[Federal Register Volume 85, Number 176 (Thursday, September 10, 2020)]
[Notices]
[Pages 55908-55915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19942]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89760; File No. SR-LCH SA-2020-004]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to the Clearing of Single Name Credit 
Default Swaps Referencing Monoline Insurance Companies and the 
Amendment of LCH SA's Rules in Accordance With its Risk Policies

September 3, 2020.
    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 August 28, 2020, 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 
described in Items I, II and III below, which Items have been prepared 
primarily by LCH SA. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    Banque Centrale de Compensation, which conducts business under the 
name LCH SA (``LCH SA''), is proposing to amend its rules to permit the 
clearing of single name credit default swaps (``CDS'') referencing 
monoline insurance companies. LCH SA is also proposing to revise a 
number of its rules to incorporate new terms and to make conforming and 
clarifying amendments in order to implement a number of changes 
required by LCH Group Holdings Limited (``LCH Group'') Risk Policies to 
which LCH SA adheres. 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

1. Purpose
    The Proposed Rule Change will permit LCH SA to clear single name 
CDS referencing monoline insurance companies, i.e. an insurance company 
that provides coverage for a specific kind of insurable risk. 
Separately, by revising a number of LCH SA's rules to incorporate new 
terms and to make conforming and clarifying amendments, the Proposed 
Rule Change will implement a number of changes required by LCH Group 
Holdings Limited (``LCH Group'') Risk Policies to which LCH SA adheres 
and further enhance certain aspects of the CDS Clearing Service, 
including the CDS Default Management Process.\3\
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    \3\ The proposed amendments are set out in in the following: (i) 
CDS Clearing Rule Book (``Rule Book''); (ii) CDS Clearing Supplement 
(``Supplement''); (iii) CDS Clearing Procedures (``Procedures''); 
(iv) Reference Guide: CDS Margin Framework; and (v) CDSClear Default 
Fund Methodology (together with the Reference Guide: CDS Margin 
Framework, the ``CDSClear Risk Methodology''). All capitalized terms 
not defined herein have the same definition as the Rule Book, 
Supplement or Procedures, as applicable.
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    The LCH Group Risk Policies also include a few changes that apply 
only to LCH Ltd and because of that, those changes are not describes in 
this narrative.
(i) Single Name CDS Referencing a Monoline Insurance Company
    LCH SA is proposing to introduce clearing of single name CDS 
transactions referencing monoline insurance companies. Although indices 
(e.g. CDX.NA.IG and CDS.NA.HY) that

[[Page 55909]]

