82 FR 53536 - Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change, Security-Based Swap Submission, or Advance Notice Relating to Wrong Way Risk Margin

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 220 (November 16, 2017)

Page Range		53536-53537
FR Document		2017-24784
Federal Register, Volume 82 Issue 220 (Thursday, November 16, 2017)
[Federal Register Volume 82, Number 220 (Thursday, November 16, 2017)]
[Notices]
[Pages 53536-53537]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-24784]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82043; File No. SR-LCH SA-2017-009]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice 
Relating to Wrong Way Risk Margin

November 9, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on October 30, 2017, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change 
described in Items I, II, and III below, which Items have been prepared 
primarily by LCH SA. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    LCH SA is proposing to amend its Reference Guide: CDS Margin 
Framework (``CDSClear Margin Framework'' or ``Framework'') to adjust 
the wrong way risk (``WWR'') margin component of the Framework to more 
appropriately address offsets between currencies when calculating WWR 
margin.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, LCH SA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. LCH SA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of these statements.

A. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The WWR component of the Framework is designed to cover the 
anticipated financial contagion effect that would arise in case of a 
clearing member being declared in default. The current WWR margin 
formula acknowledges offsets as between currencies by allowing offset 
between WWR and right way risk (``RWR''). Specifically, a WWR currency 
offset is applied as the greater of: (x) the WWR amount in Euros minus 
the RWR amount in Euros, where non-Euro amounts are converted to Euros 
using a foreign exchange (``FX'') rate plus or minus a haircut; and (y) 
the WWR amount in Euros multiplied by 1 minus a factor, which 
represents the correlation between European and U.S. financial 
institutions by calculating the average historical cross correlation of 
credit spreads on credit default swaps (``CDS'') in respect of all 
pairs of European and U.S. financial institutions that are clearing 
members. Under the current calculation, if one currency has WWR and the 
other has RWR, LCH SA would compare the WWR amount as offset by the RWR 
to the WWR amount as reduced by taking the correlation factor into 
account and take the greater of the two. As a result, either the full 
amount of RWR is considered as offsetting the WWR, or only a portion of 
the WWR is taken into account without any regard to the expected amount 
of RWR.
    LCH SA believes that it is appropriate to consider the offset 
between the WWR amount and RWR amount but it would not be appropriate 
to apply the correlation factor to discount the WWR amount while also 
allowing the RWR to offset the WWR amount to its full extent. To be 
conservative, LCH SA believes that it is appropriate to apply the 
correlation factor to the RWR amount when using RWR to offset the WWR 
amount. Accordingly, LCH SA proposes to modify the WWR currency offset 
formula in the Framework to be the greater of: (i) the WWR amount in 
Euros, where such amounts are converted to Euros using an FX rate plus 
or minus a haircut, minus (ii) the RWR amount multiplied by the 10-year 
average historical correlation of credit spreads on CDS in respect of 
European and U.S. financial institutions; and zero. As of April 2016, 
the 10-year average historical correlation of credit spreads on CDS in 
respect of European and U.S. financial institutions was set to 48 
percent.
    Under this approach, RWR would never completely offset WWR and 
instead would be discounted based on the average of observed 
correlations of CDS credit spreads in respect of European and U.S. 
financial institutions. LCH SA believes that this change rationalizes 
the WWR currency offset and results in a more conservative WWR margin 
calculation.
2. Statutory Basis
    LCH SA believes that the proposed rule change is consistent with 
the requirements of Section 17A of the Securities Exchange Act of 1934 
\3\ (the ``Act'') and the regulations thereunder, including the 
standards under Rule 17Ad-22(b)(1) and (2).\4\ Specifically, in 
accordance with Section 17(A)(b)(3)(F),\5\ LCH SA believes that the 
proposed rule change will assure the safeguarding of securities and 
funds which are in the custody or control of the clearing agency or for 
which it is responsible, in that the proposed rule change is designed 
to rationalize the WWR currency offset and more conservatively 
calculate the WWR margin with respect to a clearing member. Therefore, 
LCH SA believes that the proposed rule change is consistent with the 
requirement of safeguarding securities and funds in Section 
17(A)(b)(3)(F) of the Act and the requirements of maintaining margin 
and limiting a clearing agency's exposures to potential losses from 
participants' defaults under normal market conditions in Rule 17Ad-
22(b)(1) and (2).\6\
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    \3\ 15 U.S.C. 78q-1.
    \4\ 17 CFR 240.17Ad-22(b)(1) and (2).
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
    \6\ 17 CFR 240.17Ad-22(b)(1) and (2).
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    Moreover, LCH SA believes that the proposed rule change is 
consistent with the requirements in Rule 17Ad-22(e)(6).\7\ Rule 17Ad-
22(e)(6)(i) and (v) require a covered clearing agency that provides 
central counterparty services to cover its credit exposures to its 
participants by establishing a risk-based margin system that, among 
other things, considers and produces margin levels commensurate with, 
the risks and particular attributes of each relevant product, 
portfolio, and market, and uses an appropriate method for measuring 
credit exposure that accounts for relevant product risk factors and 
portfolio effects across products.\8\ WWR is an important risk factor 
for clearing CDS products. As noted above, the proposed rule change 
rationalizes the WWR currency offset and more conservatively calculates 
WWR margin.

