[Federal Register Volume 87, Number 54 (Monday, March 21, 2022)]
[Notices]
[Pages 16035-16038]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-05843]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94423; File No. SR-LCH SA-2022-002]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to the CDS Clearing Rule Book, 
Supplement, and Procedures

March 15, 2022.
    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 March 11, 2022, 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) a Clearing Notice (``Clearing 
Notice''), to allow LCH SA to enhance its clearing services as follows: 
(i) Implement the queuing of trades received outside of the Real Time 
Session, therefore avoiding automatic rejection of such trades by the 
Clearing System; (ii) allow Daily Backloading for Index Swaptions, 
which is currently only permitted for CDS; and (iii) accept ad-hoc 
compression requests directly from Clients of Clearing Members.
    In addition, LCH SA is also proposing to revise a number of its 
rules to make conforming amendments to the recently amended CFTC 
Regulation 39.13(g)(8)(ii).
    Finally, LCH SA is proposing additional clarifying amendments for 
consistency purposes.
    The text of the proposed rule changes (the ``Proposed Rule 
Change'') has been annexed [sic] as Exhibit 5.
    The launch of this initiative 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.
    (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, procedures and supplement to (1) allow LCH SA to implement 
various initiatives enhancing the CDSClear clearing services offering 
and (2) make additional amendments and conforming and clarifying 
amendments for consistency purposes.
1. Proposed Amendments To Permit LCH SA To Offer the Queuing of Trades 
Received Outside of the Real Time Session
    On each Clearing Day, the Real Time Session begins at the Start of 
Real Time and ends at the End of Real Time, as described in a Clearing 
Notice. To be eligible for novation, an Intraday Transaction, which is 
a CDS or Index Swaption which (i) has been entered into between two 
Approved Trade Source System (ATSS) Participants; and (ii) is submitted 
for clearing to LCH SA by the relevant ATSS Participants through an 
Approved Trade Source System, must pass the Eligibility Controls and 
the Client Transaction Checks (if applicable), and must be submitted to 
LCH SA during the Real Time Session. Should any of these criteria not 
be satisfied, the Intraday Transaction shall be automatically rejected 
and become a Rejected Transaction. However, in order to avoid automatic 
rejection of Intraday Transactions sent by an Approved Trade Source 
System to LCH SA outside of the Real Time Session, and to align with 
LCH Limited's offering and practice, Intraday Transactions which are 
submitted to LCH SA for clearing outside of the Real Time Session will

[[Page 16036]]

