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<title>Federal Register, Volume 91 Issue 2 (Monday, January 5, 2026)</title>
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[Federal Register Volume 91, Number 2 (Monday, January 5, 2026)]
[Notices]
[Pages 315-326]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-24228]
[[Page 315]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104529; File No. SR-LCH SA-2025-010]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to LCH SA's Default Management Policy,
Investment Risk Policy, Liquidity Risk Policy, Settlement, Payment and
Custody Risk Policy, Model Governance, Validation and Review Policy and
Contract and Market Acceptability Policy
December 30, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4,\2\ notice is hereby given that on
December 29, 2025, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (``Commission'') the proposed rule change, as
described in Items I, II and III below, which Items have been prepared
by the clearing agency. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
LCH SA is submitting several risk policies (``Risk Policies'')
which LCH SA has adopted, including: (i) the Default Management Policy;
(ii) the Investment Risk Policy; (iii) the Liquidity Risk Policy; (iv)
the Settlement, Payment and Custody Risk Policy; (v) the Model
Governance, Validation and Review Policy; and (vi) the Contract and
Market Acceptability Policy. The Risk Policies have been issued by LCH
Group Holdings Limited (``LCH Group'') \3\ and adopted by the LCH SA
Risk Committee and LCH SA Board.\4\
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\3\ LCH Group Holdings Limited is an indirect wholly owned
subsidiary of the London Stock Exchange Group plc. In addition to
LCH SA, LCH Group also owns LCH Limited, a recognized central
counterparty supervised in the United Kingdom by the Bank of England
and a derivatives clearing organization (``DCO'') registered with
the Commodity Futures Trading Commission.
\4\ The Risk Policies have been elaborated in common with LCH
Ltd. in order to ensure risk management consistency within LCH
Group. Identical risk policies have been approved by LCH Ltd.'s
governance.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, LCH SA included statements
concerning the purpose of and basis for the Risk Policies and discussed
any comments it received on the Risk Policies. The text of these
statements may be examined at the places specified in Item IV below.
LCH SA has prepared summaries, set forth in sections A, B, and C below,
of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Risk Policies have been adopted by LCH SA in order to set out
the specific risk management requirements that govern its operations as
a clearing agency. Moreover, the Risk Policies clarify the roles and
responsibilities within LCH SA for compliance with the Risk Policies.
Finally, the Risk Policies have been designed to ensure consistency
with all relevant laws and regulations, including the European Markets
Infrastructure Regulation (``EMIR'') \5\ and Section 17A of the Act \6\
and the regulations thereunder.\7\
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\5\ Regulation (EU) No 648/2012 of the European Parliament and
of the Council of 4 July 2012 on OTC derivatives, central
counterparties and trade repositories.
\6\ 15 U.S.C. 78q-1.
\7\ The Risk Policies generally identify the relevant provisions
of law and regulation applicable to that policy.
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a. Default Management Policy
The Default Management Policy (``DMP'') sets out the minimum
standards that LCH SA must meet in managing the default of a clearing
member. The DMP sits atop a multi-tiered default management framework,
which also includes the Default Management Guidelines \8\ and the
Default Management Procedures \9\ adopted thereunder.
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\8\ The Default Management Guidelines, which are specific to LCH
SA, provide a guide to be used by each of LCH SA's Clearing Services
on defining and implementing the Service-specific default management
process in compliance with the Default Management Policy. The
guidelines describe the high-level strategy, principles, standards,
ownership and governance at LCH SA and each Clearing Service.
\9\ The head of each Clearing Service is responsible for
maintaining Default Management Procedures for such Service, and such
Procedures are reviewed quarterly. The Default Management Procedures
specify the processes and procedures at the Clearing Service level
for managing a default. These procedures must meet the standards
laid out in the DMP and follow the principles outlined in the
specific Default Management Guidelines. The relevant procedures are
set out in Appendix 1 to the CDS Clear Rulebook for the CDSClear
Service and in Chapter 5 of Title IV to the LCH SA Clearing Rule
Book for LCH SA's other clearing services. LCH SA maintains a
Default Management Procedure is in place to allow for the
appropriate coordination across the CCP, including with respect to
each Service and transversal services, including CaLM.
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The Default Management Procedures specify the processes and
procedures at the Clearing Service \10\ level for managing a default.
These procedures must meet the standards laid out in the DMP and follow
the principles outlined in the specific Default Management Guidelines.
The head of each Clearing Service (for example, CDSClear which provides
clearing services for credit default swaps) is responsible for
maintaining Default Management Procedures for such Service, and such
Procedures are reviewed quarterly. The relevant procedures are set out
in Appendix 1 to the CDSClear Rulebook for the CDSClear Service and in
Chapter 5 of Title IV to the LCH SA Clearing Rule Book for LCH SA's
other clearing services.
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\10\ LCH SA currently maintains 3 separate Clearing Services:
(i) CDSClear, which provides clearing services for credit default
swaps; (ii) RepoClear SA, which provides clearing services in
respect of repo and cash transactions on Euro-denominated government
and supra-national debts across thirteen (13) markets (France,
Italy, Spain, Germany, Belgium, Austria, Finland, Ireland, The
Netherlands, Portugal, Slovakia, Slovenia and Supranational), as
well as a basket collateral service through its [euro]GCPlus
triparty basket repo offering; (iii) DigitalAssetClear, which
provides a fully-regulated and segregated clearing service for cash-
settled Bitcoin index futures and options contracts traded on GFO-X,
the UK's first FCA-regulated, centrally-cleared multilateral trading
facility (MTF) dedicated to digital asset futures and options. LCH
SA formally operated its EquityClear and CommodityClear services,
each of which has since been closed.
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The DMP clarifies the roles and responsibilities within LCH SA for
compliance with the DMP. For example, LCH SA's First and Second Line
Risk teams are responsible for: (i) maintaining LCH SA's Default
Management Guidelines, which the Executive Risk Committee (``ERCo'')
must approve; \11\ (ii) designing and organizing company-wide default
management fire drill tests on at least an annual basis; and (iii) the
ongoing monitoring of compliance with the DMP.
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\11\ Any changes to the Default Management Guidelines must be
approved by LCH SA's ERCo and shared with the Default Crisis
Management Team (``DCMT''). The ERCo, which is chaired by LCH SA's
Chief Risk Officer (``CRO''), is comprised of the heads of each
Clearing Service, the CROs of each Clearing Service, and risk
management and compliance executives. The DCMT is comprised of
senior LCH SA executives and is empowered to make all relevant
decisions during the management of a default at LCH SA.
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The DMP also provides that LCH SA's Legal team is responsible, in
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conjunction with each Clearing Service, the Rule Change Committee and
LCH SA Compliance, for ensuring that key aspects of default procedures
are publicly disclosed in the Rulebook or other disclosures; and, in
conjunction with LCH SA's External Communications, for drafting the
default notice in case of default. LCH SA's Compliance team is
responsible for notifying the relevant regulators in the event of a
default. LCH SA Finance is responsible for producing the financial
statement at the end of the default management process.
The DMP also sets out applicable default governance standards. In
particular, the DMP establishes that it is the responsibility of LCH
SA's Chief Executive Officer (``CEO''), or the CEO's authorized
delegate, acting on the recommendation of the CRO, or the CRO's
authorized delegate, to place a clearing member in default \12\ and
initiate a DCMT.\13\ In addition, the DMP confirms that regulators and
relevant exchanges should be notified as soon as the decision is taken
to place a member in default, and a default notice should be delivered
more generally according to the Rulebook. Further, a market
communication strategy should be executed.
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\12\ The grounds for calling a default must be clear and agreed
with LCH SA Legal.
\13\ In addition, an LCH Group Default Crisis Management Team
will meet to consider coordination across both LCH SA and LCH
Limited, if necessary.
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The head of the affected Clearing Service will convene its Default
Management Group (``DMG'') to manage the default, under the supervision
and oversight of the DCMT. The standards that a DMG must meet are also
described, in particular that the DMG must be accessible at short
notice and emergency contact details must be maintained for such
purpose. For example, if the DMG includes clearing member traders, the
DMG should enter into contractual agreements with such traders that
ensure their independence and outline their duty to provide impartial
advice to LCH SA. Further, if the DMG relies on brokers/intermediaries
to perform the liquidation strategy (i.e., no other exit options are
available), a minimum of two contractually-regulated relationships
should be in place.\14\ Moreover, a secretary must be appointed, and
the DMG will be responsible for documenting critical actions and
decisions and maintain records of all relevant documents and emails.
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\14\ The brokers/intermediaries must meet the requirements set
out for this purpose in the LCH SA Settlement, Payment and Custody
Risk Policy, be approved by ERCo at the request of the relevant
Clearing Service, and should also engage in any fire drills.
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The DMP requires the Default Management Procedures of each Clearing
Service to have a defined exit methodology for a defaulted clearing
member's portfolio.\15\ In addition, the procedures must describe: (i)
the hedging and execution methodology for neutralizing material
directional risks of the defaulting portfolio, where applicable; (ii)
the intended auction process, where an auction is relied upon; (iii)
the portability arrangements necessary to facilitate the porting and
liquidation of a clearing member's clients' positions and collateral;
(iv) the default management reporting capability, distinguishing
segregated assets and liabilities for each member and client account at
both intra-day and end of day intervals; (v) the operational control
framework, which should at least ensure all risk positions are
adequately reconciled and accounted for prior to engaging the exit
strategy; and (vi) the communications strategy to internal and external
stakeholders.\16\
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\15\ LCH SA's CEO (or the CEO's authorized delegate) has the
authority to make final decisions, but can delegate authority to
each DMG to develop and execute the liquidation strategy and hedging
and porting solutions, which must be approved by LCH SA's CRO (or
the CRO's authorized delegate). Explicit approval of LCH SA's CEO
and CRO must be obtained before the DMG executes any actions that
would require the use of LCH SA's skin in the game (SITG).
