82_FR_61026 82 FR 60781 - Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Wrong Way Risk Margin

82 FR 60781 - Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Wrong Way Risk Margin

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 245 (December 22, 2017)

Page Range60781-60782
FR Document2017-27563

Federal Register, Volume 82 Issue 245 (Friday, December 22, 2017) 
[Federal Register Volume 82, Number 245 (Friday, December 22, 2017)]
[Notices]
[Pages 60781-60782]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-27563]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82345; File No. SR-LCH SA-2017-009]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to Wrong Way Risk Margin

December 18, 2017.

I. Introduction

    On October 30, 2017, Banque Central 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-2017-009) to amend its 
Reference Guide: CDS Margin Framework (``CDSClear Margin Framework'' or 
``Framework'') to adjust the manner in which the wrong way risk 
(``WWR'') margin component of the Framework addresses offsets between 
currencies when calculating WWR margin. The proposed rule change was 
published for comment in the Federal Register on November 16, 2017.\3\ 
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\ Securities Exchange Act Release No. 34-82043 (November 9, 
2017), 82 FR 53536 (November 16, 2017) (SR-LCH-SA-2017-009) 
(``Notice'').
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II. Description of the Proposed Rule Change

    LCH SA has proposed to amend its CDSClear Margin Framework to 
adjust the manner in which the WWR margin component of the Framework 
addresses offsets between currencies when calculating WWR margin. 
According to LCH SA, 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 provides for offsets between currencies by allowing 
offset between WWR and right way risk (``RWR''). Specifically, under 
the current approach, a WWR currency offset is applied as the greater 
of: (x) The WWR amount in Euros minus the RWR amount in Euros \4\; and 
(y) the WWR amount in Euros multiplied by 1 minus a factor representing 
the correlation between European and U.S. financial institutions by 
calculating the average historical cross correlation of credit spreads 
on credit default swaps (``CDS'') with respect to all pairs of European 
and U.S. financial institutions that are clearing members of LCH SA.\5\ 
Under this approach, 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, which is reduced by scaling the WWR by 1 minus the correlation 
factor, and take the greater of these two amounts.\6\ As a result, 
either the full amount of RWR is allowed to offset the WWR, or only a 
portion of the WWR is taken into account without any regard to the 
amount of RWR.\7\
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    \4\ Amounts not denominated in Euros are converted to Euros 
using a foreign exchange rate plus or minus a haircut. See, Notice, 
82 FR at 53536.
    \5\ Id.
    \6\ Id.
    \7\ Id.
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    LCH SA proposed to revise this approach by amending the WWR 
currency offset formula in the Framework to set the WWR margin 
component of Framework as the greater of: (i) The WWR amount in Euros, 
minus 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 (ii) zero. Thus, under the proposed 
approach, RWR would never completely offset WWR, but rather would 
offset WWR after discounting it based on the average of observed 
correlations of CDS credit spreads with respect to European and U.S. 
financial institutions.\8\
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    \8\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\9\ Section 17A(b)(3)(F) of the Act \10\ requires, among 
other things, 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, as well as to assure the 
safeguarding of securities and funds which are in the custody and 
control of the clearing agency or for which it is responsible, and to 
protect investors and the public interest. Rule

[[Page 60782]]

17Ad-22(b)(2) requires, in relevant part, a registered clearing agency 
that performs central counterparty services to establish, implement, 
maintain and enforce written policies and procedures that are 
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.\11\ Rules 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.\12\
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    \9\ 15 U.S.C. 78s(b)(2)(C).
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22(b)(2).
    \12\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A(b)(3)(F) of the Act and the relevant provisions of 
Rule 17Ad-22 thereunder. Specifically, the Commission believes that the 
proposed rule change will enhance LCH SA's assessment of the risks 
associated with clearing products that may exhibit WWR, and thereby 
collect an appropriate level of resources, which in turn will improve 
LCH SA's ability to withstand the default of a Clearing Member. As a 
result, the Commission believes that the proposed rule change will 
augment LCH SA's ability to safeguard the securities and funds which 
are in its custody and control. Therefore, the Commission finds that 
the proposed rule change is consistent with the requirements of Section 
17A(b)(3)(F) of the Act.
    Moreover, the Commission believes that WWR is a relevant factor 
when considering the risks associated with clearing securities 
products, including CDS products, and when developing margin models to 
cover credit exposures associated with providing clearance and 
settlement services for such products. By ensuring that it will take 
into consideration both WWR and RWR as proposed, LCH SA will have 
margin that more accurately measures the level of risk, and should 
therefore produce margin requirements that are commensurate with such 
risks, as well as the attributes of the products it clears. 
Accordingly, the Commission finds that the proposed rule change is 
consistent with the requirements of Rule 17Ad-22(b)(2) and Rule 17Ad-
22(e)(6)(i) and (v).