not be rejected but will be deemed to have been submitted at the Start 
of the next Real Time Session.
    The proposed changes described below would allow LCH SA to offer 
the operational queuing of such Intraday Transactions.
i. Rule Book
a. Changes to Article 3.1.4.3
    Article 3.1.4.3 of the Rule Book would be amended to provide that 
any Intraday Transaction received for clearing by LCH SA outside of the 
Real Time Session will be deemed to have been submitted at the Start of 
the Real Time Session on the following Clearing Day. As such, the 
submission of Intraday Transactions outside of the Real Time Session 
would no longer be a cause of automatic rejection. However, the 
Eligibility Controls, the Client Transaction Checks (if applicable) or 
the Notional and Collateral Checks shall remain so.
ii. Clearing Notice 2016/057 on Real Time Session
    The Clearing Notice on Real Time Session would also be subject to 
clarifying changes, provided as Exhibit 3 to File No. SR-LCH SA-2022-
002, to introduce flexibility in the Start and End of Real Time, and 
explicitly provide that LCH SA may change the time for the Start of 
Real Time (SoRT) or the End of Real Time (EoRT), in exceptional 
circumstances and where it is deemed necessary (e.g., a long-running 
backloading process, other operational incident, request from the CDS 
Members community, etc.). In such event, the new effective time for the 
Real Time Session shall be communicated to the Clearing Members and 
correspond to the time where the relevant service notification of the 
opening or the closing (as applicable) of the Real Time Session is 
sent.
    Clarifying this process would avoid uncertainty and potential 
adverse consequences with regard to the ``deemed'' time of submission 
of Intraday Transactions sent by an ATSS to LCH SA outside of the Real 
Time Session, and therefore queued, in an event where the following 
Start of Real Time would be postponed to a later time (or brought 
forward earlier) than 9:05 a.m. CET.
2. Proposed Amendments To Permit LCH SA To Offer Daily Backloading 
Services to Index Swaptions
    Backloading describes the process of clearing trades which were 
held uncleared for a period of time after trading. LCH SA is currently 
offering Daily Backloading Cycle, whether for House Trade Legs or 
Client Trade Legs, for Credit Default Swaps (CDS) only. LCH SA proposes 
to extend such Daily Backloading Cycle to Index Swaptions as well, upon 
request from the Clearing Members.
    The proposed changes described below would allow the extension of 
Daily Backloading Cycles to Index Swaptions by LCH SA.
i. Rule Book
    Daily Backloading Cycles are only available for Daily Backloading 
Transactions, which may be either house transactions (CM Backloading 
Transaction) or Client transactions (Client Backloading Transaction), 
both being defined in Section 1.1.1 of the Rule Book as an existing 
CDS. The definitions of CM Backloading Transaction and Client 
Backloading Transaction would therefore be amended to relate to 
existing CDS or Index Swaptions.
ii. Clearing Procedures
    In addition, with the details regarding Backloading Transactions 
being set out in Section 5.2 of the Clearing Procedures, Section 
5.2(c)--Daily Backloading Cycle, would also be amended to expressly 
include Index Swaptions within its scope.
3. Amendments To Permit LCH SA To Accept Ad Hoc Compression Request 
From Clients
    Compression is a process of reducing the number of trades in 
clearing members or clients' portfolios. It simplifies the management 
of their positions and frees up valuable capital that would otherwise 
be held unnecessarily against offsetting positions that can be 
compressed. Risk-free compression of trades can be performed 
automatically or through ad-hoc compression requests, at the initiative 
of the Clearing Member. Ad-hoc compression can currently be performed 
upon request of a Clearing Member whether on house transactions or 
client transactions. It has been brought to LCH SA's attention that, 
for Clearing Members to process each request for ad-hoc compression 
from each of their Clients was creating an operational burden that LCH 
SA would like to alleviate. In order to do so, and given that such 
compression operations are risk-free, LCH SA proposes to allow Clients 
to make ad-hoc compression requests for their own trades directly to 
LCH SA, without the need to go through their Clearing Member.
    The following proposed rules changes would be necessary to proceed 
with this enhanced service.
i. Rule Book
    Section 3.3.1--General of the Rule Book sets out the conditions and 
methods of compression, and notably that compression of a Cleared 
Transaction may only be requested by a Clearing Member. Articles 
3.3.1.1, 3.3.1.2, 3.3.1.4 and 3.3.1.5 would consequently be amended to 
reflect that the request may come from a Clearing Member or a Client, 
as applicable. However, LCH SA would accept Clients' requests for ad-
hoc compression only, and any request to setup an automatic compression 
of trades shall come from Clearing Members exclusively. It is therefore 
important that the proposed amendments specify, where necessary, that 
the compression methods are available upon request of Clearing Members 
or Client, as applicable.
ii. Clearing Procedures
    In addition, for consistency purposes, this initiative to allow 
Client compression requests would require bringing the same amendments 
as described above within Sections 5.5 and 5.16(f) of the Procedures. 
LCH SA is also proposing to update Section 5.5(a) to reflect the 
following operational changes: (1) The Ad Hoc Compression Order File 
has evolved and no longer defines the Cleared Transaction resulting 
from compression and (2) the means and details to upload this Ad Hoc 
Compression Order File would now be found on the LCH website, rather 
than in a Clearing Notice, for easier access to Clearing Members. 
Uploading the request file would also be done through the LCH Portal 
(LCH's IT interface) only, and processed the same day, or at the Start 
of the next Real Time Session in case of exceptional unavailability of 
the LCH Portal. The contingency solution provided for in Section 5.5(a) 
has become obsolete and would be deleted. Finally, to avoid any risk of 
inconsistency, references to specific opening and closing times of the 
Real Time Session in the 3rd paragraph of Section 5.5(a), currently 
defined in a Clearing Notice, would be replaced by references to the 
Real Time Session as defined in the Rule Book and in the Clearing 
Notice.
iii. Clearing Supplement
    Similarly, Parts A, B and C of the Clearing Supplement would be 
conformed, such that the definition of Compression Cut-off Date would 
be amended to reflect that the ad-hoc compression request may come from 
a Clearing Member or a Client, as applicable. Similar amendments would 
be made to Section 2.1(c)(i)(A) and (C)