contain monoline insurance companies as constituents are clearable by 
LCH SA, single name CDS transactions referencing monoline insurers 
currently are not eligible for clearing. To permit participants to 
submit for clearing single name CDS referencing a monoline insurance 
company, LCH SA proposes to modify its CDS Clearing Supplement and 
Section 4 of the CDS Clearing Procedures, Eligibility Requirements.
    In this regard, in Part B of the Supplement, Section 2.3 (Single 
Name Cleared Transaction Confirmation), paragraph (g) is proposed to be 
amended to include a reference to the ``Additional Provisions for 
Monoline Insurer Reference Entities'', published on September 15, 2014 
(the ``Monoline Supplement'') by the International Swaps and 
Derivatives Association, Inc. (``ISDA''). As a result of this change, 
the Monoline Supplement would be applicable to any Single Name Cleared 
Transaction that is a monoline insurer in the relevant confirmation.
    In addition, Section 2.2 (Index Cleared Transaction Confirmation), 
paragraph (f), sub-paragraphs (iii) and (iv) are proposed to be amended 
to clarify that the ``Monoline Supplement'' will apply to each Index 
Cleared Transaction Confirmation referencing a Markit CDX in which the 
Reference Entity is identified as ``monoline'' in the Index Annex 
published by Markit Group Limited. Further, the relevant paragraph on 
``Monoline Insurer as Reference Entity'' would be deleted from the 
applicable CDX Standard Terms Supplement and replaced with a direct 
reference to the Monoline Supplement, which will apply to each relevant 
Reference Entity identified as a ``monoline''. LCH SA is proposing this 
change for the avoidance of doubt, since it is not clear whether the 
Monoline Supplement is specified as ``Applicable'' in the Index Annex.
    Finally, Section 4.1 of the Procedures, paragraph (c)(iii)(B)(5) is 
proposed to be amended to provide for an additional eligibility 
requirement, pursuant to which only single names which are ``Standard 
North American Corporate'' referencing a monoline insurance entity for 
which the Monoline Supplement is specified as ``Applicable'' are 
eligible for clearing by LCH SA.\4\
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    \4\ The proposed introduction of clearing single names CDS 
referencing a monoline insurer requires no change in LCH SA's margin 
methodology and has no impact on either the Margin or the Stress 
Test framework of CDSClear.
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(ii) Implementation of LCH Group Risk Policies
    LCH SA is proposing several actions to implement changes in LCH 
Group's Risk policies (LCH Group Financial Resource Adequacy policy, 
LCH Group Collateral Risk policy, LCH Group Counterparty Credit Risk 
policy). In particular, LCH SA is proposing to introduce two new 
margins to address additional financial risks to which Clearing Members 
may be exposed in identified circumstances: (1) Legal Entity Identifier 
Margin; and (2) Stress Test Loss Over Additional Margin/Net Capital 
Ratio Margin. In addition, LCH SA is proposing to add a stress test to 
non-cash collateral.
(a) Legal Entity Identifier Margin
    The LCH Group Financial Resource Adequacy policy (``FRAP'') 
requires that enough margins be held to cover the potential loss from 
any member (including clients of that member). Some members have for 
operational or historical reasons been set in LCH SA's systems as two 
different members although the legal entity and legal membership are 
only one. In most cases, because margins are calculated by margin 
account, given the absence of netting between the two accounts, this 
would translate into superior margins. However, the current framework 
could potentially miss some concentration effects that would increase 
the overall liquidation costs as these two accounts would be liquidated 
simultaneously. In order to cover these cases, it was recommended by 
LCH SA Second Line Risk team to tackle existing shortfalls in the 
margin calculation in order to ensure an appropriate margin coverage in 
line with section 4 and 5 of the FRAP.
    So, as described in Section 6.2 of the Reference Guide: CDS Margin 
Framework, CDSClear is proposing the introduce a legal Entity 
Identifier Margin (``LEI Margin''). The LEI Margin would cover that 
risk by charging the incremental risk, if any, to the House account of 
the Clearing Member. The LEI Margin is calculated using an algorithm, 
approved by the board of directors of LCH SA following consultation 
with the Risk Committee, based on the Open Positions registered in the 
Margin Accounts of one or more Clearing Members identified by the same 
LEI.
(b) Stress Test Loss Over Additional Margin/Net Capital Ratio Margin
    The Counterparty Credit Risk policy requires that each clearing 
member and clearing member group be subject to a uncovered stress 
losses over net capital threshold. As a result, CDSClear is introducing 
this new margin in its section 6.3 of LCH SA Reference Guide: CDS 
Margin Framework, the purpose of Stress Test Loss Over Additional 
Margin/Net Capital Ratio Margin (``STLOAM/Net Capital Ratio Margin'') 
is to assure that Members have enough capital to absorb losses that 
could materialize under an extreme but plausible market risk scenario. 
As a matter of policy, LCH SA believes that stress risk of a Member 
over the Collateral already deposited (i.e., Initial Margin, Add-ons 
and Default Fund Contribution) should not exceed 30 percent (30%) of 
the Member's net capital. If it does, the difference is then charged to 
the Clearing Member under the ``STLOAM/Net Capital Ratio Margin'' to 
bring this ratio below 30 percent (30%).
    In addition to the above amendments of the LCH SA Reference Guide 
CDS Margin Framework, to implement these two new margins, LCH SA also 
proposes to amend Section 1.1.1 of the Rule Book to add ``Legal Entity 
Identifier Margin'' and ``Stress Test Loss Over Additional Margin/Net 
Capital Ratio Margin'' as defined terms and to make a reference to 
these two defined terms in the current definition of ``Margin''.
    As with other Margin, the LEI Margin and the STLOAM/Net Capital 
Ratio Margin are defined by making reference to the amount calculated 
in accordance with Section 2 of the Procedures. In this regard, 
therefore, Section 2 of the Procedures are proposed to be amended by 
adding new paragraphs 2.12 (Legal Entity Identifier Margin) and 2.14 
(Stress Test Loss Over Additional Margin/Net Capital Ratio Margin), 
which provide describe these new margins and by adding a reference to 
these new margins in paragraph 2.2 (a) (Margin Requirement).
(c) Technical Amendments With Regard to Margin
    LCH SA is proposing to make corrections to Section 1.1.1 of the 
Rule Book by adding the definition of the ``Liquidity and Concentration 
Risk Margin'', which is an existing margin as described in Section 2 of 
the Procedures but was erroneously omitted in Section 1.1.1 of the Rule 
Book. A reference to Liquidity and Concentration Risk Margin will also 
be added to the definition of ``Margin''.
    Further, LCH SA proposes to (1) add the definition of a new defined 
term ``Vega Margin'' to Section 1.1.1 of the Rule Book, (2) make a 
reference to the Vega Margin to the definitions of ``Margin'' and 
``Initial Margin'' in the Rule Book, and (3) add the description of 
such margin in a new sub-paragraph (g) to Section 2.7 of the Procedures 
for consistency and to provide greater transparency to LCH SA's 
Clearing

[[Page 55910]]