\16\ The default management procedures may not contradict the
Rulebook.
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The DMP further requires each Clearing Service to maintain
sufficient resources to support the default management process.
Although resources may be drawn from the support and operations
departments, staff made available for default management process cannot
jeopardize the resources required for on-going ``business as usual''
functions. In addition, the DMG must be familiar with each Clearing
Service's Business Continuity Plan in place and the back-up
arrangements for performing their tasks in all circumstances (including
extreme but plausible scenarios such as the unavailability of the
office site and/or external DMG members).
The DMP requires each Clearing Service, in coordination with its
DMG, to conduct regular fire drill tests including testing extreme but
plausible scenarios and to participate in the annual joint fire drill
exercises across both CCPs.\17\ The procedures that LCH SA must follow
if it requests a temporary exception to any of the policies set out in
the DMP are also described. Finally, the DMP confirms that LCH SA's CEO
and CRO (or their respective authorized delegates if either or both are
unavailable) may jointly determine to override the DMP if the
application leads to results which are not in line with the intent of
the policy (e.g., by delaying action or increasing risk). In these
circumstances, the DMP provides that the LCH SA Board must be notified
of such actions as soon as practicable.
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\17\ Each Clearing Service must notify LCH SA Risk of the
planning and scope of each Clearing Service's fire drill testing
(e.g., actions, products, portfolio, included in the fire drill
testing).
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b. Investment Risk Policy
The Investment Risk Policy (``IRP'') sets out the LCH Group
standards for the management of investment risk at LCH SA. The key
principles of these standards are capital preservation and liquidity
management. The IRP applies to the investment of cash funds derived
from: (i) margins; (ii) default fund contributions; (iii) CCP capital
and retained earnings; and (iv) settlement failures.
The IRP clarifies the roles and responsibilities within LCH Group
and LCH SA for compliance with the IRP. The policy owner is the LCH SA
CRO. In addition:
<bullet> LCH SA Credit Risk is responsible for assigning and
maintaining (i) counterparty Internal Credit Scores (``ICS'') according
to the Counterparty Credit Risk Policy, and (ii) counterparty limits
within the framework outlined in the IRP;
<bullet> LCH SA's Collateral and Liquidity Management (``CaLM'')
team is responsible for (i) investment and monitoring activities in
accordance with the IRP and other relevant Group Risk policies and all
relevant regulations, (ii) for static data and collateral pricing,\18\
and (iii) annually reviewing the appropriateness of controls that are
managed by Triparty agents in accordance with this policy, where
possible;
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\18\ Collateral pricing is subject to the standards set out in
the Contract and Market Acceptability Policy, discussed below.
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<bullet> LCH SA's Risk Collateral and Liquidity Risk Management
(``CaLM Risk'') team is responsible for independently assessing and
monitoring investment exposures, including country and supranational
concentration risk;
<bullet> LCH SA Compliance is responsible for monitoring that a
suitable framework is in place to maintain compliance with all relevant
regulations regarding CaLM activities, and for monitoring relevant
regulatory rules and circulating relevant
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requirements to the appropriate internal stakeholders; and
<bullet> LCH SA Legal is responsible for preparation of the
necessary legal documents, and where relevant, provide a review on
segregation arrangements.
The IRP restricts counterparty and eligible issuers to sovereign
governments, central banks, institutions guaranteed by one or more
governments of approved sovereigns with an ICS of three (3) or above
and where no legislation is planned to remove the guarantee,\19\
certain supranational entities, and credit and financial institutions,
each of which must meet the internal credit scores or other standards
set out in the IRP. The IRP also establishes investment criteria with
regard to cash, securities, derivatives,\20\ foreign exchange (``FX'')
products \21\ and repurchase and reverse repurchase transactions.\22\
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\19\ Certain non-guaranteed entities are permitted issuers in
limited circumstances where, despite the lack of a formal guarantee,
the entity receives capital support from an eligible government and
is determined to be systemically important by fulfilling a public
policy mission, and no legislation is planned to remove either the
capital support or change the public policy mission.
\20\ Derivatives may be executed only with eligible credit and
financial institutions and are only permitted to: (i) hedge the
portfolio of a defaulted clearing member as part of LCH SA's Default
Management Procedure; or (ii) hedge currency risk arising from LCH
SA's liquidity management framework.
\21\ In normal market conditions, FX products are used only for
the purpose of testing liquidity arrangements, reducing exposures in
non-reporting currencies, or, subject to approval of the LCH SA CRO
(or authorized delegate), meeting operational liquidity shortfalls.
When managing a default, FX products may be used to eliminate the
risk associated with collateral liquidations or product flows as
well as the variation margin to be paid by LCH SA to non-defaulters
in a currency other than the currency in which such margin has been
deposited.
\22\ For example, such repurchase and reverse repurchase
transactions must only be executed with Central Banks, Credit/
Financial Institutions and should be conducted in accordance with
the applicable legal agreements. In addition, specific counterparty
limits, issuer limits and concentration limits are set out in an
annex to the IRP.
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In addition, the IRP sets out requirements with regard to the
approval of new investment products. All new investment products must
be reviewed and approved by the ERCo and must go through the New
Product Approval process. Further, if a new investment product
introduces new and novel risks to LCH SA, the IRP provides that the
investment product must also be reviewed by the Risk Committee and
approved by the Board.
The IRP also sets investment risk limits, i.e., weighted average
maturity, secured versus unsecured and counterparty concentration,
clarifies the responsibility for approving a new investment
counterparty or issuer and clarifies the process by which
counterparties, issuers and concentration limits are approved and
modified including any applicable haircuts.
The IRP sets out the counterparty, issuer and limit approval change
process to provide that the ERCo must approve any new counterparty or
issuer. The ERCo will also assign a counterparty limit within the
framework outlined by the IRP. Any limit changes must be within the
framework outlined in the IRP annexes and notified to CaLM and CaLM
Risk.\23\
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\23\ Applicable counterparty limits, instrument limits and
concentration limits are set out in an annex to the IRP.
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The IRP also provides that CaLM Risk is responsible for monitoring
country and supranational concentration. The IRP provides that
unsecured deposits may be held in the Banque de France without
monitoring, but deposits in all other central banks are subject to (and
counted towards) country concentration monitoring thresholds, unless
otherwise approved by the ERCo.
c. Liquidity Risk Policy
The Liquidity Risk Policy (``LRP'') sets out the LCH Group
standards for the management of liquidity risk at LCH SA. The basic
goal of the LRP is to ensure that LCH SA has enough cash on hand to
meet all the expected and unexpected financial obligations that arise
during the course of the day. The LRP describes how LCH SA will measure
whether it has enough available cash, both daily and intraday.
The LRP sets out the roles and responsibilities within LCH SA for
compliance with the LRP. In this regard, the LRP clarifies that: (i)
LCH SA CaLM is responsible for maintaining a liquidity plan, conducting
liquidity tests and managing the day-to-day liquidity of LCH SA
according to the standards set out in the LRP, and for notifying the
ERCo immediately of any exceptions; (ii) LCH SA CaLM Risk monitors and
measures the adequacy of the cash levels held to meet the outflows, and
reports issues for potential corrective action to CaLM; and (iii) LCH
SA Operations is responsible for the operational and control processes
related to intraday liquidity flows and interoperability
arrangements.\24\ Any exceptions to the established policies will
require a formal request to ERCo, a notification to the LCH SA Risk
Committee, and approval from the Board and LCH SA Risk Committee.
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\24\ LCH SA Operations also support operations associated with
liquidity/credit arrangements at Central Banks and Central
Securities Depositories.
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The LRP also identifies the different sources and availability of
liquidity,\25\ including: (i) cash from deposits and maturing
investments; (ii) LCH SA proprietary unencumbered (non-cash) assets
managed by CaLM; and (iii) unencumbered assets from repurchase
transactions undertaken by CaLM (including defaulted clearing members).
In addition, LCH SA may also use available Central Bank arrangements to
generate same-day liquidity by pledging non-cash collateral deposited
by its members on a title transfer basis. LCH SA can also access a
defaulted clearing member's non-cash margin collateral. In addition,
LCH SA may access any RepoClear assets ``received versus payment'' from
non-defaulting RepoClear counterparties in respect of transactions with
a defaulted RepoClear clearing member.\26\
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\25\ LCH SA holds all cash assets at either Central Banks or at
highly creditworthy commercial banks as prescribed in the
Settlement, Payment and Custody Risk Policy. The remaining liquidity
resources described below constitute assets that are readily
available and convertible into cash through prearranged funding
arrangements such as repurchase agreements and Central Bank
arrangements. LCH SA also permits other prearranged funding
arrangements that are determined by the Board to be highly reliable
even in extreme but plausible market conditions.
\26\ Separately, the LRP explains that, in circumstances in
which LCH SA is authorized to deposit clearing member cash with a
Central Bank and the Central Bank requires LCH SA to set a target
daily operating balance, CaLM is responsible for setting the target
operating balance, with the approval of the CRO and the ERCo.
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The LRP clarifies that LCH SA's two main sources of liquidity needs
are: (i) operational liquidity, e.g., repayment of excess cash
collateral to clearing members, substitution of cash collateral upon
clearing member request, provision of liquidity to facilitate
settlement including fails, overall reduction in Liabilities (Initial
and Additional Margin) and thus cash posted for margin coverage, and FX
Options warehouse cash replenishment; and (ii) default liquidity, e.g.,
fulfilment of the settlement obligations of a defaulted clearing
member, posting of variation margins to non-defaulting members on the
positions held by a defaulted clearing member, and hedging costs and
potential losses due to the liquidation of the cleared positions and
collateral posted by a defaulted clearing member.\27\
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\27\ Other potential draws on liquidity include an increase of
cash or collateral that is encumbered for credit lines at
international central securities depositories (``ICSDs'') and
settlement agents.
