82_FR_31492 82 FR 31364 - Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change, as Amended by Amendment No. 1 Thereto, To Add Rules Related to the Clearing of CDX.NA.HY CDS

82 FR 31364 - Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change, as Amended by Amendment No. 1 Thereto, To Add Rules Related to the Clearing of CDX.NA.HY CDS

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 128 (July 6, 2017)

Page Range31364-31366
FR Document2017-14239

Federal Register, Volume 82 Issue 128 (Thursday, July 6, 2017)
[Federal Register Volume 82, Number 128 (Thursday, July 6, 2017)]
[Notices]
[Pages 31364-31366]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-14239]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81056; File No. SR-LCH SA-2017-005]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change, as Amended by Amendment No. 1 Thereto, To Add Rules 
Related to the Clearing of CDX.NA.HY CDS

June 30, 2017.

I. Introduction

    On April 28, 2017, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change (SR-LCH SA-2017-005) to amend LCH 
SA's CDS Margin Framework and CDSClear Default Fund Methodology in 
order to permit LCH SA to clear CDS contracts on the CDX.NA.HY index. 
On May 5, 2017, LCH SA filed Amendment No. 1.\3\ The proposed rule 
change was published in the Federal Register on May 17, 2017.\4\ The 
Commission received no comment letters regarding the proposed 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\ LCH SA filed Amendment No. 1 to replace the initial filing 
in its entirety in order to clarify certain changes to the CDSClear 
Margin Framework.
    \4\ Securities Exchange Act Release No. 34-80666 (May 11, 2017), 
82 FR 22699 (May 17, 2017) (SR-LCH SA-2017-005) (``Notice'').
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II. Description of the Proposed Rule Change

    LCH SA has proposed various changes to its CDS Margin Framework and 
CDSClear Default Fund Methodology for the purpose of permitting LCH SA 
to clear CDS contracts on the CDX.NA.HY index.

A. Changes to CDS Margin Framework

    With respect to the CDS Margin Framework, LCH SA proposed to amend 
the short charge component of its margin methodology to provide a 
description of the purpose of the short charge, noting that it is 
intended to account for the probability of a credit event occurring 
during the period from the default of a Clearing Member to liquidation 
of the defaulting Clearing Member's portfolio, as well as to adjust the 
method for calculating the short charge to account for CDX.NA.HY index 
contracts. Under its current CDS Margin Framework, LCH SA calculates 
the short charge component by taking the larger of (1) a ``Global Short 
Charge,'' derived from the Clearing Member's top net short exposure 
with respect to any CDS contract and its top net short exposure among 
the three ``riskiest'' reference entities (of any type), i.e. those 
that are most likely to default, in the Clearing Member's portfolio, 
and (2) the top two net short exposures with respect to CDS contracts 
on senior financial entities.\5\ LCH SA believes that high yield 
entities are risker than senior financial entities, and as a result it 
proposed to introduce a ``High Yield Short Charge'' that would replace 
the top two net short exposures to CDS on senior financial entities in 
its approach to calculating the short charge.\6\ Consequently, the 
short charge under the proposed rule change would be the greater of (1) 
the ``Global Short Charge,'' as described above, and (2) a ``High Yield 
Short Charge,'' calculated from a member's top net short exposure (with 
respect to high yield CDS) and its top two net short exposures among 
the three ``riskiest'' reference entities in the high yield category in 
the Clearing Member's portfolio.\7\
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    \5\ Notice, 82 FR at 22700.
    \6\ Id.
    \7\ Id.
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    LCH SA also proposed to make certain conforming changes throughout 
Section 4.1.1 of the CDS Margin Framework, which describes the ``net 
short exposure'' calculation, to refer to CDX.NA.HY contracts, as well 
as to clarify that in order to calculate margin in Euros, all US dollar 
denominated variables are converted to Euros utilizing the current USD/
Euro foreign exchange rate and calibrated haircut based upon historical 
data. Furthermore, LCH SA proposed conforming changes to Section 4.1.2 
of the CDS Margin Framework, which describes the ``top exposure'' 
component of the short charge and Section 4.1.3 of the CDS Margin 
Framework, which describes the process by which LCH SA identifies the 
``riskiest'' entities (of any type) in determining the short charge, to 
incorporate terms for CDX.NA.HY index contracts and to clarify the 
calculation as it applies to high yield indices. LCH SA also proposed 
clarifying changes to Section 4.1.4 of the CDS Margin Framework to 
summarize the calculation for the short charge amount.\8\
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    \8\ Id.
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    LCH SA proposed to amend the CDS Margin Framework by deleting 
Section 4.3 in its entirety because the substance of that section would 
be contained in other sections of the CDS Margin Framework as a result 
of the proposed changes described above.\9\
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    \9\ Id.
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    In addition, LCH SA also proposed to amend Section 5.1 of the CDS 
Margin Framework, which sets forth the wrong way risk (``WWR'') 
component of LCH SA's margin methodology. According to LCH SA, the 
current approach leverages the short charge framework by calculating 
the top two net short exposures of financial entities in a Clearing 
Member's portfolio following the calculation described above for the 
short charge margin. LCH SA then compares these top two net short 
exposures of financial entities to the Global Short Charge and imposes 
the

