[Federal Register Volume 87, Number 96 (Wednesday, May 18, 2022)]
[Notices]
[Pages 30318-30321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-10613]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94898; File No. SR-LCH SA-2022-003]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to the Restructuring Notification Process for 
Swaptions

May 12, 2022.

I. Introduction

    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''), pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its CDS Clearing 
Supplement (the ``Clearing Supplement'') and certain CDS Clearing 
Procedures (the ``Procedures'').\3\ The proposed rule change was 
published for comment in the Federal Register on March 30, 2022.\4\ 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, Clearing Supplement, or 
Procedures, as applicable.
    \4\ Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change to Relating to the Restructuring Notification 
Process for Swaptions, Exchange Act Release No. 94505 (March 24, 
2022); 87 FR 18416 (March 30, 2022) (SR-LCH SA-2022-003) 
(``Notice'').
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II. Description of the Proposed Rule Change

    As detailed below, the amendments to the Clearing Supplement and 
the Procedures would (A) establish a new delegation requirement for 
Clearing Members in the case of a restructuring affecting an option to 
purchase Index CDS (an ``Index Swaption''); (B) limit LCH's liability 
to Clearing Members in light of this new requirement; (C) update 
certain provisions related to the exercise of Index Swaptions; (D) 
require Clearing Members and Clients consent to disclosure of their 
contact information in connection with the restructuring or exercise of 
Index Swaptions; and (E) correct typographical errors.

A. New Delegation Requirement

    The proposed rule change would require that Clearing Members 
delegate to their Clients the authority to send and receive certain 
notices on their behalf. This new requirement would apply to a

[[Page 30319]]

Client's cleared transaction in an Index Swaption where the underlying 
Index CDS is being restructured due to an event affecting one of its 
reference entities. Generally, this delegation requirement would mirror 
the delegation mechanism that currently applies to Clients in 
exercising their Index Swaptions.\5\
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    \5\ See Self-Regulatory Organizations; LCH SA; Order Approving 
Proposed Rule Change Relating to Implementation of Electronic 
Exercise Platform (Oct. 11, 2018), Exchange Act Release No. 84410 
(Oct. 17, 2018) (SR-LCH SA-2018-004).
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    To establish this new requirement, the proposed rule change would 
amend Part C of the Clearing Supplement and Appendix VIII thereto. Part 
C sets out the terms applicable to a cleared Index Swaption transaction 
between a Clearing Member and LCH SA, while Appendix VIII sets out the 
terms applicable to the corresponding Index Swaption transaction 
between that Clearing Member and its Client. For example, the proposed 
rule change would add to Part C new defined terms, such as 
Restructuring Delegation Beneficiary (which would mean a Client 
designated by a Clearing Member to send and receive Credit Event 
Notices and Notices to Exercise Movement Option on its behalf). The 
proposed rule change similarly would revise existing defined terms, 
revise existing references to conform to new defined terms or changes 
in existing defined terms, and revise existing references to take into 
account the re-numbering of sections.
    In addition to these revisions to defined terms and references, the 
proposed rule change would set out the delegation requirement in a new 
Section 5.7 of Part C. This new section would apply to Client Cleared 
Transactions in Index Swaptions that are being restructured, and it 
would require Clearing Members designate their Clients to act on their 
behalf with respect to sending and receiving certain notices related to 
the restructuring. After a Clearing Member designates its Client, LCH 
SA would deem any delivery or receipt of a restructuring notice by the 
designated Client to constitute the delivery or receipt of a valid 
notice by the Clearing Member. LCH SA would treat any reference in the 
Clearing Supplement to a notice being delivered to or by a Clearing 
Member accordingly. This new section would generally mirror the 
provisions of current Section 6.4, which requires that Clearing Members 
designate their relevant Clients to act on their behalf with respect to 
exercising and abandoning Index Swaptions that are Client Cleared 
Transactions. A Clearing Member could withdraw the designation as long 
as there is no Swaption Restructuring Cleared Transaction registered in 
the Client Trade Account of the relevant Client.\6\
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    \6\ The proposed rule change would make a similar change to 
Section 6.4, which specifies when a Clearing Member may withdraw a 
delegation related to exercise of Index Swaptions.
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    The proposed rule change would make similar amendments to the 
provisions found in Appendix VIII of Part C, which must be incorporated 
into an Index Swaption transaction between a Clearing Member and its 
Client (collectively, the ``Mandatory Provisions''). For example, the 
proposed rule change would replace current Mandatory Provision 7 with a 
new provision that would require a Clearing Member to designate its 
Client in accordance with new Section 5.7 of Part C discussed above. 
New Mandatory Provision 7 also would require Clients to deliver Credit 
Event Notices or Notices to Exercise Movement Option directly to its 
counterparty, and would explain what would happen if the Client does 
not provide the notification within the required timeframe.
    In addition to the changes to Part C and Appendix VIII of the 
Clearing Supplement, the proposed rule change would amend Section 5 of 
the Procedures to specify how Clearing Members would notify LCH SA of 
the delegation. The proposed rule change would do so by amending 5.19, 
which currently sets out the process for delegations related to 
exercise of Index Swaptions, so that it applies to delegations related 
to restructuring as well. Under amended Section 5.19, a Clearing Member 
must notify LCH SA of the delegation by sending a completed 
notification form, and a Clearing Member may withdraw the delegation 
only if no Swaption Restructuring Cleared Transaction is registered in 
the Client Trade Account of the relevant Restructuring Delegation 
Beneficiary.

