[Federal Register Volume 91, Number 103 (Friday, May 29, 2026)]
[Notices]
[Pages 32136-32141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2026-10665]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-105553; File No. SR-LCH SA-2026-001]
Self-Regulatory Organizations; LCH SA; Order Approving Proposed
Rule Change Relating to the CDSClear Risk Framework
May 26, 2026.
I. Introduction
On April 8, 2026, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (the ``Commission''), pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (the ``Act'') \1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change to
[[Page 32137]]
modify its CDS Clearing risk framework. The proposed rule change was
published for comment in the Federal Register on April 17, 2026.\3\ The
Commission did not receive comments regarding the proposed rule change.
For the reasons discussed below, the Commission is approving the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 105233 (Apr. 14, 2026),
91 FR 20750 (Apr. 17, 2026) (File No. SR-LCH SA-2026-001)
(``Notice'').
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II. Description of the Proposed Rule Change
LCH SA is a clearing agency registered with the Commission that
provides central counterparty (``CCP'') services for security-based
swaps, including credit default swaps (``CDS'') and options on CDS,
through its CDSClear business unit. Part of LCH SA's CCP function is to
interpose itself as the buyer to every seller and the seller to every
buyer for certain financial transactions, which exposes it to certain
risks arising from providing clearing and settlement services to its
clearing members. One such risk is the credit risk stemming from the
trading activities of LCH SA's clearing members because LCH SA is
obligated to perform on the contracts it clears, even in the event of a
clearing member's default. LCH SA manages credit risk, in part, by
maintaining prefunded sufficient resources to cover losses in the event
of a member default. LCH SA maintains these financial resources by
requiring its clearing members to provide initial margin and contribute
to a default fund.
LCH SA collects initial margin to cover the potential loss from any
clearing member (including the clients of that clearing member) to a
99.7% level under normal market conditions, should LCH SA need to close
out that member's portfolio within the given holding period. LCH SA's
process for determining initial margin is explained in, and controlled
by, its CDSClear Margin Reference Guide (``Margin Guide''). As
described in the Margin Guide, LCH SA determines a clearing member's
initial margin based on various assumptions, components, and charges,
including Spread Margin.\4\
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\4\ Spread Margin is intended to cover losses in the event of
unfavorable credit spread and volatility moves.
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In addition to the amounts collected as initial margin, LCH SA's
default fund (the ``Default Fund'') is a prefunded mutualized pool of
resources available to cover any further potential losses to LCH SA in
the event of a clearing member's default. LCH SA sizes the Default Fund
so that it can withstand the simultaneous default of the two largest
member groups under extreme but plausible market conditions (``cover-2
standard'').\5\ LCH SA determines the sufficiency of the Default Fund
by conducting daily stress testing. Daily stress testing involves the
daily revaluation of each clearing member's portfolio using a set of
historical and theoretical stress test scenarios incorporating price
and volatility shifts to estimate a worst-case loss in excess of that
clearing member's initial margin. LCH SA's method for conducting stress
testing and sizing the Default Fund is explained in, and controlled by,
its CDSClear Default Fund Reference Guide (``Stress Guide'').
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\5\ See also 17 CFR 240.17ad-22(e)(4)(ii).
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LCH SA proposes to amend the Stress Guide and Margin Guide. The
amendments address recommendations from an independent review performed
by LCH SA's Model Validation Team and remove certain stress test
scenarios that LCH SA no longer considers plausible. LCH SA represents
that when initially set, these stress test scenarios created an overly
conservative level of the Default Fund and, therefore, require
updating.\6\ LCH SA states that the proposed recalibration would
decrease the Default Fund but represents that nevertheless LCH SA would
continue to meet or exceed the cover-2 standard.\7\
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\6\ See Notice, 91 FR at 20751.
\7\ Id. See also 17 CFR 240.17ad-22(e)(4)(ii).
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Additionally, LCH SA proposes to make non-substantive changes to
the Stress Guide and Margin Guide to conform the documents to a common
template adopted by LCH SA's affiliated companies. LCH SA is an
affiliate of LCH, Ltd, through common ownership by LCH Group Holdings
Limited. LCH SA's ultimate parent company is London Stock Exchange
Group plc (``LSEG''). LCH SA's proposed changes to the Stress Guide and
Margin Guide would restructure and reorganize the contents in those
documents to conform with a common template adopted by LSEG entities.
