83 FR 28886 - Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Changes Related to LCH SA's Recovery and Wind Down Plans
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 120 (June 21, 2018)
Federal Register Volume 83, Issue 120 (June 21, 2018)
| Page Range | 28886-28890 | |
| FR Document | 2018-13300 |
[Federal Register Volume 83, Number 120 (Thursday, June 21, 2018)] [Notices] [Pages 28886-28890] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-13300] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83451; File Nos. SR-LCH SA-2017-012 and SR-LCH SA-2017- 013] Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Changes Related to LCH SA's Recovery and Wind Down Plans June 15, 2018. I. Introduction On November 30, 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 (LCH SA-2017-012) to adopt a recovery plan (the ``RP''). The proposed rule change was published for comment in the Federal Register on December 19, 2017.\3\ On December 7, 2017, LCH SA filed with the Commission a proposed rule change (LCH SA-2017-013) to adopt a wind down plan (``WDP'').\4\ The proposed rule change was published for comment in the Federal Register on December 19, 2017.\5\ On January 23, 2018, pursuant to Section 19(b)(2) of the Act,\6\ the Commission designated a longer period for Commission action on both proposed rule changes.\7\ On March 19, 2018 the Commission instituted proceedings under Section 19(b)(2)(B) of the Act \8\ to determine whether to approve or disapprove the proposed rule changes.\9\ To date, the Commission has not received any comments on the proposed rule changes. For the reasons discussed below, the Commission is approving the proposed rule changes. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ Securities Exchange Act Release No. 34-82316 (Dec. 13, 2017), 82 FR 60246 (Dec. 19, 2017) (SR-LCH-SA-2017-012) (``Notice 012''). \4\ Capitalized terms used in this order but not defined herein have the same meanings specified in LCH SA's rules. \5\ Securities Exchange Act Release No. 34-82317 (Dec. 13, 2017), 82 FR 60238 (Dec. 19, 2017) (SR-LCH SA-2017-013) (``Notice 013''). \6\ 15 U.S.C. 78s(b)(2). \7\ Securities Exchange Act Release No. 34-82570 (Jan. 23, 2018), 83 FR 4088 (Jan. 29, 2018) (SR-LCH-SA-2017-012) and Securities Exchange Act Release No. 34-82571 (Jan. 23, 2018), 83 FR 4081 (Jan. 29, 2018) (SR-LCH SA-2017-013). \8\ 15 U.S.C. 78s(b)(2)(B). \9\ Securities Exchange Act Release No. 34-82901 (March 19, 2018), 83 FR 12833 (March 23, 2018) (SR-LCH SA-2017-012; SR-LCH SA- 2017-013). --------------------------------------------------------------------------- II. Description of the Proposed Rule Changes 10 --------------------------------------------------------------------------- \10\ The descriptions of the proposed rule changes are substantially excerpted from Notice 012 and Notice 013. --------------------------------------------------------------------------- As a ``covered clearing agency,'' \11\ LCH SA is required to, among other things, ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . maintain a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, general business, investment, custody, and other risks that arise in or are borne by the covered clearing agency, which . . . includes plans for the recovery and orderly wind-down of the covered clearing agency necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses.'' \12\ The Commission has previously clarified that it believes that such recovery and wind-down plans are ``rules'' within the meaning of Exchange Act Section 19(b) and Rule 19b-4 because such plans would constitute changes to a stated policy, practice or interpretation of a covered clearing agency.\13\ Accordingly, a covered clearing agency, such as LCH SA, must file its RP and WDP with the Commission. --------------------------------------------------------------------------- \11\ The term ``covered clearing agency'' is defined in SEC Rule 17Ad-22(a)(5), 17 CFR 240.17Ad-22(a)(5). \12\ 17 CFR 240.17Ad-22(e)(3)(ii). \13\ Standards for Covered Clearing Agencies, Securities Exchange Act Release No. 34-78961 (Sep. 28, 2016), 81 FR 70786, 70809 (Oct. 13, 2016). --------------------------------------------------------------------------- A. The RP (LCH SA-2017-012) LCH SA's RP seeks to maintain the continuity of critical services in times of extreme stress and to facilitate the recovery of LCH SA from such stress. In particular, the RP describes (i) the scenarios and triggers for initiating recovery measures; (ii) various recovery tools used in such recovery; and (iii) the governance framework for managing the RP. Each of those aspects of the RP are discussed in more detail below. The scenarios that could necessitate the implementation of the RP include the default of one or more clearing members, liquidity shortfalls as a result of the default of an investment counterparty of LCH SA or any other investment losses resulting from changes in the market value on the investments, a loss resulting from an event which impacts the critical services provided by LCH SA (e.g., failure in the provision of service by a third party), loss of critical contracts with exchanges, or the operational or financial failure of a financial market infrastructure such as an allied clearing house or trade repository.\14\ --------------------------------------------------------------------------- \14\ See Notice 012, 82 FR at 60247. --------------------------------------------------------------------------- The default management process is used to re-establish a matched book and return to business as usual and therefore LCH SA considers it to be a recovery tool.\15\ When pre-funded resources, such as defaulter's margin, defaulter's default fund contributions, LCH SA's capital, and non-defaulters' default fund contributions, are no longer available to meet obligations due to member and non-member losses, the RP lists various measures and tools that LCH SA can use to return to business as usual.