[[Page 31365]]

greater of those two as the short charge, which addresses the WWR 
arising from the correlation between a Clearing Member default and the 
default(s) of the top two financial entities in the Clearing Member's 
portfolio.\10\ The proposed rule change amends Section 5.1 of the CDS 
Margin Framework to make the WWR component more explicit, such that, 
when the top two net short exposures in respect of financial entities 
exceeds the short charge margin, as amended to equal the greater of the 
Global Short Charge and the High Yield Short Charge, LCH SA will charge 
the incremental amount that is attributable to the top two financial 
entities as part of the WWR Margin.\11\
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    \10\ Id.
    \11\ Id.
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    LCH SA further proposed to amend a heading in Section 3 and a table 
in Section 3.1.1 to clarify that the summary of the margin framework 
also applies to CDX HY contracts. Additional conforming changes in the 
CDS Margin Framework were proposed with respect to Sections 5, 6, 8, 
10, and 11 of the CDS Margin Framework to clarify that the those 
sections also apply to high yield indices.\12\
---------------------------------------------------------------------------

    \12\ Id.
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B. Changes to CDSClear Default Fund Methodology

    LCH SA also proposed changes to its CDSClear Default Fund 
Methodology. Specifically, LCH SA proposed to amend Section 2.3 of the 
CDSClear Default Fund Methodology to modify the existing stressed short 
charge. Under its current approach, LCH SA calculates a stressed short 
charge, which equals the greater of (1) the top net short exposure plus 
the top two net short exposures among the three entities most likely to 
default in the Clearing Member's portfolio, and (2) the top two net 
short exposures which are senior financial entities plus the top net 
short exposures among the three riskiest senior financial entities in 
the Clearing Member's portfolio. Under the proposed rule change, LCH SA 
will take the default of high yield entities into account and add a 
third prong to the stressed short charge calculation which will take 
the greater of (1) and (2) as described above in this paragraph, or (3) 
the top two net short exposures which are high yield entities plus the 
top two net short exposures among the three high yield entities most 
likely to default in the Clearing Member's portfolio.\13\
---------------------------------------------------------------------------

    \13\ Id.
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    Finally, LCH SA also proposed to amend Section 3.8 of the CDSClear 
Default Fund Methodology, which describes the correlation between index 
families and series, to reflect that additional data will be used.\14\
---------------------------------------------------------------------------

