
[Federal Register Volume 88, Number 173 (Friday, September 8, 2023)]
[Notices]
[Pages 62118-62126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-19354]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98276; File No. SR-LCH SA-2023-005]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to Portfolio Margining

September 1, 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 
revise its portfolio margining program (``Program'') and make other 
unrelated changes. The Proposed Rule Change was published for comment 
in the Federal Register on July 19, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 97888 (July 13, 2023), 
88 FR 46221 (July 19, 2023) (File No. SR-LCH-2023-005) (``Notice'').
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II. Description of the Proposed Rule Change

    LCH SA is a clearing agency that offers clearing of, among other 
things, credit-default swaps (``CDS'').\4\ LCH SA is registered with 
the Commission for clearing CDS that are security-based swaps (``SBS'') 
and with the Commodity Futures Trading Commission (``CFTC'') for 
clearing CDS that are swaps. As part of its CDS clearing business, LCH 
offers clearing of CDS submitted by Clearing Members on behalf of their 
U.S. clients. As part of this U.S. client clearing, LCH previously 
proposed, and the Commission approved, certain changes to its rules and 
procedures to allow for portfolio margining.\5\
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    \4\ Capitalized terms used but not defined herein have the 
meanings specified in the LCH SA Rule Book (``Rule Book''), CDS 
Clearing Supplement (``Supplement''), CDS Clearing Procedures 
(``Procedures''), and FCM/BD CDS Clearing Regulations 
(``Regulations''), as applicable.
    \5\ See Order Approving Proposed Rule Change to Adopt ICC's 
Enhanced Margin Methodology, Exchange Act Release No. 66001 (Dec. 
16, 2011).
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    Portfolio margining is the practice by which transactions in SBS 
are cleared and held on a commingled basis with transactions in swaps. 
Under such a portfolio margining arrangement, Clearing Members are able 
to maintain reduced levels of margin that are commensurate with the 
risks of the portfolio based on correlations in a Clearing Member's 
cleared CDS positions consisting of both swaps and SBS. LCH is required 
to conduct its portfolio margining program pursuant to the terms and 
conditions of an exemptive order issued by the Commission,\6\ as well 
as an exemptive order issued by the Commodity Futures Trading 
Commission (``CFTC'').\7\ Under these orders, LCH SA's Clearing Members 
that are registered future commission merchants (``FCM'') and broker-
dealers (``BD'') are authorized to clear and hold SBS transactions a 
commingled basis with cleared swaps on behalf of their clients (``FCM/
BD Clients'').
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    \6\ Exchange Act Release 34-93501 Order Granting Conditional 
Exemptions Under the Securities Exchange Act of 1934 in Connection 
With the Portfolio Margining of Cleared Swaps and Security-Based 
Swaps That Are Credit Default Swaps'', 86 FR 61357 (November 5, 
2021) (``Portfolio Margining Order''). The Portfolio Margining Order 
replaced a similar Commission order issued in 2012. See Order 
Granting Conditional Exemptions under the Securities Exchange Act of 
1934 in Connection with Portfolio Margining of Swaps and Security-
based Swaps, Exchange Act Release No. 68433 (Dec. 12, 2012) 77 FR 
75211 (Dec. 19, 2012).
    \7\ See Treatment of Funds Held in Connection with Clearing by 
LCH SA of Single-Name Credit Default Swaps, Including Spun-Out 
Component Transactions (Nov. 1, 2021), available at https://www.cftc.gov/media/6711/lchsa4dorder11022021/download.
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    The purpose of the Proposed Rule Change is to revise and update LCH 
SA's portfolio margining program (the ``Program''). The Proposed Rule 
Change would amend certain provisions of the Rule Book and Procedures 
regarding collateral, the client collateral buffer, and the release of 
collateral to a Clearing Member. The Proposed Rule Change would update 
LCH SA's Liquidity Risk Modelling Framework (``LRMF'') with respect to 
the liquidity resources and requirements applicable to FCM/BD Clearing 
Members. Finally, The Proposed Rule Change will also make other 
miscellaneous amendments to LCH SA's Rule Book and Procedures. These 
miscellaneous amendments cover Time References, Real Time Session, and 
Personnel Requirements.

A. Portfolio Margining Program

    As discussed above, LCH first established the Program in 2021. 
Currently, the basis for the Program is primarily Article 6.2.1.1 of 
the Rule Book and Section 3 of the Procedures. As discussed further 
below, the Proposed Rule Change would delete Article 6.2.1.1 from the 
Rule Book, replace it with a new Regulation 7, and revise Section 3 of 
the Procedures.
Article 6.2.1.1(iii) of the Rule Book and Regulation 7
    Article 6.2.1.1(iii) currently provides that an FCM/BD Clearing 
Member that is both an FCM and a BD may elect to clear and hold FCM/BD 
Cleared Transactions that are SBS for FCM/BD Clients in the FCM/BD 
Swaps Client Account Structure on a commingled basis with Cleared Swaps 
and margin such combined positions on a portfolio basis in compliance 
with Applicable Laws, provided that each FCM/BD Client is an eligible 
contract participant as defined in Section 1a(18) of the Commodity 
Exchange Act. As mentioned, the Proposed Rule Change would delete this 
provision and replace with a new Regulation 7, as part of the FCM/BD 
CDS Clearing Regulations. New Regulation 7 would maintain the 
requirements currently found in Article 6.2.1.1(iii) while also 
clarifying operation of the program.
    Paragraph (a) of Regulation 7, In General, would define Program as 
the ability of FCM/BD Clearing Members, on behalf of their FCM/BD 
clients, to portfolio margin FCM/BD Cleared Transactions \8\ that are 
SBS with FCM/BD Cleared Transactions that are Cleared Swaps.\9\
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    \8\ The Proposed Rule Change would define the term ``FCM/BD 
Portfolio Margining Transaction'' to mean an FCM/BD Cleared 
Transaction that is an SBS and which is held in the FCM/BD Swaps 
Client Account Structure pursuant to the Portfolio Margining 
Program. The Proposed Rule Change would add references to this new 
defined term, where relevant, in the Regulations, the Procedures, 
and the Rule Book.
    \9\ The Definitions section of the Regulations will be amended 
to define the ``Portfolio Margining Program'' by making a direct 
reference to Regulation 7(a) in the Regulations.
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    Paragraph (b) of Regulation 7, Participation, would state that FCM/
BD Clearing Members may participate in the Program by providing LCH SA 
materials that LCH SA may require from time to time.\10\ This section 
would also provide that, in providing these materials to LCH SA, the 
FCM/BD Clearing Member shall be deemed to represent that: (i) it is 
both an FCM and a BD and neither such status has been

