[Federal Register Volume 87, Number 61 (Wednesday, March 30, 2022)]
[Notices]
[Pages 18416-18419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-06628]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94505; File No. SR-LCH SA-2022-003]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to the Restructuring Notification Process 
for Swaptions

March 24, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on March 18, 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.
---------------------------------------------------------------------------

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

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

    (a) Banque Centrale de Compensation, which conducts business under 
the name LCH SA (``LCH SA''), is proposing to amend its (i) CDS 
Clearing Supplement (``Supplement'') and (ii) CDS Clearing Procedures 
(``Procedures'') to incorporate new terms and to make conforming, 
clarifying and clean-up changes to implement a delegation mechanism for 
clients of CDSClear clearing members which applies in the context of 
the restructuring process for swaptions (the ``Proposed Rule Change'').
    The text of the Proposed Rule Change has been annexed [sic] as 
Exhibit 5.\3\
---------------------------------------------------------------------------

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

    The implementation of the Proposed Rule Change will be contingent 
on LCH SA's receipt of all necessary regulatory approvals.
    (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 to [sic] amend the 
restructuring notification process applicable in respect of swaptions 
registered in a Client Account Structure. Currently, in the event of a 
restructuring which would be applicable to a component transaction of 
the underlying index transaction to which a set of swaptions relate, 
Clearing Members would be in charge of sending and receiving the 
relevant notices in respect of this restructuring and notifying LCH SA 
of any such notice delivered or received by no later than 5:00 p.m. on 
the cut-off date. Where such restructuring also relate to swaptions 
registered in a Client Account Structure, this also implies from the 
Client that it shall first deliver the restructuring notice to its 
Clearing Member and its Clearing Member delivers the equivalent notice 
to the other Clearing Member to allow for this notification requirement 
by the relevant Clearing Member to LCH SA by no later than 5:00 p.m. on 
the cut-off date.
    The proposed amendments to the restructuring process for swaptions 
registered in a Client Account Structure will remove any dependency 
between the notification duties in the context of a restructuring. The 
proposed rule change will provide for a delegation mechanism whereby 
Clearing Members shall appoint their Clients as their Restructuring 
Delegation Beneficiaries for the purposes of sending and receiving the 
relevant notices to the other Clearing Member(s) or Client(s) in the 
event of a restructuring affecting the swaptions registered in their 
relevant Client Account Structure. The notification duty vis-[agrave]-
vis LCH SA following the sending or receiving of the notices will also 
rely on such Restructuring Delegation Beneficiary. These amendments 
replicate the current delegation legal mechanism which is used in the 
context of the exercise process in respect of swaptions registered in a 
Client Account Structure.
1. Supplement
    LCH SA is proposing to modify Part C of the Supplement (``Part C'') 
to incorporate terms for implementing the delegation mechanism for the 
restructuring process and to make certain conforming and clean-up 
changes to improve clarity of Part C.
    Section 1.2 (Terms defined in the CDS Clearing Supplement) of Part 
C would be amended by adding the following new defined terms.
    The term ``Restructuring Delegation Beneficiary'' would be added to 
refer to a Client of a Clearing Member designated by such Clearing 
Member pursuant to new Section 5.7 (Delegation by Clearing Members to 
Clients) as being entitled to send and receive Credit Event Notices and 
Notices to Exercise Movement Option in respect of the relevant Swaption 
Restructuring Cleared Transactions on such Clearing Member's behalf.
    The term ``Swaption Restructuring CCM Client Notice would be added 
to make a cross reference to its definition as set out in Mandatory 
Provision 7.3 (Duty to Deliver Swaption Restructuring CCM Client 
Notice) in Appendix VIII to Part C.