\16\ The RP is organized to discuss each tool according to the nature of the loss the tool is designed to address (e.g., clearing member default losses, liquidity shortfalls, operational, business, and investment risks). The RP also discusses the sequence in which these tools would be used and the relative strength of each.\17\ --------------------------------------------------------------------------- \15\ Id. \16\ Id. at 60249. \17\ Id. at 60249-60250. --------------------------------------------------------------------------- When pre-funded resources have been exhausted after a clearing member default, LCH SA can call a default fund assessment up to a cap, request voluntary payments from all non-defaulting members, and effectuate service closure.\18\ In the event such tools are unavailable, certain other business-as-usual tools, such as default fund additional margin, may enable LCH SA to collect additional resources. --------------------------------------------------------------------------- \18\ Id. at 60249. --------------------------------------------------------------------------- In the event of a liquidity shortfall, LCH SA may use its central bank credit line to deposit securities received on behalf of defaulting clearing members and obtain liquidity.\19\ Other potential tools to manage a liquidity stress situation include limits with respect to illiquid collateral, the application of increased haircuts on certain types of collateral to incentivize the use of more liquid collateral, and specific liquidity margins.\20\ LCH SA also could defer funding for the settlement platform for a limited period of time, but views this as a tool of last resort.\21\ --------------------------------------------------------------------------- \19\ Id. \20\ Id. \21\ Id. --------------------------------------------------------------------------- For most investment, business, and operational losses, LCH SA can allocate [[Page 28887]] its capital surplus against losses.\22\ Further down the list of preferable recovery tools for non-clearing member defaults are the abilities to raise capital or utilize insurance meant to cover a specific operational risk event.\23\ For any disruption or loss of a key third-party service provider, LCH SA would be able to exercise several contractual rights and maintains exit plans that are intended to safeguard the continuity of services.\24\ --------------------------------------------------------------------------- \22\ Id. \23\ See Notice 012, 82 FR at 60249. \24\ Id. at 60250. --------------------------------------------------------------------------- The RP discusses the governance surrounding its creation, invocation, and operation.\25\ LCH SA relies upon its existing governance forums for both the creation and on-going monitoring and operation of the RP. Specifically, the LCH SA Management Committee is responsible for the preparation of the RP and the monitoring and implementation of the recovery tools set forth in the RP.\26\ The LCH SA Risk Committee reviews and makes a recommendation to the Board, which ultimately has the power to approve the RP.\27\ However, before submission to the LCH SA Risk Committee, the RP is reviewed and validated by the Executive Risk Committee of LCH SA's parent company, LCH Group.\28\ --------------------------------------------------------------------------- \25\ Id. \26\ Id. \27\ Id. \28\ Id. --------------------------------------------------------------------------- The Default Management Group is responsible for the management of clearing member defaults while all critical decisions are escalated and submitted to the LCH SA Default Crisis Management Team (``DCMT'').\29\ The triggering of recovery measures is subject to discussion in the DCMT and approval by the LCH SA CEO.\30\ --------------------------------------------------------------------------- \29\ Id. \30\ Id. --------------------------------------------------------------------------- The management of non-clearing member events will vary based on the nature of the event.\31\ For example, investment losses and liquidity shortfalls are managed by the departments responsible for controlling such risks within the parameters set by the Board.\32\ Similarly, operational risks are managed by each business line in accordance with the operational risk policy approved by the Board.\33\ Business risk is managed by individual business lines, with a second line challenge performed by the risk and finance departments to verify if sufficient capital buffers are available for the applicable business risks.\34\ Matters are escalated to the Management Committee when the RP is triggered and the LCH SA Board will approve implementation of the RP.\35\ --------------------------------------------------------------------------- \31\ Id. \32\ Id. \33\ Id. \34\ Id. \35\ Id. --------------------------------------------------------------------------- B. The WDP (LCH SA-2017-013) In the event a recovery is not successful, LCH SA would invoke its WDP to wind down its operations to full service closure in an orderly manner, thereby minimizing the disruption to clearing members, market participants, and the broader financial system. The WDP would be triggered after a determination by the LCH SA Board that all the recovery tools have been exhausted and have failed to return LCH SA to business as usual.\36\ A voluntary wind-down not precipitated by these extreme events is not considered under the WDP.\37\ The WDP would set forth clear mechanisms for the transfer of LCH SA's membership and business, and would be designed to facilitate continued access to critical services and to minimize market impact.\38\ --------------------------------------------------------------------------- \36\ Notice 013, 82 FR at 60239. \37\ Id. \38\ Id. at 60239-60240. --------------------------------------------------------------------------- The decision to wind down would be taken by the Board and ultimately the LCH SA shareholders, upon advice of the Executive Risk Committee and Local Management Committee (``LMC'').\39\ The LMC or DCMT would monitor the implementation of the WDP.\40\ LCH SA would consult with all relevant regulatory authorities before making a decision to wind down and, unless all clearing services have already been closed, the French Autorit[eacute] de Contr[ocirc]le Prudentiel et de Resolution (``ACPR'') would have to approve such a decision.