[Federal Register Volume 88, Number 122 (Tuesday, June 27, 2023)]
[Notices]
[Pages 41692-41695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-13562]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97786; File No. SR-LCH SA-2023-003]


Self-Regulatory Organizations; LCH SA; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to Liquidity Risk Modelling Framework

June 21, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 41693]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 8, 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 
described in Items I, II and III below, which Items have been primarily 
prepared by LCH SA. LCH SA filed the proposed rule change pursuant to 
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) \4\ thereunder, 
such that the proposed rule change was immediately effective upon 
filing with the Commission. On June 15, 2023, LCH SA filed Amendment 
No. 1 to the proposed rule change to make certain changes to the 
Exhibit 1A.\5\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as modified by Amendment No. 1 
(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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ Amendment No. 1 amends the Exhibit 1A in order to correct 
language provided in the Exhibit 1A's Section III.
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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 Modelling Framework 
(the ``Framework''), which describes the Liquidity Stress Testing 
framework by which the Collateral and Liquidity Risk Management 
department service (``CaLRM'') of LCH SA 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.\6\
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    \6\ LCH SA, a subsidiary of LCH Group and an indirect subsidiary 
of the London Stock Exchange Group plc (``LSEG''), 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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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 Proposed Rule Change is being adopted solely to reorganize the 
structure of the Framework to conform the Framework to the common 
template adopted by LSEG for use by each of its affiliates. The content 
of the current Framework has been fully transferred to the new LSEG 
template structure without any substantial changes in the wording of 
the existing paragraphs of the current Framework, other than the 
changes necessary to improve the clarity of the document or to increase 
consistency between the different sections and the appendix. To the 
extent that some general parts of the standardized LSEG template were 
not fully covered in the current Framework, these sections were either: 
(a) completed using the information taken from other LCH SA internal 
documents; or (b) drafted by CaLRM to increase the level of detail of 
the Framework.\7\
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    \7\ Exhibit 3.1 [sic] is a chart that maps the table of contents 
of the current Framework to the table of contents of the amended 
Framework following the LSEG template.
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    In this regard:
     An executive summary has been added to the Framework to 
provide an overview of the Framework and highlight its main principles 
along with the methodology for the assessment of the liquidity risk, in 
particular noting that the Framework details various ongoing monitoring 
activities related to the liquidity risk model such as the daily 
assessment of the liquidity resources available to meet the liquidity 
requirements that can arise either due to operational activities or due 
to default of any of the CCP members, periodic reverse stress testing 
and validation of stress testing framework along with the model 
governance activities for making any changes to LCH SA's liquidity risk 
model;
     Section 1.4 of the amended Framework, Model Governance, 
was taken from paragraph 87 of the LCH Risk Policy, Liquidity Risk, and 
provides an overview of the governance process to be followed depending 
on the different risk model actions (e.g. major change, non-material 
change, model monitoring, model validation);
     Section 1.5 of the amended Framework, Model Exposure, was 
taken from paragraph 86 of the LCH Risk Policy, Liquidity Risk, and 
classifies the importance of the model as high as an incorrect model 
could lead to a liquidity shortfall and have a significant impact on 
the CCP's liquidity resources;
     Section 1.6.1.3 Synthesis, appendix 6.3 Reminder of SA's 
sources of liquidity and related risk drivers and appendix 6.5 
Liquidity risk monitoring reports of the amended Framework: It has been 
specified that the intraday credit line provided by Norges Bank can be 
used by LCH SA to cover the non-Euro Variation margin payments related 
to the activity of Euronext Oslo;
     Section 1.6.2: A spelling error have been corrected from 
``Transfer to the 3G pool tested on Feb 15th 2019. For Spain, Germany, 
and Belgium the liquidity impact is currenctly equal to the auto-
collateralization amount (successful transfer tested in September 
2019)'' to ``Transfer to the 3G pool tested on Feb 15th 2019. For 
Spain, Germany, and Belgium the liquidity impact is currently equal to 
the auto-collateralization amount (successful transfer tested in 
September 2019)'';
     Section 2 of the amended Framework, Limitations and 
Compensating Controls, prepared by CaLRM, describes the features of the 
amended Framework;
     Sections 3.1 and 3.2 of the amended Framework, Model 
Choice and Industry Standard, respectively, prepared by CaLRM, explain 
that LCH SA calculates its daily liquidity resources requirements using 
the industry-standard cover 2 approach, which is also required by 
Article 53 of Regulation (EU) No. 153/2013;
     Section 4.1.2 of the amended Framework, Model Inputs and 
Variable Selection, prepared by CaLRM, summarizes the factors that are 
taken into account in calculating liquidity resources and liquidity 
requirements, which are set out in greater detail in Section 4.1.5, 
Model assumptions, of the amended Framework.
     Section 4.1.4 of the amended Framework, Mathematical 
formula, derivation and algorithm, and numerical approximation, 
prepared by CaLRM, summarizes the formula for calculating the 
operational target, i.e., the amount of liquidity required to be held 
to satisfy the liquidity needs related to the operational management of 
LCH SA in a stressed environment that does not lead to a member's 
default, as explained in Section 4.1.5, Model assumptions, of the 
amended Framework. In particular, the content of sections 4.1.4 and 
4.1.5 of the amended Framework have been transposed from the section 
5.2.1.1 of the current Framework Assumption. The separation of 
information has the

