[Federal Register Volume 88, Number 15 (Tuesday, January 24, 2023)]
[Notices]
[Pages 4227-4230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-01270]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96694; File No. SR-LCH SA-2023-001]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to the Liquidity Risk Model Framework

January 18, 2023.
    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 January 4, 2023, 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 
(``Proposed

[[Page 4228]]

Rule Change'') described in Items I, II and III below, which Items have 
been primarily prepared 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

    LCH SA is proposing to amend its Liquidity Risk Model framework 
(the ``Framework''), which describes the framework by which the LCH SA 
Collateral and Liquidity Risk Management (``CaLRM'') team assures that 
LCH SA has enough cash available to meet any financial obligations, 
both expected and unexpected, that may arise over the liquidation 
period for each of the clearing services that LCH SA offers.\3\ The 
Framework is part of LCH SA's Risk Management Procedures (the 
``Procedures'') and it is consistent with LCH group liquidity risk 
policy to which LCH SA shall comply.
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    \3\ LCH SA, a subsidiary of LCH Group, manages its liquidity 
risk pursuant to, among other policies and procedures, the Group 
Liquidity Risk Policy and the Group Liquidity Plan applicable to 
each entity within LCH Group. In addition to its CDSClear service, 
LCH SA provides clearing services in connection with cash equities 
and derivatives listed for trading on Euronext (EquityClear), 
commodity derivatives listed for trading on Euronext 
(CommodityClear), and tri-party Repo transactions (RepoClear).
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    The text of the Proposed Rule Change is in Exhibit 5 [sic].\4\
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    \4\ Capitalized terms used but not defined herein shall have the 
meaning specified in the CDS Clearing Rule Book or the Clearing 
Supplement, as applicable.
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    The implementation of the Proposed Rule Change 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.

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 such statements.

A. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The Framework is one of several well-developed policies and 
procedures that LCH SA maintains to manage its liquidity risk, i.e., 
the risk that LCH SA will not have enough cash available, in extreme 
but plausible circumstances, to settle margin payments or delivery 
obligations when they become due, in particular upon the default of a 
clearing member. Such policies and procedures include, among others:
    (i) the Group Liquidity Risk Policy which ensures that each CCP of 
the LCH group has enough liquid resources on hand to meet all the 
expected and unexpected financial obligations that arise during the 
course of the day. The policy lays out how a CCP will measure whether 
there is enough available liquid resources;
    (ii) the LCH SA Liquidity Plan that sets out the principles and 
procedures for liquidity management within LCH SA. Its main objectives 
are to:
     Ensure the liquidity adequacy of LCH SA at all times in 
accordance with policies set by the appropriate governance authority 
monitored and reported by Risk Management;
     Ensure that liquidity management and resources are aligned 
with LCH SA operational requirements to meet payment obligations as 
they fall due under Business as Usual and stressed liquidity 
conditions;
     Ensure effective liquidity risk identification and 
escalation within Collateral and Liquidity Management (``CaLM'') 
service and other relevant departments with LCH SA.
    (iii) the Group Financial Resource Adequacy Plan which details the 
standards by which financial resources should be assessed against 
member exposures. This includes Variation Margins, Initial Margins, 
Margin Add-Ons for liquidity risk, concentration risk, wrong way risk 
where appropriate, as well as the sizing and re-sizing of the default 
funds across the LCH Group CCPs;
    (iv) the Group Collateral Risk Policy; which sets out the standards 
for the management of collateral risk across the LCH Group CCPs and 
ensures that CCPs must have a robust mechanism in place to process and 
control the collateral posted by members;
    (v) the Group Investment Risk Policy which sets out the standards 
for the management of investment risk across the LCH Group CCPs;
    (vi) the LCH SA Collateral Control Framework which describes the 
actions undertaken by the CaLRM team to implement the collateral limits 
laid out in the Group Collateral Risk Policy and to ensure that the 
prices integrated on a daily basis by margin team are accurate and 
fairly priced.
    In brief, the Framework: (i) identifies LCH SA's sources of 
liquidity and corresponding liquidity risks; (ii) identifies LCH SA's 
liquidity requirements with respect to its members and its 
interoperable central counterparty (``CCP''); \5\ (iii) describes the 
metrics and limits that LCH SA monitors; and (iv) describes the 
scenarios under which these metrics are computed.
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    \5\ LCH SA has an interoperability agreement with Cassa di 
Compensazione e Garanzia (``CC&G''), an Italian CCP, pursuant to 
which LCH SA's clearing members and CC&G's clearing members are able 
to benefit from common clearing services without having to join the 
other CCP. Each CCP is a clearing member of the other one with a 
particular status when accessing the clearing system of the other 
counterparty.
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    (i) Default Fund reduction and intraday injection of liquidity in 
the settlement platform to be considered in operational target.\6\
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    \6\ The Operational target represents the amount of liquidity to 
be held to satisfy the liquidity needs related to the operational 
management of the CCP in a stressed environment that does not lead 
to a member's default.
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    As per a recommendation from LCH SA's independent risk model 
validation department,\7\ LCH SA is proposing to amend the Framework in 
order to address more accurately its liquidity requirements in the 
event of a Default Fund (``DF'') scheduled reduction \8\ or an 
extraordinary intraday liquidity injection \9\ in the settlement 
platform.
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    \7\ Only proposed changes described in (i) are due to model 
validation recommendation.
    \8\ Every first business day of the month the CCP recalibrate 
its DF amounts according to its internal procedures. If the amounts 
recalibrated are lower than the amounts in force resources will be 
returned to members accordingly within the 4th business day of the 
month. Moreover only global reduction in DF amounts are considered 
in the calculation of operational target. Increases in DF would 
augment the available liquidity and reduce the Operational target 
and therefore are not considered.
    \9\ When volumes in the settlement platform are particularly 
high the treasury department may need to inject additional liquidity 
during the day to ensure the smooth function of the settlement 
flows.
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    Before any DF change there exists a latency between the final 
approval of the new DF total amount and the settlement of the new 
contributions. To properly reflect the decrease of the DF in the 
calculation of the operational target until the settlement of the 
contributions the new proposed framework will include the following 
enhancements.
     The DF recomputed is compared to the DF actually paid and 
in the account of LCH SA.
     The amount that will reported will be the following.
    [cir] only global drain of liquidity will be considered and added 
to the operational target because they

