[Federal Register Volume 86, Number 144 (Friday, July 30, 2021)]
[Notices]
[Pages 41115-41123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-16232]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92501; File No. SR-LCH SA-2021-001]


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

July 26, 2021.

I. Introduction

    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'' or ``SEC''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (the 
``Act''),\1\ and Rule 19b-4,\2\ a proposed rule change to amend LCH 
SA's (i) CDS Clearing Rule Book (the ``Rule Book''); (ii) CDS Clearing 
Supplement (the ``Clearing Supplement''); (iii) 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 CDS that are security-based swaps (``SBS'') submitted by 
Clearing Members on behalf of their U.S. clients.\3\ The proposed rule 
change was published for comment in the Federal Register on May 3, 
2021.\4\ On June 10, 2021, the Commission designated a longer period 
within which to take action on the proposed rule change, until August 
1, 2021.\5\ The Commission did not receive comments regarding 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\ Capitalized terms used but not defined herein have the 
meanings specified in the Rule Book, the Clearing Supplement, the 
Procedures, and the Clearing Regulations, as applicable.
    \4\ 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, Exchange Act Release No. 34-91676 
(April 26, 2021); 86 FR 23445 (May 3, 2021) (SR-LCH SA-2021-001) 
(``Notice'').
    \5\ Self-Regulatory Organizations; LCH SA; Notice of Designation 
of Longer Period for Commission Action on Proposed Rule Change 
Relating to the Clearing of Single-Name Credit Default Swaps by U.S. 
Customers, Exchange Act Release No. 34-92142 (June 10, 2021); 86 FR 
32079 (June 16, 2021) (SR-LCH SA-2021-001).
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II. Description of the Proposed Rule Change

    Currently, LCH SA's Clearing Members are permitted to submit for 
clearing swaps on behalf of their U.S. clients. The proposed rule 
change would amend the LCH SA documents mentioned above to permit LCH 
SA's Clearing Members also to submit for clearing SBS on behalf of 
their U.S. clients. Thus, after the proposed rule change becomes 
effective, LCH SA would permit its Clearing Members to submit for 
clearing both swaps and SBS on behalf of their U.S. clients.
    In addition to this initiative, the proposed rule change would also 
make certain other confirming and clarifying changes, as discussed 
further below in Part II.E.

A. Rule Book

    To facilitate this initiative, the proposed rule change would amend 
the Rule Book to, among other things, (i) modify existing and adopt new 
defined terms; (ii) modify the membership requirements applicable to 
Clearing Members; (iii) remove provisions that prohibit Clearing 
Members from offering clearing services to U.S. clients with respect to 
SBS; (iv) establish the account structure for Clearing Members clearing 
SBS on behalf of U.S. clients; (v) update provisions to apply them to 
Clearing Members that are broker-dealers; and (vi) amend the Appendix 
to apply relevant provisions of the CDS Default Management Process to 
SBS. These amendments are discussed below according to the different 
titles of the Rule Book.
i. Title I
    The proposed rule change would add new, and modify existing, 
defined terms related to Clearing Members and Clients found in Title I 
of the Rule Book. These changes would facilitate registered broker-
dealers becoming Clearing Members for the purpose of clearing SBS on 
behalf of U.S. clients. For example, the proposed rule change would add 
a definition for ``BD,'' to mean a legal entity that is a ``broker'' or 
``dealer'' as defined in Section 3(a)(4) or 3(a)(5) of the Act, 
respectively, and is registered in such capacity with the Commission 
and a member in good standing of FINRA. Similarly, the proposed rule 
change would amend the defined term ``FCM Clearing Member'' to be 
``FCM/BD Clearing Member.'' As amended, the term ``FCM/BD Clearing 
Member'' would mean any FCM, BD, or

[[Page 41116]]

