[Federal Register Volume 83, Number 121 (Friday, June 22, 2018)]
[Notices]
[Pages 29146-29148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-13378]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83456; File No. SR-LCH SA-2018-003]


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

June 18, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 4, 2018, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change (the 
``Proposed Rule Change'') described in Items I, II and III below, which 
Items have been primarily prepared by LCH SA. The Commission is 
publishing this notice to solicit comments on the Proposed Rule Change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    LCH SA is proposing to amend its Risk Management Procedures (the 
``Procedures'') to adopt a Liquidity Risk Modelling Framework (the 
``Framework''), which describes the Liquidity Stress Testing framework 
by which the Collateral and Liquidity Risk Management department 
(``CaLRM'') of LCH Group Holdings Limited (``LCH Group'') assures that 
LCH SA has enough cash available to meet any financial obligations, 
both expected and unexpected, that may arise over the liquidation 
period for each of the clearing services that LCH SA offers.\3\
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    \3\ LCH SA, a wholly owned subsidiary of LCH Group, manages its 
liquidity risk pursuant to, among other policies and procedures, the 
Group Liquidity Risk Policy and the Group Liquidity Plan applicable 
to each entity within LCH Group.
     In addition to its CDSClear service, LCH SA provides clearing 
services in connection with cash equities and derivatives listed for 
trading on Euronext (EquityClear), commodity derivatives listed for 
trading on Euronext (CommodityClear), and tri-party Repo 
transactions (RepoClear).
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, LCH SA included statements 
concerning the purpose of and basis for the Proposed Rule Change and 
discussed any comments it received on the Proposed Rule Change. The 
text of these statements may be examined at the places specified in 
Item IV below. LCH SA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    LCH SA currently maintains a number of well-developed policies and 
procedures designed to manage its

[[Page 29147]]