[[Page 53537]]

Therefore, LCH SA believes that the proposed rule change is consistent 
with Rule 17Ad-22(e)(6)(i) and (v).
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    \7\ 17 CFR 240.17Ad-22(e)(6).
    \8\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\9\ LCH SA does 
not believe that the proposed rule change would impose burdens on 
competition that are not necessary or appropriate in furtherance of the 
purposes of the Act. While the proposed rule change may result in 
higher WWR margin charges on participants, the revisions to the margin 
methodology will uniformly apply across all participants. In addition, 
as stated above, the proposed rule change is consistent with the 
applicable requirements of the Act and is appropriate in order to more 
conservatively calculate WWR margin. Therefore, LCH SA does not believe 
that the proposed rule change imposes any burden on competition that is 
not necessary or appropriate in furtherance of the purposes of the Act.
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    \9\ 15 U.S.C. 78q-1(b)(3)(I).
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C. Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. LCH SA will notify the Commission of any written 
comments received by LCH SA.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-LCH SA-2017-009 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-LCH SA-2017-009. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of LCH SA and on LCH 
SA's Web site at http://www.lch.com/asset-classes/cdsclear.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-LCH SA-2017-009 and should 
be submitted on or before December 7, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-24784 Filed 11-15-17; 8:45 am]
 BILLING CODE 8011-01-P
53536 Federal Register / Vol. 82, No. 220 / Thursday, November 16, 2017 / Notices

