[Federal Register Volume 90, Number 85 (Monday, May 5, 2025)]
[Notices]
[Pages 19020-19023]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-07705]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102955; File No. SR-LCH SA-2025-005]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to Revisions to Its Rule Book and FCM/BD
Regulations Related To Clearing Member Testing Requirements
April 29, 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
17, 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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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
LCH SA is proposing to amend its CDS Clearing Rule Book (``Rule
Book'') and FCM/BD CDS Clearing Regulations (``FCM/BD Regulations'')
to: (i) provide that each Clearing Member must participate in the
testing of LCH SA's business continuity and disaster recovery
(``BCDR'') plans and LCH SA's recovery and orderly wind-down (``RWD'')
plans pursuant to Exchange Act Rule 1004 (``Reg SCI'') \3\ and Exchange
Act Rule 17ad-26(a)(8)(i) \4\ and (ii) incorporate the margin adequacy
requirements pursuant to Commodity Exchange Act (``CEA'') Rule 1.44 \5\
(the ``Proposed Rule Change'').\6\ The text of the Proposed Rule Change
is provided in Exhibit 5 [SIC].\7\ 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\ 17 CFR 242.1004.
\4\ 17 CFR 240.17ad-26(a)(8)(i).
\5\ 17 CFR 1.44.
\6\ All capitalized terms not defined herein have the same
meaning as in the Rule Book in its version as available on LCH SA's
website: https://www.lseg.com/en/post-trade/clearing/clearing-resources/rulebooks/lch-sa#t-over-the-counter-credit-default-swaps.
\7\ All capitalized terms not defined herein have the same
definition as in the Framework, unless otherwise stated.
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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 amend the Rule Book \8\ to provide that each
Clearing Member must participate in testing of LCH SA's BCDR plans and
[[Page 19021]]
RWD plans as LCH SA may reasonably require in order to comply with its
regulatory obligations pursuant to Reg SCI \9\ and Exchange Act Rule
17ad-26(a)(8)(i).\10\ In addition, LCH SA is also proposing to revise
Regulation 6 of the FCM/BD CDS Clearing Regulations \11\ by adding
provisions on the treatment of separate accounts by FCM/BDs pursuant to
CEA Rule 1.44.\12\
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\8\ LCH SA's CDS Clearing Rule Book can be found on LCH SA's
public website: https://www.lseg.com/content/dam/post-trade/en_us/documents/lch/rulebooks/lch-sa/lch-sa-cdsclear-rule-book-12162024.pdf.
\9\ 17 CFR 242.1004.
\10\ 17 CFR 240.17ad-26(a)(8)(i).
\11\ LCH SA's FCM/BD CDS Clearing Regulations can be found on
LCH SA's public website: https://www.lseg.com/content/dam/post-trade/en_us/documents/lch/rulebooks/lch-sa/lch-sa-cdsclear-fcm-bd-cds-regulations.pdf.
\12\ 17 CFR 1.44.
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LCH SA currently engages select participants to assist with
functional and performance testing of its SCI systems as part of its
overall BCDR program. To ensure it has the authority to designate
select participants to engage in BCDR testing, LCH SA is proposing to
specify in its Rule Book the authority to designate participants to
assist with BCDR testing in accordance with its regulatory obligations
under Reg SCI \13\ and to ensure it can maintain fair and orderly
markets in the event such BCDR plans are activated. Separately, LCH SA
is proposing to update its Rule Book to clarify that Clearing Members
will be required to participate in the testing of its RWD plans if
designated to do so. Under the SEC's final rule regarding RWD,\14\ LCH
SA is required to have the authority to designate its Clearing Members
and other stakeholders (e.g., Settlement Banks) to participate in
testing its RWD plans. This requirement will be in addition to its
authority to designate Clearing Members to participate in default
management testing and will be performed by LCH SA at least once every
12 months.\15\
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\13\ 17 CFR 242.1004.
\14\ 17 CFR 240.17ad-26(a)(8)(i).
