83_FR_52782 83 FR 52581 - Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Implementation of Electronic Exercise Platform

83 FR 52581 - Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Implementation of Electronic Exercise Platform

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 201 (October 17, 2018)

Page Range52581-52586
FR Document2018-22540

Federal Register, Volume 83 Issue 201 (Wednesday, October 17, 2018)
[Federal Register Volume 83, Number 201 (Wednesday, October 17, 2018)]
[Notices]
[Pages 52581-52586]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-22540]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84410; File No. SR-LCH SA-2018-004]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to Implementation of Electronic Exercise Platform

October 11, 2018.

I. Introduction

    On August 24, 2018, 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 (the ``Proposed Rule Change'') to 
amend its (i) CDS Clearing Rule Book (``Rule Book''), (ii) CDS Clearing 
Supplement (``Supplement''), and (iii) CDS Clearing Procedures 
(``Procedures'') to incorporate new terms and to make conforming, 
clarifying, and clean-up changes to implement a new electronic exercise 
platform (``EEP'') for the exercise of options on index credit default 
swaps (``CDS Options'') by Clearing Members and their Clients. The 
proposed rule change was published for comment in the Federal Register 
on September 5, 2018.\3\ The Commission has not received any comments 
on the proposed rule 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. 34-83983 (Aug. 29, 
2018), 83 FR 45155 (Sept. 5, 2018) (SR-LCH SA-2018-004) 
(``Notice'').
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II. Description of the Proposed Rule Change

    The proposed rule change would create an EEP for CDS Options to 
capture and support decisions to exercise CDS Options by Clearing 
Members and their Clients.\4\ Currently, LCH SA matches a Clearing 
Member or Client holding the option to either buy or sell protection on 
the underlying index credit default swap (``CDS'') (``CDS Option 
buyer''), with a Clearing Member or Client obligated to either buy or 
sell protection, as applicable, on the underlying index CDS (``CDS 
Option seller'') (this transaction is a ``matched pair'').\5\ The 
creation of the matched pair allows the CDS Option buyer to exercise or 
abandon the CDS Option. If the CDS Option buyer exercises the CDS 
Option, the CDS Option buyer must notify the CDS Option seller manually 
via email and then inform LCH SA that the exercise notice has been 
successfully delivered. LCH SA then manually executes the exercise 
decisions and updates its risk system.
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    \4\ Capitalized terms used herein but not otherwise defined have 
the meaning set forth in the Rule Book, Supplement, and Procedures, 
which are available at https://www.lch.com/resources/rules-and-regulations/sa-rulebooks.
    \5\ For more information regarding the operation of CDS Options, 
see Exchange Act Release No. 34-82109 (Nov. 17, 2017), 82 FR 55905 
(Nov. 24, 2017) (SR-LCH SA 2017-006; SR-LCH SA-2017-007).
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    Under the proposed rule change, LCH would still create matched 
pairs to allow the exercise or abandonment of a CDS Option. The 
proposed rule change would, however, eliminate the manual notification 
process between the CDS Option buyer and CDS Option seller by 
providing, through the EEP, an electronic process for exercising CDS 
Options. Specifically, a CDS Option buyer would submit an intent 
through the EEP to either exercise or abandon the CDS Option (``Option 
Intent''). If validly submitted before the expiration date of the CDS 
Option, the Option Intent would serve as notice to the CDS Option 
seller that the CDS Option buyer is going to exercise or abandon the 
CDS Option. The proposed rule change would require Clearing Members and 
Clients to use the EEP system to exercise CDS Options. The proposed 
rule change would also require Clearing Members to delegate to Clients 
the ability to directly exercise CDS Options related to their cleared 
transactions (``Client Cleared Transactions''). The EEP would capture 
CDS Option buyers' exercise decisions in real time and notify the 
relevant CDS Option sellers in real time. In addition, the EEP would 
validate and check exercise decisions and facilitate the anonymous 
exercise of CDS Options.
    The proposed rule change would create and implement the EEP through 
amendments to LCH SA's Rule Book, Supplement, and Procedures. These 
amendments are summarized below according to how they affect: (i) The 
exercise of CDS Options directly by Clients; (ii) the operational 
process for the exercise of CDS Options in the EEP; and (iii) technical 
specifications of the EEP. The proposed rule change would also make 
other changes to the Rule Book, Supplement, and Procedures, as 
discussed below.

A. Exercise of CDS Options Directly by Clients

    The proposed rule change would add new provisions to allow for the 
exercise of CDS Options in the EEP directly by Clients.\6\ 
Specifically, with respect to those CDS Options transactions that are 
Client Cleared Transactions, new Section 6.4 of the Supplement would 
require Clearing Members to designate their relevant Clients to act on 
their behalf via the EEP.\7\ The Client so designated would be the 
Exercise Delegation Beneficiary. Moreover, the proposed rule change 
would amend the Rule Book to require that Clearing Members delegate to 
their Clients sufficient power to act on their behalf via the EEP and 
to ensure that their Clients have created an account in the LCH Portal 
for use of the EEP (``Client Portal Account'') before delegating such 
power.\8\ Finally, the proposed rule change would amend the Rule Book 
to require Clients to exercise their delegated power only through their 
Client Portal Account unless the EEP is or will be unavailable for the 
exercise of CDS Options (an ``EEP Failure Event'').\9\
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    \6\ The proposed rule change would also apply these provisions 
to FCM Clearing Members who clear credit-default swaps and CDS 
Options for their Clients. Notice, 83 FR at 45156.
    \7\ Notice, 83 FR at 45158.
    \8\ Notice, 83 FR at 45156.
    \9\ Id.
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    The proposed rule change would add similar provisions to Appendix 
VIII of the Supplement. Appendix VIII provides mandatory provisions 
that are incorporated into transactions between a Clearing Member and 
its Client. Changes to Appendix VIII are necessary to incorporate the 
conditions described above directly into the terms of the transaction 
between a Clearing Member and its Client. Specifically, the proposed 
rule change would add new Section 5, which would provide that the 
Clearing Member and its Client agree that the Clearing Member will 
designate

[[Page 52582]]

its Client as its Exercise Delegation Beneficiary with respect to 
Client Cleared Transactions.\10\ Moreover, new Section 5 would specify 
the conditions upon which an Option Intent submitted by an Exercise 
Delegation Beneficiary with respect to a Client Cleared Transaction 
will be deemed a valid notice to exercise or abandon a CDS Option.\11\ 
Specifically, such an Option Intent will be deemed valid if (i) the 
Client submits the Option Intent through its Client Portal Account; 
(ii) the Option Intent is submitted prior to 4.00 p.m. (London time) on 
the expiration date of the CDS Option; and (iii) LCH SA completes the 
steps necessary to make the intent available for viewing in the EEP, 
including validation of the EEP Controls (these controls are described 
further below in subsection C as part of the technical specifications 
of the EEP).\12\
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    \10\ Notice, 83 FR at 45161.
    \11\ Id.
    \12\ Notice, 83 FR at 45161. The proposed rule change would 
define the term ``EEP Controls'' as the controls that LCH SA 
performs immediately following the submission of an Option Intent. 
These controls are described in Section 5 of the Procedures. If an 
Option Intent does not pass these controls it is not made available 
for viewing in the EEP by the Option Seller, and thus will not be 
deemed a valid notice to exercise or abandon a CDS Option.
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    The proposed rule change would also limit LCH SA's liability 
associated with Clients using the EEP to exercise their CDS Options. 
The proposed rule change would amend the Rule Book to eliminate LCH 
SA's liability for (i) any damage caused to a Clearing Member by its 
Client exercising or not exercising a CDS Option in the EEP and (ii) 
any improper use or disclosure by a third party, including a Client, of 
information made available at the request of a Clearing Member.\13\ The 
proposed rule change would add a new Section 13(b) to the Supplement to 
eliminate LCH SA's liability to a Clearing Member for any cost or 
expense arising out of any failure of an Exercise Delegation 
Beneficiary to perform its obligations in relation with a delegation or 
in connection with the exercise or abandonment of a CDS Option.\14\ 
Additionally, the proposed rule change would amend Section 13(d), which 
currently provides that LCH SA will have no responsibility to verify 
the contents of any notice received by it from any Clearing Member 
under the terms of any Cleared Transaction.\15\ The proposed rule 
change would amend Section 13(d) to clarify that this limitation on 
responsibility also applies to any notice received from an Exercise 
Delegation Beneficiary of a Clearing Member.
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    \13\ Notice, 83 FR at 45156.
    \14\ Notice, 83 FR at 45160.
    \15\ Notice, 83 FR at 45160.
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B. Operational Process for the Exercise of CDS Options in the EEP