liquidity risk, i.e., the risk that LCH SA will not have enough cash 
available, in extreme but plausible circumstances, to settle margin 
payments or delivery obligations when they become due, in particular 
upon the default of a clearing member. Such policies and procedures 
include, among others: (i) The Group Liquidity Risk Policy; (ii) the 
Group Liquidity Plan; (iii) the Group Financial Resource Adequacy Plan; 
(iv) the Group Collateral Risk Policy; (v) the Group Investment Risk 
Policy; and (vi) the LCH SA Collateral Control Framework. As described 
below, the proposed Framework would complement these existing policies 
and procedures and develop further the Group Liquidity Risk Policy.
    In brief, the Framework: (i) Identifies LCH SA's sources of 
liquidity and corresponding liquidity risks; (ii) identifies LCH SA's 
liquidity requirements with respect to its members and its 
interoperable central counterparty (``CCP''); \4\ (iii) describes the 
metrics and limits that LCH SA monitors; and (iv) describes the 
scenarios under which these metrics are computed.
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    \4\ LCH SA has an interoperability agreement with Cassa di 
Compensazione e Garanzia (``CC&G''), an Italian CCP, pursuant to 
which LCH SA's clearing members and CC&G's clearing members are able 
to benefit from common clearing services without having to join the 
other CCP. Each CCP is a clearing member of the other one with a 
particular status when accessing the clearing system of the other 
counterparty.
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    The proposed Framework first identifies the main sources of 
liquidity available to LCH SA, cash and non-cash collateral, and 
assigns non-cash collateral to one of three tiers.\5\ Tier 1 assets are 
limited to those securities that are deemed to be of sufficient quality 
and demand to generate liquidity at little or no loss in the event of a 
default of a clearing member or a major market stress. LCH SA is able 
to pledge these securities to the Banque de France to generate cash on 
the same day. Only Tier 1 assets are included as liquidity resources in 
liquidity stress testing.\6\
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    \5\ Securities comprising non-cash collateral are comprised of 
the following components: (i) Margin collateral, i.e., non-cash 
collateral pledged by clearing members for margin cover; (ii) 
Collateral and Liquidity Management (``CaLM'') collateral, i.e., 
direct securities holdings that are part of the CaLM's investment 
activities; and (iii) clearing settlement collateral, i.e., 
collateral resulting from the physical settlement of contracts on 
behalf of a defaulting clearing member.
    \6\ Tier 2 assets are those securities that have a market and 
may be financed but are of lesser quality than Tier 1 assets. Tier 3 
assets are deemed to have little or no liquidity value in the event 
of a default or major market stress or are deemed to be too illiquid 
to be converted in the timeframe that a CCP would require.
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    The proposed Framework then highlights the three principal events 
under which LCH SA would require liquidity: (i) The default of one or 
more clearing members; (ii) the default of CC&G and (iii) operational 
liquidity needs (each defined below).
    The proposed Framework also examines liquidity needs arising from 
members' defaults, liquidity needs arising from an interoperating 
central counterparty's default (currently CC&G), and the manner in 
which operational liquidity requirements are determined. Liquidity 
needs arising from members' defaults are those needs arising from 
fulfilment of the settlement of the securities of the defaulted 
clearing member; posting of variation margin to non-defaulting members 
on the positions held by the defaulted clearing member(s); the value of 
bonds pledged at the Banque de France; haircuts by the European Central 
Bank on securities posted by the defaulting Clearing Member; and 
investment losses. Liquidity needs arising from interoperating CCPs' 
defaults are those needs arising from the service closure of the 
Italian Clearing activity (e.g. reimbursement of the margins and 
default funds related to the Italian clearing activity, cash settlement 
of the Italian repo positions). Operational liquidity is defined as the 
amount of liquidity that LCH SA is required to hold to satisfy 
liquidity needs related to the operational management of LCH SA in a 
stressed environment that does not lead to a member's default. Such 
liquidity requirements arise from a number of factors, including the 
need to repay excess cash posted by members, the need to repay margin 
when margin requirements are reduced, and the substitution of cash 
collateral and European Central Bank eligible securities.
    The proposed Framework next describes the metrics used to determine 
LCH SA's liquidity needs that are calculated each day over a five-day 
period. Such metrics include: (i) The liquidity coverage ratio; (ii) a 
monthly rolling average liquidity buffer; (iii) a daily minimum 
liquidity buffer; and (iv) required cash collateral.
    With respect to the liquidity coverage ratio, the proposed 
Framework explains how the liquidity coverage ratio is determined for 
each of the clearing services that LCH SA offers in a Cover 2 scenario, 
i.e., the liquidity risk arising from the default of at least two 
clearing group members to which LCH SA has the largest exposures during 
the 5 days following default. The Cover 2 amount is computed by 
aggregating the liquidity risks related to clearing members within the 
same group across all of LCH SA's services. The two largest group 
members are chosen according to the liquidity needs related to these 
members. The liquidity requirements are generated by three risk 
drivers: The settlement risk, market risk and the ECB haircut. For the 
CDSClear service, LCH SA determines the liquidity risk by considering 
variation margin modelled at member level by applying the most punitive 
CDS spread widening stress scenario for both ITraxx Main and CrossOver 
(currently the historical scenario considering the 2007 crisis). The 
Framework focuses on the principal risks for which LCH SA must assure 
that it has sufficient liquidity.
    Finally, the Framework describes the reverse stress test that LCH 
SA runs at least quarterly. The reverse stress test is designed to help 
determine the limits of the models and of the liquidity risk management 
framework by modelling extreme market conditions that go beyond what 
are considered plausible market conditions over a 5-day time horizon. 
LCH SA stresses seven risk factors independently, and also considers 
these risk factors together in two combined reverse stress test 
scenarios, the Behavioural and Macro-economic.
2. Statutory Basis
    LCH SA has determined that the Proposed Rule Change is consistent 
with the requirements of Section 17A of the Act \7\ and regulations 
thereunder applicable to it. The Framework implements the provisions of 
Section 17A(b)(3)(F) of the Act,\8\ which require, inter alia, that the 
rules of a clearing agency ``assure the safeguarding of securities and 
funds that are in its custody or control or for which it is 
responsible.'' Further, Regulation 17dA-22(e) requires a clearing 
agency to maintain and enforce written policies and procedures 
reasonably designed to ``measure, monitor, and manage the liquidity 
risk that arises in or is borne by the covered clearing agency.'' \9\ 
Consistent with these provisions, the Framework assures that the 
clearing agency maintains sufficient liquid resources to effect the 
settlement of payment obligations with a high degree of confidence 
under a wide range of foreseeable stress scenarios.\10\
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    \7\ 15 U.S.C. 78q-1.
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(e)(7).
    \10\ The proposed Framework is also consistent with LCH SA's 
obligations under the European Markets Infrastructure Regulation 
(``EMIR''); Regulation (EU) No 648/2012 of the European Parliament 
and of the Council of 4 July 2012 on OTC derivatives, central 
counterparties and trade reporting.
     In particular, EMIR Article 44 provides, in part:
     ``A CCP shall at all times have access to adequate liquidity to 
perform its services and activities. . . . A CCP shall measure, on a 
daily basis, its potential liquidity needs [taking] into account the 
liquidity risk generated by the default of at least the two clearing 
members to which it has the largest exposures.''

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B. Clearing Agency's Statement on Burden on Competition

    LCH SA does not believe the Proposed Rule Change would have any 
impact, or impose any burden, on competition. The Proposed Rule Change 
does not address any competitive issue or have any impact on the 
competition among central counterparties. LCH SA operates an open 
access model, and the Proposed Rule Change will have no effect on this 
model.

C. Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the Proposed Rule Change have not been 
solicited or received. LCH SA will notify the Commission of any written 
comments received by LCH SA.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to [email protected]. Please include 
File Number SR-LCH SA-2018-003 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-LCH SA-2018-003. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings will also be available for inspection 
and copying at the principal office of LCH SA and on LCH SA's website 
at http://www.lch.com/asset-classes/cdsclear.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-LCH SA-2018-003 and should 
be submitted on or before July 12, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-13378 Filed 6-21-18; 8:45 am]
 BILLING CODE 8011-01-P