\41\ LCH SA would also keep relevant regulatory authorities regularly informed of the plan's implementation.\42\ If LCH SA was in resolution at the time, the relevant regulatory authority governing the resolution of LCH SA would need to make the decision to wind-down.\43\ --------------------------------------------------------------------------- \39\ Id. at 60239. \40\ Id. \41\ Id. \42\ Id. \43\ Id. --------------------------------------------------------------------------- The WDP assumes that LCH SA's businesses would be wound down until full closure, including the closure of all its business lines at the same time.\44\ This is a worst case assumption, however, and the WDP acknowledges that it is likely that in the phases preceding the decision to wind-down, some business lines will have been closed, transferred, or scaled down.\45\ --------------------------------------------------------------------------- \44\ Id. \45\ Id. --------------------------------------------------------------------------- The WDP provides that LCH SA would publish written notice to the clearing members that a wind-down event has occurred and potential dates by which transactions will no longer be accepted for clearing.\46\ In a non-default situation or in a situation where the corresponding business line is still active, LCH SA would attempt to give clearing members the maximum time necessary to clear transactions in the normal course, close-out positions, and switch to another central counterparty.\47\ --------------------------------------------------------------------------- \46\ Id. at 60239-60240. \47\ Id. at 60240 --------------------------------------------------------------------------- In line with the RP, the WDP describes the functions of LCH SA and distinguishes critical functions that LCH SA provides to the market (all of LCH SA's clearing functions are considered critical); services that are critical to the support of LCH SA's critical functions (such as IT, risk, operations, and collateral and risk management); and non- critical support functions (such as finance, legal, and human resources). The WDP then provides detail about the closure of these functions. For instance, the treasury function would close once all clearing services have ceased and monies are paid by LCH SA and its members.\48\ Further, once the WDP is implemented, LCH SA would deposit remaining cash in central bank accounts or invest the cash in instruments with maturities no longer than same-day repos.\49\ LCH SA would keep active any other supporting operational, information technology, or risk functions until all positions are closed.\50\ Finally, the WDP describes the closure of LCH SA's clearing services and provides citations to the various clearing services' rule book provisions giving a legal basis for the actions taken to effectuate the WDP.\51\ --------------------------------------------------------------------------- \48\ Id. at 60240. \49\ Id. \50\ Id. \51\ Id. --------------------------------------------------------------------------- The WDP further notes that LCH SA's contractual agreements with third-party service providers, such as information technology or venue providers, contain wind-down provisions that permit LCH SA to exit the agreements under particular conditions.\52\ --------------------------------------------------------------------------- \52\ Id. --------------------------------------------------------------------------- Separately from the WDP, but in line with the processes and timeline described in the WDP, LCH SA calculates the costs required for a wind down. These costs encompass staff salaries, indemnities for staff departure, [[Page 28888]] costs to be paid to suppliers during notice periods, and all foreseeable costs that would be due in the event of a wind-down.\53\ Based on these calculations, the WDP concludes that these costs would be less than the capital LCH SA holds under EU regulations (capital equal to the operating expenses for a six (6) month period) and that LCH SA would be in a position to close the company within six months of the decision to wind-down.\54\ --------------------------------------------------------------------------- \53\ Id. \54\ Id. --------------------------------------------------------------------------- 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.\55\ For the reasons given below, the Commission finds that the proposed rule changes are consistent with Section 17A(b)(3)(F) of the Act \56\ and Rules 17Ad-22(e)(2)(i), (iii), and (v), 17Ad- 22(e)(3)(ii), and 17Ad-22(e)(15)(i)-(ii) thereunder.\57\ --------------------------------------------------------------------------- \55\ 15 U.S.C. 78s(b)(2)(C). \56\ 15 U.S.C. 78q-1(b)(3)(F). \57\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v); (e)(3)(ii); (e)(15)(i)-(ii). --------------------------------------------------------------------------- A. Consistency With Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of LCH SA be designed to promote the prompt and accurate clearance and settlement of securities transactions and, to the extent applicable, derivative agreements, contracts, and transactions, as well as to assure the safeguarding of securities and funds which are in the custody or control of LCH SA or for which it is responsible, and, in general, to protect investors and the public interest.