B. Limitation of Liability

    To complement the new delegation requirement, the proposed change 
would add new Section 13(c) to Part C of the Clearing Supplement. Under 
new Section 13(c), LCH SA would have no liability to a Clearing Member 
for any loss, cost or expense arising out of any failure of a Client to 
perform its obligations or in connection with the delivery of notices 
related to a restructuring. Section 13(c) would mirror existing Section 
13(b), under which LCH SA has no liability to a Clearing Member for any 
loss, cost or expense arising out of any failure of a Client to perform 
its obligations in connection with a delegation of authority to 
exercise Index Swaptions.

C. Exercise Provisions

    Unrelated to the new delegation requirement, the proposed rule 
change also would amend certain existing provisions found in Section 6 
of Part C. Section 6 of Part C describes the process for exercising 
Index Swaptions and the sending and receiving of notices related to 
exercise. The purchaser of an Index Swaption exercises it through an 
Exercise Matched Pair, which consists of a buyer and seller paired by 
LCH SA. Section 6.1(a) requires that, upon the creation of an Exercise 
Matched Pair, LCH SA notify the buyer and seller, but it prohibits LCH 
SA from providing any detail with respect to their identities. The 
proposed rule change would delete this prohibition as duplicative in 
light of existing Section 6.1(b). That section dictates the 
circumstances in which LCH SA may provide the buyer and seller details 
about each other's identity. LCH SA may only do so through a Protected 
Exercise Matched Pair Report, and it may only provide access to this 
report when there is a failure of LCH SA's electronic platform for 
exercising Index Swaptions. Finally, the proposed rule change would add 
at the end of 6.1 a new paragraph to state that a Clearing Member 
expressly consents to the disclosure of its information in accordance 
with this section through the Protected Exercise Matched Pair Report.
    Section 6.5 describes the actions that LCH SA would take when there 
is a failure of LCH SA's electronic platform for exercising Index 
Swaptions. As mentioned above, where there is such a failure, LCH SA 
would provide access to the Protected Exercise Matched Pair Report. The 
proposed rule change would move from Section 6.1 to Section 6.5 
language that requires LCH SA to provide contact information to Index 
Swaption buyers and sellers comprised within an Exercise Matched Pair. 
As a result of this change, where there is a failure of LCH SA's 
electronic platform for exercising Index Swaptions, LCH SA would 
provide each Clearing Member (or Client to whom the Clearing Member has 
delegated authority to exercise) with the other's address, fax number, 
telephone number, and contact email. LCH SA would provide this 
information in addition to providing access to the Protected Exercise 
Matched Pair Report. Finally, as part of this change, the proposed rule 
change would amend references to the Protected Exercise Matched Pair 
Report throughout Part C. LCH is making this change to accommodate 
differences in how it

[[Page 30320]]

stores Clearing Members' and Clients' contact information as required 
by applicable law.

D. Consents to Disclosure of Contact Information

    As part of the amendments to the Clearing Supplement, the proposed 
rule change also would add provisions that state expressly that 
Clearing Members and Clients consent to the disclosure of their contact 
information in connection with providing notices related to the 
restructuring of Index Swaptions and the exercise of Index Swaptions. 
These provisions would help to ensure that LCH SA is able to disclose 
this information under applicable law.

E. Correcting Typographical Errors

    Finally, the proposed rule change would correct typographical 
errors in Part C of the Clearing Supplement and the Mandatory 
Provisions found in Appendix VIII.