legal entity that is both an FCM and BD that has been admitted to LCH 
SA as a clearing member. The proposed rule change would make a similar 
modification to the defined term ``FCM Client,'' which would become 
``FCM/BD Client.''
    Similarly, the proposed rule change would modify a number of 
defined terms and add new defined terms that relate to the account 
structure in which transactions would be recorded and collateral for 
Cleared Swaps and SBS would be held. Among other changes, the proposed 
rule change would add a new defined term for ``Cleared Swap,'' which 
would be used to differentiate between ``swaps'' and ``SBS'' and their 
different account structures and add new defined terms for ``Cleared 
Swaps Customer'' and ``Cleared Swaps Customer Collateral.'' Overall, 
these changes would establish three account structures: (i) A separate 
account structure for Cleared Swaps; (ii) a separate account structure 
for SBS; and (iii) 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.\6\
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    \6\ 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) (``Portfolio 
Margining Order'') (setting out certain conditions that dually 
registered clearing agencies/derivatives clearing organizations and 
participating BD/FCMs must satisfy when offering a program to 
commingle and portfolio margin cleared CDS for customer positions).
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    Moreover, the proposed rule change would amend certain terms with 
respect to legal jurisdictions to reflect the availability of clearing 
SBS for U.S. clients. Specifically, the proposed rule change would 
modify the term ``Non-U.S. CCM'' to mean, when used in the context of 
an Original Transaction, 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. Similarly, the proposed 
rule change would modify the term ``U.S. CCM Client'' to mean 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.
    Finally, the proposed rule change would make clarifying and 
conforming changes to other defined terms, and other Articles of Title 
I of the Rule Book, to reflect these changes. These changes would 
update references to Clearing Members to apply them to FCM/BD Clearing 
Members instead of just FCM Clearing Members.
ii. Title II and Title III
    The proposed rule change would next amend Title II and Title III of 
the Rule Book, which relate to the requirements applicable to LCH SA's 
Clearing Members and LCH SA's clearing operations. First, the proposed 
rule change would amend Article 2.1.1.2 of the Rule Book 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. Second, the proposed rule change 
would amend Article 2.2.3.1 to define a BD's ``net capital'' as its net 
capital as provided in SEC Rule 15c3-1.
    The proposed rule change would also make conforming changes 
throughout Title II and in Article 3.1.10.9 of Title III to apply them 
to an FCM/BD Clearing Member instead of just an FCM Clearing Member. 
These changes would update references to Clearing Members to apply them 
to FCM/BD Clearing Members instead of just FCM Clearing Members.
iii. Title IV
    The proposed rule change would also amend Title IV regarding risk 
management, specifically, Article 4.2.2.5, which relates to the return 
of excess collateral. Under Article 4.2.2.5 as revised, if (i) 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 
(ii) the value of the Collateral attributed to the FCM/BD Buffer 
Financial Account exceeds the FCM/BD Client Collateral Buffer 
Threshold, then LCH SA would treat the excess as follows. If the excess 
is related to Cleared Swaps, it would be reclassified as FCM/BD Swaps 
Unallocated Client Excess Collateral, and thereafter may be returned to 
the FCM/BD Clearing Member upon request in the conditions set out in 
Section 3 of the Procedures, subject to Article 6.2.5 of the Rule Book. 
If the excess is related to SBS (excluding SBS that are held in the 
FCM/BD Swaps Client Account Structure as Cleared Swaps, as described 
below), it would be reclassified as FCM/BD SBS Client Excess 
Collateral, and thereafter may be returned to the FCM/BD Clearing 
Member upon request in the conditions set out in Section 3 of the 
Procedures, subject to Article 6.2.5 of the Rule Book.
    The proposed rule change would also make conforming changes 
throughout Title IV to apply the articles to an FCM/BD Clearing Member 
instead of just an FCM Clearing Member. These changes would update 
references to Clearing Members to apply them to FCM/BD Clearing Members 
instead of just FCM Clearing Members.
iv. Title V
    The proposed rule change next would amend Title V, regarding CDS 
Client Clearing Services provided by a CCM. Here the proposed rule 
change would amend Article 5.1.1.2 to permit LCH SA's Clearing Members 
to submit for clearing SBS on behalf of their U.S. clients. Currently, 
Article 5.1.1.2 prohibits a Non-U.S. Clearing Member from offering 
client clearing services to any U.S. client with respect to SBS and any 
U.S. Clearing Member from offering client clearing services to any 
client with respect to SBS. The proposed rule change would delete this 
provision.
    The proposed rule change also would amend another provision of 
Article 5.1.1.2 that currently prohibits a Clearing Member from 
offering clearing services to any U.S. client (other than an affiliate 
of the Clearing Member) with respect to an Original Transaction that is 
not SBS, unless the Clearing Member meets the specified conditions. As 
amended, this provision would prohibit a Clearing Member from offering 
clearing services to any U.S. client, other than an affiliate of the 
Clearing Member, with respect to swaps and SBS, unless the Clearing 
Member (i) is an FCM/BD and (ii) has provided LCH SA with an opinion of 
counsel confirming that the provision of clearing services would not be 
contrary to applicable law.
v. Title VI
    The proposed rule change would amend Title VI, regarding FCM/BD 
client clearing. First, Article 6.1.1.2(vi) currently prohibits an FCM 
Clearing Member from providing CDS Client Clearing Services (defined as 
clearing services in respect of CDS and/or Index Swaptions provided by 
a Clearing Member to its Clients) to any client. The proposed rule 
change would delete this prohibition.
    The proposed rule change next would amend Article 6.2.1.1, which 
currently specifies the account structure that LCH SA must open and 
maintain for each FCM Clearing Member that provides client clearing 
services for swaps. The proposed rule change would amend this article 
so that it specifies the client account structure for an FCM/BD 
Clearing Member providing client clearing services for swaps and SBS. 
Thus, the proposed rule change would

[[Page 41117]]

