83 FR 12052 - Self-Regulatory Organizations; LCH SA; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to End of Day Price Contribution

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 53 (March 19, 2018)

[Federal Register Volume 83, Number 53 (Monday, March 19, 2018)]
[Notices]
[Pages 12052-12054]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-05448]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82863; File No. SR-LCH SA-2018-002]


Self-Regulatory Organizations; LCH SA; Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change Relating to End of 
Day Price Contribution

March 13, 2018.
    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 March 8, 2018,\3\ 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. LCH SA has filed the proposed rule change pursuant 
to Section 19(b)(3)(A) \4\ of the Act and Rule 19b-4(f)(4) \5\ 
thereunder, so that the proposal was effective upon filing with the 
Commission. 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.
    \3\ This notice supersedes and replaces the notice of this 
proposed rule change previously made public on the Commission's 
website on March 5, 2018.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(4).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    LCH SA is proposing to amend its CDS Clearing Procedures (the 
``Procedures'') in order to implement a new window for end of day price 
contribution for CDX North American indices and related USD denominated 
single name CDS transactions at New York close of business (the 
``Proposed Rule Change'').
    The text of the proposed rule change has been annexed as Exhibit 5.

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
    In connection with the clearing of CDX North American indices and 
related USD denominated single name CDS transactions, LCH SA proposes 
to modify the end of day price contribution process by changing the 
following timelines for a CDS Contractual Currency \6\ in US Dollar:
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    \6\ Capitalized terms not defined herein are defined in LCH SA's 
Rulebook, available at: https://www.lch.com/resources/rules-and-regulations/sa-rulebooks.

--The daily Price Requirement Files availability for download from 
between 14:30 and 15:00 GMT to from 14:30 New York City local time 
except when the Price Contribution Day occurs on the Price Contribution 
Day immediately preceding 1st January, 4th July or 25th December for 
which the files may be available earlier as notified by LCH SA in 
advance;
--The daily Market Data submission by Price Contribution Participants 
from between 16:00 and 16:35 GMT to between 16:30 and 16:35 New York 
City local time, except when the Price Contribution Day occurs on the 
Price Contribution Day immediately preceding 1st January, 4th July or 
25th December for which the files may be available earlier as notified 
by LCH SA in advance;
--The fallback to composite spread/prices from 17:15 GMT to 17:15 New 
York City local time;
--The disclosure of the occurrence of a Firm Day to Price Contribution 
Participants from promptly after the closure of the submission window 
at 16:35 GMT to promptly after the closure of the submission window at 
16:35 New York City local time;
--The execution of a CDS Cross Trade by Price Contribution Participants 
on a Firm Day from prior to 18:30 GMT to prior to 17:30 New York City 
local time;
--The notification of execution of Cross Trades on a Firm Day by a 
Price Contribution Participant to LCH SA from before 18:30 GMT to 
before 17:30 New York City local time.

    LCH SA is also taking this opportunity to make the following 
amendments to Section 5 of the Procedures with respect to the timeline 
of the end of day price contribution process for a CDS with a CDS 
Contractual Currency in Euro and an Index Swaption:

--The daily Price Requirement Files availability for download from 
between 14:30 and 15:00 GMT to from 13:15 GMT, except when the Price 
Contribution Day occurs on the Price Contribution Day immediately 
preceding 1st January or 25th December for which the files may be 
available earlier as notified by LCH SA in advance;
--The daily Market Data submission by Price Contribution Participants 
from between 16:00 and 16:35 GMT to between 16:30 and 16:35 GMT, except 
when the Price Contribution Day occurs on the Price Contribution Day 
immediately preceding 1st January or 25th December for which the files 
may be available earlier as notified by LCH SA in advance.

    The main purpose of the Proposed Rule Change is to allow LCH SA to 
mark to market USD denominated index and

[[Page 12053]]