For the Commission, by the Division of A. Clearing Agency’s Statement of the Under this approach, RWR would
Trading and Markets, pursuant to delegated Purpose of, and Statutory Basis for, the never completely offset WWR and
authority.19 Proposed Rule Change instead would be discounted based on
Eduardo A. Aleman, the average of observed correlations of
Assistant Secretary.
1. Purpose
CDS credit spreads in respect of
[FR Doc. 2017–24780 Filed 11–15–17; 8:45 am] The WWR component of the European and U.S. financial
BILLING CODE 8011–01–P
Framework is designed to cover the institutions. LCH SA believes that this
anticipated financial contagion effect change rationalizes the WWR currency
that would arise in case of a clearing offset and results in a more conservative
SECURITIES AND EXCHANGE member being declared in default. The WWR margin calculation.
COMMISSION current WWR margin formula
acknowledges offsets as between 2. Statutory Basis
[Release No. 34–82043; File No. SR–LCH currencies by allowing offset between LCH SA believes that the proposed
SA–2017–009]
WWR and right way risk (‘‘RWR’’). rule change is consistent with the
Self-Regulatory Organizations; LCH Specifically, a WWR currency offset is requirements of Section 17A of the
SA; Notice of Filing of Proposed Rule applied as the greater of: (x) the WWR Securities Exchange Act of 1934 3 (the
Change, Security-Based Swap amount in Euros minus the RWR ‘‘Act’’) and the regulations thereunder,
Submission, or Advance Notice amount in Euros, where non-Euro including the standards under Rule
Relating to Wrong Way Risk Margin amounts are converted to Euros using a 17Ad–22(b)(1) and (2).4 Specifically, in
foreign exchange (‘‘FX’’) rate plus or accordance with Section 17(A)(b)(3)(F),5
November 9, 2017. minus a haircut; and (y) the WWR LCH SA believes that the proposed rule
Pursuant to Section 19(b)(1) of the amount in Euros multiplied by 1 minus change will assure the safeguarding of
Securities Exchange Act of 1934 a factor, which represents the securities and funds which are in the
(‘‘Act’’) 1 and Rule 19b–4 thereunder 2 correlation between European and U.S. custody or control of the clearing agency
notice is hereby given that on October financial institutions by calculating the or for which it is responsible, in that the
30, 2017, Banque Centrale de average historical cross correlation of proposed rule change is designed to
Compensation, which conducts credit spreads on credit default swaps rationalize the WWR currency offset and
business under the name LCH SA (‘‘LCH (‘‘CDS’’) in respect of all pairs of more conservatively calculate the WWR
SA’’), filed with the Securities and European and U.S. financial institutions margin with respect to a clearing
Exchange Commission (‘‘Commission’’) that are clearing members. Under the member. Therefore, LCH SA believes
the proposed rule change described in current calculation, if one currency has that the proposed rule change is
Items I, II, and III below, which Items WWR and the other has RWR, LCH SA consistent with the requirement of
have been prepared primarily by LCH would compare the WWR amount as safeguarding securities and funds in
SA. The Commission is publishing this offset by the RWR to the WWR amount Section 17(A)(b)(3)(F) of the Act and the
notice to solicit comments on the as reduced by taking the correlation requirements of maintaining margin and
proposed rule change from interested factor into account and take the greater limiting a clearing agency’s exposures to
persons. of the two. As a result, either the full potential losses from participants’
amount of RWR is considered as defaults under normal market
I. Clearing Agency’s Statement of the offsetting the WWR, or only a portion of
Terms of Substance of the Proposed conditions in Rule 17Ad–22(b)(1) and
the WWR is taken into account without (2).6
Rule Change any regard to the expected amount of Moreover, LCH SA believes that the
LCH SA is proposing to amend its RWR. proposed rule change is consistent with
Reference Guide: CDS Margin LCH SA believes that it is appropriate the requirements in Rule 17Ad–
Framework (‘‘CDSClear Margin to consider the offset between the WWR 22(e)(6).7 Rule 17Ad–22(e)(6)(i) and (v)
Framework’’ or ‘‘Framework’’) to adjust amount and RWR amount but it would require a covered clearing agency that
the wrong way risk (‘‘WWR’’) margin not be appropriate to apply the provides central counterparty services
component of the Framework to more correlation factor to discount the WWR
to cover its credit exposures to its
appropriately address offsets between amount while also allowing the RWR to
participants by establishing a risk-based
currencies when calculating WWR offset the WWR amount to its full
margin system that, among other things,
margin. extent. To be conservative, LCH SA
considers and produces margin levels
believes that it is appropriate to apply
II. Clearing Agency’s Statement of the commensurate with, the risks and
the correlation factor to the RWR
Purpose of, and Statutory Basis for, the particular attributes of each relevant
amount when using RWR to offset the
Proposed Rule Change product, portfolio, and market, and uses
WWR amount. Accordingly, LCH SA
an appropriate method for measuring
In its filing with the Commission, proposes to modify the WWR currency
credit exposure that accounts for
LCH SA included statements concerning offset formula in the Framework to be
the greater of: (i) the WWR amount in relevant product risk factors and
the purpose of and basis for the portfolio effects across products.8 WWR
proposed rule change and discussed any Euros, where such amounts are
converted to Euros using an FX rate plus is an important risk factor for clearing
comments it received on the proposed CDS products. As noted above, the
rule change. The text of these statements or minus a haircut, minus (ii) the RWR
proposed rule change rationalizes the
asabaliauskas on DSKBBXCHB2PROD with NOTICES