add a new subsection (ii) that specifies the accounts that would make 
up the FCM/BD SBS Client Account Structure. This structure would mirror 
the structure applicable to swaps.
    Thus, under the proposed rule change, 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 include:
     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; and
     An FCM/BD Swaps Client Collateral Account.
    Likewise, Article 6.2.1.1(ii) would set forth the required account 
structure for a BD (which may also be an FCM) with respect to any SBS 
(excluding SBS that are permitted to be held in an account with Cleared 
Swaps), which would include:
     An FCM/BD SBS Client Trade Account for each SBS Customer; 
\7\
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    \7\ In furtherance of this change, the proposed rule change also 
would amend Article 6.2.2.1, which relates to the establishment of 
trade accounts, to require LCH SA to open FCM/BD SBS Client Trade 
Accounts for SBS Customers.
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     An FCM/BD SBS Client Margin Account for each SBS Customer; 
\8\
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    \8\ In furtherance of this change, the proposed rule change also 
would amend Article 6.2.3.1, which relates to the establishment of 
client margin accounts, to require LCH SA to open FCM/BD SBS Client 
Margin Accounts for SBS Customers. Similarly, the proposed rule 
change would amend Article 6.2.3.2 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; \9\
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    \9\ In furtherance of this change, the proposed rule change also 
would amend Article 6.2.4.1, which relates to the establishment of 
Client Financial Accounts and related accounts, to require LCH SA to 
open FCM/BD SBS Client Financial Accounts for SBS Customers, in 
which LCH SA will record the value of Collateral provided by the 
FCM/BD Clearing Member in respect of each such SBS Customer's Open 
Positions in SBS.
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     An FCM/BD SBS Client Excess Collateral Financial Account; 
\10\
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    \10\ In furtherance of this change, the proposed rule change 
also would amend Article 6.2.4.1, which relates to the establishment 
of Client Financial Accounts and related accounts, to require LCH SA 
to open an FCM/BD SBS Client Excess Collateral Financial Account for 
SBS Customers, in which LCH SA will record the value of FCM/BD SBS 
Client Excess Collateral.
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     An FCM/BD SBS Buffer Financial Account; \11\ and
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    \11\ In furtherance of this change, the proposed rule change 
also would amend Article 6.2.4.1, which relates to the establishment 
of Client Financial Accounts and related accounts, to require LCH SA 
to open an FCM/BD SBS Buffer Financial Account for SBS Customers, in 
which LCH SA will record the value of Collateral provided by the 
FCM/BD Clearing Member as FCM/BD SBS Client Collateral Buffer.
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     An FCM/BD SBS Client Collateral Account.\12\
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    \12\ In furtherance of this change, the proposed rule change 
also would amend Article 6.2.4.1, which relates to the establishment 
of Client Financial Accounts and related accounts, to require LCH SA 
to open FCM/BD SBS Client Collateral Accounts for SBS Customers, in 
which LCH SA will record the value of Collateral held by LCH SA in 
the other accounts listed in Article 6.2.1.1(ii) (such as the FCM/BD 
SBS Client Financial Account and FCM/BD SBS Client Excess Collateral 
Financial Account).
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    Moreover, the proposed rule change would add a new Article 
6.2.1.1(iii) 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.\13\ This provision would be subject to the condition 
that each FCM/BD Client participating in the portfolio margining must 
be an eligible contract participant as defined in Section 1a(18) of the 
Commodity Exchange Act.\14\ Upon such election, FCM/BD Cleared 
Transactions that are SBS would be included as Cleared Swaps and 
maintained in the FCM/BD Swaps Client Account Structure.
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    \13\ See Portfolio Margin Order, 77 FR 75211.
    \14\ 7 U.S.C. 1a(18).
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    The proposed rule change also would add a new article regarding the 
return of excess collateral. Under new Article 6.2.5.2, 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. LCH SA would be 
required to 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, new Article 6.2.5.2(iv) would require, among other things, 
that LCH SA 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 would return FCM/BD SBS 
Client Excess Collateral to such FCM/BD Clearing Member.
    The proposed rule change also would amend Article 6.2.6.1, which 
currently requires an FCM Clearing Member to collect collateral from 
each client in respect of such client's open positions in an amount at 
least equal to the greater of (i) the amount required by LCH SA for the 
FCM Client Margin Account for such client or (ii) such higher amount as 
required in Section 2 of the Procedures. The proposed rule change would 
amend this Article to apply it to FCM/BD Clearing Members and to add a 
corresponding provision for client open positions in SBS in an amount 
at least equal to the amount required by LCH SA for the FCM/BD SBS 
Client Margin Accounts.
    Finally, the proposed rule change would make conforming changes 
throughout Title VI by updating references to Clearing Members to 
ensure that the articles apply to an FCM/BD Clearing Member instead of 
just an FCM Clearing Member.
vi. Appendix
    Appendix 1 of the Rule Book describes LCH SA's CDS Default 
Management Process. The proposed rule change would amend the defined 
term ``Transaction Categories,'' which currently sets out the different 
categories of transactions that LCH SA clears. The proposed rule change 
would amend the definition of ``Transaction Categories'' to include 
``Single Name Cleared Transactions.'' This change would help ensure 
that LCH SA's default management process applies to SBS.
    The proposed rule change also would amend Clause 3.3 of Appendix 1, 
which sets out the applicable U.S. law and regulation that LCH SA would 
act in accordance with in carrying out the CDS Default Management 
Process, such as the Exchange Act and SEC regulations. The proposed 
rule change would add to Clause 3.3 a reference to the new defined term 
``SIPC'' in Section 1.1.1 of the Rule Book, such that LCH SA would act 
in accordance with SIPC in carrying out the CDS Default Management 
Process, in addition to the other U.S. laws and regulations currently 
listed in Clause 3.3. Under the proposed rule change, ``SIPC'' would be 
defined as the

[[Page 41118]]

Securities Investor Protection Corporation or any successor thereto.
    The proposed rule change would revise Clause 5.4, which relates to 
competitive bidding in a default auction. Currently under Clause 5.4, 
all Non-Defaulting Clearing Members are required to participate in 
Competitive Bidding for each Auction Package notwithstanding that any 
Non-Defaulting Clearing Member may not have registered within its 
Account Structure a Cleared Transaction of the type included in the 
relevant Transaction Category for an Auction Package, subject to 
certain exceptions. As proposed to be revised, under Clause 5.4 a Non-
Defaulting Clearing Member that is a BD but not an FCM would not be 
required to participate in Competitive Bidding for an Auction Package 
containing any Cleared Swaps and a Non-Defaulting Clearing Member that 
is an FCM but not a BD would not be required to participate in 
Competitive Bidding for an Auction Package containing any SBS.
    The proposed rule change also would make conforming changes 
throughout Appendix 1 to apply Appendix 1 to an FCM/BD Clearing Member 
instead of just an FCM Clearing Member. Specifically, references to 
Clearing Members would be updated to apply them to FCM/BD Clearing 
Members instead of just FCM Clearing Members.