    The proposed rule change would make a number of amendments to the 
Rule Book and Supplement to further specify the operational process for 
the exercise of CDS Options in the EEP.
    First, the proposed rule change would add defined terms to the Rule 
Book and Supplement relevant to the creation and implementation of the 
EEP.\16\ Moreover, the proposed rule change would amend existing 
defined terms both to account for exercise of CDS Options through the 
EEP and to correct typographical errors.\17\
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    \16\ For an explanation of the definition of each of these 
terms, see Notice, 83 FR at 45156-45157.
    \17\ Notice, 83 FR at 45156-45157.
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    Second, the proposed rule change would make a number of 
modifications and additions to Section 6 to provide for the operation 
of the new EEP. The proposed rule change would facilitate the anonymous 
exercise of CDS Options by removing the requirement that LCH SA notify 
the CDS Option buyer and CDS Option seller of their respective 
identifies.\18\ Instead, LCH SA would keep the identities and contact 
information of the CDS Option buyer and CDS Option seller in a 
protected report (the ``Protected Exercise Matched Pair Report''), and 
it would provide access to this report only during an EEP Failure 
Event, as discussed below.\19\
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    \18\ Notice, 83 FR at 45157.
    \19\ The proposed rule change would add a new Section 5.8 to 
Appendix VIII of the Supplement to require Clients to consent to the 
disclosure of their address, fax number, telephone number, contact 
email address (and any other applicable notice details) by their 
Clearing Members to LCH SA and by LCH SA in any Protected Exercise 
Matched Pair Report. Notice, 83 FR at 45162.
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    The proposed rule change would also describe the circumstances in 
which LCH SA would consider the exercise of a CDS Option via the EEP to 
be valid in new Section 6.3. Specifically, the proposed rule change 
would provide that an Option Intent is a valid notice to exercise or 
abandon a CDS Option if the CDS Option buyer submits the Option Intent 
prior to 4.00 p.m. (London time) and LCH SA has completed those steps 
necessary to make such Option Intent available for viewing in the EEP, 
including validation of the EEP Controls (discussed below).\20\
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    \20\ Notice, 83 FR at 45157-45158.
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    The proposed rule change would also provide procedures for exercise 
of CDS Options during an EEP Failure Event.\21\ Specifically, new 
Section 6.5 would require LCH SA to notify Clearing Members and their 
Exercise Delegation Beneficiaries of the EEP Failure Event and the 
subsequent resolution of the event.\22\ Following the occurrence of the 
EEP Failure Event, Clearing Members (or their Exercise Delegation 
Beneficiaries, as applicable) would be authorized to access the 
information contained in the Protected Exercise Matched Pair Report 
regarding the identity and contact information of the other Clearing 
Member (or Exercise Delegation Beneficiary) within the matched 
pair.\23\ During an EEP Failure Event, exercise or abandonment of CDS 
Options would fall back to the existing manual delivery process using 
the contact information from the Protected Exercise Matched Pair 
Report. For an exercise or abandonment to be effective, a Clearing 
Member (or its Exercise Delegation Beneficiary) would be required to 
notify LCH SA of such exercise of abandonment by no later than 5.00 
p.m. (Central European Time) on the expiration date of the CDS 
Option.\24\
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    \21\ The proposed rule change would also amend Appendix VIII of 
the Supplement, regarding mandatory terms that are incorporated into 
transactions between a Clearing Member and its Client, to add 
provisions that mirror these procedures.
    \22\ Notice, 83 FR at 45158.
    \23\ Notice, 83 FR at 45158.
    \24\ Id.
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    The proposed rule change would also address the circumstances under 
which a CDS Option transaction will be terminated taking into account 
implementation of the EEP. Specifically, the proposed rule change would 
terminate a CDS Option where the CDS Option buyer elects to abandon the 
CDS Option or fails to submit an Option Intent by the expiration date 
of the CDS Option.\25\ Moreover, the proposed rule change would allow 
LCH SA to terminate a CDS Option if the CDS Option buyer does not 
submit an Option Intent by the expiration date of the CDS Option or if 
there is an EEP Failure Event and LCH SA does not receive a notice of 
exercise or abandonment by 5.00 p.m. (Central European Time) on the 
expiration date.\26\
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    \25\ Id.
    \26\ If there is an EEP Failure Event and LCH SA does not 
receive a notice of exercise or abandonment by 5.00 p.m. (Central 
European Time) on the expiration date, the proposed rule change 
would provide that LCH may, in its sole discretion, give effect to 
the terms of the notice if LCH determines that the notice was in 
fact delivered and would have been effective. If LCH SA determines 
that it is not possible to give effect to the terms of such notice, 
then the relevant Clearing Members in a matched pair (or their 
Exercise Delegation Beneficiaries, as applicable) would have rights 
against each other for settlement payment as though parties to a 
bilateral credit default swap transaction on the terms of the 
relevant underlying index. Notice, 83 FR at 45158-45159.

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[[Page 52583]]

    The proposed rule change would address situations where 
communications failures at Clearing Members and their Clients prohibit 
access to the EEP.\27\ Specifically, new Section 6.10 would provide 
that if a Clearing Member or its Exercise Delegation Beneficiary 
experiences a significant communications or information technology 
failure resulting in it being impossible or impracticable to use EEP (a 
``Clearing Member Communications Failure Event''), such Clearing Member 
or its Exercise Delegation Beneficiary shall deliver notices to, and 
receive notices from, LCH SA using the existing manual exercise 
process.\28\ New Section 6.10 would further specify that upon receipt 
of such notice, LCH SA will submit the notice to the EEP system for 
processing by submitting an Option Intent in respect of such notice. 
New Section 6.10 would further specify the conditions in which such a 
notice would be deemed valid, including submission of the Option Intent 
prior to 4.00 p.m. (London time) and LCH SA has completed those steps 
necessary to make such Option Intent available for viewing in the EEP, 
including validation of the EEP Controls (discussed below).\29\
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    \27\ The proposed rule change would also amend Appendix VIII of 
the Supplement, regarding mandatory terms that are incorporated into 
transactions between a Clearing Member and its Client, to add 
provisions that mirror these procedures. Notice, 83 FR at 45161.
    \28\ Notice, 83 FR at 45159.
    \29\ Id.
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    New Section 6.10 would further require a Clearing Member or 
Exercise Delegation Beneficiary affected by a Clearing Member 
Communications Failure Event to notify LCH SA of the occurrence of the 
communications failure event using the form notice set out in the 
Appendix of the Supplement.\30\ Similarly, section 6.10 would require 
an affected Clearing Member or Exercise Delegation Beneficiary to 
notify LCH SA as soon as reasonably practicable when no longer subject 
to a communications failure event, in which case the requirement to use 
the EEP would resume.\31\
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    \30\ Notice, 83 FR at 45159.
    \31\ Id.
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    Finally, new Section 6.10(e) would require a Clearing Member or 
Exercise Delegation Beneficiary subject to a Clearing Member 
Communications Failure Event to use reasonable efforts to (i) mitigate 
the operational impact on other Clearing Members and LCH SA of any such 
event; (ii) cure such event as soon as reasonably practicable; and 
(iii) ensure that the circumstances which caused such event do not 
recur.\32\
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    \32\ Notice, 83 FR at 45159.
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    Third, the proposed rule change would also make various changes to 
Section 8 of the Supplement regarding delivery of notices. The proposed 
rule change would first amend Section 8.1(a) to make clear that Section 
8.1(a) is subject to new Section 6.3.\33\ Section 8.1(a) provides 
general conditions for the effectiveness of notices delivered in 
respect of cleared transactions, and Section 6.3, as discussed above, 
provides specific conditions for the effectiveness of notices delivered 
via the EEP. The proposed rule change would next amend Section 8.1(b) 
to implement certain conforming changes regarding notices from or to 
LCH SA in the EEP, including with respect to the occurrence of an EEP 
Failure Event.\34\ Additionally, the proposed rule change would amend 
Section 8.1(c) to provide that notices shall be given to the name and 
address provided in the Protected Exercise Matched Pair Report.\35\
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    \33\ Notice, 83 FR at 45160.
    \34\ Id.
    \35\ Notice, 83 FR at 45160.
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    The proposed rule change would also renumber Section 8.2 as new 
Section 8.3. The proposed rule change would then delete the existing 
Section 8.3 as well as the existing Section 8.4.\36\ Both of these 
sections would no longer be applicable after the implementation of EEP. 
The proposed rule change would renumber Section 8.5 as new Section 8.2 
and make certain conforming changes to account for the delivery of the 
Protected Exercise Matched Pair Report.\37\ The proposed rule change 
would also describe the procedures to be used if LCH SA does not 
provide the Protected Exercise Matched Pair Report. In such a case, 
clearing members may deliver notices to exercise or abandon CDS Options 
directly to LCH SA and vice versa.\38\
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    \36\ Id.
    \37\ Id.
    \38\ Id.
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    Fourth, the proposed rule change would add a new Appendix VI to 
serve as the form to be used by a Clearing Member or Client to notify 
LCH SA that it is subject to a Clearing Member Communications Failure 
Event and a new Appendix VII to serve as the form to notify LCH SA that 
it is no longer subject to such an event.\39\
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    \39\ Id.
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C. Technical Specifications of the EEP

    The technical specifications of the EEP would be set out in 
amendments to Section 5 of the Procedures. Specifically, the proposed 
rule change would add a definition of ``LCH Portal'' to Section 5.3(f). 
``LCH Portal'' would be defined as a single sign-on solution for 
various LCH SA applications to which Clearing Members may have access 
over secured internet.\40\ The proposed rule change would revise 
Section 5.16 to add a new paragraph entitling a Clearing Member to 
request that all or part of the reports provided under Section 5.16 be 
made available on the Client Portal Account.\41\
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    \40\ Notice, 83 FR at 45162.
    \41\ Id.
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    The proposed rule change would also amend Section 5.16(a)(i)(J) to 
replace all references to ``Cleared Transaction Exercise Report'' with 
``Protected Exercise Matched Pairs Report'' to reflect the new 
reporting structure in EEP.\42\ The proposed rule change would further 
specify the timing for ICEEU's preparation of the Protected Exercise 
Matched Pairs Report and that such report will only be made accessible 
following the occurrence of an EEP Failure Event.\43\
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    \42\ Id.
    \43\ Id.
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    The proposed rule change would delete the current Section 
5.16(c)(ii), regarding reports of open interest in CDS Options, because 
such a report would no longer be applicable after the proposed rule 
change.\44\ The proposed rule change would renumber current Section 
5.16(c)(iii) as a new Section 5.16(c)(ii) and current Section 
5.16(c)(iv) as a new Section 5.16(c)(iii).
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    \44\ Id.
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    The proposed rule change would add a new Section 5.19 to require 
Clearing Members to notify LCH SA when they delegate power to exercise 
or abandon CDS Options to their Clients by sending a completed and 
signed notification form to LCH SA via email.\45\
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    \45\ Notice, 83 FR at 45162.
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    The proposed rule change would add a new Section 5.19.2 to describe 
the EEP Controls that LCH SA will use to determine that an Option 
Intent is validly submitted. Specifically, upon a submission of an 
Option Intent in the EEP, LCH SA will carry out logicality controls to 
identify an intent which could have been submitted in the EEP in 
error.\46\ The controls will be based on the relative position or the 
price of the exercise compared to reference prices provided in the 
EEP.\47\ LCH SA will not register in the EEP any intent which does not 
pass such controls, and LCH SA will inform the applicable Clearing 
Member or Exercise Delegation Beneficiary. The Clearing Member or

[[Page 52584]]