IV. Conclusion

    It Is Therefore Ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-LCH SA-2017-009) be, and hereby is, 
approved.\13\
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    \13\ 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.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-27563 Filed 12-21-17; 8:45 am]
 BILLING CODE 8011-01-P

Federal Register / Vol. 82, No. 245 / Friday, December 22, 2017 / Notices 60781 Electronic Comments SECURITIES AND EXCHANGE a factor representing the correlation COMMISSION between European and U.S. financial • Use the Commission’s internet institutions by calculating the average comment form (http://www.sec.gov/ [Release No. 34–82345; File No. SR–LCH SA–2017–009] historical cross correlation of credit rules/sro.shtml); or spreads on credit default swaps (‘‘CDS’’) • Send an email to rule-comments@ Self-Regulatory Organizations; LCH with respect to all pairs of European and sec.gov. Please include File Number SR– SA; Order Approving Proposed Rule U.S. financial institutions that are CBOE–2017–076 on the subject line. Change Relating to Wrong Way Risk clearing members of LCH SA.5 Under Margin this approach, if one currency has WWR Paper Comments and the other has RWR, LCH SA would December 18, 2017. compare the WWR amount, as offset by • Send paper comments in triplicate I. Introduction the RWR, to the WWR amount, which to Secretary, Securities and Exchange is reduced by scaling the WWR by 1 Commission, 100 F Street NE, On October 30, 2017, Banque Central minus the correlation factor, and take Washington, DC 20549–1090. de Compensation, which conducts the greater of these two amounts.6 As a business under the name LCH SA (‘‘LCH result, either the full amount of RWR is All submissions should refer to File SA’’), filed with the Securities and allowed to offset the WWR, or only a Number SR–CBOE–2017–076. This file Exchange Commission (‘‘Commission’’), portion of the WWR is taken into number should be included on the pursuant to Section 19(b)(1) of the account without any regard to the subject line if email is used. To help the Securities Exchange Act of 1934 Commission process and review your amount of RWR.7 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a LCH SA proposed to revise this comments more efficiently, please use proposed rule change (SR–LCH SA– approach by amending the WWR only one method. The Commission will 2017–009) to amend its Reference currency offset formula in the post all comments on the Commission’s Guide: CDS Margin Framework Framework to set the WWR margin internet website (http://www.sec.gov/ (‘‘CDSClear Margin Framework’’ or component of Framework as the greater rules/sro.shtml). Copies of the ‘‘Framework’’) to adjust the manner in of: (i) The WWR amount in Euros, submission, all subsequent which the wrong way risk (‘‘WWR’’) minus the RWR amount multiplied by amendments, all written statements margin component of the Framework the 10-year average historical with respect to the proposed rule addresses offsets between currencies correlation of credit spreads on CDS in change that are filed with the when calculating WWR margin. The respect of European and U.S. financial Commission, and all written proposed rule change was published for institutions; and (ii) zero. Thus, under communications relating to the comment in the Federal Register on the proposed approach, RWR would proposed rule change between the November 16, 2017.3 The Commission never completely offset WWR, but Commission and any person, other than received no comment letters regarding rather would offset WWR after those that may be withheld from the the proposed change. For the reasons discounting it based on the average of public in accordance with the discussed below, the Commission is observed correlations of CDS credit provisions of 5 U.S.C. 552, will be approving the proposed rule change. spreads with respect to European and available for website viewing and II. Description of the Proposed Rule U.S. financial institutions.8 printing in the Commission’s Public Change III. Discussion and Commission Reference Room, 100 F Street NE, Findings LCH SA has proposed to amend its Washington, DC 20549 on official CDSClear Margin Framework to adjust business days between the hours of Section 19(b)(2)(C) of the Act directs the manner in which the WWR margin the Commission to approve a proposed 10:00 a.m. and 3:00 p.m. Copies of the component of the Framework addresses rule change of a self-regulatory filing also will be available for offsets between currencies when organization if it finds that such inspection and copying at the principal calculating WWR margin. According to proposed rule change is consistent with office of the Exchange. All comments LCH SA, the WWR component of the the requirements of the Act and the received will be posted without change. Framework is designed to cover the rules and regulations thereunder Persons submitting comments are anticipated financial contagion effect applicable to such organization.9 cautioned that we do not redact or edit that would arise in case of a clearing Section 17A(b)(3)(F) of the Act 10 personal identifying information from member being declared in default. The requires, among other things, that the comment submissions. You should current WWR margin formula provides rules of a registered clearing agency be submit only information that you wish for offsets between currencies by designed to promote the prompt and to make available publicly. All allowing offset between WWR and right accurate clearance and settlement of submissions should refer to File way risk (‘‘RWR’’). Specifically, under securities transactions and, to the extent Number SR–CBOE–2017–076 and the current approach, a WWR currency applicable, derivative agreements, should be submitted on or before offset is applied as the greater of: (x) The contracts, and transactions, as well as to January 12, 2018. WWR amount in Euros minus the RWR assure the safeguarding of securities and amount in Euros 4; and (y) the WWR funds which are in the custody and For the Commission, by the Division of amount in Euros multiplied by 1 minus control of the clearing agency or for Trading and Markets, pursuant to delegated authority.16 which it is responsible, and to protect sradovich on DSK3GMQ082PROD with NOTICES 1 15 U.S.C. 78s(b)(1). investors and the public interest. Rule Robert W. Errett, 2 17 CFR 240.19b–4. 3 Securities Exchange Act Release No. 34–82043 Deputy Secretary. 5 Id. (November 9, 2017), 82 FR 53536 (November 16, [FR Doc. 2017–27564 Filed 12–21–17; 8:45 am] 6 Id. 2017) (SR–LCH–SA–2017–009) (‘‘Notice’’). 7 Id. BILLING CODE 8011–01–P 4 Amounts not denominated in Euros are 8 Id. converted to Euros using a foreign exchange rate 9 15 U.S.C. 78s(b)(2)(C). plus or minus a haircut. See, Notice, 82 FR at 16 17 CFR 200.30–3(a)(12). 53536. 10 15 U.S.C. 78q–1(b)(3)(F). VerDate Sep<11>2014 16:59 Dec 21, 2017 Jkt 244001 PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 E:\FR\FM\22DEN1.SGM 22DEN1