[[Page 62119]]

revoked; (ii) it is in compliance with the applicable requirements of 
the Portfolio Margining Order and the CFTC Portfolio Margining Order; 
and (iii) each relevant FCM/BD Client is an eligible contract 
participant as defined in Section 1a(18) of the Commodity Exchange Act.
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    \10\ A ``Clearing Member'' is defined as a general member or a 
select member, as the context requires.
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    Paragraph (c) of Regulation 7, Operation, would provide that, 
following the portfolio margining start date, all FCM/BD Cleared 
Transactions that are SBS for the relevant FCM/BD Client will be 
treated as FCM/BD Portfolio Margining Transactions and will be held 
(along with any associated collateral) in the FCM/BD Swaps Client 
Account Structure on a commingled basis with FCM/BD Cleared 
Transactions that are Cleared Swaps for such FCM/BD client. Further, 
all such FCM/BD Portfolio Margining Transactions will constitute 
Cleared Swaps for purposes of the CDS Clearing Rules and the resulting 
combined positions will be margined on a portfolio basis in respect of 
the relevant FCM/BD Client. Finally, this section would provide that 
the relevant FCM/BD Client shall be deemed to acknowledge and agree 
that any property used to margin, guarantee or secure the FCM/BD 
Portfolio Margining Transactions will not receive customer protection 
treatment under the Exchange Act or Securities Investor Protection Act 
of 1970 and will instead receive customer protection treatment under 
the commodity broker liquidation provisions of the U.S. Bankruptcy Code 
and the rules and regulations promulgated thereunder.
    In addition to new Regulation 7, the Proposed Rule Change would 
amend other sections of the Regulations to make conforming amendments. 
In the definitions section, the Proposed Rule Change would add, among 
other things, add defined terms for Portfolio Margining Program, SEC 
Portfolio Margining Order, and FCM/BD Portfolio Margining 
Transaction.\11\ The Proposed Rule Change also would amend the 
definition of the LCH Cleared Swaps Client Segregated Depository 
Account to include FCM/BD Portfolio Margining Transactions.\12\ 
Similarly, the Proposed Rule Change would amend the definition of the 
LCH SBS Client Segregated Depository Account to exclude any FCM/BD 
Portfolio Margining Transactions.\13\
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    \11\ As mentioned above, the term ``FCM/BD Portfolio Margining 
Transaction'' would mean an FCM/BD Cleared Transaction that is an 
SBS and which is held in the FCM/BD Swaps Client Account Structure 
pursuant to the Portfolio Margining Program. The Proposed Rule 
Change would add references to this new defined term, where 
relevant, in the Regulations, the Procedures, and the Rule Book. See 
supra note 8.
    \12\ Cleared Swaps Client Segregated Depository account is 
defined as the omnibus account (which will consist of one or more 
accounts at one or more permitted depositories which are commingled 
for purposes of the applicable provisions of the Commodity Exchange 
Act and Commodity Future Trading Commission (``CFTC'') regulations) 
maintained by LCH SA for the benefit of cleared swaps customers of 
its FCM/BD Clearing Members.
    \13\ LCH SBS Client Segregated Depository Account will be 
defined in the Regulations to mean one or more accounts at one or 
more Banks which are commingled for purposes of the applicable 
provisions of the Exchange Act and SEC Regulations) maintained by 
LCH SA for the benefit of SBS customers of its FCM/BD Clearing 
Members with a bank, which is segregated in accordance with the 
Exchange Act and Commission Regulations and contains collateral 
deposited by such FCM/BD Clearing Members on behalf of their SBS 
customers in connection with FCM/BD Cleared Transactions that are 
SBS cleared for such SBS customers by such FCM/BD Clearing Members, 
excluding any FCM/BD portfolio margining transactions.
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    The Proposed Rule Change also would amend Regulation 2, which 
covers depository accounts. Going forward, LCH SA will assume that all 
FCM/BD clients will elect to portfolio margin all their SBS 
transactions in an FCM/BD Cleared Swaps Client Segregated Depository 
Account rather than a separate FCM/BD SBS Client Segregated Depository 
Account. The Proposed Rule Change therefore would amend Regulation 2(a) 
so that FCM/BD Clearing Members would establish and maintain an FCM/BD 
SBS Client Segregated Depository Account only if required. The Proposed 
Rule Change also would amend Regulation 2(b) to similarly provide that 
LCH SA would only establish and maintain an LCH SBS Client Segregated 
Depository Account \14\ for an FCM/BD Clearing Member upon request. 
Finally, the Proposed Rule Change would amend Regulation 2(c) to 
confirm that all Collateral deposited with LCH SA by FCM/BD Clearing 
Members in connection with cleared swaps will include collateral 
deposited in connection with FCM/BD Portfolio Margining Transactions 
and will be held in an LCH cleared swaps segregated depository account.
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    \14\ The Regulations define an LCH SBS Client Segregated 
Depository Account to mean an omnibus account (which will consist of 
one or more accounts at one or more Banks which are commingled for 
purposes of the applicable provisions of the Exchange Act and SEC 
Regulations) maintained by LCH SA for the benefit of SBS Customers 
of its FCM/BD Clearing Members with a Bank, which is segregated in 
accordance with the Exchange Act and SEC Regulations and contains 
Collateral deposited by such FCM/BD Clearing Members on behalf of 
their SBS Customers in connection with FCM/BD Cleared Transactions 
that are SBS cleared for such SBS Customers by such FCM/BD Clearing 
Members, excluding any FCM/BD Portfolio Margining Transactions.
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The Procedures
    Section 3 of the Procedures covers Collateral, Variation Margin, 
and Cash Payments. The Proposed Rule Change would revise Section 3 in 
the expectation that all FCM/BD clients will elect to portfolio margin 
their SBS transactions.
    To that end, the Proposed Rule Change would amend Section 3 so that 
LCH SA would establish and maintain SBS-related accounts only when 
required. Specifically, LCH SA would maintain the following accounts 
only when required: (i) an FCM/BD SBS Client Collateral Account to 
record the Collateral held by LCH SA for the benefit of such FCM/BD 
Clearing Member's SBS customers with respect to SBS; (ii) a TARGET2 
Account \15\ used to make Collateral calls in relation to the Client 
Margin Requirements with respect to SBS; (iii) a U.S. Dollar (``USD'') 
account to credit USD Cash Collateral which is transferred by FCM/BD 
Clearing Members to be recorded in their FCM/BD SBS Client Collateral 
Account; and (iv) a segregated depository account in the Bank of New 
York Mellon (``BNYM'') US to register BNYM eligible collateral \16\ 
which is transferred by FCM/BD Clearing Members in connection with SBS 
other than SBS that constitute FCM/BD Portfolio Margining Transactions. 
Going forward, any reference to these accounts would be preceded by the 
condition that such account is established.
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    \15\ As defined in the Rule Book, TARGET2 is the system known as 
Trans-European Automated Real-time Gross Settlement Express Transfer 
2. A ``TARGET2 Account'' is an account held by a TARGET2 participant 
in TARGET2 payment module with a Eurosystem Central Bank.
    \16\ ``BNYM US'' and ``Eligible Collateral'' are defined below.
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    Similarly, the Proposed Rule Change would amend Section 3 so that 
FCM/BD Clearing Members would establish and maintain SBS-related 
accounts only when required. Specifically, FCM/BD Clearing Members 
would maintain the following accounts only when required: (i) a TARGET2 
Account for the purposes of the Collateral Calls in respect of its 
Client Margin Requirements with respect to SBS; (ii) a BNYM cash 
account for the purposes of satisfying its Cash Payments obligations in 
respect of its Client Cleared Transactions that are SBS. Going forward, 
any reference to these accounts would be preceded by the condition that 
such account is established.
Rule Book
    The Proposed Rule Change would amend certain definitions set out in 
the Rule Book to recognize that FCM/BD Portfolio Margining Transactions 
will be treated as Cleared Swaps and governed by new FCM/BD Regulation 
7. As with

[[Page 62120]]