\15\ LCH SA maintains a CDS Default Management Committee
comprising representatives nominated by Clearing Members and
appointed by LCH SA (with oversight provided by the LCH SA Risk
Committee). Among other responsibilities, the CDS Default Management
Committee reviews the CDS Default Management Process and the CDS
Default Management Guidance Manual and assists LCH SA in the design,
testing and further improvement of the CDS Default Management
Process, including by participating in regular fire drills (default
management tests) in relation to the CDS Default Management Process.
Section 2.2.8.1. of the Rule Book further provides that as a
condition to membership, members, including Select Members that
choose to nominate a member to LCH SA's Default Management Group
pursuant to Article 2.2.0.4. of LCH SA's Rule Book (``Select Members
opting in''), are required to participate in technical and
operational tests to ensure the continuity and orderly functioning
of the CDS Clearing Service. As members, including Select Members
opting in are required to nominate representatives to participate in
the CDS Default Management Committee, participation in fire drills
is therefore a condition of membership. Please also see Section 10.2
of LCH SA's Rule Book.
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1. Expansion of Participation Requirement for BCDR and RWD Plans
Testing
LCH SA proposes to amend Article 2.2.8.1 of the Rule Book to
provide that each Clearing Member must participate in functional and
performance testing of the operation of LCH SA's BCDR plans and LCH
SA's RWD plans, in the manner and frequency specified by LCH SA, as LCH
SA may reasonably require to comply with its applicable regulatory
obligations, on one month's notice via member notification sent by
email. This proposed new requirement would be in addition to existing
Clearing Member participation requirements in any other technical and
operational tests, reasonably organized at the discretion of LCH SA, in
order to ensure the continuity and orderly functioning of LCH SA's CDS
Clearing Service. Specifically, LCH SA may already designate Clearing
Members to participate in default management testing as a condition of
membership pursuant to its Rule Book and now proposes to separately
clarify that pursuant to revised Article 2.2.8.1 of the Rule Book,
Clearing Members must also participate in BCDR testing and its RWD
plans.\16\ Under the Proposed Rule Change and similar to its authority
for the purposes of conducting default management testing, LCH SA will
have the authority to designate Clearing Members to participate in
scheduled operational and performance testing of the operation of LCH
SA's BCDR and RWD plans. To effectuate this change, LCH SA is proposing
to add new sub-paragraph (ii) to Article 2.2.8.1 to specify each
Clearing Member must participate in BCDR and RWD testing, as determined
by LCH SA, provided Clearing Members are at least notified by email one
month in advance of such testing. LCH SA will continue to require
Clearing Members participate in other technical and operational tests,
including for purposes of default management, and will clarify this
existing requirement in sub-paragraph (i) of Article 2.2.8.1.
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\16\ Please see Note [15] regarding the role of the CDS Default
Management Committee and the requirements for Clearing Member
participation in fire drills.
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2. Treatment of Separate Accounts by FCM/BDs
LCH SA proposes to amend Regulation 6 of the FCM/BD Regulations for
the purposes of taking into account the recent adoption of CEA Rule
1.44 \17\ in respect of the margin treatment of separate accounts by
FCM/BDs by adding a new paragraph (f) related to the withdrawal of
Cleared Swaps Customer Funds and in accordance with Article 6.2.6.2 of
the CDS Clearing Rule Book, each FCM/BD Clearing Member shall ensure
that no Cleared Swaps Customer withdraws Cleared Swaps Customer
Collateral from its Cleared Swaps Customer Account (as such terms are
defined in CEA Rule 22.1 \18\) with the FCM/BD Clearing Member unless
the ``net liquidating value'' (as such term is used in Part 39 of the
CFTC Regulations \19\) plus the funds attributable to such Cleared Swap
Customer remaining in such Cleared Swaps Customer Account after such
withdrawal is sufficient to meet the amount of Collateral as required
by LCH SA in accordance with Article 6.2.6.1 of the CDS Clearing Rule
Book in respect of all FCM/BD Cleared Transactions entered into on
behalf of that Cleared Swap Customer. At the end of this new paragraph
(f), LCH SA also proposes to specify that references to ``Cleared Swaps
Customer Account'' shall include all Cleared Swaps Customer Accounts
for which the Cleared Swaps Customer is the beneficial owner, except
for any Cleared Swaps Customer with multiple such accounts for which
the FCM/BD Clearing Member has made the separate accounts election
pursuant to new CEA Rule 1.44(d) \20\ and provided further that the
FCM/BD complies with the requirements of CEA Rule 1.44.\21\
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\17\ Id.