LCH SA represents that the goal of the common template is to ease the
model validation teams' review of all models across LSEG entities.\8\
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\8\ See Notice, 91 FR at 20751.
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The Stress Guide and the Margin Guide, including the proposed
changes, would continue to be subject to and interact with LCH SA's
Financial Resource Adequacy Policy (``FRAP'').\9\ The FRAP is part of
LCH SA's overall governance framework and sets forth the standards
governing the assessment of financial resources, including default
funds, against certain market risks in clearing member portfolios.\10\
The FRAP contemplates, in part, reverse stress testing, sensitivity
analysis of margin models, a review of parameters and assumptions for
backtesting on a monthly basis \11\ and less than monthly under certain
conditions,\12\ and consideration of modifications to ensure back-
testing practices are appropriate for determining the adequacy of
margin resources.\13\ The FRAP would remain applicable to the details
found in both the Stress Guide and Margin Guide.
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\9\ See Exchange Act Release No. 104051 (Sept. 25, 2025), 90 FR
47001 (Sept. 30, 2025) (SR-LCH SA-2025-007), which approved the LCH
SA Financial Risk Adequacy Policy.
\10\ Id., at 47003.
\11\ Id., at 47003-47007.
\12\ Id., at n. 26 (``The FRAP also requires LCH SA to conduct a
sensitivity analysis of its margin models and a review of its
parameters and assumptions for back- testing more frequently than
monthly during periods of time when the products cleared or markets
served display high volatility or become less liquid, or when the
size or concentration of positions held by the participants
increases or decreases significantly.'').
\13\ Id., at 47003.
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A. Stress Guide
The proposal would amend the Stress Guide primarily by changing the
definition of stress scenarios. Further changes stem from the Model
Validation Team requests. Other, non-substantive changes aim to conform
with the new LSEG template.
Currently, Section 5.1.4 of the Stress Guide explicitly lists
certain stress testing scenarios, such as those calibrated around the
Lehman Brothers' 2008 collapse. However, LCH SA states that these
scenarios are inconsistent with the definition of plausibility, as
found in the FRAP,\14\ due to the application of multipliers to these
historical shocks.\15\ To mitigate this inconsistency, LCH SA proposes
to make historical scenarios more plausible based on a defined set of
criteria across all scenarios so that the worst historical stress can
be captured uniformly across a variety of periods without adding
arbitrary multipliers on top of historical moves. Under the proposal,
one criterion would be used for directional scenarios and another
criterion for decorrelation scenarios \16\ to identify the most
historically significant periods. As such, the proposal would continue
to capture significant market events, such as the Lehman Brothers'
default.
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\14\ Extreme but plausible scenarios are quantified as once-in-
30 years events, under the FRAP. See Notice, 91 FR at 20753.
\15\ See Notice, 91 FR at 20753.
\16\ Directional scenarios aim to capture the effects of the
largest historical widening or tightening of credit spreads while
decorrelation scenarios aim to capture the effects of historical
divergences between regions.
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[[Page 32138]]
The current theoretical scenarios listed in Section 5.1.4 of the
Stress Guide were deemed sufficiently conservative when initially
designed to mitigate risk but lacked a clear quantification of
plausibility. The proposal would clarify that the theoretical scenarios
would rely on a multivariate distribution calibrated using historical
data to generate extreme but plausible scenarios quantified as once-in-
thirty-year events, consistent with LCH SA policies. The calibrated
distribution would be used to generate sample joint returns across risk
factors, which would then be sorted based on criteria representing key
strategies to identify the most extreme draws in the sample for each
risk profile. Scenarios for implied volatilities would keep the same
calibration but would be considered jointly with spread moves to more
consistently capture the cross-effect of both risk factors on the
option price.
LCH SA also proposes to address the consistency and comparability
of stress scenarios. Currently, stress test scenarios assume an
extended holding period of a minimum of five days, varying by each
scenario. As proposed, Section 5.1.1.1 would clarify that the holding
period considered during stress test calibration would be set to seven
days across all scenarios.
The proposal would align the handling of option exercise with
regular margins, as described in Section 5.1.4.2. Under the proposal,
the assumption would be that market moves happen first, followed by
exercise decisions, which would be reflected in the calculation.