Article 6.2.1.1(iii), discussed earlier, the current definitions 
implement portfolio margining as adopted by LCH SA in 2021. With the 
adoption of new FCM/BD Regulation 7, the Proposed Rule Change would 
revise references to current definitions or Articles in the Rule Book 
to reflect the new Portfolio Margining Program.\17\
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    \17\ In particular, the Proposed Rule Change would remove 
references to Article 6.2.1.1(iii). As noted earlier, with the 
implementation of the more comprehensive Portfolio Margining Program 
set out in Section 7 of the Regulations, the Proposed Rule Change 
would delete Article 6.2.1.1(iii) as unnecessary.
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    The Proposed Rule Change first would amend the defined term Cleared 
Swap. Currently, Cleared Swap is defined as an FCM/BD cleared 
transaction (i) constituting a Cleared Swap as defined in CFTC 
Regulation 22.1 or (ii) constituting an SBS that is held in the FCM/BD 
swaps client account structure set out in Article 6.2.1.1(i) in 
pursuant to Article 6.2.1.1(iii). The Proposed Rule Change would delete 
most of (ii) and replace with a reference to FCM/BD Portfolio Margining 
Transaction.\18\ Under the Proposed Rule Change, a Cleared Swap would 
be an FCM/BD cleared transaction (i) constituting a Cleared Swap as 
defined in CFTC Regulation 22.1 or (ii) constituting an FCM/ND 
Portfolio Margining Transaction.
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    \18\ The Proposed Rule Change would add a definition for FCM/BD 
Portfolio Margining Transaction to the Rule Book. That term would 
have the same meaning as set out in the Regulations. As discussed 
above, under the Regulations, an FCM/BD Portfolio Margining 
Transaction is an FCM/BD Cleared Transaction that is an SBS and 
which is held in the FCM/BD Swaps Client Account Structure pursuant 
to the Portfolio Margining Program.
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    The Proposed Rule Change next would the defined term Cleared Swaps 
Customer. Cleared Swaps Customer is currently defined as (i) a Cleared 
Swaps Customer, as defined in CFTC Regulation 22.1, of an FCM/BD 
Clearing Member with respect to Cleared Swaps, that is an eligible 
contract participant, and (ii) a person that would be a Cleared Swaps 
Customer of an FCM/BD Clearing Member with respect to any transaction 
constituting an SBS that is a Cleared Swap. The Proposed Rule Change 
would amend (ii) to include a person that is treated as a Cleared Swaps 
Customer in connection with maintaining FCM/BD Portfolio Margining 
Transactions. Under the Proposed Rule Change, a Cleared Swaps Customer 
would be (i) a Cleared Swaps Customer, as defined in CFTC Regulation 
22.1, of an FCM/BD Clearing Member with respect to Cleared Swaps, that 
is an eligible contract participant, and (ii) a person that is treated 
as a Cleared Swaps Customer in connection with maintaining FCM/BD 
Portfolio Margining Transactions in the FCM/BD Swaps Client Account 
Structure of an FCM/BD Clearing Member pursuant to the Portfolio 
Margining Program.
    The Proposed Rule Change would likewise amend the definition of 
Cleared Swaps Customer Collateral. Currently, Cleared Swaps Customer 
Collateral is Cleared Swaps Customer Collateral, as defined in CFTC 
Regulation 22.1, with respect to Cleared Swaps, including with respect 
to any transaction constituting an SBS that is a Cleared Swap, as if 
such transaction is a Cleared Swap for purposes of the definition of 
Cleared Swaps Customer Collateral in CFTC Regulation 22.1. As revised, 
this definition will provide that Cleared Swaps Customer Collateral is 
Cleared Swaps Customer Collateral, as defined in CFTC Regulation 22.1, 
with respect to Cleared Swaps, including with respect to any 
transaction constituting an SBS that is an FCM/BD Portfolio Margining 
Transaction.
    The Rule Book also contains definitions related to the accounts 
associated with customer transactions in SBS and Swaps. Among others, 
these include the FCM/BD SBS Client Collateral Account, FCM/BD Swaps 
Client Collateral Account, FCM/BD SBS Client Financial Account, FCM/BD 
Swaps Client Financial Account, FCM/BD SBS Client Margin Account, FCM/
BD Swaps Client Margin Account, FCM/BD SBS Client Trade Account, and 
FCM/BD Swaps Client Trade Account. With respect to these defined terms, 
the Proposed Rule Change would (i) remove references to Article 
6.2.1.1(iii) (which is being deleted, as discussed above) and (ii) add 
references to the new defined term FCM/BD Portfolio Margining 
Transaction.
    Finally, the Proposed Rule Change would add a new defined term for 
Portfolio Margining Program. That term would have the same meaning as 
set out in the Regulations.

B. Collateral and Accounts

    The Proposed Rule Change would also amend provisions of the Rule 
Book and the Procedures regarding permitted Collateral (including 
Eligible Collateral and Eligible Currency \19\), the Client Collateral 
Buffer, and the release of collateral to a Clearing Member.
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    \19\ The term ``Eligible Collateral'' is defined as securities 
and other types of non-Cash Collateral as set out in Section 3 of 
the Procedures accepted by LCH SA for the purposes of satisfying a 
Clearing Member's Margin Requirements or novating Original 
Transaction; the term ``Eligible Currency'' is defined to mean cash 
in such currencies as set out in Section 3 of the Procedures 
accepted by LCH SA as Cash Collateral. The term ``Collateral'' is 
defined as Eligible Collateral and/or Cash Collateral. The term 
``Cash Collateral'' is defined as any cash provided in an Eligible 
Currency which is transferred to LCH SA by way of full title 
transfer for the purpose of satisfying a Clearing Member's Margin 
Requirements and/or its Contribution Requirement and/or novating 
Original Transactions, as the case may be.
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Eligible Collateral and Eligible Currency
    With regard to Eligible Collateral, the Proposed Rule Change would 
amend Section 3 of the Procedures to replace certain references to US 
Treasury Bills (``US T-Bills''). Specifically, the Proposed Rule Change 
would delete references to US T-Bills recorded in an FCM/BD Clearing 
Member's FCM/BD Client Collateral Account. The Proposed Rule Change 
would refer instead to BNYM US Eligible Collateral. This new defined 
term would mean Eligible Collateral to be held in LCH SA's segregated 
depository account opened in the books BNYM US. LCH SA is making this 
particular change because there are also other securities, in addition 
to US T-Bills, that could be held with BNYM.
    With regard to Eligible Currency, the Proposed Rule Change would 
amend the definition to provide that Pound Sterling is only eligible in 
certain circumstances. Going forward, Pound Sterling will no longer be 
an Eligible Currency for purposes of the FCM/BD Client Account 
Structure of an FCM/BD Clearing Member. As a result, Eligible 
Currencies for FCM/BD Client Account Structure will be limited to the 
Euro and USD. Practically speaking, this means going forward CCM 
Clearing Members \20\ can deposit Pound Sterling with respect to their 
Clients while FCM/BD Clearing Members cannot. LCH is making this change 
to comply with certain regulatory requirements applicable to client 
collateral.\21\
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    \20\ A CCM is a Clearing Member of LCH SA and party to the CDS 
admission agreement. If a CCM wishes to provide CDS CCM client 
clearing services, it must either (i) be a general member or (ii) 
provide such CDS CCM client clearing services to its affiliated 
firms only. A Clearing Member cannot be admitted as a CCM and an 
FCM/BD Clearing Member at the same time. See Notice, 88 FR at 46229. 
The Proposed Rule Change would update the definition of CCM in the 
Rule Book to replace an incorrect reference to FCM/BD Clearing 
Member.
    \21\ LCH SA explained in the Notice that it LCH SA will not 
allow the transfer of Pound Sterling on behalf of FCM/BD Clients to 
be credited to an LCH SA's account opened with Euroclear Bank 
because Euroclear Bank is not an eligible Permitted Depository 
within the meaning of CFTC Regulations 22.1 and 22.4. See Notice, 88 
FR at 46225.
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    Further to this point, the Proposed Rule Change would delete from 
Section 3.8 provisions that currently require LCH SA to open certain 
bank accounts. LCH SA uses these bank accounts to