\18\ 17 CFR 22.1.
\19\ See 17 CFR 39.13(g)(8)(iii).
\20\ 17 CFR 1.44(d).
\21\ Id.
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LCH SA is proposing this amendment following the CFTC's adoption of
new Rule 1.44,\22\ which allows FCMs to treat separate accounts of a
single beneficial owner as accounts of different legal entities for
purposes of the CFTC's margin adequacy requirements. As amended, Rule
1.44 codifies the CFTC's no-action position in CFTC Letter No. 19-17
dated July 10, 2019 (and subsequent extensions thereto) (the
``Letter''),\23\ and as a result, LCH SA will remove the references to
this CFTC Letter from paragraph (e) of Regulation 6 of the FCM/BD
Regulations because Rule 1.44 now supersedes the requirements specified
in the Letter. The paragraphs of Regulation 6 following the new
paragraph (f) will be renumbered and any cross-reference to paragraphs
(f) et seq. of Regulation 6
[[Page 19022]]
will be also updated in the FCM/BD Regulations.
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\22\ 17 CFR 1.44.
\23\ CFTC Letter No. 19-17, Advisory and Time-Limited No-Action
Relief with Respect to the Treatment of Separate Accounts by Futures
Commission Merchants (July 10, 2019).
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2. Statutory Basis
LCH SA believes that the Proposed Rule Change is consistent with
the requirements of Section 17A of the Exchange Act \24\ and the
regulations thereunder, including the standards under Exchange Act Rule
17Ad-22.\25\ Exchange Act Section 17A(b)(3)(A) \26\ requires, among
other things, that a clearing agency must have the capacity to be able
to facilitate the prompt and accurate clearance and settlement of
securities transactions and derivative agreements, contracts, and
transactions for which it is responsible, to safeguard securities and
funds in its custody or control or for which it is responsible, and to
comply with the Exchange Act and the rules and regulations thereunder.
Exchange Act Section 17A(d)(1) provides that a clearing agency shall
not engage, directly or indirectly, in any activity as clearing agency
in contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Exchange Act.\27\ Further, Exchange Act Section 17A(b)(4)(B)
provides, in part, that a registered clearing agency may deny
participation to, or condition the participation of, any person if such
person does not meet such standards of financial responsibility,
operational capability, experience, and competence as are prescribed by
the rules of the clearing agency.\28\
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\24\ 15 U.S.C. 78q-1.
\25\ 17 CFR 240.17ad-22.
\26\ 15 U.S.C. 78q-1(b)(3)(A).
\27\ 15 U.S.C. 78q-1(d)(1).
\28\ 15 U.S.C. 78q-1(b)(4)(B).
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Exchange Act Rule 17Ad-22 provides that a clearing agency must
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to, among other things, manage the
covered clearing agency's operational risks by establishing and
maintaining a business continuity plan that addresses events posing a
significant risk of disrupting operations.\29\ In addition, Reg SCI
provides that a clearing agency (an SCI entity) must establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that its SCI systems and indirect SCI systems, have
levels of capacity, integrity, resiliency, availability, and security,
adequate to maintain the SCI entity's operational capability and
promote the maintenance of fair and orderly markets.\30\ Such policies
and procedures must include business continuity and disaster recovery
plans that include maintaining backup and recovery capabilities
sufficiently resilient and geographically diverse and that are
reasonably designed to achieve next business day resumption of trading
and two-hour resumption of critical SCI systems following a wide-scale
disruption.\31\ Reg SCI also provides that LCH SA, as an SCI entity,
must have the authority to designate members or participants to
participate in the scheduled functional and performance testing of the
operation of such [BCDR] plans, in the manner and frequency specified
by LCH SA, provided that such frequency shall not be less than once
every 12 months.\32\
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\29\ 17 CFR 240.17ad-22(e)(17)(iii).
\30\ 17 CFR 242.1001(a)(1).
\31\ 17 CFR 242.1001(a)(2)(v).