Exercise Delegation Beneficiary may then choose to re-submit such 
intent or make a ``Force Submission.'' \48\ A Force Submission occurs 
when the Clearing Member or its Exercise Delegation Beneficiary elects 
to bypass the controls by specifying ``Confirm'' or ``Force'' when 
submitting the Option Intent.\49\ LCH SA will not carry out controls on 
such an Option Intent.\50\
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    \46\ Id.
    \47\ Id.
    \48\ Id.
    \49\ Id.
    \50\ Id.
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    New Section 5.19.2 would further specify that, before registering 
any Option Intent, LCH SA will ensure that such intent (i) is submitted 
by a user who (a) is connected with the proper user ID and password and 
(b) based on such ID and password, is duly authorized to exercise or 
abandon, as applicable, the relevant CDS Options; (ii) has not already 
been submitted in the EEP (other than as a partial Exercise); and (iii) 
passes the logicality controls or is a Force Submission.\51\
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    \51\ Notice, 83 FR at 45162.
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D. Other Changes

    The proposed rule change would make a number of other changes 
related to CDS Options. First, the proposed rule change would make a 
number of amendments regarding restructuring of CDS Options following a 
credit event in respect of an entity referenced by the index underlying 
the CDS Option.\52\ The proposed rule change would maintain the 
existing manual notification process for transactions in restructured 
CDS Options. To that end, the proposed rule change would delete a 
number of provisions from Section 8 of the Supplement, which currently 
contains the manual notification process, and reinstate them in Section 
5, which sets out the procedures for restructured CDS Options.\53\ 
Similarly, the proposed rule change would make changes to Section 7 of 
the Supplement regarding settlement of restructured CDS Options. The 
proposed rule change would also amend Section 7.2 of the Supplement to 
incorporate the term ``Auction Final Price Determination Date'' in 
order to correct an inaccurate reference in the current version of the 
Supplement.\54\ Additionally, the proposed rule change would amend 
Section 7.3(b)(ii) of the Supplement to clarify that a valid Credit 
Event Notice must be delivered or deemed to be delivered in respect for 
subsections (x) and (y) of Section 7.3(b)(ii) to apply.\55\ Finally, 
the proposed rule change would correct typographical errors in Sections 
7.3 and 7.4(a) of the Supplement.\56\
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    \52\ Notice, 83 FR at 45157.
    \53\ Id.
    \54\ Notice, 83 FR at 45160.
    \55\ Notice, 83 FR at 45160.
    \56\ Id.
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    Second, the proposed rule change would update Section 9 of the 
Supplement, regarding the creation of matched pairs. The proposed rule 
change would delete Sections 9.1(c) and (d) to remove the requirement 
that, to the extent possible, each matched pair of a CDS Option have an 
amount which is an integral multiple of Euro 1,000,000 subject to a 
maximum of Euro 100,000,000.\57\ Although this change is unrelated to 
the implementation of EEP, LCH SA does not believe this condition is 
necessary any longer, so the proposed rule change would update the 
Supplement accordingly.
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    \57\ Id.
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    Finally, the proposed rule change would make typographical 
corrections, update conforming references, and revise numbering 
throughout the Rule Book, Supplement, and Procedures, as necessary.

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.\58\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \59\ and Rules 17Ad-22(e)(1), (e)(17)(i)-(ii), and (e)(18) 
thereunder.\60\
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    \58\ 15 U.S.C. 78s(b)(2)(C).
    \59\ 15 U.S.C. 78q-1(b)(3)(F).
    \60\ 17 CFR 240.17Ad-22(e)(1), (e)(17)(i)-(ii), and (e)(18).
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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.\61\
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    \61\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that by eliminating the existing manual 
notification process and replacing it with an electronic one, the EEP, 
in general, would promote the efficient and effective exercise of CDS 
Options. The EEP would eliminate the possible delays, errors, and 
miscommunications that can result from manual notification via email. 
In doing so, the Commission believes the EEP would promote the prompt 
and accurate clearance and settlement of CDS Options transactions by 
providing a means for the efficient exercise of CDS Options. Moreover, 
in reducing the likelihood of delays, errors, and miscommunications as 
compared to the existing manual notification process, the Commission 
believes that the EEP would reduce the likelihood of disputes over the 
exercise of CDS Options and the possibility that LCH SA may not 
accurately capture a CDS Option buyer's intent to abandon or exercise a 
CDS Option. In this regard, the Commission believes the EEP would help 
assure the safeguarding of securities and funds relating to CDS Options 
which are in the custody or control of LCH SA or for which it is 
responsible by helping LCH SA to avoid disruptions to its operations 
which could, in turn, impede access to securities and funds required in 
connection with the exercise or abandonment of CDS Options. For both of 
these reasons, the Commission also believes that the EEP, in general, 
would protect investors and the public interest. Thus, the Commission 
believes that the EEP, in general, would be consistent with Section 
17A(b)(3)(F) of the Act.\62\
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    \62\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission further believes that the specific aspects of the 
proposed rule change that would facilitate the operation of the EEP 
would also be consistent with Section 17A(b)(3)(F).\63\ Specifically, 
the Commission believes that in (i) adding new defined terms (and 
modifying existing defined terms accordingly); (ii) defining the 
circumstances in which LCH SA would consider the exercise of a CDS 
Option via the EEP to be valid; (iii) providing the circumstances in 
which LCH SA would terminate a CDS Option; and (iv) establishing the 
enforceability of notices delivered via the EEP, the proposed rule 
change would provide the legal basis for operation of the EEP. 
Similarly, by providing the technical specifications of the EEP 
(including defining the applications and reports associated with the 
EEP) and establishing the controls LCH SA would use to determine if an 
Option Intent was submitted correctly and by an authorized user, the 
Commission believes the proposed rule change would provide the 
technological basis for operation of the EEP. The Commission believes 
that these aspects of the proposed rule change would

[[Page 52585]]

thereby promote the use and operation of the EEP for executing CDS 
Options transactions and therefore would promote the prompt and 
accurate clearance and settlement of such transactions, consistent with 
Section 17A(b)(3)(F).\64\
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    \63\ 15 U.S.C. 78q-1(b)(3)(F).
    \64\ 15 U.S.C. 78q-1(b)(3)(F).
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    Similarly, the Commission believes that the provisions of the 
proposed rule change facilitating the exercise of CDS Options in the 
EEP directly by Clients would promote the prompt and accurate clearance 
and settlement of CDS Options. The Commission believes that if Clients 
were not able to exercise their CDS Options directly in the EEP they 
would have to rely on Clearing Members to do so on their behalf, which 
would require communicating their intentions to Clearing Members 
accurately and with sufficient time to allow Clearing Members to act 
before expiration of the CDS Options. In contrast, allowing Clients to 
exercise their CDS Options directly in the EEP should be more efficient 
than, and avoid possible delays and miscommunications associated with, 
Clearing Members exercising CDS Options on behalf of Clients. As a 
result, the Commission believes the proposed rule change would promote 
the prompt and accurate clearance and settlement of CDS Option 
transactions by providing Clients a more efficient means for the 
exercise of their CDS Options.
    Finally, the Commission believes that the other changes discussed 
above are consistent with Section 17A(b)(3)(F) of the Act.\65\ 
Specifically, by consolidating provisions regarding delivery of notices 
with provisions regarding restructuring of CDS Options and making other 
updates regarding restructuring of CDS Options, the Commission believes 
the proposed rule change would allow the existing notification process 
for restructuring of CDS Options to continue after implementation of 
the EEP. This would allow LCH SA to continue clearing and settling 
restructured CDS Options outside of the EEP, thereby helping to promote 
the prompt and accurate clearance and settlement of restructured CDS 
Options. Moreover, the Commission believes that updating Section 9 of 
the Supplement to remove the inapplicable provisions regarding the 
creation of matched pairs would help ensure that LCH SA continues to 
create matched pairs consistently, which is necessary to pair CDS 
Option buyers and CDS Option sellers for purposes of executing or 
abandoning CDS Options. The Commission therefore believes that these 
aspects of the proposed rule change would promote the prompt and 
accurate clearance and settlement of CDS Option transactions.
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Therefore, for all of the above reasons the Commission finds that 
the proposed rule change would promote the prompt and accurate 
clearance and settlement of CDS Options 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.\66\
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(1) of the Act

    Rule 17Ad-22(e)(1) requires that LCH SA establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide for a well-founded, clear, transparent, and 
enforceable legal basis for each aspect of its activities in all 
relevant jurisdictions.\67\
---------------------------------------------------------------------------

    \67\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

    As discussed above, the Commission believes that the proposed rule 
change would provide the legal basis for operation of the EEP by (i) 
adding new defined terms (and modifying existing defined terms 
accordingly); (ii) establishing the circumstances in which LCH SA would 
consider the exercise of a CDS Option via the EEP to be valid; and 
(iii) defining the circumstances in which LCH SA would terminate a CDS 
Option. Moreover, the Commission believes the proposed rule change, in 
making typographical corrections, updating conforming references, and 
revising numbering throughout the Rule Book, Supplement, and 
Procedures, would help ensure the consistency and accuracy of the Rule 
Book, Supplement, and Procedures after implementation of the EEP, 
thereby further helping to establish the legal basis for operation of 
the EEP.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(e)(1).\68\
---------------------------------------------------------------------------

    \68\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

C. Consistency With Rules 17Ad-22(e)(17)(i)-(ii) of the Act

    Rule 17Ad-22(e)(17)(i)-(ii) requires that LCH SA establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to manage its operational risks by identifying the 
plausible sources of operational risk, both internal and external, and 
mitigating their impact through the use of appropriate systems, 
policies, procedures, and controls and ensuring that systems have a 
high degree of security, resiliency, operational reliability, and 
adequate, scalable capacity.\69\
---------------------------------------------------------------------------

    \69\ 17 CFR 240.17Ad-22(e)(17)(i), (ii).
---------------------------------------------------------------------------