[[Page 62121]]

credit non-Euro, non-USD Cash Collateral which is transferred by an 
FCM/BD Clearing Member to be recorded in its FCM/BD Swaps Client 
Collateral Account or FCM/BD SBS Client Collateral Account. Because LCH 
SA will only treat Euro and USD as Eligible Currency for FCB/BD Clients 
going forward, LCH SA would no longer need to establish these accounts.
    The Proposed Rule Change would also make this same change to Client 
Collateral Buffer, including the FCM/BD Client Collateral Buffer.\22\ 
The Client Collateral Buffer is the value of Collateral transferred by 
a Clearing Member to LCH SA, which is the Clearing Member's own 
property, and which allows that Clearing Member to satisfy margin 
requirements in respect of a Client's account. The Clearing Member 
could use the buffer, for example, to satisfy the Notional and 
Collateral Checks performed by LCH SA in respect of Eligible Intraday 
Transactions comprising one or more Client Trade Legs.
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    \22\ The FCM/BD Client Collateral Buffer's definition includes 
both the FCM/BD Swaps Client Collateral Buffer and the FCM/BD SBS 
Client Collateral Buffer. The FCM/BD Swaps Client Collateral Buffer 
is defined in the Rule Book to mean the aggregate value of 
Collateral transferred by an FCM/BD Clearing Member to LCH SA, 
comprising such FCM/BD Clearing Member's own property, and recorded 
in such FCM/BD Clearing Member's FCM/BD Swaps Buffer Account which 
may be used by LCH SA to meet obligations in respect of the Cleared 
Swaps of Cleared Swaps Customers, including for the purpose of 
satisfying the notional and collateral checks performed by LCH SA in 
respect of eligible intraday transactions. The FCM/BD Swaps Client 
Collateral Buffer is similarly defined.
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    Currently, LCH SA accepts as Client Collateral Buffer only Euro-
denominated Cash Collateral. Under the Proposed Rule Change, LCH SA 
would accept (i) Cash Collateral \23\ or Eligible Collateral as CCM 
Client Collateral Buffer and (i) Cash Collateral or Eligible Collateral 
as being acceptable by LCH SA to be registered in the FCM/BD Client 
Collateral Account, as FCM/BD Client Collateral Buffer. As discussed 
above, Pound Sterling would no longer be an Eligible Currency for 
purposes of the FCM/BD Client Account Structure of an FCM/BD Clearing 
Member going forward. Thus, this change would mean in effect that LCH 
SA would accept Pound Sterling as CCM Client Collateral Buffer but not 
as FCM/BD Client Collateral Buffer.
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    \23\ Cash Collateral is defined in the Rule Book as any cash 
provided in an Eligible Currency which is transferred to LCH SA by 
way of full title transfer in accordance with Section 3 of the 
Procedures for the purpose of satisfying a Clearing Member's Margin 
Requirements and/or its Contribution Requirement and/or novating 
Original Transactions, as the case may be.
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    Section 3 of the Procedures addresses how Clearing Members may 
transfer Collateral to LCH SA. The Proposed Rule Change would amend 
these provisions to effectuate the distinction between Pound Sterling 
as collateral, and Euros/USD. Specifically, the Proposed Rule Change 
would amend Sections 3.7(f), 3.8 (f), 3.8(g), 3.10, 3.15(a), and 
3.17(a) to refer specifically to the transfer of Euro-denominated cash, 
non-Euro denominated Cash Collateral, USD-denominated Cash Collateral, 
Eligible Collateral provided with full title transfer, Eligible 
Collateral, and BNYM Eligible Collateral, respectively, to be 
maintained as Client Collateral Buffer, provided that such Clearing 
Member is permitted to maintain that type of Collateral as Client 
Collateral Buffer.
    Finally, the Proposed Rule Change would amend Appendix 1 of the 
Rule Book to effectuate the distinction between Pound Sterling as 
collateral, and Euros/USD. Appendix 1 of the Rule Book describes LCH 
SA's default management process for its CDS business. Under Appendix 1 
currently, in the event of an Event of Default occurring in respect of 
a Clearing Member, LCH SA will: (i) if the Defaulting Clearing Member 
is a CCM, transfer an amount of Cash Collateral denominated in Euro 
which is equal to the CCM Allocated Client Collateral Buffer for the 
relevant CCM Client Account Structure from the CCM House Collateral 
Account to the relevant CCM Client Collateral Account; or (ii) if the 
Defaulting Clearing Member is an FCM/BD Clearing Member, transfer an 
amount of Collateral which is equal to the FCM/BD Allocated Client 
Collateral Buffer for the relevant FCM/BD Client Margin Requirement 
from the FCM/BD Buffer Financial Account to the relevant FCM/BD Client 
Financial Account. Since an amount of Collateral equal to the value of 
the CCM Allocated Client Collateral Buffer needs to be transferred from 
the House Collateral Account of a Defaulting Clearing Member that is a 
CCM to the relevant CCM Client Collateral Account, and since the Client 
Collateral Buffer for CCMs could be maintained in Pounds as well as 
Euro, LCH SA would need first to liquidate into Euro any Cash 
Collateral that is not Euro. The Proposed Rule Change would make 
equivalent changes to the provisions dealing with the transfer of an 
amount in Euro equivalent to the CCM Allocated Client Collateral Buffer 
of a CCM in the event of: (i) an early termination trigger date, in 
accordance with Article 8.5.2 (a)(i) and (b)(i) of Appendix 1 of the 
Rule Book and (ii) an LCH Default in accordance with the Article 
1.3.1.3 (iv) of the Rule Book, save that under these circumstances, LCH 
SA would not be permitted to liquidate any pledged Eligible Collateral 
taken into account in that CCM Client Collateral Buffer.
Client Collateral Buffer Threshold and Return of Excess Collateral
    Currently, LCH SA allows Clearing Members to set a minimum value of 
Collateral to maintain as Client Collateral Buffer. This amount is 
known as the ``Client Collateral Buffer Threshold.'' Currently, if the 
value of the Collateral attributed to the FCM/BD Buffer Financial 
Account exceeds the FCM/BD Client Collateral Buffer Threshold, the 
amount of the excess, if related to Cleared Swaps, will be reclassified 
as FCM/BD Swaps Unallocated Client Excess Collateral and, if related to 
SBS will be reclassified as FCM/BD SBS Client Excess Collateral. The 
Proposed Rule Change would update how Clearing Members can update or 
increase the amount of the threshold, as well as revise the treatment 
of Collateral that exceeds the threshold.
    With respect to the amount of the threshold, currently Section 
2.3(d) of the Procedures provides that a Clearing Member looking to 
change the Client Collateral Buffer Threshold or House Excess 
Collateral Threshold \24\ must submit a request to LCH on the business 
day before the intended change. Thus, the change is not implemented 
until the next business day. The Proposed Rule Change would revise 
Section 2.3(d) to allow Clearing Members to set or update these 
thresholds on the business day such request is made, instead of the 
next business day. LCH SA is making this change to meet Clearing 
Members' expectations to be able to update their thresholds more 
quickly than is currently possible.
---------------------------------------------------------------------------

    \24\ The House Excess Collateral Threshold is The minimum value 
of Collateral, that a CCM or FCM/BD Clearing Member wishes to 
maintain as House Excess Collateral in its House Collateral Account.