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The LRP also describes the steps that LCH SA takes to assess its
liquidity position. In particular, the LRP notes
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that the assessment must be run: (i) daily at an aggregated level and
on all material currencies; \28\ (ii) over a forward liquidity period
of 30 days; \29\ and intraday at various times when the CCP has
scheduled obligations to pay.\30\ In addition, the assessment must
factor in regulatory restrictions on the use and liquidation of client
assets maintained in segregated accounts and consider stress scenarios
that include restricted market access and behavioral assumptions on how
members may withdraw cash during times of stress. Importantly, the LRP
provides that the liquidity assessment must: (i) model the gross
liquidity impact of the default of the two member groups with the
largest liquidity requirement; \31\ (ii) include ``extreme but
plausible'' stress scenarios; \32\ and (iii) include reverse stress
testing that models extreme but plausible market scenarios in order to
help determine the limits of the current model, including the
plausibility thresholds which would trigger more in-depth analysis.\33\
The model used to conduct liquidity stress testing must be reviewed
through reverse stress testing on at least a monthly basis, with any
findings reported to the CRO, the ERCo and the Risk Committee, and
validated annually by an independent Model Validation Team, with any
findings reported to ERCo and the Risk Committee.\34\ Finally, CaLM is
responsible for evaluating the reliability of LCH SA's liquidity
arrangements by assessing the availability of the liquidity resources
through due diligence and/or testing processes.\35\
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\28\ LCH SA's material currency is the Euro, as specified in the
Model Governance, Validation and Review Policy. For the avoidance of
doubt, the LRP requires that exposures to all non-material
currencies (i.e., other than Euro, including GBP and USD) be
monitored on a daily basis as well.
\29\ With the ERCo approval, LCH SA may use a shorter period of
5 days.
\30\ Annex I, Intraday Liquidity Monitoring, to the LRP provides
additional detail on the factors that LCH SA should take into
account in assessing intraday liquidity.
\31\ In addition, LCH SA also models the gross liquidity impact
of the default of the family participant with the largest liquidity
requirement for a specific SEC compliant liquidity metric.
\32\ The LRP explains that an event is deemed to be implausible
if it is considered to have a likelihood of occurrence of less than
once in 30 years. If an event is not deemed to be implausible, it is
considered plausible.
\33\ The LRP further clarifies in Appendix II that LCH SA will
review the models used to conduct liquidity stress testing more
frequently than monthly, as required by Exchange Act rule 17ad-
22(e)(7)(vi), when the products cleared or markets served display
high volatility or become less liquid, when the size or
concentration of positions held by the clearing agency's
participants increases significantly, or in other appropriate
circumstances described in dedicated procedures.
\34\ The results of the reverse stress tests are used to
evaluate the adequacy of LCH SA's liquidity risk management
framework and, if needed, to make the necessary adjustments to that
framework. In addition, the LRP provides that the findings are
evaluated to ensure that the testing scenarios are appropriate to
determine LCH SA's liquidity needs and resources considering current
and evolving market conditions.
\35\ The liquidity assessment is subject to certain limits and
restrictions specified in the LRP. Specifically, the liquidity
coverage ratio for LCH (defined as the total available liquid assets
at the start of the business day divided by the total liquidity
requirements for that day) must be at least 105% on each day during
the assessment period, and no one member within a given Clearing
Service may use more than 25% of available liquidity following the
default of the member that is the largest liquidity user assuming
that the repo market is fully closed (``25% Member Cash Limit'').
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The LRP provides that LCH CaLM Risk is responsible for maintaining
a liquidity tiering scale reflecting the liquidity risk of the
collateral posted by clearing members. It also identifies the extreme
but plausible stress scenarios that LCH SA must run as part of its
liquidity stress tests.
The LRP also establishes a framework for monitoring concentration
risks in LCH SA's liquidity resources.\36\ For each Clearing Service,
cash margin posted by members must remain within the 25% Member Cash
Limit, and LCH SA therefore requires advance notice for replacing cash
with non-cash margin and may limit returns of cash margin to ensure
such limits are not breached. In addition, no member can provide more
than 25% of LCH SA's committed credit lines.\37\ There are no
concentration limits in relation to credit lines with international
central securities depositories (ICSDs).\38\
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\36\ The concentration limits applicable to LCH SA's protected
payment system (``PPS'') banks and concentration banks is governed
by the Settlement, Payment, and Custody Risk Policy.
\37\ The establishment of such credit lines requires Board
approval. The credit provider must be approved by the ERCo and
maintain a minimum ICS. A member's line of credit with LCH SA does
not count towards the available liquidity resources in the event of
that member's default.
\38\ LCH SA is required under the EMIR framework to deposit
margin, default fund contributions and other financial resources
with the operator of the ICSD in a manner that ensures the full
protection of those assets. The LRP also clarifies that ICSD credit
lines, which are used to facilitate settlement of LCH SA's clearing
and investment activities, are generally not counted as liquidity
assets, provided that such lines are not committed and not
associated with Central Bank arrangements. Assets pledged against
ICSD credit lines are deducted from LCH SA's available liquidity
resources to reflect their encumbrance.
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Finally, Appendix II sets out two additional liquidity stress
testing and reporting requirements.\39\ First, the Board will be
presented, not less than annually, with an analysis of the prearranged
non-committed funding arrangements that are included as part of LCH
SA's available liquidity resources for purposes of its liquidity
assessments, in order to determine whether such resources are highly
reliable even in extreme but plausible market conditions. In addition,
Appendix II to the LRP specifies that the scenarios in which such
reverse stress testing reviews will be undertaken more frequently than
monthly are where the products cleared or markets served display high
volatility or become less liquid, when the size or concentration of
members' positions increases significantly, or in other appropriate
circumstances described in dedicated procedures.
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\39\ Appendix II also establishes the monthly reverse stress
testing arrangements.
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d. Settlement, Payment and Custody Risk Policy
The Settlement, Payment and Custody Risk Policy (``CRP'') sets out
the LCH Group standards for the management of risks to LCH SA that
arise from the intermediaries used for settlement, payment and custody
activities.\40\ The purpose of the CRP is to mitigate the risks arising
from the default or operational failure of one or more intermediaries,
including: (i) the credit risk from direct unsecured exposure; (ii) the
increase in clearing member exposures from failed or delayed margin
payments; and (iii) liquidity risk from delayed access to securities
held as collateral or investments. It provides that the LCH SA Board's
risk appetite for settlement, payment and custodian risk is very
low.\41\
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\40\ Intermediaries covered by the CRP include: (i) central
banks; (ii) settlement platforms; (iii) international or domestic
central securities depositories (ICSDs and CSDs); (iv) settlement
agents; (v) custodians and sub-custodians; (vi) concentration banks;
(vii) protected payment system (PPS) banks; and (viii) other
intermediaries which give rise to settlement, payment or custody
risks.
\41\ See Exchange Act Release No. 34-104051 (September 25,
2025), File No. SR-LCH SA-2025-007, which approved the LCH SA Risk
Governance Framework (RGF) defining the term ``very low'' as: ``LCH
is not willing to accept risks in most circumstances. The Board
should decide if the benefits outweigh the costs and the risk is
worth taking.''
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The CRP also establishes the roles and responsibilities within LCH
SA for compliance with the CRP. In this regard:
<bullet> LCH SA CaLM Risk is responsible for the ongoing monitoring
of compliance with the requirements of this policy, and LCH SA Credit
Risk is responsible for assigning and maintaining the intermediaries'
internal credit scores (ICS) in accordance with the Counterparty Credit
Risk Policy; \42\
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\42\ See Exchange Act Release No. 34-104051 (September 25,
2025), File No. SR-LCH SA-2025-007, which approved the LCH SA
Counterparty Credit Risk Policy.
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[[Page 319]]
<bullet> LCH SA Operations is responsible for: (i) overseeing the
on-boarding process including requesting from LCH SA Credit Risk an ICS
prior to opening accounts and obtaining relevant internal governance
approvals, including compliance and legal where applicable; (ii)
undertaking the required due diligence to establish and maintain an
intermediary relationship, including execution of necessary legal
agreements; (iii) regularly updating LCH SA CaLM and LCH SA CaLM Risk
with a list of all liquidity facilities associated with settlement and
payment activities; (iv) monitoring of payment and settlement
activities and timely escalation of fails; (v) facilitating settlements
in accordance with the policy; (vi) reconciliations and delivery of end
of day intermediary position reports; and (vii) ensuring that relevant
infrastructure and back up arrangements are adequate to perform
settlement and payment activities as required by LCH SA; \43\
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\43\ Such activities include: (i) maintaining at all times a
current list of intermediary accounts; (ii) ownership of back-up
intermediary procedures; (iii) determining back-up intermediary
arrangements for collateral and investment related activities; (iv)
facilitating contingency payment arrangements for clearing members
in the absence or failure of PPS banks; and (v) conducting annual
contingency testing.
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<bullet> LCH SA CaLM is responsible for: (i) the organization and
establishment of investment-related liquidity facilities, including
execution of necessary legal agreements; (ii) sponsoring any new or
existing investment-related intermediary within the LCH SA governance
framework; and (iii) funding settlement activities of the clearing
services;
<bullet> LCH SA Clearing Services is responsible for: (i)
determination and application of the related intraday and overnight
liquidity facilities required to reliably conduct clearing services;
(ii) maintaining a list of all facilities associated with clearing
activities, including liquidity facilities, which is available on
demand with any changes notified to LCH SA CaLM and LCH SA CaLM Risk;
(iii) sponsoring any new or existing clearing-related intermediary
within the LCH Group governance framework; and (iv) ensuring that the
relevant clearing infrastructure and back-up intermediary arrangements
are adequate to perform clearing activities as required by LCH SA; and
<bullet> LCH SA Legal is responsible for ensuring that all legal
documents are consistent with regulatory requirements and signed by an
authorized signatory.
