[Federal Register Volume 87, Number 61 (Wednesday, March 30, 2022)]
[Notices]
[Pages 18416-18419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-06628]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94505; File No. SR-LCH SA-2022-003]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to the Restructuring Notification Process
for Swaptions
March 24, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on March 18, 2022, 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
(a) Banque Centrale de Compensation, which conducts business under
the name LCH SA (``LCH SA''), is proposing to amend its (i) CDS
Clearing Supplement (``Supplement'') and (ii) CDS Clearing Procedures
(``Procedures'') to incorporate new terms and to make conforming,
clarifying and clean-up changes to implement a delegation mechanism for
clients of CDSClear clearing members which applies in the context of
the restructuring process for swaptions (the ``Proposed Rule Change'').
The text of the Proposed Rule Change has been annexed [sic] as
Exhibit 5.\3\
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\3\ All capitalized terms not defined herein have the same
definition as in the CDS Clearing Rule Book, Supplement or
Procedures, as applicable.
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The implementation of the Proposed Rule Change will be contingent
on LCH SA's receipt of all necessary regulatory approvals.
(b) Not applicable.
(c) Not 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
(a) Purpose
The purpose of the Proposed Rule Change is to to [sic] amend the
restructuring notification process applicable in respect of swaptions
registered in a Client Account Structure. Currently, in the event of a
restructuring which would be applicable to a component transaction of
the underlying index transaction to which a set of swaptions relate,
Clearing Members would be in charge of sending and receiving the
relevant notices in respect of this restructuring and notifying LCH SA
of any such notice delivered or received by no later than 5:00 p.m. on
the cut-off date. Where such restructuring also relate to swaptions
registered in a Client Account Structure, this also implies from the
Client that it shall first deliver the restructuring notice to its
Clearing Member and its Clearing Member delivers the equivalent notice
to the other Clearing Member to allow for this notification requirement
by the relevant Clearing Member to LCH SA by no later than 5:00 p.m. on
the cut-off date.
The proposed amendments to the restructuring process for swaptions
registered in a Client Account Structure will remove any dependency
between the notification duties in the context of a restructuring. The
proposed rule change will provide for a delegation mechanism whereby
Clearing Members shall appoint their Clients as their Restructuring
Delegation Beneficiaries for the purposes of sending and receiving the
relevant notices to the other Clearing Member(s) or Client(s) in the
event of a restructuring affecting the swaptions registered in their
relevant Client Account Structure. The notification duty vis-[agrave]-
vis LCH SA following the sending or receiving of the notices will also
rely on such Restructuring Delegation Beneficiary. These amendments
replicate the current delegation legal mechanism which is used in the
context of the exercise process in respect of swaptions registered in a
Client Account Structure.
1. Supplement
LCH SA is proposing to modify Part C of the Supplement (``Part C'')
to incorporate terms for implementing the delegation mechanism for the
restructuring process and to make certain conforming and clean-up
changes to improve clarity of Part C.
Section 1.2 (Terms defined in the CDS Clearing Supplement) of Part
C would be amended by adding the following new defined terms.
The term ``Restructuring Delegation Beneficiary'' would be added to
refer to a Client of a Clearing Member designated by such Clearing
Member pursuant to new Section 5.7 (Delegation by Clearing Members to
Clients) as being entitled to send and receive Credit Event Notices and
Notices to Exercise Movement Option in respect of the relevant Swaption
Restructuring Cleared Transactions on such Clearing Member's behalf.
The term ``Swaption Restructuring CCM Client Notice would be added
to make a cross reference to its definition as set out in Mandatory
Provision 7.3 (Duty to Deliver Swaption Restructuring CCM Client
Notice) in Appendix VIII to Part C.
[[Page 18417]]
The existing term ``Exercise Delegation Beneficiary'' would be
amended for clarification purpose as the current reference to ``The''
Client seems to imply that only a single Client of a Clearing Member
could be appointed as an Exercise Delegation Beneficiary irrespective
of whether the Clearing Member is acting on behalf of other Clients and
therefore this reference will be replaced by ``A'' Client for the sake
of clarity.
Because of the new Section 5.7 (Delegation by Clearing Members to
Clients) added to Part C, any cross-references to Sections 5 following
this new Section 5.7 should be renumbered. Therefore the cross-
references in the definitions of ``Swaption Restructuring Clearing
Member Notice'' and ``Swaption Restructuring Clearing Member Notice
Deadline'' would be updated accordingly.