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

[[Page 62122]]

    Relatedly, the Proposed Rule Change would amend Article 4.2.2.3 of 
the Rule Book. It currently provides that only a CCM Clearing Member, 
and not an FCM/BD Clearing Member, may increase the amount of the 
Client Collateral Buffer. The Proposed Rule Change would amend this 
article to confirm that an FCM/BD Clearing Member may also increase the 
amount of Client Collateral Buffer above the Client Collateral Buffer 
Threshold.\25\ LCH SA is making the proposed revisions regarding the 
possibility for an FCM/BD Clearing Member to increase the amount of 
FCM/BD Client Collateral Buffer above the FCM/BD Client Collateral 
Buffer Threshold to provide for the more efficient handling of 
Collateral held on behalf of FCM/BD Clients.
---------------------------------------------------------------------------

    \25\ Article 4.2.2.3 of the Rule Book further provides that 
transfers to the Client Collateral Buffer will be made in accordance 
with Section 2 and Section 3 of the Procedures.
---------------------------------------------------------------------------

    Given that, under the Proposed Rule Change, Clearing Members would 
be allowed to increase the Collateral Buffer Threshold, the Proposed 
Rule Change also would revise how LCH treats Collateral deposited in 
excess of that threshold. Currently, under Article 4.2.2.5, where (i) 
the FCM/BD Margin Balance of an FCM/BD Client Financial Account exceeds 
the relevant FCM/BD Client Margin Requirement prior to the Morning Call 
or (ii) the value of the Collateral attributed to the FCM/BD Buffer 
Financial Account exceeds the FCM/BD Client Collateral Buffer 
Threshold, LCH SA treats such excess as FCM/BD Swaps Unallocated Client 
Excess Collateral or FCM/BD SBS Client Excess Collateral.\26\ An FCM/BD 
Clearing Member may then request the return of such excess collateral, 
subject to the conditions set out in Section 3 of the Procedures and 
Article 6.2.5 of the Rule Book.
---------------------------------------------------------------------------

    \26\ ``Client Excess Collateral'' is defined as the CCM Client 
Excess Collateral or the FCM/BD Client Excess Collateral, as the 
context requires.
---------------------------------------------------------------------------

    The proposed amendments to Article 4.2.2.5 would remove the 
reclassification of any value of the Collateral above the FCM/BD Client 
Collateral Buffer Threshold as FCM/BD Swaps Unallocated Client Excess 
Collateral, or FCM/BD SBS Client Excess Collateral, where appropriate. 
Instead, if the value of the Collateral attributed to the FCM/BD Buffer 
Financial Account exceeds the FCM/BD Client Collateral Buffer 
Threshold, the FCM/BD Clearing Member may request to have such excess 
returned to it, subject to the conditions set out in Section 3 of the 
Procedures and Article 6.2.5 of the Rule Book. Moreover, Article 
4.2.2.5 as amended would also give FCM/BD Clearing Members the 
alternative of requesting the transfer of any FCM/BD Swaps Unallocated 
Client Excess Collateral, or FCM/BD SBS Client Excess Collateral, where 
appropriate, to the FCM/BD Buffer Financial Account and its 
reclassification as FCM/BD Client Collateral Buffer.
    Article 6.2.5.1(ii) of the Rule Book currently states that if a 
FCM/BD Clearing Member delivers Collateral to LCH SA on behalf of one 
or more FCM/BD clients in an amount that would cause an FCM/BD Swaps 
Client Financial Account to contain FCM/BD Swaps Client Excess 
Collateral, then LCH SA may (i) reject the deposit, (ii) transfer the 
excess back to the Clearing Member, or (iii) accept the deposit and 
transfer the excess to the FCM/BD Swaps Unallocated Client Collateral 
Financial Account. The Proposed Rule Change would revise Article 
6.2.5.1(ii) so that LCH SA would accept the deposit and treat the 
excess as FCM/BD Swaps Client Collateral Buffer. Under 6.2.5.1(iii)(c) 
as amended, the FCM/BD Clearing Member could then request the return of 
any amount of excess FCM/BD Swaps Client Collateral Buffer, in 
accordance with Section 3 of the Procedures.
    Finally, the Proposed Rule Change would amend 6.2.5.1(iv)(d) to 
reflect the ability of an FCM/BD Clearing Member to increase the FCM/BD 
Swaps Client Collateral Buffer and treat excess collateral as Buffer, 
as discussed above. Currently, Article 6.2.5.1(iv)(d) states that upon 
the request of an FCM/BD Clearing Member, LCH SA will return FCM/SBS 
Swaps Unallocated Client Excess Collateral to the Clearing Member. In 
doing so, the FCM/BD Clearing Member represents that the request 
complies with CFTC regulations and that the returned Collateral will 
remain segregated as required by CFTC regulations and LCH SA's Rule 
Book. As amended, an FCM/BD Clearing Member could request LCH SA to (i) 
return FCM/BD Swaps Unallocated Client Excess Collateral to it in 
accordance Section 3 of the Procedures or (ii) reclassify such FCM/BD 
Swaps Unallocated Client Excess Collateral as FCM/BD Swaps Client 
Collateral Buffer and record the value of such Collateral to the 
relevant FCM/BD Swaps Buffer Financial Account. In doing so, the FCM/BD 
Clearing Member would represent and warrant that the request complies 
with CFTC Regulations and has been made by an individual who is 
properly authorized to make the request. If an FCM/BD Clearing Member 
requests that LCH SA return FCM/BD Swaps Unallocated Client Excess 
Collateral to it, the Clearing Member would further represent to LCH SA 
that the Collateral will remain segregated as by CFTC Regulations and 
LCH SA's CDS Clearing Rules. If an FCM/BD Clearing Member requests that 
LCH SA reclassify such FCM/BD Swaps Unallocated Client Excess 
Collateral as FCM/BD Swaps Client Collateral Buffer and record the 
value of such Collateral to the relevant FCM/BD Swaps Buffer Financial 
Account, the Clearing Member would further represent to LCH SA that the 
request reflects the true characterization of the Collateral, including 
in particular that the Collateral is the property of the FCM/BD 
Clearing Member. The FCM/BD Clearing Member would also be required to 
provide such additional information as LCH SA may reasonably request.
    Article 6.2.5.2 of the Rule Book addresses FCM/BD SBS Excess 
Collateral and FCM/BD SBS Client Collateral Buffer. Article 6.2.5.2 
applies to the FCM/BD SBS Client Account Structure, which LCH SA would 
only establish if required, as discussed above. Article 6.2.5.2 
parallels the procedures in Article 6.2.5.1 above with regard to FCM/BD 
Swaps Client Collateral. The Proposed Rule Change would make the same 
amendments to Article 6.2.5.2 as it is making to 6.2.5.1.
Return of Collateral
    The Proposed Rule Change would also amend certain provisions of 
Section 3 of the Procedures to clarify the process by which a Clearing 
Member may request the return of Collateral. Specifically, the Proposed 
Rule Change would make these changes to Section 3.7, 3.8, and 3.15.
    Section 3.7 applies to the return Euro-denominated Cash Collateral. 
Section 3.7(g)(iv) currently describes how an FCM/BD Clearing Member 
may request the return of FCM/BD Swaps Unallocated Client Excess 
Collateral that is Euro-denominated Cash Collateral. Section 3.7(g)(v) 
currently describes how an FCM/BD Clearing Member may request the 
return of FCM/BD SBS Client Excess Collateral that is Euro-denominated 
Cash Collateral. In either case, the Clearing Member may request the 
return of excess collateral provided the amount requested does not 
exceed the amount of collateral in the account. The Proposed Rule 
Change would combine 3.7(g)(iv) and (v) into single provision that 
would apply to any Euro-denominated Cash Collateral recorded in a 
Clearing Member's FCM/BD Client Collateral Account. As defined in the 
Rule Book, FCM/BD Client Collateral Account means an