Members. Vega Margin is currently captured by the description of the 
``Spread Margin'' which provides that the volatility variations and 
fluctuations referred to in sub-paragraph (a) (Spread Margin) of 
Section 2.7 of the Procedures are at-the-money volatility variations. 
By separating Vega Margin from Spread Margin and other margins, the 
reports provided Clearing Members will be more detailed.
    As described in proposed Section 2.7(g), Vega Margin ``covers the 
risk of future price fluctuations of an Index Swaption Cleared 
Transaction in case of unfavorable deformations of the volatility 
surface, when liquidating a Default Clearing Member's portfolio of 
House Cleared Transactions or Non-Ported Cleared Transactions.''
    A reference to the Vega Margin is also added to paragraph 2.2 (a) 
(Margin Requirement) of Section 2 of the Procedures.
    LCH SA also proposes to remove the defined term of ``Margin Account 
Uncovered Risk'' from Section 1.1.1 of the Rule Book, as this defined 
term is no longer used in the Rule Book and existing references to this 
defined term in Section 6 of the Procedures are redundant with the 
reference to the ``Group Member Uncovered Risk''. References to the 
Margin Account Uncovered Risk will also be removed from paragraph 6.4 
(Calculation of the CDS Default Fund Amount) of Section 6 of the 
Procedures.
    Finally, the order in which the Margins are listed in the 
definition of ``Margin'' in Section 1.1.1 of the Rule Book and 
paragraph 2.2 (a) (Margin Requirement) of Section 2 of the Procedures 
will be amended to be consistent with the order of description of each 
Margin as provided for in paragraphs 2.7 et seq. of Section 2 of the 
Procedures.
(d) Non-Cash Collateral Stress Test
    Following an examination of LCH SA, the ACPR recommended that LCH 
SA revise its policies and procedures to assure that sovereign debt 
risk would be better monitored and that non cash collateral be 
integrated in the stress scenarios. For this purpose, the Appendix 4 of 
the FRAP was amended to add ``margin collateral'' in the scope and 
definition of the Stress Test Loss (``STL'') in order to ensure that 
both clearing and collateral are stressed jointly in the cover 2 
consideration. The FRAP is also amended to specify that the Stress 
Testing Regime must be independently validated and reviewed at least 
annually in consultation with the LCH SA Risk Committee. LCH Group 
Collateral Risk policy (Section 8 Paragraph 59) is also amended in 
order to include the reference to this modification and definition of 
the STL. LCH Group Collateral Risk policy is also including a number of 
minor changes for clarification purposes only.
    LCH SA decided to apply stress scenarios to non-cash collateral 
securities posted to cover margin requirements and include the 
potential stressed loss over the collateral haircut in the sizing of 
the Default Fund. Any stressed loss beyond the haircut already applied 
to collateral would be added into the Stress Test Loss Over Initial 
Margins calculation, and would be reflected in the CDSClear Default 
Fund calculation (Section 1.1 of the CDSClear Default Fund Methodology) 
as well the margins related to stress risk such as the Credit Quality 
Margin (Section 3.1 of the CDSClear Default Fund Methodology) and the 
Default Fund Additional Margin (Section 3.3 of the CDSClear Default 
Fund Methodology). To implement this added stress test, LCH SA also 
proposes to amend the definition of ``Group Member Uncovered Risk'' in 
Section 1.1.1 of the Rule Book by inserting a reference to the stress-
tested potential loss that would be incurred in relation to Collateral 
(in addition to the existing reference to Open Positions). Group Member 
Uncovered Risk is used to calculate the funded portion of the CDS 
Default Fund Amount, in accordance with Article 4.4.1.2 of the Rule 
Book.
(e) Internal Credit Scores
    The Appendix 4 of the FRAP is proposed to be modified to clarify 
that, in circumstances in which a Clearing Member group comprises 
affiliate members with different Internal Credit Scores (``ICS''), the 
Member group exposure as defined by the Credit Team will be subject to 
the ICS clearing limit associated with the largest exposure. The ICS of 
a Clearing Member is used as an input in different margin add-ons 
calculations (such as the Default Fund Additional Margin (``DFAM''), 
some of which are calculated at the group Clearing Member level. This 
proposed c clarifies that, in the event a Clearing Member group 
includes various affiliates having a different ICS, the margin add-on 
calculations will be made using the ICS of the affiliate having the 
largest exposure.
    Section 4.3 of LCH Group Counterparty Credit Risk policy is 
modified to specify in the paragraph 27 that any change to Clearing 
Member's ICS and application of any related additional margin are both 
approved by the LCH SA Executive Risk Committee (``ERCo'') with 
additional minor amendments clarifying that the LCH SA team referred to 
is the Credit Risk Team.
(f) CDS Default Management Process and Early Termination
    LCH SA proposes to make a number of amendments to the Rule Book and 
Procedures for the purpose of enhancing some aspects of the CDS Default 
Management Process and Early Termination and making other amendments, 
corrections and clarifications. These amendments to LCH SA's internal 
governance relating to default management risk were identified 
following fire drills run by LCH SA.
    Article 4.3.3.1 of the Rule Book identifies the resources available 
to LCH SA to be used to cover any Damage incurred by LCH SA in relation 
to an Event of Default arising in respect of a Clearing Member. LCH SA 
proposes to amend Article 4.3.3.1 by adding a new resource in a new 
indent (IV) of sub-paragraph (b) of paragraph (i), pursuant to which 
LCH SA will be entitled to use any remaining House collateral of the 
Defaulting Clearing Member transferred in respect of other LCH SA's 
clearing services to reduce or cover losses attributed to the 
liquidated Client Cleared Transactions of the Defaulting Clearing 
Member, to the extent such collateral is not applied in the context of 
such other clearing services in accordance with the rules applicable to 
such other clearing services. Indents of sub-paragraph (b) of paragraph 
(i) will be renumbered from (I) to (IV) and indents of sub-paragraph 
(a) of paragraph (i) from (I) to (II). LCH SA is also proposing to 
specify that the use of the resource described in indent (II) of sub-
paragraph (b) of paragraph (i) is subject to the declaration of default 
of the relevant Clearing Member in respect of the other clearing 
services to be consistent with the provisions of indent (II) of sub-
paragraph (a) of paragraph (i).
    In addition, a reference to a Clearing Notice will be added to 
Clauses 4.3.1 and 4.3.2 of Appendix 1 (CDS Default Management Process) 
of the Rule Book. The Clearing Notice describes the conditions 
applicable to the notification of the identity of the Client's Backup 
Clearing Member by a Client and the consent to be provided by the 
appointed Backup Clearing Member.
    LCH SA also proposes to amend Clause 8 (Early Termination) of 
Appendix 1 of the Rule Book to introduce a number of enhancements and 
clarifications. Clause 8 of Appendix 1 provides for the service closure 
process in respect of the CDS Clearing Service which is the last step 
in the default management process applied by