Afterward, the impact of the defaulting entities would be considered.
Additionally, the proposal would, under Section 5.1.4.4, rewrite
the logic of the stressed Short Charge in a manner consistent with the
Short Charge in the Margin Guide. Specifically, LCH SA proposes to
introduce tables summarizing the combinations of International Swaps
and Derivatives Association (``ISDA'') definitions and seniorities that
can default together, and summarizing the recovery rates used in the
Net Short Exposure calculations.
The remainder of the proposed changes to the Stress Guide would
help ensure compliance with the LSEG model documentation template
requirements, including the addition of an Executive Summary section;
the contextualization of the use and purpose of the model (Section 1);
the provision of information on the model limitations and compensating
controls (Section 2); the description of modelling data and the
rationale for the modelling approach (Sections 3 and 4); and a more
condensed definition of the Default Fund size (Section 5.1.1.2).
Likewise, Sections 6 through 9, generally covering model testing,
ongoing monitoring, control environment, and appendices, would be added
as generic sections to comply with the LSEG template requirements.
LCH SA states that amending the plausibility of stress test
scenarios in the Stress Guide is expected to result in a 41% decrease
in the Default Fund, on average, over the course of the 12-month period
leading into March 2026.\17\ LCH SA estimates the full range of the
observed decreases in that period to be between 32% and 44%.\18\ LCH SA
states that, generally, its clearing members are expected to experience
similar percentages of decreases in their Default Fund Contribution
requirements, except the smallest members who are and would continue to
be subject to the [euro]10 million contribution floor and would not see
any decrease.\19\ LCH SA estimates that the largest expected decrease
would amount to [euro]605 million for its largest member.\20\ LCH SA
represents that realigning the plausibility of the stress test
scenarios would continue to satisfy the regulatorily required cover-2
standard.\21\
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\17\ See Notice, 91 FR at 20753.
\18\ Id.
\19\ Id.
\20\ Id.
\21\ See n. 5, supra, and accompanying text.
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B. Margin Guide
The proposal would amend the Margin Guide primarily to change how
LCH SA calculates the Spread Margin component of initial margin,
including updating the lookback period and the floor used in
calculating the Spread Margin. Other, non-substantive, changes aim to
conform with the new LSEG template.
As noted above, Spread Margin is intended to cover losses in the
event of unfavorable credit spread and volatility moves. As a starting
point, LCH SA calculates a distribution of potential losses for each
portfolio using simulated scenarios based on historical credit spread
returns. Currently, the historical credit spread returns are derived
from a lookback period consisting of data starting in 2007 and
continuing to the present day. Thus, this lookback period is always
growing with the addition of new historical data. This approach risks
diluting the impact of including the most stressed periods in the
lookback, as other time periods, representing less stressed market
conditions, could eventually outweigh the impact of the most stressed
periods. To address this potential dilution risk, the proposal would
replace the current lookback period with a discreet, limited timeframe.
Under the proposal, LCH SA would use a fixed 10-year lookback period.
LCH SA would update the 10-year lookback daily, with one day from the
previous 10 years dropping and the most recent day being added. In
addition to the rolling 10-year lookback, LCH SA would also consider,
as a separate period representing stressed market conditions,
historical data from July 2007 to June 2010. In doing so, LCH SA would
adjust historical returns from 2007 to make them more relevant to the
current market regime. The proposed change in the lookback period would
apply to both the scaled and unscaled model, in order to ensure that
the sample does not grow over time.
At the outset, the fixed stressed period would cover July 2007
through June 2010 but would be reviewed every year as part of the
annual model validation. To address the potential disappearance of
significant dates, the proposed changes also encompass a new annual
test, which would assess the impact on the spread margin of removing
the oldest year from the 10-year rolling window. LCH SA represents that
the goal of amending the lookback period is to reduce its size and
adjust historical returns from 2007 to more accurately reflect the
current market regime.\22\
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\22\ See Notice, 91 FR at 20751.
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Separately, the proposal would amend the Spread Margin floor.
Currently, LCH SA determines the final amount of the Spread Margin for
a given portfolio as the maximum between two calculations: one based on
an Expected Shortfall measure using volatility scaled returns and a
second based on an Expected Shortfall measure using unscaled returns.