[[Page 62123]]

FCM/BD Swaps Client Collateral Account and/or an FCM/BD SBS Client 
Collateral Account. Thus, this new provision would apply to both Swaps 
and SBS. Under this new provision, LCH SA would return Euro-denominated 
Cash Collateral recorded in a Clearing Member's FCM/BD Client 
Collateral Account if LCH SA determines that it will continue to hold 
Collateral sufficient to cover the FCM/BD Client Margin Requirement for 
each FCM/BD Client Margin Account and to satisfy the FCM/BD Clearing 
Member's Client Collateral Buffer Threshold.
    Section 3.8 applies to the return of non-Euro-denominated cash 
collateral. Here the Proposed Rule Change would carry forward the 
distinction between Pound Sterling as collateral, and Euros/USD 
discussed above. For example, the Proposed Rule Change would add a 
provision to explain how a CCM could request the return of non-Euro 
denominated Cash Collateral recorded as CCM Client Collateral Buffer. 
The Proposed Rule Change also would revise 3.8(i), which describes how 
an FCM/BD Clearing Member may request the return of USD-denominated 
Cash Collateral recorded in its FCM/BD Client Account. Under the 
revised provision, LCH SA would return USD-denominated Cash Collateral 
recorded in the FCM/BD Client Account if it holds sufficient Collateral 
(other than that which is to be returned) to cover the FCM/BD Client 
Margin Requirement for each FCM/BD Client Margin Account and to satisfy 
the FCM/BD Clearing Member's obligation in respect of its FCM/BD Client 
Collateral Buffer Threshold. These revisions are a result of CCM 
Clearing Members being able to use Pound Sterling in their Client 
Collateral going forward but not FCM/BD Clearing Members.
    Like this change to Section 3.8, the Proposed Rule Change would 
amend Section 3.10.1(c) and Section 3.10.2(d) to set out the same 
process by which a CCM may request the return of Eligible Collateral 
transferred with full title, on a bilateral basis, and pursuant to a 
triparty arrangement, respectively. The Proposed Rule Change would 
amend Section 3.15(b) in the same way, to set out the process by which 
a CCM may request the release of Pledged Eligible Collateral.
Type of Accounts
    The Proposed Rule Change would also amend Section 3 of the 
Procedures to clarify the use of TARGET2 and BNYM accounts by LCH SA 
and its Clearing Members.
    With regard to TARGET2 accounts, the Proposed Rule Change would 
specify in 3.18(b) the TARGET2 accounts that LCH SA would use for 
making or receiving payments in Euro. The Proposed Rule Change also 
would specify in 3.18(b) the TARGET2 accounts that would be used for 
satisfying FCM/BD Clearing Members' cash payment obligations with 
respect to Client Cleared Transactions. Relatedly, the Proposed Rule 
Change would amend Section 3.7(d)(iii) to provide that, in respect of 
the FCM/BD client account structure of an FCM/BD Clearing Member, there 
will be no aggregation of payments between Euro-denominated cash 
payments and Euro-denominated Cash Collateral transfers through TARGET2 
because Euro-denominated cash payments will be made by using the LCH 
CCM Client TARGET 2 Account whereas the transfer of Euro-denominated 
Cash Collateral will be made by using the LCH FCM/BD swaps client 
TARGET2 account or the LCH FCM/BD SBS Client TARGET2 Account.
    With regard to BNYM accounts,\27\ the Proposed Rule Change would 
amend Section 3.18(c) to consolidate the number of accounts that LCH SA 
maintains. Currently, LCH SA maintains separate accounts for Client 
transactions in Swaps and Client transactions in SBS. The Proposed Rule 
Change would remove the separate accounts and consolidate them into one 
Client account. Thus, going forward, LCH SA will maintain only two BNYM 
accounts, each for the purpose of debiting or crediting USD to satisfy 
Cash Payments and/or Variation Margin Collateral Transfer obligations. 
One account will be for a Clearing Member's own transactions, and the 
other will be for the transactions of the Clearing Member's Clients. 
LCH SA is consolidating these accounts in the expectation that all FCM/
BD clients will elect to portfolio margin their SBS transactions.
---------------------------------------------------------------------------

    \27\ As noted above, USD is the only Eligible Currency and US 
Treasury bills are the only Eligible Collateral held in BNYM 
accounts.
---------------------------------------------------------------------------

    Finally, the Proposed Rule Change would delete from the Procedures 
references to the former time slot for the cash payments in respect of 
Client Variation Margin requirements of an FCM/BD Clearing Member given 
that time slot no longer exists.

C. Miscellaneous Amendments

i. Time Reference
    Article 1.2.8.1 of the Rule Book currently provides that, where 
reference is made in the CDS Clearing Documentation to a time or 
deadline, it will mean Central European Time (``CET''), unless 
otherwise stipulated. The Proposed Rule Change would revise this 
Article to provide that where reference is made in the CDS Clearing 
Documentation to a time or deadline, it will be understood to mean 
Paris Time, unless otherwise stipulated in the CDS Clearing 
Documentation. The Proposed Rule Change would remove all references to 
CET from the Procedures and the Supplement. With respect to the 
Supplement in particular, the Proposed Rule Change would provide 
instead that any reference to a time of day shall be deemed to be a 
reference to the time zone as set out in Section 1.2.8 of the Rule Book 
unless otherwise provided.
    The Proposed Rule Change also would amend Section 5.18 of the 
Procedures in this regard. Section 5.18 currently states that all 
references to times and deadlines in Section 5.18 are to London local 
time unless otherwise specified.
ii. Real Time Session
    LCH SA's ``Real Time Session'' is, in essence, its operating hours. 
For example, Article 3.1.4.1 of the Rule Book provides that an Intraday 
Transaction may be submitted to LCH SA during the Real Time Session on 
any Clearing Day, and Article 3.1.4.3 states that if an Intraday 
Transaction is received for clearing by LCH SA outside of the Real Time 
Session, it will be deemed to have been submitted at the Start of the 
Real Time Session on the following Clearing Day. Currently, the Rule 
Book defines ``Real Time Session'' to mean the period commencing at the 
Start of Real Time and ending at the End of Real Time in respect of 
each Clearing Day.\28\ Moreover, the Rule Book defines ``Start of Real 
Time'' as the time as specific in a Clearing Notice. The Proposed Rule 
Change would not alter these definitions, but it would adopt a new 
clearing notice. This new clearing notice would provide that, unless 
notified otherwise, ``Start of Real Time (SoRT)'' would mean on each 
clearing day, the earlier of: (i) the time when all relevant Clearing 
Members have satisfied the morning call; and (ii) 09.05 (Paris time). 
Moreover, the new clearing notice would provide that End of Real Time 
means 16.30 (New York time) instead of 19.30 CET.
---------------------------------------------------------------------------