[[Page 55911]]

LCH SA in the event of a default occurring in respect of one or several 
Clearing Member(s). Since the calculation of the Margin Repayment 
Amounts occurs before the calculation of the LCH Repayments Amounts, 
Clause 8.5 and Clause 8.6 have been reorganized so that they adequately 
reflect the order in which these amounts are calculated. Consequently, 
Clause 5 will be entitled ``Margin Repayment Amounts'' and the 
provisions dealing with the calculation of the LCH Repayment Amounts 
will be moved to the following Clause 8.6, ``LCH Repayment Amounts'' 
including also notification details on the LCH Repayment Amounts.
    LCH SA further proposes to provide for the possible liquidation in 
Euro of any Non-Defaulting Clearing Member's Collateral other than Euro 
denominated Cash Collateral provided that the CDS Repayment Amount 
calculated by LCH SA is a Negative CDS Repayment Amount and the 
relevant Non-Defaulting Clearing Member has not already paid such 
amount. Where there is a Positive CDS Repayment Amount or a Discounted 
CDS Repayment Amount, LCH SA will not liquidate the Collateral other 
than Euro denominated Cash Collateral and will redeliver or repay such 
Collateral in accordance with the proposed amended Clauses 8.5 and 8.7 
of Appendix 1 of the Rule Book.
    LCH SA, therefore, is proposing to make a distinction in the 
calculation of the Margin Repayment Amounts which will include, or not, 
the Euro amount resulting from the liquidation in Euro of the non-Euro 
denominated Cash Collateral, depending on the calculated CDS Repayment 
Amount in accordance with the proposed amended Clause 8.5.2 of Appendix 
1. In the case of a Positive CDS Repayment Amount or a Discounted CDS 
Repayment Amount, the Margin Repayment Amount will take into account 
the value of Euro denominated Cash Collateral recorded in the relevant 
Collateral Account since any Collateral other than Euro denominated 
Cash Collateral will be redelivered or repaid by LCH SA in accordance 
with amended Clause 8.7. In the case of a Negative CDS Repayment 
Amount, the Margin Repayment Amount will take into account the value of 
Euro denominated Cash Collateral recorded in the relevant Collateral 
Account and any Euro amount resulting from the liquidation in Euro of 
the Collateral other than Cash Collateral denominated in Euro. Clause 
8.1.4 will be amended to reflect this change.
    Since the Collateral other than Euro denominated Cash Collateral 
will be either liquidated in Euro and taken into account in the 
calculation of the relevant Margin Repayment Amount in accordance with 
proposed amended Clause 8.5 or repaid or redelivered to the Clearing 
Member in accordance with proposed amended Clause 8.7, the scope of 
Clause 8.10 on conversion is proposed to be limited to the calculation 
made under Clause 8.2 in respect of the CDS Repayment Amounts for which 
LCH SA may need to convert USD denominated amounts into Euro. The 
timing provided for Clause 8.10 is also proposed to be aligned with the 
timing provided for Clause 8.3 on the price sources to be used for the 
purpose of calculating CDS Repayment Amounts.
    Clause 8.3 is proposed to be amended to change the order among 
price sources to reflect what would happen in practice. Finally, it is 
proposed to amend Clause 8.6 to correct an inconsistency between 
applicable timings provided for in Clauses 8.3 and 8.6. As a result, 
the notification of the LCH Repayment Amounts is proposed to be made by 
no later than the end of the second Business Day following the Early 
Termination Trigger Date. The current notification deadline could not 
be achieved in practice as it is set at 15.00 on the Early Termination 
Trigger Date or on the first Business Day following the Early 
Termination Trigger Date, whereas the calculation of a CDS Repayment 
Amount, which is taken into account in the calculation of a LCH 
Repayment Amount, is based on the prices determined as at the end of 
the Business Day following the Early Termination Trigger Date in 
accordance with Clause 8.3 of Appendix 1.
(g) Amendments Related to Disciplinary Measures
    LCH SA proposes to add a new measure, which would be available in 
the event of any repetitive failures to submit prices as part of the 
price submission procedure by a Clearing Member, in Section 8 of the 
Procedures. LCH SA's risk model depends on the accuracy of the market 
data that it receives from Clearing Members. Although the failure to 
submit prices is not an issue among the current eleven market-maker 
CDSClear Clearing Members, the amendment is intended to anticipate 
potential failures by Clearing Members admitted as General Members as 
their number grows and assure that LCH SA has the authority to 
discipline a Clearing Member that repeatedly fails to provide timely 
and accurate pricing data.
    This additional measure consists in increasing the relevant 
Clearing Member's Contribution for the next monthly calculation of each 
Clearing Member's Contribution Requirement by an amount equal to the 
aggregate amount of fines to be incurred for such failures occurring 
each Price Contribution Day during the month following such monthly 
calculation. Paragraph 8.3 (Immediate Measure), paragraph (a) of 
Section 8 of the Procedures has therefore been amended to provide for 
this new measure in new indent (ii) and the provisions dealing with the 
fine that may be imposed for a failure to provide prices has been moved 
from the beginning of Paragraph 8.3 (a) to new indent (i). Paragraphs 
8.3 (b) and (c) will be amended to take into account the changes made 
to paragraph (a), including the use of the new defined term ``Price 
Alleged Breach''.
    A reference to Section 8 of the Procedures has been added at the 
beginning of Article 4.4.1.3 of the Rule Book as the calculation of a 
Clearing Member's Contribution could be impacted by the implementation 
of this new measure provided by Paragraph 8.3 (a) of Section 8 of the 
Procedures.
    The amendments to Section 8 of the Procedures also contain 
typographical corrections.
(h) Corrections to the Provisions Related to the Clearing Members' 
Contribution Requirement
    Following discussions on the default fund contribution payments to 
be made by Clearing Members that may move their positions from one 
entity to another one as part of the Brexit process, LCH SA proposes to 
clarify in Article 4.4.1.3 of the Rule Book that the Initial Margins to 
be taken into account for the purpose of the calculation of a Clearing 
Member's Contribution to the CDS Default Fund would be the available 
Initial Margins for all Clearing Days if there is less than sixty 
Clearing Days of history available in respect of a Clearing Member's 
Account Structure.
    The last paragraph of Article 4.4.1.8 of the Rule Book will be also 
removed. This paragraph states that LCH SA is not entitled to increase 
the Contribution Requirement of a Clearing Member whose aggregate 
amount of Initial Margins has not increased.
    LCH SA has found that, in light of the netting in the calculation 
of the Initial Margin(s) provided by LCH SA through its portfolio 
margining framework, there may be circumstances in which a change in a 
Clearing Member's positions could lead to an increase of its Group 
Member Uncovered Risk but not of its Initial Margin(s). In this event, 
LCH SA has determined that it should have the authority to increase the 
Contribution Requirement of a Clearing Member. The