    \14\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \15\ directs the Commission to 
approve a proposed rule of a self-regulatory organization if the 
Commission finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. Section 17A(b)(3)(F) of the Act \16\ 
requires, in relevant part, that the rules of a registered clearing 
agency be designed to promote the prompt and accurate clearance and 
settlement of securities transactions and, to the extent applicable, 
derivative agreements, contracts, and transactions. Rule 17Ad-22(b)(2) 
\17\ requires, in relevant part, a registered clearing agency that 
performs central counterparty services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to use margin requirements to limit its credit exposures to 
participants under normal market conditions and use risk-based models 
and parameters to set margin requirements. Rule 17Ad-22(b)(3) \18\ 
requires, in relevant part, a registered clearing agency that performs 
central counterparty services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to maintain 
additional financial resources sufficient to withstand, at a minimum, a 
default by the two participant families to which it has the largest 
exposures in extreme but plausible market conditions where such 
registered clearing agency acts as a central counterparty for security-
based swaps. Rule 17Ad-22(e)(4)(i) and (ii) \19\ require a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to maintain sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence, and for a covered clearing 
agency involved in activities with a more complex risk profile,\20\ 
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 the 
covered clearing agency in extreme but plausible market conditions. 
Finally, Rule 17Ad-22(e)(6)(i) \21\ requires a covered clearing agency 
that provides central counterparty services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to cover its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum considers, 
and produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio and market.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2)(C).
    \16\ 15 U.S.C. 78q-1(b)(3)(F).
    \17\ 17 CFR 240.17Ad-22(b)(2).
    \18\ 17 CFR 240.17Ad-22(b)(3).
    \19\ 17 CFR 240.17Ad-22(e)(4)(i) and (ii).
    \20\ Rule 17Ad-22(a)(4)(i) defines a covered clearing agency 
involved in activities with a more complex risk profile as a 
clearing agency registered with the Commission under Section 17A of 
the Act that provides central counterparty services for security-
based swaps. See 17 CFR 240.17Ad-22(a)(4)(i).
    \21\ 17 CFR 240.17Ad-22(e)(6)(i).
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    The Commission finds that the proposed rule change, which amends 
LCH SA's CDS Margin Framework and CDSClear Default Fund Methodology to 
permit LCH SA to clear CDS contracts on the CDX.NA.HY index, is 
consistent with Section 17A of the Act and the applicable provisions of 
Rule 17Ad-22 thereunder. By amending its CDS Margin Framework, LCH SA 
amends the approach to its short charge component of its margin 
methodology to consider the specific risks associated with, and 
incorporate parameters addressing the risks, associated with clearing 
contracts on the CDX.NA.HY index, and as a result, LCH SA will be able 
to calculate margin requirements to cover its exposures associated with 
clearing contracts on the CDX.NA.HY index. Therefore, the Commission 
finds that the proposed rule changes are consistent with Rule 17Ad-
22(b)(2), 17Ad-22(e)(4)(i), and 17Ad-22(e)(6)(i).
    Additionally, by amending its CDSClear Default Fund Methodology to 
change the manner in which it calculates its short charge to consider 
the risks introduced by clearing contracts on the CDX.NA.HY index, the 
Commission believes that LCH SA will be able to more appropriately 
calculate and maintain the financial resources necessary to cover the 
default of by the two participant families to which it has the largest 
exposures in extreme but plausible market conditions. Therefore, the 
Commission finds that the proposed rule change is consistent with the 
requirements of Rule 17Ad-22(b)(3) and Rule 17Ad-22(e)(4)(ii).
    Because the proposed rule change amends LCH SA's CDS Margin 
Framework and CDSClear Default Fund Methodology in such a manner as to

[[Page 31366]]

allow LCH SA to more appropriately take into consideration the risks 
associated with clearing contracts on the CDX.NA.HY index, and to 
collect margin and other financial resources that reflect such risks, 
the Commission believes that the proposed changes are designed to 
promote the prompt and accurate clearance and settlement of such 
contracts. As a result, the Commission finds that the proposed rule 
changes are consistent with Section 17A(b)(3)(F) of the Act.

IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-LCH SA-2017-005), as amended by 
Amendment No. 1, be, and hereby is, approved.\22\
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    \22\ 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.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2017-14239 Filed 7-5-17; 8:45 am]
BILLING CODE 8011-01-P



                                                31364                            Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices

                                                for’’ their CCLF contribution 87 fails to                 pursuant to Section 19(b)(1) of the                          approach to calculating the short
                                                account for the fact that the proposal                    Securities Exchange Act of 1934                              charge.6 Consequently, the short charge
                                                also requires FICC to conduct its own                     (‘‘Act’’) 1 and Rule 19b-4 thereunder,2 a                    under the proposed rule change would
                                                due diligence. Specifically, FICC would                   proposed rule change (SR–LCH SA–                             be the greater of (1) the ‘‘Global Short
                                                confirm that Netting Members have                         2017–005) to amend LCH SA’s CDS                              Charge,’’ as described above, and (2) a
                                                sufficient information to understand                      Margin Framework and CDSClear                                ‘‘High Yield Short Charge,’’ calculated
                                                and manage their liquidity risks and to                   Default Fund Methodology in order to                         from a member’s top net short exposure
                                                meet its commitments to provide                           permit LCH SA to clear CDS contracts                         (with respect to high yield CDS) and its
                                                liquidity. Therefore, the Commission                      on the CDX.NA.HY index. On May 5,                            top two net short exposures among the
                                                believes that the proposal is consistent                  2017, LCH SA filed Amendment No. 1.3                         three ‘‘riskiest’’ reference entities in the
                                                with Rule 17Ad–22(e)(7)(iv).                              The proposed rule change was                                 high yield category in the Clearing
                                                   Finally, Rule 17Ad–22(e)(7)(v) under                   published in the Federal Register on                         Member’s portfolio.7
                                                the Exchange Act requires policies and                    May 17, 2017.4 The Commission                                   LCH SA also proposed to make
                                                procedures for maintaining and testing                    received no comment letters regarding                        certain conforming changes throughout
                                                with each liquidity provider, to the                      the proposed change. For the reasons                         Section 4.1.1 of the CDS Margin
                                                extent practicable, FICC’s procedures                     discussed below, the Commission is                           Framework, which describes the ‘‘net
                                                and operational capacity for accessing                    approving the proposed rule change.                          short exposure’’ calculation, to refer to
                                                its relevant liquid resources. As                                                                                      CDX.NA.HY contracts, as well as to
                                                described above, under the proposal,                      II. Description of the Proposed Rule                         clarify that in order to calculate margin
                                                FICC would test its operational                           Change                                                       in Euros, all US dollar denominated
                                                procedures for invoking a CCLF Event                         LCH SA has proposed various                               variables are converted to Euros
                                                and require Netting Members to                            changes to its CDS Margin Framework                          utilizing the current USD/Euro foreign
                                                participate in such tests. Therefore, the                 and CDSClear Default Fund                                    exchange rate and calibrated haircut
                                                Commission believes that the proposal                     Methodology for the purpose of                               based upon historical data.
                                                is consistent with Rule 17Ad–                             permitting LCH SA to clear CDS                               Furthermore, LCH SA proposed
                                                22(e)(7)(v).                                              contracts on the CDX.NA.HY index.                            conforming changes to Section 4.1.2 of
                                                                                                          A. Changes to CDS Margin Framework                           the CDS Margin Framework, which
                                                IV. Conclusion
                                                                                                                                                                       describes the ‘‘top exposure’’
                                                  It is therefore noticed, pursuant to                       With respect to the CDS Margin                            component of the short charge and
                                                Section 806(e)(1)(I) of the Clearing                      Framework, LCH SA proposed to amend                          Section 4.1.3 of the CDS Margin
                                                Supervision Act,88 that the Commission                    the short charge component of its                            Framework, which describes the process
                                                DOES NOT OBJECT to advance notice                         margin methodology to provide a                              by which LCH SA identifies the
                                                SR–FICC–2017–802 and that FICC                            description of the purpose of the short                      ‘‘riskiest’’ entities (of any type) in
                                                hereby is AUTHORIZED to implement                         charge, noting that it is intended to                        determining the short charge, to
                                                the change as of the date of this notice                  account for the probability of a credit                      incorporate terms for CDX.NA.HY index
                                                or the date of an order by the                            event occurring during the period from                       contracts and to clarify the calculation
                                                Commission approving proposed rule                        the default of a Clearing Member to                          as it applies to high yield indices. LCH
