[Federal Register Volume 84, Number 237 (Tuesday, December 10, 2019)]
[Notices]
[Pages 67488-67491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26497]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87655; File No. SR-LCH SA-2019-007]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to Amendments to LCH SA's Liquidity Risk
Modelling Framework
December 4, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 3, 2019, 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
(``Proposed Rule Change'') described in Items I, II, and III below,
which Items have been primarily prepared by LCH SA. 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 proposing to amend its Liquidity Risk Modelling Framework
(the ``Framework''), which describes the Liquidity Stress Testing
framework by which the Collateral and Liquidity Risk Management
department (``CaLRM'') of LCH Group Holdings Limited (``LCH Group'')
assures that LCH SA has enough cash available to meet any financial
obligations, both expected and unexpected, that may arise over the
liquidation period for each of the clearing services that LCH SA
offers.\3\ The Commission first approved the Framework by Order dated
July 18, 2018.\4\
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\3\ LCH SA, a subsidiary of LCH Group, manages its liquidity
risk pursuant to, among other policies and procedures, the Group
Liquidity Risk Policy and the Group Liquidity Plan applicable to
each entity within LCH Group.
In addition to its CDSClear service, LCH SA provides clearing
services in connection with cash equities and derivatives listed for
trading on Euronext (EquityClear), commodity derivatives listed for
trading on Euronext (CommodityClear), and tri-party Repo
transactions (RepoClear).
\4\ Securities Exchange Act Release No. 34-83691 (July 24,
2018), 83 FR 36635 (July 30, 2018); File No. SR-LCH SA-2018-003)
(the ``Release'').
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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 Proposed Rule Change and
discussed any comments it received on the Proposed Rule Change. The
text of these statements may be examined at the places specified in
Item IV below. LCH SA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The Framework is one of several well-developed policies and
procedures that LCH SA maintains to manage its liquidity risk, i.e.,
the risk that LCH SA will not have enough cash available, in extreme
but plausible circumstances, to settle margin payments or delivery
obligations when they become due, in particular upon the default of a
clearing member. Such policies and procedures include, among others:
(i) The Group Liquidity Risk Policy; (ii) the Group Liquidity Plan;
(iii) the Group Financial Resource Adequacy Plan; (iv) the Group
Collateral Risk Policy; (v) the Group Investment Risk Policy; and (vi)
the LCH SA Collateral Control Framework. The Framework complements
these policies and procedures and develops further the Group Liquidity
Risk Policy.
In brief, the Framework: (i) Identifies LCH SA's sources of
liquidity and corresponding liquidity risks; (ii) identifies LCH SA's
liquidity requirements with respect to its members and its
interoperable central counterparty (``CCP''); \5\ (iii) describes the
metrics and limits that LCH SA monitors; and (iv) describes the
scenarios under which these metrics are computed.\6\
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\5\ LCH SA has an interoperability agreement with Cassa di
Compensazione e Garanzia (``CC&G''), an Italian CCP, pursuant to
which LCH SA's clearing members and CC&G's clearing members are able
to benefit from common clearing services without having to join the
other CCP. Each CCP is a clearing member of the other one with a
particular status when accessing the clearing system of the other
counterparty.
\6\ The Release describes the operation of the Framework in
greater detail.
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(i) Physically-Settled Options
LCH SA is proposing to amend the Framework in order to address more
accurately its liquidity requirements in the event of the assignment
and exercise of physically-settled options involving a defaulting
clearing member during the liquidation period of such clearing member.
Specifically, the amended Framework will address LCH SA's liquidity
requirements in the event options that are in the money are
[[Page 67489]]
exercised either on the day (``T''), or on the business day immediately
following the day (``T+1''), on which the clearing member that is a
seller of the options defaults.
If such defaulting clearing member is a seller of a Call option
that is in the money, LCH SA would have to purchase the underlying
securities in the market at a stressed price and await payment at the
strike price from the non-defaulting purchaser of the Call option at
settlement. If such defaulting clearing member is a seller of a Put
option that is in the money, LCH SA would have to purchase the
underlying securities at the strike price from the non-defaulting
purchaser of the Put option. Although margins should cover any
potential loss, liquidity outflows as a result of the sales' proceeds
are included as liquidity requirements, in each case.