LCH SA refers to the second measure as the Spread Margin floor. In
proposed Section 5.2.4.2 of the Margin Guide, LCH SA would replace the
Expected Shortfall measure with a VaR measure for the Spread Margin
floor while still using unscaled returns. Thus, going forward, Spread
Margin would be the maximum between an Expected Shortfall using
volatility scaled returns and a VaR using unscaled returns. LCH SA
represents that this change would simplify the Spread Margin floor,
thus helping to ensure that the main model is driving the margin more
often and that the Margin Guide aligns with the general market practice
for a floor.\23\
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\23\ Id.
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With respect to the first measure described above, an Expected
Shortfall
[[Page 32139]]
using volatility scaled returns, the proposal also would amend how LCH
SA scales the returns. As presently written, the Margin Guide gives 50%
weight to the current volatility when rescaling returns before applying
them to create simulated spread scenarios. As proposed, Section
5.2.4.1.1 would reduce that by half to a 25% weighting. That is, after
having divided past returns by the volatility observed on the past date
to normalize the return, this figure would be multiplied by a value
equal to the sum of 25% of the current volatility and 75% of the
volatility on the past date corresponding to the original return,
instead of setting both weights to 50%, as is currently done. LCH
represents that this is meant to address the procyclicality risk
profile of the Spread Margin because it gives less weight to more
recent volatility and, thus, mitigates the impact that renewed market
volatility may have on the margins.\24\ In calculating a distribution
of potential losses for each portfolio, LCH SA considers profit and
loss (``P&L'') over a five-day holding period. Under its current
approach, LCH SA retains the worst end-of-day point over the five-day
period of calculation behind the short charge, where LCH SA makes P&L
calculations and chooses the worst. As proposed, Section 5.2.4.1.5 of
the Margin Guide would specify that the P&L would be calculated between
business date and business date plus five, reflecting that one P&L per
scenario of the Expected Shortfall would be calculated at the five-day
P&L.\25\ LCH SA represents that the proposed change would not only
reduce the complexity of the calculations and the time it takes to make
them, but would also comply with regulatory timeframes for confirming
whether a trade sent for clearing is accepted or rejected under the
European Union MiFIR and U.S. Commodity Futures Trading Commission
regulations.\26\
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\24\ See Notice, 91 FR at 20751-52.
\25\ LCH SA proposes a simplification related to moving toward a
five-day P&L. Section 5.2.4.1.6 would amend the logic for applying
jump to default calculations ahead of an option exercise date, such
that defaults would be assumed to have happened after the credit
spreads have moved and the exercise decision would have been taken.
\26\ See Notice, 91 FR at 20751 n.7, 8.
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Further changes in other sections of the Margin Guide would not
amend calculations but, rather, would clarify the description of the
current methodology. For example, most model limitations and
compensating controls were documented elsewhere but a new Section 2
would explicitly list them, as well as introduce a new limitation
related to the control to put in place the monitoring of the potential
removal of key historical events from the 10-year rolling lookback
window used in the spread margin calculations. Section 4.7.2, while
mostly unchanged, would incorporate the description of structural and
contractual subordination for credit default swaps, while in Section 5
the proposal would introduce margins that were missing from the summary
table, such as Net Capital Ratio and Credit Quality Margin.
Similarly, the proposal would make clarifying changes elsewhere in
Section 5. Section 5.1.4.1 would summarize in a table format the ISDA
definitions and seniorities considered in the jump to default
scenarios. Sections 5.1.4.3 and 5.2.4.3.5 would clarify the treatment
of jump to default risk close to maturity dates to cover the risk that
bought protection via a CDS contract, index or single name, would not
be applicable for credit events happening after the maturity date of
the contract. For ease of reading, Section 5.2.4.1.7.1 would replace
multiple tables of combinations of defaults and recovery rates into a
single, consolidated table.
Section 5.2.4.3.4 would clarify how Spread Margin interacts with
another component of initial margin, the Short Charge. Although LCH SA
would continue to consider an Expected Shortfall that covers both
market moves and a jump to default risk, as now, the proposal would
modify the interplay between the Spread Margin and Short Charge within
that Expected Shortfall. Under the proposal, the Spread Margin would be
part of the P&L attributable to market moves only and the Short Charge
would represent the incremental P&L attributable to the jump to default
risk.\27\
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\27\ The proposal would not impact the current practice of
summing up both margins (Spread Margin and Short Charge).