B. Clearing Supplement

    Similar to some of the changes to the Rule Book discussed above, 
the proposed rule change would make conforming changes to apply the 
Clearing Supplement to an FCM/BD Clearing Member instead of just an FCM 
Clearing Member. These changes would update references to Clearing 
Members to apply them to FCM/BD Clearing Members instead of just FCM 
Clearing Members.

C. Procedures

    The proposed rule change would amend Sections 2, 3, 4, and 5 of the 
Procedures.
i. Section 2
    Similar to the changes to the Rule Book and Clearing Supplement 
discussed above, in Section 2 of the Procedures, the proposed rule 
change would make conforming changes to apply Section 2 to an FCM/BD 
Clearing Member instead of just an FCM Clearing Member. These changes 
would update references to Clearing Members to apply them to FCM/BD 
Clearing Members instead of just FCM Clearing Members.
ii. Section 3
    Similar to the changes to the Rule Book and Clearing Supplement 
discussed above, in Section 3 of the Procedures, the proposed rule 
change would make conforming changes to apply Section 3 to an FCM/BD 
Clearing Member instead of just an FCM Clearing Member. These changes 
would update references to Clearing Members to apply them to FCM/BD 
Clearing Members instead of just FCM Clearing Members.
    In addition, the proposed rule change would amend Section 3.3(b), 
which relates to the Collateral Account structure, to add a reference 
to the FCM/BD SBS Client Collateral Account. In this account LCH SA 
would record the Collateral held by LCH SA for the benefit of an FCM/BD 
Clearing Member's SBS Customers with respect to SBS. The value in this 
account would be further divided among and recorded in three separate 
accounts: (i) The FCM/BD SBS Client Financial Account; (ii) the FCM/BD 
SBS Buffer Financial Account; and (iii) the FCM/BD SBS Client Excess 
Collateral Financial Account.
    The proposed rule change would amend Section 3.7, which relates to 
collection of Euro denominated cash collateral. As described in Section 
3.7(a), LCH SA performs Collateral Calls using TARGET2 Accounts opened 
in its name. The proposed rule change would amend Section 3.7(a) to 
provide that LCH SA will perform Collateral Calls with respect to the 
Clients of a Clearing Member using a TARGET2 Account. As described in 
the proposed amendment, LCH SA would use this TARGET2 Account 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.
    Similarly, the proposed rule change would amend Section 3.7(b), 
which relates to the TARGET2 Accounts that a Clearing Member must hold. 
Section 3.7(b) currently requires that a Clearing Member hold two 
TARGET2 Accounts, one related to house margin and the other related to 
client margin. The proposed rule change would add to these two accounts 
a third account, relating to client margin with respect to SBS. Thus, 
as revised, Section 3.7(b) would require that an FCM/BD Clearing Member 
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 Requirements with respect 
to Cleared Swaps and FCM/BD Client Collateral Buffer Threshold, and 
(iii) its Client Margin Requirements with respect to SBS (excluding SBS 
that are held in the FCM/BD Swaps Client Account Structure) and FCM/BD 
Client Collateral Buffer Threshold.
    The proposed rule change next would amend Section 3.7(g), which 
relates to the return of Euro denominated cash collateral. Currently, 
Section 3.7(g)(iv) allows a Clearing Member to request LCH SA to return 
some or all FCM Unallocated Client Excess Collateral in the form of 
Euro denominated Cash Collateral provided that the requested amount 
does not exceed the FCM Unallocated Client Excess Collateral recorded 
in its Client Collateral Account. The proposed rule change would amend 
Section 3.7(g)(iv) to clarify that it applies to FCM/BD Clearing 
Members, not just FCM Clearing Members. The proposed rule change also 
would add to Section 3.7(g) a new paragraph (v), which would mirror 
paragraph (iv) of Section 3.7(g) described above, but it would apply to 
excess collateral related to SBS. Thus, under new Section 3.7(g)(v), a 
Clearing Member may also 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.
    The proposed rule change also would amend Section 3.8, which sets 
out the multi-currency accounts in which LCH SA holds non-Euro 
Collateral provided by Clearing Members to meet house and client margin 
requirements. Currently, Section 3.8(a) requires that LCH SA have two 
multi-currency accounts for holding non-Euro Cash Collateral provided 
by Clearing Members in respect of their clients. The proposed rule 
change would add a third account, requiring that LCH SA have, with 
respect to Clients of a Clearing Member, 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. This account would form part of the LCH SBS Client 
Segregated Depository Account for purposes of the FCM/BD CDS Clearing 
Regulations.
    Similarly, Section 3.8(b) currently requires that LCH SA have two 
USD cash accounts for holding USD Cash Collateral provided by Clearing 
Members in respect of their clients. The proposed rule change would add 
a third account, requiring that LCH SA have,