    The Commission believes that, in replacing the existing manual 
notification process, the EEP would reduce LCH SA's operational risks 
associated with clearing and settling CDS Options. For example, the EEP 
would check whether an Option Intent was erroneous based on the 
relative position or the price in the Option Intent compared to 
reference prices provided in the EEP. Such validity checks are not a 
feature of the current notification process, and the Commission 
believes that these checks would reduce the likelihood that an Option 
Intent is submitted in error or otherwise miscommunicated. This, in 
turn, would reduce the risk to LCH SA that it does not accurately 
capture or execute a Clearing Member's or a Client's intent in 
exercising or abandoning a CDS Option. Moreover, under the EEP, if a 
CDS Option buyer submits an Option Intent before the exercise deadline 
and it passes the EEP validation checks, the notice of exercise or 
abandonment would be deemed legally delivered by LCH SA to the CDS 
Option seller on a real time basis. The Commission believes that this 
feature of the EEP would help reduce the possibility that LCH SA could 
fail to carry out a Clearing Member's or a Client's intent in 
exercising a CDS Option, further reducing LCH SA's operational risks in 
clearing and settling CDS Option transactions.
    The proposed rule change would establish procedures for the 
exercise of CDS Options in the case of the EEP not being operational or 
a Clearing Member or Client being unable to access the EEP due to a 
Clearing Member Communications Failure Event. In addition, the proposed 
rule change would require Clearing Members and Clients to (i) mitigate 
the impact of a Clearing Member Communications Failure Event; (ii) cure 
such event as soon as reasonably practicable; and (iii) ensure that the 
circumstances which caused such event do not recur. The Commission 
believes that these procedures, which would fall back on the existing 
manual notification process in place of the EEP, would provide a 
reasonable alternative in circumstances where the EEP is unavailable or 
inaccessible. The Commission further believes that these procedures, in 
providing another means to exercise CDS Options, would help mitigate 
the impact to Clearing Members and Clients from a malfunction of the 
EEP or a

[[Page 52586]]

communications failure. Thus, the Commission believes that these 
alternative procedures would help ensure the resiliency and operational 
reliability of the EEP by providing a means to exercise CDS Options 
where the EEP is unavailable or inaccessible.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rules 17Ad-22(e)(17)(i)-
(ii).\70\
---------------------------------------------------------------------------

    \70\ 17 CFR 240.17Ad-22(e)(17)(i)-(ii).
---------------------------------------------------------------------------

D. Consistency With Rule 17Ad-22(e)(18)

    Rule 17Ad-22(e)(18) requires that LCH SA establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to establish objective, risk-based, and publicly disclosed 
criteria for participation, which permit fair and open access by direct 
and, where relevant, indirect participants and other financial market 
utilities, require participants to have sufficient financial resources 
and robust operational capacity to meet obligations arising from 
participation in the clearing agency, and monitor compliance with such 
participation requirements on an ongoing basis.\71\
---------------------------------------------------------------------------

    \71\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

    The Commission believes that by allowing Clients to exercise CDS 
Options in the EEP directly, the proposed rule change would establish 
objective and publicly disclosed criteria for Clients to participate in 
the EEP. Specifically, the proposed rule change would, as discussed 
above, require Clearing Members to designate their relevant Clients to 
act on their behalf via the EEP with respect to those CDS Options 
transactions that are Client Cleared Transactions. The proposed rule 
change would also require that Clearing Members delegate to their 
Clients sufficient power to act on their behalf via the EEP and require 
Clients to exercise that power through their Client Portal Account on 
the EEP. Finally, the proposed rule change would add provisions to 
Appendix VIII of the Supplement to incorporate these conditions 
directly into the terms of the transaction between a Clearing Member 
and its Client. The Commission believes that these aspects of the 
proposed rule change would establish the objective and public criteria 
that Clients must follow to directly access the EEP and participate in 
exercising CDS Options at LCH SA. Moreover, the Commission believes 
these aspects of the proposed rule change would permit fair and open 
access by Clients by requiring Clearing Members to designate their 
relevant Clients to act on their behalf in exercising their CDS 
Options.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(e)(18).\72\
---------------------------------------------------------------------------

    \72\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular, Section 17A(b)(3)(F) of the Act \73\ and Rules 17Ad-
22(e)(1), (e)(17)(i)-(ii), and (e)(18) thereunder.\74\
---------------------------------------------------------------------------

    \73\ 15 U.S.C. 78q-1(b)(3)(F).
    \74\ 17 CFR 240.17Ad-22(e)(1), (e)(17)(i)-(ii), (e)(18).
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-LCH SA-2018-004) 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\
Eduardo A. Aleman,
Assistant Secretary.
---------------------------------------------------------------------------

    \76\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2018-22540 Filed 10-16-18; 8:45 am]
 BILLING CODE 8011-01-P



                                                                         Federal Register / Vol. 83, No. 201 / Wednesday, October 17, 2018 / Notices                                                 52581

                                               office of the Exchange. All comments                    discussed below, the Commission is                    the EEP would validate and check
                                               received will be posted without change.                 approving the proposed rule change.                   exercise decisions and facilitate the
                                               Persons submitting comments are                                                                               anonymous exercise of CDS Options.
                                                                                                       II. Description of the Proposed Rule                    The proposed rule change would
                                               cautioned that we do not redact or edit
                                                                                                       Change                                                create and implement the EEP through
                                               personal identifying information from
                                               comment submissions. You should                            The proposed rule change would                     amendments to LCH SA’s Rule Book,
                                               submit only information that you wish                   create an EEP for CDS Options to                      Supplement, and Procedures. These
                                               to make available publicly. All                         capture and support decisions to                      amendments are summarized below
                                               submissions should refer to File                        exercise CDS Options by Clearing                      according to how they affect: (i) The
                                               Number SR–NYSE–2018–47 and should                       Members and their Clients.4 Currently,                exercise of CDS Options directly by
                                               be submitted on or before November 7,                   LCH SA matches a Clearing Member or                   Clients; (ii) the operational process for
                                               2018.                                                   Client holding the option to either buy               the exercise of CDS Options in the EEP;
                                                                                                       or sell protection on the underlying                  and (iii) technical specifications of the
                                                 For the Commission, by the Division of
                                                                                                       index credit default swap (‘‘CDS’’)                   EEP. The proposed rule change would
                                               Trading and Markets, pursuant to delegated
                                                                                                       (‘‘CDS Option buyer’’), with a Clearing               also make other changes to the Rule
                                               authority.14
                                                                                                       Member or Client obligated to either buy              Book, Supplement, and Procedures, as
                                               Eduardo A. Aleman,                                      or sell protection, as applicable, on the             discussed below.
                                               Assistant Secretary.                                    underlying index CDS (‘‘CDS Option                    A. Exercise of CDS Options Directly by
                                               [FR Doc. 2018–22539 Filed 10–16–18; 8:45 am]            seller’’) (this transaction is a ‘‘matched            Clients
                                               BILLING CODE 8011–01–P                                  pair’’).5 The creation of the matched
                                                                                                       pair allows the CDS Option buyer to                      The proposed rule change would add
                                                                                                       exercise or abandon the CDS Option. If                new provisions to allow for the exercise
                                               SECURITIES AND EXCHANGE                                 the CDS Option buyer exercises the CDS                of CDS Options in the EEP directly by
                                               COMMISSION                                              Option, the CDS Option buyer must                     Clients.6 Specifically, with respect to
                                                                                                       notify the CDS Option seller manually                 those CDS Options transactions that are
                                                                                                       via email and then inform LCH SA that                 Client Cleared Transactions, new
                                               [Release No. 34–84410; File No. SR–LCH
                                                                                                       the exercise notice has been                          Section 6.4 of the Supplement would
                                               SA–2018–004]
                                                                                                       successfully delivered. LCH SA then                   require Clearing Members to designate
                                               Self-Regulatory Organizations; LCH                      manually executes the exercise                        their relevant Clients to act on their
                                               SA; Order Approving Proposed Rule                       decisions and updates its risk system.                behalf via the EEP.7 The Client so
                                               Change Relating to Implementation of                       Under the proposed rule change, LCH                designated would be the Exercise
                                               Electronic Exercise Platform                            would still create matched pairs to                   Delegation Beneficiary. Moreover, the
                                                                                                       allow the exercise or abandonment of a                proposed rule change would amend the
                                               October 11, 2018.                                       CDS Option. The proposed rule change                  Rule Book to require that Clearing
                                                                                                       would, however, eliminate the manual                  Members delegate to their Clients
                                               I. Introduction                                                                                               sufficient power to act on their behalf
                                                                                                       notification process between the CDS
                                                  On August 24, 2018, Banque Centrale                  Option buyer and CDS Option seller by                 via the EEP and to ensure that their
                                               de Compensation, which conducts                         providing, through the EEP, an                        Clients have created an account in the
                                               business under the name LCH SA (‘‘LCH                   electronic process for exercising CDS                 LCH Portal for use of the EEP (‘‘Client
                                               SA’’), filed with the Securities and                    Options. Specifically, a CDS Option                   Portal Account’’) before delegating such
                                               Exchange Commission (‘‘Commission’’),                   buyer would submit an intent through                  power.8 Finally, the proposed rule
                                               pursuant to Section 19(b)(1) of the                     the EEP to either exercise or abandon                 change would amend the Rule Book to
                                                                                                       the CDS Option (‘‘Option Intent’’). If                require Clients to exercise their
                                               Securities Exchange Act of 1934
                                                                                                       validly submitted before the expiration               delegated power only through their
                                               (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a
                                                                                                       date of the CDS Option, the Option                    Client Portal Account unless the EEP is
                                               proposed rule change (the ‘‘Proposed
                                                                                                       Intent would serve as notice to the CDS               or will be unavailable for the exercise of
                                               Rule Change’’) to amend its (i) CDS
                                                                                                       Option seller that the CDS Option buyer               CDS Options (an ‘‘EEP Failure Event’’).9
                                               Clearing Rule Book (‘‘Rule Book’’), (ii)                                                                         The proposed rule change would add
                                               CDS Clearing Supplement                                 is going to exercise or abandon the CDS
                                                                                                                                                             similar provisions to Appendix VIII of
                                               (‘‘Supplement’’), and (iii) CDS Clearing                Option. The proposed rule change
                                                                                                                                                             the Supplement. Appendix VIII
                                               Procedures (‘‘Procedures’’) to                          would require Clearing Members and                    provides mandatory provisions that are
                                               incorporate new terms and to make                       Clients to use the EEP system to exercise             incorporated into transactions between
                                               conforming, clarifying, and clean-up                    CDS Options. The proposed rule change                 a Clearing Member and its Client.
                                               changes to implement a new electronic                   would also require Clearing Members to                Changes to Appendix VIII are necessary
                                               exercise platform (‘‘EEP’’) for the                     delegate to Clients the ability to directly           to incorporate the conditions described
                                               exercise of options on index credit                     exercise CDS Options related to their                 above directly into the terms of the
                                               default swaps (‘‘CDS Options’’) by                      cleared transactions (‘‘Client Cleared                transaction between a Clearing Member
                                               Clearing Members and their Clients. The                 Transactions’’). The EEP would capture                and its Client. Specifically, the
                                               proposed rule change was published for                  CDS Option buyers’ exercise decisions                 proposed rule change would add new
                                               comment in the Federal Register on                      in real time and notify the relevant CDS              Section 5, which would provide that the
                                               September 5, 2018.3 The Commission                      Option sellers in real time. In addition,             Clearing Member and its Client agree
                                               has not received any comments on the                                                                          that the Clearing Member will designate
daltland on DSKBBV9HB2PROD with NOTICES