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Additionally, the proposal would clarify that the calculation logic
remains the same for all types of products (Section 5.4.4); would
simplify the presentation of the Wrong Way Risk shock applied by
removing the distinction between systemic and non-systemic entities
since the treatment is the same for both when calculating margin
(Section 5.5.4.1.1); and would clarify in a footnote how correlation is
used in the wrong way risk calculation and the progress on
implementation of the most recent change to the wrong way risk model
(Section 5.5.4.1.5). Other proposed changes would describe in more
detail the purpose of each scenario defined in the Vega margin
calculation (Sections 5.6.4.1 and 5.6.4.2); would clarify the use case
for Contingency Variation Margin (Section 5.10); would clarify that the
Credit Quality Margin and Default Fund Additional Margin are charged as
part of the initial margin, similar to all other margins (Sections 5.13
and 5.14); \28\ and would remove discussions about coupon and upfront
cash flows, which are independent of the risk model (Section 5.15).
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\28\ For increased readability, Section 5.14 also would change
the order of the calculation steps without changing the calculations
themselves.
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The remainder of the proposed changes to the Margin Guide would
help ensure compliance with the LSEG model documentation template
requirements, including the addition of an Executive Summary section
providing a high-level overview of the CDSClear Risk Framework; the
contextualization of the use and purpose of the model (Section 1); the
separation of margins into different sections rather than summarizing
multiple margins together in Section 3.1; a more detailed description
of market data processing upstream of the margin calculations (Section
4.1); listing the official names of credit indices in section 5.7
rather than their commonly used names; and the inclusion of a model
overview, and a description of model inputs and outputs (Sections 5.7
through 5.15). Likewise, Sections 6 through 9, generally covering model
testing, ongoing monitoring, control environment, and appendices, would
be added as generic sections to comply with the LSEG template
requirements.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act requires the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
the proposed rule change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to the
organization.\29\ Under the Commission's Rules of Practice, the
``burden to demonstrate that a proposed rule change is consistent with
the Exchange Act and the rules and regulations issued thereunder . . .
is on the self-regulatory organization [`SRO'] that proposed the rule
change.'' \30\
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\29\ 15 U.S.C. 78s(b)(2)(C).
\30\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\31\ and
[[Page 32140]]
any failure of an SRO to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Exchange Act and the
applicable rules and regulations.\32\ Moreover, ``unquestioning
reliance'' on an SRO's representations in a proposed rule change is not
sufficient to justify Commission approval of a proposed rule
change.\33\
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\31\ Id.
\32\ Id.
\33\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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After carefully considering the proposed rule change, the
Commission finds that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to LCH SA. More specifically, for the reasons given below,
the Commission finds that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act,\34\ and Rules 17ad-22(e)(3) and
(e)(4).\35\
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\34\ 15 U.S.C. 78q-1(b)(3)(F).
\35\ 17 CFR 240.17ad-22(e)(3), and (e)(4).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of LCH SA be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions.\36\
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\36\ 15 U.S.C. 78q-1(b)(3)(F).
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As noted above, the proposal would amend the Stress Guide and
Margin Guide to recalibrate the stress tests used to size the Default
Fund to maintain plausibility while continuing to meet a cover-2
standard, and to more accurately reflect current markets and liquidity
risk arising out of a potential clearing member default. Most
prominently, the Stress Guide would help ensure the uniformity of
criteria applied across historical stress scenarios and clarify the
quantification of what is deemed extreme but plausible, and the Margin
Guide would introduce a 10-year rolling lookback window alongside a
fixed stress period to help mitigate the risk of dilution. Although the
size of the Default Fund would be reduced by these changes, LCH SA
would continue to meet or exceed the cover-2 standard. In this regard,
the Stress Guide and Margin Guide are designed to ensure that LCH SA
can maintain its resilience in the event of a default, thereby enabling
LCH SA to continue to provide its clearance and settlement services to
the public in such circumstances. By amending the Stress Guide and
Margin Guide in these ways, LCH SA has taken measures to provide that
its rules are designed to promote the prompt and accurate clearance and
settlement of securities transactions and, to the extent applicable,
derivative agreements, contracts, and transactions.
Accordingly, the proposed rule change promotes the prompt and
accurate clearance and settlement of transactions at LCH SA, consistent
with Section 17A(b)(3)(F) of the Act.\37\
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\37\ Id.