[[Page 41119]]

with respect to Clients of a Clearing Member, 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. This account 
would form part of the LCH SBS Client Segregated Depository Account for 
purposes of the FCM/BD CDS Clearing Regulations.
    With respect to the return of excess collateral, the proposed rule 
change would amend Section 3.8(h) and (i), to provide for the return of 
excess collateral in respect of SBS. These amendments would mirror the 
provisions currently applicable to swaps.
    Finally, the proposed rule change would amend Section 3.18, 
relating to cash payments and variation margin transfers. Currently, 
Section 3.18(c) lists the accounts that LCH SA uses when making or 
receiving Cash Payments and/or Variation Margin Collateral Transfer 
obligations in USD. The proposed rule change would add to this list 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).
iii. Section 4
    Section 4 sets out certain requirements that a transaction must 
satisfy to be eligible for clearing at LCH SA. Currently, Section 4.1 
provides 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. The proposed rule change would delete 
Section 4.1, thus permitting Clearing Members to submit SBS to LCH SA 
for clearing on behalf of U.S. Clients.
iv. Section 5
    Section 5 of the Procedures specifies LCH SA's CDS Clearing 
Operations Procedures and includes numerous references to ``FCM 
Clearing Members.'' Similar to the changes to the Rule Book and 
Clearing Supplement discussed above, the proposed rule change would 
change these references from ``FCM Clearing Members'' to ``FCM/BD 
Clearing Members.'' This would help ensure that the Clearing Operations 
Procedures in Section 5 apply to FCM/BD Clearing Members instead of 
just FCM Clearing Members.

D. Clearing Regulations

    The proposed rule change also would amend LCH SA's CDS Clearing 
Regulations, which impose certain obligations on LCH SA's Clearing 
Members and is divided into Regulations 1 through 6, as well as a 
Definitions section appearing before Regulation 1. The proposed rule 
change would first update certain of the defined terms found in the 
Definitions section to reflect some of the changes discussed above. For 
example, the proposed rule change would amend a number of defined terms 
to use the term ``Cleared Swaps Customer,'' which, as discussed above, 
the proposed rule change would add to the Rule Book. The proposed rule 
change would also add the defined term ``LCH SBS Client Segregated 
Depository Account,'' which, as discussed above, the proposed rule 
change would reference in Section 3 of the Procedures.
    In Regulation 2 (Depository Accounts), the proposed rule change 
would set out the relevant account structure for SBS. Under Regulation 
2 as revised, each FCM/BD Clearing Member 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. An FCM/BD Clearing 
Member would be required to maintain the FCM/BD SBS Client Segregated 
Depository Account with a Bank in accordance with the Exchange Act and 
SEC Regulations and the FCM/BD Clearing Member would be allowed to 
commingle assets of all of its SBS Customers held in that account in a 
single omnibus account established and maintained in accordance with 
SEC regulations. LCH SA would designate the FCM/BD SBS Client 
Segregated Depository Account maintained by each FCM/BD Clearing Member 
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).\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 240.15c3-3(p).
---------------------------------------------------------------------------

    Similarly, under Regulation 2 as revised, LCH SA would be required 
to establish and maintain a 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. LCH SA would be required to maintain the LCH SBS Client 
Segregated Depository Account with a Bank in accordance with the 
Exchange Act and SEC regulations and LCH SA would be allowed to 
commingle assets of all of the SBS Customers in that account in a 
single omnibus account established and maintained in accordance with 
SEC regulations. Regulation 2 would further require that LCH SA hold in 
the LCH SBS Client Segregated Depository Account all Collateral that is 
deposited by FCM/BD Clearing Members in connection with SBS cleared on 
behalf of SBS Customers (other than Collateral provided to satisfy the 
Contribution Requirement of such FCM/BD Clearing Members). Moreover, 
Regulation 2 would require that LCH SA maintain the LCH SBS Client 
Segregated Depository Account separately from any and all assets of the 
FCM/BD Clearing Members, or any other assets that LCH SA is holding for 
clients (other than SBS Customers) and that the account contain no 
assets other than Collateral deposited by FCM/BD Clearing Members in 
connection with the clearing of SBS on behalf of their SBS Customers. 
Finally, LCH SA would designate the LCH SBS Client Segregated 
Depository Account 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.
    The proposed rule change also would update Regulation 3 of the CDS 
Clearing Regulations (Collateral), to apply to the LCH SBS Client 
Segregated Depository Account. Under Regulation 3 as revised, 
securities or cash held in the LCH SBS Client Segregated Depository 
Account would be subject to a security interest in accordance with 
Regulation 5 and no collateral deposited in the LCH SBS Client 
Segregated Depository Account may be applied on or in respect of 
payment or satisfaction of the FCM/BD Clearing Member's liabilities to 
LCH SA.
    Similarly, the proposed rule change would update Regulation 4 
(Transfer) to apply to BDs, SBS, and SBS Customers. Currently, 
Regulation 4 requires that, if an FCM Clearing Member is a Defaulting 
Clearing Member, any action by LCH SA pursuant to the Rule Book 
(including the CDS Default Management Process) must be taken in 
compliance with the Commodity Exchange Act and CFTC regulations and 
applicable bankruptcy laws regarding the liquidation or transfer of FCM 
Cleared Transactions carried by an FCM on behalf of its clients. Under 
Regulation 4 as revised, if an FCM/BD Clearing Member is a

[[Page 41120]]