[[Page 55912]]

amendment to Article 4.4.1.8 will implement this change.
    Finally, Paragraph 6.6 (Additional Contribution Amount) of Section 
6 of the Procedures will be amended to clarify when the Additional 
Contribution Amount is required to be paid upon a call by LCH SA. As 
proposed to be amended, Paragraph 6.6 confirms that, if the Clearing 
Member is notified on or before14:00, the payment is to be made to LCH 
SA with Euro-denominated Cash Collateral through TARGET2 by 09.00 the 
next Business Day.\5\ If the call is made after 14.00, payment is 
required to be made at the payment window used for the purpose of the 
First Intraday Call on the next Business Day.
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    \5\ As defined in the Rule Book, ``Business Day'' means ``any 
day that is not a holiday in the TARGET2 calendar''.
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(i) Miscellaneous Technical and Clarifying Amendments
    LCH SA is proposing to make a general reference to reports referred 
to in Section 5 of the Procedures instead of making a specific 
reference to the Cleared Transaction Portfolio Report in paragraphs (c) 
(Index Fungible) of Sections 4.8 in Part A and Part B of the 
Supplement. The purpose of this amendment is to harmonise all of the 
references made to the reports in the Supplement and to avoid the need 
for modifying the Supplement if there is a change in the name of the 
reports provided for in Section 5 of the Procedures.
    In addition, paragraph (c) of Sections 9.1 (Occurrence of Clearing 
Member Self Referencing Transaction) of Parts A and B of the Supplement 
will be aligned by removing the reference to the Clearing Member being 
the Reference Entity from Part B. This text is unnecessary as Section 
9.1 only deals with Self Referencing Transactions for which the 
Clearing Member is the Reference Entity.
    The amendments to the CDS Clearing Supplement also contain 
typographical corrections and amendments to incorrect used defined 
terms or incorrect cross-references.
(j) Correction to Certain Defined Terms
    The definition of ``CDS Contractual Currency'' in Section 1.1.1 of 
the CDS Clearing Rule Book will be amended to clarify that in respect 
of an Index Swaption, the CDS Contractual Currency shall mean the 
currency of the underlying transaction of an Index Swaption. The 
defined term ``CDS Contractual Currency'' is used in the context of the 
price contribution process as set out in Section 5 of the Procedures to 
determine the relevant applicable timings in respect of a credit 
default swap or an index swaption.
    Since the proposed amended definition of ``CDS Contractual 
Currency'' refers to the term of ``Underlying Index Transaction'' which 
is defined in the Supplement, a definition of ``Underlying Index 
Transaction'' will be added to Section 1.1.1 of the Rule Book to refer 
to the definition as set out in Part C of the Supplement.
    LCH SA proposes to remove the defined terms of ``CDS Intraday 
Transaction'' and ``Index Swaption Intraday Transaction'' from Section 
1.1.1 of the Rule Book as there is no longer the need to make a 
distinction between these two types of Intraday Transactions. The 
current distinction was made initially when the CDS Clearing Service 
was extended to the clearing of Index Swaptions on an intraday basis 
only. The weekly backloading service is now available to Index 
Swaptions since last year and this distinction between intraday trades 
is no longer relevant from a drafting perspective. The defined term 
``Intraday Transaction'' will be therefore amended to replace the 
references to ``CDS Intraday Transaction'' and ``Index Swaption 
Intraday Transaction'' by ``CDS'' and ``Index Swaption'' respectively. 