\58\ --------------------------------------------------------------------------- \58\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- As described above, the RP would specify the steps that LCH would take in recovery and the governance framework applicable to taking such steps. It would analyze the anticipated impact of the recovery tools, the incentives created by such tools, and the risks associated with using such tools. It would also explain how the tools used in the plan are transparent, measurable, manageable, and controllable. The Commission believes that by specifying the steps LCH SA would take and the tools it would use to bring about recovery in the face of losses, the RP would increase the likelihood that recovery would be orderly, efficient, and successful. In increasing the likelihood that recovery of LCH SA would be orderly, efficient, and successful, the Commission believes that the RP would enhance LCH SA's ability to maintain the continuity of its critical services (including clearance and settlement services) during, through, and following periods of extreme stress giving rise to the need for recovery, thereby promoting the prompt and accurate clearance and settlement of CDS transactions. The Commission also believes that the RP would help assure the safeguarding of securities or funds in the custody or control of LCH SA by reducing the likelihood of a disorderly or unsuccessful recovery, which could otherwise disrupt access to such securities or funds. For the same reason, the Commission also believes the RP would be consistent with the protection of investors and the public interest. Similarly, the Commission believes that the WDP would enhance LCH SA's ability to promote the prompt and accurate clearance and settlement of securities transactions and to safeguard securities and funds in its control by establishing a plan to effectuate an orderly wind down. Specifically, the WDP's governance process and notice provisions would facilitate the orderly close-out of positions and potential transfer of positions to other central counter parties. Therefore, the Commission believes that these provisions would enhance LCH SA's ability to maintain and continue the prompt and accurate clearance and settlement of CDS transactions by assuring that such transactions are closed-out and transferred to other central counterparties in an orderly and transparent manner. Moreover, by specifying in advance the steps LCH SA would take in a wind down, the WDP would assure an efficient and orderly wind down of LCH SA. The Commission believes that this, in turn, would assure the safeguarding of securities or funds in the custody or control of LCH SA by reducing the likelihood of an inefficient or disorderly wind down, which could disrupt access to such securities or funds. Finally, the Commission believes that the WDP's requirement that LCH SA deposit remaining cash in central bank accounts and limit investment options to short term highly-liquid instruments would further enhance LCH SA's ability to safeguard funds in its control by reducing the risk of liquidity constraints and investment losses during a wind down. Therefore, the Commission finds that the proposed rule changes would promote the prompt and accurate clearance and settlement of securities transactions, assure the safeguarding of securities and funds in LCH SA's custody and control, and, in general, protect investors and the public interest, consistent with the Section 17A(b)(3)(F) of the Act.\59\ --------------------------------------------------------------------------- \59\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- B. Consistency With Rules 17Ad-22(e)(2)(i), (iii), and (v) Rules 17Ad-22(e)(2)(i), (iii), and (v) require that LCH SA establish, implement, maintain, and enforce written policies and procedures reasonably designed to provide for governance arrangements that are clear and transparent, that support the public interest requirements in Section 17A of the Act applicable to clearing agencies, and the objectives of owners and participants, and that specify clear and direct lines of responsibility.\60\ --------------------------------------------------------------------------- \60\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v). --------------------------------------------------------------------------- The RP would identify clear lines of responsibility for its preparation and final approval, the monitoring of its use, and the functioning of the recovery tools. The RP would also specify the process LCH SA would take to receive input from various parties at LCH SA, including management committees and the Board. Further, the RP would enhance transparency by including member representatives in the review of the RP. The Commission believes that these lines of control and input from various LCH SA stakeholders can contribute to establishing, implementing, maintain and enforcing clear and transparent governance arrangements that support the public interest requirements in Section 17A of the Act applicable to clearing agencies, and the objectives of owners and participants. The WDP similarly would identify clear lines of responsibility for the invocation, monitoring, and approval of the WDP, and ultimately, a wind down. It would enhance transparency by requiring final approval by the LCH SA shareholders and providing for communication to clearing members and other users of LCH SA's services. The Commission believes that both of these features of the WDP would represent clear and transparent governance arrangements. Therefore, the Commission finds that the proposed rule changes would establish clear and transport governance arrangements for the RP and WDP, [[Page 28889]] consistent with Rules 17Ad-22(e)(2)(i), (iii), and (v).\61\ --------------------------------------------------------------------------- \61\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v). --------------------------------------------------------------------------- C. Consistency With Rule 17Ad-22(e)(3)(ii) Rule 17Ad-22(e)(3)(ii) requires that LCH SA establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, general business, investment, custody, and other risks that arise in or are borne by LCH SA, which includes plans for the recovery and orderly wind-down of LCH SA necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses.\62\ --------------------------------------------------------------------------- \62\ 17 CFR 240.17Ad-22(e)(3)(ii). --------------------------------------------------------------------------- The Commission believes that the information the RP would provide about the steps that LCH SA would take, and the tools it would use, to effectuate a recovery of LCH SA would enhance LCH SA's ability to recover from credit losses, liquidity shortfalls, general business risk losses, or other losses, consistent with Rule 17Ad-22(e)(3)(ii).