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.\7\ For the reasons discussed below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \8\ and Rule 17Ad-22(e)(17) thereunder.\9\
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    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(e)(17).
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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.\10\ 
Based on its review of the record, and for the reasons discussed below, 
the Commission believes the proposed changes to the Clearing Supplement 
and the Procedures are consistent with the promotion of the prompt and 
accurate clearance and settlement of transactions at LCH SA.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that the changes to implement the new 
delegation requirement, as discussed in Part II.A above, should promote 
the prompt and accurate clearance and settlement of Index Swaptions at 
LCH SA. Under the delegation requirement, a Client would send and 
receive notices related to a restructuring affecting one of its Index 
Swaptions directly, rather than relying on its Clearing Member. The 
Commission believes these changes therefore would reduce the 
operational burden on Clearing Members in clearing Index Swaptions for 
their Clients. The Commission believes reducing the operational burden 
on Clearing Members in clearing Index Swaptions for their Clients could 
in turn encourage more Clearing Members to offer such clearing service 
to their Clients, and therefore could promote the prompt and accurate 
clearance and settlement of Index Swaptions at LCH SA.
    For similar reasons, the Commission believes that the changes 
discussed in Parts II.B and II.D above should promote the prompt and 
accurate clearance and settlement of Index Swaptions at LCH SA. The 
Commission believes that limiting LCH SA's liability in connection with 
the new delegation requirement should reduce the risk to LCH SA in 
relying on Clients to satisfy their obligations under the delegation. 
The Commission believes that doing so should enable LCH SA to implement 
the new delegation requirement. The Commission similarly believes that 
having Clearing Members and Clients consent to the disclosure of their 
contact information in connection with providing notices related to the 
restructuring of Index Swaptions should enable LCH SA to implement the 
new delegation requirement. The Commission believes such consent would 
enable LCH SA to disclose the contact information and that LCH SA may 
need to disclose such information in order for Clients to send notices 
related to a restructuring directly to other Clearing Members and 
Clients. The Commission therefore believes that both of these changes 
should facilitate LCH SA's ability to implement the new delegation 
requirement, which, for the reasons discussed above, the Commission 
believes should promote the prompt and accurate clearance and 
settlement of Index Swaptions transactions at LCH SA.
    The Commission further believes that the changes related to the 
exercise of Index Swaptions, including having Clearing Members and 
Clients consent to the disclosure of their contact information in 
connection with exercise, as discussed in Parts II.C and II.D above, 
should promote the prompt ad accurate clearance and settlement Index 
Swaptions at LCH SA. The Commission believes that the changes described 
in Part II.C above would help to clarify the content of the Exercise 
Matched Pair Report and that having Clearing Members and Clients 
consent to the disclosure of their contact information, as described in 
Part II.D above, should enable LCH SA to provide contact information, 
including through the Exercise Matched Pair Report. The Commission 
believes that where there is a failure of LCH SA's electronic platform 
for exercising Index Swaptions, Clearing Members and Clients could use 
the information in the Exercise Matched Pair Report, and the other 
contract information provided by LCH SA, to send notices related to 
exercise. The Commission therefore believes these changes should help 
to ensure that buyers of Index Swaptions are able to exercise their 
positions even where there is a failure of LCH SA's electronic exercise 
platform. The Commission believes that doing so should promote the 
prompt and accurate clearance and settlement of Index Swaptions at LCH 
SA.
    Finally, the Commission believes that correcting typographical 
errors, as discussed in Part II.E above, should help to ensure the 
clarity and accuracy of the Clearing Supplement, and therefore should 
promote the prompt and accurate clearance and settlement of 
transactions using the Clearing Supplement.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\11\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(17)

    Rule 17Ad-22(e)(17) requires that LCH SA establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to manage its operational risks by, among other things, 
ensuring that systems have a high degree of operational 
reliability.\12\ The Commission believes that the new delegation 
requirement would increase the resiliency of the restructuring process 
for Index Swaptions. The Commission believes that making each Client 
responsible for sending and receiving notices related to exercise would 
delegate to Clients a responsibility that is currently concentrated in 
Clearing Members. Each Client would send and receive notices, rather 
than one Clearing Member bearing this responsibility for all of its 
Clients. As a result, the Commission believes this aspect of the 
proposed rule change should reduce the potential disruption that could 
result from a

[[Page 30321]]

Clearing Member's operational failure, and therefore should increase 
the operational reliability of the restructuring process for Index 
Swaptions.
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    \12\ 17 CFR 240.17Ad-22(e)(17).
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    The Commission further believes that the changes discussed in Parts 
II.C and II.D above should enable LCH SA to provide contact 
information, including through the Exercise Matched Pair Report, where 
there is a failure of LCH SA's electronic exercise platform. The 
Commission therefore believes that these changes should help to ensure 
that buyers of Index Swaptions are able to exercise their positions 
even where there is a failure of LCH SA's electronic exercise platform, 
and accordingly, these aspects of the proposed rule should increase the 
operational reliability of the exercise process for Index Swaptions.
    Therefore, the Commission finds that these aspects of the proposed 
rule change are consistent with Rule 17Ad-22(e)(17).\13\
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    \13\ 17 CFR 240.17Ad-22(e)(17).
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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 \14\ and Rule 17Ad-22(e)(17) thereunder.\15\
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ 17 CFR 240.17Ad-22(e)(17).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\16\ that the proposed rule change (SR-LCH SA-2022-003) be, and hereby 
is, approved.\17\
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    \16\ 15 U.S.C. 78s(b)(2).
    \17\ 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).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10613 Filed 5-17-22; 8:45 am]
BILLING CODE 8011-01-P