[[Page 41694]]

purpose of providing more clarity to the document and comply with the 
LSEG template format; the operational risk'';
     Section 4.1.5 Model Assumptions of the amended Framework 
reflects two rewording that increase the clarity of the document. In 
particular, the sentence ``The difference min(computed-actual,0) is 
reported in the OP from the 1st of the month till the day that computed 
DF = actual DF'' has been updated to ``The difference min(computed-
actual,0) is reported in the OP from the 1st of the month until the day 
that computed DF = actual DF and the sentence '' To have a 100% 
alignment with actual validation and settlement flow a manual 
intervention would be necessary to be performed every beginning of the 
month in order to manually input the date in the program but this is 
not recommendable since it would increase significantly the operational 
risk'' is proposed to be modified as ``To have a 100% alignment with 
actual validation and settlement flow, a manual intervention would need 
to be performed every beginning of the month in order to manually input 
the date in the program but this is not recommended since it would 
increase significantly the operational risk'';
     Sections 4.2.2 and 4.3.2, Model inputs and Variable 
selection of the amended Framework, prepared by CaLRM to complete the 
LSEG template, summarizes the variables used to calculate the liquidity 
coverage ratio (``LCR'') for LCH SA and CC&G, which are set out in 
detail in Sections 4.2.4 and 4.3.4, respectively, of the amended 
Framework;
     Sections 4.1.3, 4.2.3 and 4.3.3, Model outputs of the 
amended Framework, prepared by CaLRM to complete the LSEG template, 
states that, based on the liquidity profile for that day, CaLRM 
generates daily reports on LCH SA's operational liquidity resource 
requirements, and the LCR for LCH SA and CC&G, respectively;
     Section 5.1 of the amended Framework, Ongoing Monitoring 
reflects the fact after the transposition to the new LSEG template the 
sections detailing the calculation of Operation target (4.1), LCR and 
liquidity buffer (4.2) now precede the presentation of the ongoing 
monitoring and therefore the following sentence have been removed ``The 
next section provides with the operational target, LCR, the liquidity 
buffer calculation.'';
     Section 5.4 of the amended Framework, Model Change as 
Applicable, is drawn from paragraph 88 of the LCH Risk Policy, 
Liquidity Risk; and details the criteria considered to assess the 
materiality of a risk model change;
     Section 5.5 of the amended Framework, Testing Summary and 
Model Limitations, was prepared by CaLRM and summarizes the information 
set out in paragraphs 95-97 of the LCH Risk Policy, Liquidity Risk, to 
give an overview of the risk model performance assessment that includes 
daily monitoring, periodic reverse stress testing and annual model 
validation.
     Appendix 6.3 Reminder of SA's sources of liquidity and 
related risk drivers in the amended framework: A footnote number have 
been updated to clarify if the specific risk drivers identified in the 
table are driven by a change in behavior of our membership, a Credit 
Risk consideration, a Market Risk consideration or an Operational Risk 
consideration.
     Appendix 6.4 Liquidity risk drivers synthesis by reports 
in the amended Framework: The format of the table that summarizes the 
different risk drivers has been adjusted to better reflect the mapping 
of the single risk drivers under the appropriate three macro categories 
to which they may belong Defaulter, Closure of Italian Debt Activities, 
BAU. In Particular,

