[Federal Register Volume 84, Number 105 (Friday, May 31, 2019)]
[Notices]
[Pages 25318-25329]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11319]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85940; File No. SR-LCH SA-2019-003]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change, as Modified by Amendments No. 1 and 2, To 
Implement Settled-to-Market Treatment of Variation Margin, Permit the 
Creation of Multiple Account Structures, Permit Select Members To 
Provide Clearing Services to Affiliated Firms, and Update the 
Onboarding Procedures

May 24, 2019.
    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 May 13, 2019, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission'' or ``SEC'') the proposed rule 
change described in Items I, II and III below, which Items have been 
prepared primarily by LCH SA. On May 21, 2019, LCH SA filed Amendment 
No. 1 to the proposed rule change, and on May 24, 2019, LCH SA filed 
Amendment No. 2 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as modified by Amendments No. 1 and 2, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendments No. 1 and 2 both corrected technical issues with 
the initial filing of the proposed rule change but did not make any 
changes to the substance of the filing or the text of the proposed 
rule change.
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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 (i) CDS Clearing Rule Book (``Rule 
Book''), (ii) CDS Clearing Supplement (``Supplement''), and (iii) CDS 
Clearing Procedures (``Procedures'') (collectively the ``CDS Clearing 
Rules'') to incorporate new terms and to make conforming, clarifying, 
and clean-up changes intended to: (1) Implement a ``settled-to-market'' 
(``STM'') treatment

[[Page 25319]]

of variation margin \4\ as a method for further mitigating counterparty 
credit risk related to changes in the market value of transactions; (2) 
permit Clearing Members \5\ to create multiple account structures for a 
single client and multiple trade accounts per client within a single 
omnibus account structure; (3) permit Select Members \6\ to provide 
client clearing services to their ``Affiliated Firms'' (discussed 
below); and (4) make certain clarifications and enhancements to LCH 
SA's existing onboarding procedures to better reflect current business 
practices. Capitalized terms not defined or modified in this rule 
proposal will have the same meaning as in LCH SA's existing Rule Book, 
Supplement, or Procedures.
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    \4\ Lowercase ``variation margin'' in this rule proposal 
generically refers to amounts exchanged as a result of a change in 
market value of a transaction, irrespective of the legal 
characterization of such amounts as settlement or collateral 
transfer.
    \5\ Clearing Members include Select Members (defined below) and 
General Members as the context requires. General Members are a 
``CCM'' (i.e., generally any legal entity admitted as a clearing 
member in accordance with the CDS Clearing Rules and party to the 
CDS Admission Agreement) or an ``FCM Clearing Member'' (i.e., 
generally any Futures Commission Merchant (``FCM'') that has been 
admitted as a clearing member in accordance with the CDS Clearing 
Rules and is a party to the CDS Admission Agreement and which has 
not elected to become a CCM) that has been admitted by LCH SA as a 
General Member in accordance with Section 1 of the Procedures.
    \6\ A Select Member is a CCM or an FCM Clearing Member that: (a) 
Does not provide CDS Client Clearing Services to Clients other than 
Affiliated Firms (defined herein); and (b) has been admitted by LCH 
SA as a Select Member in accordance with Section 1 of the 
Procedures.
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    The text of the proposed rule change has been annexed as Exhibit 5.

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 these statements.

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

    LCH SA is proposing to amend its CDS Clearing Rules to add STM as a 
way to treat variation margin. Once implemented, non-FCMs and non-US 
Clearing Members will be able to treat variation margin either as (i) 
collateralized-to-market (``CTM'') or as (ii) STM. FCMs and US Clearing 
Members will be required to treat variation margin as STM.
    Under the CTM model, parties make daily payments of variation 
margin as collateral transfer as described in LCH SA's CDS Clearing 
Rules. LCH SA's CDS Clearing Rules also provide for the payment of 
Price Alignment Interest (``PAI'') which a party that receives 
collateral typically pays to its counterparty. The CFTC Staff has 
stated that, ``[i]n cleared markets, PAI eliminates the basis risk that 
would otherwise exist between cleared and uncleared derivatives. Thus, 
PAI represents the interest that would be paid on any collateral posted 
in connection with an uncleared swap contract.'' \7\ Variation margin 
payments collateralize the market exposure on a given day based on the 
market price each day but ``the exposure between the counterparties 
carries forward through the life of the contract'' with collateral 
passing back and forth between the counterparties through future 
variation margin payments.\8\
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    \7\ See CFTC Staff Letter No. 17-51 (Oct. 27. 2017) (available 
at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/17-51.pdf).
    \8\ Id. at 4.
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    Under the proposed STM model, LCH SA's CDS Clearing Rules will be 
amended such that all Clearing Members using the STM model will make 
daily payments of variation margin called ``NPV Payments'' and payments 
called ``Price Alignment Amount'' (``PAA''). The PAA is economically 
equivalent to PAI, and represents the amount that would have been paid 
if the variation margin were treated as collateral as opposed to a 
settled amount. As the CFTC Staff explained, ``[u]nlike the 
collateralized-to-market model . . . these payments settle the 
outstanding exposure of the counterparties.'' \9\ Each day, the 
outstanding exposure will change, and new payments will be needed to 
settle the exposure.
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    \9\ Id.
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    LCH SA has determined to file this proposed rule change in order 
to, among other things, amend its CDS Clearing Rules to require the STM 
treatment of variation margin paid or received by FCMs and US Clearing 
Members, which is intended to promote the prompt and accurate clearance 
and settlement of all Cleared Transactions. As a result of the proposed 
rule change, FCMs and US Clearing Members that are subject to 
regulatory capital requirements promulgated by the federal bank 
regulatory agencies, might obtain more favourable regulatory capital 
treatment of Cleared Transactions.\10\ The proposed rule change to 
require the STM treatment of variation margin would also be consistent 
with a recent CFTC staff Interpretive Letter indicating that CTM 
variation margin payments would not satisfy CFTC regulations that 
require daily settlement that is irrevocable and unconditional.\11\ LCH 
SA will also make STM available as an option, but not a requirement, 
for non-FCMs and non-US Clearing Members.
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    \10\ See Interagency Guidance on the Regulatory Capital 
Treatment of Certain Centrally-Cleared Derivative Contracts Under 
Regulatory Capital Rules (August 14, 2017) (available at https://www.federalreserve.gov/supervisionreg/srletters/sr1707a1.pdf).
    \11\ See CFTC Staff Letter No. 17-51 (Oct. 27. 2017).
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    LCH SA's affiliate, LCH Limited, promulgated clearing rules in its 
LCH Limited General Regulations which provide at Regulation 57A, among 
other sections, for STM for SwapClear Clearing Members established 
under the laws of any state of the United States or under the federal 
laws of the United States.\12\ Regulation 57A was initially proposed in 
2015. At that time, LCH Limited, through its membership in the 
International Swaps and Derivatives Association (``ISDA''), approached 
the SEC's Office of the Chief Accountant to discuss the accounting 
implications associated with implementing STM.\13\ The ISDA dialogue 
resulted in a confirmatory letter from ISDA to the SEC's Office of the 
Chief Accountant on January 4, 2017 confirming ISDA's understanding 
that the SEC did not object to certain tax related views associated 
with the implementation of STM variation margin treatment for U.S. 
persons. LCH Limited's clearing rules have provided for STM variation 
margin treatment since on or around December 2015. Whereas previously 
STM variation margin treatment was only available to LCH Limited 
members, this rule proposal will implement STM variation margin 
treatment for LCH SA, and thereby making it also available to LCH SA 
Clearing Members, including FCMs and US Clearing Members for which STM 
variation margin treatment is required.
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    \12\ General Regulations of LCH Limited, Regulation 57A (Nov. 
2018), available at https://www.lch.com/system/files/media_root/General%20Regulations%20-%2026%20November%202018.pdf.
    \13\ Confirmation Letter Related to ISDA Accounting Committee 
White Paper, ISDA (Jan. 4, 2017), available at https://www.isda.org/a/lgiDE/isda-sec-vm-settlement-confirming-letter.pdf.
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    In addition, this rule proposal will amend the CDS Clearing Rules 
to permit Clearing Members to create multiple account structures for a 
single client and multiple Trade Accounts per client