may be examined at the places specified amount multiplied by the 10-year
average historical correlation of credit WWR currency offset and more
in Item IV below. LCH SA has prepared conservatively calculates WWR margin.
summaries, set forth in sections A, B, spreads on CDS in respect of European
and C below, of the most significant and U.S. financial institutions; and zero. 3 15 U.S.C. 78q–1.
aspects of these statements. As of April 2016, the 10-year average 4 17 CFR 240.17Ad–22(b)(1) and (2).
historical correlation of credit spreads 5 15 U.S.C. 78q–1(b)(3)(F).
19 17 CFR 200.30–3(a)(12). on CDS in respect of European and U.S. 6 17 CFR 240.17Ad–22(b)(1) and (2).
1 15 U.S.C. 78s(b)(1). financial institutions was set to 48 7 17 CFR 240.17Ad–22(e)(6).
2 17 CFR 240.19b–4. percent. 8 17 CFR 240.17Ad–22(e)(6)(i) and (v).

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Federal Register / Vol. 82, No. 220 / Thursday, November 16, 2017 / Notices 53537

Therefore, LCH SA believes that the Comments may be submitted by any of SECURITIES AND EXCHANGE
proposed rule change is consistent with the following methods: COMMISSION
Rule 17Ad–22(e)(6)(i) and (v).
Electronic Comments [SEC File No. 270–173, OMB Control No.
B. Clearing Agency’s Statement on • Use the Commission’s Internet 3235–0178]
Burden on Competition comment form (http://www.sec.gov/ Proposed Collection; Comment
Section 17A(b)(3)(I) of the Act rules/sro.shtml); or Request
requires that the rules of a clearing • Send an email to rule-comments@
agency not impose any burden on sec.gov. Please include File Number SR– Upon Written Request, Copies Available
competition not necessary or LCH SA–2017–009 on the subject line. From: Securities and Exchange
appropriate in furtherance of the Commission, Office of FOIA Services,
Paper Comments
purposes of the Act.9 LCH SA does not 100 F Street NE., Washington, DC
believe that the proposed rule change • Send paper comments in triplicate 20549–2736
would impose burdens on competition to Secretary, Securities and Exchange Extension:
that are not necessary or appropriate in Commission, 100 F Street NE., Rule 31a–1
furtherance of the purposes of the Act. Washington, DC 20549–1090.
Notice is hereby given that, pursuant
While the proposed rule change may All submissions should refer to File
to the Paperwork Reduction Act of 1995
result in higher WWR margin charges on Number SR–LCH SA–2017–009. This
(44 U.S.C. 3501–3520), the Securities
participants, the revisions to the margin file number should be included on the
and Exchange Commission
methodology will uniformly apply subject line if email is used. To help the
(‘‘Commission’’) is soliciting comments
across all participants. In addition, as Commission process and review your
on the collections of information
stated above, the proposed rule change comments more efficiently, please use
summarized below. The Commission
is consistent with the applicable only one method. The Commission will
plans to submit these existing
requirements of the Act and is post all comments on the Commission’s
collections of information to the Office
appropriate in order to more Internet Web site (http://www.sec.gov/
of Management and Budget for
conservatively calculate WWR margin. rules/sro.shtml). Copies of the
extension.
Therefore, LCH SA does not believe that submission, all subsequent
Rule 31a–1 (17 CFR 270.31a–1) under
the proposed rule change imposes any amendments, all written statements
the Investment Company Act of 1940
burden on competition that is not with respect to the proposed rule
(the ‘‘Act’’) (15 U.S.C. 80a) is entitled
necessary or appropriate in furtherance change that are filed with the
‘‘Records to be maintained by registered
of the purposes of the Act. Commission, and all written
investment companies, certain majority-
communications relating to the