The CRP provides that all intermediaries must meet the internal
credit score assigned by LCH SA Credit Risk and confirms that, in
selecting an intermediary, central banks are preferred over any other
intermediary and ICSD/CSD are preferred over credit institutions. The
steps that should be taken if an intermediary no longer meets the
established criteria in order to mitigate the risk to LCH SA are also
described. In this regard, in the event that an existing intermediary
is downgraded such that it no longer meets the entry criteria, the CRP
provides that LCH SA ERCo must be notified. Further, a risk mitigation
plan should be put in place and approved by LCH SA ERCo, which may
include, but is not limited to: (i) the intermediary not being able to
offer the service to any additional clearing members; (ii) the
intermediary being subject to more frequent operational due diligence,
including responding to LCH SA's request for additional information to
assess its capability to perform its contractual services; and (iii)
termination of the intermediary's status.\44\
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\44\ In this case, the CRP notes that a suitable transition
period should be provided to minimize impacts to financial system
stability.
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The CRP provides that the due diligence that LCH SA conducts with
regard to intermediaries must allow LCH to meet its regulatory
obligations in respect of segregation of assets. In this regard, the
CRP states that the due diligence on operational framework/performance
and segregation must be set up to be refreshed at least once every two
years (or sooner if there are significant changes) by LCH SA Operations
and results posted and any escalations or issues reported to LCH SA
ERCo. In addition, where an intermediary used by LCH SA in the
securities settlement or custody processes with a Clearing Member
belongs to the same group as the Member itself, the CRP provides that
LCH SA is permitted to hold at the intermediary only passive balances
described in the Appendix. Moreover, the due diligence process must
confirm that assets held in custody by such an intermediary will remain
segregated in the event of the insolvency of the intermediary or an
intermediate affiliate company, and as such be released promptly.
The CRP details other business requirements, including relating to
PPS and concentration banks, which should offer finality of payment.
Any deviation from the CRP including, but not limited to, any reduction
in market standards in terms of finality of payment, should result in
the LCH Clearing Member having alternative settlement risk mitigation
in place. The CRP also requires that either a backup intermediary or
contingency plans must be in place. To that end, LCH SA is required to
have at least two formalized and regularly tested arrangements for each
of the following services: (a) security settlement platform/system, and
(b) commercial concentration bank. Where there is no back-up
intermediary in the market or where none can be established using
reasonable commercial efforts, contingency plans which address the non-
availability of a back-up must be maintained.
In addition, the CRP specifies the controls that must be in place
to validate all payment amounts and recipients and requires that such
controls must be independently tested at least annually. Reconciliation
controls also must be in place for cash and securities with custodian,
settlement and payment banks.
The CRP describes the procedures by which LCH SA monitors the risks
to which LCH SA and its clearing members may be exposed, including the
Appendix to the policy, which sets the exposure limits for LCH SA with
regard to: (i) overnight direct credit exposure of LCH SA to the
intermediaries resulting from settlement, payment and custody
activities; and (ii) intraday unsecured exposure to commercial
concentration banks as a result of concentration and investment
activities. In particular, the CRP provides that intraday limit usage
is monitored by LCH SA Collateral Operations team and any breaches must
be reported to LCH SA Credit Risk, LCH SA CaLM and LCH SA CaLM Risk
staff immediately. The report should contain details regarding usage,
breaches, explanation and remediation.
e. Model Governance, Validation and Review Policy
The Model Governance, Validation and Review Policy (``MGVRP'') sets
out the relevant steps relating to (i) a new or changed model from
initiation to validation and (ii) regular independent model validation
and backtesting of all models. The policy provides a consistent
framework across LCH Group to ensure that all models meet the relevant
quality criteria and that a validation process meeting all regulatory
requirements is followed.
The MGVRP applies to a new, change or review of: (i) a margin model
that estimates market risk under certain conditions or assumptions;
(ii) a stress testing framework used for default fund sizing; (iii) a
model providing a valuation for a financial product subject to a CCP
guarantee or received as collateral; (iv) a credit scoring model
[[Page 320]]
providing an assessment of the creditworthiness of a CCP's
counterparties; (v) a liquidity risk framework managing the risk that
LCH Group and its entities do not have sufficient liquidity to meet
their payment obligations as they fall due under certain market
conditions; (vi) a collateral risk framework defining the haircut
methodology applicable to eligible collateral posted by members; and
(vii) a model performance framework inclusive of statistical back-
testing. These features include: (i) reliance on underlying
(historical) data, i.e., the model uses relevant (historical) data;
(ii) assumptions, i.e., relevant assumptions on distribution and model
volatility; (iii) parameters, i.e., inputs into the model (could be
equal to (i) in some models) which are relevant for the evaluation of
an event, price or credit score; (iv) methodology/algorithm, i.e., a
processing component that transforms the historical model inputs into
the estimates; and (v) separate outcome, i.e., the estimated risk,
price or credit score using the methodology and relevant inputs.\45\
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\45\ The MGVRP notes that there are circumstances in which
clearing members are required to contribute further resources over
and above the amounts derived from margin models and margin model
add-ons. Where these are determined from existing financial risk
limits such as the CCP Cover 2 Limit, the CCP Concentration Limit,
or any other such limit or threshold described in the credit and
financial risk policies, such limits are outside the scope of the
MGVRP.
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The MGVRP also clarifies and expands upon the roles and
responsibilities within LCH SA for compliance with the MGVRP. The
policy explains that: (i) the relevant model owners are responsible for
the initiation, development, implementation, documentation and
maintenance of their models (and the relating model risk); and (ii) LCH
SA Risk is responsible for the identification, review and assessment of
margin methodologies, margin parameter review and approval, model
performance review, evaluation of model changes and review of pricing
and valuation methods.\46\ Further, the LCH SA Model Validation team or
an external party will be responsible for independently validating each
model yearly at least once every 12 months to confirm that the model is
still performing adequately.\47\
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\46\ LCH SA's Head of Market Risk/Credit Risk can delegate to
the LCH Group Model Working Group (``MWG'') tasks relating to the
monitoring and oversight of model development and change process.
\47\ The independent party must have the relevant knowledge and
experience to perform this task and will not be involved in any way
in the model building and testing process.
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The MGVRP reaffirms that all models within the scope of the policy
must meet the at regulatory requirements in each jurisdiction
applicable to the model.\48\ In addition, model risk should remain
within the LCH Board risk appetite as described in the LCH Risk
Governance Framework. Moreover, model performance, allowable offsets
and required counter cyclical features should meet the requirements
described in the LCH Financial Resource Adequacy Policy and LCH
Procyclicality Policy.
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\48\ Reference to relevant regulatory provisions, including
EMIR/ESMA technical standards and CFTC rules are provided, as well
as a broad statement requiring compliance with all applicable
regulatory requirements.
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The MGVRP provides, in addition, that LCH will document all models
in a model inventory, to record key attributes and allow for the
tracking of model validation actions and classify the importance of
each model as either high importance or low importance based on the
potential financial impact in the event the model is incorrect. A model
is of high importance if, in the event it is incorrect, it could lead
to a shortfall in (i) LCH SA capital greater than 10 percent, (ii)
prefunded financial resources (in the waterfall) greater than five (5)
percent, or (iii) total margin requirements for a class of financial
instruments greater than 10 percent. A model is of low importance if,
in the event it is incorrect, it will not lead to a shortfall greater
than any of the above. An assessment of the importance of a model will
be performed by the LCH SA's Head of Market Risk/Credit Risk, the LCH
SA CRO, and/or the Deputy CRO.
The model governance process depends on the importance of the model
and actions taken for any model.\49\ New models and material changes in
models with high importance require full risk governance review,
including: (i) member consultation and review as required by local
supervisors; (ii) peer review by quantitative experts through the MWG;
(iii) review by Financial Risk Working Group (``FRWG''); (iv)
independent validation of the model; (v) approval by ERCo; (vi) review
by the Risk Committee; (vii) approval by the relevant Board; and (viii)
review and/or approval by regulators, if applicable. New models and
material changes in models with low importance, on the other hand
require review by FRWG and approval by ERCo.\50\
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\49\ To the extent practicable, LCH will apply the same
standards and rules to models supplied by third parties as are
applied to models developed in-house.
\50\ Non-material changes in high importance models and low
importance models require review by FRWG followed by approval by
ERCo, in the case of high importance models, and notification to
ERCo, in the case of low importance models.
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A revision to a model is considered a material change if it meets
one of the following criteria:
<bullet> The model revision leads to substantial change in
outcomes, especially where it leads to a reduction of coverage. The
following changes in outcomes after model revision are considered
material: (i) CCP capital changes more than +/-10 percent; (ii)
prefunded financial resources (in the waterfall) change more than +/-
five (5) percent; (iii) total margin requirements for a class of
financial instruments change more than +/-10 percent; (iv) a decrease
or increase of the estimated liquidity needs in any major currency (for
LCH SA, EUR) greater than 20% or the total liquidity needs greater than
10% (based on end of day positions); or (v) a decrease or increase of
the total value of non-cash collateral at a CCP level greater than 10%;
<bullet> A change is made to a key parameter of the model which in
the future may result in a substantial change in outcomes;
<bullet> The model revision leads to a change in theoretical and
empirical underpinnings of the model; or
<bullet> The model revision also leads to a change in risk policy.
