[Federal Register Volume 90, Number 80 (Monday, April 28, 2025)]
[Notices]
[Pages 17662-17665]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-07218]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102905; File No. SR-LCH SA-2025-004]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to Collateral Concentration Limits
April 22, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4,\2\ notice is hereby given that on April
8, 2025, Banque Centrale de Compensation, which conducts business under
the name LCH SA (``LCH SA''), filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change (``Proposed Rule
Change''), as described in Items I, II and III below, which Items have
been prepared primarily by the clearing agency. 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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[[Page 17663]]
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
LCH SA is proposing to amend revise the amount of supranational and
European agency securities clearing members may post to satisfy initial
margin requirements (the ``Proposed Rule Change'').\3\ The text of the
Proposed Rule Change is provided in Exhibit 5 [SIC]. The implementation
of the Proposed Rule Change will be contingent on LCH SA's receipt of
all necessary regulatory approvals.
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\3\ All capitalized terms not defined herein have the same
meaning as in the Rule Book or Procedures, as applicable, in their
version as available on LCH SA's website: https://www.lch.com/resources/rulebooks/lch-sa.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, LCH SA included statements
concerning the purpose of and basis for the Proposed Rule Change and
discussed any comments it received on the Proposed Rule Change. The
text of these statements may be examined at the places specified in
Item IV below. LCH SA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
LCH SA is proposing to revise the amount of supranational and
European agency securities clearing members may post to satisfy initial
margin requirements, including by revising the current concentration
limit per individual International Securities Identification Number
(``ISIN'') with respect to the instrument's total outstanding amount.
LCH SA currently allows clearing members to post as collateral for
initial margin requirements, supranational and European agency debt
securities issued by the following entities: Caisse d'Amortissement de
la Dette Sociale (``CADES''); European Financial Stability Facility
(``EFSF''); European Investment Bank (``EIB''); European Union
(``EU''); International Bank for Reconstruction and Development
(``IBRD''); European Stability Mechanism (``ESM''); Landwirtschaftliche
Rentenbank (``Rentenbank'') and Kreditanstalt f[uuml]r Wiederaufbau
(``KFW'').\4\ Clearing members may currently post no more than the
lower of (1) 50% of the value of the clearing member's initial margin
requirement and (2) [euro]500 million for the total amount of
supranational and European agency securities. Any remaining initial
margin requirements must be satisfied with either cash or other
eligible securities.
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\4\ LCH SA's list of eligible securities as collateral and the
respective haircuts can be found here: https://www.lseg.com/content/dam/post-trade/en_us/documents/lch/collateral-management/lch-sa/acceptable-collateral-haircuts-lch-sa.pdf.
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LCH SA is now proposing to apply individual limits to supranational
and European agency securities, rather than applying a single limit
across all such issuers. The application of individual limits by the
issuer will provide clearing members more flexibility in the
composition of securities collateral posted as margin and to allow for
LCH SA to apply a targeted approach to establishing limits on such
acceptable collateral. LCH SA's Collateral and Liquidity Risk
Management team (``CaLM'') will establish limits for each security type
based on a market analysis of the credit and liquidity risk profile of
each issuer. Should market conditions or the credit or liquidity risk
profile of the issuer change, CaLM will be afforded more precision in
how it may adjust limits and/or concentration thresholds, while
continuing to manage the overall collateral risk of all securities
lodged to satisfy clearing member margin requirements. The Proposed
Rule Change will also further align how LCH SA currently manages the
risk for all non-cash collateral and provide consistency with the
collateral management practices for non-cash collateral at LCH Limited.
Following an analysis of the risk profile for each supranational
and European agency security instrument,\5\ LCH SA is proposing to
establish the limit of supranational and European agency securities to
be the lesser of 50% of the value of the member's initial margin
requirement and as follows for each issuer:
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\5\ In accordance with LCH SA's Collateral Risk Management
Policy, non-cash collateral limits are established following an
analysis of the market, credit, concentration and liquidity risk of
each issuer. LCH SA also evaluates wrong-way risk and FX risk, and
following this comprehensive analysis of each issuer, will establish
a limit commensurate with the risk appetite determined in accordance
with LCH SA's Risk Governance Framework.
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EU [euro]2,000 million;
EIB [euro]1,250 million;
EFSF [euro]750 million;
IBRD [euro]750 million;
ESM [euro]750 million;
KFW [euro]1,250 million;
Rentenbank [euro]500 million; and
CADES [euro]500 million.
As part of this revision to the supranational and European agency
securities' limits, LCH SA is also proposing to apply a more
conservative concentration limit per ISIN of each security type from
the current level of 25% to 15%.\6\ The proposed concentration limit of
15% acknowledges that SSA issuances are slightly less liquid than core
EGBs, which have a 25% concentration limit set, whilst maintaining
strong credit quality. The application of a more conservative
concentration limit by individual ISIN aligns with LCH SA's current
practices of managing concentration risk should LCH SA need to
liquidate the collateral in the event of a clearing member default.\7\
LCH SA is not proposing the addition of any new non-cash collateral
types and the limits established herein are for supranational and
European agency securities already acceptable as margin collateral.
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\6\ Information regarding concentration limits per ISIN is
available on LCH SA's Knowledge Center, which is only accessible to
members. The internal link to access those limits is: https://lseg.lightning.force.com/lightning/r/Knowledge__kav/ka0WT0000002jyjYAA/view.