[[Page 16037]]

and Section 4.3 in the relevant Parts of the Clearing Supplement, 
serving the same purpose.
4. Other Proposed Amendments to the Clearing Rules Made for 
Clarification, Consistency, or Regulatory Compliance Purposes
Compliance With CFTC Regulation Part 39.13(g)(8)(ii)
    Following a recent amendment to the CFTC Regulation Sec.  
39.13(g)(8)(ii), with a compliance date of January 27, 2021,\3\ the 
Rule Book needs to be updated as follows. Prior to such amendment, the 
CFTC Regulation Sec.  39.13(g)(8)(ii) provided that a Derivatives 
Clearing Organisation (DCO) require its Futures Commission Merchant 
(FCM) Clearing Members to collect Initial Margin from customers 
entering into non-hedging transactions ``at a level that is greater 
than 100 percent of'' the Initial Margin required by the DCO.\4\ 
Current Section 2.2(e) of the Procedures thus requires each FCM/BD 
Clearing Member to collect additional Collateral from the relevant FCM/
BD Client with respect to a non-hedging Client Cleared Transaction at a 
level of 10% above the normal FCM/BD Client Margin Requirement.
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    \3\ 85 FR at 4812 and 4856.
    \4\ 85 FR at 4812.
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    DCOs (i.e., LCH SA) are now required to apply prudential standards 
that result in Clearing Members (more specifically FCMs) identifying 
categories of customers with ``heightened risk profiles'' and 
collecting collateral for each such customer account, at a level that 
exceeds the Initial Margin requirement determined by the DCO, and that 
is commensurate with the risk presented by each such account.\5\
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    \5\ 17 CFR 39.13(g)(8)(ii).
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    Consequently, LCH SA would no longer require one standard 10% 
percentage applicable to all Clearing Members and their relevant 
customers, but an adjustable level of customer Initial Margin 
requirement applicable to each Clearing Member/customer according to 
the risk related to such customer's portfolio. The Rule Book, in its 
Article 6.2.6.1, would therefore be amended to reflect this new 
regulatory standard for FCM/BD Clients with heightened risk profiles. 
In a similar way, Section 2.2(e) of the Procedures would be modified to 
remove the 10% additional margin requirement and reflect such 
regulatory change.
    For harmonization purposes, the wording used in LCH SA's proposed 
rules changes has been closely inspired from the wording used in the 
SwapClear rules of LCH Limited for the same conforming purposes.
Treasury Reports Re-Design
    For consistency and clarity purposes, LCH SA proposes to clean up 
and modify the names of several treasury collateral management reports 
detailed in Section 5.16(a)(iii) of the Procedures, and certain monthly 
reports detailed in Section 5.16(d) of the Procedures, following a 
rebranding of such treasury reports in LCH's system that allow them to 
be machine readable.
Introduction of the Trading City Concept and Simplification of the 
Clearing Day Definition
    In anticipation of CDSClear's future commercial initiatives, and 
notably the extension of clearing services to iTraxx Asia (excl. Japan) 
and Australia (subject to regulatory approval), i.e., instruments which 
may be denominated in US Dollars (USD) but traded outside of the United 
States of America, it appears that the current correlation made in the 
Rule Book between instruments denominated in USD and the business 
calendar of commercial banks in New York City will become obsolete and 
problematic. As such, the Proposed Rule Change aims at de-correlating 
all products denominated in USD from the same specific calendar, by 
introducing the concept of Trading City, which would correspond to the 
city in which a CDS or Index Swaption is typically traded, as 
determined by LCH SA and published on the LCH website. As an example, 
for single name products, the Trading City would usually be determined 
by Transaction Type in the ISDA Physical Settlement Matrix. However, 
there may be occasions where this determination would need to be 
overridden, for example in the event of a corporate action resulting in 
a change of place where such single name is traded. In that way, CDS 
and Index Swaption products denominated in USD but traded in Asia, 
Australia, etc., would no longer be bound to the New York City business 
calendar, but rather to the business calendar of the relevant Trading 
City. The definition of Trading City would be added in Section 1.1.1 of 
the Rule Book, together with the definitions of Latest Contributed 
Price Time and Latest Cross Trade Execution Time that refer to the 
Trading City for the purpose of Section 5.18.4 (Use of composite 
spreads/prices) and 5.18.5 (Trade crossing) of the Procedures, 
respectively. The definition of Price Contribution Day in Section 1.1.1 
of the Rule Book would be revised in the same fashion to remove 
references to currencies and specific calendars and would instead refer 
to Trading City for USD denominated products. Sections 5.18.3 (Price 
submission procedure), 5.18.4 (Use of composite spreads/prices), and 
5.18.5 (Trade crossing) of the Procedures would consequently be amended 
to remove any specific calendar and timings for the price contribution 
process and refer to the new defined term of ``Trading City''.
    Finally, LCH SA proposes to amend the definition of Clearing Day in 
Section 1.1.1 of the Rule Book for greater flexibility, by removing the 
references to a Business Day and a day on which commercial banks in 
London are open for business and replacing them with a reference to any 
day on which LCH SA is open for business as set forth on the website 
and in member notification from time to time.
Minimum Bid Size Multiplier
    Within the Appendix 1 of the Rule Book, relating to CDS Default 
Management Process, the name of Minimum Bid Size Denominator used 
during the bidding process for auctions appeared to be misleading as 
the relating amount, used to determine the Minimum Bid Size above which 
an auction participant is required to bid, is in fact a multiplier 
rather than a denominator. For clarity and consistency purposes, it is 
therefore proposed to rename this amount as the Minimum Bid Size 
Multiplier, and to amend its definition in paragraph 5.4.2(iii) of 
Appendix 1 and its reference as the variable ``C'' in the calculation 
methodology set forth in paragraph 5.4.4 (Minimum Bid Size) of Appendix 
1.
(b) Statutory Basis
    LCH SA believes that the Proposed Rule Change is consistent with 
the requirements of Section 17A of the Exchange Act \6\ and the 
regulations thereunder, including the standards under Exchange Act Rule 
17Ad-22.\7\ Section 17A(b)(3)(F) of the Exchange Act \8\ 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.
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    \6\ 15 U.S.C. 78q-1.
    \7\ 17 CFR 240.17Ad-22.
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    By avoiding automatic rejection of trades received outside of the 
Real Time Session, the proposed implementation of the queuing mechanism 
of such trades is clearly intended to promote the prompt and accurate 
clearance of these transactions subject to satisfying the