[[Page 4229]]

represent a scheduled liquidity outflow that needs to be covered by 
adequate liquidity resources by the CCP,
    [cir] Eventual negative amounts will be reported in the operational 
target for all the days from the beginning of the month till settlement 
date.
    Moreover, according to the current internal fails monitoring 
operating mode, a threshold of 1 bln Euro is set to request a formal 
approval by the LCH SA Chief Risk Officer and the Head of LCH SA CaLM 
or their delegates, before allowing the LCH SA Operations team to 
inject extraordinary liquidity intraday in the settlement platform.
    The current liquidity framework does not take into consideration 
eventual extraordinary liquidity injection in the settlement system in 
the calculation of the operational target. The revised liquidity 
framework, while maintaining consistency with the current procedure, 
will require a rerun of the operational target anytime a significant 
amount (bigger or equal than 1 bln Euro) of liquidity is injected 
intraday. Eventual intraday injection will be subtracted from the 
liquidity resources available that are compared against the operational 
target to ensure that LCH SA has adequate liquidity to satisfy the 
needs related to the operational management of the CCP.
    (ii) Committed credit line.
    LCH SA is proposing clarifications to the Framework to reflect the 
final closure of one committed credit line that took place the December 
15th 2021. The committee credit line with Kas bank has been replaced by 
a multi-currency overdraft facility of [euro]10 million with an 
International bank. In addition the CCP put in place a secured 
committed intraday credit line with Norges Bank to cover the non-Euro 
VM payments for the Euronext Oslo listed derivatives activity. The 
amount of the Norges bank credit line is flexible and is determined on 
a daily basis based on the collateral deposited with Euroclear Bank.
    Finally, in accordance with what is defined in the SA liquidity 
Plan, it has been reported in the Framework the list of options that 
LCH SA has to address in a default situation any liquidity shortfall in 
a currency different from EUR. These are:

 The non EUR cash deposited as collateral
 The sale of the non EUR securities of the defaulting member
 Repo transactions
    [cir] Bilateral Repo transactions (Non Euro cash taker and Non Euro 
collateral giver)
    [cir] Cross-currency Bilateral Repo (Non Euro cash taker and Euro 
collateral giver)
    [cir] Cross-currency Triparty Repo (Non Euro cash taker and Euro 
collateral giver)
 The use of the multicurrency overdraft facility with an 
International Bank
 Use of the FX spot market transactions
 ECB weekly tender in USD (last resort). Given its banking 
status, LCH SA has access to the ECB Open market operations in USD.
 Replace LCH SA's liabilities in non EUR by EUR as per clearing 
rulebook