[[Page 18417]]

    The existing term ``Exercise Delegation Beneficiary'' would be 
amended for clarification purpose as the current reference to ``The'' 
Client seems to imply that only a single Client of a Clearing Member 
could be appointed as an Exercise Delegation Beneficiary irrespective 
of whether the Clearing Member is acting on behalf of other Clients and 
therefore this reference will be replaced by ``A'' Client for the sake 
of clarity.
    Because of the new Section 5.7 (Delegation by Clearing Members to 
Clients) added to Part C, any cross-references to Sections 5 following 
this new Section 5.7 should be renumbered. Therefore the cross-
references in the definitions of ``Swaption Restructuring Clearing 
Member Notice'' and ``Swaption Restructuring Clearing Member Notice 
Deadline'' would be updated accordingly.
    A new sub-paragraph (ii) would be added to Section 1.7 (c) 
(Application to FCM/BD Clearing Members) to provide that, 
notwithstanding an FCM/BD Clearing Member acting as agent for the 
account of an FCM/BD Client with respect to Index Swaption Cleared 
Transactions, an FCM/BD Clearing Member shall designate its FCM/BD 
Client to send and receive the relevant restructuring notices on its 
behalf as its Restructuring Delegation Beneficiary in accordance with 
the relevant provisions of Part C. As a result, the current equivalent 
paragraph (c) in respect of the exercise process has been renumbered as 
a sub-paragraph (i).
    Section 5 (Restructuring) of Part C would be amended to add new 
provisions to implement this delegation mechanism for the restructuring 
process involving swaptions registered in a Client Account Structure.
    Sections 5.1, 5.3, 5.5 and 5.6 of Part C would be amended by adding 
references to the new defined term of Restructuring Delegation 
Beneficiary where needed.
    An additional paragraph would be added at the end of Section 5.1 to 
provide for the express consent from the Clearing Member on the 
disclosure of its information needed for the purpose of the 
restructuring process.
    A new Section 5.7 (Delegation by Clearing Members to Clients) is 
proposed to be added in order to provide for the legal mechanism of 
delegation which will apply for Clients and will replicate the 
equivalent provisions of Section 6.4 (Delegation by Clearing Members to 
Clients) applicable in respect of the exercise process. Specifically, 
Section 5.7 would provide that, with respect to the sending of the 
relevant notices for Swaption Restructuring Cleared Transactions of a 
Swaption Restructuring Matched Pair which are Client Cleared 
Transactions, Clearing Members shall designate their relevant Clients 
to act on their behalf and such designation will take effect as soon as 
reasonably practicable following receipt by LCH SA of duly completed 
and signed Delegation Forms. The Client so designated will be the 
Restructuring Delegation Beneficiary. Such designation may be withdrawn 
provided that there is no Swaption Restructuring Cleared Transaction 
registered in the relevant Client Account Structure. Where a Clearing 
Member designates its Client in accordance with new Section 5.7, any 
delivery or receipt of a restructuring notice by the designated Client 
will be deemed to constitute the delivery or receipt of a valid 
restructuring notice by its Clearing Member. Similarly, any reference 
in Part C to a restructuring notice delivered or received by a 
designated Client will be interpreted as delivery or receipt by a 
Clearing Member.
    Because of the insertion of this new Section 5.7 (Delegation by 
Clearing Members to Clients) in Part C, the following Sections 5 would 
be renumbered and any cross-reference in Part C to the renumbered 
Sections would be amended accordingly.