[[Page 25320]]

within a single omnibus account structure. This rule proposal will also 
permit Select Members to provide clearing services to their Affiliated 
Firms and make clarifying changes to LCH SA's onboarding procedures to 
reflect current business practices.
1. Amendments To Permit Settled-to-Market Treatment for Cleared 
Transactions
    The updated CDS Clearing Rules will permit non-FCMs and non-US 
Clearing Members to utilize either the STM accounting method or CTM 
accounting method where permitted and will require FCMs and US Clearing 
Members to utilize the STM treatment. To implement the STM treatment of 
variation margin, the Rule Book, Supplement, and Procedures will be 
amended by adding new and amending existing defined terms and 
provisions as described below.
i. Rule Book
    With respect to the Rule Book, LCH SA proposes to add additional 
defined terms and make amendments to existing defined terms contained 
within Title I, Chapter 1, Section 1.1.1.
    The term ``Client NPV Payment Requirement'' will be added to 
describe the NPV Amount (defined below) that LCH SA will calculate as 
payment by a Clearing Member to LCH SA or by LCH SA to a Clearing 
Member in relation to certain STM Cleared Transactions and as the case 
may be, Irrevocable Backloading STM Transactions which are not Rejected 
Transactions, allocated to a relevant Client Margin Account.
    The term ``Converting Clearing Member'' will be added to capture a 
framework whereby a Clearing Member submits a written request to LCH SA 
to convert all of the CTM Cleared Transactions registered in a CTM 
Trade Account into STM Cleared Transactions by converting the 
underlying account from a CTM Trade Account into an STM Trade Account. 
This is a one-way conversion from CTM to STM and, once complete, is 
irrevocable.
    The term ``CTM Cleared Transactions'' will be added to cross 
reference a Cleared Transaction that is registered in a CTM Trade 
Account as described in Title III, Chapter 1, Section 3.1.10.
    The term ``CTM Trade Account'' will be added to describe a Trade 
Account that a Clearing Member elects to classify as a CTM Trade 
Account in accordance with Section 5 of the Procedures.
    The term ``House NPV Payment Requirement'' will be added to 
describe the NPV Amount (defined below) that LCH SA will calculate as 
payment by a Clearing Member to LCH SA or by LCH SA to a Clearing 
Member in relation to certain STM Cleared Transactions, and as the case 
may be, Irrevocable Backloading STM Transactions which are not Rejected 
Transactions, allocated to the relevant Clearing Member's House Margin 
Account.
    The term ``Irrevocable Backloading STM Transaction'' will be added 
to clarify the definition of Irrevocable Backloading Transaction, which 
after novation by LCH SA will be registered in the relevant Account 
Structure as an STM Cleared Transaction.
    The term ``Irrevocable Backloading CTM Transaction'' will be added 
to clarify the definition of Irrevocable Backloading Transaction which 
after novation by LCH SA will be registered in the relevant Account 
Structure as a CTM Cleared Transaction.
    The term ``NPV Amount'' will be added to define the relevant 
amounts computed in accordance with Section 2 of the Procedures.
    The term ``NPV Payment'' will be added to describe the amount of 
cash paid by a Clearing Member to LCH SA to satisfy the NPV Payment 
Requirement.
    The term ``NPV Payment Requirement'' will be added as a collective 
definition of both House NPV Payment Requirement or a Client NPV 
Payment Requirement.
    The term ``Price Alignment Amount'' will be added to define the 
relevant amounts computed in accordance with Section 2 of the 
Procedures.
    The term ``STM Cleared Transaction'' will be added to define a 
Cleared Transaction that is registered in an STM Trade Account in 
accordance with Title III, Chapter 1, Section 3.1.10.
    The term ``STM Trade Account'' will be added to describe a Trade 
Account that a Clearing Member elects to classify as an STM Trade 
Account in accordance with Section 5 of the Procedures.
    The term ``Variation Margin Collateral Transfer'' will be added to 
describe the amount of cash transferred by a Clearing Member or LCH SA 
by way of full title transfer to satisfy a Variation Margin 
Requirement. The definition also includes an affirmative statement that 
Variation Margin Collateral Transfer is subject to the provisions of 
article L. 211-38 of the French Monetary and Financial Code.
    The term ``Backloading Failure'' will be amended to add the concept 
of Variation Margin Collateral Transfers as an additional possible 
transfer that may need to be made at the same time as the Morning Call.
    The term ``Cash Payment'' will be amended for consistency purposes 
to eliminate the reference to Variation Margin which has been replaced 
by reference to NPV Payments and to add a reference to ``Price 
Alignment Amount'', as a parallel to the reference to ``Price Alignment 
Interest''.
    The term ``CCM Gross Omnibus Multi Sub-Account Client Margin 
Account'' will be amended to add the concept of Client NPV Payment 
Requirement as a possible value that will be calculated, as applicable.
    The term ``CCM Gross Omnibus Single Sub-Account Client Margin 
Account'' will be amended to add the concept of Client NPV Payment 
Requirement as a possible value that will be calculated, as applicable. 
The definition will also be modified to account for the concept of 
Account Structure.
    The term ``CCM House Margin Account'' will be amended to add the 
concept of House NPV Payment Requirement as a possible value that will 
be calculated, as applicable.
    The term ``CCM Indirect Client Gross Segregated Margin Account'' 
will be amended to add Client NPV Payment Requirement as a possible 
value that will be calculated, as applicable. The definition will also 
be modified to account for the concept of Account Structure.
    The term ``CCM Indirect Client Net Segregated Margin Account'' will 
be amended to add Client NPV Payment Requirement as a possible value 
that will be calculated, as applicable.
    The term ``CCM Individual Segregated Client Margin Account'' will 
be amended to add Client NPV Payment Requirement as a possible value 
that will be calculated, as applicable. The definition will also be 
modified to account for the concept of Account Structure.
    The term ``CCM Net Omnibus Segregated Client Margin Account'' will 
be amended to add Client NPV Payment Requirement as a possible value 
that will be calculated, as applicable.
    The term ``Client Assets'' will be amended to add NPV Amounts, as 
applicable, as an additional component of accruals which will be 
considered Client Assets.
    The term ``Client Variation Margin Requirement'' will be amended to 
clarify that in practice, Variation Margin will be calculated on a 
transaction-by-transaction basis rather than on an Open Position basis. 
In order to affect this clarification, LCH SA proposes to replace Open 
Positions with CTM Cleared Transactions in the definition of Client 
Variation Margin Requirement. Conforming changes will be made 
throughout the Rule Book. The same

[[Page 25321]]

