
[Federal Register Volume 88, Number 147 (Wednesday, August 2, 2023)]
[Notices]
[Pages 50923-50926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-16389]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98009; File No. SR-LCH SA-2023-004]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to Triparty Collateral Mechanism

July 27, 2023.

I. Introduction

    On May 30, 2023, 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 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change (``Proposed Rule Change'') to 
amend its Credit Default Swap Clearing Procedures (``Procedures'') and 
Credit Default Swap Clearing Rule Book (``Rule Book'') to reflect the 
introduction of a triparty collateral mechanism to the CDSClear 
service. The Proposed Rule Change was published for comment in the 
Federal Register on June 16, 2023.\3\ The Commission has not received 
any comments on the Proposed Rule Change. For the reasons discussed 
below, the Commission is approving the Proposed Rule Change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 97706 (June 12, 2023), 
88 FR 39492 (June 16, 2023) (File No. SR-LCH-2023-004) (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    LCH SA is a clearing agency registered with the Commission for the 
purpose of clearing security-based swaps (specifically, credit-default 
swaps or ``CDS''). LCH SA has procedures in place to deal with the 
default of a clearing member who participates in its CDS clearing 
business. In order to minimize the contagion risk of such a default, 
LCH SA calculates margin requirements for each clearing member and 
requires each member to transfer collateral to LCH SA to meet their 
respective margin requirements.
    Currently, LCH SA requires members participating in its CDSClear 
service

[[Page 50924]]

(the ``Clearing Members'') to manage the pledging and transfer of 
collateral to LCH SA on a bilateral basis. For LCH SA's non-U.S. 
business lines (e.g., its repo clearing business), LCH SA offers a 
``triparty collateral'' mechanism where LCH SA and a clearing member 
may authorize an agent to enter settlement instructions on the clearing 
member's behalf into the LCH SA's securities settlement system.\4\ LCH 
SA states that members benefit because such a triparty process is more 
efficient operationally.\5\ LCH SA members requested that LCH SA 
harmonize collateral management processes across business lines by 
introducing a triparty collateral management process into LCH SA's CDS 
business.\6\
---------------------------------------------------------------------------

    \4\ The agent's ability to enter settlement instructions on the 
clearing member's behalf would be done for the purposes of 
transferring collateral to LCH SA or releasing such collateral, and 
would affect movements of securities between a clearing member 
account and LCH SA by the relevant triparty agent on a full title 
transfer basis.
    \5\ See Notice, 88 FR at 39493.
    \6\ To facilitate the use of a triparty collateral mechanism, 
the clearing member, the relevant triparty agents, and LCH SA must 
enter into a specific contractual arrangement.
---------------------------------------------------------------------------

    LCH SA now proposes to offer the triparty collateral mechanism to 
its members participating in CDSClear.\7\ LCH SA is not changing 
collateral eligibility or concentration limits, but rather, is merely 
providing for a different process for posting acceptable collateral. To 
effectuate the change, LCH SA proposes the following changes to its 
rules.
---------------------------------------------------------------------------

    \7\ LCH SA is proposing to offer the triparty collateral 
mechanism as an optional collateral management tool, but does not 
intend to obligate its members to use the tri-party mechanism.
---------------------------------------------------------------------------

A. Amendments to Rule Book

    LCH SA is proposing to modify Section 1.1.1 (Terms defined in the 
CDS Clearing Rule Book) to include a new term, ``Triparty 
Documentation,'' which refers to the documentation of the agreement 
entered into between LCH SA, the relevant triparty agent, and a 
Clearing Member having exercised its option to transfer Eligible 
Collateral \8\ on a full title transfer basis to LCH SA through a 
Triparty Documentation pursuant to Section 3 of the Procedures. Section 
3 includes procedures related to collateral, variation margin, and cash 
payment.
---------------------------------------------------------------------------

