[Federal Register Volume 84, Number 237 (Tuesday, December 10, 2019)]
[Notices]
[Pages 67488-67491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26497]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87655; File No. SR-LCH SA-2019-007]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to Amendments to LCH SA's Liquidity Risk 
Modelling Framework

December 4, 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 December 3, 2019, 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 
(``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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    LCH SA is proposing to amend its Liquidity Risk Modelling Framework 
(the ``Framework''), which describes the Liquidity Stress Testing 
framework by which the Collateral and Liquidity Risk Management 
department (``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\ The Commission first approved the Framework by Order dated 
July 18, 2018.\4\
---------------------------------------------------------------------------

    \3\ LCH SA, a 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).
    \4\ Securities Exchange Act Release No. 34-83691 (July 24, 
2018), 83 FR 36635 (July 30, 2018); File No. SR-LCH SA-2018-003) 
(the ``Release'').
---------------------------------------------------------------------------

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

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

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

1. Purpose
    The Framework is one of several well-developed policies and 
procedures that LCH SA maintains to manage its 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. The Framework complements 
these policies and procedures and develops 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''); \5\ (iii) describes the 
metrics and limits that LCH SA monitors; and (iv) describes the 
scenarios under which these metrics are computed.\6\
---------------------------------------------------------------------------

    \5\ 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.
    \6\ The Release describes the operation of the Framework in 
greater detail.
---------------------------------------------------------------------------

(i) Physically-Settled Options
    LCH SA is proposing to amend the Framework in order to address more 
accurately its liquidity requirements in the event of the assignment 
and exercise of physically-settled options involving a defaulting 
clearing member during the liquidation period of such clearing member. 
Specifically, the amended Framework will address LCH SA's liquidity 
requirements in the event options that are in the money are

[[Page 67489]]

exercised either on the day (``T''), or on the business day immediately 
following the day (``T+1''), on which the clearing member that is a 
seller of the options defaults.
    If such defaulting clearing member is a seller of a Call option 
that is in the money, LCH SA would have to purchase the underlying 
securities in the market at a stressed price and await payment at the 
strike price from the non-defaulting purchaser of the Call option at 
settlement. If such defaulting clearing member is a seller of a Put 
option that is in the money, LCH SA would have to purchase the 
underlying securities at the strike price from the non-defaulting 
purchaser of the Put option. Although margins should cover any 
potential loss, liquidity outflows as a result of the sales' proceeds 
are included as liquidity requirements, in each case.
    In the current Framework, there is no liquidity provision related 
to the risk of assignment and exercise of options at expiration. In 
order to address this concern, the amended Framework will anticipate, 
prior to the expiration dates, the amount of liquidity funding that may 
arise from options that may be exercised, in the event of the default 
of LCH SA's two largest members (``Cover2''). On a daily basis, LCH's 
Liquidity and Concentration Risk (``LCR'') calculation will identify 
all of the potential positions that are in the money or at the money on 
that day and the next business day. Given the potential option 
exercise, the LCR will generate a liquidity need. The additional 
liquidity amount that LCH SA could potentially need will be equal to 
the sum of the equities to source following the option assignments at 
expiration and/or the difference between the underlying securities and 
the strike price or the strike price minus the asset in the event of a 
cash settlement.
    In practice, the process will work as follows on a daily basis:
     The liquidity needs arising from the options that are in 
the money or at the money, having their expiries on T or T+1, will be 
computed by applying no market stress to the equities.
     The liquidity needs arising from the options that are in 
the money or at the money, having their expiries on T or T+1, will be 
computed by applying a stress scenario to the equities.
     LCH SA will select the positions consistent with the 
Cover2 for both modes described above and will retain the most punitive 
one.

This amount will be added to the current cash equity amount in the LCR.
(ii) Fixed Income Clearing System
    Further, LCH SA is proposing to amend the Framework to take into 
account the expansion of sovereign debt for which LCH SA provides 
clearing services through its Fixed Income Clearing System. LCH SA 
initially provided clearing services only with respect to French 
sovereign debt. The Fixed Income Clearing service subsequently added 
the sovereign debt of Italy, Spain, Germany, and Belgium. More 
recently, the Fixed Income Clearing System has been extended to eight 
additional Euro markets: Austria, Netherlands, Finland, Ireland, 
Portugal, Slovakia, Slovenia and Supranationals.\7\
---------------------------------------------------------------------------

    \7\ The supranational debt eligible for clearing is currently 
limited to the Euro denominated debt of the European Investment 
Bank.
---------------------------------------------------------------------------

    In this regard, therefore, the Framework has been revised to 
provide that all securities resulting from the settlement of all 
repurchase contracts (``repos'') on behalf of a defaulting clearing 
member, not just repos on the sovereign debt of France, Italy and 
Spain, may be used to generate liquidity at the Banque de France. The 
amended Framework also clarifies that, in the event that a Central Bank 
Guarantee (``CBG'') is triggered by the default of a clearing member 
posting the CBG, the relevant Central Bank will pay the liabilities of 
the defaulting clearing member in cash.
    Further, the Framework has been revised to (i) identify the 
relevant central securities depository (``CSD'') through which 
transactions in the sovereign debt of the different jurisdictions may 
settle,\8\ (ii) describe the manner by which LCH SA injects liquidity 
into each settlement platform, in particular, Euroclear Bank and 
Clearstream Luxembourg, and (iii) modify the limits by settlement 
platform on the main liquidity drivers (i.e., cash injected into the 
platforms, auto-collateralization and gross fails).
---------------------------------------------------------------------------