amendments will also be made to the term ``House Variation Margin 
Requirement.''
    The term ``FCM Client Margin Account'' will be amended to update 
the cross references to Irrevocable Backloading STM Transactions and 
Client NPV Payment Requirement.
    The term ``FCM Client Margin Requirement'' will be amended to 
delete any reference to the term Variation Margin.
    The term ``FCM House Margin Account'' will be amended to update the 
cross references to Irrevocable Backloading STM Transactions and House 
NPV Payment Requirement.
    The term ``FCM House Margin Requirement'' will be amended to delete 
any reference to the term Variation Margin.
    The term ``Open Position'' will be amended to mirror the language 
contained within what was formerly Article 3.2.2.3. As a result, the 
cross reference to Article 3.2.2.3, as well as the Article itself, will 
be removed from the Rule Book. The cross references to Article 5.2.3.3 
and Article 6.2.3.3, as well as the Articles themselves, will also be 
removed from the Rule Book.
    The term ``Payment Failure'' will be amended to replace the term 
Cash Payment by Variation Margin, to add the newly defined term Price 
Alignment Amount as a category of amounts which may trigger a Payment 
Failure, and to add a new sub-section (v) in reference to NPV Amount to 
satisfy a Clearing Member's NPV Payment Requirement.
    The term ``Variation Margin'' will be amended to remove the 
reference to Price Alignment Interest.
    Beyond definitional changes, LCH SA proposes to amend the Rule Book 
at Title I, Chapter 2, Section 1.2.7, Article 1.2.7.4 to include the 
term ``Variation Margin Collateral Transfer'' regarding the currency in 
which the Clearing Members are required to make payments and/or 
transfers.
    LCH SA proposes to amend Section 1.2.9, Article 1.2.9.2 to include 
the payment of NPV Amounts to the Clearing Member as new item (iii) and 
the payment of the Price Alignment Amount to the Clearing Member as new 
item (iv), where applicable. In addition, item (i) is modified to 
clarify that the payment of Variation Margin to the relevant Clearing 
Member is by way of Variation Margin Collateral Transfer.
    LCH SA proposes to amend the Rule Book at Title I, Chapter 3, 
Section 1.3.1, Article 1.3.1.4 to include clarifying language that the 
cumulative value of all NPV Amount(s) paid by the Clearing Member or 
LCH SA in respect of NPV Payment Requirements for the corresponding 
House Margin Account or Client Margin Account should be included in the 
computation of the value of each Cleared Transaction. Article 1.3.1.5 
will be amended to include the concept of NPV Amount, as applicable, 
whereas currently it references Variation Margin only. Article 1.3.1.6 
will be amended to include the concept of redelivery of Variation 
Margin whereas currently the section only refers to repayment.
    LCH SA proposes to amend the Rule Book at Title II, Chapter 2, 
Section 2.2.1, Article 2.2.1.1. in order to include the reference to 
Variation Margin Collateral Transfer obligations whereas currently the 
Article only refers to Cash Payment obligations.
    Rule Book at Title II, Chapter 2, Section 2.2.7, Article 2.2.7.2 
will be modified to include the reference to Variation Margin 
Collateral Transfer obligations, whereas the Article only refers to 
Cash Payment obligations. The same modifications will be brought to 
Article 2.2.7.4.
    LCH SA proposes to amend the Rule Book at Title II, Chapter 4, 
Section 2.4.2, Article 2.4.2.8 to add the reference to NPV Payment 
Requirements whereas the Article only refers to Variation Margin 
Requirement.
    Rule Book at Title III, Chapter 1, Section 3.1.8, Article 3.1.5.1 
will be modified to remove the concept of Variation Margin Requirement 
from the existing paragraph and to create a stand-alone paragraph that 
specifically addresses the method for calculating the Variation Margin 
Requirement and/or NPV Payment Requirement by cross-referencing Title 
IV, Chapter 2 of the Rule Book; Section 2 of the Procedures; and Title 
III, Chapter 1, Section 3.1.7 of the Rule Book.
    Rule Book at Title III, Chapter 1, Section 3.1.9, Articles 3.1.9.2 
and 3.1.9.3 will be modified to add the reference to NPV Payment 
Requirement(s) whereas currently these Articles only refer to Variation 
Margin Requirement(s).
    LCH SA proposes to make updates to the provisions of the Rule Book 
that discuss the registration of cleared transactions. New Rule Book 
Title III, Chapter 1, Section 3.1.10, Article 3.1.10.7 through 3.1.10.9 
will be added to the Rule Book. Current Article 3.1.10.7 will become 
Article 3.1.10.10 and current Article 3.1.10.8 will become Article 
3.1.10.11. New Article 3.1.10.7 will permit Clearing Members to elect 
to classify each Trade Account as either a CTM Trade Account or an STM 
Trade Account in accordance with Section 5 of the Procedures. Trade 
Accounts will default to CTM Trade Accounts where a Clearing Member 
does not make an election. Cleared Transactions registered within a 
Trade Account will have the same classification as the Trade Account 
itself. Trade Accounts may only comprise CTM Cleared Transactions or 
STM Cleared Transactions, but not both simultaneously.
    New Article 3.1.10.8 will introduce the concept of a ``Converting 
Clearing Member'' which is intended to capture a framework whereby a 
Clearing Member submits a written request to LCH SA to convert all of 
the CTM Cleared Transactions registered into a CTM Trade Account into 
STM Cleared Transactions by converting the underlying account from a 
CTM Trade Account into an STM Trade Account. This is a one-way 
conversion from CTM to STM and, once complete, is irrevocable. This 
caveat will be memorialized in Article 3.1.10.8.
    Notwithstanding the provisions of Article 3.1.10.7 and Article 
3.1.10.8, under new Article 3.1.10.9, each Cleared Transaction 
registered in the name of a Clearing Member that is an FCM or otherwise 
established under the laws of any state of the United States or under 
US federal law, will be registered as an STM Cleared Transaction. It 
will neither be possible to register transactions for these entities as 
CTM Cleared Transactions nor to convert from an STM Cleared Transaction 
to a CTM Cleared Transaction.
    LCH SA proposes to update Article 4.1.1.1 of Section 4.1.1 under 
Title IV, Chapter 1 in order to add a reference to House NPV Payment 
Requirement and Client NPV Payment Requirement, whereas currently this 
Article only refers to House Variation Margin Requirement and Client 
Variation Margin Requirement.
    Updated Section 4.2.3 of the Chapter 2 under Title IV will now 
capture the concept of Variation Margin Requirement and NPV Payment 
Requirement whereas the current section only refers to ``Collateral 
Calls''. In addition, the reference to NPV Payment Requirement will be 
added to Title IV, Chapter 2 itself, whereas currently this Chapter is 
only named ``Margin''. Article 4.2.3.1 will be amended to add the 
reference to NPV Payment Requirement in addition to the reference to 
Variation Margin Requirement and also to add the reference to NPV 
Amount in addition to the reference to Variation Margin. Article 
4.2.3.2 will also be amended in order to replace the term ``Cash 
Payment'' by NPV Payment as a payment to satisfy a NPV Payment 
Requirement and Variation Margin

[[Page 25322]]

Collateral Transfer as a transfer to satisfy a Variation Margin 
Requirement; the word ``transfers'' will also be added in addition to 
the word ``payments''.
    Section 4.2.5 will now capture the concept of NPV Amounts in 
addition to Variation Margin to account for the new STM business 
workflows and will be renamed to ``Variation Margin and NPV Amounts''. 
Specifically, Article 4.2.5.1 is modified to account for the newly 
defined terms described earlier in this rule proposal. The concept of 
Cash Payments is replaced by an obligation to make either Variation 
Margin Collateral Transfers or NPV Payments and to differentiate that 
Variation Margin Collateral Transfers are applicable to CTM Cleared 
Transactions or Irrevocable Backloading CTM Transactions; and that NPV 
Payments are applicable to STM Cleared Transactions or Irrevocable 
Backloading STM Transactions when such amounts are due.
    Updated Article 4.2.5.2 will be amended to capture the concept of 
NPV Amounts within the requirement that such amounts are payable by a 
Clearing Member or LCH SA at the same time as the Morning Call or as 
otherwise provided by the Procedures. Variation Margin Collateral 
Transfer or NPV Payments will be made in compliance with the times set 
out in Section 3 of the Procedures. In addition, the Rule Book will 
state that LCH SA and the Clearing Member agree that satisfaction of 
the payment obligation arising under the NPV Payment Requirement will 
discharge any such obligation required to settle outstanding exposure 
under an STM Cleared Transaction or for an Irrevocable Backloading STM 
Transaction which is not a Rejected Transaction. New Article 4.2.5.3 is 
intended to clarify that, notwithstanding anything to the contrary in 
the CDS Clearing Documentation, a Variation Margin Collateral Transfer 
obligation does not arise for STM Cleared Transactions or for 
Irrevocable Backloading STM Transactions. This Article is not intended 
to prejudice any other rights to require Collateral to be transferred 
under the CDS Clearing Documentation (e.g., a Collateral transfer 
requirement in respect of a Clearing Member's Margin Requirement for 
STM Cleared Transactions).
    In addition, LCH SA proposes to amend Title IV, Chapter 2, Section 
4.2.7, Article 4.2.7.1 to clarify the fact that risk calculation 
performed by LCH SA also includes the calculation of Variation Margin 
Requirement and NPV Payment Requirement in addition to Margin 
Requirements and Open Positions. Article 4.2.7.2. will also be amended 
in order to clarify the term ``clearing functions'' shall mean the 
validation of Variation Margin Requirements and NPV Payment 
Requirements, in addition to Margin Requirements.
    LCH SA proposes to amend Title IV, Chapter 3, Section 4.3.2, 
Article 4.3.2.3 (viii) to clarify that, in case of default of a 
Clearing Member, LCH SA will be authorized to convert the Variation 
Margin Collateral Transfer obligations into cash payment obligations. 
The purpose of such change is to ensure that in the case of default, 
Variation Margin will be applied by LCH SA in the same way as an NPV 
Payment (i.e., as a cash payment). Such treatment is consistent with 
how LCH SA currently treats Variation Margin, but this amendment is 
required because the new definition of Cash Payment will no longer 
capture Variation Margin and Variation Margin is not captured within 
the definition of Collateral.
    In addition to the specific proposed changes to the Rule Book 
discussed above, certain conforming changes and clarifications to 
incorporate the concepts of NPV Payment Requirement, NPV Amount, and 
Price Alignment Amount with respect to STM were made throughout the 
Rule Book. Corresponding changes and clarifications were made with 
respect to CTM with conforming references to Variation Margin 
Requirement, Variation Margin, and Price Alignment Interest. References 
to Variation Margin and Variation Margin Requirements were removed in 
respect of FCM Clearing Members. Such proposed changes are notably 
inserted in Title V, Chapter 1, Section 5.1.1, Article 5.1.1.3 (xvii), 
Title V, Chapter 2, Section 5.2.3, Article 5.2.3.2, Title VI, Chapter 
1, Section 6.1.1, Article 6.1.1.3 (xii), Title VI, Chapter 2, Section 
6.2.3, Article 6.2.3.2 and Sections 1.1, 6.2, 7.1, 8.1.4, 8.2, 8.5 of 
the CDS Default Management Process in Appendix 1.
ii. Procedures
(A) Section 2
    LCH SA Procedures Section 2 will be updated to reflect the 
operational steps required to facilitate the NPV Payments and Price 
Alignment required to operationalize the STM business model while still 
maintaining the CTM business model for non-FCMs and non-US Clearing 
Members. As a result, the Section itself will be renamed Margin, NPV 
Payment and Price Alignment.
    The cross reference in Section 2.1 to Procedures Section 3 will be 
updated to reference Variation Margin Collateral Transfers whereas 
previously the reference was only to Cash Payments. Corresponding 
updates (discussed below) will be made throughout Section 3.
    Section 2.2 will be amended to make certain clean-up and conforming 
changes in order to ensure that the new defined terms relevant to 
implementing STM are applied consistently to the existing procedure. 
Specifically, Section 2.2(c) will now be called Variation Margin 
Requirement and NPV Payment Requirement and will be broken into two 
sub-sections, as applicable, to either: (i) Transfer Variation Margin 
to or receive Variation Margin from LCH SA to satisfy the Client 
Variation Margin Requirement and/or House Variation Margin Requirement; 
and/or (ii) make NPV Payment to or receive NPV Payment from LCH SA to 
satisfy the Client NPV Payment Requirement and/or House NPV Payment 
Requirement. Section 2.2(d) will be updated to add the concept of NPV 
Amount within the list of amounts that, when aggregated, represent the 
amount that can be called from a Clearing Member that is a CDS Seller 
in respect of a Cleared Transaction referencing a single Reference 
Entity. Section 2.2(g) will be retitled ``Calculation of Margin and NPV 
Amount(s) following a Payment Failure or the issuance of a Default 
Notice in respect of a Clearing Member'' and will be updated to 
incorporate the concept of NPV Amount(s) as an alternative to Margin 
throughout the section.
    Section 2.4 will be renamed ``Collateral, Cash Payments, and 
Variation Margin Collateral Transfers''. In parallel, Section 2.4(a) 
will also be renamed to ``Types of Collateral and currencies for Cash 
Payments and Variation Margin Collateral Transfers'' and Section 2.4(b) 
will be renamed to ``Transferring Collateral and making Cash Payments 
and Variation Margin Collateral Transfers''. Within Section 2.4(a) the 
concept of Variation Margin Collateral Transfers, NPV Payment(s), and 
Variation Margin will be added to the cross reference to Procedure 
Section 3 which sets out the applicable types of Collateral and 
currencies that may be used. Section 2.4(b) which also cross references 
to Procedure Section 3 will be similarly updated.
    Section 2.5 will be renamed to ``Payment of the Margin Requirement, 
Variation Margin Requirement, NPV Payment Requirement and Provision of 
Excess Collateral and Client Collateral Buffer''. Section 2.5 (a) which 
discusses the Morning Call is amended to include the concept of NPV 
Payment Requirement in timing, notification, and payment requirement. 
In addition, certain requirements of Clearing Members that previously 
referenced