The MGVRP describes the manner in which LCH SA will conduct daily
backtesting of portfolios and margin models to verify the performance
of all employed margin models. LCH SA performs the following types of
backtesting:
<bullet> Portfolio backtesting to assure the appropriate overall
functioning of the model and to test if the required confidence
interval was met; and
<bullet> Additional backtesting to verify the underlying reasons/
causes of breaches on portfolio level or to identify underlying
weakness of the model relating to certain products, risk types or
market conditions.
A summary of backtesting exceptions (i.e., P&L changes in excess of
margin coverage) is reported daily. If the headline frequency and
materiality of backtesting breaches indicate that the required
confidence interval cannot be met or exceptions are verified alongside
stress testing results, further investigation on the validity of the
margin model may be warranted. In addition, investigation on the
validity of the margin model is also performed by LCH SA Risk
Management when: (i) backtesting shows that any individual market has
numerous breaches and/or falls below the target confidence level
[[Page 321]]
and/or fails the adjusted significance tests; or (ii) margin shortfalls
are identified for specific products or specific market conditions.\51\
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\51\ Portfolio backtesting results are notified at least
quarterly to the Risk Committee where any breaches of target
confidence level and mitigating actions are presented. A daily
monitor is also distributed to CROs and Business Heads.
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The outcomes of this investigation are reported to the LCH SA Head
of Market Risk. Possible actions in response include: (i) taking member
specific action such as the calling of additional margin; (ii)
reviewing the margin rates for individual contracts/securities
responsible for breaches; and (iii) conducting an intermediate review
of the underlying methodologies and inputs to verify their suitability.
Further, the MGVRP sets out the process by which models are
independently validated. The model validation process evaluates the
conceptual and practical soundness of models. The MGVRP sets out a
detailed list of the steps that must be taken into account when
conducting a comprehensive validation of each margin model, including a
model that uses stress testing, the liquidity risk framework,
collateral risk framework and credit scoring framework.\52\
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\52\ The results of the model validation process are reported to
ERCo with one of three grades: (i) satisfactory; (ii) needs
improvement; or (iii) unsatisfactory.
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A comprehensive validation of margin models will include the
following:
<bullet> A review of all documentation/information provided by the
model developer;
<bullet> An analysis of margin models, both core initial margin and
margin add-ons including Default Fund Additional Margin;
<bullet> An evaluation of the conceptual soundness of the model and
framework structure;
<bullet> A review of the on-going monitoring procedures such as
daily margin coverage and back-testing;
<bullet> A review of the parameters and assumptions made in the
development of the models, their methodologies and the framework
including an assessment of the theoretical and empirical properties of
the model;
<bullet> A review of the adequacy and appropriateness of the
models, their methodologies and framework adopted in respect of the
type of contracts they apply to;
<bullet> An analysis of the outcomes of testing results against LCH
performance criteria;
<bullet> A review of the diversification benefits of the model
where applicable;
<bullet> A review of the margin period of risk where applicable;
<bullet> An assessment of pro-cyclical effects and how such affects
are mitigated where applicable;
<bullet> A review of price data, pricing models, market data and
the use of proxies;
<bullet> An assessment of margin model sensitivity to the material
risk factors and correlations (if applicable) through sensitivity
analysis;
<bullet> Assurance that the model complies with applicable LCH SA
policies; and
<bullet> Assurance that the model continues to meet regulatory
requirements.
In addition, a comprehensive validation of a model that uses stress
testing will include the following:
<bullet> A review of all documentation/information provided by the
model developer;
<bullet> An analysis of the risks which are not covered by margin
models, but included in stress testing;
<bullet> An assessment of the stress testing framework and ensure
LCH SA has defined extreme but plausible conditions;
<bullet> An analysis of stress testing outcomes;
<bullet> An assessment of the comprehensiveness of the stress
testing framework, taking account of all relevant risk factors and
products LCH SA clears;
<bullet> An evaluation of the degree of consideration that the
stress tests incorporate correlation, concentration risk and emerging
risk captured by hypothetical/theoretical scenarios;
<bullet> Assurance that the model complies with applicable LCH SA
policies; and
<bullet> Assurance that the model continues to meet regulatory
requirements.
Finally, the MGVRP provides that LCH will disclose the general
principles of its underlying models, methodologies, nature of tests
performed and a high-level summary of test results unless such
disclosure may put at risk business secrecy and soundness of LCH.
g. Contract and Market Acceptability Policy
The Contract and Market Acceptability Policy (``CMAP'') describes
the principles and factors that will be applied whenever any new
Market,\53\ Product \54\ or Contract \55\ is proposed to be accepted by
LCH SA.\56\ In particular, the CMAP sets out a standard approach to
assessing the acceptability of new contracts and markets in order to
assure that LCH SA: (i) understands all factors that may influence its
decision whether to accept, and risk manage, a new Contract or Market
(or maturity); (ii) identifies, manages and monitors any new risks that
may be posed by the introduction of the new Contract or Market; (iii)
highlights the need for any additional risk measures, such as
amendments to the existing initial margin calculations; (iv) ensures an
ongoing consistent approach to the assessment of new Contracts; and (v)
informs the market place and maintains and demonstrates a level playing
field.
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\53\ A Market is defined as a market undertaking, which is
either a legal or operational entity providing a trade feed to a CCP
or an OTC market where trading is arranged on a bilateral basis.
\54\ A Product is defined as a series of Contracts that have
similar characteristics or specifications.
\55\ A Contract is defined to mean either a derivatives contract
with a unique product specification or any individual security
accepted on the cash or fixed income markets.
\56\ References to potential CPSS-IOSCO and ESMA standards set
out in the current policy have been removed as unnecessary.
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The CMAP sets out the process by which different Markets, Products
and Contracts are approved and accepted for clearing. Specifically:
<bullet> Any new class of OTC derivatives must be reviewed and
approved if any by the relevant regulators subject to the appropriate
internal governance process.
<bullet> Any new Market is subject to review by LCH SA's Risk
Committee and approval by the Board.\57\
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\57\ As an exception to this requirement, a new trade source or
venue for an existing Clearing Service or Product may be approved by
the LCH SA ERCo, provided that it has assured that there is no
change to the risk profile of LCH SA and that a satisfactory
operational risk assessment has been completed.
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<bullet> Any new Product or Contract that exhibits novel risk
features or requires significant changes to existing risk controls must
be approved by LCH SA's Risk Committee and the Board.
<bullet> The LCH SA ERCo has the delegated authority of LCH SA's
Risk Committee/Board to approve any new Contracts, Products or trade
sources which present no novel risks and require minimal changes to
existing risk controls. Where the ERCo has approved such Contracts,
Products or trade source, the Risk Committee will be notified at their
next meeting.
<bullet> LCH SA's Operations Department has been delegated
authority from ERCo to approve more conventional Products and Contracts
that arise from the normal day to day course of business and that meet
the criteria set out in the Appendix to the CMAP, and may also approve
new Contracts that LCH SA has contractually agreed to clear within a
pre-determined framework and
[[Page 322]]
contractually related procedures.\58\ The Appendix sets out in detail
the acceptance criteria for various characteristics of new Products and
Contracts. The characteristics are determined by the type of Product or
Contract \59\ and include, for instance, the markets such products are
traded on, the country of domicile, the ICSD, and the issuer rating. In
such cases, the ERCo will be notified each quarter with the volume and
type of the Contracts and Products approved by the delegate.
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\58\ The LCH SA ERCo must approve the procedures.
\59\ The types of Products and Contracts covered by the Appendix
are: New Cash Equity (DVP/RVP) Products; New Cash Bond (DVP/RVP)
Products (excluding Repo/FI Services); New Cash European Structured
(DVP/RVP) Products (Warrants); New CDS Contracts; New Exchange
Traded Futures and Options Contracts; Fixed Income Repurchase/Buy
Sell Bank Securities; and New Digital Assets Traded Futures and
Options Contracts.
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The CMAP also clarifies the roles and responsibilities within LCH
SA for compliance with the CMAP. In this regard: (i) LCH SA ERCo is
responsible for reviewing and making decisions on the suitability of
new Contract and Market requests for clearing; (ii) the relevant
clearing service is responsible for preparing and evaluating requests
with respect to the minimum requirements and principles described in
the CMAP prior to presentation to LCH SA ERCo and for reviewing price
validation controls on a regular basis with LCH SA Risk responsible for
approving any changes; and (iii) LCH SA's Operations Department, when
acting in the capacity of approval delegate, is responsible to ensure
new requests meet the minimum requirements described in the CMAP. LCH
SA's Operations Department is also responsible for notifying LCH SA
ERCo quarterly of the new contracts approved each quarter.
The CMAP reaffirms the principles underlying the policy,
emphasizing that all Products accepted for clearing must be eligible to
be cleared according to the regulations applicable in each jurisdiction
in which LCH SA operates. Further, in determining the acceptability of
a new Contract, Product or Market, LCH SA must ensure that (i) in the
event of a default, if the defaulted member had positions in that
Contract, Product or Market, that LCH SA could manage the close-out of
those positions within the scope of the LCH Default Management Policy;
and (ii) there is sufficient price discovery to determine a reliable
market value of the Product or Contract. The CMAP further provides that
another important principle to be followed when accepting a new
Contract, Product or Market is to ensure that the risk measures and
principles in the applicable margining methodology are in line with its
specific risks. LCH SA's standard margining policies or methodology may
therefore be amended, subject to the relevant internal governance
process \60\ and regulatory approval, to appropriately risk manage a
new Contract or Market.
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\60\ As also referred to in the MGVRP.