[[Page 16038]]

requirements of the Rule Book provisions.
    Further, LCH SA is proposing to extend the Daily Backloading Cycle 
(currently limited to CDS transactions) to Index Swaptions upon request 
from its Clearing Members. It is widely considered beneficial to 
backload as much of a bilateral portfolio as possible to more 
efficiently manage the stock of outstanding trades. This significantly 
improves operational efficiency and also improves the likelihood of old 
trades being compressed.
    LCH SA is also proposing to accept ad-hoc compression requests from 
Clients of Clearing Members directly. The result of a compression 
process is a cleaner portfolio, with less complexity and the potential 
to provide Clearing Members with some relief in terms of meeting 
regulatory capital requirements.
    Therefore, LCH SA believes that these proposed enhancements to the 
CDSClear services 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.\9\
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    LCH SA is proposing to modify its existing rules in order to comply 
with the new regulatory provisions of CFTC Regulation 39.13(g)(8)(ii) 
\10\ that have a compliance date of January 27, 2021, and require each 
FCM to analyse the risk profile of each of their customers to determine 
if they present a heightened risk profile. LCH SA believes that this 
proposed change is consistent with Exchange Act Rule 17Ad-22(e)(1) \11\ 
that requires a covered clearing agency to 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.
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    \10\ 17 CFR 39.13(g)(8)(ii).
    \11\ 17 CFR 240.17Ad-22(e)(1).
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    Finally, as described above, LCH SA is also proposing to make 
certain clarifying and conforming changes in the Rule Book regarding 
the (i) Treasury Reports re-design, (ii) Minimum Bid Size Multiplier, 
(iii) introduction of the Trading City concept and (iv) simplification 
of the Clearing Day definition. By ensuring that such rules and 
definitions are clear, transparent, and consistent with applicable laws 
and regulations in all relevant jurisdictions, LCH SA believes these 
proposed changes reduce potential legal risk at LCH SA and are 
therefore consistent with the requirements of Exchange Act Rule 17Ad-
22(e)(1).\12\
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    \12\ 17 CFR 240.17Ad-22(e)(1).
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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.\13\ The Proposed 
Rule Change will comply with regulatory requirements or will enhance 
the CDS Clearing Service in order to promote competition and the risk 
management process. Accordingly, LCH SA will continue to apply its 
existing fair and open access criteria to its CDS Clearing Service. 
Thus LCH SA does not believe that the Proposed Rule Change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
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    \13\ 15 U.S.C. 78q-1(b)(3)(I).
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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 [email protected]. Please include 
File Number SR-LCH SA-2022-002 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-2022-002. 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-2022-002 and should 
be submitted on or before April 11, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-05843 Filed 3-18-22; 8:45 am]
BILLING CODE 8011-01-P