Defaulting Clearing Member, any action taken by LCH SA pursuant to the 
Rule Book (including the CDS Default Management Process) must be taken 
in compliance with the Commodity Exchange Act and CFTC regulations or 
the Exchange Act and SEC regulations, as applicable, and applicable 
bankruptcy laws regarding the liquidation or transfer of Cleared Swaps 
carried by an FCM on behalf of its clients or SBS carried by a BD on 
behalf of its SBS Customers. Moreover, under Regulation 4 as revised, 
to the extent any transfer by an FCM/BD Clearing Member of open 
contracts between its Proprietary Account and accounts of its FCM/BD 
Clients, upon an FCM/BD Client default, is permitted pursuant to the 
Rule Book (including the CDS Default Management Process) and the 
Procedures, such transfer must be made subject to applicable provisions 
of the Commodity Exchange Act and CFTC regulations or the Exchange Act 
and SEC regulations, as applicable, regarding segregation of assets. 
Currently, this provision only applies to the Commodity Exchange Act 
and CFTC regulations.
    The proposed rule change also would update Regulation 5 of the CDS 
Clearing Regulations (Security Interest) to apply to BDs, SBS, and SBS 
Customers. Currently, Regulation 5 provides that each FCM 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 Proprietary Depository 
Account and in an LCH Cleared Swaps Client Segregated Depository 
Account, as security for unconditional payment and satisfaction of the 
obligations and liabilities of the FCM Clearing Member to LCH SA. The 
proposed rule change would amend this provision so that it applies to 
FCM/BD Clearing Members and the LCH SBS Client Segregated Depository 
Account. The proposed rule change also would clarify that in no event 
shall LCH SA's security interest in the Collateral in an LCH Cleared 
Swaps Client Segregated Depository Account or 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. Currently, this provision only applies to LCH Cleared 
Swaps Client Segregated Depository Account and swaps clients.
    Finally, similar to the changes to the Rule Book, Clearing 
Supplement, and Procedures discussed above, throughout the Clearing 
Regulations the proposed rule change would make conforming changes to 
apply the Clearing Regulations to an FCM/BD Clearing Member instead of 
just an FCM Clearing Member. These changes would update references to 
Clearing Members to apply them to FCM/BD Clearing Members instead of 
just FCM Clearing Members, including changing the title of the document 
to the ``FCM/BD CDS Clearing Regulations.'' The proposed rule change 
would similarly add references to the Exchange Act when discussing 
applicable law.

E. Additional Changes Unrelated to U.S. Client Clearing

    In addition to the changes discussed above related to U.S. client 
clearing, the proposed rule change would make certain other changes not 
directly related to that initiative. First, the proposed rule change 
would amend Appendix 1 of the Rule Book (CDS Default Management 
Process). As discussed above, Appendix 1 of the Rule Book describes LCH 
SA's CDS Default Management Process. In Clause 5.4.4 (Minimum Bid 
Size), the amendment would revise the current formula for LCH SA's 
calculation of the Minimum Bid Size for each Non-Defaulting Clearing 
Member by incorporating a 100% maximum cap, thus clarifying that a Non-
Defaulting Clearing Member would never be required to bid for more than 
100% of the relevant Auction Package in a default auction. This 
proposed change would also be consistent with existing Clause 5.4.6 
(Bids in excess of the Minimum Bid Size), which prohibits a Non-
Defaulting Clearing Member from submitting Bid(s) whose Bid Size(s), 
alone or in aggregate, exceed 100% of the relevant Auction Package. The 
proposed rule change also would revise Clause 5.9.1 for LCH SA's 
recalculation of Minimum Bid Sizes for Residual Auction Packages in a 
potential second round of Competitive Bidding. Under existing Clause 
5.9.1(i), LCH SA will reduce a Non-Defaulting Clearing Member's 
original Minimum Bid Size as calculated in Clause 5.4.4 by an amount 
equal to the Bid Credit, which is the percentage difference between the 
Minimum Bid Size and the percentage of the aggregate of the Bid Sizes 
of the Non-Defaulting Member's Initial Winning Bids. The proposed rule 
change would provide that such recalculation is ``subject to the 
maximum value for the Bid Credit of the Minimum Bid Size.''
    In Clause 8.1.1 of Appendix 1 of the Rule Book, the proposed rule 
change would remove a reference to the Early Termination Trigger Date 
at the end of the paragraph. Currently, that paragraph provides that 
upon an Early Termination Trigger Date, other payment and delivery 
obligations in relation to any Cleared Transactions and any other 
obligations pursuant to the CDS Clearing Documentation (including 
Collateral registered in any Collateral Accounts and other Collateral 
representing a Clearing Member's Contribution Requirement) shall be 
payable or deliverable on the Early Termination Trigger Date and in 
accordance with the provisions of Clause 8.1.1. The proposed rule 
change would retain this language but delete the reference to the Early 
Termination Trigger Date at the end of the paragraph such that the 
obligations shall be payable or deliverable in accordance with the 
provisions of Clause 8.1.1, rather than on the Early Termination 
Trigger Date and in accordance with the provisions of Clause 8.1.1. 
This change would help to ensure consistency in the operation of the 
Early Termination process since all payment and delivery obligations in 
the context of the Early Termination process would be made at the date 
and times as set out in the provisions of Clause 8.1.1. Thus, this 
change would remove a potential inconsistency between the Early 
Termination Trigger Date and the provisions of Clause 8.1.1.
    Finally, the proposed rule change would amend Regulation 6 of the 
Clearing Regulations to implement CFTC Letter No. 19-17.\16\ Under CFTC 
Letter No. 19-17, a Derivatives Clearing Organization may permit a 
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, the proposed rule 
change would amend Regulation 6(e) to allow 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

[[Page 41121]]

owner, unless the Clearing Member complies with the relevant conditions 
set out in CFTC Letter No. 19-17.
---------------------------------------------------------------------------

    \16\ 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'').
---------------------------------------------------------------------------

III. Discussion and 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 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\17\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \18\ and Rules 17Ad-22(e)(1) and (e)(18).\19\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(2)(C).
    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(e)(1), (e)(18).
---------------------------------------------------------------------------