    \8\ Eligible Collateral is defined by LCH as ``Such securities 
and other types of non Cash Collateral as are set out in Section 3 
of the Procedures as being acceptable by LCH SA for the purposes of 
satisfying a Clearing Member's Margin Requirements and/or novating 
Original Transactions, as applicable.''
---------------------------------------------------------------------------

    LCH SA also proposes to amend section 2 of its Rule Book to add a 
new subsection (xxiv) to Section 2.2.1.1, to provide for a new 
membership requirement where the triparty applicant shall accept to 
comply with the performance of its obligations pursuant to a Triparty 
Documentation. Further, LCH SA proposes to amend Section 2.2.2.1 to add 
a new subsection (vii) to require a Clearing Member to comply with the 
performance of the obligations pursuant to a Triparty Documentation.\9\
---------------------------------------------------------------------------

    \9\ The subsequent subsections would also need to be renumbered 
for both amendments.
---------------------------------------------------------------------------

    LCH SA proposes to make several amendments to Section 4 of the Rule 
Book, which addresses risk management and collateral requirements. 
Since the Triparty Documentation will provide for the haircut that will 
apply to the relevant collateral, LCH SA proposes to add a reference to 
the Triparty Documentation in Section 4.2.6.4 which currently provides, 
among others, that LCH SA may apply haircuts to Eligible Collateral as 
set out on the LCH SA website. LCH SA also proposes to add the failure 
of a Clearing Member to perform its obligations in accordance with, or 
a breach of, any Triparty Documentation to the list of Events provided 
for in Section 4.3.1.1, which describes events that might constitute a 
Clearing Member default, as this is currently the case in respect of 
the CDS Clearing Documentation and the Pledge Agreement.
    LCH SA also proposes to make the following conforming Rule Book 
changes that are not related to the implementation of the Triparty 
Documentation solution for the CDSClear service. Specifically, the 
definition of ``Pledged Eligible Collateral'' in Section 1.1.1 (Terms 
defined in the CDS Clearing Rule Book) would be amended by removing a 
reference to a Clearing Notice, because the list of Eligible Currencies 
and collateral is already set out in Section 3 of the Procedures in 
accordance with Section 4.2.6.1, and the proposed amended Section 3 of 
the Procedures would provide where the list of collateral (including 
Pledged Eligible Collateral) could be found. Section 2.2.2.1 would be 
amended to correct a cross-reference in subsection (iv). Finally, LCH 
SA would amend Section 4.2.6.1 by making a reference to Section 3 of 
the Procedures regarding the conditions that will govern the 
notification of any change in eligible currencies and collateral.

B. Amendments to Procedures

    LCH SA proposes to modify Section 3 of the Procedures, which covers 
the topics of collateral, variation margin, and cash payments, to 
incorporate terms for implementing the triparty collateral mechanism. 
The Proposed Rule Change amends Section 3.10 (Eligible Collateral 
transferred with full title) to include securities transferred pursuant 
to a Triparty Documentation, by adding a new paragraph to Section 
3.10.2 (Eligible Collateral provided pursuant to a Triparty 
Documentation) and a new introductory paragraph stating that Eligible 
Collateral transferred with full title may be provided by a Clearing 
Member either on a bilateral basis or pursuant to a Triparty 
Documentation in accordance.
    The Proposed Change will move current Section 3.10 under a new 
paragraph in Section 3.10.1 entitled ``Eligible Collateral provided on 
a bilateral basis,'' and any reference to collateral provided with full 
title transfer in this new paragraph in Section 3.10.1 will be 
clarified by adding that such Eligible Collateral is provided on a 
bilateral basis. LCH SA proposes to replace any cross-reference to 
Section 3.10 in Section 3 of the Procedures with a cross-reference to a 
new paragraph in Section 3.10.1 where necessary. As a result of the new 
paragraph in Section 3.10.2, a cross-reference to subsection (d) will 
be added to each section referring to the return of any type of 
collateral. This cross-reference allows for Eligible Collateral to be 
transferred with full title pursuant to a Triparty Documentation.
    The new paragraph in Section 3.10.2, as further described below, 
will mainly replicate the paragraph in Section 3.10.1, but will amend 
the content to refer to the Triparty Documentation. The new amendments 
would include the requirement for a Clearing Member to enter into the 
Triparty Documentation, as set out in a new sub-paragraph (a) and the 
reference to triparty accounts to be used by LCH SA. However, due to 
the use of a triparty agent for managing Clearing Member Collateral 
posted with LCH SA, there will be some differences in the timelines 
applicable to the Clearing Member for the purposes of transferring, or 
requesting return of, securities subject to the Triparty Documentation, 
as described below.
    Subsection (a) of Section 3.10.2 (General information) states that 
the Clearing Member, a triparty agent (either Euroclear Bank or 
Euroclear France), and LCH SA may enter into the relevant Triparty 
Documentation, whose documentation is available upon request to the 
CDSClear Business Development & Relationship Management team. Under the 
Triparty Documentation, the relevant triparty agent will be authorized 
by LCH SA and the Clearing