                                               proposed rule change. For the reasons                     4 Capitalized terms used herein but not otherwise

                                                                                                       defined have the meaning set forth in the Rule
                                                                                                                                                               6 The proposed rule change would also apply
                                                                                                       Book, Supplement, and Procedures, which are
                                                 14 17 CFR 200.30–3(a)(12).                                                                                  these provisions to FCM Clearing Members who
                                                                                                       available at https://www.lch.com/resources/rules-
                                                 1 15 U.S.C. 78s(b)(1).
                                                                                                       and-regulations/sa-rulebooks.                         clear credit-default swaps and CDS Options for
                                                 2 17 CFR 240.19b–4.                                     5 For more information regarding the operation of   their Clients. Notice, 83 FR at 45156.
                                                 3 Securities Exchange Act Release No. 34–83983                                                                7 Notice, 83 FR at 45158.
                                                                                                       CDS Options, see Exchange Act Release No. 34–
                                                                                                                                                               8 Notice, 83 FR at 45156.
                                               (Aug. 29, 2018), 83 FR 45155 (Sept. 5, 2018) (SR–       82109 (Nov. 17, 2017), 82 FR 55905 (Nov. 24, 2017)
                                               LCH SA–2018–004) (‘‘Notice’’).                          (SR–LCH SA 2017–006; SR–LCH SA–2017–007).               9 Id.




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                                               52582                       Federal Register / Vol. 83, No. 201 / Wednesday, October 17, 2018 / Notices

                                               its Client as its Exercise Delegation                     to any notice received from an Exercise                 Specifically, new Section 6.5 would
                                               Beneficiary with respect to Client                        Delegation Beneficiary of a Clearing                    require LCH SA to notify Clearing
                                               Cleared Transactions.10 Moreover, new                     Member.                                                 Members and their Exercise Delegation
                                               Section 5 would specify the conditions                                                                            Beneficiaries of the EEP Failure Event
                                                                                                         B. Operational Process for the Exercise
                                               upon which an Option Intent submitted                                                                             and the subsequent resolution of the
                                                                                                         of CDS Options in the EEP
                                               by an Exercise Delegation Beneficiary                                                                             event.22 Following the occurrence of the
                                               with respect to a Client Cleared                            The proposed rule change would                        EEP Failure Event, Clearing Members
                                               Transaction will be deemed a valid                        make a number of amendments to the                      (or their Exercise Delegation
                                               notice to exercise or abandon a CDS                       Rule Book and Supplement to further                     Beneficiaries, as applicable) would be
                                               Option.11 Specifically, such an Option                    specify the operational process for the                 authorized to access the information
                                               Intent will be deemed valid if (i) the                    exercise of CDS Options in the EEP.                     contained in the Protected Exercise
                                               Client submits the Option Intent                            First, the proposed rule change would                 Matched Pair Report regarding the
                                               through its Client Portal Account; (ii)                   add defined terms to the Rule Book and                  identity and contact information of the
                                               the Option Intent is submitted prior to                   Supplement relevant to the creation and                 other Clearing Member (or Exercise
                                               4.00 p.m. (London time) on the                            implementation of the EEP.16 Moreover,                  Delegation Beneficiary) within the
                                               expiration date of the CDS Option; and                    the proposed rule change would amend                    matched pair.23 During an EEP Failure
                                               (iii) LCH SA completes the steps                          existing defined terms both to account                  Event, exercise or abandonment of CDS
                                               necessary to make the intent available                    for exercise of CDS Options through the                 Options would fall back to the existing
                                               for viewing in the EEP, including                         EEP and to correct typographical                        manual delivery process using the
                                               validation of the EEP Controls (these                     errors.17                                               contact information from the Protected
                                               controls are described further below in                     Second, the proposed rule change                      Exercise Matched Pair Report. For an
                                               subsection C as part of the technical                     would make a number of modifications                    exercise or abandonment to be effective,
                                               specifications of the EEP).12                             and additions to Section 6 to provide for               a Clearing Member (or its Exercise
                                                  The proposed rule change would also                    the operation of the new EEP. The                       Delegation Beneficiary) would be
                                               limit LCH SA’s liability associated with                  proposed rule change would facilitate                   required to notify LCH SA of such
                                               Clients using the EEP to exercise their                   the anonymous exercise of CDS Options                   exercise of abandonment by no later
                                               CDS Options. The proposed rule change                     by removing the requirement that LCH                    than 5.00 p.m. (Central European Time)
                                               would amend the Rule Book to                              SA notify the CDS Option buyer and                      on the expiration date of the CDS
                                               eliminate LCH SA’s liability for (i) any                  CDS Option seller of their respective                   Option.24
                                               damage caused to a Clearing Member by                     identifies.18 Instead, LCH SA would                       The proposed rule change would also
                                               its Client exercising or not exercising a                 keep the identities and contact                         address the circumstances under which
                                               CDS Option in the EEP and (ii) any                        information of the CDS Option buyer                     a CDS Option transaction will be
                                               improper use or disclosure by a third                     and CDS Option seller in a protected                    terminated taking into account
                                               party, including a Client, of information                 report (the ‘‘Protected Exercise Matched                implementation of the EEP. Specifically,
                                               made available at the request of a                        Pair Report’’), and it would provide                    the proposed rule change would
                                               Clearing Member.13 The proposed rule                      access to this report only during an EEP                terminate a CDS Option where the CDS
                                               change would add a new Section 13(b)                      Failure Event, as discussed below.19                    Option buyer elects to abandon the CDS
                                               to the Supplement to eliminate LCH                          The proposed rule change would also                   Option or fails to submit an Option
                                               SA’s liability to a Clearing Member for                   describe the circumstances in which                     Intent by the expiration date of the CDS
                                               any cost or expense arising out of any                    LCH SA would consider the exercise of                   Option.25 Moreover, the proposed rule
                                               failure of an Exercise Delegation                         a CDS Option via the EEP to be valid in                 change would allow LCH SA to
                                               Beneficiary to perform its obligations in                 new Section 6.3. Specifically, the                      terminate a CDS Option if the CDS
                                               relation with a delegation or in                          proposed rule change would provide                      Option buyer does not submit an Option
                                               connection with the exercise or                           that an Option Intent is a valid notice                 Intent by the expiration date of the CDS
                                               abandonment of a CDS Option.14                            to exercise or abandon a CDS Option if                  Option or if there is an EEP Failure
                                               Additionally, the proposed rule change                    the CDS Option buyer submits the                        Event and LCH SA does not receive a
                                               would amend Section 13(d), which                          Option Intent prior to 4.00 p.m. (London                notice of exercise or abandonment by
                                               currently provides that LCH SA will                       time) and LCH SA has completed those                    5.00 p.m. (Central European Time) on
                                               have no responsibility to verify the                      steps necessary to make such Option                     the expiration date.26
                                               contents of any notice received by it                     Intent available for viewing in the EEP,
                                               from any Clearing Member under the                        including validation of the EEP Controls                mandatory terms that are incorporated into
                                               terms of any Cleared Transaction.15 The                   (discussed below).20                                    transactions between a Clearing Member and its
                                               proposed rule change would amend                            The proposed rule change would also                   Client, to add provisions that mirror these
                                               Section 13(d) to clarify that this                        provide procedures for exercise of CDS                  procedures.
                                                                                                                                                                    22 Notice, 83 FR at 45158.
                                               limitation on responsibility also applies                 Options during an EEP Failure Event.21                     23 Notice, 83 FR at 45158.
                                                                                                                                                                    24 Id.
                                                 10 Notice,   83 FR at 45161.                              16 For an explanation of the definition of each of
                                                                                                                                                                    25 Id.
                                                 11 Id.                                                  these terms, see Notice, 83 FR at 45156–45157.             26 If there is an EEP Failure Event and LCH SA
                                                 12 Notice, 83 FR at 45161. The proposed rule              17 Notice, 83 FR at 45156–45157.
                                                                                                                                                                 does not receive a notice of exercise or
                                               change would define the term ‘‘EEP Controls’’ as            18 Notice, 83 FR at 45157.
                                                                                                                                                                 abandonment by 5.00 p.m. (Central European Time)
                                               the controls that LCH SA performs immediately               19 The proposed rule change would add a new
                                                                                                                                                                 on the expiration date, the proposed rule change
                                               following the submission of an Option Intent. These       Section 5.8 to Appendix VIII of the Supplement to       would provide that LCH may, in its sole discretion,
                                               controls are described in Section 5 of the
daltland on DSKBBV9HB2PROD with NOTICES




                                                                                                         require Clients to consent to the disclosure of their   give effect to the terms of the notice if LCH
                                               Procedures. If an Option Intent does not pass these       address, fax number, telephone number, contact          determines that the notice was in fact delivered and
                                               controls it is not made available for viewing in the      email address (and any other applicable notice          would have been effective. If LCH SA determines
                                               EEP by the Option Seller, and thus will not be            details) by their Clearing Members to LCH SA and        that it is not possible to give effect to the terms of
                                               deemed a valid notice to exercise or abandon a CDS        by LCH SA in any Protected Exercise Matched Pair        such notice, then the relevant Clearing Members in
                                               Option.                                                   Report. Notice, 83 FR at 45162.                         a matched pair (or their Exercise Delegation
                                                 13 Notice, 83 FR at 45156.                                20 Notice, 83 FR at 45157–45158.
                                                                                                                                                                 Beneficiaries, as applicable) would have rights
                                                 14 Notice, 83 FR at 45160.                                21 The proposed rule change would also amend          against each other for settlement payment as though
                                                 15 Notice, 83 FR at 45160.                              Appendix VIII of the Supplement, regarding              parties to a bilateral credit default swap transaction



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                                                                         Federal Register / Vol. 83, No. 201 / Wednesday, October 17, 2018 / Notices                                            52583