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B. Consistency With Rule 17Ad-22(e)(3)
Rule 17Ad-22(e)(3) requires that LCH SA establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to, among other things, maintain a sound risk management
framework for comprehensively managing credit and other risks that
arise in or are borne by the covered clearing agency.\38\
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\38\ 17 CFR 240.17ad-22(e)(3).
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LCH SA's proposed changes stem from Model Validation Team
recommendations and are designed to work in tandem to maintain a sound
framework for comprehensively managing credit risk. For example, the
Stress Guide recalibrates stress testing scenarios to help maintain
plausibility in light of the present market structure, uniformly sets
the stress test calibration to seven days across all scenarios, aligns
the handling of option exercise with regular margins, and rewrites the
logic behind the stressed Short Charge to be consistent with that found
in the Margin Guide. As further example, the Margin Guide introduces a
10-year rolling lookback window used alongside a fixed stress period to
help prevent dilution; simplifies the calculation behind the Spread
Margin floor; specifies that one P&L per scenario of the Expected
Shortfall would be calculated at the five-day P&L; and adjusts the
weighting of the current volatility when rescaling returns before
applying them to create simulated spread scenarios. Taken together, the
changes to the Stress Guide and Margin Guide clarify details around LCH
SA's approach to credit risk that is borne by the clearing agency in
current markets. Additionally, the conforming changes to the Stress
Guide and Margin Guide, such as the additions of an Executive Summary
section and a section on the contextualization of the use and purpose
of the model, help ensure compliance with the model documentation
template requirements across LSEG entities, thus assisting with
establishing a cohesive and comprehensive risk management framework.
Accordingly, the proposed rule change is consistent with Rule 17Ad-
22(e)(3).\39\
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\39\ Id.
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C. Consistency With Rule 17ad-22(e)(4)
Rule 17ad-22(e)(4)(i) and (ii) requires that LCH SA establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to, among other things effectively identify,
measure, monitor, and manage its credit exposures to participants and
those arising from its payment, clearing, and settlement processes,
including by maintaining sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence; and maintaining additional financial resources at the
minimum to enable it to cover a wide range of foreseeable stress
scenarios that include, but are not limited to, the default of the two
participant families that would potentially cause the largest aggregate
credit exposure for LCH SA in extreme but plausible market
conditions.\40\
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\40\ 17 CFR 240.17ad-22(e)(4)(i) and (ii).
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As stated above, the proposal's revisions to the Stress Guide
primarily aim to maintain plausibility in current markets. The proposal
would do so by eliminating explicitly listed stress testing scenarios
and amending the application of certain multipliers to historical
shocks in favor of a defined set of criteria across all scenarios to
uniformly capture the worst historical stress over a variety of
periods. Additionally, amendments to the Stress Guide clarify the
quantification of plausibility, based on the FRAP's definition of a
once-in-30 years event. The Margin Guide primarily adds a rolling
lookback window used in parallel with a fixed stressed period to
prevent dilution of the most stressed periods when determining the
Spread Margin. Such changes result in a 41% reduction of the Default
Fund, on average. However, because the Default Fund initially was set
at a level that did not necessarily reflect LCH SA's service levels and
the markets it serves, LCH SA represents that the changes would not
impede LCH SA from continuing to meet its cover-2 regulatory
obligations,\41\ and thus maintain sufficient financial resources to
cover its credit exposure to each participant fully with a high degree
of confidence.
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\41\ See Notice, 91 FR at 20753.
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[[Page 32141]]
Accordingly, the proposed rule change is consistent with Rule 17ad-
22(e)(4)(i) and (ii).\42\
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\42\ 17 CFR 240.17ad-22(e)(4)(i) and (ii).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A(b)(3)(F) of the
Act,\43\ and Rules 17ad-22(e)(3) and (e)(4) \44\ thereunder.
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\43\ 15 U.S.C. 78q-1(b)(3)(F).
\44\ 17 CFR 240.17ad-22(e)(3) and (e)(4).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\45\ that the proposed rule change (SR-LCH SA-2026-001) be, and hereby
is, approved.\46\
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\45\ 15 U.S.C. 78s(b)(2).
\46\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-10665 Filed 5-28-26; 8:45 am]
BILLING CODE 8011-01-P