C. Clearing Agency’s Statement on owned subsidiaries thereof, and other
proposed rule change between the
Comments on the Proposed Rule persons having transactions with
Commission and any person, other than
Change Received From Members, registered investment companies.’’ Rule
those that may be withheld from the
Participants or Others 31a–1 requires registered investment
public in accordance with the
companies (‘‘funds’’), and every
Written comments relating to the provisions of 5 U.S.C. 552, will be
underwriter, broker, dealer, or
proposed rule change have not been available for Web site viewing and
investment adviser that is a majority-
solicited or received. LCH SA will printing in the Commission’s Public
owned subsidiary of a fund, to maintain
notify the Commission of any written Reference Room, 100 F Street NE.,
and keep current accounts, books, and
comments received by LCH SA. Washington, DC 20549 on official
other documents which constitute the
business days between the hours of
III. Date of Effectiveness of the record forming the basis for financial
10:00 a.m. and 3:00 p.m. Copies of the
Proposed Rule Change and Timing for statements required to be filed pursuant
filing also will be available for
Commission Action to section 31 of the Act (15 U.S.C. 80a–
inspection and copying at the principal
30) and of the auditor’s certificates
Within 45 days of the date of office of LCH SA and on LCH SA’s Web
relating thereto. The rule lists specific
publication of this notice in the Federal site at http://www.lch.com/asset-
records to be maintained by funds. The
Register or within such longer period classes/cdsclear.
rule also requires certain underwriters,
up to 90 days (i) as the Commission may All comments received will be posted
brokers, dealers, depositors, and
designate if it finds such longer period without change. Persons submitting
investment advisers to maintain the
to be appropriate and publishes its comments are cautioned that we do not
records that they are required to
reasons for so finding or (ii) as to which redact or edit personal identifying
maintain under federal securities laws.
the self-regulatory organization information from comment submissions.
There are approximately 4,029
consents, the Commission will: You should submit only information
investment companies registered with
(A) By order approve or disapprove that you wish to make available
the Commission, all of which are
such proposed rule change, or publicly. All submissions should refer
required to comply with rule 31a–1. For
(B) institute proceedings to determine to File Number SR–LCH SA–2017–009
purposes of determining the burden
whether the proposed rule change and should be submitted on or before
imposed by rule 31a–1, the Commission
should be disapproved. December 7, 2017.
staff estimates that each fund is divided
For the Commission, by the Division of
asabaliauskas on DSKBBXCHB2PROD with NOTICES

IV. Solicitation of Comments into approximately four series, on
Trading and Markets, pursuant to delegated average, and that each series is required
Interested persons are invited to authority.10 to comply with the recordkeeping
submit written data, views, and Eduardo A. Aleman, requirements of rule 31a–1. Based on
arguments concerning the foregoing, Assistant Secretary. conversations with fund representatives,
including whether the proposed rule [FR Doc. 2017–24784 Filed 11–15–17; 8:45 am] it is estimated that rule 31a–1 imposes
change is consistent with the Act. BILLING CODE 8011–01–P an average burden of approximately
1,750 hours annually per series for a
9 15 U.S.C. 78q–1(b)(3)(I). 10 17 CFR 200.30–3(a)(12). total of 7,000 annual hours per fund.

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Document Created: 2017-11-16 03:53:46
Document Modified: 2017-11-16 03:53:46
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		82 FR 53536