\63\ Specifically, the information from the RP would enable LCH SA to prepare in advance for the use of such tools and practice the use of such tools, which would in turn enhance LCH SA's ability to use such tools effectively to carry out a successful recovery. In addition, by establishing a single source of information about, and steps needed to effectuate, a recovery of LCH SA, the RP would allow LCH SA personnel to effectuate a recovery in a consistent and coordinated fashion, and would thereby increase the likelihood of a successful recovery. Moreover, by identifying and assessing available recovery tools, the Commission believes that the RP would enhance LCH SA's ability to use such tools effectively to bring about a recovery by identifying in advance which tools may be most effective for different situations or needs, consistent with Rule 17Ad-22(e)(3)(ii).\64\ --------------------------------------------------------------------------- \63\ Id. \64\ Id. --------------------------------------------------------------------------- Similarly, in providing detailed information about the governance requirements related to triggering and implementing the WDP discussed in more detail above, the Commission believes that the WDP would enhance LCH SA's ability to effectuate an orderly wind-down, consistent with Rule 17Ad-22(e)(3)(ii).\65\ Specifically, by setting out in advance the steps LCH SA would take to trigger and effectuate a wind- down, the WDP would enable LCH SA to prepare in advance for a wind- down, and practice the steps needed to effectuate a wind-down, which the Commission believes would enhance LCH SA's ability to use the WDP effectively to carry-out an orderly wind-down. In addition, by establishing a single source of information about, and steps needed to effectuate, a wind-down of LCH SA, the Commission believes the WDP would allow LCH SA personnel to effectuate a wind-down in a consistent and coordinated fashion, and would thereby increase the likelihood of an orderly wind-down. Finally, the WDP would identify the legal basis for LCH's actions with respect to a potential wind-down, including relevant citations to provisions of the rule books of its various clearing services and contractual agreements, which the Commission believes would further facilitate a well-reasoned, legal, and orderly wind-down process by providing LCH SA with a single source of information and steps needed for a wind-down, consistent with Rule 17Ad-22(e)(3)(ii).\66\ --------------------------------------------------------------------------- \65\ Id. \66\ Id. --------------------------------------------------------------------------- Therefore, the Commission finds that the proposed rule changes would be plans for the orderly recovery and wind down of LCH SA, consistent Rule 17Ad-22(e)(3)(ii).\67\ --------------------------------------------------------------------------- \67\ Id. --------------------------------------------------------------------------- D. Consistency With Rules 17Ad-22(e)(15)(i)-(ii) Rules 17Ad-22(e)(15)(i)-(ii) require LCH SA to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that LCH SA can continue operations and services as a going concern if those losses materialize, including by (i) determining the amount of liquid net assets funded by equity based upon its general business risk profile and the length of time required to achieve a recovery or orderly wind-down, as appropriate, of its critical operations and services if such action is taken and (ii) holding liquid net assets funded by equity equal to the greater of either (x) six months of the LCH SA's current operating expenses, or (y) the amount determined by the board of directors to be sufficient to ensure a recovery or orderly wind-down of critical operations and services.\68\ --------------------------------------------------------------------------- \68\ 17 CFR 240.17Ad-22(e)(15)(i)-(ii). --------------------------------------------------------------------------- LCH SA's RP would include a quantitative assessment of the situations that could necessitate a recovery and related recovery tools. This quantitative assessment would consider the potential impact to LCH SA's liquid net assets funded by equity, including its surplus capital. It would also include an assessment of the time to implement the various recovery tools. Thus, the Commission finds that the RP would indicate the potential cost and length of recovery, consistent with Rules 17Ad-22(e)(15)(i)-(ii).\69\ --------------------------------------------------------------------------- \69\ 17 CFR 240.17Ad-22(e)(15)(i)-(ii). --------------------------------------------------------------------------- Similarly, LCH SA's WDP would calculate costs related to a wind down. These costs would include staffing, technological, facilities, legal, and other resources necessary during the actual wind-down period. Further, the WDP concludes, based on recently audited amounts, that LCH SA would hold highly liquid resources corresponding to six months of operating expenses and that this amount would exceed the estimated costs of conducting a wind-down. The WDP also concludes that the length of time it would take LCH SA to wind-down and close clearing services would be six months from the decision to wind-down. Thus, the Commission finds that the WDP would indicate LCH SA's ability to effectuate a wind down within six months of the decision to wind-down at a lower cost than the amount of its liquid resources, consistent with Rules 17Ad-22(e)(15)(i)-(ii).\70\ --------------------------------------------------------------------------- \70\ 17 CFR 240.17Ad-22(e)(15)(i)-(ii). --------------------------------------------------------------------------- Therefore, the Commission finds that the proposed rule changes would determine the length of time required to achieve a recovery or orderly wind-down of LCH SA and the associated costs and would further ensure that LCH SA holds liquid net assets greater than these costs, consistent with Rules 17Ad-22(e)(15)(i)-(ii).