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The CMAP sets out the factors that LCH SA will consider in
assessing any new Market, Product or Contract, including: (i)
membership or counterparty risk; \61\ (ii) standardization of Products;
(iii) pricing; \62\ (iv) product liquidity; \63\ (v) default
management; (vi) market risk; (vii) operational risk and associated
Internal Capital Adequacy Assessment Process (ICAAP) risks; \64\ (viii)
legal, compliance, insurance and reputational risk; (ix) settlement
risk; (x) liquidity risk; (xi) issuer risk; and (xii) foreign currency
risk.
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\61\ A minimum of three creditworthy clearing members are
required for any new Market, although a greater number is preferred.
\62\ In order to establish a reliable mark-to-market price, any
new Product or Contract must have prices that are updated daily from
a reliable source(s). In this regard, LCH SA may rely on a
recognized exchange as the sole source of prices for exchange-traded
products, but OTC traded Products or Contracts must have at least
three reliable sources of bids. Further, price validation controls
such as price variance and staleness tolerances must be in place to
ensure on-going quality assurance of all price data.
\63\ Expected volume, open interest, issuance and bid/offer
costs should be evaluated for each new Product or Contract to ensure
there is sufficient liquidity to close positions in the event of a
member default. Where a new Contract is added to a group of similar
Contracts that fall into an existing liquidity margin class, the
liquidity assessment will be that of the existing liquidity margin
class.
\64\ Each service is required to have in place a contingency
arrangement for receiving trades and must test at least annually the
daily trading volume capacity (for primary and contingency
arrangements) and total outstanding trades, or where relevant
outstanding positions, capacity. The results of the capacity testing
and minimum system capacity requirements are to be reported by each
service to LCH SA ERCo at least annually. LCH SA ERCo reserves the
right to set a higher multiplier for a given service to reflect the
potential exposure to a stress event or allowance for a growing
service with limited history.
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Finally, the CMAP (i) provides that all Markets and Products will
be reviewed on an ongoing basis to assure that they continue to comply
with the criteria set out in the policy including that after such a
review, an annual summary and statement must be presented to the Risk
Committee and (ii) describes the procedures by which changes to the
policy and its annexes may be approved.
2. Statutory Basis
LCH SA has determined that Risk Policies are consistent with the
requirements of Section 17A of the Act \65\ and regulations thereunder
applicable to it, including Commission Rule 17ad-22(e).\66\ In
particular, Section 17A(b)(3)(F) of the Act requires, inter alia, that
the rules of a clearing agency ``promote the prompt and accurate
clearance and settlement of . . . derivatives agreements, contracts,
and transactions'' and ``assure the safeguarding of securities and
funds that are in its custody or control or for which it is
responsible.'' \67\ These elements of Section 17A(b)(3)(F) of the Act
are addressed by: (i) the CRP, which establishes standards for the
selection and monitoring of intermediaries that LCH SA uses for
settlement, payment and custody services; and (ii) the IRP, which sets
out the principles, standards, and monitoring practices governing LCH
SA's management of investment risk.
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\65\ 15 U.S.C. 78q-1.
\66\ 17 CFR 240.17ad-22.
\67\ 15 U.S.C. 78q-1(b)(3)(F).
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The CRP sets out more clearly LCH SA's standards for the management
of risks that may arise from the intermediaries used for settlement,
payment and custody activities in order to mitigate better the risks
arising from the default or operational failure of one or more
intermediaries. Among other standards, the policy sets a preference for
central banks over other intermediaries and ICSD/CSD over credit
institutions, thereby prioritizing entities with the highest levels of
safety and reliability for LCH SA's custody and control of securities
and funds. By requiring the use of operationally robust intermediaries,
the CRP reduces the risk of settlement or payment failures and,
therefore, promotes the prompt and accurate clearance and settlement of
derivatives agreements, contracts, and transactions, consistent with
Section 17A(b)(3)(F). The policy requires intermediaries to meet
internal credit scores and describes the steps that will be taken if an
intermediary no longer meets such thresholds, including risk-mitigation
plans and potential termination of the intermediary relationship, to
ensure continued safeguarding of securities and funds. The CRP also
mandates due diligence to confirm that assets belonging to LCH SA or
its clearing members are fully segregated, identifiable, and promptly
accessible in the event of a default, ensuring that client securities
and funds are safeguarded and can be recovered without delay. To limit
settlement risk, the policy requires ``delivery versus payment''
settlement where applicable and controls for any ``free of payment
settlements'', as well as payment finality
[[Page 323]]
from concentration banks. The CRP therefore also meets the requirements
of 17A(b)(3)(F) of the Act by assuring the safeguarding of securities
and funds that are in LCH SA's custody or control or for which it is
responsible.
In addition, the policy establishes robust controls to validate all
payment amounts and recipients, requires independent annual testing of
such controls, and sets out procedures for regular monitoring and
escalation of any breaches or settlement failures. Manual payments
require dual validation and oversight by senior management, reducing
the risk of misappropriation or operational error and therefore
promoting the prompt and accurate clearance and settlement of
derivatives agreements, contracts, and transactions. The policy also
sets out the procedures by which LCH SA monitors the risks to which it
and its clearing members may be exposed from such intermediaries.
Separately, the IRP enhances the standards for managing the risk
arising from the investment of cash funds derived from: (i) margins;
(ii) default fund contributions; (iii) CCP capital and retained
earnings; and (iv) cash arising from settlement failures. The policy
restricts counterparty and eligible issuers to sovereign governments,
central banks, government guaranteed institutions, certain
supranational entities, and credit and financial institutions, each of
which must meet the internal credit scores or other standards set out
in the policy. Permissible investments under the IRP are restricted to
cash, securities, derivatives, foreign exchange products and repurchase
and reverse repurchase transactions. The policy also establishes a
formal approval process of new investment products with executive and
board oversight. These measures minimize credit, market and liquidity
risk, and help ensure the prompt and reliable access to assets, thereby
promoting the prompt and accurate clearance and settlement of
derivatives agreements, contracts and transactions as required under
Section 17A(b)(3)(F) of the Act.
The policy also sets robust investment risk limits, including a
weighted average portfolio maturity cap of two years; daily interest-
rate-risk stress testing with potential losses capped at 10% of capital
resources; and secured versus unsecured and counterparty concentration.
In setting such limits, LCH SA assures the safeguarding of securities
and funds that are in LCH SA's custody or control or for which it is
responsible, in line with Section 17A(b)(3)(F) of the Act.
Collectively, the foregoing policies and procedures set out in the
CRP and the IRP are designed to ensure the ``prompt and accurate
clearance and settlement of . . . derivatives agreements, contracts,
and transactions'' and the ``safeguarding of securities and funds which
are in the custody or control of the clearing agency''. As such, these
policies are consistent with those parts of Section 17A(b)(3)(F) of the
Act.
Commission Rule 17ad-22(e)(2)(i) provides that each covered
clearing agency must establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide for
governance arrangements that are clear and transparent.\68\ As
discussed above, each of the Risk Policies expands on and clarifies the
standards by which LCH SA manages the various risks to which it is
exposed as a CCP. Importantly, each Risk Policy clearly describes the
roles and responsibilities of the various units within LCH SA or LCH
Group, as applicable, responsible for compliance with each policy. For
example, the DMP specifies that LCH SA Risk is responsible for: (i)
maintaining LCH SA's Default Management Guidelines; (ii) designing and
organizing company-wide default management fire drill tests on at least
an annual basis; and (iii) the ongoing monitoring of compliance with
the DMP. In addition, LCH SA Legal is responsible: (i) in conjunction
with each Clearing Service and the Rule Change Committee and LCH SA
Compliance, for ensuring that key aspects of default procedures are
publicly disclosed in the Rulebook or other disclosures; (ii) in
conjunction with Compliance, for notifying the relevant regulators in
the event of a default; and (iii) in conjunction with LCH SA's External
Communications, for drafting and delivering the default notice.
Governance standards have also been strengthened, more fully describing
the responsibility of the CEO to place a clearing member in default and
initiate a Default Crisis Management Team and Default Management Group
to manage the default.
---------------------------------------------------------------------------
\68\ 17 CFR 240.17ad-22(e)(2)(i).
---------------------------------------------------------------------------
Similarly, the LRP clearly explains that: (i) LCH SA CaLM is
responsible for maintaining a liquidity plan, conducting liquidity
tests and managing the day-to-day liquidity of LCH SA according to the
standards set out in the LRP, and for notifying LCH SA ERCo immediately
of any exceptions; (ii) LCH SA CaLM Risk monitors and measures the
adequacy of the cash levels held to meet the outflows, and reports
issues for potential corrective action to LCH SA CaLM; and (iii) LCH SA
Operations is responsible for the operational and control processes
related to intraday liquidity flows and interoperability arrangements.
By expanding on and clarifying the standards by which LCH SA
manages the various risks to which it is exposed as a CCP and more
clearly describing the roles and responsibilities of the various units
within LCH SA or LCH Group, as applicable, responsible for compliance
with each Risk Policy, the Risk Policies provide for governance
arrangements that are clear and transparent. As such, the Risk Policies
are consistent with Commission Rule 17ad-22(e)(2)(i).\69\
---------------------------------------------------------------------------
\69\ Id.
---------------------------------------------------------------------------
Commission Rule 17ad-22(e)(2)(v) \70\ provides that each covered
clearing agency must establish, implement, maintain, and enforce
written policies and procedures reasonably designed to specify clear
and direct lines of responsibility. As discussed in detail immediately
above, each Risk Policy clearly describes the roles and
responsibilities of the various units within LCH SA or LCH Group, as
applicable, responsible for compliance with each policy. By more
clearly describing the roles and responsibilities of the various units
within LCH SA or LCH Group, as applicable, responsible for compliance
with each Risk Policy, the Risk Policies specify clear and direct lines
of responsibility. As such, the Risk Policies are consistent with
Commission Rule 17ad-22(e)(2)(v).\71\
---------------------------------------------------------------------------
\70\ 17 CFR 240.17ad-22(e)(2)(v).