    \8\ French sovereign debt may settle through Euroclear Bank, 
Italian sovereign debt through Monte Titoli, Spanish sovereign debt 
through Iberclear, German sovereign debt through Clearstream 
Frankfurt, and Belgian sovereign debt through the National Bank of 
Belgium. The sovereign debt of the remaining jurisdictions may 
settle through either Euroclear Bank or Clearstream Luxembourg. All 
transactions are settled through Target 2 Securities, a Eurosystem 
technical platform to which CSDs assign the management of securities 
settlement in central bank money.
---------------------------------------------------------------------------

(iii) Stress Tests
    LCH SA is proposing clarifications with respect to certain aspects 
of its stress tests. With respect to the operational liquidity 
target,\9\ which is a metric allowing LCH SA to confirm that the 
business as usual liquidity sources are sufficient for a five day 
period in stressed situations, consistent with the LCR time horizon, 
the Framework notes that LCH SA uses a three-day window, in particular 
with regard to margin reduction. The Framework further clarifies that, 
in calculating liquidity resources, LCH SA deducts funds required to 
facilitate settlements, cover end of day fails at Euroclear Bank and 
Clearstream Luxembourg, and avoid Target 2 Securities fails. In 
addition, the Framework assumes that members allowed to post CBGs will 
switch from cash or ECB-eligible non-cash collateral to CBGs (although 
the Framework does not currently take such switches into account, since 
all eligible members, i.e., Dutch and Belgian members, have already 
done so). Moreover, the amended Framework confirms that, in calculating 
required variation margin payments to CC&G, LCH SA assumes a 
theoretical 5-day holding period.
---------------------------------------------------------------------------

    \9\ Operational liquidity is defined to mean the amount of 
liquidity related to the operational management of LCH SA that is 
required to be held in a stressed environment that does not lead to 
a clearing member's default.
---------------------------------------------------------------------------

    The amended Framework also clarifies how stressed liquidity 
requirements and impact are calculated for each clearing member, in 
particular with respect to the cash equity settlement requirement for 
options. These calculations are used to determine the two clearing 
members that would potentially cause the largest aggregate liquidity 
exposure for the CCP in extreme but plausible market conditions.
    Finally, the Framework clarifies how LCH SA conducts reverse stress 
tests in order to determine if there is a combination of changes in LCH 
SA's liquidity that could lead to a liquidity shortfall. In particular, 
the amended Framework considers whether there is a combination of 
changes in LCH SA's liquidity resources that could lead to a liquidity 
shortfall, even in the absence of stress in the market.
2. Statutory Basis
    LCH SA has determined that Proposed Rule Change is consistent with 
the requirements of Section 17A of the Act \10\ and regulations 
thereunder applicable to it. Section 17A(b)(3)(F) of the Act requires, 
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.'' \11\ Further, Regulation 17dA-
22(e)(4)(ii) requires a CCP that is involved in activities with a more

[[Page 67490]]

complex risk profile, e.g., that provides CCP services for security-
based swaps, to maintain and enforce written policies and procedures 
reasonably designed to effectively ``measure, monitor, and manage its 
credit exposures from its payment, clearing and settlement processes'' 
to assure that it maintains additional financial resources to enable it 
to cover a wide range of stress scenarios that include the default to 
two participant family clearing members that would potentially cause 
the largest aggregate liquidity exposure for the CCP in extreme but 
plausible market conditions.\12\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78q-1.
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ 17 CFR 240.17Ad-22(e)(4)(ii).
---------------------------------------------------------------------------

    As discussed earlier, LCH SA is proposing to amend the Framework to 
address specifically LCH SA's liquidity requirements in the event of 
the assignment and exercise of physically-settled options involving a 
defaulting clearing member during the liquidation of such clearing 
member. The proposed amendment will assist LCH SA in defining more 
accurately its liquidity requirements by assuring that LCH SA will 
maintain appropriate levels of liquidity in the event of the assignment 
and exercise of options involving a defaulting clearing member. 
Specifically, the amended Framework will anticipate, prior to their 
expiration dates, the amount of liquidity funding that may arise from 
options that may be exercised, in the event of the default of LCH SA's 
two largest members.
    The policies and procedures set out in the amended Framework, 
therefore, are designed to enhance LCH SA's to measure, monitor, and 
manage the liquidity risk that may arise in connection with its 
activities as a covered clearing agency. As such the amendments to the 
Framework regarding LCH SA's liquidity requirements in the event of the 
assignment and exercise of options involving a defaulting clearing 
member are consistent with the requirements of Regulation 17dA-
22(e)(4)(ii).
    As noted above, Section 17A(b)(3)(F) of the Act requires 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.'' To better implement this statutory requirement, LCH SA 
is proposing to amend the Framework to take into account the expansion 
of sovereign debt for which LCH SA provides clearing services through 
its Fixed Income Clearing System. In addition to French sovereign debt, 
the Fixed Income Clearing service now provides clearing services with 
respect to the sovereign debt of eleven other European jurisdictions, 
as well as the European Investment Bank.\13\ The revised Framework: (i) 
Identifies the relevant CSD through which transactions in the sovereign 
debt of the different jurisdictions may settle; (ii) describes the 
manner by which LCH SA injects liquidity into each settlement platform; 
and (iii) modifies the limits by settlement platform on the main 
liquidity drivers (i.e., cash injected into the platforms, auto-
collateralization and gross fails). The revised Framework also provides 
that all securities resulting from the settlement of repos on behalf of 
a defaulting clearing member may be used to generate liquidity at the 
Banque de France and clarifies that, in the event that a CBG is 
triggered by the default of a clearing member, the relevant Central 
Bank will pay the defaulting clearing member's liabilities in cash.
---------------------------------------------------------------------------