[[Page 25323]]

Cash Payments, are now split to incorporate the concept of Variation 
Margin Collateral Transfers and NPV Payments where applicable. In 
reference to certain Excess Collateral and/or Cash Payments by FCM 
Clearing Members, the concept of Variation Margin Requirement will be 
replaced by NPV Payment Requirement. In addition, this section 
previously provided that LCH SA is able to credit Euro denominated Cash 
Collateral and/or make Cash payments to relevant Clearing Members in 
accordance with the process outlined in Procedure Section 3. This 
section will now also incorporate the concept of Variation Margin 
Collateral Transfer(s) with respect to relevant Clearing Members. 
Section 2.5(b) under the heading ``Second Intraday Call'' will be 
updated for consistency such that the existing cross reference to 
Procedure Section 3 will be applicable to Clearing Members that are 
required to transfer Collateral to satisfy their Required Collateral 
Amount, and now also to make Variation Margin Collateral Transfers in 
respect of their Variation Margin Requirement. The existing reference 
to Cash Payments will be revised for consistency to reference NPV 
Payments and any applicable NPV Payment Requirement.
    LCH SA proposes to make amendments to Section 2.13 through the end 
of Procedures Section 2. A new Section 2.14 covering ``NPV Amount'' and 
a new Section 2.17 covering ``Price Alignment Amount'' will be added to 
the Procedures. Contingency Variation Margin (formerly Section 2.14) 
will be updated and re-numbered to Section 2.15 and Price Alignment 
Interest (formerly Section 2.15) will be updated and re-numbered to 
Section 2.16. Credit Quality Margin (formerly Section 2.16) will be re-
numbered to Section 2.18 and Extraordinary Margin (formerly Section 
2.17) will be re-numbered to Section 2.19 although neither section is 
subject to substantive updates.
    Section 2.13 will be amended to specify that Variation Margin is 
applicable to CTM Cleared Transactions and Irrevocable Backloading CTM 
Transactions which are not Rejected Transactions, rather than all 
Cleared Transactions. Section 2.13 previously referred to ``net 
position value'' but will be amended to refer to ``net present value'' 
throughout. The portion of Section 2.13(ii), which previously outlined 
a netting procedure for payments from a Clearing Member to LCH SA and 
from LCH SA to a Clearing Member, will be renumbered 2.13(b) and will 
be amended to address the calculation of net present value for each CTM 
Cleared Transaction or Irrevocable Backloading CTM Transaction and to 
account for global changes to the defined terms in the Rule Book and 
Procedures.
    New Section 2.14 NPV Amount will be added to the Procedures to 
outline the specific operational steps required to facilitate the 
accounting for an STM Cleared Transaction. An NPV Amount is an amount 
paid on each Cash Payment Day between the Clearing Member and LCH SA to 
account for the variation of the market value of the CDS, or as the 
case may be, Index Swaption that is an STM Cleared Transaction of 
Irrevocable Backloading STM Transaction. The updated Procedures 
described the method by which LCH SA will go about calculating the NPV 
Amount. The NPV Amount calculation will be based on the net present 
value of each STM Cleared Transaction and Irrevocable Backloading STM 
Transaction on each Cash Payment Day. The net present value for each 
STM Cleared Transaction or Irrevocable Backloading STM Transaction is 
based on the End of Day Contributed Prices provided to LCH SA as 
proscribed in the Rule Book Article 4.2.7.1 and Procedures Section 5. 
Unless otherwise agreed between the Clearing Member and LCH SA, the net 
present value on the Trade Date is zero. Immediately upon determining 
net present value, the net present value will be reset to zero (``NPV 
Reset''), however, the NPV Reset will not be deemed to have occurred 
where the STM Cleared Transaction or Irrevocable Backloading STM 
Transaction is held in the Account Structure of an FCM and the NPV 
Payment Requirement is not satisfied.
    Contemporaneous with the NPV Reset, if LCH SA determines that the 
value of the STM Cleared Transaction or Irrevocable Backloading STM 
Transaction has increased since the last NPV Reset, LCH SA will make a 
cash payment (the NPV Amount) denominated in the same currency as the 
STM Cleared Transaction or Irrevocable Backloading STM Transaction and 
equal to the amount of the increase in the net present value to the 
Clearing Member. If the net present value has decreased, then a 
corresponding payment will be made by the Clearing Member to LCH SA. If 
there is no change in net present value, then no payments are required. 
New Section 2.14 contains provisions to ensure clarity with regard to 
the meaning of an ``increase'' and ``decrease'' in net present value. 
The proposed Procedure will state that, for the avoidance of doubt, an 
``increase'' in the net present value means the value of an STM Cleared 
Transaction or Irrevocable Backloading STM Transaction has moved in 
favour of the Clearing Member since the immediately preceding NPV Reset 
while a ``decrease'' means the opposite.
    Where amounts payable on each Cash Payment Day are in the same 
currency and are related to the same Margin Account, proposed Section 
2.14 provides for aggregation of amounts payable by the Clearing Member 
to LCH SA and for aggregation of amounts payable by LCH SA to the 
Clearing Member. In addition, the amounts will be offset against each 
other as applicable. This procedure will result in a net payment amount 
from either the Clearing Member to LCH SA or LCH SA to the Clearing 
Member in accordance with Article 4.2.3.2 of the Rule Book and 
Procedures Section 3. In addition, at the end of Section 2.14 a cross 
reference will be added to Clause 7 of the CDS Default Management 
process, regarding the details of the adjustment of the NPV Amount 
which may occur.
    Conforming changes are proposed to Section 2.15 to replace 
references to Cash payment with NPV Payment and Variation Margin 
Collateral Transfer and to reflect related concepts throughout the 
section.
    Section 2.16 will be amended to specify that it is applicable to 
the receipt of Variation Margin Collateral Transfers and related to CTM 
Cleared Transactions. Previously this section referred to Variation 
Margin payments. A substantively new sentence will also be added to 
Section 2.16 to describe how LCH SA will handle a negative interest 
rate environment. Where the applicable Price Alignment Interest rate is 
negative, ``LCH SA will either (i) pay Price Alignment Interest if a 
Clearing Member has, on a cumulative net basis, received Variation 
Margin from LCH SA, or (ii) charge Price Alignment Interest if a 
Clearing member has, on a cumulative net basis, transferred Variation 
Margin.''
    New Section 2.17 Price Alignment Amount will be added to the 
Procedures to outline the specific operational steps required to 
facilitate the accounting for an STM Cleared Transaction. The Price 
Alignment Amount is identical to the Price Alignment Interest amount 
and the two payments serve the same functional purpose although the 
legal status of the two payments is different. Procedure Section 5 
outlines the process by which a report is generated on each Cash 
Payment Day indicating the applicable Price Alignment Amount to be paid 
or received by each Clearing Member. Under proposed Section 2.17, if 
LCH SA determines that the Cumulative Net Present Value is greater than 
zero, the applicable Price Alignment Amount will immediately