    \28\ ``Start of Real Time'' and ``End of Real Time'' are defined 
as the time as specified in a clearing notice.
---------------------------------------------------------------------------

    Relatedly, the Proposed Rule Change would amend Article 2.3.3.5 of 
the Rule Book. Article 2.3.3.5 requires each Clearing Member to ensure 
that appropriate personnel are available for communications with LCH SA 
during

[[Page 62124]]

Opening Hours on each Business Day. The Proposed Rule Change would 
instead require each Clearing Member to have appropriate personnel 
available for communications with LCH SA during the Real Time Session, 
instead of only at opening hours.
    The Proposed Rule Change would make an equivalent change to Section 
5(c) of the Procedures. Currently, Section 5(c) specifies LCH SA's 
opening hours, provides that the LCH SA operations team is available 
during those hours, and further provides the hours of availability for 
LCH SA's technical helpdesk. The Proposed Rule Change would replace 
these different times with one, under which LCH SA would be open during 
the Real Time Session and its operations team would be available during 
the Real Time Session. As a result of these changes, the Proposed Rule 
Change would remove defined term ``Opening Hours'' from the definitions 
section of the Rule Book since it would no longer be used.\29\
---------------------------------------------------------------------------

    \29\ ``Opening Hours'' is currently defined as 8:00 to 19:30 
each business day.
---------------------------------------------------------------------------

iii. Other Changes
    Finally, the Proposed Rule Change would make other minor amendments 
for consistency or clarity to the Rule Book, the Procedures, and the 
Regulations.

D. Amendments to Liquidity Risk Modelling Framework

    The Proposed Rule Change would amend LCH SA's LRMF. As discussed 
below, these amendments would for the most part clarify that FCM/BD 
clients' funds are segregated. As such, they are not available 
resources to LCH SA in a default management context unless the 
liquidity requirement is driven by the FCM/BD Clearing Member of such 
FCM/BD Clients. LCH SA is making these changes to comply with 
applicable regulations. The Proposed Rule Change also would make a few 
amendments to the LRMF to add clarity, as discussed below.
    The Proposed Rule Change would first make a clarifying update to 
Section 1.1.1. Section 1.1.1 explains that the CDS business line 
gathers clearing activity for a wide selection of Euro index and single 
names. The Proposed Rule Change would update this description to 
include clearing activities related to the clearing of US, Australia, 
and Asia sovereign index and single names. This change would reflect 
the current composition of LCH SA's CDS business line.
    The Proposed Rule Change would amend Section 1.6.1, which addresses 
Liquidity Sources. The Proposed Rule Change would clarify that LCH SA 
has the right to consider available for liquidity purposes cash posted 
by Clearing Members to meet margin requirements and their excess cash, 
except cash received from FCM/BD clearing member(s) on behalf of their 
FCM/BD clients or excess cash for FCM/BD Clients. That cash would be 
excluded unless the liquidity requirement is driven by the relevant 
FCM/BD clearing member.
    The proposed amendment to 1.6.1 also would clarify that LCH SA has 
the right to consider available for liquidity purposes all the 
resources collected if deposited under the full title transfer regime. 
Collateral deposited by FCM/BD Clearing Members on behalf of their FCM/
BD Clients would not be deposited under the full title transfer regime. 
Instead, such Collateral would be subject to a security interest. 
Accordingly, the Proposed Rule Change would update a footnote, which 
currently provides a list of Collateral which is not transferred by way 
of full title transfer, to add a reference to Collateral received from 
FCM/BD Clients.
    The Proposed Rule Change next would update Section 1.6.1.1, which 
addresses Collateral transfer to the 3G pool, to reflect the fact that 
non-cash collateral deposited via a single pledged account is a way to 
post Collateral for activities not limited to CDS related activities 
only and to provide that USD securities received from FCM/BD Clients 
would not be deposited via full title transfer accounts.
    The Proposed Rule Change would amend Section 1.6.1.2, which 
addresses assessment of assets' liquidity, to prohibit LCH SA from re-
hypothecating non-cash collateral collected from FCM/BD clients. LCH SA 
would not be able to use such cash for liquidity unless the FCM/BD 
Clearing Member of such FCM/BD clients is in default. The Proposed Rule 
Change would apply the same treatment to securities resulting from FCM/
BD Clients' cash which LCH SA invested.
    Section 1.6.1.3 contains a table that summarizes LCH SA's liquidity 
sources. The Proposed Rule Change would add to this table explanations 
to exclude the following from consideration as liquidity sources: (i) 
Collateral received from FCM/BD Clearing Members on behalf of FCM/BD 
Clients; (ii) excess cash for FCM/BD Clients that can be generated on 
an intraday basis; and (iii) securities resulting from investment of 
FCM/BD Clients' cash. As mentioned above, these sources would only be 
available if the liquidity requirement is driven by the FCM/BD Clearing 
Member of such FCM/BD Clients.
    The Proposed Rule Change next would amend the description of the 
liquidity need ``repayment of excess cash by members'' in Section 
4.1.2, which covers Model inputs and Variable selection. The Proposed 
Rule Change would provide that, when calculating the liquid resources 
available to be compared against the Operational Target,\30\ the cash 
received from the FCM/BD Clearing Members on behalf of their FCM/BD 
Clients is excluded. In two associated footnotes, the Proposed Rule 
Change would specify that Securities in DKK, NOK, SEC, AUD, CAD, CHF, 
JPY are excluded from liquidity assets as well as collateral belonging 
to FCM/BD clients.
---------------------------------------------------------------------------

    \30\ 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.
---------------------------------------------------------------------------

    Section 4.1.5 describes certain assumptions that LCH SA makes when 
the Operational Target as well as certain sources of liquidity that LCH 
SA uses when calculating the target. One the sources of liquidity is 
LCH SA's cash deposit at Banque de France overnight. The Proposed Rule 
Change would specify that this cash deposit does not include cash from 
FCM/BD Clients. Moreover in Section 4.1.5, paragraph c., the Proposed 
Rule Change would correct a typographical error in the penultimate 
sentence.
    The Proposed Rule Change would amend Sections 4.2.2, which covers 
model inputs and variable selection, and 4.2.4, which covers 
mathematical formula, derivation and algorithm, and numerical 
approximation, to explain that when LCH SA calculates its liquidity 
coverage ratio, the resources of FCM/BD clients are segregated and 
unavailable. LCH SA would only consider these resources to be available 
where the relevant FCM/BD Clearing Member is assumed to be in default. 
Even in that case, the possibility to use the resource held on behalf 
of FCM/BD clients for liquidity purposes would be capped to the 
obligations of the FCM/BD Client.
    The Proposed Rule Change would next amend Section 4.2.5.3, which 
covers stress scenario selection. Here the Proposed Rule Change would 
correct a minor typographical error. It would refer to CDSClear rather 
than CDS when describing the market stress scenario considered in the 
LCR. The amendment is made for consistency purposes and is not linked 
to the FCM/BD related initiative.