                                                  The proposed rule change would                       ensure that the circumstances which                    would add a definition of ‘‘LCH Portal’’
                                               address situations where                                caused such event do not recur.32                      to Section 5.3(f). ‘‘LCH Portal’’ would be
                                               communications failures at Clearing                        Third, the proposed rule change                     defined as a single sign-on solution for
                                               Members and their Clients prohibit                      would also make various changes to                     various LCH SA applications to which
                                               access to the EEP.27 Specifically, new                  Section 8 of the Supplement regarding                  Clearing Members may have access over
                                               Section 6.10 would provide that if a                    delivery of notices. The proposed rule                 secured internet.40 The proposed rule
                                               Clearing Member or its Exercise                         change would first amend Section 8.1(a)                change would revise Section 5.16 to add
                                               Delegation Beneficiary experiences a                    to make clear that Section 8.1(a) is                   a new paragraph entitling a Clearing
                                               significant communications or                           subject to new Section 6.3.33 Section                  Member to request that all or part of the
                                               information technology failure resulting                8.1(a) provides general conditions for                 reports provided under Section 5.16 be
                                               in it being impossible or impracticable                 the effectiveness of notices delivered in              made available on the Client Portal
                                               to use EEP (a ‘‘Clearing Member                         respect of cleared transactions, and                   Account.41
                                               Communications Failure Event’’), such                   Section 6.3, as discussed above,                         The proposed rule change would also
                                               Clearing Member or its Exercise                         provides specific conditions for the                   amend Section 5.16(a)(i)(J) to replace all
                                               Delegation Beneficiary shall deliver                    effectiveness of notices delivered via the             references to ‘‘Cleared Transaction
                                               notices to, and receive notices from,                   EEP. The proposed rule change would                    Exercise Report’’ with ‘‘Protected
                                               LCH SA using the existing manual                        next amend Section 8.1(b) to implement                 Exercise Matched Pairs Report’’ to
                                               exercise process.28 New Section 6.10                    certain conforming changes regarding                   reflect the new reporting structure in
                                               would further specify that upon receipt                 notices from or to LCH SA in the EEP,                  EEP.42 The proposed rule change would
                                               of such notice, LCH SA will submit the                  including with respect to the occurrence               further specify the timing for ICEEU’s
                                               notice to the EEP system for processing                 of an EEP Failure Event.34 Additionally,               preparation of the Protected Exercise
                                               by submitting an Option Intent in                       the proposed rule change would amend                   Matched Pairs Report and that such
                                               respect of such notice. New Section 6.10                Section 8.1(c) to provide that notices                 report will only be made accessible
                                               would further specify the conditions in                 shall be given to the name and address                 following the occurrence of an EEP
                                               which such a notice would be deemed                     provided in the Protected Exercise                     Failure Event.43
                                               valid, including submission of the                      Matched Pair Report.35                                   The proposed rule change would
                                               Option Intent prior to 4.00 p.m. (London                   The proposed rule change would also                 delete the current Section 5.16(c)(ii),
                                               time) and LCH SA has completed those                    renumber Section 8.2 as new Section                    regarding reports of open interest in
                                               steps necessary to make such Option                     8.3. The proposed rule change would                    CDS Options, because such a report
                                               Intent available for viewing in the EEP,                then delete the existing Section 8.3 as                would no longer be applicable after the
                                               including validation of the EEP Controls                well as the existing Section 8.4.36 Both               proposed rule change.44 The proposed
                                               (discussed below).29                                    of these sections would no longer be                   rule change would renumber current
                                                                                                       applicable after the implementation of
                                                  New Section 6.10 would further                                                                              Section 5.16(c)(iii) as a new Section
                                                                                                       EEP. The proposed rule change would
                                               require a Clearing Member or Exercise                                                                          5.16(c)(ii) and current Section
                                                                                                       renumber Section 8.5 as new Section 8.2
                                               Delegation Beneficiary affected by a                                                                           5.16(c)(iv) as a new Section 5.16(c)(iii).
                                                                                                       and make certain conforming changes to
                                               Clearing Member Communications                                                                                   The proposed rule change would add
                                                                                                       account for the delivery of the Protected
                                               Failure Event to notify LCH SA of the                                                                          a new Section 5.19 to require Clearing
                                                                                                       Exercise Matched Pair Report.37 The
                                               occurrence of the communications                                                                               Members to notify LCH SA when they
                                                                                                       proposed rule change would also
                                               failure event using the form notice set                                                                        delegate power to exercise or abandon
                                                                                                       describe the procedures to be used if
                                               out in the Appendix of the                                                                                     CDS Options to their Clients by sending
                                                                                                       LCH SA does not provide the Protected
                                               Supplement.30 Similarly, section 6.10                                                                          a completed and signed notification
                                                                                                       Exercise Matched Pair Report. In such a
                                               would require an affected Clearing                      case, clearing members may deliver                     form to LCH SA via email.45
                                               Member or Exercise Delegation                           notices to exercise or abandon CDS                       The proposed rule change would add
                                               Beneficiary to notify LCH SA as soon as                 Options directly to LCH SA and vice                    a new Section 5.19.2 to describe the EEP
                                               reasonably practicable when no longer                   versa.38                                               Controls that LCH SA will use to
                                               subject to a communications failure                        Fourth, the proposed rule change                    determine that an Option Intent is
                                               event, in which case the requirement to                 would add a new Appendix VI to serve                   validly submitted. Specifically, upon a
                                               use the EEP would resume.31                             as the form to be used by a Clearing                   submission of an Option Intent in the
                                                  Finally, new Section 6.10(e) would                   Member or Client to notify LCH SA that                 EEP, LCH SA will carry out logicality
                                               require a Clearing Member or Exercise                   it is subject to a Clearing Member                     controls to identify an intent which
                                               Delegation Beneficiary subject to a                     Communications Failure Event and a                     could have been submitted in the EEP
                                               Clearing Member Communications                          new Appendix VII to serve as the form                  in error.46 The controls will be based on
                                               Failure Event to use reasonable efforts to              to notify LCH SA that it is no longer                  the relative position or the price of the
                                               (i) mitigate the operational impact on                  subject to such an event.39                            exercise compared to reference prices
                                               other Clearing Members and LCH SA of                                                                           provided in the EEP.47 LCH SA will not
                                               any such event; (ii) cure such event as                 C. Technical Specifications of the EEP                 register in the EEP any intent which
                                               soon as reasonably practicable; and (iii)                 The technical specifications of the                  does not pass such controls, and LCH
                                                                                                       EEP would be set out in amendments to                  SA will inform the applicable Clearing
                                               on the terms of the relevant underlying index.          Section 5 of the Procedures.                           Member or Exercise Delegation
                                               Notice, 83 FR at 45158–45159.                           Specifically, the proposed rule change                 Beneficiary. The Clearing Member or
                                                  27 The proposed rule change would also amend

                                               Appendix VIII of the Supplement, regarding
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                                                                                                         32 Notice,                                             40 Notice,   83 FR at 45162.
                                               mandatory terms that are incorporated into                             83 FR at 45159.
                                                                                                         33 Notice,                                             41 Id.
                                               transactions between a Clearing Member and its                         83 FR at 45160.
                                                                                                         34 Id.                                                 42 Id.
                                               Client, to add provisions that mirror these
                                               procedures. Notice, 83 FR at 45161.                       35 Notice,   83 FR at 45160.                           43 Id.
                                                  28 Notice, 83 FR at 45159.                             36 Id.                                                 44 Id.
                                                  29 Id.                                                 37 Id.                                                 45 Notice,   83 FR at 45162.
                                                  30 Notice, 83 FR at 45159.                             38 Id.                                                 46 Id.
                                                  31 Id.                                                 39 Id.                                                 47 Id.




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                                               52584                     Federal Register / Vol. 83, No. 201 / Wednesday, October 17, 2018 / Notices