[[Page 25324]]

become payable to LCH SA by the Clearing Member in the same currency as 
the STM Cleared Transaction. If the Cumulative Net Present Value is 
less than zero, the applicable Price Alignment Amount will immediately 
become payable to the Clearing Member by LCH SA in the same currency as 
the STM Cleared Transaction. Proposed Section 2.17 also outlines the 
treatment of STM Cleared Transactions that are transferred to either 
(i) a Backup Clearing Member pursuant to the CDS Default Management 
Process; or (ii) a Receiving Clearing Member. In both instances, the 
Trade Date of the STM Cleared Transaction for the purpose of 
determining the Cumulative Net Present Value is the date of the 
transfer. The same treatment will apply in an instance where a Clearing 
Member elects to convert from a CTM Cleared Transaction to an STM 
Cleared Transaction.
    Proposed Section 2.17 contains three definitions that are 
applicable for the purposes of this section. ``Cumulative Net Present 
Value'' is a hypothetical value computed by LCH SA on each Cash Payment 
Day falling after a Trade Date, based on certain aggregate NPV Amounts 
payable to LCH SA by a Clearing Member and by LCH SA to a Clearing 
Member. ``Price Alignment Amount'' is computed on each Cash Payment Day 
falling after a Trade Date. It means the product of (i) the absolute 
value of the Cumulative Net Present Value on each Cash Payment Day; 
(ii) the applicable Price Alignment Amount Rate on each Cash Payment 
Day; and (iii) the day count fraction determined by LCH SA as being 
applicable to the currency of the STM Cleared Transaction. ``Price 
Alignment Amount Rate'' means the applicable prevailing interest rate 
of the Cash Payment Date as mentioned in the files and reports to the 
Clearing Member.
(B) Section 3
    Similar to Section 2, Section 3 itself will be renamed 
``Collateral, Variation Margin and Cash Payment'' to reflect the new 
business processes required to facilitate STM.
    LCH SA proposes to update Procedures Section 3.7(c) and (d) at 
various sub-sections to make conforming changes to integrate the 
concepts of Variation Margin Collateral Transfers and Client NPV 
Payment Requirements where applicable.
    Section 3.11 will be renamed to ``LCH SA's rights in respect of 
Collateral and Variation Margin transferred with full title''. 
Conforming amendments will be made to various sub-sections to include 
the concept of Variation Margin where applicable. Substantively, at 
Section 3.11(b), the Procedures will be updated to reflect that LCH SA 
may use Variation Margin transferred by Clearing Members for the 
purposes of transferring corresponding Variation Margin or making 
corresponding NPV Payment(s) to other Clearing Members in accordance 
with the CDS Clearing Rules. Section 3.11(c) will include a reference 
to the Variation Margin in addition to the reference to the term 
Collateral.
    Section 3.18 will be renamed ``Cash Payments and Variation Margin 
Collateral Transfers''. Conforming amendments will be made to the 
various sub-sections to include the concept of Variation Margin 
Collateral Transfer where applicable. The headings for the table at 
Section 3.18(a) will be updated to (i) Cash Payment/Variation Margin 
Type and (ii) Cash Payment/Cash transfer. A new row will be added to 
the table indicating that Cash in CDS Contractual Currency is the 
appropriate Cash Payment/Cash transfer when making an NPV Payment, 
Price Alignment Amount.
(C) Section 5
    LCH SA proposes to make certain conforming changes throughout 
Procedures Section 5. In Section 5.6(c) language that previously 
referenced Variation Margin will be expanded to also reference rights 
over aggregate NPV Amounts in respect to a transfer of Client Assets. 
Similarly, in Section 5.6(d), row 9 of the timetable for transfers will 
be updated to include reference to NPV Payment Requirement whereas 
previously it only referred to Variation Margin Requirement.
    The section titled ``Registration of Cleared Transactions'' which 
is found at Section 5.11 will be subject to updates to accommodate the 
STM business processes. A new Section 5.11(a) titled STM or CTM 
Classification of Trade Accounts will be added. As described earlier in 
this rule proposal, non-FCMs and non-US Clearing Members will be given 
the option to elect to designate a Trade Account as either an STM Trade 
Account or a CTM Trade Account. Where no election is made, the account 
will default to a CTM Trade Account. FCMs and US Clearing Members will 
not be given such an option as their accounts will need to be 
classified as STM Trade Accounts. Former Section 5.11(a) ``Notification 
of registration'', will be re-numbered to 5.11(b). Former Section 
5.11(b) will be re-numbered to Section 5.11(c) and is discussed within 
the Account Structures section of this rule proposal.
    New Section 5.11(d), titled ``Conversion of STM Cleared 
Transactions'' will be added to the Procedures to describe the specific 
steps undertaken in connection with an STM Conversion Request which 
will convert a CTM Trade Account into an STM Trade Account. As 
proposed, upon receipt of an STM Conversion Request pursuant to Rule 
Book Article 3.1.10.8, LCH SA will have sole and absolute discretion to 
nominate a Business Date for the conversion which will be called the 
``STM Conversion Date.'' On the STM Conversion Date, subject to 
conditions discussed below, the relevant CTM Trade Account will become 
an STM Trade account and all Cleared Transactions registered in the 
Trade Account will no longer be CTM Transactions, but rather will 
immediately and automatically become STM Cleared Transactions. The 
conversion will be affected through technological and operational 
changes made by LCH SA, rather than by terminating the existing CTM 
Cleared Transactions and entering into new STM Cleared Transactions.
    The occurrence of the STM Conversion Date is subject to a series of 
conditions outlined in the new Section 5.11(d) including: (i) The 
Converting Clearing Member is not a Defaulting Clearing Member; (ii) 
the relevant Deemed Client Transactions may not be subject to an early 
termination date; (iii) the STM Conversion Request may not violate 
applicable laws or regulations; (iv) the Converting Clearing Member 
must have satisfied all of its Cash Payment and Variation Margin and 
Collateral Transfer obligations up to, but excluding, the STM 
Conversion Date; (v) the Converting Clearing Member has paid to LCH SA, 
or LCH SA has paid to the Converting Clearing Member (as applicable), 
any cash settlement amount that LCH SA determines (in its sole and 
absolute discretion) must be paid to ensure that the net present value 
of each Cleared Transaction registered in the relevant Trade Account 
shall be equal to zero on the STM Conversion Date. The Converting 
Clearing Member and LCH SA agree that LCH SA may, in its sole and 
absolute discretion, apply any Variation Margin transferred to and held 
by LCH SA in respect of the Cleared Transaction registered in the 
relevant Trade Account to satisfy (in whole or in part) the Converting 
Clearing Member's obligation to pay the amount (if any) required in 
relation to each such Cleared Transaction. The Converting Member and 
LCH SA agree that any Variation Margin transferred to and held by the 
Converting Clearing Member in