Consequently, the term ``Index Swaption Intraday Transaction'' will be 
replaced by ``Index Swaption'' in Article 3.1.6.1 and Section 4.1 
(Eligibility Requirements) of the Procedures, paragraph (c) (iii) (C) 
will be amended to remove ``Index Swaption Intraday Transaction'' but 
also ``Weekly Backloading Transaction'' as there is no need to make 
such reference. Section 4.1 (Eligibility Requirements) of the 
Procedures, paragraph (c)(vii) will be amended to remove the references 
to ``CDS Intraday Transaction'' and `Index Swaption Intraday 
Transaction''.
    It is proposed to amend the definitions of ``FCM Client Margin 
Requirement'', ``FCM House Margin Requirement'' in Section 1.1.1 of the 
Rule Book to exclude Variation Margin from the Margins calculated by 
LCH SA as pursuant to Article 3.1.10.9, no Variation Margin is 
calculated for FCM Clearing Members as only STM Cleared Transaction are 
registered in their Account Structure(s).
    The definition of ``Procedures'' in Section 1.1.1 of the Rule Book 
will be amended to clarify that such documents are issued by LCH SA and 
entitled ``CDS Clearing Procedures''.
    The reference to the defined term ``Converting Clearing Member'' 
will be removed from Article 3.1.10.8 of the Rule Book as there is the 
corresponding definition in Section 1.1.1.
    Some of the defined terms in Section 1.1.1 of the Rule Book will be 
ranged in alphabetical order.
(k) Miscellaneous Amendments
    LCH SA proposes to amend Article 1.2.2.1 of the Rule Book by 
excluding the provisions of Articles 1.2.2.8 and 1.2.2.9 from its 
scope, since these two Articles deal with the publication of Clearing 
Notices and are part of the Section 1.2.2, which is contradictory to 
the last sentence of Article 1.2.2.1.
    In addition, Section 4.2.7 of the Rule Book is proposed to be 
amended to remove any reference to the LCH Settlement Prices, defined 
as the settlement prices used in respect of Index Swaption Cleared 
Transactions, since the defined term of Markit LCH Settlement Prices 
will be amended to also cover these prices, in addition to the 
settlement prices used in respect of the Index Cleared Transactions and 
Single Name Cleared Transactions by making a general reference to 
Cleared Transactions. The defined term of LCH Settlement Price, 
therefore, will be removed from Section 1.1.1, Article 5.1.1.3 and 
Article 6.1.1.3 of the Rule Book.
    LCH SA also proposes to clarify Article 5.1.1.3, indent (xiii)(a), 
of the Rule Book by making a reference to the CCM Client and extending 
the scope of this indent to cover any other purpose, in addition to the 
payment of the CDS Client Clearing Entitlement to the CCM Client. For 
example, in the event of an Event of Default occurring in respect of 
the CCM Client's Clearing Member, LCH SA would like to rely on the CCM 
Client's information provided by that Clearing Member in order to 
liaise with the CCM Client in relation to the transfer of the CCM 
Client's Relevant Client Cleared Transactions and Ported Collateral to 
a Backup Clearing Member.
    In addition, Section 5 of the Procedures is proposed to be amended 
to remove any reference to bank holidays from Paragraph 5.18.3 (Price 
Submission Procedure) as the list is not exhaustive. When Clearing 
Members are required to submit prices at earlier times, LCH SA will 
notify them in advance in accordance with the provisions of this 
Paragraph. Paragraphs 5.18.3 and 5.18.5 are also proposed to be amended 
to clarify that the CDS Contractual Currency of the Index Swaptions is 
in Euro. The reference to ``Clearing Day'' in respect of the 
notification of execution of cross trades is not correct and is 
therefore proposed to be replaced by ``Price Contribution