[[Page 62125]]

    In Section 4.3.2, which covers model inputs and variable selection, 
and 4.3.4, which covers mathematical formula, derivation and algorithm, 
and numerical approximation, the Proposed Rule Change would specify 
that, in the calculation of the LCR for the interoperable CCP, the 
resources held on behalf of FCM/BD clients must be considered 
segregated and therefore unavailable for liquidity purposes.
    Finally, in Appendix 6.3 (Reminder of LCH SA's Sources of Liquidity 
and Related Risk Drivers), the Proposed Rule Change would add two 
footnotes to specify that cash held on behalf of FCM/BD clients 
(allocated and in excess) is excluded unless the liquidity requirement 
is driven by the relevant FCM/BD Clearing Member. With respect to the 
source of liquidity coming from Non-Euro non-cash collateral posted in 
full title transfer, the Proposed Rule Change would specify in a 
footnote that securities in DKK, NOK, SEK, CAD, AUD, CHF and JPY are 
excluded from the liquidity resources. This amendment is not linked to 
the FCM/BD related initiative but made for consistency purposes. With 
respect to the liquidity source coming from the collateral of 
investment activity, the Proposed Rule Change would add a footnote to 
specify that securities coming from FCM/BD clients investment shall be 
excluded unless the relevant FCM/BD Clearing Member is in default.

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.\31\ For the reasons given below, the Commission finds 
that the Proposed Rule Change is consistent with Section 17A(b)(3)(F) 
of the Act,\32\ Rule 17Ad-22(e)(21),\33\ and Rule 17Ad-22(e)(1) \34\ 
thereunder.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78s(b)(2)(C).
    \32\ 15 U.S.C. 78q-1(b)(3)(F).
    \33\ 17 CFR 240.17Ad-22(e)(21)
    \34\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

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, as well 
as to assure the safeguarding of securities and funds which are in the 
custody or control of LCH SA or for which it is responsible.\35\ As 
discussed in more detail below, the Commission finds that the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) of the Act.\36\
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78q-1(b)(3)(F).
    \36\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The proposed changes to the Procedures would require that LCH SA 
and Clearing Members establish and use certain accounts to hold and 
transfer cash and other collateral for satisfying margin requirements 
in connection with client positions in SBS and establish procedures for 
the return of excess collateral related to client positions in SBS. In 
requiring the establishment and use of certain accounts to hold and 
transfer cash and other collateral for satisfying margin requirements, 
and in establishing procedures for the return of excess collateral 
related to client positions in SBS, these proposed changes would help 
to assure the safeguarding of securities and funds in LCH SA's custody 
and control.
    As part of the Portfolio Margining Program, The Proposed Rule 
Change also would amend the definition of the LCH Cleared Swaps Client 
Segregated Depository Account to include FCM/BD Portfolio Margining 
Transactions. Similarly, under the Proposed Rule Change LCH would, upon 
request, maintain a segregated depository account in BNYM to register 
BNYM eligible collateral. These requirements should help safeguard 
client funds by ensuring the funds are held in a segregated account.
    The Proposed Rule Change also would amend the Rule Book to require 
Clearing Members to have appropriate personnel available for 
communications with LCH SA. It also would amend time references in the 
CDS clearing documentation to clarify they mean CET, unless otherwise 
stipulated. Having personnel available should help to ensure that LCH 
SA can promptly communicate with Clearing Members as needed to clear 
and settle transactions. Similarly, clarifying references to time 
should help ensure prompt and accurate settlement.
    Therefore, for the reasons discussed above, the Commission finds 
that the Proposed Rule Change is consistent with the Section 
17A(b)(3)(F) of the Act.\37\
---------------------------------------------------------------------------

    \37\ 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.\38\ In adopting Rule 17Ad-22(e)(21), the Commission 
provided guidance as to what a covered clearing agency generally should 
consider in establishing and maintaining policies and procedures that 
address efficiency and effectiveness.\39\
---------------------------------------------------------------------------

    \38\ 17 CFR 240.17Ad-22(e)(21).
    \39\ See Standards for Covered Clearing Agencies, Securities 
Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR 70786, 70841 
(Oct. 13, 2016).
---------------------------------------------------------------------------

    The Proposed Rule Change, in revising the Program, would give FCM/
BD Clearing Members the ability, on behalf of their FCM/BD clients, to 
portfolio margin FCM/BD Cleared Transactions that are SBS with FCM/BD 
Cleared Transactions that are Cleared Swaps. Under the Program, 
Clearing Members and their Clients are able to maintain reduced levels 
of margin that are commensurate with the risks of the portfolio based 
on correlations in a Clearing Member's cleared CDS positions consisting 
of both swaps and SBS. This allows Clearing Members to have increased 
efficiency by using margin from swaps and SBS by reducing costs for 
Clearing Members and their Clients.
    Additionally, as discussed above, LCH SA also proposes to allow 
Clearing Members to set or update its house excess Collateral threshold 
or Client Collateral Buffer Threshold on the business day such request 
will be made, instead of the next business day. This allows Clearing 
Members to update Collateral faster, which should allow for more 
efficient exchange of Collateral.
    The Proposed Rule Change would require each Clearing Member to have 
appropriate personnel available for communications with LCH SA during 
the Real Time Session, instead of only at opening hours. This change 
would allow for faster communication between Clearing Members and LCH 
SA by ensuring there is no delay because of lack of personnel.
    The Commission believes, therefore, that the Proposed Rule Change 
is consistent with the requirements of Rule 17Ad-22(e)(21) under the 
Act.\40\
---------------------------------------------------------------------------

    \40\ 17 CFR 240.17Ad-22(e)(21).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(1)

    Rule 17Ad-22(e)(1) requires that LCH SA establish, implement, 
maintain, and

[[Page 62126]]

enforce written policies and procedures reasonably designed to provide 
for a well-founded, clear, transparent, and enforceable legal basis for 
each aspect of its activities in all relevant jurisdictions.\41\
---------------------------------------------------------------------------

    \41\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

    The Commission believes that the other changes related to the 
Default Management Process, as discussed above, would help to ensure 
that the legal basis for LCH SA's activities is well-founded and clear. 
LCH SA proposes to amend Article 4.2.2 regarding the stages of defaults 
where a Clearing Member is a CCM. Specifically, LCH SA proposes to add 
additional conditions regarding the transfer of Collateral. This helps 
to ensure clarity in the CDS Default Management Process.
    LCH SA is amending its Procedures and Rule book to create a 
standard to create an enforceable legal basis for its portfolio 
margining is the practice by which transactions in SBS are cleared and 
held on a commingled basis with transactions in swaps. This standard is 
based on the Portfolio Margining Order and the CFTC Portfolio Margining 
Order. This Program creates a clear and well-founded legal basis based 
on the guidance from both the CFTC and the Commission.
    As discussed above, LCH SA proposes to make clarifying amendments 
to its Liquidity Risk Modeling Framework. For example, as discussed 
above, the Proposed Rule Change would amend the description of the 
liquidity need repayment of excess cash by members. The Proposed Rule 
Change would provide that, when calculating the liquid resources 
available, the cash received from the FCM/BD Clearing Members on behalf 
of their FCM/BD Clients is excluded. This helps ensure LCH SA has clear 
standards when calculating liquid resources available.
    Thus, the Commission finds that these aspects of the Proposed Rule 
Change are consistent with Rule 17Ad-22(e)(1).\42\
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    \42\ 17 CFR 240.17Ad-22(e)(1).
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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, 17A(b)(3)(F) of the Act,\43\ Rule 17Ad-
22(e)(21),\44\ and Rule 17Ad-22(e)(1) \45\ thereunder.
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    \43\ 15 U.S.C. 78q-1(b)(3)(F).
    \44\ 17 CFR 240.17Ad-22(e)(21)
    \45\ 17 CFR 240.17Ad-22(e)(1).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the Proposed Rule Change (SR-LCH SA-2023-005) be, and hereby is, 
approved.\46\
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    \46\ 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.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-19354 Filed 9-7-23; 8:45 am]
BILLING CODE 8011-01-P