A new sub-paragraph (ii) would be added to Section 1.7 (c)
(Application to FCM/BD Clearing Members) to provide that,
notwithstanding an FCM/BD Clearing Member acting as agent for the
account of an FCM/BD Client with respect to Index Swaption Cleared
Transactions, an FCM/BD Clearing Member shall designate its FCM/BD
Client to send and receive the relevant restructuring notices on its
behalf as its Restructuring Delegation Beneficiary in accordance with
the relevant provisions of Part C. As a result, the current equivalent
paragraph (c) in respect of the exercise process has been renumbered as
a sub-paragraph (i).
Section 5 (Restructuring) of Part C would be amended to add new
provisions to implement this delegation mechanism for the restructuring
process involving swaptions registered in a Client Account Structure.
Sections 5.1, 5.3, 5.5 and 5.6 of Part C would be amended by adding
references to the new defined term of Restructuring Delegation
Beneficiary where needed.
An additional paragraph would be added at the end of Section 5.1 to
provide for the express consent from the Clearing Member on the
disclosure of its information needed for the purpose of the
restructuring process.
A new Section 5.7 (Delegation by Clearing Members to Clients) is
proposed to be added in order to provide for the legal mechanism of
delegation which will apply for Clients and will replicate the
equivalent provisions of Section 6.4 (Delegation by Clearing Members to
Clients) applicable in respect of the exercise process. Specifically,
Section 5.7 would provide that, with respect to the sending of the
relevant notices for Swaption Restructuring Cleared Transactions of a
Swaption Restructuring Matched Pair which are Client Cleared
Transactions, Clearing Members shall designate their relevant Clients
to act on their behalf and such designation will take effect as soon as
reasonably practicable following receipt by LCH SA of duly completed
and signed Delegation Forms. The Client so designated will be the
Restructuring Delegation Beneficiary. Such designation may be withdrawn
provided that there is no Swaption Restructuring Cleared Transaction
registered in the relevant Client Account Structure. Where a Clearing
Member designates its Client in accordance with new Section 5.7, any
delivery or receipt of a restructuring notice by the designated Client
will be deemed to constitute the delivery or receipt of a valid
restructuring notice by its Clearing Member. Similarly, any reference
in Part C to a restructuring notice delivered or received by a
designated Client will be interpreted as delivery or receipt by a
Clearing Member.
Because of the insertion of this new Section 5.7 (Delegation by
Clearing Members to Clients) in Part C, the following Sections 5 would
be renumbered and any cross-reference in Part C to the renumbered
Sections would be amended accordingly.
Section 5.8 (Swaption Restructuring Clearing Member Notices) of
Part C would be amended to include the appropriate references to the
Client designated as a Restructuring Delegation Beneficiary which will
notify LCH SA of the delivery or receipt of the relevant restructuring
notices on behalf of its Clearing Member in order that LCH SA may give
effect to the relevant restructuring notices exchanged between the
parties to a Swaption Restructuring Cleared Transaction. There will be
also references to the new defined term of Swaption Restructuring CCM
Client Notice to be added and which, pursuant to Mandatory Provision
7.3 of Appendix VIII to Part C, will refer to the notice sent to LCH SA
or the relevant Clearing Member by a Restructuring Delegation
Beneficiary following receipt or delivery of a restructuring notice.
Paragraph (b) of Section 8.1 (General Rules relating to Notices) to
[sic] remove the reference to the occurrence of an Electronic Exercise
Platform (``EEP'') Failure Event since the scope of this paragraph will
be broader than the exercise process as it will include a new reference
to a Restructuring Delegation Beneficiary.
Finally, Section 13 (Exclusion of Liability) of Part C would be
amended to add a new Section 13(c) replicating the provisions of
Section 13(b) and specifying that LCH SA would have no liability to a
Clearing Member which has delegated to a Restructuring Delegation
Beneficiary its power to send or receive the relevant restructuring
notices on its behalf for any loss, cost or expense arising out of any
failure of such Restructuring Delegation beneficiary to perform its
obligations in relation with such delegation or in connection with or
arising from the delivery of such notices.
Part C would be also amended to make the following conforming
changes that are not related to the restructuring delegation.
In Section 6.1 (Creation and Notification of Exercise Matched
Pairs) of Part C, the provisions on the content of the Protected
Exercise Matched Pair Report would be amended to remove any reference
to contact details of the relevant parties. Indeed, since such contract
details will be the subject of a separate notification by LCH SA, a new
paragraph would be added at the end of sub-paragraph (ii) of Section
6.5(a) which would be entitled as ``Access to the Protected Exercise
Matched Pair Report and other information''. As a result of this
change, any reference to the Protected Exercise Matched Pair Report in
Part C, including but not limited to Section 8, would be amended by
either removing the reference to this report to keep general
notification's references or adding a reference to any other
information which is notified by LCH SA for the purpose of the exercise
process for consistency purposes. Similarly to the amendment made under
Section 5.1, an additional paragraph will be added at the end of
Section 6.1 to require for the express consent from the Clearing Member
on the disclosure of its information needed for the purpose of the
exercise process.