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, as well 
as to assure the safeguarding of securities and funds which are in the 
custody or control of LCH SA or for which it is responsible.\20\ As 
discussed in more detail below, the Commission finds that the proposed 
rule change is consistent with Section 17A(b)(3)(F) of the Act.\21\
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above, the proposed rule change would make a number of 
changes to the Rule Book, Clearing Supplement, Procedures, and Clearing 
Regulations to permit LCH SA's Clearing Members to offer client 
clearing services in respect of SBS to U.S. clients. Specifically, as 
discussed in Part II.A, the proposed rule change would amend the Rule 
Book to (i) add and update defined terms; (ii) modify the membership 
requirements applicable to Clearing Members; (iii) remove provisions 
that prohibit Clearing Members from offering clearing services to U.S. 
clients with respect to SBS; (iv) permit broker-dealers to become 
Clearing Members and update provisions to apply them to Clearing 
Members that are broker-dealers; (v) establish the account structure 
for Clearing Members clearing SBS on behalf of U.S. clients, including 
the treatment of collateral posted by Clearing Members in respect of 
client positions in SBS; and (vi) amend the Appendix to apply relevant 
provisions of the CDS Default Management Process to SBS. The Commission 
believes these changes would facilitate clearing of SBS for U.S. 
clients by establishing the legal and operational framework for 
Clearing Members to clear SBS on behalf of U.S. clients, thereby 
promoting the prompt and accurate clearance and settlement of 
securities transactions by such clients at LCH SA. Similarly, the 
changes with respect to collateral posted by Clearing Members in 
respect of client positions in SBS would help to ensure that such 
collateral is subject to the provisions of LCH SA's Rule Book regarding 
the protection of collateral, including the return of excess 
collateral, thereby helping to assure the safeguarding of securities 
and funds in LCH SA's custody and control. Because the changes to the 
Clearing Supplement discussed in Part II.B above would further these 
changes to the Rule Book by making conforming changes to apply the 
Clearing Supplement to an FCM/BD Clearing Member instead of just an FCM 
Clearing Member, the Commission believes the changes to the Clearing 
Supplement also would promote the prompt and accurate clearance and 
settlement of securities transactions and assure the safeguarding of 
securities and funds in LCH SA's custody and control.
    As discussed in Part II.C, the proposed changes to the Procedures 
would (i) make conforming changes to apply them to an FCM/BD Clearing 
Member instead of just an FCM Clearing Member; (ii) require that LCH SA 
and Clearing Members establish and use certain accounts to hold and 
transfer cash and other collateral for satisfying margin requirements 
in connection with client positions in SBS; (iii) establish procedures 
for the return of excess collateral related to client positions in SBS; 
and (iv) remove provisions that currently prohibit LCH SA from 
accepting SBS transactions in respect of U.S. clients. Like the changes 
to the Rule Book and Clearing Supplement, the Commission believes these 
changes would facilitate clearing of SBS for U.S. clients by 
establishing the financial accounts and operational framework needed 
for clearing client positions in SBS and removing provisions that 
currently prohibit LCH SA from accepting SBS transactions in respect of 
U.S. clients, thereby promoting the prompt and accurate clearance and 
settlement of those securities transactions at LCH SA. Moreover, in 
requiring the establishment and use of certain accounts to hold and 
transfer cash and other collateral for satisfying margin requirements, 
and in establishing procedures for the return of excess collateral 
related to client positions in SBS, these proposed changes would help 
to assure the safeguarding of securities and funds in LCH SA's custody 
and control.
    For similar reasons, the Commission finds the proposed changes to 
the Clearing Regulations also are consistent with Section 17A(b)(3)(F) 
of the Act.\22\ Requiring that Clearing Members and LCH SA establish 
accounts with a Bank for holding collateral on behalf of SBS Customers 
and requiring that the accounts be maintained separately from any and 
all assets of the FCM/BD Clearing Members, or any other assets that LCH 
SA is holding for clients (other than SBS Customers), should promote 
the safekeeping of SBS Customers' collateral, thereby assuring 
safeguarding of securities and funds in LCH SA's custody and control. 
Similarly, in amending Regulation 3 and Regulation 5 to clarify that 
the security interest granted to LCH SA applies to FCM/BD Clearing 
Members and the LCH SBS Client Segregated Depository Account and that 
no collateral deposited in the LCH SBS Client Segregated Depository 
Account may be applied on or in respect of payment or satisfaction of 
any of the FCM/BD Clearing Member's liabilities to LCH SA, the 
Commission believes the proposed rule change should help to assure that 
SBS Customers' collateral is not misapplied to satisfy a Clearing 
Member's liabilities, again assuring the safeguarding of securities and 
funds in LCH SA's custody and control. Moreover, amending Regulation 4 
to require that any action by LCH SA pursuant to the Rule Book 
(including the CDS Default Management Process) be taken in compliance 
with the Exchange Act and SEC regulations as well as applicable 
bankruptcy laws regarding the liquidation or transfer of SBS carried by 
a BD on behalf of its clients, should help to assure the safekeeping of 
SBS Customers' collateral after the default of a Clearing Member. 
Finally, making conforming changes to apply the Clearing Regulations to 
an FCM/BD Clearing Member instead of just an FCM Clearing Member should 
help to assure the applicability of these provisions to SBS.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Finally, the Commission finds the other changes unrelated to U.S. 
client clearing, discussed in Part II.E above, are also consistent with 
Section 17A(b)(3)(F) of the Act.\23\ Amending Appendix 1 of the Rule 
Book to provide that each Non-Defaulting Clearing Member would never be 
required to bid