                                                change SR–FICC–2017–002 that reflects                     liquidation of the defaulting Clearing                       SA also proposed clarifying changes to
                                                the changes that are consistent with this                 Member’s portfolio, as well as to adjust                     Section 4.1.4 of the CDS Margin
                                                Advance Notice, whichever is later.                       the method for calculating the short                         Framework to summarize the
                                                   By the Commission.                                     charge to account for CDX.NA.HY index                        calculation for the short charge
                                                Jill M. Peterson,                                         contracts. Under its current CDS Margin                      amount.8
                                                Assistant Secretary.
                                                                                                          Framework, LCH SA calculates the short                          LCH SA proposed to amend the CDS
                                                                                                          charge component by taking the larger                        Margin Framework by deleting Section
                                                [FR Doc. 2017–14145 Filed 7–5–17; 8:45 am]
                                                                                                          of (1) a ‘‘Global Short Charge,’’ derived                    4.3 in its entirety because the substance
                                                BILLING CODE 8011–01–P
                                                                                                          from the Clearing Member’s top net                           of that section would be contained in
                                                                                                          short exposure with respect to any CDS                       other sections of the CDS Margin
                                                SECURITIES AND EXCHANGE                                   contract and its top net short exposure                      Framework as a result of the proposed
                                                COMMISSION                                                among the three ‘‘riskiest’’ reference                       changes described above.9
                                                                                                          entities (of any type), i.e. those that are                     In addition, LCH SA also proposed to
                                                [Release No. 34–81056; File No. SR–LCH                    most likely to default, in the Clearing                      amend Section 5.1 of the CDS Margin
                                                SA–2017–005]                                              Member’s portfolio, and (2) the top two                      Framework, which sets forth the wrong
                                                                                                          net short exposures with respect to CDS                      way risk (‘‘WWR’’) component of LCH
                                                Self-Regulatory Organizations; LCH
                                                                                                          contracts on senior financial entities.5                     SA’s margin methodology. According to
                                                SA; Order Approving Proposed Rule
                                                                                                          LCH SA believes that high yield entities                     LCH SA, the current approach leverages
                                                Change, as Amended by Amendment
                                                                                                          are risker than senior financial entities,                   the short charge framework by
                                                No. 1 Thereto, To Add Rules Related to
                                                                                                          and as a result it proposed to introduce                     calculating the top two net short
                                                the Clearing of CDX.NA.HY CDS
                                                                                                          a ‘‘High Yield Short Charge’’ that would                     exposures of financial entities in a
                                                June 30, 2017.                                            replace the top two net short exposures                      Clearing Member’s portfolio following
                                                                                                          to CDS on senior financial entities in its                   the calculation described above for the
                                                I. Introduction
                                                                                                                                                                       short charge margin. LCH SA then
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                                                   On April 28, 2017, Banque Centrale                          1 15
                                                                                                                  U.S.C. 78s(b)(1).                                    compares these top two net short
                                                de Compensation, which conducts                                2 17
                                                                                                                  CFR 240.19b–4.                                       exposures of financial entities to the
                                                                                                            3 LCH SA filed Amendment No. 1 to replace the
                                                business under the name LCH SA (‘‘LCH                                                                                  Global Short Charge and imposes the
                                                                                                          initial filing in its entirety in order to clarify certain
                                                SA’’), filed with the Securities and                      changes to the CDSClear Margin Framework.
                                                Exchange Commission (‘‘Commission’’),                       4 Securities Exchange Act Release No. 34–80666              6 Id.
                                                                                                                                                                        7 Id.
                                                                                                          (May 11, 2017), 82 FR 22699 (May 17, 2017) (SR–
                                                  87 Ronin Letter at 2.                                   LCH SA–2017–005) (‘‘Notice’’).                                8 Id.
                                                  88 12 U.S.C. 5465(e)(1)(I).                               5 Notice, 82 FR at 22700.                                   9 Id.