[[Page 55913]]

Day'' in indent (d) of Paragraph 5.18.5. The reference to ``Clearing 
Day'' in the paragraph is relevant for trades denominated in Euro but 
not in US Dollars since the definition of Clearing Day does not take 
into account bank holidays in the U.S., contrary to the definition of 
``Price Contribution Day''. In Section 5 of the Procedures, LCH SA 
further proposes to specify that any reference to the ``Operations 
department'' is a reference to the ``CDSClear Operations Department''.
    Finally, LCH SA proposes to remove all the Appendices of Section 5 
of the Procedures, which are template forms to be used in the context 
of the Pre-Default Portability process as provided for in Paragraph 5.6 
of Section 5 of the Procedures. The forms referred to in the CDS 
Clearing Rules are in general not appended to the rules and LCH SA 
would like to gain flexibility in amending them from time to time, for 
example to change contact details or make other minor changes to these 
forms without the need to amend Section 5 of the Procedures. The 
references to such Appendices will be removed from Paragraph 5.6 and 
the template forms will be available upon request pursuant to amended 
Paragraph 5.6.\5\
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    \5\ The amendments to the Rule Book (including Appendix 1) and 
the Procedures also contain typographical corrections and amendments 
to incorrect defined terms or incorrect cross-references.
---------------------------------------------------------------------------

(b) Statutory Basis
    LCH SA has determined that Proposed Rule Change is consistent with 
the requirements of Section 17A of the Securities Exchange Act 
(``Act'') \6\ and regulations thereunder applicable to it. Section 
17A(b)(3)(F) of the Act requires, inter alia, that the rules of a 
clearing agency ``promote the prompt and accurate clearance and 
settlement of securities transactions and . . . assure the safeguarding 
of securities and funds that are in its custody or control or for which 
it is responsible . . . and, in general, to protect investors and the 
public interest.'' \7\
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    \6\ 15 U.S.C. 78q-1
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    LCH SA has proposed amendments to introduce the clearing of single 
name CDS transactions referencing a monoline insurer constituent of 
certain indices such as the CDX.NA IG and CDS.NA.HY. In doing so, LCH 
SA has assured that its existing risk management methodology, and in 
particular its Wrong Way Risk margin framework, is appropriate to 
manage the risk arising from the clearing of a single name CDS 
referencing a monoline insurer, including collecting and maintaining 
financial resources intended to cover the risks to which LCH SA is 
exposed in connection with offering such clearing services. As such LCH 
SA will be able to minimize the risk that the losses associated with 
the default of a participant (or participants) in the clearing service 
will extend to other participants in the service. By introducing the 
clearing of single name CDS transactions referencing a monoline insurer 
constituent of the CDX.NA IG and CDS.NA.HY indices, LCH SA is promoting 
the prompt and accurate clearance and settlement of derivatives 
transactions. As such, the clearing of single name CDS transactions 
referencing a monoline insurers is consistent with Section 17A(b) 
(3)(F) of the Act.
    Regulation 17Ad-22(e)(3)(i) requires a ``covered clearing agency'', 
i.e., a clearing agency that is involved in activities with a more 
complex risk profile, such as providing services for security-based 
swaps, to maintain and enforce written policies and procedures 
reasonably designed to maintain a sound risk management framework for 
comprehensively managing the risks that arise in or are borne by the 
covered clearing agency, including risk management policies, 
procedures, and systems designed to identify, measure, monitor, and 
manage the range of risks that arise in or are borne by the covered 
clearing agency.\8\
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    \8\ 17 CFR 240.17Ad-22(e)(3)(i).
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    As noted above, in introducing the clearing of single name CDS 
transactions referencing a monoline insurer, LCH SA made such 
amendments as are necessary to assure that its risk management 
methodology is appropriate to measure, monitor and manage the risk 
arising from the clearing of such single name CDS. As such, the 
clearing of single name CDS transactions referencing a monoline 
insurers is consistent with Regulation 17Ad-22(e)(3)(i).
    Regulation 17dA-22(e)(4)(ii) requires a covered clearing agency 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.\9\
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    \9\ 17 CFR 240.17Ad-22(e)(4)(ii).
---------------------------------------------------------------------------