[[Page 50925]]

Member to enter settlement instructions on their behalf into the 
relevant securities settlement system to transfer with full title 
securities as Eligible Collateral between LCH SA and the Clearing 
Member.
    Sub-paragraph (b) (Securities accounts) states that LCH SA will 
hold collateral in security accounts at the relevant triparty agent(s) 
as applicable for the Clearing Member's house activity, and separately, 
client activity (excluding any FCM Clients, since the provision of 
securities pursuant to this triparty collateral solution will not be 
permitted for FCM Clients pursuant to new sub-paragraph (c) of new 
paragraph 3.1.0.2, indent (ii)).\10\
---------------------------------------------------------------------------

    \10\ LCH SA may invest eligible collateral provided to LCH SA 
with full title pursuant to a triparty arrangement in accordance 
with Paragraph 3.11(b).
---------------------------------------------------------------------------

    Sub-paragraph (c) will include provisions describing the transfer 
of Eligible Collateral pursuant to a Triparty Documentation; the 
purpose of such transfer is either for transferring additional 
collateral or substituting such collateral for any alternative 
collateral recorded in its collateral accounts. To transfer collateral 
on a specific business day, a Clearing Member would need to notify LCH 
SA of its request to transfer such Eligible Collateral pursuant to a 
Triparty Documentation by no later than 16:00 CET on the prior business 
day. If the Clearing Member notifies LCH SA that the collateral will 
move client accounts, the member must specify which client account 
shall record Eligible Collateral; otherwise, LCH SA will not accept the 
transfer request.\11\
---------------------------------------------------------------------------

    \11\ LCH SA makes intra-day margin calls throughout the day. 
Whether the collateral will be taken into account with regard to a 
specific intra-day margin call is dependent on when LCH SA received 
confirmation from a Clearing Member's triparty agent. Proposed 
section 3.10.02(c) describes how confirmation timing affects margin 
calculations in more detail.
---------------------------------------------------------------------------

    Sub-paragraph (d) addresses the applicable conditions for returning 
collateral to a Clearing Member. A Clearing Member must request a 
return of collateral no later than 12:00 CET on the business day before 
they want to receive the collateral. LCH SA would transfer the 
requested collateral between 12:25 and 12:55 CET on the requested 
day.\12\ Any return request received by LCH SA shall be deemed firm and 
irrevocable. By 12:00 CET on the day the collateral is returned, LCH SA 
will re-calculate the value of the Eligible Collateral to be returned 
(the ``Eligible Triparty Collateral Value''). If LCH SA holds 
sufficient collateral (other than that which is to be returned) to 
cover the relevant margin requirement, it will return the collateral. 
If LCH SA does not hold sufficient collateral (other than that which is 
to be returned) to cover the relevant margin requirement, LCH SA will 
attempt to debit an amount of Euros equal to the Eligible Triparty 
Collateral Value from the TARGET2 \13\ Account(s) of the Clearing 
Member (or its TARGET2 Payment Agent), after which LCH SA would return 
the collateral.\14\ LCH SA would instruct the triparty agent(s) to 
return the collateral between 13:00 and 15:00 CET, in advance of the 
relevant Central Securities Depository/International Central Securities 
Depository cut-off time (except in exceptional circumstances, as 
determined in an objective and commercially reasonable manner). The 
last paragraph of new paragraph 3.10.2 will provide for exceptional 
time limits for notification of transfer and return requests in cases 
of atypical market conditions.
---------------------------------------------------------------------------