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                                                                                Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices                                                 31365

                                                greater of those two as the short charge,                describes the correlation between index                 financial resources at the minimum to
                                                which addresses the WWR arising from                     families and series, to reflect that                    enable it to cover a wide range of
                                                the correlation between a Clearing                       additional data will be used.14                         foreseeable stress scenarios that include,
                                                Member default and the default(s) of the                                                                         but are not limited to, the default of the
                                                                                                         III. Discussion and Commission
                                                top two financial entities in the Clearing                                                                       two participant families that would
                                                                                                         Findings
                                                Member’s portfolio.10 The proposed rule                                                                          potentially cause the largest aggregate
                                                change amends Section 5.1 of the CDS                        Section 19(b)(2)(C) of the Act 15                    credit exposure for the covered clearing
                                                Margin Framework to make the WWR                         directs the Commission to approve a                     agency in extreme but plausible market
                                                component more explicit, such that,                      proposed rule of a self-regulatory                      conditions. Finally, Rule 17Ad–
                                                when the top two net short exposures in                  organization if the Commission finds                    22(e)(6)(i) 21 requires a covered clearing
                                                respect of financial entities exceeds the                that such proposed rule change is                       agency that provides central
                                                short charge margin, as amended to                       consistent with the requirements of the                 counterparty services to establish,
                                                equal the greater of the Global Short                    Act and the rules and regulations                       implement, maintain and enforce
                                                Charge and the High Yield Short Charge,                  thereunder applicable to such                           written policies and procedures
                                                LCH SA will charge the incremental                       organization. Section 17A(b)(3)(F) of the               reasonably designed to cover its credit
                                                amount that is attributable to the top                   Act 16 requires, in relevant part, that the             exposures to its participants by
                                                two financial entities as part of the                    rules of a registered clearing agency be                establishing a risk-based margin system
                                                WWR Margin.11                                            designed to promote the prompt and                      that, at a minimum considers, and
                                                  LCH SA further proposed to amend a                     accurate clearance and settlement of                    produces margin levels commensurate
                                                heading in Section 3 and a table in                      securities transactions and, to the extent              with, the risks and particular attributes
                                                Section 3.1.1 to clarify that the summary                applicable, derivative agreements,                      of each relevant product, portfolio and
                                                of the margin framework also applies to                  contracts, and transactions. Rule 17Ad–                 market.
                                                CDX HY contracts. Additional                             22(b)(2) 17 requires, in relevant part, a                  The Commission finds that the
                                                conforming changes in the CDS Margin                     registered clearing agency that performs                proposed rule change, which amends
                                                Framework were proposed with respect                     central counterparty services to                        LCH SA’s CDS Margin Framework and
                                                to Sections 5, 6, 8, 10, and 11 of the CDS               establish, implement, maintain and                      CDSClear Default Fund Methodology to
                                                Margin Framework to clarify that the                     enforce written policies and procedures                 permit LCH SA to clear CDS contracts
                                                those sections also apply to high yield                  reasonably designed to use margin                       on the CDX.NA.HY index, is consistent
                                                indices.12                                               requirements to limit its credit                        with Section 17A of the Act and the
                                                                                                         exposures to participants under normal                  applicable provisions of Rule 17Ad–22
                                                B. Changes to CDSClear Default Fund                      market conditions and use risk-based                    thereunder. By amending its CDS
                                                Methodology                                              models and parameters to set margin                     Margin Framework, LCH SA amends the
                                                   LCH SA also proposed changes to its                   requirements. Rule 17Ad–22(b)(3) 18                     approach to its short charge component
                                                CDSClear Default Fund Methodology.                       requires, in relevant part, a registered                of its margin methodology to consider
                                                Specifically, LCH SA proposed to                         clearing agency that performs central                   the specific risks associated with, and
                                                amend Section 2.3 of the CDSClear                        counterparty services to establish,                     incorporate parameters addressing the
                                                Default Fund Methodology to modify                       implement, maintain and enforce                         risks, associated with clearing contracts
                                                the existing stressed short charge. Under                written policies and procedures                         on the CDX.NA.HY index, and as a
                                                its current approach, LCH SA calculates                  reasonably designed to maintain                         result, LCH SA will be able to calculate
                                                a stressed short charge, which equals                    additional financial resources sufficient               margin requirements to cover its
                                                the greater of (1) the top net short                     to withstand, at a minimum, a default                   exposures associated with clearing
                                                exposure plus the top two net short                      by the two participant families to which                contracts on the CDX.NA.HY index.
                                                exposures among the three entities most                  it has the largest exposures in extreme                 Therefore, the Commission finds that
                                                likely to default in the Clearing                        but plausible market conditions where                   the proposed rule changes are consistent
                                                Member’s portfolio, and (2) the top two                  such registered clearing agency acts as                 with Rule 17Ad–22(b)(2), 17Ad–
                                                net short exposures which are senior                     a central counterparty for security-based               22(e)(4)(i), and 17Ad–22(e)(6)(i).
                                                financial entities plus the top net short                swaps. Rule 17Ad–22(e)(4)(i) and (ii) 19                   Additionally, by amending its
                                                exposures among the three riskiest                       require a covered clearing agency to                    CDSClear Default Fund Methodology to
                                                senior financial entities in the Clearing                establish, implement, maintain and                      change the manner in which it
                                                Member’s portfolio. Under the proposed                   enforce written policies and procedures                 calculates its short charge to consider
                                                rule change, LCH SA will take the                        reasonably designed to maintain                         the risks introduced by clearing
                                                default of high yield entities into                      sufficient financial resources to cover its             contracts on the CDX.NA.HY index, the
                                                account and add a third prong to the                     credit exposure to each participant fully               Commission believes that LCH SA will
                                                stressed short charge calculation which                  with a high degree of confidence, and                   be able to more appropriately calculate
                                                will take the greater of (1) and (2) as                  for a covered clearing agency involved                  and maintain the financial resources
                                                described above in this paragraph, or (3)                in activities with a more complex risk                  necessary to cover the default of by the
                                                the top two net short exposures which                    profile,20 maintaining additional                       two participant families to which it has
                                                are high yield entities plus the top two                                                                         the largest exposures in extreme but
                                                net short exposures among the three
                                                                                                              14 Id.
                                                                                                                                                                 plausible market conditions. Therefore,
                                                                                                              15 15
                                                                                                                 U.S.C. 78s(b)(2)(C).
                                                high yield entities most likely to default                                                                       the Commission finds that the proposed
                                                                                                              16 15
                                                                                                                 U.S.C. 78q–1(b)(3)(F).
                                                in the Clearing Member’s portfolio.13                      17 17 CFR 240.17Ad–22(b)(2).
                                                                                                                                                                 rule change is consistent with the
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                                                   Finally, LCH SA also proposed to                        18 17 CFR 240.17Ad–22(b)(3).                          requirements of Rule 17Ad–22(b)(3) and
                                                amend Section 3.8 of the CDSClear                          19 17 CFR 240.17Ad–22(e)(4)(i) and (ii).              Rule 17Ad–22(e)(4)(ii).
                                                Default Fund Methodology, which                            20 Rule 17Ad–22(a)(4)(i) defines a covered               Because the proposed rule change
                                                                                                         clearing agency involved in activities with a more      amends LCH SA’s CDS Margin
                                                  10 Id.
                                                                                                         complex risk profile as a clearing agency registered    Framework and CDSClear Default Fund
                                                                                                         with the Commission under Section 17A of the Act
                                                  11 Id.
                                                                                                         that provides central counterparty services for
                                                                                                                                                                 Methodology in such a manner as to
                                                  12 Id.
                                                                                                         security-based swaps. See 17 CFR 240.17Ad–
                                                  13 Id.                                                 22(a)(4)(i).                                              21 17   CFR 240.17Ad–22(e)(6)(i).