    (iii) Updated figure of maximum limit of liquidity injected in the 
settlement system to ease settlement.
    In the section of the Framework that describes how the settlement 
of physical securities is made and how such activity impact the 
liquidity of the CCP, LCH SA is updating the maximum level of liquidity 
to be injected daily in the settlement system to ease settlement flow.
    In particular, the CCP have defined for each Central Securities 
Depository (CSD) in which settlement takes place an amount of liquidity 
that is injected everyday to ease the settlement flow and such 
liquidity consumption is monitored by Operation team during the 
settlement cycle that occurs throughout the day.
    The updated figures have been defined as a function of the actual 
settlement activity observed by Operations team to optimize the 
management of the CCP liquidity.
    Moreover, in the same section of the Framework, it is described the 
mechanism of auto-collateralization which is a feature of T2S that 
enables to obtain the liquidity necessary to the finalization of 
transactions by pledging the security underlying the transaction at the 
Central Bank to get cash. It has been clarified that LCH SA 
successfully managed to test the transfer to its 3G pool (central bank 
liquidity) of securities coming from settlement for Italy, Spain and 
Germany transactions.
2. Statutory Basis
    LCH SA has determined that the Proposed Rule Change is consistent 
with the requirements of section 17A of the Act \10\ and regulations 
thereunder applicable to it. section 17A(b)(3)(F) of the Act requires, 
inter alia, that the rules of a clearing agency ``assure the 
safeguarding of securities and funds that are in its custody or control 
or for which it is responsible.'' \11\
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    \10\ 15 U.S.C. 78q-1.
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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    LCH SA believes that the Proposed Rule Change is consistent with 
the requirements of section 17A of the Act and regulations thereunder 
applicable to it, including Commission Rule 17Ad-22(e). In particular, 
section 17A(b)(3)(F) of the Act requires, inter alia, that the rules of 
a clearing agency be designed to ``promote the prompt and accurate 
clearance and settlement of derivatives agreements, contracts, and 
transactions''. The proposed changes in the Operational target 
described above under Item 3(1)(i) enhance the ability of LCH SA to 
manage its liquidity during the daily services it provides by properly 
anticipating potential scheduled needs (Default Fund reductions) as 
well as ensuring that the liquidity available is always sufficient to 
continue the clearing and settlement operations also in the event of 
extraordinary intraday liquidity injection in the settlement systems. 
The new proposed rule will further strengthen the robustness of the 
liquidity management of the Clearing Agency thus contributing to the 
prompt and accurate clearance and settlement of securities 
transactions. The proposed changes described above also provide the 
details about the means the Clearing Agency has to deal with liquidity 
shortfalls in non Euros that may arise during a default situation. By 
being allowed to leverage on different options the Clearing Agency has 
the ability to address such liquidity shortfalls without impacting its 
services and therefore promoting the accurate clearance and settlement 
of securities transactions. Finally, the proposed changes described 
under item (1) (iii) represent mainly an update of the figures of the 
liquidity amounts used for easing settlement in the different CSD that 
LCH SA uses. This update is the result of a periodic review performed 
by the LCH SA Operation team to optimize the liquidity management of 
the clearing house. By ensuring that the liquidity injected is 
proportional to the settlement activity the clearing house is promoting 
the prompt and accurate settlement of securities.
    As discussed above, LCH SA is proposing to amend the Framework to 
address specifically LCH SA's liquidity requirements in the event of 
Default Fund reduction or extraordinary intraday injection of liquidity 
in the settlement platforms. The proposed amendments will assist LCH SA 
in defining more accurately its liquidity requirements by assuring that 
LCH SA will maintain appropriate levels of liquidity. Specifically, the 
amended Framework will anticipate the effect of

[[Page 4230]]

scheduled reductions to the Default Fund amount or recalculate the 
liquidity indicators whenever significant extraordinary liquidity is 
injected intraday in the settlement systems.
    The policies and procedures set out in the amended Framework, 
therefore, are designed to enhance LCH SA's ability to measure, 
monitor, and manage the liquidity risk that may arise in connection 
with its activities as a covered clearing agency. As such the 
amendments to the Framework regarding LCH SA's liquidity requirements 
are consistent with the requirements of Regulation 17dA-22(e)(7)(i) 
\12\ requiring that a covered clearing agency's policies and procedures 
be reasonably designed to ensure that it maintains sufficient liquid 
resources in all relevant currencies to effect same-day and, where 
appropriate, intraday and multiday settlement of payment obligations 
with a high degree of confidence under a wide range of potential stress 
scenarios that includes the default of the participant family that 
would generate the largest aggregate payment obligation for it in 
extreme but plausible market conditions and also with Regulation 17dA-
22(e)(7)(ii) \13\ requiring a covered clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to ensure that it holds qualifying liquid resources 
sufficient to meet the minimum liquidity resource requirement in each 
relevant currency for which the covered clearing agency has payment 
obligations owed to clearing members.
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    \12\ 17 CFR 240.17Ad-22(e)(7)(i).
    \13\ 17 CFR 240.17Ad-22(e)(7)(ii).
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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.\14\ LCH SA does 
not believe the Proposed Rule Change would have any impact, or impose 
any burden, on competition. The Proposed Rule Change does not address 
any competitive issue or have any impact on the competition among 
central counterparties. LCH SA operates an open access model, and the 
Proposed Rule Change will have no effect on this model.
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    \14\ 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-2023-001 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-LCH SA-2023-001. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of LCH SA and on LCH SA's website 
at: https://www.lch.com/resources/rulebooks/proposed-rule-changes. All 
comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-LCH SA-2023-001 and should 
be submitted on or before February 14, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-01270 Filed 1-23-23; 8:45 am]
BILLING CODE 8011-01-P