\71\ Id.
---------------------------------------------------------------------------
Commission Rule 17ad-22(e)(7) \72\ requires each covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to effectively measure, monitor, and
manage the liquidity risk that arises in or is borne by the covered
clearing agency, including measuring, monitoring, and managing its
settlement and funding flows on an ongoing and timely basis, and its
use of intraday liquidity by, inter alia, (i) maintaining sufficient
liquid resources at the minimum in all relevant currencies to effect
same-day and, where appropriate, intraday and multiday settlement of
payment obligations with a high degree of confidence under a wide range
of foreseeable stress scenarios that includes, but is not limited to,
the default of the participant family that would generate the largest
aggregate payment obligation for the covered clearing agency in extreme
but plausible
[[Page 324]]
market conditions; \73\ (ii) holding qualifying liquid resources
sufficient to meet the minimum liquidity resource requirement under
Commission Rule 17ad-22(e)(7)(i) \74\ in each relevant currency for
which the covered clearing agency has payment obligations owed to
clearing members; \75\ (iii) using the access to accounts and services
at a relevant central bank, when available and where determined to be
practical by the board of directors of the covered clearing agency, to
enhance its management of liquidity risk; \76\ and (iv) determining the
amount and regularly testing the sufficiency of the liquid resources
held for the purpose of meeting minimum liquidity resources under
Commission Rule 17ad-22(e)(7)(i), by meeting, at a minimum, the items
listed in Commission Rule 17ad-22(e)(7)(vi)(A) to (D).\77\
---------------------------------------------------------------------------
\72\ 17 CFR 240.17ad-22(e)(7).
\73\ 17 CFR 240.17ad-22(e)(7)(i).
\74\ Id.
\75\ 17 CFR 240.17ad-22(e)(7)(ii).
\76\ 17 CFR 240.17ad-22(e)(7)(iii).
\77\ 17 CFR 240.17ad-22(e)(7)(vi).
---------------------------------------------------------------------------
As noted, the LRP sets out the standards pursuant to which LCH SA
ensures that it has enough cash on hand to meet all expected and
unexpected financial obligations throughout the day. The LRP identifies
both the primary liquidity resources available to LCH SA and the
primary sources of liquidity requirements. The policy requires LCH SA
to assess its liquidity position: (i) daily at an aggregated level and
on all material currencies; (ii) over a forward liquidity period of 30
days; and (iii) intraday at various times when the CCP has scheduled
obligations to pay.\78\
---------------------------------------------------------------------------
\78\ As noted above, an annex to the LRP provides additional
detail on the factors LCH SA should take into account in assessing
intraday liquidity.
---------------------------------------------------------------------------
The assessment must also factor in regulatory restrictions on the
use and liquidation of client assets maintained in segregated accounts
and consider stress scenarios that include restricted market access and
behavioral assumptions on how members may withdraw cash during times of
stress. Importantly, the LRP provides that the liquidity assessment
must: (i) model the gross liquidity impact of the default of the two
member groups with the largest liquidity requirement; (ii) include
``extreme but plausible'' stress scenarios; and (iii) include reverse
stress testing that models extreme but plausible market scenarios in
order to help determine the limits of the current model, including the
plausibility thresholds which would trigger more in-depth analysis.
Finally, the policy requires that the model used to conduct liquidity
stress testing must be reviewed through reverse stress testing on at
least a monthly basis, with any findings reported to LCH SA's CRO, ERCo
and the Risk Committee, and validated annually by an independent Model
Validation Team, with any findings reported to ERCo and the Risk
Committee.\79\
---------------------------------------------------------------------------
\79\ As noted above, another annex to the LRP provides guidance
for the review and validation of the liquidity risk management
framework and liquidity stress testing model.
---------------------------------------------------------------------------
By requiring LCH SA to assess its liquidity position at least daily
to assure, inter alia, that it has sufficient liquid resources in all
relevant currencies to meet its financial requirements in extreme but
plausible stress scenarios, the LRP is consistent with the requirements
of Commission Rule 17ad-22(e)(7).\80\
---------------------------------------------------------------------------
\80\ 17 CFR 240.17ad-22(e)(7).
---------------------------------------------------------------------------
Commission Rule 17ad-22(e)(13) requires a covered clearing agency
to ensure that it has the authority and operational capacity to take
timely action to contain losses and liquidity demands and continue to
meet its obligations by, at a minimum, requiring the covered clearing
agency's participants and, when practicable, other stakeholders to
participate in the testing and review of its default procedures,
including any close-out procedures, at least annually and following
material changes thereto.\81\ In addition to strengthening the default
governance and clarifying the roles and responsibilities of the units
within LCH SA for managing a default of a clearing member, the DMP sets
out the standards that each Default Management Group must meet,
requires each Clearing Service to have a defined exit methodology for a
defaulted clearing member's portfolio, including procedures that
describe: (i) the hedging and execution methodology for neutralizing
material directional risks of the defaulting portfolio, where
applicable; (ii) where an auction (transferring the risk of a defaulted
clearing member to other members) is relied upon as part of its
closeout procedure, the intended auction process to be followed
(including the auction type, participation requirements, acceptance of
bid(s), portfolio allocation, transfer and collateralization); and
(iii) the portability arrangements necessary to facilitate the porting
and liquidation of a clearing member's clients' positions and
collateral. The DMP also requires that the default management reports
maintained by each Clearing Service must distinguish the segregated
assets and liabilities for each member and client account at both
intra-day and end of day intervals. Finally, each Clearing Service must
conduct regular fire drill tests including testing extreme but
plausible scenarios and participate in the annual joint fire drill
exercises across both CCPs.
---------------------------------------------------------------------------
\81\ 17 CFR 240.17ad-22(e)(13).
---------------------------------------------------------------------------
By requiring LCH SA to have a defined exit methodology for a
defaulted clearing member's portfolio, to maintain default management
reports that distinguish the segregated assets and liabilities for each
member and client account at both intra-day and end of day intervals,
and to conduct regular fire drill tests including testing extreme but
plausible scenarios and to participate in the annual joint fire drill
exercises, the DMP is consistent with Commission Rule 17ad-
22(e)(13).\82\
---------------------------------------------------------------------------
\82\ Id.
---------------------------------------------------------------------------
Commission Rule 17ad-22(e)(16) requires a covered clearing agency
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to safeguard the clearing agency's own
and its participants' assets, minimize the risk of loss and delay in
access to these assets, and invest such assets in instruments with
minimal credit, market, and liquidity risks.\83\ The IRP sets out the
standards for the management of LCH SA's investment risk. In addition
to clarifying the roles and responsibilities within LCH SA for
compliance with the policy, noted above, the IRP: (i) restricts
counterparties and eligible issuers to sovereign governments, central
banks, government guaranteed institutions, certain supranational
entities, and credit and financial institutions, each of which must
meet the internal credit scores or other standards set out in the IRP;
(ii) sets investment criteria with regard to cash, securities,
derivatives, foreign exchange products and repurchase and reverse
repurchase transactions \84\ as well as requirements with regard to the
approval of new investment products; and (iii) sets investment risk
limits. The policy also clarifies responsibility for approving a new
investment counterparty or issuer, as well as the process by which
counterparties, issuers and concentration limits are approved and
modified.
---------------------------------------------------------------------------
\83\ 17 CFR 240.17ad-22(e)(16).
\84\ As noted above, specific counterparty limits, issuer limits
and concentration limits are set out in an annex to the IRP.
---------------------------------------------------------------------------
By setting out: (i) a policy restricting counterparties and
eligible issuers; (ii) investment criteria with regard to cash,
securities, derivatives, foreign exchange products and repurchase and
reverse repurchase transactions as well as the requirements with regard
to the
[[Page 325]]
approval of new investment products; and (iii) a policy setting
investment risk limits, the Investment Risk Policy is consistent with
Commission Rule 17ad-22(e)(16).\85\
---------------------------------------------------------------------------
\85\ 17 CFR 240.17ad-22(e)(16).
---------------------------------------------------------------------------
Commission Rule 17ad-22(e)(4)(vii) requires a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes by, inter
alia, performing a model validation for its credit risk models not less
than annually or more frequently as may be contemplated by the covered
clearing agency's risk management framework \86\ established pursuant
to Commission Rule 17ad-22(e)(3).\87\ In addition, Commission Rule
17ad-22(e)(6)(vii) requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to cover, if the covered clearing agency provides
central counterparty services, its credit exposures to its participants
by establishing a risk-based margin system that requires a model
validation for the covered clearing agency's margin system and related
models to be performed not less than annually, or more frequently as
may be contemplated by the covered clearing agency's risk management
framework \88\ established pursuant to Commission Rule 17ad-
22(e)(3).\89\ Further, Commission Rule 17ad-22(e)(7)(vii) requires a
covered clearing agency to establish, implement, maintain and enforce
written policies and procedures reasonably designed to effectively
measure, monitor, and manage the liquidity risk that arises in or is
borne by the covered clearing agency, including measuring, monitoring,
and managing its settlement and funding flows on an ongoing and timely
basis, and its use of intraday liquidity by, inter alia, performing a
model validation of its liquidity risk models not less than annually or
more frequently as may be contemplated by the covered clearing agency's
risk management framework \90\ established pursuant to Commission Rule
17ad-22(e)(3).\91\
---------------------------------------------------------------------------
\86\ 17 CFR 240.17ad-22(e)(4)(vii).
\87\ 17 CFR 240.17ad-22(e)(3).
\88\ 17 CFR 240.17ad-22(e)(6)(vii).
\89\ 17 CFR 240.17ad-22(e)(3).
\90\ 17 CFR 240.17ad-22(e)(7)(vii).
