[[Page 23453]]

impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \35\ 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-2021-001 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-LCH SA-2021-001. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the 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/rulebooks/proposed-rule-changes.
    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-2021-001 and should 
be submitted on or before May 24, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-09025 Filed 4-30-21; 8:45 am]
BILLING CODE 8011-01-P