single names positions with prices contributed at the close rather than 
in the middle of the trading session for these instruments such that 
both the Initial Margin and Variation Margin to be settled at the 
following First Margin Run are reflecting accurately the entirety of 
the previous trading session and the associated market moves.
2. Statutory Basis
    LCH SA believes that the Proposed Rule Change is consistent with 
the requirements of Section 17A of the Act \7\ and regulations 
thereunder applicable to it, including the standards under Rule 17Ad-
22.\8\
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    \7\ 15 U.S.C. 78q-1.
    \8\ 17 CFR 240.17Ad-22.
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    Specifically, Section 17A(b)(3)(F) \9\ of the Act requires, among 
other things, that the rules of a clearing agency be designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions and derivative agreements, contracts, and transactions and 
to assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible. As noted above, the Proposed Rule Change will allow LCH SA 
to reflect more accurately in its Initial Margin and Variation Margin 
calculations the entirety of the market moves for USD denominated index 
and single names observed in the previous trading session, and thus 
further strengthen the safeguarding of securities and funds under 
control of LCH SA.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    LCH SA believes that the Proposed Rule Change satisfies the 
requirements of Rule 17Ad-22(b)(2), (b)(3), (e)(1), (e)(4), and 
(e)(6).\10\
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    \10\ 17 CFR 240.17Ad-22(b)(2), (b)(3), (e)(1), (e)(4), and 
(e)(6).
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    Rule 17Ad-22(b)(2) requires a clearing agency acting as a central 
counterparty to use margin requirements to limit its credit exposures 
to participants under normal market conditions and to use risk-based 
models and parameters to set margin requirements.\11\ Rule 17Ad-
22(b)(3) \12\ requires each clearing agency acting as a central 
counterparty for security-based swaps to maintain sufficient financial 
resources to withstand, at a minimum, a default by the two participant 
families to which it has the largest exposure in extreme but plausible 
market conditions (the ``cover two standard''). Rule 17Ad-22(e)(4)(i) 
requires a covered clearing agency to effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
arising from its payment, clearing and settlement processes by 
maintaining sufficient financial resources to cover its credit exposure 
to each participant fully with a high degree of confidence,\13\ and 
Rule 17Ad-22(e)(6) requires 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 meets 
certain minimum requirements.\14\
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    \11\ 17 CFR 240.17Ad-22(b)(2).
    \12\ 17 CFR 240.17Ad-22(b)(3).
    \13\ 17 CFR 240.17Ad-22(e)(4)(i).
    \14\ 17 CFR 240.17Ad-22(e)(6).
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    As described above, LCH SA proposes to amend the timeline of the 
end of price contribution process for USD denominated index and single 
name positions to reflect the market moves observed during the entirety 
of the previous trading session in the calculation of the Initial 
Margin and Variation Margin to be settled at the following First Margin 
Run. This implies that the margin requirements set by LCH SA and use of 
such margin requirements limit LCH SA's credit exposures to 
participants in clearing USD denominated index and single name CDS 
transactions under normal market conditions, consistent with Rule 17Ad-
22(b)(2).\15\ LCH SA also believes that its current risk-based margin 
methodology, by relying on prices contributed at the close of the 
trading session, takes into account, and generates margin levels 
commensurate with, the risks and particular attributes of USD 
denominated index and single name CDS transactions at the product and 
portfolio levels, appropriate to the relevant market it serves, 
consistent with Rule 17Ad-22(e)(6)(i) and (v).\16\ In addition, LCH SA 
believes that the margin calculation under the current CDSClear margin 
framework and based on prices for USD denominated index and single name 
positions contributed at the close of the trading session would also 
sufficiently account for the 5-day liquidation period for house account 
portfolio and 7-day liquidation period for client portfolio and 
therefore, is reasonably designed to cover LCH SA's potential future 
exposure to participants in the interval between the last margin 
collection and the close out of positions following a participant 
default, consistent with Rule 17Ad-22(e)(6)(iii).\17\
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    \15\ 17 CFR 240.17Ad-22(b)(2).
    \16\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
    \17\ 17 CFR 240.17Ad-22(e)(6)(iii).
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    Further, Rule 17Ad-22(b)(3) requires a clearing agency acting as a 
central counterparty for security-based swaps to establish policies and 
procedures reasonably designed to maintain the cover two standard.\18\ 
Similarly, Rule 17Ad-22(e)(4)(ii) requires a covered clearing agency 
that provides central counterparty services for security-based swaps to 
maintain financial resources additional to margin to enable it to cover 
a wide range of foreseeable stress scenarios that include, but are not 
limited to, meeting the cover two standard.\19\ LCH SA believes that 
its current Default Fund methodology based on prices for USD 
denominated index and single name positions provided at the close of 
the trading session will also appropriately incorporate the risk of 
clearing USD denominated index and single name CDS transactions, as 
together with the existing CDSClear margin framework, will be 
reasonably designed to ensure that LCH SA maintains sufficient 
financial resources to meet the cover two standard, in accordance with 
Rule 17Ad-22(b)(3) and (e)(4)(ii).\20\
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    \18\ 17 CFR 240.17Ad-22(b)(3).
    \19\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \20\ 17 CFR 240.17Ad-22(b)(3) and (e)(4)(ii).
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    LCH SA also believes that the proposed rule change is consistent 
with Rule 17Ad-22(e)(1), which requires each covered clearing agency's 
policies and procedures be reasonably designed to provide for a well-
founded, clear, transparent, and enforceable legal basis for each 
aspect of its activities in all relevant jurisdictions.\21\ As 
described above, the proposed rule change would make a clear 
distinction on the timelines associated to the end of day price 
contribution process for Euro and USD denominated positions. LCH SA 
believes that this change would provide for a clear and transparent 
legal basis for CDSClear clearing members' requirement to provide 
accurate prices on all of their open positions, consistent with Rule 
17Ad-22(e)(1).\22\
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    \21\ 17 CFR 240.17Ad-22(e)(1).
    \22\ 17 CFR 240.17Ad-22(e)(1).
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    For the reasons stated above, LCH SA believes that the proposed 
rule change is consistent with the requirements of prompt and accurate 
clearance and settlement of securities transactions and derivatives 
agreements, contracts and transactions, and assuring the safeguarding 
of securities and funds in the custody or control of the clearing 
agency or for which it is responsible, in accordance with 17A(b)(3)(F) 
of the Act.\23\
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
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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 do not impose any burden on

[[Page 12054]]

competition not necessary or appropriate in furtherance of the purposes 
of the Act.\24\
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    \24\ 15 U.S.C. 78q-1(b)(3)(I).
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    The Proposed Rule Change will apply equally to all CDSClear members 
and clients and does not adversely affect their ability to engage in 
cleared transactions or to access clearing services offered by LCH SA 
CDSClear.
    Therefore, LCH SA does not believe that the Proposed Rule Change 
would have any impact, or impose any burden, on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \25\ and paragraph (f) of Rule 19b-4 
thereunder.\26\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
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    \25\ 15 U.S.C. 78s.
    \26\ 17 CFR 240.19b-4.
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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-2018-002 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-2018-002. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 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 website 
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-2018-002 and should 
be submitted on or before April 9, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
Eduardo A. Aleman,
Assistant Secretary.
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    \27\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-05448 Filed 3-16-18; 8:45 am]
BILLING CODE 8011-01-P