                                               Exercise Delegation Beneficiary may                     typographical errors in Sections 7.3 and               and effective exercise of CDS Options.
                                               then choose to re-submit such intent or                 7.4(a) of the Supplement.56                            The EEP would eliminate the possible
                                               make a ‘‘Force Submission.’’ 48 A Force                    Second, the proposed rule change                    delays, errors, and miscommunications
                                               Submission occurs when the Clearing                     would update Section 9 of the                          that can result from manual notification
                                               Member or its Exercise Delegation                       Supplement, regarding the creation of                  via email. In doing so, the Commission
                                               Beneficiary elects to bypass the controls               matched pairs. The proposed rule                       believes the EEP would promote the
                                               by specifying ‘‘Confirm’’ or ‘‘Force’’                  change would delete Sections 9.1(c) and                prompt and accurate clearance and
                                               when submitting the Option Intent.49                    (d) to remove the requirement that, to                 settlement of CDS Options transactions
                                               LCH SA will not carry out controls on                   the extent possible, each matched pair                 by providing a means for the efficient
                                               such an Option Intent.50                                of a CDS Option have an amount which                   exercise of CDS Options. Moreover, in
                                                  New Section 5.19.2 would further                     is an integral multiple of Euro 1,000,000              reducing the likelihood of delays, errors,
                                               specify that, before registering any                    subject to a maximum of Euro                           and miscommunications as compared to
                                               Option Intent, LCH SA will ensure that                  100,000,000.57 Although this change is                 the existing manual notification process,
                                               such intent (i) is submitted by a user                  unrelated to the implementation of EEP,                the Commission believes that the EEP
                                               who (a) is connected with the proper                    LCH SA does not believe this condition                 would reduce the likelihood of disputes
                                               user ID and password and (b) based on                   is necessary any longer, so the proposed               over the exercise of CDS Options and
                                               such ID and password, is duly                           rule change would update the                           the possibility that LCH SA may not
                                               authorized to exercise or abandon, as                   Supplement accordingly.                                accurately capture a CDS Option buyer’s
                                               applicable, the relevant CDS Options;                      Finally, the proposed rule change                   intent to abandon or exercise a CDS
                                               (ii) has not already been submitted in                  would make typographical corrections,                  Option. In this regard, the Commission
                                               the EEP (other than as a partial                        update conforming references, and                      believes the EEP would help assure the
                                               Exercise); and (iii) passes the logicality              revise numbering throughout the Rule                   safeguarding of securities and funds
                                               controls or is a Force Submission.51                    Book, Supplement, and Procedures, as                   relating to CDS Options which are in the
                                                                                                       necessary.                                             custody or control of LCH SA or for
                                               D. Other Changes
                                                                                                       III. Discussion and Commission                         which it is responsible by helping LCH
                                                 The proposed rule change would                                                                               SA to avoid disruptions to its operations
                                               make a number of other changes related                  Findings
                                                                                                                                                              which could, in turn, impede access to
                                               to CDS Options. First, the proposed rule                   Section 19(b)(2)(C) of the Act directs              securities and funds required in
                                               change would make a number of                           the Commission to approve a proposed                   connection with the exercise or
                                               amendments regarding restructuring of                   rule change of a self-regulatory                       abandonment of CDS Options. For both
                                               CDS Options following a credit event in                 organization if it finds that such                     of these reasons, the Commission also
                                               respect of an entity referenced by the                  proposed rule change is consistent with                believes that the EEP, in general, would
                                               index underlying the CDS Option.52 The                  the requirements of the Act and the                    protect investors and the public interest.
                                               proposed rule change would maintain                     rules and regulations thereunder                       Thus, the Commission believes that the
                                               the existing manual notification process                applicable to such organization.58 For                 EEP, in general, would be consistent
                                               for transactions in restructured CDS                    the reasons given below, the                           with Section 17A(b)(3)(F) of the Act.62
                                               Options. To that end, the proposed rule                 Commission finds that the proposed                       The Commission further believes that
                                               change would delete a number of                         rule change is consistent with Section                 the specific aspects of the proposed rule
                                               provisions from Section 8 of the                        17A(b)(3)(F) of the Act 59 and Rules                   change that would facilitate the
                                               Supplement, which currently contains                    17Ad–22(e)(1), (e)(17)(i)–(ii), and (e)(18)            operation of the EEP would also be
                                               the manual notification process, and                    thereunder.60                                          consistent with Section 17A(b)(3)(F).63
                                               reinstate them in Section 5, which sets                 A. Consistency With Section                            Specifically, the Commission believes
                                               out the procedures for restructured CDS                 17A(b)(3)(F) of the Act                                that in (i) adding new defined terms
                                               Options.53 Similarly, the proposed rule                                                                        (and modifying existing defined terms
                                               change would make changes to Section                       Section 17A(b)(3)(F) of the Act                     accordingly); (ii) defining the
                                               7 of the Supplement regarding                           requires, among other things, that the                 circumstances in which LCH SA would
                                               settlement of restructured CDS Options.                 rules of LCH SA be designed to promote                 consider the exercise of a CDS Option
                                               The proposed rule change would also                     the prompt and accurate clearance and                  via the EEP to be valid; (iii) providing
                                               amend Section 7.2 of the Supplement to                  settlement of securities transactions                  the circumstances in which LCH SA
                                               incorporate the term ‘‘Auction Final                    and, to the extent applicable, derivative              would terminate a CDS Option; and (iv)
                                               Price Determination Date’’ in order to                  agreements, contracts, and transactions,               establishing the enforceability of notices
                                               correct an inaccurate reference in the                  as well as to assure the safeguarding of               delivered via the EEP, the proposed rule
                                               current version of the Supplement.54                    securities and funds which are in the                  change would provide the legal basis for
                                               Additionally, the proposed rule change                  custody or control of LCH SA or for                    operation of the EEP. Similarly, by
                                               would amend Section 7.3(b)(ii) of the                   which it is responsible, and, in general,              providing the technical specifications of
                                               Supplement to clarify that a valid Credit               to protect investors and the public                    the EEP (including defining the
                                               Event Notice must be delivered or                       interest.61                                            applications and reports associated with
                                               deemed to be delivered in respect for                      The Commission believes that by                     the EEP) and establishing the controls
                                               subsections (x) and (y) of Section                      eliminating the existing manual                        LCH SA would use to determine if an
                                               7.3(b)(ii) to apply.55 Finally, the                     notification process and replacing it                  Option Intent was submitted correctly
                                               proposed rule change would correct                      with an electronic one, the EEP, in                    and by an authorized user, the
                                                                                                       general, would promote the efficient                   Commission believes the proposed rule
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                                                 48 Id.
                                                 49 Id.                                                  56 Id.
                                                                                                                                                              change would provide the technological
                                                 50 Id.                                                  57 Id.
                                                                                                                                                              basis for operation of the EEP. The
                                                 51 Notice, 83 FR at 45162.                              58 15  U.S.C. 78s(b)(2)(C).                          Commission believes that these aspects
                                                 52 Notice, 83 FR at 45157.                              59 15  U.S.C. 78q–1(b)(3)(F).                        of the proposed rule change would
                                                 53 Id.                                                   60 17 CFR 240.17Ad–22(e)(1), (e)(17)(i)–(ii), and
                                                 54 Notice, 83 FR at 45160.                            (e)(18).                                                62 15   U.S.C. 78q–1(b)(3)(F).
                                                 55 Notice, 83 FR at 45160.                               61 15 U.S.C. 78q–1(b)(3)(F).                         63 15   U.S.C. 78q–1(b)(3)(F).



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                                                                          Federal Register / Vol. 83, No. 201 / Wednesday, October 17, 2018 / Notices                                                     52585

                                               thereby promote the use and operation                   change would promote the prompt and                   degree of security, resiliency,
                                               of the EEP for executing CDS Options                    accurate clearance and settlement of                  operational reliability, and adequate,
                                               transactions and therefore would                        CDS Option transactions.                              scalable capacity.69
                                               promote the prompt and accurate                           Therefore, for all of the above reasons                The Commission believes that, in
                                               clearance and settlement of such                        the Commission finds that the proposed                replacing the existing manual
                                               transactions, consistent with Section                   rule change would promote the prompt                  notification process, the EEP would
                                               17A(b)(3)(F).64                                         and accurate clearance and settlement of              reduce LCH SA’s operational risks
                                                  Similarly, the Commission believes                   CDS Options transactions, assure the                  associated with clearing and settling
                                               that the provisions of the proposed rule                safeguarding of securities and funds in               CDS Options. For example, the EEP
                                               change facilitating the exercise of CDS                 LCH SA’s custody and control, and, in                 would check whether an Option Intent
                                               Options in the EEP directly by Clients                  general, protect investors and the public             was erroneous based on the relative
                                               would promote the prompt and accurate                   interest, consistent with the Section                 position or the price in the Option
                                               clearance and settlement of CDS                         17A(b)(3)(F) of the Act.66                            Intent compared to reference prices
                                               Options. The Commission believes that                                                                         provided in the EEP. Such validity
                                               if Clients were not able to exercise their              B. Consistency With Rule 17Ad–22(e)(1)                checks are not a feature of the current
                                               CDS Options directly in the EEP they                    of the Act                                            notification process, and the
                                               would have to rely on Clearing Members                     Rule 17Ad–22(e)(1) requires that LCH               Commission believes that these checks
                                               to do so on their behalf, which would                   SA establish, implement, maintain and                 would reduce the likelihood that an
                                               require communicating their intentions                  enforce written policies and procedures               Option Intent is submitted in error or
                                               to Clearing Members accurately and                      reasonably designed to provide for a                  otherwise miscommunicated. This, in
                                               with sufficient time to allow Clearing                  well-founded, clear, transparent, and                 turn, would reduce the risk to LCH SA
                                               Members to act before expiration of the                 enforceable legal basis for each aspect of            that it does not accurately capture or
                                               CDS Options. In contrast, allowing                      its activities in all relevant                        execute a Clearing Member’s or a
                                               Clients to exercise their CDS Options                   jurisdictions.67                                      Client’s intent in exercising or
                                               directly in the EEP should be more                         As discussed above, the Commission                 abandoning a CDS Option. Moreover,
                                               efficient than, and avoid possible delays               believes that the proposed rule change                under the EEP, if a CDS Option buyer
                                               and miscommunications associated                        would provide the legal basis for                     submits an Option Intent before the
                                               with, Clearing Members exercising CDS                   operation of the EEP by (i) adding new                exercise deadline and it passes the EEP
                                               Options on behalf of Clients. As a result,              defined terms (and modifying existing                 validation checks, the notice of exercise
                                               the Commission believes the proposed                    defined terms accordingly); (ii)                      or abandonment would be deemed
                                               rule change would promote the prompt                    establishing the circumstances in which               legally delivered by LCH SA to the CDS
                                               and accurate clearance and settlement of                LCH SA would consider the exercise of                 Option seller on a real time basis. The
                                               CDS Option transactions by providing                    a CDS Option via the EEP to be valid;                 Commission believes that this feature of
                                               Clients a more efficient means for the                  and (iii) defining the circumstances in               the EEP would help reduce the
                                               exercise of their CDS Options.                          which LCH SA would terminate a CDS                    possibility that LCH SA could fail to
                                                  Finally, the Commission believes that                Option. Moreover, the Commission                      carry out a Clearing Member’s or a
                                               the other changes discussed above are                   believes the proposed rule change, in                 Client’s intent in exercising a CDS
                                               consistent with Section 17A(b)(3)(F) of                 making typographical corrections,                     Option, further reducing LCH SA’s
                                               the Act.65 Specifically, by consolidating               updating conforming references, and                   operational risks in clearing and settling
                                               provisions regarding delivery of notices                revising numbering throughout the Rule                CDS Option transactions.
                                               with provisions regarding restructuring                 Book, Supplement, and Procedures,                        The proposed rule change would
                                               of CDS Options and making other                         would help ensure the consistency and                 establish procedures for the exercise of
                                               updates regarding restructuring of CDS                  accuracy of the Rule Book, Supplement,                CDS Options in the case of the EEP not
                                               Options, the Commission believes the                    and Procedures after implementation of                being operational or a Clearing Member
                                               proposed rule change would allow the                    the EEP, thereby further helping to                   or Client being unable to access the EEP
                                               existing notification process for                       establish the legal basis for operation of            due to a Clearing Member
                                               restructuring of CDS Options to                         the EEP.                                              Communications Failure Event. In
                                               continue after implementation of the                       Therefore, for the above reasons the               addition, the proposed rule change
                                               EEP. This would allow LCH SA to                         Commission finds that the proposed                    would require Clearing Members and
                                               continue clearing and settling                          rule change is consistent with Rule                   Clients to (i) mitigate the impact of a
                                               restructured CDS Options outside of the                 17Ad–22(e)(1).68                                      Clearing Member Communications
                                               EEP, thereby helping to promote the                                                                           Failure Event; (ii) cure such event as
                                               prompt and accurate clearance and                       C. Consistency With Rules 17Ad–                       soon as reasonably practicable; and (iii)
                                               settlement of restructured CDS Options.                 22(e)(17)(i)–(ii) of the Act                          ensure that the circumstances which
                                               Moreover, the Commission believes that                    Rule 17Ad–22(e)(17)(i)–(ii) requires                caused such event do not recur. The
                                               updating Section 9 of the Supplement to                 that LCH SA establish, implement,                     Commission believes that these
                                               remove the inapplicable provisions                      maintain and enforce written policies                 procedures, which would fall back on
                                               regarding the creation of matched pairs                 and procedures reasonably designed to                 the existing manual notification process
                                               would help ensure that LCH SA                           manage its operational risks by                       in place of the EEP, would provide a
                                               continues to create matched pairs                       identifying the plausible sources of                  reasonable alternative in circumstances
                                               consistently, which is necessary to pair                operational risk, both internal and                   where the EEP is unavailable or
                                               CDS Option buyers and CDS Option                        external, and mitigating their impact                 inaccessible. The Commission further
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                                               sellers for purposes of executing or                    through the use of appropriate systems,               believes that these procedures, in
                                               abandoning CDS Options. The                             policies, procedures, and controls and                providing another means to exercise
                                               Commission therefore believes that                      ensuring that systems have a high                     CDS Options, would help mitigate the
                                               these aspects of the proposed rule                                                                            impact to Clearing Members and Clients
                                                                                                         66 15 U.S.C. 78q–1(b)(3)(F).                        from a malfunction of the EEP or a
                                                 64 15 U.S.C. 78q–1(b)(3)(F).                            67 17 CFR 240.17Ad–22(e)(1).
                                                 65 15 U.S.C. 78q–1(b)(3)(F).                            68 17 CFR 240.17Ad–22(e)(1).                          69 17   CFR 240.17Ad–22(e)(17)(i), (ii).