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                                                31366                           Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices

                                                allow LCH SA to more appropriately                       I. Self-Regulatory Organization’s                     ‘‘Participants’’) filed with the
                                                take into consideration the risks                        Statement of the Terms of Substance of                Commission, pursuant to Section 11A of
                                                associated with clearing contracts on the                the Proposed Rule Change                              the Exchange Act 6 and Rule 608 of
                                                CDX.NA.HY index, and to collect                             FINRA is proposing to adopt FINRA                  Regulation NMS thereunder,7 the
                                                margin and other financial resources                     Rule 6898 (Consolidated Audit Trail—                  National Market System Plan Governing
                                                that reflect such risks, the Commission                  Fee Dispute Resolution) to establish the              the Consolidated Audit Trail (the ‘‘CAT
                                                believes that the proposed changes are                   procedures for resolving potential                    NMS Plan’’ or ‘‘Plan’’).8 The
                                                designed to promote the prompt and                       disputes related to CAT Fees charged to               Participants filed the Plan to comply
                                                accurate clearance and settlement of                     Industry Members.3                                    with Rule 613 of Regulation NMS under
                                                                                                            The text of the proposed rule change               the Exchange Act.9 The Plan was
                                                such contracts. As a result, the
                                                                                                         is available on FINRA’s Web site at                   published for comment in the Federal
                                                Commission finds that the proposed
                                                                                                         http://www.finra.org, at the principal                Register on May 17, 2016,10 and
                                                rule changes are consistent with Section                                                                       approved by the Commission, as
                                                17A(b)(3)(F) of the Act.                                 office of FINRA, and at the
                                                                                                         Commission’s Public Reference Room.                   modified, on November 15, 2016.11 The
                                                IV. Conclusion                                                                                                 Plan is designed to create, implement
                                                                                                         II. Self-Regulatory Organization’s                    and maintain a consolidated audit trail
                                                  It is therefore ordered pursuant to                    Statement of the Purpose of, and                      (‘‘CAT’’) that would capture customer
                                                Section 19(b)(2) of the Act that the                     Statutory Basis for, the Proposed Rule                and order event information for orders
                                                proposed rule change (SR–LCH SA–                         Change                                                in NMS Securities and OTC Equity
                                                2017–005), as amended by Amendment                          In its filing with the Commission,                 Securities, across all markets, from the
                                                No. 1, be, and hereby is, approved.22                    FINRA included statements concerning                  time of order inception through routing,
                                                                                                         the purpose of and basis for the                      cancellation, modification, or execution
                                                  For the Commission by the Division of
                                                                                                         proposed rule change and discussed any                in a single consolidated data source.
                                                Trading and Markets, pursuant to delegated
                                                                                                         comments it received on the proposed                  The Plan accomplishes this by creating
                                                authority.23
                                                                                                         rule change. The text of these statements             CAT NMS, LLC (the ‘‘Company’’), of
                                                Brent J. Fields,                                         may be examined at the places specified               which each Participant is a member, to
                                                Secretary.                                               in Item IV below. FINRA has prepared                  operate the CAT.12 Under the CAT NMS
                                                [FR Doc. 2017–14239 Filed 7–5–17; 8:45 am]               summaries, set forth in sections A, B,                Plan, the Operating Committee of the
                                                BILLING CODE 8011–01–P                                   and C below, of the most significant                  Company (‘‘Operating Committee’’) has
                                                                                                         aspects of such statements.                           discretion to establish funding for the
                                                                                                                                                               Company to operate the CAT, including
                                                                                                         A. Self-Regulatory Organization’s
                                                SECURITIES AND EXCHANGE                                                                                        establishing fees that the Participants
                                                                                                         Statement of the Purpose of, and the
                                                COMMISSION                                                                                                     will pay, and establishing fees for
                                                                                                         Statutory Basis for, the Proposed Rule
                                                                                                                                                               Industry Members that will be
                                                                                                         Change
                                                [Release No. 34–81053; File No. SR–FINRA–                                                                      implemented by the Participants (‘‘CAT
                                                2017–020]                                                1. Purpose                                            Fees’’).13 The Participants are required
                                                                                                            Bats BYX Exchange, Inc., Bats BZX                  to file with the SEC under Section 19(b)
                                                Self-Regulatory Organizations;                           Exchange, Inc., Bats EDGA Exchange,                   of the Exchange Act any such CAT Fees
                                                Financial Industry Regulatory                            Inc., Bats EDGX Exchange, Inc., BOX                   applicable to Industry Members that the
                                                Authority, Inc.; Notice of Filing of a                   Options Exchange LLC, C2 Options                      Operating Committee approves.14
                                                Proposed Rule Change To Adopt                            Exchange, Incorporated, Chicago Board                 Accordingly, FINRA has filed a
                                                FINRA Rule 6898 (Consolidated Audit                      Options Exchange, Incorporated,                       proposed rule change with the SEC to
                                                Trail—Fee Dispute Resolution)                            Chicago Stock Exchange, Inc., FINRA,                  adopt the Consolidated Audit Trail
                                                                                                         Investors’ Exchange LLC, Miami                        Funding Fees, which will require
                                                June 29, 2017.                                           International Securities Exchange, LLC,               Industry Members that are FINRA
                                                                                                         MIAX PEARL, LLC, NASDAQ BX, Inc.,                     members to pay the CAT Fees
                                                   Pursuant to the provisions of Section
                                                                                                         Nasdaq GEMX, LLC, Nasdaq ISE, LLC,                    determined by the Operating
                                                19(b)(1) of the Securities Exchange Act                                                                        Committee.15 FINRA submits this
                                                of 1934 (‘‘Act’’ or the ‘‘Exchange Act’’) 1              Nasdaq MRX, LLC,4 NASDAQ PHLX
                                                                                                         LLC, The NASDAQ Stock Market LLC,
                                                and Rule 19b-4 thereunder,2 notice is                                                                            6 15  U.S.C. 78k–1.
                                                                                                         New York Stock Exchange LLC, NYSE
                                                hereby given that, on June 19, 2017,                                                                             7 17  CFR 242.608.
                                                                                                         MKT LLC, NYSE Arca, Inc. and NYSE
                                                Financial Industry Regulatory                            National, Inc.5 (collectively, the
                                                                                                                                                                  8 See Letter from the Participants to Brent J.