\7\ Please see Section 3 (``Collateral, Variation Margin and
Cash Payment'') of LCH SA's CDS Clearing Procedures and LCH SA's
list of eligible securities available here: https://www.lseg.com/en/post-trade/clearing/collateral-management/sa-collateral-management/sa-acceptable-collateral/sa-acceptable-securities. LCH SA has
additional tools to manage concentration and/or liquidity risk for
non-cash collateral. This includes applying a concentration/
liquidity charge added on top of the issuer's base haircut,
establishing a hard cap per individual ISIN and establishing a mid-
to bid-price adjustment on the security. Notwithstanding the
foregoing, any concentration limit breaches will be escalated and
managed in accordance with LCH SA's Collateral Risk Management
Policy.
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To determine the respective limits for each security type, LCH SA
assessed the Internal Credit Score (``ICS'') of each issuer, the total
amount of each issue outstanding and the weighted average of the yield
bid-ask spread. LCH SA then assessed the liquidation cost for each
issuer's ISIN by working with select investment counterparties to
perform a hypothetical liquidation analysis at certain portfolio
amounts under stressed market conditions. The results of this analysis
were used to validate the proposed individual limits and for purposes
of evaluating the associated haircuts. Following this exercise, LCH SA
determined the limits reflected in the Proposed Rule Change adequately
incorporate the liquidity profile of the issue, the credit risk profile
of the issuer and have appropriately conservative haircuts that covers
both the bid price variation and the additional liquidation costs
(related to the increased concentration) associated with each security
type under stressed market conditions. Notwithstanding the foregoing,
LCH SA will monitor the
[[Page 17664]]
limits and calibrate the associated haircuts as part of its ongoing
collateral risk management processes.
2. Statutory Basis
LCH SA believes that the Proposed Rule Change is consistent with
the requirements of Section 17A of the Exchange Act \8\ and the
regulations thereunder, including the clearing agency standards under
Exchange Act Rule 17Ad-22.\9\ Section 17A(b)(3)(F) of the Exchange Act
\10\ requires, among other things, that rules of the clearing agency
are designed 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.
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\8\ 15 U.S.C. 78q-1.
\9\ 17 CFR 240.17ad-22.
\10\ 15 U.S.C. 78q-1(b)(3)(F).
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LCH SA is proposing to revise the amount of supranational and
European agency securities clearing members may post to satisfy initial
margin requirements by establishing individual limits per issuer,
rather than a single limit across all issuers. LCH SA currently allows
clearing members to post as collateral for initial margin requirements,
supranational and European agency debt securities and is not proposing
to expand the composition of eligible collateral. Instead, LCH SA is
proposing to establish individual limits for each supranational and
European agency security type following an analysis of each issuer's
market, credit, concentration, liquidity, wrong-way and FX risk in
accordance with its Collateral Risk Management Policy. The resulting
proposed limits will therefore incorporate the credit and liquidity
risk profile for each issuer and will be reviewed on an ongoing basis
as part of LCH SA's established collateral risk management practices.
Based on the foregoing, LCH SA believes that the Proposed Rule Change
is consistent with the requirements of Section 17A of the Exchange
Act,\11\ and in particular with respect to assuring it can adequately
safeguard the securities in its custody for which it is responsible.
Specifically, the proposed limits per issuer and concentration limit
per ISIN, will further ensure LCH SA manages the risk of collateral in
its custody for purposes of facilitating its clearing and settlement
responsibilities in accordance with the Act.
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\11\ Id.
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LCH SA also believes that the Proposed Rule Change is consistent
with the requirements of Exchange Act Rule 17Ad-22(e)(5).\12\ Rule
17Ad-22(e)(5) provides, inter alia, that a covered clearing agency
limit the assets it accepts as collateral to those with low credit,
liquidity, and market risks, and set and enforce appropriately
conservative haircuts and concentration limits if the covered clearing
agency requires collateral to manage its or its participants' credit
exposure; and require a review of the sufficiency of its collateral
haircuts and concentration limits to be performed not less than
annually.\13\ LCH SA believes that the Proposed Rule Change is
consistent with Rule 17Ad-22(e)(5).\14\ LCH SA currently only accepts
non-cash collateral with minimal credit, liquidity and market risks,
including select supranational and European agency securities, and has
established conservative haircuts and concentration limits for these
securities. LCH SA is proposing a more targeted approach to managing
the composition of non-cash securities collateral by establishing
individual limits by issuer and applying a more conservative
concentration limit by ISIN. As per existing collateral management
practices, LCH SA would re-evaluate and potentially revise these limits
should market conditions or the credit or liquidity risk profile of the
issuer change. In doing so, LCH SA will be able to continue to manage
the overall collateral risk of all securities lodged to satisfy
clearing member margin requirements and provide consistency with the
collateral management practices for non-cash collateral at LCH Limited.
Therefore, LCH SA believes that the Proposed Rule Change is consistent
with Rule 17Ad-22(e)(5).\15\
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\12\ 17 CFR 240.17ad-22(e)(5).
\13\ Id.
\14\ Id.
\15\ Id.
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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.\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.
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\16\ 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 (https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking);
or
Send an email to [email protected]. Please include
file number SR-LCH SA-2025-004 on the subject line.
Paper Comments
Send paper comments in triplicate to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to file number SR-LCH SA-2025-004. 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 (https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking). Copies of the
submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the
[[Page 17665]]
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 a.m. and 3 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. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to file number SR-LCH SA-2025-004 and should be submitted
on or before May 19, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-07218 Filed 4-25-25; 8:45 am]
BILLING CODE 8011-01-P