In the current Framework, there is no liquidity provision related
to the risk of assignment and exercise of options at expiration. In
order to address this concern, the amended Framework will anticipate,
prior to the expiration dates, the amount of liquidity funding that may
arise from options that may be exercised, in the event of the default
of LCH SA's two largest members (``Cover2''). On a daily basis, LCH's
Liquidity and Concentration Risk (``LCR'') calculation will identify
all of the potential positions that are in the money or at the money on
that day and the next business day. Given the potential option
exercise, the LCR will generate a liquidity need. The additional
liquidity amount that LCH SA could potentially need will be equal to
the sum of the equities to source following the option assignments at
expiration and/or the difference between the underlying securities and
the strike price or the strike price minus the asset in the event of a
cash settlement.
In practice, the process will work as follows on a daily basis:
The liquidity needs arising from the options that are in
the money or at the money, having their expiries on T or T+1, will be
computed by applying no market stress to the equities.
The liquidity needs arising from the options that are in
the money or at the money, having their expiries on T or T+1, will be
computed by applying a stress scenario to the equities.
LCH SA will select the positions consistent with the
Cover2 for both modes described above and will retain the most punitive
one.
This amount will be added to the current cash equity amount in the LCR.
(ii) Fixed Income Clearing System
Further, LCH SA is proposing to amend the Framework to take into
account the expansion of sovereign debt for which LCH SA provides
clearing services through its Fixed Income Clearing System. LCH SA
initially provided clearing services only with respect to French
sovereign debt. The Fixed Income Clearing service subsequently added
the sovereign debt of Italy, Spain, Germany, and Belgium. More
recently, the Fixed Income Clearing System has been extended to eight
additional Euro markets: Austria, Netherlands, Finland, Ireland,
Portugal, Slovakia, Slovenia and Supranationals.\7\
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\7\ The supranational debt eligible for clearing is currently
limited to the Euro denominated debt of the European Investment
Bank.
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In this regard, therefore, the Framework has been revised to
provide that all securities resulting from the settlement of all
repurchase contracts (``repos'') on behalf of a defaulting clearing
member, not just repos on the sovereign debt of France, Italy and
Spain, may be used to generate liquidity at the Banque de France. The
amended Framework also clarifies that, in the event that a Central Bank
Guarantee (``CBG'') is triggered by the default of a clearing member
posting the CBG, the relevant Central Bank will pay the liabilities of
the defaulting clearing member in cash.
Further, the Framework has been revised to (i) identify the
relevant central securities depository (``CSD'') through which
transactions in the sovereign debt of the different jurisdictions may
settle,\8\ (ii) describe the manner by which LCH SA injects liquidity
into each settlement platform, in particular, Euroclear Bank and
Clearstream Luxembourg, and (iii) modify the limits by settlement
platform on the main liquidity drivers (i.e., cash injected into the
platforms, auto-collateralization and gross fails).
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\8\ French sovereign debt may settle through Euroclear Bank,
Italian sovereign debt through Monte Titoli, Spanish sovereign debt
through Iberclear, German sovereign debt through Clearstream
Frankfurt, and Belgian sovereign debt through the National Bank of
Belgium. The sovereign debt of the remaining jurisdictions may
settle through either Euroclear Bank or Clearstream Luxembourg. All
transactions are settled through Target 2 Securities, a Eurosystem
technical platform to which CSDs assign the management of securities
settlement in central bank money.
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(iii) Stress Tests
LCH SA is proposing clarifications with respect to certain aspects
of its stress tests. With respect to the operational liquidity
target,\9\ which is a metric allowing LCH SA to confirm that the
business as usual liquidity sources are sufficient for a five day
period in stressed situations, consistent with the LCR time horizon,
the Framework notes that LCH SA uses a three-day window, in particular
with regard to margin reduction. The Framework further clarifies that,
in calculating liquidity resources, LCH SA deducts funds required to
facilitate settlements, cover end of day fails at Euroclear Bank and
Clearstream Luxembourg, and avoid Target 2 Securities fails. In
addition, the Framework assumes that members allowed to post CBGs will
switch from cash or ECB-eligible non-cash collateral to CBGs (although
the Framework does not currently take such switches into account, since
all eligible members, i.e., Dutch and Belgian members, have already
done so). Moreover, the amended Framework confirms that, in calculating
required variation margin payments to CC&G, LCH SA assumes a
theoretical 5-day holding period.