                                                Authority, Inc. (‘‘FINRA’’) filed with the                                                                     Fields, Secretary, Commission, dated September 30,
                                                                                                                                                               2014; and Letter from Participants to Brent J. Fields,
                                                Securities and Exchange Commission                         3 Unless otherwise specified, capitalized terms
                                                                                                                                                               Secretary, Commission, dated February 27, 2015.
                                                (‘‘SEC’’ or the ‘‘Commission’’) the                      used in this rule filing are defined as set forth     On December 23, 2015, the Participants submitted
                                                proposed rule change as described in                     herein or in the Consolidated Audit Trail Funding     an amendment to the CAT NMS Plan. See Letter
                                                                                                         Fees Rule, the CAT Compliance Rule Series or in       from Participants to Brent J. Fields, Secretary,
                                                Items I and II below, which Items have                   the CAT NMS Plan.                                     Commission, dated December 23, 2015.
                                                been prepared by FINRA. The                                4 ISE Gemini, LLC, ISE Mercury, LLC and                9 17 CFR 242.613.

                                                Commission is publishing this notice to                  International Securities Exchange, LLC have been         10 Securities Exchange Act Release No. 77724
                                                                                                         renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC,
                                                solicit comments on the proposed rule                    and Nasdaq ISE, LLC, respectively. See Securities
                                                                                                                                                               (April 27, 2016), 81 FR 30614 (May 17, 2016).
                                                                                                                                                                  11 Securities Exchange Act Release No. 79318
                                                change from interested persons.                          Exchange Act Release No. 80248 (March 15, 2017),
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                                                                                                                                                               (November 15, 2016), 81 FR 84696 (November 23,
                                                                                                         82 FR 14547 (March 21, 2017); Securities Exchange
                                                                                                                                                               2016) (‘‘Approval Order’’).
                                                   22 In approving the proposed rule change, the         Act Release No. 80326 (March 29, 2017), 82 FR            12 The Plan also serves as the limited liability
                                                                                                         16460 (April 4, 2017); and Securities Exchange Act
                                                Commission considered the proposal’s impact on                                                                 company agreement for the Company.
                                                                                                         Release No. 80325 (March 29, 2017), 82 FR 16445
                                                efficiency, competition, and capital formation. 15                                                                13 Section 11.1(b) of the CAT NMS Plan.
                                                                                                         (April 4, 2017).
                                                U.S.C. 78c(f).                                             5 National Stock Exchange, Inc. has been renamed       14 See supra note 12 [sic].
                                                   23 17 CFR 200.30–3(a)(12).
                                                                                                         NYSE National, Inc. See Securities Exchange Act          15 See Securities Exchange Act Release No. 80710
                                                   1 15 U.S.C. 78s(b)(1).
                                                                                                         Release No. 79902 (January 30, 2017), 82 FR 9258      (May 17, 2017), 82 FR 23629 [sic] (May 23, 2017)
                                                   2 17 CFR 240.19b–4.                                   (February 3, 2017).                                   (SR–FINRA–2017–011).



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Document Created: 2017-07-06 01:05:12
Document Modified: 2017-07-06 01:05:12
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation82 FR 31364 

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