In addition, and on the basis of new Section 5.7, Section 6.4 would
specify that the designation of a Client as an Exercise Delegation
Beneficiary may be withdrawn provided that there is no Exercise Cleared
Transaction registered in the relevant Client Account Structure.
Appendix VIII (CCM Client Transaction Requirements) to Part C would
be amended for the purposes of including references to the new
delegation mechanism for the restructuring process. Any Client
designated as a Restructuring Delegation Beneficiary will be in charge
of sending and receiving the relevant restructuring notice for the
relevant Swaption Index Cleared Transaction directly to the relevant
Clearing Member or Client on behalf of its Clearing Member. As a
[[Page 18418]]
result, there will be no longer the need for them to send restructuring
notices to their Clearing Members to allow them to send equivalent
notice to the other Clearing Member comprised in the relevant Matched
Pair. Mandatory Provision 4 will be therefore amended to remove the
reference to the restructuring notices that could be sent by a CCM
Client to its CCM in respect of the mirroring transaction between such
CCM Client and CCM.
The changes made to Section 6.1 (Creation and Notification of
Exercise Matched Pairs) of Part C would be replicated in Mandatory
Provisions 5.4 and 5.8 to remove the reference to the Protected
Exercise Matched Pair Report which is too restrictive or refer to other
notice details provided by LCH SA for the purposes of the exercise
process.
Mandatory Provision 5.6 would be amended to add a reference to the
CCM since contact details of a CCM Client could be also provided by a
CCM to LCH SA.
The current Mandatory Provision 7 is entirely removed from Appendix
VIII as it applies to the delivery of notices in respect of the
mirroring transaction between a CCM Client and its CCM in the event of
restructuring, which will be no longer needed following the
implementation of the proposed rule change. New Mandatory Provision 7
will be entitled ``Designation of CCM Client as a Restructuring
Delegation Beneficiary by CCM'' and replicates the equivalent
provisions of Mandatory Provision 5 (Designation of CCM Client as an
Exercise Delegation Beneficiary) subject to the necessary amendments
linked to the restructuring process. New paragraph 7.1 will provide for
the mandatory designation of a CCM Client as a Restructuring Delegation
Beneficiary by its CCM in accordance with new Section 5.7 of Part C.
New paragraph 7.2 will provide that neither the CCM nor the CCM Client
shall send the relevant restructuring notices for the mirroring
transaction between the CCM and its CCM Client but instead the CCM
Client as the Restructuring Delegation Beneficiary shall send or
receive the relevant restructuring notices for the corresponding CCM
Client Cleared Transaction pursuant to Part C, such restructuring
notices being deemed sent or received in respect of the relevant
mirroring transaction. The following new paragraph 7.3 provides for the
duty to deliver a Swaption Restructuring CCM Client Notice to LCH SA by
the Restructuring Delegation Beneficiary. If such notification is not
made within the required timeframe, LCH SA will decide either to give
effect to the restructuring notices pursuant to Section 5.8(c) of Part
C or not to give effect to the restructuring notices then, following
Exercise, an amount shall be payable between the Clearing Members equal
to the difference between the value of the Matched Buyer Contract had
the Swaption Restructuring CCM Client Notice been given to LCH SA
within the required timeframe and the value of such contract in the
absence of such Swaption Restructuring CCM Client Notice having been
given. This amount shall be determined and paid in accordance with the
provisions of this new paragraph. New paragraph 7.4 relates to the
contact details of LCH SA and the CCM Client to be used for the
purposes of delivering the relevant notices. Last paragraph 7.5
provides for a confidentiality waiver regarding the notice details
provided by the CCM Client.
Finally, the proposed amendments to the Supplement also contain
typographical corrections in Sections 3.1 and 8.1(c) of Part C and
Mandatory Provisions 5.1 and 5.4 of Appendix VIII to Part C without
affecting the meanings of such Sections or Mandatory Provisions.
2. Procedures
LCH SA also proposes to modify Section 5 of the Procedures to
incorporate terms for implementing the new delegation mechanism for the
purposes of the restructuring process applicable in respect of
swaptions.
Section 5.19.1 which currently deals with the delegation applicable
to the exercise process will be amended for taking into account the
delegation for the restructuring process. Consequently, Section 5.19.1
will be entitled ``Delegation by Clearing Members to Clients'' and
Section 5.19 ``Delegation by Clearing Members to Clients and Electronic
Exercise Platform''.