60782 Federal Register / Vol. 82, No. 245 / Friday, December 22, 2017 / Notices 17Ad–22(b)(2) requires, in relevant part, 22(b)(2) and Rule 17Ad–22(e)(6)(i) and II. Self-Regulatory Organization’s a registered clearing agency that (v). Statement of the Purpose of, and performs central counterparty services Statutory Basis for, the Proposed Rule to establish, implement, maintain and IV. Conclusion Change enforce written policies and procedures It Is Therefore Ordered pursuant to In its filing with the Commission, the that are reasonably designed to use Section 19(b)(2) of the Act that the self-regulatory organization included margin requirements to limit its credit proposed rule change (SR–LCH SA– statements concerning the purpose of, exposures to participants under normal 2017–009) be, and hereby is, and basis for, the proposed rule change market conditions and use risk-based approved.13 and discussed any comments it received models and parameters to set margin on the proposed rule change. The text requirements.11 Rules 17Ad–22(e)(6)(i) For the Commission by the Division of Trading and Markets, pursuant to delegated of those statements may be examined at and (v) require a covered clearing the places specified in Item IV below. authority.14 agency that provides central The Exchange has prepared summaries, counterparty services to cover its credit Robert W. Errett, set forth in sections A, B, and C below, exposures to its participants by Deputy Secretary. of the most significant parts of such establishing a risk-based margin system [FR Doc. 2017–27563 Filed 12–21–17; 8:45 am] statements. that, among other things, considers and BILLING CODE 8011–01–P produces margin levels commensurate A. Self-Regulatory Organization’s with, the risks and particular attributes Statement of the Purpose of, and the of each relevant product, portfolio, and SECURITIES AND EXCHANGE Statutory Basis for, the Proposed Rule market, and uses an appropriate method COMMISSION Change for measuring credit exposure that 1. Purpose accounts for relevant product risk [Release No. 34–82343; File No. SR–NYSE– factors and portfolio effects across The Exchange proposes to amend its 2017–68] products.12 Price List to provide a rebate for the The Commission finds that the Self-Regulatory Organizations; New NYSE Bonds system.4 proposed rule change is consistent with The Exchange currently does not York Stock Exchange LLC; Notice of Section 17A(b)(3)(F) of the Act and the charge any execution fee for orders in Filing and Immediate Effectiveness of relevant provisions of Rule 17Ad–22 bonds that take liquidity from the NYSE Proposed Rule Change To Amend Its thereunder. Specifically, the Bonds Book. For orders in bonds that Price List To Adopt a Rebate for the Commission believes that the proposed provide liquidity, the Exchange NYSE BondsSM System rule change will enhance LCH SA’s currently provides a rebate of $0.05 per assessment of the risks associated with December 18, 2017. bond, with a maximum rebate of $50 per clearing products that may exhibit execution, for bond liquidity providers Pursuant to Section 19(b)(1) 1 of the that meet the requirements of Rule 88.5 WWR, and thereby collect an Securities Exchange Act of 1934 (the appropriate level of resources, which in The Exchange also currently provides ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 rebates under the Liquidity Provider turn will improve LCH SA’s ability to notice is hereby given that, on December withstand the default of a Clearing Incentive Program 6 pursuant to which 14, 2017, New York Stock Exchange the Exchange pays a daily rebate to a Member. As a result, the Commission LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed believes that the proposed rule change User 7 that is a Member or Member with the Securities and Exchange Organization based on the number of will augment LCH SA’s ability to Commission (the ‘‘Commission’’) the safeguard the securities and funds Qualifying CUSIPs on the NYSE Bonds proposed rule change as described in Book for which a Unique User 8 meets which are in its custody and control. Items I, II, and III below, which Items Therefore, the Commission finds that prescribed quoting requirements. The have been prepared by the self- Exchange is not proposing any change the proposed rule change is consistent regulatory organization. The with the requirements of Section to the bond liquidity provider rebate Commission is publishing this notice to 17A(b)(3)(F) of the Act. solicit comments on the proposed rule 4 The Exchange originally filed to amend the Fee Moreover, the Commission believes change from interested persons. Schedule on December 1, 2017 (SR–NYSE–2017– that WWR is a relevant factor when 65) and withdrew such filing on December 14, considering the risks associated with I. Self-Regulatory Organization’s 2017. clearing securities products, including Statement of the Terms of Substance of 5 There are currently no bond liquidity providers CDS products, and when developing the Proposed Rule Change who meet the requirements of Rule 88 and therefore no rebates are currently provided under the margin models to cover credit exposures program. associated with providing clearance and The Exchange proposes to amend its 6 See Securities Exchange Act Release Nos 77591 settlement services for such products. Price List to adopt a rebate for the NYSE (April 12, 2016), 81 FR 22656 (April 18, 2016) (SR– By ensuring that it will take into BondsSM system. The proposed rule NYSE–2016–26); 77812 (May 11, 2016), 81 FR consideration both WWR and RWR as change is available on the Exchange’s 30594 (May 17, 2016) (SR–NYSE–2016–34); and website at www.nyse.com, at the 79210 (November 1, 2016), 81 FR 78213 (November proposed, LCH SA will have margin that 7, 2016) (SR–NYSE–2016–68). more accurately measures the level of principal office of the Exchange, and at 7 Rule 86(b)(2)(M) defines a User as any Member risk, and should therefore produce the Commission’s Public Reference or Member Organization, Sponsored Participant, or margin requirements that are Room. Authorized Trader that is authorized to access NYSE Bonds. sradovich on DSK3GMQ082PROD with NOTICES commensurate with such risks, as well 8 For purposes of the Liquidity Provider Incentive 13 In approving the proposed rule change, the as the attributes of the products it clears. Program, the term ‘Unique User’ means a User, a Commission considered the proposal’s impact on Accordingly, the Commission finds that efficiency, competition, and capital formation. 15 trading desk of a User, or a customer of a User, on the proposed rule change is consistent whose behalf a Member or Member Organization U.S.C. 78c(f). enters quotes or orders under a Unique User ID that with the requirements of Rule 17Ad– 14 17 CFR 200.30–3(a)(12). such User requests from and is provided by the 1 15 U.S.C. 78s(b)(1). Exchange. See Securities Exchange Act Release No. 11 17 CFR 240.17Ad–22(b)(2). 2 15 U.S.C. 78a. 80934 (June 15, 2017), 82 FR 28173 (June 20, 2017) 12 17 CFR 240.17Ad–22(e)(6)(i) and (v). 3 17 CFR 240.19b–4. (SR–NYSE–2017–27). VerDate Sep<11>2014 16:59 Dec 21, 2017 Jkt 244001 PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 E:\FR\FM\22DEN1.SGM 22DEN1


Document Created: 2017-12-22 00:34:10
Document Modified: 2017-12-22 00:34:10
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 60781 
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