[[Page 41122]]

for more than 100% of the relevant Auction Package and to remove a 
reference to the Early Termination Trigger Date at the end of the 
paragraph would correct existing drafting errors in clauses pertaining 
to the CDS Default Management Process. Correcting these errors should 
help to ensure that the CDS Default Management Process is applied 
consistently and correctly, thereby helping to ensure a smooth 
resolution of Clearing Member defaults. This in turn should help to 
ensure that LCH SA continues to operate as normal after a Clearing 
Member default, and thus should promote the prompt and accurate 
clearance and settlement of transactions. Moreover, in amending 
Regulation 6 of the Clearing Regulations to implement CFTC Letter No. 
19-17, the proposed rule change should allow LCH SA's Clearing Members 
that are FCMs to take advantage of that relief, thereby promoting the 
use of LCH SA's clearing services among such members and the prompt and 
accurate clearance and settlement of derivative transactions.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Therefore, for the reasons discussed above, the Commission finds 
that the proposed rule change is consistent with the Section 
17A(b)(3)(F) of the Act.\24\
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. 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.\25\ The Commission believes the changes 
discussed above permitting LCH SA's Clearing Members to submit for 
clearing SBS on behalf of their U.S. clients would establish a well-
founded, clear, transparent, and enforceable legal basis for such 
client clearing services. In particular, removing current provisions 
from the Rule Book that prohibit Clearing Members from offering 
clearing services to U.S. clients with respect to SBS and removing 
provisions from the Procedures that prohibit LCH SA from accepting SBS 
transactions in respect of U.S. clients, would help ensure that the 
legal basis for providing clearing to U.S. clients with respect to SBS 
is well-founded. Establishing the account structure to be used by 
Clearing Members clearing SBS on behalf of U.S. clients and requiring 
that Clearing Members and LCH SA establish accounts for holding and 
transferring cash and other collateral on behalf of SBS Customers 
likewise would help ensure that the methods for holding and 
transferring such collateral are clear and transparent. Amending 
Appendix 1 of the Rule Book to apply the CDS Default Management Process 
to SBS would help to ensure the enforceability of the CDS Default 
Management Process with respect to SBS, while amending Regulation 3 and 
Regulation 5 of the Clearing Regulations to clarify that the security 
interest granted to LCH SA applies to FCM/BD Clearing Members and the 
LCH SBS Client Segregated Depository Account, and that no collateral 
deposited in the LCH SBS Client Segregated Depository Account may be 
applied on or in respect of payment or satisfaction of any of the FCM/
BD Clearing Member's liabilities to LCH SA, would help to ensure the 
enforceability of LCH SA's security interest while protecting SBS 
customer collateral. Finally, amending defined terms and provisions 
throughout the Rule Book, Clearing Supplement, Procedures, and Clearing 
Regulations to clarify that they apply to BDs and SBS would help to 
ensure that the legal bases for applying these provisions to BDs and 
SBS are similarly well-founded and clear.
---------------------------------------------------------------------------

    \25\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

    The Commission believes that the other changes unrelated to U.S. 
client clearing, as discussed in Part II.E above, would similarly help 
to ensure that the legal basis for LCH SA's activities is well-founded 
and clear. Amending Appendix 1 of the Rule Book to provide that each 
Non-Defaulting Clearing Member would never be required to bid for more 
than 100% of the relevant Auction Package and to remove a reference to 
the Early Termination Trigger Date at the end of the paragraph would 
correct drafting errors in clauses pertaining to the CDS Default 
Management Process, thereby helping to ensure the clarity of the CDS 
Default Management Process. Amending Regulation 6 of the Clearing 
Regulations to implement CFTC Letter No. 19-17 should help clarify the 
ability of Clearing Members that are FCMs to rely on the provisions of 
such letter.
    Thus, the Commission finds that these aspects of the proposed rule 
change are consistent with Rule 17Ad-22(e)(1).\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(18)

    Rule 17Ad-22(e)(18) requires that LCH SA 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.\27\ As discussed above, 
as part of the proposed changes permitting LCH SA's Clearing Members to 
submit for clearing SBS on behalf of their U.S. clients, the proposed 
rule change would impose certain requirements on Clearing Members who 
wish to offer clearing to U.S. clients. Among other things, Clearing 
Members would be required to establish accounts for holding and 
transferring cash and other collateral on behalf of SBS Customers and 
would be prohibited from offering clearing services to any U.S. Client, 
other than an affiliate of the clearing member, with respect to swaps 
and SBS, unless the Clearing Member (i) is an FCM or BD and (ii) has 
provided LCH SA with an opinion of counsel confirming that the 
provision of clearing services would not be contrary to applicable law. 
The Commission believes these changes would establish objective, risk-
based, and publicly disclosed criteria for participation by LCH SA's 
Clearing Members in client clearing for U.S. clients, which should 
permit fair and open access by Clearing Members directly and U.S. 
clients indirectly.
---------------------------------------------------------------------------

    \27\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

    Thus, the Commission finds that these aspects of the proposed rule 
change are consistent with Rule 17Ad-22(e)(18).\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

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 \29\ and Rules 17Ad-22(e)(1) and (e)(18).\30\
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78q-1(b)(3)(F).
    \30\ 17 CFR 240.17Ad-22(e)(1), (e)(18).
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\31\ that the proposed rule change (SR-LCH SA-2021-001), be, and hereby 
is, approved.\32\
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    \31\ 15 U.S.C. 78s(b)(2).
    \32\ 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).


[[Page 41123]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-16232 Filed 7-29-21; 8:45 am]
BILLING CODE 8011-01-P