[[Page 25325]]

respect of the Cleared Transaction registered in the relevant Trade 
Account shall be applied to satisfy (in whole or in part) LCH SA's 
obligation to pay the amount (if any) required in relation to each such 
Cleared Transaction; and (vi) the Converting Clearing Member is in 
satisfactory compliance with all other conditions stipulated by LCH SA.
    In connection with each STM Conversion Request made by a Clearing 
Member, proposed Section 5.11(d) requires that the Clearing Member 
agree that after the STM Conversion Date, it will neither be possible 
to ``re-convert'' the Trade Account back into a CTM Trade Account nor 
to convert individual transactions back into CTM Cleared Transactions. 
Finally, LCH SA will be able to rely on an STM Conversion Request made 
by the person, agent, officer, employee, or representative as made 
under the full authority to do so and to bind the Converting Clearing 
Member to the STM Conversion Request.
    The discussion of the Cleared Trades Report in Section 
5.16(a)(i)(F) will be augmented to include an additional information 
element on the report to indicate the classification of the Cleared 
Transaction as either a CTM Cleared Transaction or an STM Cleared 
Transaction. This distinction was not required previously because all 
transactions were cleared on a CTM basis. The report discussed at 
Section 5.16(c)(iii) will be renamed to ``Variation Margin and NPV 
Amount Report'' and the description will be updated to reference NPV 
Amount and NPV Payment Requirements, whereas previously it only 
referenced Variation Margin and Variation Margin Requirement. In 
addition, the concept of a ``transfer'' will be added where applicable 
to account for the different method of money movement for CTM Cleared 
Transactions as contrasted with STM Cleared Transactions which are 
``paid'' to LCH SA.
    Section 5.18.4 related to the use of composite spreads/prices will 
be updated to include references to NPV Payment Requirement whereas 
previously the section only referenced the Variation Margin 
Requirement.
iii. Clearing Supplement
    In support of the proposed STM business model, LCH SA will also add 
new provisions to the Supplement in each of its three parts. Each of 
these three new sections is substantially similar.
     For Index Cleared Transactions and Single Name 
Transactions incorporating the 2003 ISDA Credit Derivatives 
Definitions--Part A, Section 2.6 will be added to the Supplement;
     For Index Cleared Transactions and Single Name 
Transactions incorporating the 2014 ISDA Credit Derivatives 
Definitions--Part B, Section 2.6 will be added to the Supplement; and
     For Credit Index Swaptions--Part C, a Section 2.4 will be 
added to the Supplement.
    The proposed new sections will establish the ``STM Cleared Terms'' 
for each of the three categories of transactions outlined above. If a 
Cleared Transaction is designated as an STM Cleared Transaction in 
accordance with Rule Book Article 3.1.10.7, it will automatically be 
governed by the STM Cleared Terms.
    In accordance with the STM Cleared Terms, net present value will be 
computed at least once per Cash Payment Day in accordance with 
Procedures Section 2. Immediately upon determining the net present 
value, a cash amount may become due and payable by the Clearing Member 
or LCH SA and the net present value of the STM Cleared Transaction will 
be reset to zero. Any required payments will be made in accordance with 
Section 2 of the Procedures. The STM Cleared Terms will also provide 
that in any circumstance that prevents NPV Payments or Variation Margin 
Collateral Transfers from being made in U.S. dollars, LCH SA will be 
permitted to convert such amounts into Euro in accordance with Rule 
Book Article 4.2.3.2.
    Similarly, Price Alignment Amount will be determined at least once 
per Cash Payment Day in accordance with Procedures Section 2. 
Immediately upon determining the Price Alignment Amount, a cash amount 
may become due and payable by the Clearing Member or LCH SA as 
determined in accordance with Procedures Section 2.17. For the 
avoidance of doubt, the new Supplement section will state that any 
Price Alignment Amount shall immediately become due and payable by the 
relevant party under the STM Cleared Terms applicable to the STM 
Cleared Transaction and will be made in such time and manner as is 
consistent with Procedures Section 2.
2. Amendments To Permit Multiple Account Structures
i. Rule Book
    LCH SA proposes to amend the Rule Book at Title V, Chapter 2, 
Section 5.2.1, Article 5.2.1.1 to eliminate the existing language that 
restricts a CCM Client from being allocated to more than one account 
structure at the same time. Specifically, the current language states 
that ``a single CCM Client is not permitted to be allocated, at the 
same time, to (i) more than one CCM Client Account Structure of the 
same CCM (except in connection with the provision of indirect clearing 
services by such CCM Client to its CCM Indirect Clients) and (ii) 
within a CCM Gross Omnibus Segregated Account Structure, more than one 
CCM Gross Omnibus Sub-Account Structure.'' This language will be 
removed from the Rule Book.
    The terms ``CCM Gross Omnibus Multi Sub-Account Structure'', ``CCM 
Indirect Client Gross Segregated Account Structure'', ``CCM Indirect 
Client Net Segregated Account Structure'' and ``CCM Net Omnibus 
Segregated Account Structure'' will be amended to reference ``one or 
more'' CCM Client Trade Accounts(s) where previously the definition 
referred to ``a'' CCM Client Trade Account(s).
    Where relevant, the reference to a ``Sub-Account Client'' or to a 
Client in the definitions or articles will now refer to a ``Sub-Account 
Structure'' or to a ``Structure'' so that the wording will not imply 
anymore that a Client can hold only one account structure.
    Title V, Chapter 2, Section 5.2.1, Article 5.2.1.3 will be modified 
to permit CCM Net Omnibus Segregated Account Clients to configure 
account allocations at the CCM Net Omnibus Segregated Account Structure 
level and to configure multiple allocation accounts of each type. This 
Article will also be modified to refer to ``one or more'' CCM Gross 
Omnibus Sub-Account Structure(s) or ``CCM Individual Segregated Account 
Structure(s)'' where previously it only referred to a structure.
    Title V, Chapter 2, Section 5.2.1, Article 5.2.2.1 will be modified 
to permit LCH SA to open one or more CCM Client Trade Accounts(s) for 
each CCM Omnibus Segregated Account Client; one CCM Client Trade 
Account for each CCM Individual Segregated Account Structure; and one 
or more CCM Client Trade Account(s) for each CCM Indirect Client 
belonging to a CCM Indirect Client Segregated Account Structure.
    Title V, Chapter 2, Section 5.2.3, Article 5.2.3.1 will be modified 
to substitute the concept of a client account structure in place of the 
existing concept of a client, thereby permitting more than one account 
structure for a single client.
    Title V, Chapter 2, Section 5.2.3, Article 5.2.4.3 will be modified 
to substitute the concept of an account structure in place of the 
existing concept of a client in Article 5.2.4.3(i)

[[Page 25326]]

and (iv). In addition, changes to this article make clarifying 
amendments to the sentence structure.
ii. Procedures
    Procedures at Section 5.3(f) will be modified to refer to the 
ability for CCMs to have several account structures and trade accounts 
by adding the word ``relevant'' to the last paragraph of the section in 
reference to Client Trade Accounts and Client Margin Accounts. The same 
modification will be brought to Section 5.5. In addition, Procedures at 
Section 5.6(b)(i) and (iv) will be modified to refer to ``a'' rather 
than ``the'' CCM Client Trade Account and ``a'' rather than ``the'' CCM 
Gross Omnibus Single Sub-Account structure.
3. Amendments To Permit Select Members Clearing for Affiliated Firms
i. Rule Book
    In order to permit Select Members to provide client clearing 
services to certain affiliates, ``Affiliated Firm'' will now be 
included as a defined term in the Rule Book and will be added into the 
definition of ``Select Member'' as a category of persons to whom Select 
Members are permitted to provide client clearing services. The 
definition of Affiliated Firm will also be augmented into other defined 
terms as appropriate. Certain conforming changes are also proposed to 
Title II, Chapter 2; Title IV, Chapter 2; Title V, Chapter 1; and Title 
VI, Chapter 1 of the Rule Book and to the Procedures at Section 
5.11(c).
    With respect to a Clearing Member, an Affiliated Firm is any 
Affiliate or any entity that is otherwise member to the same 
institutional protection scheme (as defined in the CRR \14\) as the 
Clearing Member. The Rule Book currently defines Affiliate with respect 
to a Clearing Member, as any entity that controls, directly or 
indirectly, the Clearing Member, any entity controlled, directly or 
indirectly, by the Clearing Member or any entity directly or indirectly 
under common control with such Clearing Member.
---------------------------------------------------------------------------

    \14\ CRR refers to Regulation (EU) No. 575/2013 of the European 
Parliament and of the Council of 26 June 2016 on prudential 
requirements for credit institutions and investment firms and 
amending Regulation (EU) No. 648/2012 and all delegated regulatory 
and implementing technical standards adopted pursuant to Regulation 
(EU) No. 575/2013 and published in the Official Journal of the 
European Union from time-to-time.
---------------------------------------------------------------------------