--the Defaulter category includes the following risk drivers: Non 
default of EU Sovereign, Settlement, VM, ECB Haircut, Investment losses
--The Closure of Italian debt Activities category includes the 
following risk drivers: IM+AM Italy and CC&G Default Fund Italy
--The BAU category includes the following risk drivers: Excess, 
Substitutions, Avoiding fails, Margin reductions, VM to pay to CC&G, 
Default Fund Reduction. These changes are considered not substantive 
because they relate only to a format adjustment of a table described in 
the annex and not to a change in the calculation or reporting of 
indicators for liquidity monitoring as described in sections 4.1, 4.2 
and 4.3. The changes improve the coherence between the core sections of 
the document and the appendix.
2. Statutory Basis
    LCH SA has determined that the Proposed Rule Change is consistent 
with the requirements of Section 17A of the Act \8\ and regulations 
thereunder applicable to it. In particular, Section 17A(b)(3)(F) of the 
Act requires, inter alia, that the rules of a clearing agency should be 
designed to ``assure the safeguarding of securities and funds that are 
in its custody or control or for which it is responsible.\9\ In 
addition, Regulation 17Ad-22(e)(7)(i) \10\ requires a covered clearing 
agency's policies and procedures to be reasonably designed to assure 
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. Further, Regulation 17Ad-22(e)(7)(ii) \11\ requires 
a covered clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to assure 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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    \8\ 15 U.S.C. 78q-1.
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 17 CFR 240.17Ad-22(e)(7)(i).
    \11\ 17 CFR 240.17Ad-22(e)(7)(ii).
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    As discussed above, the sole purpose of the amended Framework is to 
reorganize the structure of the Framework to conform the Framework to 
the common template adopted by LSEG for use by each of its affiliates. 
The content of the current Framework has been fully transferred to the 
new LSEG template structure without any substantial changes in the 
wording of the existing paragraphs of the current Framework. To the 
extent that some general parts of the LSEG standardized template were 
not fully covered in the current Framework, these sections were either: 
(a) completed using the information taken from other LCH SA internal 
documents; or (b) drafted by CaLRM to increase the level of detail of 
the Framework.
    The policies and procedures set out in the amended Framework,\12\ 
therefore, continue to be consistent with the requirements of Section 
17A(b)(3)(F) of the Act \13\ and Regulation 17Ad-22(e)(7)(i) \14\ and 
Regulation 17Ad-22(e)(7)(ii).\15\
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    \12\ The Commission has previously determined that the Framework 
is consistent with the requirements of Section 17A(b)(3)(F) of the 
Act and Regulation 17Ad-22(e)(7)(i) and Regulation 17Ad-
22(e)(7)(ii). See, Order Approving Proposed Rule Change Relating to 
the Amendments to LCH SA's Liquidity Risk Modelling Framework, 
Release No. 34-90541 (Dec. 1, 2020).
    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(e)(7)(i).
    \15\ 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.\16\ 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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    \16\ 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

    Because the foregoing proposed rule change does not: (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-
4(f)(6) \18\ thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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-2023-003 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-2023-003. 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 such filings will also be available for inspection 
and copying at the principal office of LCH SA and on LCH SA's website 
at http://www.lch.com/resources/rules-and-regulations/proposed-rule-changes.
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to File Number SR-LCH SA-2023-003 and 
should be submitted on or before July 18, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-13562 Filed 6-26-23; 8:45 am]
BILLING CODE 8011-01-P