\71\ --------------------------------------------------------------------------- \71\ 17 CFR 240.17Ad-22(e)(15)(i)-(ii). --------------------------------------------------------------------------- III. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule changes are consistent with the requirements of the Act, and in particular, Section 17A(b)(3)(F) of the Act \72\ and Rules 17Ad- 22(e)(2)(i), (iii), and (v), 17Ad-22(e)(3)(ii), 17Ad-22(e)(15)(i)-(ii) thereunder.\73\ --------------------------------------------------------------------------- \72\ 15 U.S.C. 78q-1(b)(3)(F). \73\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v); (e)(3)(ii); (e)(15)(i)-(ii). --------------------------------------------------------------------------- It is therefore ordered pursuant to Section 19(b)(2) of the Act that the proposed rule change (SR-LCH SA- [[Page 28890]] 2017-012) be, and hereby is, approved.\74\ --------------------------------------------------------------------------- \74\ In approving the proposed rule change, the Commission considered the proposal's impacts on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). --------------------------------------------------------------------------- It is therefore ordered pursuant to Section 19(b)(2) of the Act that the proposed rule change (SR-LCH SA-2017-013) be, and hereby is, approved.\75\ --------------------------------------------------------------------------- \75\ In approving the proposed rule change, the Commission considered the proposal's impacts 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.\76\ --------------------------------------------------------------------------- \76\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-13300 Filed 6-20-18; 8:45 am] BILLING CODE 8011-01-P
![28886 Federal Register / Vol. 83, No. 120 / Thursday, June 21, 2018 / Notices
should be submitted on or before July approve or disapprove the proposed changes in the market value on the
12, 2018. rule changes.9 To date, the Commission investments, a loss resulting from an
For the Commission, by the Division of has not received any comments on the event which impacts the critical
Trading and Markets, pursuant to delegated proposed rule changes. For the reasons services provided by LCH SA (e.g.,
authority.13 discussed below, the Commission is failure in the provision of service by a
Eduardo A. Aleman, approving the proposed rule changes. third party), loss of critical contracts
Assistant Secretary. II. Description of the Proposed Rule with exchanges, or the operational or
[FR Doc. 2018–13299 Filed 6–20–18; 8:45 am] Changes 10 financial failure of a financial market
infrastructure such as an allied clearing
BILLING CODE 8011–01–P As a ‘‘covered clearing agency,’’ 11 house or trade repository.14
LCH SA is required to, among other The default management process is
things, ‘‘establish, implement, maintain used to re-establish a matched book and
SECURITIES AND EXCHANGE and enforce written policies and
COMMISSION return to business as usual and therefore
procedures reasonably designed to . . . LCH SA considers it to be a recovery
[Release No. 34–83451; File Nos. SR–LCH maintain a sound risk management tool.15 When pre-funded resources, such
SA–2017–012 and SR–LCH SA–2017–013] framework for comprehensively as defaulter’s margin, defaulter’s default
managing legal, credit, liquidity, fund contributions, LCH SA’s capital,
Self-Regulatory Organizations; LCH operational, general business, and non-defaulters’ default fund
SA; Order Approving Proposed Rule investment, custody, and other risks contributions, are no longer available to
Changes Related to LCH SA’s that arise in or are borne by the covered meet obligations due to member and
Recovery and Wind Down Plans clearing agency, which . . . includes non-member losses, the RP lists various
plans for the recovery and orderly wind- measures and tools that LCH SA can use
June 15, 2018.
down of the covered clearing agency to return to business as usual.16 The RP
I. Introduction necessitated by credit losses, liquidity is organized to discuss each tool
shortfalls, losses from general business according to the nature of the loss the
On November 30, 2017, Banque
risk, or any other losses.’’ 12 The tool is designed to address (e.g., clearing
Centrale de Compensation, which
Commission has previously clarified member default losses, liquidity
conducts business under the name LCH
that it believes that such recovery and shortfalls, operational, business, and
SA (‘‘LCH SA’’), filed with the
wind-down plans are ‘‘rules’’ within the investment risks). The RP also discusses
Securities and Exchange Commission
meaning of Exchange Act Section 19(b)
(‘‘Commission’’), pursuant to Section the sequence in which these tools
and Rule 19b–4 because such plans
19(b)(1) of the Securities Exchange Act would be used and the relative strength
would constitute changes to a stated
of 1934 (‘‘Act’’) 1 and Rule 19b–4 of each.17
policy, practice or interpretation of a
thereunder,2 a proposed rule change When pre-funded resources have been
covered clearing agency.13 Accordingly,
(LCH SA–2017–012) to adopt a recovery exhausted after a clearing member
a covered clearing agency, such as LCH
plan (the ‘‘RP’’). The proposed rule default, LCH SA can call a default fund
SA, must file its RP and WDP with the
change was published for comment in assessment up to a cap, request
Commission.
the Federal Register on December 19, voluntary payments from all non-
2017.3 On December 7, 2017, LCH SA A. The RP (LCH SA–2017–012) defaulting members, and effectuate
filed with the Commission a proposed LCH SA’s RP seeks to maintain the service closure.18 In the event such tools
rule change (LCH SA–2017–013) to continuity of critical services in times of are unavailable, certain other business-
adopt a wind down plan (‘‘WDP’’).4 The extreme stress and to facilitate the as-usual tools, such as default fund
proposed rule change was published for recovery of LCH SA from such stress. In additional margin, may enable LCH SA
comment in the Federal Register on particular, the RP describes (i) the to collect additional resources.