    The term ``Select Member'' will be amended to permit a Select 
Member to provide clearing services to their Affiliated Firms whereas 
currently Select Members are not permitted to provide clearing services 
to any third-party.
    The term ``CCM'' will be amended to permit Clearing Members to 
provide CDS CCM Client Clearing Services to their Affiliated Firms 
without qualifying as General Members.
    The term ``FCM Clearing Member'' will also be amended to permit 
Clearing Members to provide CDS FCM Client Clearing Services to 
Affiliated Firms without qualifying as General Members.
    The terms ``CCM Indirect Gross Segregated Account Client'', ``CCM 
Indirect Net Segregated Account Client'', and ``CCM Individual 
Segregated Account Client'' will be amended to expand the definitions 
to capture the new defined term Affiliated Firm.
    The term ``FCM Client'' will be amended to include a specific 
reference to the new defined term Affiliated Firm as an additional 
category of persons who are deemed to be FCM Clients.
    Rule Book Article 2.2.0.4 will be modified to ensure that Select 
Members account for Product Families held by both the Select Members 
and any Affiliated Firms to which the Select Member provides CDS Client 
Clearing Services. The Membership Requirements in Article 2.2.1.1, 
Continuing Obligations in Article 2.2.2.1, Markit LCH Settlement Price 
and LCH Settlement Price authorization in 4.2.7.2 are broadened to 
apply to Select Members who intend to provide CDS Client Clearing 
Services to Affiliated Firms. Article 5.1.1.1 and Article 5.1.1.2 are 
modified to permit Select Members to provide CDS Client Clearing 
Services to Affiliated Firms. Article 6.1.1.2 is modified to permit FCM 
Clearing Members to provide CDS Client Clearing services to Affiliated 
Firms.
ii. Procedures
    Finally, Procedures at Section 5.11(c) will be modified to ensure 
that the change to Rule Book Article 2.2.0.4 regarding Product Families 
is incorporated into the procedures for updating the Product Family 
Form and thus operationalized by Select Members and LCH SA's personnel 
when updating Product Family Forms.
4. Onboarding Procedures Clarifications
    LCH SA is also proposing to make updates to Procedures Section 1 to 
account for normal course of business changes to its current onboarding 
process. These modifications will ensure that Section 1 of the 
Procedures accurately reflects the current processes for onboarding 
applicants (``Applicants'') to CDSClear. Section 1.1(b) and (c) will be 
updated to consolidate certain steps that were previously characterized 
as a stand-alone ``initial review'' into the overall ``application 
process.'' Whereas previously, the CDSClear Admission Form was only 
completed after an initial review, it will now be submitted prior to 
the initial review. Section 1.1 is further amended to adjust the 
operational timing of the review steps undertaken during the 30 days of 
the application process. Section 1.1(d) (formerly Section 1.1(e)) is 
updated to permit more flexibility for LCH SA to use its discretion to 
determine if a site visit is appropriate when evaluating applications. 
Language setting a target to review applications within 30 Business 
Days, or 40 Business Days where a legal opinion is required, is removed 
from the Procedure as the overall timeline to either (i) reject or (ii) 
accept an application is described in Section 1.1(b) (formerly 1.1(c)).
    Section 1.1(f) previously described LCH SA's ability to impose 
conditions or limitations on the exercise of certain rights under the 
CDS Clearing Documentation. This section will be clarified to eliminate 
the concept of ``conditions'' but the Procedure will continue to permit 
LCH SA to impose limitations following approval. A recently approved 
Applicant, before the submission of its first Original Transaction, 
shall make its initial Contribution into the CDS Default Fund and shall 
also post sufficient Collateral before the submission of its first 
Intraday Transaction, which LCH SA believes is consistent with its 
regulatory obligations to manage risk.
    Finally, Section 1.1(g) will now reference a Clearing Member's 
possible obligation to put in place a Power of Attorney in respect of 
Bank of New York Mellon for the purposes of posting Collateral, 
transferring Variation Margin, and making Cash Payments when submitting 
its first Client Clearing Form.
5. Technical Amendments
    The amendments to the Procedures, Rule Book, and Supplement also 
contain typographical corrections, clean-up changes, and similar 
technical corrections as well as various conforming references to the 
new or revised defined terms. Specifically, the reference to CFTC 
Regulation 1.3(y) was amended to CFTC Regulation 1.3 based on comments 
from the CFTC. The description of the Clearing Member Restructuring 
Pair File in the Procedures Section 5.16(a)(i)(H) will be revised to 
reference an M(M)R Restructuring rather than a Restructuring Credit 
Event. Later, the Procedures Section 5.17 which

[[Page 25327]]

describes Regulatory Reporting obligations are updated to remove the 
reference to the name of a specific trade repository. Finally, 
corresponding changes to provision numbering throughout each document 
have been made as necessary and in compliance the US law and regulatory 
guidance.
(b) Statutory Basis
    As more fully discussed below, LCH SA believes that the proposed 
rule changes in connection with (1) implementing settled-to-market as a 
method to mitigate counterparty credit risk related to changes in the 
market value of transactions; (2) permitting Clearing Members to create 
multiple account structures for a single Client and multiple trade 
accounts per Client within a single omnibus account structure; (3) 
permitting Select Members to provide client clearing services to their 
Affiliated Firms; and (4) making clarifications and enhancements to the 
existing onboarding procedures to better reflect current business 
practices, are consistent with the requirements of Section 17A of the 
Securities Exchange Act of 1934 \15\ (the ``Exchange Act'') and the 
regulations thereunder, including the standards under Exchange Act Rule 
17Ad-22.\16\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78q-1.
    \16\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

1. Amendments To Permit Settled-To-Market Treatment for Cleared 
Transactions
    LCH SA believes that the proposed amendments to the CDS Clearing 
Rules to permit STM Variation Margin treatment for Cleared Transactions 
are consistent with the requirements of Section 17A of the Exchange 
Act.\17\ Section 17A(b)(3)(F) of the Exchange Act \18\ requires, among 
other things, that the rules of a clearing agency be designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions and, to the extent applicable, derivative agreements, 
contracts, and transactions.
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    \17\ 15 U.S.C. 78q-1.
    \18\ 15 U.S.C. 78q-1(b)(3)(F).
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    LCH SA's proposed amendments and resulting operating model is 
similar to other clearing agencies servicing US counterparties who have 
implemented STM variation margin treatment. For example, ICE Clear 
Credit LLC (``ICC'') adopted changes to its clearing rules to clearly 
characterize margin payments as STM. ICC acknowledged that, prior to 
the ICC's August 2018 changes, its clearing rules were not entirely 
clear about some aspects of its operational procedures which were 
already treating transactions as STM.\19\ In its order approving ICC's 
rule changes, the SEC confirmed that the operational practice of 
treating payments made under an STM model as settlement payments is 
consistent with an overall clearing program designed to ``assure the 
safeguarding of securities and funds which are in the control of the 
ICC or for which it is responsible . . . the [f]ramework would, in 
general, protect investors and the public interest.'' \20\
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    \19\ Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating To Amending the ICC Clearing 
Rules Regarding Mark-to-Market Margin, Securities Exchange Act 
Release No. 34-83832; File No. SR-ICC-2018-006 (June 29, 2018), 83 
FR 41118 (Aug. 13, 2018) (available at https://www.govinfo.gov/content/pkg/FR-2018-08-17/pdf/2018-17741.pdf).
    \20\ Id. at 41120.
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    LCH SA's proposed rule changes will align with the requirements of 
Exchange Act Rule 17Ad-22(e)(8) which requires each covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to ``define the point at which 
settlement is final to be no later than the end of the day on which the 
payment or obligation is due and, where necessary or appropriate, 
intraday or in real time.'' \21\ In adopting Exchange Act Rule 17Ad-
22(e)(8), the SEC recognized that there may be a number of ways to 
address compliance, highlighting three factors: (i) Whether a clearing 
agency's policies and procedures clearly define the point at which 
settlement is final; (ii) whether a clearing agency completes final 
settlement no later than the end of the value date, and preferably 
intraday or in real time; and (iii) whether a clearing agency clearly 
defines the point after which unsettled payments, transfer 
instructions, or other obligations may not be revoked by a 
participant.\22\
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    \21\ 17 CFR 240.17Ad-22(e)(8).
    \22\ Securities and Exchange Commission; Standards for Covered 
Clearing Agencies, Exchange Act Release No. 3478961; File No. S7-03-
14 (Sept. 28, 2016), 81 FR 70786 (Oct. 13, 2016) (available at: 
https://www.sec.gov/rules/final/2016/34-78961.pdf).
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    The proposed rule changes with respect to the STM model 
transparently outline a specific process by which STM transactions will 
be facilitated, including the operational steps that LCH SA will follow 
once STM is implemented to ensure finality is achieved. The CDS 
Clearing Rules will clearly describe the daily mandatory STM processes 
for FCMs and US Clearing Members, as well as the optional processes for 
non-FCMs and non-US Clearing Members to convert to and maintain STM 
accounts. Under the proposed STM model, the daily transfer of NPV 
Payments and PAA constitutes a final settlement of the outstanding 
exposure between the counterparties. All Clearing Members using the STM 
model will make applicable payments each day, thereby achieving a final 
settlement for that day. Each subsequent day, the outstanding exposure 
will change, and new payments will be needed to settle the exposure. 
The STM model is in contrast to the CTM model where transfers of 
collateral are made between the counterparties, with associated rights 
to reclaim such collateral. Under the CTM model, exposure between the 
counterparties carries forward through the life of the contract. 
Implementation of the STM model aligns LCH SA's operations with the 
requirements of Exchange Act Rule 17Ad-22(e)(8) by clearly defining a 
daily settlement cycle and settling each amount on the day that it is 
due.
    Thus, the proposed rule changes to implement STM variation margin 
treatment, which includes daily settlement under the STM model and 
achieves finality with respect to STM positions each day, will promote 
the prompt and accurate settlement of securities transactions and 
derivative agreements, contracts, and transactions and assuring the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible and, 
therefore, will be consistent with Section 17A of the Exchange Act and 
the rules promulgated thereunder.
2. Amendments To Permit Multiple Account Structures; Amendments To 
Permit Select Member's Clearing for Affiliated Firms; and Onboarding 
Procedures Clarifications
    In the SEC's Order as of December 29, 2016 Granting Application for 
Registration as a Clearing Agency and Request for Exemptive Relief \23\ 
(``2016 Order''), the SEC evaluated LCH SA's membership standards 
against the requirements of Section 17A(b)(3)(B) of the Exchange Act 
which provides that the rules of a clearing agency must permit certain 
categories of persons to be eligible for membership including: 
Registered brokers or dealers, registered clearing agencies, registered 
investment companies, banks, and insurance companies.\24\ The 2016 
Order went on