    \13\ The eleven jurisdictions are: Austria; Belgium; Finland; 
Germany; Ireland; Italy; Netherlands; Portugal; Spain; Slovakia; and 
Slovenia.
---------------------------------------------------------------------------

    The proposed amendments strengthen LCH SA's policies and procedures 
intended to ``assure the safeguarding of securities and funds that are 
in its custody or control or for which it is responsible'' (i) by 
specifying the CSDs through which transactions in the identified 
foreign sovereign debt may settle and the means by which LCH SA 
interacts with such CSDs, (ii) by confirming that all securities of a 
defaulting clearing member resulting from repos are available to the 
Banque de France, and (iii) by providing that a Central Bank that has 
provided a CBG will pay a defaulting clearing member's liabilities in 
cash. As such, the amendments to the Framework regarding the Fixed 
Income Clearing Service are consistent with Section 17A(b)(3)(F) of the 
Act.
    Regulation 17dA-22(e)(4)(i) and (vi)(A) requires a clearing agency 
to maintain and enforce written policies and procedures reasonably 
designed to conduct stress testing of its total financial resources 
once each day using standard predetermined parameters and assumptions 
to assure that it has sufficient financial resources to cover its 
credit exposure to each participant fully with a high degree of 
confidence.\14\ As discussed above, LCH SA is proposing amendments to 
the Framework to identify certain additional factors that that LCH will 
take into account in conducting its stress tests and provide greater 
clarity regarding LCH SA's stress testing practices.
---------------------------------------------------------------------------

    \14\ 17 CFR 240.17Ad-22(e)(4)(i) and (vi).
---------------------------------------------------------------------------

    In particular, the Framework confirms that in calculating its 
operational liquidity target,\15\ LCH SA uses a three-day rather than a 
five-day window, in particular with regard to margin reduction. The 
Framework further clarifies that, in calculating liquidity resources, 
LCH SA deducts funds required to facilitate settlements, cover end of 
day fails at Euroclear Bank and Clearstream Luxembourg, and avoid 
Target 2 Securities fails. The Framework also confirms that it assumes 
that members allowed to post CBGs will switch from cash or ECB-eligible 
non-cash collateral.
---------------------------------------------------------------------------

    \15\ The term ``operational liquidity'' is defined at footnote 
21, supra.
---------------------------------------------------------------------------

    The amended Framework further clarifies how stressed liquidity 
requirements are calculated for each clearing member, in particular 
with respect to the cash equity settlement requirement for options, to 
determine the two clearing members that would potentially cause the 
largest aggregate liquidity exposure for the CCP in extreme but 
plausible market conditions. The Framework also clarifies the manner in 
which LCH SA conducts reverse stress tests in order to determine if 
there is a combination of changes in LCH SA's liquidity that could lead 
to a liquidity shortfall.
    By clarifying the factors that it takes into account in conducting 
daily stress testing, the proposed amendments enhance LCH SA's written 
policies and procedures with regard to stress testing and thereby 
assures that LCH SA maintains sufficient additional financial resources 
to enable it to cover a wide range of stress scenarios that include the 
default to two participant family clearing members that would 
potentially cause the largest aggregate liquidity exposure for the CCP 
in extreme but plausible market conditions. As such, therefore, the 
proposed amendments, therefore, are consistent with the requirements of 
Regulation 17dA-22(e)(4)(i) and (vi)(A).

B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\16\ LCH SA does 
not believe the Proposed Rule Change would have any impact, or impose 
any burden, on competition. The Proposed Rule Change does not address 
any competitive issue or have any impact on the competition among 
central counterparties. LCH SA operates an open access model, and the 
Proposed

[[Page 67491]]

Rule Change will have no effect on this model.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

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:
     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-2019-007 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-LCH SA-2019-007. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings will also be available for inspection 
and copying at the principal office of LCH SA and on LCH SA's website 
at http://www.lch.com/resources/rules-and-regulations/proposed-rule-changes-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-2019-007 and should 
be submitted on or before December 31, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

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

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-26497 Filed 12-9-19; 8:45 am]
BILLING CODE 8011-01-P