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                                               52586                       Federal Register / Vol. 83, No. 201 / Wednesday, October 17, 2018 / Notices

                                               communications failure. Thus, the                         Clients to act on their behalf in                     I. Self-Regulatory Organization’s
                                               Commission believes that these                            exercising their CDS Options.                         Statement of the Terms of Substance of
                                               alternative procedures would help                           Therefore, for the above reasons the                the Proposed Rule Change
                                               ensure the resiliency and operational                     Commission finds that the proposed                       The Exchange proposes to amend
                                               reliability of the EEP by providing a                     rule change is consistent with Rule                   Rule 7.14E, Clearance and Settlement, to
                                               means to exercise CDS Options where                       17Ad–22(e)(18).72                                     remove language that is inconsistent
                                               the EEP is unavailable or inaccessible.                                                                         with the Exchange’s Price List. The
                                                  Therefore, for the above reasons the                   IV. Conclusion
                                                                                                                                                               proposed rule change is available on the
                                               Commission finds that the proposed                           On the basis of the foregoing, the                 Exchange’s website at www.nyse.com, at
                                               rule change is consistent with Rules                      Commission finds that the proposed                    the principal office of the Exchange, and
                                               17Ad–22(e)(17)(i)–(ii).70                                 rule change is consistent with the                    at the Commission’s Public Reference
                                               D. Consistency With Rule 17Ad–                            requirements of the Act, and in                       Room.
                                               22(e)(18)                                                 particular, Section 17A(b)(3)(F) of the
                                                                                                         Act 73 and Rules 17Ad–22(e)(1),                       II. Self-Regulatory Organization’s
                                                  Rule 17Ad–22(e)(18) requires that                      (e)(17)(i)–(ii), and (e)(18) thereunder.74            Statement of the Purpose of, and
                                               LCH SA establish, implement, maintain                        It is therefore ordered pursuant to                Statutory Basis for, the Proposed Rule
                                               and enforce written policies and                          Section 19(b)(2) of the Act that the                  Change
                                               procedures reasonably designed to                         proposed rule change (SR–LCH SA–                         In its filing with the Commission, the
                                               establish objective, risk-based, and                      2018–004) be, and hereby is,                          self-regulatory organization included
                                               publicly disclosed criteria for                           approved.75                                           statements concerning the purpose of,
                                               participation, which permit fair and                                                                            and basis for, the proposed rule change
                                               open access by direct and, where                            For the Commission by the Division of
                                                                                                         Trading and Markets, pursuant to delegated            and discussed any comments it received
                                               relevant, indirect participants and other                                                                       on the proposed rule change. The text
                                                                                                         authority.76
                                               financial market utilities, require                                                                             of those statements may be examined at
                                                                                                         Eduardo A. Aleman,
                                               participants to have sufficient financial                                                                       the places specified in Item IV below.
                                               resources and robust operational                          Assistant Secretary.
                                                                                                         [FR Doc. 2018–22540 Filed 10–16–18; 8:45 am]
                                                                                                                                                               The Exchange has prepared summaries,
                                               capacity to meet obligations arising from                                                                       set forth in sections A, B, and C below,
                                               participation in the clearing agency, and                 BILLING CODE 8011–01–P
                                                                                                                                                               of the most significant parts of such
                                               monitor compliance with such                                                                                    statements.
                                               participation requirements on an
                                               ongoing basis.71                                          SECURITIES AND EXCHANGE                               A. Self-Regulatory Organization’s
                                                  The Commission believes that by                        COMMISSION                                            Statement of the Purpose of, and the
                                               allowing Clients to exercise CDS                                                                                Statutory Basis for, the Proposed Rule
                                               Options in the EEP directly, the                          [Release No. 34–84412; File No. SR–                   Change
                                               proposed rule change would establish                      NYSEAMER–2018–45]
                                                                                                                                                               1. Purpose
                                               objective and publicly disclosed criteria
                                               for Clients to participate in the EEP.                    Self-Regulatory Organizations; NYSE                      The Exchange proposes to amend
                                               Specifically, the proposed rule change                    American LLC; Notice of Filing and                    Rule 7.14E, Clearance and Settlement, to
                                               would, as discussed above, require                        Immediate Effectiveness of Proposed                   remove language that was inadvertently
                                               Clearing Members to designate their                       Rule Change To Amend Rule 7.14E,                      included when the rule was first
                                               relevant Clients to act on their behalf via               Clearance and Settlement                              adopted and that is inconsistent with
                                               the EEP with respect to those CDS                         October 11, 2018.
                                                                                                                                                               the Exchange’s Price List. The Exchange
                                               Options transactions that are Client                                                                            adopted Rule 7.14E as part of a
                                                                                                            Pursuant to Section 19(b)(1) 1 of the
                                               Cleared Transactions. The proposed rule                                                                         proposed rule change to adopt rules for
                                                                                                         Securities Exchange Act of 1934                       trading on the Exchange’s new trading
                                               change would also require that Clearing                   (‘‘Act’’) 2 and Rule 19b–4 thereunder,3
                                               Members delegate to their Clients                                                                               technology platform.4 Rule 7.14E was
                                                                                                         notice is hereby given that on                        based on similar rules of its affiliate,
                                               sufficient power to act on their behalf                   September 27, 2018, NYSE American
                                               via the EEP and require Clients to                                                                              NYSE Arca, Inc. (‘‘NYSE Arca’’) Rule
                                                                                                         LLC (‘‘Exchange’’ or ‘‘NYSE American’’)               7.14–E and adopted by the Exchange
                                               exercise that power through their Client                  filed with the Securities and Exchange
                                               Portal Account on the EEP. Finally, the                                                                         without any substantive differences.5
                                                                                                         Commission (‘‘Commission’’) the                          Paragraph (c) of Rule 7.14E states that
                                               proposed rule change would add                            proposed rule change as described in
                                               provisions to Appendix VIII of the                                                                              ‘‘[e]ach clearing firm must be admitted
                                                                                                         Items I, II, and III below, which Items               to the Exchange as an ETP Holder by
                                               Supplement to incorporate these                           have been prepared by the self-                       meeting the qualification requirements
                                               conditions directly into the terms of the                 regulatory organization. The                          set forth in Rule 2—Equities.’’ Paragraph
                                               transaction between a Clearing Member                     Commission is publishing this notice to               (c) of Rule 7.14E also includes language
                                               and its Client. The Commission believes                   solicit comments on the proposed rule                 that exempts clearing firms from paying
                                               that these aspects of the proposed rule                   change from interested persons.                       the regular ETP Holder fee where that
                                               change would establish the objective
                                                                                                                                                               clearing firm became an ETP Holder for
                                               and public criteria that Clients must                       72 17  CFR 240.17Ad–22(e)(18).                      the sole purpose of acting as a clearing
                                               follow to directly access the EEP and                       73 15  U.S.C. 78q–1(b)(3)(F).                       firm on the Exchange. This language
                                               participate in exercising CDS Options at                     74 17 CFR 240.17Ad–22(e)(1), (e)(17)(i)–(ii),

                                               LCH SA. Moreover, the Commission                          (e)(18).
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                                                                                                                                                                 4 See Securities Exchange Act Release Nos. 79242
                                                                                                            75 In approving the proposed rule change, the
                                               believes these aspects of the proposed                                                                          (November 4, 2016), 81 FR 79081 (November 10,
                                                                                                         Commission considered the proposal’s impacts on
                                               rule change would permit fair and open                    efficiency, competition, and capital formation. 15
                                                                                                                                                               2016) (SR–NYSEMKT–2016–97); 80590 (May 4,
                                               access by Clients by requiring Clearing                                                                         2017), 82 FR 21843 (May 10, 2017) (SR–NYSEMKT–
                                                                                                         U.S.C. 78c(f).                                        2017–01); and 79982 (February 7, 2017), 82 FR
                                               Members to designate their relevant                          76 17 CFR 200.30–3(a)(12).
                                                                                                                                                               105008 (February 13, 2017) (Notice) and 80577
                                                                                                            1 15 U.S.C.78s(b)(1).
                                                                                                                                                               (May 2, 2017), 82 FR 21446 (May 8, 2017) (SR–
                                                 70 17   CFR 240.17Ad–22(e)(17)(i)–(ii).                    2 15 U.S.C. 78a.                                   NYSEMKT–2017–04).
                                                 71 17   CFR 240.17Ad–22(e)(18).                            3 17 CFR 240.19b–4.                                  5 Id.




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Document Created: 2018-10-17 01:48:18
Document Modified: 2018-10-17 01:48:18
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 Citation83 FR 52581 

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