    As discussed above, LCH SA is proposing to introduce two new 
margins to address additional financial risks to which Clearing Member 
may be exposed: (i) Legal Entity Identity Margin; and (ii) Stress Test 
Loss Over Additional Margin/Net Capital Ratio Margin. These additional 
margins are intended to assure that LCH SA has sufficient financial 
resources to manage the default of a Clearing Member with multiple 
margin accounts or which has accumulated positions at LCH SA that 
provide the Clearing Member high leverage versus its net capital 
amount.
    Similarly, the proposal to apply stress test scenarios to non-cash 
collateral securities posted to cover margin requirements and to 
include the potential stressed loss over the collateral haircut is 
intended to assure that LCH SA has enough financial resources to cover 
its liquidity needs in extreme but plausible market conditions.
    The above proposals, therefore, are designed to enhance LCH SA's 
ability to 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 the liquidity risk that may arise in connection with 
its activities as a covered clearing agency. As such the amendments 
creating two new margins and applying stress test scenarios to non-cash 
collateral are consistent with the requirements of Section 17A(b)(3)(F) 
of the Act and Regulation 17dA-22(e)(4)(ii).
    Regulation 17Ad-22(e)(6)(iv) \10\ requires a covered clearing 
agency to establish a risk-based margin system that uses ``reliable 
sources of timely price data and uses procedures and sound valuation 
models for addressing circumstances in which pricing data are not 
readily available or reliable''. Further, Section 17A(b)(3)(G) of the 
Act provides that the participants of a clearing agency shall be 
appropriately disciplined for violation of any provision of the rules 
of the clearing agency by fine or any other fitting sanction. The 
addition of a new potential disciplinary measure available to LCH SA in 
the event of repetitive failures to submit prices (as part of the price 
submission procedure) by a Clearing Member is intended to assure the 
accuracy of the market data on which the CCP risk model relies and to 
appropriately discipline a Clearing

[[Page 55914]]

Member that repeatedly fails to provide timely and accurate pricing 
data. As such, the proposed amendments to provide for the imposition of 
fines on Members that do not submit prices as required are consistent 
with the provisions of Regulation 17Ad-22(e) and Section 17A(b)(3)(G) 
of the Securities Exchange Act.
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    \10\ 17 CFR 240.17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------

    Regulation 17Ad-22(e)(16) \11\ requires a covered clearing agency 
to establish, maintain and enforce written policies and procedures 
designed to ``[s]afeguard the covered clearing agency's own and its 
participants' assets, minimize the risk of loss and delay in access to 
these assets, and invest such assets in instruments with minimal 
credit, market, and liquidity risks.'' As discussed above, LCH SA is 
proposing to amend its Rule Book to enhance its CDS Default Management 
Process by adding an additional resource in the event of the default of 
a Clearing Member. Specifically, LCH SA would be entitled to use any 
remaining house collateral transferred in respect of other LCH SA 
clearing services to reduce or cover losses linked to the liquidated 
Client Cleared Transactions of the Defaulting Clearing Member. By 
enhancing the assets available to LCH SA in the event of a CDS Clearing 
Member default, LCH SA is safeguarding its own and its participants' 
assets. The proposal, therefore, is consistent with Regulation 17Ad-
22(e)(16).
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    \11\ 17 CFR 240.17Ad-22(e)(16).
---------------------------------------------------------------------------

    Regulation 17Ad-22(e)(13) provides that a clearing agency must 
establish, maintain and enforce written policies and procedures assure 
that the covered clearing agency ``has the authority and operational 
capacity to take timely action to contain losses and liquidity demands 
and continue to meet its obligations''.\12\ The proposed amendments to 
the early termination-related provisions set out in Clause 8 of 
Appendix 1 of the Rule Book are intended to clarify the applicable 
process by which LCH SA, in the event of a Clearing Member default, may 
liquidate any Non-Defaulting Clearing Member's Collateral other than 
Euro denominated Cash Collateral when necessary to make required 
payments. The proposed amendments, therefore, are intended to assure 
that LCH SA has the authority and operational capacity to take timely 
action to contain losses and liquidity demands and continue to meet its 
obligations. As such, the proposed amendments are consistent with the 
provisions of Regulation 17Ad-22(e)(13).
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    \12\ 17 CFR 240.17Ad-22(e)(13).
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    Regulation 17Ad-22(e)(4) \13\ requires a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
arising from its payment, clearing, and settlement processes, including 
by including prefunded financial resources. LCH SA is proposing (i) to 
clarify that the Initial Margins to be taken into account for the 
purpose of the calculation of a Clearing Member's Contribution would be 
the available Initial Margins if there is less than sixty Clearing Days 
of history available and (ii) to remove the provisions preventing LCH 
SA from increasing the Contribution Requirement of a Clearing Member 
whose aggregate amount of Initial Margins has not increased.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78q-1
---------------------------------------------------------------------------

    For all these reasons, LCH SA believes that the Proposed Rule 
Change is consistent with the requirements of Section 17A of the Act 
and the regulations thereunder, including the standards under Rule 
17Ad-22.

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.\14\ LCH SA does 
not believe the Proposed Rule Change would have any impact, or impose 
any burden, on competition. The Proposed Rule Change does not address 
any competitive issue or have any impact on the competition among 
central counterparties. LCH SA operates an open access model, and the 
Proposed Rule Change will have no effect on this model.
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    \14\ 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:

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-2020-004 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-2020-004. 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

[[Page 55915]]

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-2020-004 and should 
be submitted on or before October 1, 2020.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).

    October 1, 2020.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-19942 Filed 9-9-20; 8:45 am]
BILLING CODE 8011-01-P