[Federal Register Volume 85, Number 211 (Friday, October 30, 2020)]
[Notices]
[Pages 68935-68937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-24022]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90270; File No. SR-LCH SA-2020-006]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to the Amendments of LCH SA Risk
Liquidity Modeling Framework
October 26, 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 October 20, 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.
---------------------------------------------------------------------------
\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
Banque Centrale de Compensation, which conducts business under the
name LCH SA (``LCH SA''), is proposing to amend its Liquidity Risk
Modeling Framework (the ``Framework'') in order to address more
accurately the liquidity requirements in the event of the assignment
and exercise of equity American options (the ``Proposed Rule Change'').
[[Page 68936]]
The text of the proposed rule change has been annexed as Exhibit
5.\3\
---------------------------------------------------------------------------
\3\ All capitalized terms not defined herein have the same
definition as in the CDS Clearing Rule Book, Supplement or
Procedures, as applicable.
---------------------------------------------------------------------------
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
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''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\4\
and Rule 19b-4 thereunder \5\ the filing LCH SA-2019-007 to amend its
Framework. This proposed rule change was duly approved by the
Commission on January 24, 2020.\6\
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4
\6\ Self-Regulatory Organizations; LCH SA; Order Approving
Proposed Rule Change Relating to Amendments to LCH SA's Liquidity
Risk Modelling Framework; Exchange Act Release No. 88039 (Jan. 24,
2020), 85 FR 5489 (Jan. 30, 2020) (LCH SA-2019-007).
---------------------------------------------------------------------------
LCH SA is now proposing to amend the Framework in order to address
one recommendation made by the independent model validation team during
the 2018/2019 review.
The purpose of the enhancement is to include, from a liquidity
perspective, the funding risk arising from the physical settlement
linked to the exercise of American options under stressed liquidity
conditions prior to expiry. This is an extension of the scope as
American and European options exercise at expiry is already covered by
the current approved Framework.
Because equity American options can be exercised before expiry,
there is a risk of assignment and exercise of Equity American options
at any time before expiry when the 2 largest clearing members in terms
of liquidity needs for the covered clearing agency (Cover2 members) may
start facing liquidity issues. During that period, the covered clearing
agency could, as a result, observe an increase in the liquidity needs
linked to the settlement of equity American options. This concern needs
to be modelled and tackled within the liquidity coverage ratio
(``LCR'') which is the ratio of assets available over the liabilities
of LCH SA under the stressed scenario of the default of the 2 largest
clearing members (in terms of liquidity needs).
This means that on a daily basis the LCR will identify all the
potential positions that are in the money or at the money on the day of
the computation and on the next business day as well. Then, given the
potential option exercise, it will generate a liquidity need.
In practice, the daily process will work as follows:
Computation of the liquidity needs coming from the equity
American options that are in the money or at the money, by applying no
market stress.
Computation of the liquidity needs coming from the options
that are in the money or at the money, by applying a stress scenario to
the equities.
We will select the positions consistent with the 2 largest
clearing members in terms of liquidity needs for both modes described
above and will retain the most punitive one.
This amount will then be added to the current cash equity
settlement amount in the LCR.
A six month back test from May to November 2019 showed the impact
on the LCH SA LCR is less than 0.5% with the largest impact being 0.86%
and occurred on the 13th of November 2019. LCR is an internal indicator
computed at the clearing house level and there is no specific impact on
any particular Clearing Member.
In order to introduce the Proposed Rule Change, LCH SA will need to
slightly modify the Framework. The term ``expiry'' will be replaced by
``exercise'' in both sections 5.3.1.3 and 5.3.4 and the term ``at
expiry'' will be replaced by ``anytime by defaulting members in order
to raise liquidity'' in the paragraph Option Expiry of section 5.3.1.3.
(b) Statutory Basis
LCH SA believes that the Proposed Rule Change is consistent with
the requirements of Section 17A of the Securities Exchange Act of 1934
\7\ (the ``Act'') and the regulations thereunder, including the
standards under Rule 17Ad-22.\8\ In particular, Section 17(A)(b)(3)(F)
\9\ of the Act 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 derivative
agreements, contracts, and transactions and to assure the safeguarding
of securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.\10\ As described above,
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 equity American options involving a Defaulting Clearing Member
during any 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 such
American options involving a Defaulting Clearing Member. By
anticipating and ensuring that LCH SA meets its liquidity needs in such
case, the proposed rule change would help ensure that LCH SA is able to
meet its financial obligations and would allow LCH SA to continue to
meet its obligation to promptly and accurately clear and settle
securities transactions in such situations. By taking into account the
funding risk that may arise prior to expiry of American options, the
Proposed Rule Change is also helping to safeguard the securities and
funds in LCH SA's control and maintain an effective liquidity risk
management. For these reasons, LCH SA believes that the Proposed Rule
Change is consistent with Section 17A(b)(3)(F) of the Act.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78q-1.
\8\ 17 CFR 240.17Ad-22.
\9\ 15 U.S.C. 78q-1(b)(3)(F).
\10\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Further, Rule 17Ad-22(e)(7) requires a covered clearing agency to
``effectively measure, monitor, and manage the liquidity risk that
arises in or is borne by the covered clearing agency, including
measuring, monitoring, and managing its settlement and funding flows on
an ongoing and timely basis, and its use of intraday liquidity''.\11\
---------------------------------------------------------------------------
\11\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------
Regulation 17dA-22(e)(4)(ii) also requires a covered clearing
agency that is involved in activities with a more complex risk profile,
e.g., that provides clearing 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
[[Page 68937]]
resources to enable it to cover a wide range of foreseeable stress
scenarios that include the default of the two participant family
clearing members that would potentially cause the largest aggregate
credit exposure for the covered clearing agency in extreme but
plausible market conditions.\12\
---------------------------------------------------------------------------
\12\ 17 CFR 240.17Ad-22(e)(4)(ii).
---------------------------------------------------------------------------
As noted above, the amended Framework is 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 equity
American options involving a defaulting clearing member so that LCH SA
can also maintain sufficient liquid resources at the minimum in all
relevant currencies to effect the relevant settlement process of
payment obligations with a higher degree of confidence are consistent
with the requirements of Regulation 17dA-22(e)(4)(ii) and 17dA-
22(e)(7).\13\
---------------------------------------------------------------------------
\13\ 17 CFR 240.17Ad-22(e)(4)(ii) and 17dA-22(e)(7).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\14\ 17 CFR 240.17Ad-22(e)(4)(i) and (vi)(A).
---------------------------------------------------------------------------
As discussed above, by clarifying the daily process for computation
of the liquidity needs coming from the physical settlement linked to
the exercise of equity American options under stressed liquidity
conditions, the proposed amendments enhance LCH SA's written policies
and procedures with regard to stress testing practices 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 of the two participant family clearing members that would
potentially cause the largest aggregate credit exposure for LCH SA 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).\15\
---------------------------------------------------------------------------
\15\ Id.
---------------------------------------------------------------------------
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 Rule Change will have no effect on this model for any clearing
member.
---------------------------------------------------------------------------
\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:
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-2020-006 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-2020-006. 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-2020-006 and should
be submitted on or before November 20, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------
\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-24022 Filed 10-29-20; 8:45 am]
BILLING CODE 8011-01-P