    \12\ Section 3.7(c) of the Procedures defines the timing of 
collateral calls, and specifies the 12:25 to 12:55 CET period as a 
window to be use for the purpose of collateral substitutions upon a 
Clearing Member's request, which LCH SA refers to as the 
``Additional Specific Collateral Slot.''
    \13\ TARGET2 is the system known as Trans-European Automated 
Real-time Gross Settlement Express Transfer 2.
    \14\ If LCH SA cannot debit the required amount of Euros, it 
would not return the requested collateral.
---------------------------------------------------------------------------

    Current Section 3.9 of the Procedures addresses Eligible 
Collateral. In this section, LCH SA proposes to insert language stating 
that additional eligibility criteria and concentration limits apply for 
Triparty Documentation.\15\ LCH SA also proposes to insert language 
stating that it may amend the list of eligible securities by 
publication of a Clearing Notice, and add new eligibility criteria and 
concentration limits for Eligible collateral transferred with full 
title pursuant to a Triparty Documentation, subject to the prior 
consent of the relevant triparty agent. As a result, the reference to a 
Clearing Notice mentioned in Section 3.13 applicable to Eligible 
Collateral pursuant to the Pledge Agreement will be removed, as there 
will be no Clearing Notice which describes such Eligible Collateral; 
all relevant information will be found on the LCH SA website.
---------------------------------------------------------------------------

    \15\ The triparty documentation would only be able to add 
requirements, and could not reduce the eligibility criteria or 
concentration limits specified in LCH SA's rules.
---------------------------------------------------------------------------

    LCH SA also proposes changes to Section 3.9 to clarify that 
Eligible Collateral transferred with full title may be provided on a 
bilateral or trilateral basis, where necessary. LCH SA is proposing to 
amend sub-paragraph (c) (Events affecting the eligibility of Eligible 
Collateral) to exclude securities transferred pursuant to the triparty 
collateral solution from the current management process applicable to 
Collateral Events.\16\ Such Collateral Events will be managed by the 
relevant triparty agent in accordance with the Triparty Documentation. 
Consequently, the scope of Section 3.12 is reduced to Eligible 
Collateral transferred with full title on a bilateral basis.
---------------------------------------------------------------------------

    \16\ A ``Collateral Event'' is defined as either a suspension 
from trading of such security by an exchange or the public 
announcement of a take-over bid, public exchange offer, split or 
reverse split involving the entity issuing such security.
---------------------------------------------------------------------------

    LCH SA proposes other amendments to Section 3 of the Procedures in 
order to correct some cross-references or typographical errors.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act requires the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
the Proposed Rule Change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the 
organization.\17\ For the reasons given below, the Commission finds 
that the Proposed Rule Change is consistent with Section 17A(b)(3)(F) 
of the Act \18\ and Rule 17Ad-22(e)(21) thereunder.\19\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(2)(C).
    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(e)(21).
---------------------------------------------------------------------------