Pursuant to amended Section 5.19.1, a Clearing Member which has
delegated to a Client the power to send and receive the relevant
notices in the context of a restructuring for swaptions in accordance
with Section 5 of Part C shall notify such Restructuring Delegation by
sending the relevant form to LCH SA which will be defined as the
Delegation Form as it will contain both Exercise Delegation and
Restructuring Delegation. The defined term of ``Exercise Delegation
Withdrawal'' will be also replaced by ``Delegation Withdrawal'' to
cover the possibility for withdrawing the delegation applicable in
respect of the restructuring process and references to provisions of
Part C that are equivalent to the withdrawal for the exercise process
will be added for the restructuring process.
Other amendments will be made to Section 5.19.1 in order to include
the references to either the Restructuring Delegation Beneficiary or
the Restructuring Delegation where relevant.
(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
\4\ (the ``Act'') and the regulations thereunder, including the
standards under Rule 17Ad-22.\5\ Section 17(A)(b)(3)(F) \6\ 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. As noted above, the Proposed Rule Change is designed
to implement the delegation legal mechanism to operationally facilitate
any required restructuring notification process for swaptions which
will improve the process for sending and receiving of restructuring
notices to more promptly and accurately reflect the restructuring
status of the cleared option transaction in LCH systems.
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\4\ 15 U.S.C. 78q-1.
\5\ 17 CFR 240.17Ad-22.
\6\ 15 U.S.C. 78q-1(b)(3)(F).
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Further, LCH SA believes that the proposed changes to the Rule
Book, Supplement and Procedures are consistent with requirements of
Rule 17Ad-22(e)(17).\7\ Rule 17Ad-22(e)(17) requires a covered clearing
agency to manage operational risks by (i) identifying the plausible
sources of operational risk, both internal and external, and mitigating
their impact through the use of appropriate systems, policies,
procedures, and controls; (ii) ensuring that systems have a high degree
of security, resiliency, operational reliability, and adequate,
scalable capacity; and (iii) establishing and maintaining a business
continuity plan that addresses events posing a significant risk of
disrupting operations.\8\
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\7\ 17 CFR 240.17Ad-22(e)(17).
\8\ 17 CFR 240.17Ad-22(e)(17).
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As described above, the Proposed Rule Change will enable LCH SA to
more effectively manage the operational notification risks associated
with the restructuring event process by providing an alternative
solution with an operational delegation mechanism for
[[Page 18419]]
the restructuring notification process. Specifically, the current
bilateral notification process creates plausible operational and legal
risks if LCH SA is not provided in due time by its Clearing Member with
the relevant restructuring notice sent by the client. To remove any
unnecessary dependency on the bilateral notification process and duties
between the Clearing Members(s) and client(s) in the context of a
restructuring event for swaptions, the Proposed Rule Change is designed
to implement a delegation mechanism whereby clients of Clearing Members
shall be appointed as their Restructuring Delegation Beneficiaries for
the purposes of sending and receiving the relevant notices to the other
Clearing Member(s) or Client(s) in the event of a restructuring
affecting the swaptions registered in their relevant Client Account
Structure.
By implementing a relevant and consistent delegation legal
mechanism, the Proposed Rule Change is reducing potential legal risk at
LCH SA and is therefore consistent with the requirements of a well-
founded, clear, transparent, and enforceable legal framework of
Exchange Act Rule 17Ad-22(e)(1).\9\
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\9\ 17 CFR 240.17Ad-22(e)(1).
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For the reasons stated above, LCH SA believes that the Proposed
Rule Change with respect to the Supplement and Procedures in connection
with the implementation of the delegation mechanism for the
restructuring notification process for swaptions are consistent with
the requirements of prompt and accurate clearance and settlement of
securities transactions in Section 17(A)(b)(3)(F) \10\ of the Act and
the requirements of operational risk management in Rule 17Ad-22(e)(17)
\11\ and of a well-founded legal framework in Rule 17Ad-22(e)(1).\12\
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
\11\ 17 CFR 240.17Ad-22(e)(17).
\12\ 17 CFR 240.17Ad-22(e)(1).
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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.\13\ LCH SA does
not believe that the proposed rule change would impose burdens on
competition that are not necessary or appropriate in furtherance of the
purposes of the Act. Specifically, the proposed changes to the
Supplement and Procedures would apply equally to all Clearing Members
and their Clients. This would remove the burden on clearing brokers
from needing the operational capacity to intermediate the sending and
receiving of notices from clients, thereby improving the competitive
landscape for clearing brokers wishing to support the clearing of
options. Therefore, LCH SA does not believe that the proposed rule
change would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
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\13\ 15 U.S.C. 78q-1(b)(3)(I).
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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-2022-003 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-LCH SA-2022-003. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of LCH SA and on LCH SA's website
at: https://www.lch.com/resources/rulebooks/proposed-rule-changes.
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-2022-003 and should
be submitted on or before April 20, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-06628 Filed 3-29-22; 8:45 am]
BILLING CODE 8011-01-P