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\9\ Operational liquidity is defined to mean the amount of
liquidity related to the operational management of LCH SA that is
required to be held in a stressed environment that does not lead to
a clearing member's default.
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The amended Framework also clarifies how stressed liquidity
requirements and impact are calculated for each clearing member, in
particular with respect to the cash equity settlement requirement for
options. These calculations are used to determine the two clearing
members that would potentially cause the largest aggregate liquidity
exposure for the CCP in extreme but plausible market conditions.
Finally, the Framework clarifies how LCH SA conducts reverse stress
tests in order to determine if there is a combination of changes in LCH
SA's liquidity that could lead to a liquidity shortfall. In particular,
the amended Framework considers whether there is a combination of
changes in LCH SA's liquidity resources that could lead to a liquidity
shortfall, even in the absence of stress in the market.
2. Statutory Basis
LCH SA has determined that Proposed Rule Change is consistent with
the requirements of Section 17A of the Act \10\ and regulations
thereunder applicable to it. Section 17A(b)(3)(F) of the Act requires,
inter alia, that the rules of a clearing agency ``assure the
safeguarding of securities and funds that are in its custody or control
or for which it is responsible.'' \11\ Further, Regulation 17dA-
22(e)(4)(ii) requires a CCP that is involved in activities with a more
[[Page 67490]]
complex risk profile, e.g., that provides CCP services for security-
based swaps, to maintain and enforce written policies and procedures
reasonably designed to effectively ``measure, monitor, and manage its
credit exposures from its payment, clearing and settlement processes''
to assure that it maintains additional financial resources to enable it
to cover a wide range of stress scenarios that include the default to
two participant family clearing members that would potentially cause
the largest aggregate liquidity exposure for the CCP in extreme but
plausible market conditions.\12\
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\10\ 15 U.S.C. 78q-1.
\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ 17 CFR 240.17Ad-22(e)(4)(ii).
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As discussed earlier, LCH SA is proposing to amend the Framework to
address specifically LCH SA's liquidity requirements in the event of
the assignment and exercise of physically-settled options involving a
defaulting clearing member during the liquidation of such clearing
member. The proposed amendment will assist LCH SA in defining more
accurately its liquidity requirements by assuring that LCH SA will
maintain appropriate levels of liquidity in the event of the assignment
and exercise of options involving a defaulting clearing member.
Specifically, the amended Framework will anticipate, prior to their
expiration dates, the amount of liquidity funding that may arise from
options that may be exercised, in the event of the default of LCH SA's
two largest members.
The policies and procedures set out in the amended Framework,
therefore, are designed to enhance LCH SA's to measure, monitor, and
manage the liquidity risk that may arise in connection with its
activities as a covered clearing agency. As such the amendments to the
Framework regarding LCH SA's liquidity requirements in the event of the
assignment and exercise of options involving a defaulting clearing
member are consistent with the requirements of Regulation 17dA-
22(e)(4)(ii).
As noted above, Section 17A(b)(3)(F) of the Act requires that the
rules of a clearing agency ``assure the safeguarding of securities and
funds that are in its custody or control or for which it is
responsible.'' To better implement this statutory requirement, LCH SA
is proposing to amend the Framework to take into account the expansion
of sovereign debt for which LCH SA provides clearing services through
its Fixed Income Clearing System. In addition to French sovereign debt,
the Fixed Income Clearing service now provides clearing services with
respect to the sovereign debt of eleven other European jurisdictions,
as well as the European Investment Bank.\13\ The revised Framework: (i)
Identifies the relevant CSD through which transactions in the sovereign
debt of the different jurisdictions may settle; (ii) describes the
manner by which LCH SA injects liquidity into each settlement platform;
and (iii) modifies the limits by settlement platform on the main
liquidity drivers (i.e., cash injected into the platforms, auto-
collateralization and gross fails). The revised Framework also provides
that all securities resulting from the settlement of repos on behalf of
a defaulting clearing member may be used to generate liquidity at the
Banque de France and clarifies that, in the event that a CBG is
triggered by the default of a clearing member, the relevant Central
Bank will pay the defaulting clearing member's liabilities in cash.