December 19, 2017.5 On January 23, scenarios and triggers for initiating In the event of a liquidity shortfall,
2018, pursuant to Section 19(b)(2) of the recovery measures; (ii) various recovery LCH SA may use its central bank credit
Act,6 the Commission designated a tools used in such recovery; and (iii) the line to deposit securities received on
longer period for Commission action on governance framework for managing the behalf of defaulting clearing members
both proposed rule changes.7 On March RP. Each of those aspects of the RP are and obtain liquidity.19 Other potential
19, 2018 the Commission instituted discussed in more detail below. tools to manage a liquidity stress
proceedings under Section 19(b)(2)(B) of The scenarios that could necessitate situation include limits with respect to
the Act 8 to determine whether to the implementation of the RP include illiquid collateral, the application of
the default of one or more clearing increased haircuts on certain types of
13 17 CFR 200.30–3(a)(12). members, liquidity shortfalls as a result collateral to incentivize the use of more
1 15 U.S.C. 78s(b)(1).
of the default of an investment liquid collateral, and specific liquidity
2 17 CFR 240.19b–4.
counterparty of LCH SA or any other margins.20 LCH SA also could defer
3 Securities Exchange Act Release No. 34–82316
investment losses resulting from funding for the settlement platform for
(Dec. 13, 2017), 82 FR 60246 (Dec. 19, 2017) (SR–
LCH–SA–2017–012) (‘‘Notice 012’’). a limited period of time, but views this
4 Capitalized terms used in this order but not 9 Securities Exchange Act Release No. 34–82901 as a tool of last resort.21
defined herein have the same meanings specified in (March 19, 2018), 83 FR 12833 (March 23, 2018) For most investment, business, and
LCH SA’s rules. (SR–LCH SA–2017–012; SR–LCH SA–2017–013). operational losses, LCH SA can allocate
5 Securities Exchange Act Release No. 34–82317 10 The descriptions of the proposed rule changes
amozie on DSK3GDR082PROD with NOTICES1
(Dec. 13, 2017), 82 FR 60238 (Dec. 19, 2017) (SR– are substantially excerpted from Notice 012 and 14 See Notice 012, 82 FR at 60247.
LCH SA–2017–013) (‘‘Notice 013’’). Notice 013. 15 Id.
6 15 U.S.C. 78s(b)(2). 11 The term ‘‘covered clearing agency’’ is defined
16 Id. at 60249.
7 Securities Exchange Act Release No. 34–82570 in SEC Rule 17Ad–22(a)(5), 17 CFR 240.17Ad–
17 Id. at 60249–60250.
(Jan. 23, 2018), 83 FR 4088 (Jan. 29, 2018) (SR– 22(a)(5).
18 Id. at 60249.
LCH–SA–2017–012) and Securities Exchange Act 12 17 CFR 240.17Ad–22(e)(3)(ii).
19 Id.
Release No. 34–82571 (Jan. 23, 2018), 83 FR 4081 13 Standards for Covered Clearing Agencies,
(Jan. 29, 2018) (SR–LCH SA–2017–013). Securities Exchange Act Release No. 34–78961 20 Id.
8 15 U.S.C. 78s(b)(2)(B). (Sep. 28, 2016), 81 FR 70786, 70809 (Oct. 13, 2016). 21 Id.
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![28890 Federal Register / Vol. 83, No. 120 / Thursday, June 21, 2018 / Notices
2017–012) be, and hereby is, Members 5 and non-Members of the with the amounts assessed by other
approved.74 Exchange pursuant to EDGA Rule exchanges for similar connections.6
It is therefore ordered pursuant to 15.1(a) and (c) to modify its fees for The Exchange also proposes to adopt
Section 19(b)(2) of the Act that the physical ports. separate physical port fees for
proposed rule change (SR–LCH SA– The text of the proposed rule change connection to its secondary data center,
2017–013) be, and hereby is, is available at the Exchange’s website at which is predominantly maintained for
approved.75 www.markets.cboe.com, at the principal business continuity purposes (‘‘Disaster
For the Commission, by the Division of
office of the Exchange, and at the Recovery Systems’’). Particularly, the
Trading and Markets, pursuant to delegated Commission’s Public Reference Room. Disaster Recovery Systems can be
authority.76 accessed via physical ports in Chicago.