    Section 5.8 (Swaption Restructuring Clearing Member Notices) of 
Part C would be amended to include the appropriate references to the 
Client designated as a Restructuring Delegation Beneficiary which will 
notify LCH SA of the delivery or receipt of the relevant restructuring 
notices on behalf of its Clearing Member in order that LCH SA may give 
effect to the relevant restructuring notices exchanged between the 
parties to a Swaption Restructuring Cleared Transaction. There will be 
also references to the new defined term of Swaption Restructuring CCM 
Client Notice to be added and which, pursuant to Mandatory Provision 
7.3 of Appendix VIII to Part C, will refer to the notice sent to LCH SA 
or the relevant Clearing Member by a Restructuring Delegation 
Beneficiary following receipt or delivery of a restructuring notice.
    Paragraph (b) of Section 8.1 (General Rules relating to Notices) to 
[sic] remove the reference to the occurrence of an Electronic Exercise 
Platform (``EEP'') Failure Event since the scope of this paragraph will 
be broader than the exercise process as it will include a new reference 
to a Restructuring Delegation Beneficiary.
    Finally, Section 13 (Exclusion of Liability) of Part C would be 
amended to add a new Section 13(c) replicating the provisions of 
Section 13(b) and specifying that LCH SA would have no liability to a 
Clearing Member which has delegated to a Restructuring Delegation 
Beneficiary its power to send or receive the relevant restructuring 
notices on its behalf for any loss, cost or expense arising out of any 
failure of such Restructuring Delegation beneficiary to perform its 
obligations in relation with such delegation or in connection with or 
arising from the delivery of such notices.
    Part C would be also amended to make the following conforming 
changes that are not related to the restructuring delegation.
    In Section 6.1 (Creation and Notification of Exercise Matched 
Pairs) of Part C, the provisions on the content of the Protected 
Exercise Matched Pair Report would be amended to remove any reference 
to contact details of the relevant parties. Indeed, since such contract 
details will be the subject of a separate notification by LCH SA, a new 
paragraph would be added at the end of sub-paragraph (ii) of Section 
6.5(a) which would be entitled as ``Access to the Protected Exercise 
Matched Pair Report and other information''. As a result of this 
change, any reference to the Protected Exercise Matched Pair Report in 
Part C, including but not limited to Section 8, would be amended by 
either removing the reference to this report to keep general 
notification's references or adding a reference to any other 
information which is notified by LCH SA for the purpose of the exercise 
process for consistency purposes. Similarly to the amendment made under 
Section 5.1, an additional paragraph will be added at the end of 
Section 6.1 to require for the express consent from the Clearing Member 
on the disclosure of its information needed for the purpose of the 
exercise process.
    In addition, and on the basis of new Section 5.7, Section 6.4 would 
specify that the designation of a Client as an Exercise Delegation 
Beneficiary may be withdrawn provided that there is no Exercise Cleared 
Transaction registered in the relevant Client Account Structure.
    Appendix VIII (CCM Client Transaction Requirements) to Part C would 
be amended for the purposes of including references to the new 
delegation mechanism for the restructuring process. Any Client 
designated as a Restructuring Delegation Beneficiary will be in charge 
of sending and receiving the relevant restructuring notice for the 
relevant Swaption Index Cleared Transaction directly to the relevant 
Clearing Member or Client on behalf of its Clearing Member. As a