\32\ 17 CFR 242.1004(b).
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Finally, Exchange Act Rule 17ad-22 requires LCH SA to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain a sound risk management framework for
comprehensively managing legal, credit, liquidity, operational, general
business, investment, custody, and other risks that arise in or are
borne by LCH SA, which must include plans for the recovery and orderly
wind-down of LCH SA necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses.\33\
To ensure LCH SA can facilitate the successful execution of its RWD
plans in the event it is required to do so, Exchange Act Rule 17ad-26
requires LCH SA to have the authority to require its participants and,
when practicable, other stakeholders to participate in the testing of
its RWD plans.\34\
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\33\ 17 CFR 240.17ad-22(e)(3)(ii).
\34\ 17 CFR 240.17ad-26(a)(8)(i).
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LCH SA believes the Proposed Rule Change is consistent with the
provisions of Section 17A of the Exchange Act \35\ and Commission
regulations thereunder referenced above, as it would clarify LCH SA's
authority to designate participants to assist in the testing of its
BCDR plans and RWD plans, as required by Exchange Act Rule 17ad-22 \36\
and Reg SCI \37\ and Exchange Act Rule 17ad-26.\38\ In addition, LCH SA
believes the Proposed Rule Change is consistent with Section 17A of the
Exchange Act \39\ in that it would protect investors by supporting LCH
SA's preparedness for a potential default, material system outage or
implementation of its recovery and wind-down tools should it need to do
so to maintain market stability. LCH SA believes that requiring such
participation as a condition of membership is reasonable for the
broader protection of the market and is consistent with Section 17A of
the Exchange Act.\40\
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\35\ 15 U.S.C. 78q-1.
\36\ 17 CFR 240.17ad-22(e)(17)(iii) and 17 CFR 242.1004(b).
\37\ 17 CFR 242.1004(b).
\38\ 17 CFR 240.17ad-26(a)(8)(i).
\39\ 15 U.S.C. 78q-1.
\40\ Id.
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Specifically, LCH SA is proposing to clarify to participants and
other stakeholders that, as a requirement to membership and to ensure
LCH SA can successfully execute its BCDR plans and RWD plans in the
event such plans are activated, LCH SA shall designate such
participants and other stakeholders to assist in testing of such plans
as required by its regulatory obligations. This change would complement
LCH SA's ability to manage its operational risk, as the BCDR testing
requirement would provide LCH SA with valuable information to inform
and enhance its BCDR program.
Likewise, this change would complement LCH SA's risk management
framework, as RWD plan testing would be in addition to default
management testing and would include additional informative scenarios
that would trigger the execution of LCH SA's recovery tools or if such
tools are exhausted, the initiation of an orderly wind-down. The
results of RWD plan testing would complement lessons learned from
default management testing and would ensure LCH SA is prepared to
manage a recovery and/or wind-down of its core services.
Taken together, LCH SA believes that clarifying its requirements
for participant and other stakeholder testing of its BCDR plans and RWD
plans is consistent with Section 17A of the Exchange Act, Rules 17ad-22
\41\ and 17ad-26 \42\ thereunder, and Reg SCI.\43\ As part of this
Proposed Rule Change, LCH SA is also seeking to revise Regulation 6 of
the FCM/BD Regulations by adding provisions on the treatment of
separate accounts by FCM/BDs pursuant to CEA Rule 1.44.\44\ This would
not be a change to LCH SA's current operations and would only clarify
the CFTC's new rule.
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\41\ 17 CFR 240.17ad-22(e)(3)(ii) and 17 CFR 240.17ad-
22(e)(17)(iii).
\42\ 17 CFR 240.17ad-26(a)(8)(i).
\43\ 17 CFR 242.1004(b).
\44\ 17 CFR 1.44.
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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
[[Page 19023]]
agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\45\ 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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\45\ 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-2025-005 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to file number SR-LCH SA-2025-005. 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 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
materials that is obscene or subject to copyright protection. All
submissions should refer to file number SR-LCH SA-2025-005 and should
be submitted on or before May 27, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
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\46\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-07705 Filed 5-2-25; 8:45 am]
BILLING CODE 8011-01-P