[[Page 25328]]

to explain that a clearing agency is permitted to deny, or condition 
participation of, any member or any category of members listed in 
Section 17A(b)(3)(B) if such persons do not meet the financial 
responsibility, operational capability, experience, and competence 
standards set forth set by the clearing agency.\25\ In addition, 
Exchange Act Rules 17Ad-22(b)(5)-(6) require a clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures that do not limit membership to dealers and do not impose 
any specific portfolio size or transaction volume minimums.\26\ 
Exchange Act Rule 17Ad-22(b)(7) requires that a clearing agency 
establish, implement, maintain, and enforce written policies and 
procedures that ``provide[s] a person that maintains net capital equal 
to greater than $50 million with the ability to obtain membership at 
the clearing agency, provided that such persons are able to comply with 
other reasonable membership standards, with any net capital 
requirements being scalable so that they are proportional to the risks 
posed by the participants activities . . .'' \27\ among other 
requirements. Finally, the 2016 Order considered Exchange Act Rule 
17Ad-22(d)(2) which requires a registered clearing agency to establish, 
implement, maintain, and enforce written policies and procedures that 
require participants to have sufficient financial resources and robust 
operational capacity to meet the obligations arising from participating 
in the clearing agency; have procedures in place to monitor that 
participation requirements are met on an ongoing basis; and have 
participation requirements that are objective and publicly disclosed, 
and permit fair and open access.\28\
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    \23\ Self-Regulatory Organizations; LCH SA; Order Granting 
Application for Registration as a Clearing Agency and Request for 
Exemptive Relief, Order, Securities Exchange Act Release No. 34-
79707; File No. 600-36 (Dec. 29, 2016), 82 FR 1398 (Jan. 5, 2017) 
(available at https://www.govinfo.gov/contente/pkg/FR-2017-01-05/pdf/2016-31940.pdf).
    \24\ 15 U.S.C. 78q-1(b)(3)(B).
    \25\ 2016 Order at 82 FR 1402; 15 U.S.C. 78q-1(b)(4)(B).
    \26\ 17 CFR 240.17Ad-22(b)(5)-(6).
    \27\ 17 CFR 240.17Ad-22(b)(7).
    \28\ 2016 Order at 82 FR 1402; 17 CFR 240.17Ad-22(d)(2).
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    Similarly, Exchange Act Section 17A(b)(3)(A) requires a clearing 
agency to have the capacity to facilitate the prompt and accurate 
clearance and settlement and the safeguarding of securities and 
funds.\29\ Exchange Act Rule 17Ad-22(e)(17) requires a covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to identify the plausible sources of 
operational risk, both internal and external and mitigate their impact 
through the use of appropriate systems, policies, procedures and 
controls; ensure that the system have a high degree of security, 
resiliency, operational reliability, and adequate, scalable capacity; 
and establish and maintain business continuity plans that address 
events posing a significant risk of disrupting operations.\30\
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    \29\ 15 U.S.C. 78q-1(b)(3)(A).
    \30\ 17 CFR 240.17Ad-22(e)(17).
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    The modifications proposed to the Procedures Section 1 enhance and 
clarify LCH SA's existing onboarding procedure. The proposed changes 
will consolidate certain steps that were previously characterized as a 
stand-alone ``initial review'' into the overall ``application 
process''; refine certain timing for review and approvals; and refine 
how LCH SA goes about imposing limitations on Clearing Members under 
certain circumstances, among other refinements. These enhancements 
reflect LCH SA's commitment to ensuring the effectiveness of its 
overall Clearing Members onboarding program and take into account 
learning by LCH SA on these subjects since the 2016 Order.
    LCH SA has considered its proposal to permit Select Members to 
provide clearing services to Affiliated Firms and the proposal to 
modify its operational Account Structure model against the requirements 
to minimize operational risk and maintain reliable, resilient, and 
secure systems. Permitting Clearing Members to create multiple account 
structures and multiple trade accounts per Client within a single 
omnibus account structure will promote flexibility, would permit 
Clearing Members to manage and mitigate risks in a manner that is more 
closely tailored to their needs and the needs of their customers. 
Similarly, permitting Select Members to provide clearing services to 
Affiliated Firms will decrease barriers to entry for accessing cleared 
markets and thus result in a larger number of cleared transactions 
which are carried out in a clear and transparent manner. Based on LCH 
SA's significant experience operating a clearing agency, and its 
associated systems and controls, it believes that these new client-
focused features are appropriate and will enhance, not reduce, the 
level of customer protection under the current CDS Clearing Rules for 
Clearing Members and their Clients. As such, LCH SA believes that the 
modifications to the account structures and onboarding procedures, and 
addition of Client clearing for Select Members for their Affiliated 
Firms are consistent with the requirements of Section 17A of the 
Exchange Act and Exchange Act Rule 17Ad-22 described above.

B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\31\ LCH SA does 
not believe that the proposed rule change would impose burdens on 
competition that are not necessary or appropriate in furtherance of the 
purposes of the Act. Specifically, the proposed changes to the Rule 
Book, Supplement, and Procedures would apply equally to all Clearing 
Members and their Clients. For FCMs and U.S. persons, the STM business 
model will apply to all Clearing Members and their customers. Non-FCMs 
and non-US Clearing Members will be given the option to elect to 
operate under the STM business model.
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    \31\ 15 U.S.C. 78q-1(b)(3)(I).
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    The proposed rule change and implementation of STM will require 
FCMs and US Clearing Members to utilize the STM business model when 
making use of LCH SA's clearing services which may impose burdens on 
those Clearing Members and their Clients, but such burdens are 
necessary and appropriate to comply with recent CFTC guidance which is 
applicable to LCH SA and its FCMs and US Clearing Members.\32\ 
Therefore, LCH SA does not believe that the proposed rule change would 
impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
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    \32\ CFTC Staff Letter No. 17-51 at 2.
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    Further, as described above, LCH SA's proposed rule change to 
permit Select Members to provide clearing services to Affiliated Firms 
will generally improve the ability of such market participants to 
engage in cleared transactions or to access clearing services.

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.

D. Extension of Time Period for Commission Action

    LCH SA does not consent to the extension of the time period listed 
in Section 19(b)(2) of the Securities Exchange Act of 1934 for 
Commission action.

[[Page 25329]]

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-2019-003 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-2019-003. 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 the filing also will be available for inspection 
and copying at the principal office of LCH SA and on LCH SA's website 
at: https://www.lch.com/resources/rules-and-regulations/proposed-rule-changes-0.
    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-2019-003 and should 
be submitted on or before June 21, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-11319 Filed 5-30-19; 8:45 am]
BILLING CODE 8011-01-P