A. Consistency with Section 17A(b)(3)(F) of the Act

    Under Section 17A(b)(3)(F) of the Act, LCH SA's rules, among other 
things, must be ``designed to promote the prompt and accurate clearance 
and settlement of . . . derivative agreements, contracts, and 
transactions . . .'' \20\ Based on its review of the record, and for 
the reasons discussed below, the Commission believes that LCH SA's 
changes are consistent with Section 17A(b)(3)(F) of the Act because LCH 
SA is offering an additional clearing mechanism to its members.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    LCH SA is proposing to allow CDSClear Clearing Members to cover 
their margins with eligible securities through the use of a triparty 
agent. Clearing Members are under no obligation to use this solution. 
This change will broaden the solutions for Clearing Members to manage 
collateral posted to LCH SA. The introduction of the triparty mechanism 
would align collateral management practices for members across LCH SA 
business lines and enable the transfer of securities as collateral in a 
more efficient and automated way than on a bilateral basis. Offering a 
more efficient and automated

[[Page 50926]]

process may, for members who choose to use it, reduce the overall cost 
of clearing. Reducing the overall cost of clearing could, in turn, lead 
Clearing Members to clear more products. Thus, these changes would 
contribute to the prompt and accurate clearance process and settlement 
of securities transactions and derivative agreements, contracts, and 
transactions and to assure the safeguarding of securities, which is 
consistent with the requirements of Section 17(A)(b)(3)(F).\21\
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes, therefore, that the Proposed Rule Change 
is consistent with the requirements of Section 17A(b)(3)(F) of the 
Act.\22\
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(21) Under the Act

    Rule 17Ad-22(e)(21) requires covered clearing agencies to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to be efficient and effective in meeting 
the requirements of its participants and the markets it serves, and 
have the covered clearing agency's management regularly review the 
efficiency and effectiveness of its clearing and settlement 
arrangements; operating structure, including risk management policies, 
procedures, and systems; scope of products, cleared or settled; and use 
of technology and communication procedures.\23\ In adopting Rule 17Ad-
22(e)(21), the Commission provided guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures that address efficiency and effectiveness, 
stating that it should consider whether its design meets the needs of 
its participants, particularly with regard to choice of operating 
structure and use of technology and procedures.\24\
---------------------------------------------------------------------------

    \23\ 17 CFR 240.17Ad-22(e)(21).
    \24\ See Standards for Covered Clearing Agencies, Securities 
Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR 70786, 70841 
(Oct. 13, 2016).
---------------------------------------------------------------------------

    LCH SA's members expressed interest in using the triparty mechanism 
to the CDSClear business to harmonize their operational process across 
all clearing services of LCH SA.\25\ The triparty collateral mechanism 
is an optional solution that would reduce the number of manual actions 
necessary in the processing of non-cash collateral deposit and release 
for both the clearing agency and the Clearing Members. Reliance on the 
triparty mechanism could reduce the manual steps necessary for a 
Clearing Member to allocate a basket of securities in LCH SA's system 
with an automatic process for the settlement of margin calls and 
handling of coupons. Such automation would increase efficiency and 
allows for additional use of technology with the settlement of margin 
call.
---------------------------------------------------------------------------

    \25\ See Notice, 88 FR at 39493.
---------------------------------------------------------------------------

    The Commission believes, therefore, that the Proposed Rule Change 
is consistent with the requirements of Rule 17Ad-22(e)(21) under the 
Act.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22(e)(21).
---------------------------------------------------------------------------

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, Section 17A(b)(3)(F) of the Act \27\ and Rule 17Ad-
22(e)(21) thereunder.\28\
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 17 CFR 240.17Ad-22(e)(21).
---------------------------------------------------------------------------

    It Is Therefore Ordered pursuant to Section 19(b)(2) of the Act 
that the Proposed Rule Change (SR-LCH SA-2023-004) be, and hereby is, 
approved.\29\
---------------------------------------------------------------------------

    \29\ In approving the Proposed Rule Change, the Commission 
considered the proposal's impacts 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.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-16389 Filed 8-1-23; 8:45 am]
BILLING CODE 8011-01-P