[[Page 18418]]

result, there will be no longer the need for them to send restructuring 
notices to their Clearing Members to allow them to send equivalent 
notice to the other Clearing Member comprised in the relevant Matched 
Pair. Mandatory Provision 4 will be therefore amended to remove the 
reference to the restructuring notices that could be sent by a CCM 
Client to its CCM in respect of the mirroring transaction between such 
CCM Client and CCM.
    The changes made to Section 6.1 (Creation and Notification of 
Exercise Matched Pairs) of Part C would be replicated in Mandatory 
Provisions 5.4 and 5.8 to remove the reference to the Protected 
Exercise Matched Pair Report which is too restrictive or refer to other 
notice details provided by LCH SA for the purposes of the exercise 
process.
    Mandatory Provision 5.6 would be amended to add a reference to the 
CCM since contact details of a CCM Client could be also provided by a 
CCM to LCH SA.
    The current Mandatory Provision 7 is entirely removed from Appendix 
VIII as it applies to the delivery of notices in respect of the 
mirroring transaction between a CCM Client and its CCM in the event of 
restructuring, which will be no longer needed following the 
implementation of the proposed rule change. New Mandatory Provision 7 
will be entitled ``Designation of CCM Client as a Restructuring 
Delegation Beneficiary by CCM'' and replicates the equivalent 
provisions of Mandatory Provision 5 (Designation of CCM Client as an 
Exercise Delegation Beneficiary) subject to the necessary amendments 
linked to the restructuring process. New paragraph 7.1 will provide for 
the mandatory designation of a CCM Client as a Restructuring Delegation 
Beneficiary by its CCM in accordance with new Section 5.7 of Part C. 
New paragraph 7.2 will provide that neither the CCM nor the CCM Client 
shall send the relevant restructuring notices for the mirroring 
transaction between the CCM and its CCM Client but instead the CCM 
Client as the Restructuring Delegation Beneficiary shall send or 
receive the relevant restructuring notices for the corresponding CCM 
Client Cleared Transaction pursuant to Part C, such restructuring 
notices being deemed sent or received in respect of the relevant 
mirroring transaction. The following new paragraph 7.3 provides for the 
duty to deliver a Swaption Restructuring CCM Client Notice to LCH SA by 
the Restructuring Delegation Beneficiary. If such notification is not 
made within the required timeframe, LCH SA will decide either to give 
effect to the restructuring notices pursuant to Section 5.8(c) of Part 
C or not to give effect to the restructuring notices then, following 
Exercise, an amount shall be payable between the Clearing Members equal 
to the difference between the value of the Matched Buyer Contract had 
the Swaption Restructuring CCM Client Notice been given to LCH SA 
within the required timeframe and the value of such contract in the 
absence of such Swaption Restructuring CCM Client Notice having been 
given. This amount shall be determined and paid in accordance with the 
provisions of this new paragraph. New paragraph 7.4 relates to the 
contact details of LCH SA and the CCM Client to be used for the 
purposes of delivering the relevant notices. Last paragraph 7.5 
provides for a confidentiality waiver regarding the notice details 
provided by the CCM Client.
    Finally, the proposed amendments to the Supplement also contain 
typographical corrections in Sections 3.1 and 8.1(c) of Part C and 
Mandatory Provisions 5.1 and 5.4 of Appendix VIII to Part C without 
affecting the meanings of such Sections or Mandatory Provisions.
2. Procedures
    LCH SA also proposes to modify Section 5 of the Procedures to 
incorporate terms for implementing the new delegation mechanism for the 
purposes of the restructuring process applicable in respect of 
swaptions.
    Section 5.19.1 which currently deals with the delegation applicable 
to the exercise process will be amended for taking into account the 
delegation for the restructuring process. Consequently, Section 5.19.1 
will be entitled ``Delegation by Clearing Members to Clients'' and 
Section 5.19 ``Delegation by Clearing Members to Clients and Electronic 
Exercise Platform''.
    Pursuant to amended Section 5.19.1, a Clearing Member which has 
delegated to a Client the power to send and receive the relevant 
notices in the context of a restructuring for swaptions in accordance 
with Section 5 of Part C shall notify such Restructuring Delegation by 
sending the relevant form to LCH SA which will be defined as the 
Delegation Form as it will contain both Exercise Delegation and 
Restructuring Delegation. The defined term of ``Exercise Delegation 
Withdrawal'' will be also replaced by ``Delegation Withdrawal'' to 
cover the possibility for withdrawing the delegation applicable in 
respect of the restructuring process and references to provisions of 
Part C that are equivalent to the withdrawal for the exercise process 
will be added for the restructuring process.
    Other amendments will be made to Section 5.19.1 in order to include 
the references to either the Restructuring Delegation Beneficiary or 
the Restructuring Delegation where relevant.
(b) Statutory Basis
    LCH SA believes that the Proposed Rule Change is consistent with 
the requirements of Section 17A of the Securities Exchange Act of 1934 
\4\ (the ``Act'') and the regulations thereunder, including the 
standards under Rule 17Ad-22.\5\ Section 17(A)(b)(3)(F) \6\ of the Act 
requires, among other things, that the rules of a clearing agency be 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions and derivative agreements, contracts, and 
transactions and to assure the safeguarding of securities and funds 
which are in the custody or control of the clearing agency or for which 
it is responsible. As noted above, the Proposed Rule Change is designed 
to implement the delegation legal mechanism to operationally facilitate 
any required restructuring notification process for swaptions which 
will improve the process for sending and receiving of restructuring 
notices to more promptly and accurately reflect the restructuring 
status of the cleared option transaction in LCH systems.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78q-1.
    \5\ 17 CFR 240.17Ad-22.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Further, LCH SA believes that the proposed changes to the Rule 
Book, Supplement and Procedures are consistent with requirements of 
Rule 17Ad-22(e)(17).\7\ Rule 17Ad-22(e)(17) requires a covered clearing 
agency to manage operational risks by (i) 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; (ii) ensuring that systems have a high degree 
of security, resiliency, operational reliability, and adequate, 
scalable capacity; and (iii) establishing and maintaining a business 
continuity plan that addresses events posing a significant risk of 
disrupting operations.\8\
---------------------------------------------------------------------------