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\13\ The eleven jurisdictions are: Austria; Belgium; Finland;
Germany; Ireland; Italy; Netherlands; Portugal; Spain; Slovakia; and
Slovenia.
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The proposed amendments strengthen LCH SA's policies and procedures
intended to ``assure the safeguarding of securities and funds that are
in its custody or control or for which it is responsible'' (i) by
specifying the CSDs through which transactions in the identified
foreign sovereign debt may settle and the means by which LCH SA
interacts with such CSDs, (ii) by confirming that all securities of a
defaulting clearing member resulting from repos are available to the
Banque de France, and (iii) by providing that a Central Bank that has
provided a CBG will pay a defaulting clearing member's liabilities in
cash. As such, the amendments to the Framework regarding the Fixed
Income Clearing Service are consistent with Section 17A(b)(3)(F) of the
Act.
Regulation 17dA-22(e)(4)(i) and (vi)(A) requires a clearing agency
to maintain and enforce written policies and procedures reasonably
designed to conduct stress testing of its total financial resources
once each day using standard predetermined parameters and assumptions
to assure that it has sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence.\14\ As discussed above, LCH SA is proposing amendments to
the Framework to identify certain additional factors that that LCH will
take into account in conducting its stress tests and provide greater
clarity regarding LCH SA's stress testing practices.
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\14\ 17 CFR 240.17Ad-22(e)(4)(i) and (vi).
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In particular, the Framework confirms that in calculating its
operational liquidity target,\15\ LCH SA uses a three-day rather than a
five-day window, in particular with regard to margin reduction. The
Framework further clarifies that, in calculating liquidity resources,
LCH SA deducts funds required to facilitate settlements, cover end of
day fails at Euroclear Bank and Clearstream Luxembourg, and avoid
Target 2 Securities fails. The Framework also confirms that it assumes
that members allowed to post CBGs will switch from cash or ECB-eligible
non-cash collateral.
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\15\ The term ``operational liquidity'' is defined at footnote
21, supra.
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The amended Framework further clarifies how stressed liquidity
requirements are calculated for each clearing member, in particular
with respect to the cash equity settlement requirement for options, to
determine the two clearing members that would potentially cause the
largest aggregate liquidity exposure for the CCP in extreme but
plausible market conditions. The Framework also clarifies the manner in
which LCH SA conducts reverse stress tests in order to determine if
there is a combination of changes in LCH SA's liquidity that could lead
to a liquidity shortfall.
By clarifying the factors that it takes into account in conducting
daily stress testing, the proposed amendments enhance LCH SA's written
policies and procedures with regard to stress testing and thereby
assures that LCH SA maintains sufficient additional financial resources
to enable it to cover a wide range of stress scenarios that include the
default to two participant family clearing members that would
potentially cause the largest aggregate liquidity exposure for the CCP
in extreme but plausible market conditions. As such, therefore, the
proposed amendments, therefore, are consistent with the requirements of
Regulation 17dA-22(e)(4)(i) and (vi)(A).
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.\16\ LCH SA does
not believe the Proposed Rule Change would have any impact, or impose
any burden, on competition. The Proposed Rule Change does not address
any competitive issue or have any impact on the competition among
central counterparties. LCH SA operates an open access model, and the
Proposed
[[Page 67491]]
Rule Change will have no effect on this model.
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\16\ 15 U.S.C. 78q-1(b)(3)(I).
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C. Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments relating to the Proposed Rule Change have not been
solicited or received. LCH SA will notify the Commission of any written
comments received by LCH SA.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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.
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:
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
Send an email to [email protected]. Please include
File Number SR-LCH SA-2019-007 on the subject line.
Paper Comments
Send paper comments in triplicate to Vanessa A.
Countryman, Secretary, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-LCH SA-2019-007. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filings will also be available for inspection
and copying at the principal office of LCH SA and on LCH SA's website
at http://www.lch.com/resources/rules-and-regulations/proposed-rule-changes-0. All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-LCH SA-2019-007 and should
be submitted on or before December 31, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-26497 Filed 12-9-19; 8:45 am]
BILLING CODE 8011-01-P