II. Self-Regulatory Organization’s
Eduardo A. Aleman, Members and Non-Members may
Statement of the Purpose of, and
maintain physical ports in order to be
Assistant Secretary. Statutory Basis for, the Proposed Rule
able to connect to the Disaster Recovery
[FR Doc. 2018–13300 Filed 6–20–18; 8:45 am] Change
Systems in case of a disaster. Currently,
BILLING CODE 8011–01–P In its filing with the Commission, the physical ports that are used to connect
Exchange included statements to the Disaster Recovery Systems are
concerning the purpose of and basis for assessed the same fees as physical ports
SECURITIES AND EXCHANGE the proposed rule change and discussed used to connect to the Exchange’s
COMMISSION any comments it received on the trading system. The Exchange proposes
[Release No. 34–83449; File No. SR– proposed rule change. The text of these to establish separate pricing for physical
CboeEDGA–2018–010] statements may be examined at the ports that are used to connect to the
places specified in Item IV below. The Disaster Recovery Systems (‘‘Disaster
Self-Regulatory Organizations; Cboe Exchange has prepared summaries, set Recovery Physical Ports’’). Specifically,
EDGA Exchange, Inc.; Notice of Filing forth in Sections A, B, and C below, of the Exchange proposes to assess a
and Immediate Effectiveness of a the most significant parts of such monthly fee of $2,000 per 1 gigabyte
Proposed Rule Change Related to statements. Disaster Recovery Physical Port and a
Physical Port Fees for EDGA monthly fee of $6,000 per 10 gigabyte
A. Self-Regulatory Organization’s
June 15, 2018. Statement of the Purpose of, and the Disaster Recovery Physical Port. This
Statutory Basis for, the Proposed Rule amount will continue to enable the
Pursuant to Section 19(b)(1) of the
Change Exchange to maintain the Disaster
Securities Exchange Act of 1934 (the
Recovery Physical Ports in case they
‘‘Act’’),1 and Rule 19b–4 thereunder,2 1. Purpose become necessary. The Exchange notes
notice is hereby given that on June 1,
The Exchange proposes to implement that the Disaster Recovery Physical
2018, Cboe EDGA Exchange, Inc. (the
proposed changes to its fee schedule Ports may also be used to access the
‘‘Exchange’’ or ‘‘EDGA’’) filed with the Disaster Recovery Systems for the
Securities and Exchange Commission relating to physical connectivity fees,
effective June 1, 2018. By way of following affiliate exchanges Cboe BZX
(‘‘Commission’’) the proposed rule Exchange, Inc., Cboe EDGX Exchange,
change as described in Items I, II and III background, a physical port is utilized
by a Member or non-Member to connect Inc., Cboe BYX Exchange, Inc., Cboe C2
below, which Items have been prepared Exchange, Inc., Cboe Exchange, Inc. and
by the Exchange. The Exchange has to the Exchange at the data centers
where the Exchange’s servers are Cboe Futures Exchange, LLC as well.
designated the proposed rule change as The Exchange proposes to provide that
one establishing or changing a member located. The Exchange currently
maintains a presence in two third-party market participants will only be
due, fee, or other charge imposed by the assessed a single fee for any Disaster
Exchange under Section 19(b)(3)(A)(ii) data centers: (i) The primary data center
where the Exchange’s business is Recovery Physical Port that also
of the Act 3 and Rule 19b–4(f)(2) accesses the Disaster Recover Systems
thereunder,4 which renders the primarily conducted on a daily basis,
and (ii) a secondary data center, which for these exchanges.7
proposed rule change effective upon
filing with the Commission. The is predominantly maintained for 2. Statutory Basis
Commission is publishing this notice to business continuity purposes. The The Exchange believes that the
solicit comments on the proposed rule Exchange currently assesses the proposed rule change is consistent with
change from interested persons. following physical connectivity fees for the objectives of Section 6 of the Act,8
Members and non-Members on a in general, and furthers the objectives of
I. Self-Regulatory Organization’s monthly basis: $2,000 per physical port
Statement of the Terms of Substance of Section 6(b)(4),9 in particular, as it is
for a 1 gigabyte circuit and $7,000 per designed to provide for the equitable
the Proposed Rule Change physical port for a 10 gigabyte circuit. allocation of reasonable dues, fees and
The Exchange filed a proposal to The Exchange proposes to increase the other charges among its Members and
amend its fees and rebates applicable to fees per physical ports from (i) $2,000 other persons using its facilities. The
to $2,500 per month, per port for a 1 Exchange also notes that it operates in
74 In approving the proposed rule change, the gigabyte circuit and (ii) $7,000 to $7,500
Commission considered the proposal’s impacts on per month, per port for a 10 gigabyte 6 See e.g., NYSE Arca Equities Fees and Charges,
efficiency, competition, and capital formation. 15 circuit. The Exchange notes the NYSE Arca Marketplace: Other Fees and Charges,
U.S.C. 78c(f).
75 In approving the proposed rule change, the
proposed fees enable it to continue to Connectivity Fees. See also, Nasdaq Phlx LLC
amozie on DSK3GDR082PROD with NOTICES1
maintain and improve its market Pricing Schedule, Section XI, Direct Connectivity to
Commission considered the proposal’s impacts on Phlx.
efficiency, competition, and capital formation. 15 technology and services and also notes 7 For example, if a market participant uses a 1
U.S.C. 78c(f). that the proposed fee changes are in line gigabyte Disaster Recovery Physical Port to connect
76 17 CFR 200.30–3(a)(12).
to the Disaster Recovery Systems for both EDGA
1 15 U.S.C. 78s(b)(1).
5 The term ‘‘Member’’ is defined as ‘‘any and EDGX, the market participant would only be
2 17 CFR 240.19b–4. assessed one monthly fee of $2,000.
registered broker or dealer that has been admitted
3 15 U.S.C. 78s(b)(3)(A)(ii). 8 15 U.S.C. 78f.
to membership in the Exchange.’’ See Exchange
4 17 CFR 240.19b–4(f)(2). Rule 1.5(n). 9 15 U.S.C. 78f(b)(4).
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Document Created: 2018-06-21 01:22:57
Document Modified: 2018-06-21 01:22:57
| 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 | 83 FR 28886 |
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