\91\ 17 CFR 240.17ad-22(e)(3).
---------------------------------------------------------------------------
The MGVRP applies to: (i) a margin model that estimates market risk
under certain conditions or assumptions; (ii) a stress testing
framework used for default fund sizing; (iii) a model providing a
valuation for a financial product subject to a CCP guarantee or
received as collateral; (iv) a credit scoring model providing an
assessment of the creditworthiness of a CCP's counterparties, provided
the model has the features identified in the policy; (v) the liquidity
risk framework managing the risk that LCH Group and its entities do not
have sufficient liquidity to meet their payment obligations as they
fall due under certain market conditions; (vi) the collateral risk
framework defining the haircut methodology applicable to eligible
collateral posted by members; and (vii) the model performance framework
inclusive of statistical back-testing. The MGVRP describes standards by
which LCH SA will monitor the performance of models, identifying, in
particular, the standards pursuant to which each CCP will conduct daily
backtesting of portfolios and margin models.
The MGVRP requires that each model must be independently validated
at least once every 12 months by the LCH SA Model Validation team or an
external party to confirm that the model is still performing adequately
and sets out the process by which models are independently validated.
The MGVRP provides that model validation process must evaluate the
conceptual and practical soundness of models and sets out a detailed
list of the steps that will be taken in conducting a comprehensive
validation of each of the margin models, i.e., a model that uses stress
testing, the liquidity risk framework, collateral risk framework and
credit scoring framework.
By setting standards by which LCH SA will monitor the performance
of models, identifying in particular, the standards pursuant to which
each CCP will conduct daily backtesting of portfolios and margin models
and requiring that each model must be independently validated at least
every 12 months by the LCH SA Model Validation team or an external
party to confirm that the model is still performing adequately and
setting out the process by which models are independently validated,
the Model Governance, Validation and Review Policy is consistent with
Commission Rule 17ad-22(e)(4)(vii),\92\ Commission Rule 17ad-
22(e)(6)(vii) \93\ and Commission Rule 17ad-22(e)(7)(vii).\94\
---------------------------------------------------------------------------
\92\ 17 CFR 240.17ad-22(e)(4)(vii).
\93\ 17 CFR 240.17ad-22(e)(6)(vii).
\94\ 17 CFR 240.17ad-22(e)(7)(vii).
---------------------------------------------------------------------------
Commission Rule 17ad-22(e)(5) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to limit the assets it accepts as
collateral to those with low credit, liquidity, and market risks, and
set and enforce appropriately conservative haircuts and concentration
limits if the covered clearing agency requires collateral to manage its
or its participants' credit exposures.\95\
---------------------------------------------------------------------------
\95\ 17 CFR 240.17ad-22(e)(5).
---------------------------------------------------------------------------
By setting (i) the principles and criteria applied when determining
whether an asset may be accepted by LCH SA as collateral for margin
cover, and (ii) conservative counterparty concentration limits, haircut
matrices and add-ons, and other applicable limits, the IRP is
consistent with Commission Rule 17ad-22(e)(5).
In addition, Commission Rule 17ad-22(e)(6)(iii) requires covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to cover, if the covered
clearing agency provides central counterparty services, its credit
exposures to its participants by establishing a risk-based margin
system that, at a minimum, calculates margin sufficient to cover its
potential future exposure to participants in the interval between the
last margin collection and the close out of positions following a
participant default.\96\
---------------------------------------------------------------------------
\96\ 17 CFR 240.17ad-22(e)(6)(iii).
---------------------------------------------------------------------------
The MGVRP sets out the relevant steps relating to (i) a new or
changed model from initiation to validation and (ii) regular
independent model validation and backtesting of all models. As noted
above, the MGVRP applies to a change or review of, or a new: (i) margin
model that estimates market risk under certain conditions or
assumptions; (ii) stress testing framework used for default fund
sizing; (iii) model providing a valuation for a financial product
subject to a CCP guarantee or received as collateral; (iv) credit
scoring model providing an assessment of the creditworthiness of a
CCP's counterparties; (v) liquidity risk framework managing the risk
that LCH Group and its entities do not have sufficient liquidity to
meet their payment obligations as they fall due under certain market
conditions; (vi) collateral risk framework defining the haircut
methodology applicable to eligible collateral posted by clearing
members; and (vii) model performance framework inclusive of statistical
back-testing.
By requiring LCH SA to ensure that all margin models meet the
relevant quality criteria, are subject to an independent validation
process, and are
[[Page 326]]
backtested to ensure coverage of potential future exposure, the MGVRP
allows LCH SA to evaluate the riskiness of an intermediary and make
appropriate risk-based financial assumptions on margin adequacy which
is consistent with Commission Rule 17ad-22(e)(5) and 17ad-
22(e)(6)(iii).
Finally, in order to remove any potential surprise element in the
market in the event LCH SA is required to make one or more clearing
member assessments, each default fund must publish the potential member
assessments that would be called if a set number of the top clearing
members were to default.
Commission Rule 17ad-22(e)(3)(i) requires a covered clearing agency
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to maintain a sound risk management
framework for comprehensively managing legal, credit, liquidity,
operational, general business, investment, custody, and other risks
that arise in or are borne by the covered clearing agency, which
includes risk management policies, procedures, and systems designed to
identify, measure, monitor, and manage the range of risks that arise in
or are borne by the covered clearing agency, that are subject to review
on a specified periodic basis and approved by the board of directors
annually.\97\ As discussed above, the CMAP describes the principles and
factors that will be applied whenever any new Market, Product or
Contract is proposed to be accepted by LCH SA. In particular, potential
new Contracts and Markets will be assessed in order to assure that LCH
SA: (i) understands all factors that may influence its decision whether
to accept, and risk manage, a new Contract or Market (or maturity);
(ii) identifies, manages and monitors any new risks that may be posed
by the introduction of the new Contract or Market; (iii) highlights the
need for any additional risk measures, such as amendments to the
existing initial margin calculations; (iv) ensures an ongoing
consistent approach to the assessment of new Contracts; and (v) informs
the market place and maintains and demonstrates a level playing field.
The factors that LCH SA will consider in assessing any new Market,
Product or Contract, include: (i) membership or counterparty risk; (ii)
standardization of Products; (iii) pricing; (iv) product liquidity; (v)
default management; (vi) market risk; (vii) operational risk and
associated ICAAP risks; (viii) legal, compliance, insurance and
reputational risk; (ix) settlement risk; (x) liquidity risk; (xi)
issuer risk; and (xii) foreign currency risk.
---------------------------------------------------------------------------
\97\ 17 CFR 240.17ad-22(e)(3)(i).
---------------------------------------------------------------------------
By setting out the principles and factors that will be applied
whenever any new Market, Product or Contract is proposed to be accepted
by LCH SA, the CMAP is consistent with Commission Rule 17ad-
22(e)(3)(i).\98\ This is because the CMAP comprehensively sets out a
number of risk related factors that should be considered when LCH SA
considers new Markets, Products or Contracts, allowing LCH SA to
evaluate and ultimately manage any such related risks.
---------------------------------------------------------------------------
\98\ Id.
---------------------------------------------------------------------------
B. Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\99\ LCH SA does
not believe the Risk Policies would have any impact, or impose any
burden, on competition. The Risk Policies do not address any
competitive issue or have any significant impact on the competition
among central counterparties. LCH SA operates an open access clearing
model, and the Risk Policies will have no direct effect on this open
access model, subject to LCH SA's regulatory requirements and clearing
rules, provisions and overall governance process, including the
clearing membership eligibility criteria and appropriate credit risk
assessment.
---------------------------------------------------------------------------
\99\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
C. Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments relating to the Risk Policies have not been
solicited or received. LCH SA will notify the Commission of any written
comments received by LCH SA.
III. Date of Effectiveness of the Proposed Rule Change
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or (B)
institute proceedings to determine whether the proposed rule change
should be disapproved.P
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>);
or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#5f2d2a333a723c3032323a312b2c1f2c3a3c71383029"><span class="__cf_email__" data-cfemail="b4c6c1d8d199d7dbd9d9d1dac0c7f4c7d1d79ad3dbc2">[email protected]</span></a>. Please include
file number SR-LCH SA-2025-010 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-LCH SA-2025-010. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>). Copies of such
filing will be available for inspection and copying at the principal
office of LCH SA and on LCH SA's website at <a href="http://www.lch.com/resources/rules-and-regulations/proposed-rule-changes-0">http://www.lch.com/resources/rules-and-regulations/proposed-rule-changes-0</a>.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-LCH SA-2025-010 and
should be submitted on or before January 26, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\100\
---------------------------------------------------------------------------
\100\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Asistant Secretary.
[FR Doc. 2025-24228 Filed 1-2-26; 8:45 am]
BILLING CODE 8011-01-P
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Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating to LCH SA's Default Management Policy, Investment Risk Policy, Liquidity Risk Policy, Settlement, Payment and Custody Risk Policy, Model Governance, Validation and Review Policy and Contract and Market Acceptability Policy
<html> <head> <title>Federal Register, Volume 91 Issue 2 (Monday, January 5, 2026)</title> </head> <body><pre> [Federal Register Volume 91, Number 2 (Monday, January 5, 2026)] [...
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Use this for formal legal and research references to the published document.
91 FR 315
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“Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating to LCH SA's Default Management Policy, Investment Risk Policy, Liquidity Risk Policy, Settlement, Payment and Custody Risk Policy, Model Governance, Validation and Review Policy and Contract and Market Acceptability Policy,” thefederalregister.org (January 5, 2026), https://thefederalregister.org/documents/2025-24228/self-regulatory-organizations-lch-sa-notice-of-filing-of-proposed-rule-change-relating-to-lch-sa-s-default-management-po.