    \7\ 17 CFR 240.17Ad-22(e)(17).
    \8\ 17 CFR 240.17Ad-22(e)(17).
---------------------------------------------------------------------------

    As described above, the Proposed Rule Change will enable LCH SA to 
more effectively manage the operational notification risks associated 
with the restructuring event process by providing an alternative 
solution with an operational delegation mechanism for

[[Page 18419]]

the restructuring notification process. Specifically, the current 
bilateral notification process creates plausible operational and legal 
risks if LCH SA is not provided in due time by its Clearing Member with 
the relevant restructuring notice sent by the client. To remove any 
unnecessary dependency on the bilateral notification process and duties 
between the Clearing Members(s) and client(s) in the context of a 
restructuring event for swaptions, the Proposed Rule Change is designed 
to implement a delegation mechanism whereby clients of Clearing Members 
shall be appointed as their Restructuring Delegation Beneficiaries for 
the purposes of sending and receiving the relevant notices to the other 
Clearing Member(s) or Client(s) in the event of a restructuring 
affecting the swaptions registered in their relevant Client Account 
Structure.
    By implementing a relevant and consistent delegation legal 
mechanism, the Proposed Rule Change is reducing potential legal risk at 
LCH SA and is therefore consistent with the requirements of a well-
founded, clear, transparent, and enforceable legal framework of 
Exchange Act Rule 17Ad-22(e)(1).\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

    For the reasons stated above, LCH SA believes that the Proposed 
Rule Change with respect to the Supplement and Procedures in connection 
with the implementation of the delegation mechanism for the 
restructuring notification process for swaptions are consistent with 
the requirements of prompt and accurate clearance and settlement of 
securities transactions in Section 17(A)(b)(3)(F) \10\ of the Act and 
the requirements of operational risk management in Rule 17Ad-22(e)(17) 
\11\ and of a well-founded legal framework in Rule 17Ad-22(e)(1).\12\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22(e)(17).
    \12\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\13\ LCH SA does 
not believe that the proposed rule change would impose burdens on 
competition that are not necessary or appropriate in furtherance of the 
purposes of the Act. Specifically, the proposed changes to the 
Supplement and Procedures would apply equally to all Clearing Members 
and their Clients. This would remove the burden on clearing brokers 
from needing the operational capacity to intermediate the sending and 
receiving of notices from clients, thereby improving the competitive 
landscape for clearing brokers wishing to support the clearing of 
options. Therefore, LCH SA does not believe that the proposed rule 
change would impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \13\ 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 [email protected]. Please include 
File Number SR-LCH SA-2022-003 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-2022-003. 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-2022-003 and should 
be submitted on or before April 20, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-06628 Filed 3-29-22; 8:45 am]
BILLING CODE 8011-01-P


