[Federal Register Volume 85, Number 136 (Wednesday, July 15, 2020)]
[Notices]
[Pages 42959-42962]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15205]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89268; File No. SR-LCH SA-2020-002]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change, as Modified by Amendment No. 1, Relating to
Introduction of Clearing of the New Markit iTraxx MSCI ESG Screened
Europe Index Contracts
July 9, 2020.
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 June 26, 2020, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (``Commission'') the proposed rule change
described in Items I, II and III below, which Items have been prepared
primarily by LCH SA. On July 8, 2020, LCH SA filed Amendment No. 1 to
the proposed rule change. The Commission is publishing this notice to
solicit comments on the proposed rule change as modified by
[[Page 42960]]
Amendment No. 1 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
Banque Centrale de Compensation, which conducts business under the
name LCH SA (``LCH SA''), is proposing the Amendment 1 to the filing
LCH SA-2020-002 in order to (i) explain the few minor clarifications
made below with respect to both sections 3.2 and 3.8 and also remove
(ii) the non-relevant change made to the Legal Entity Identifier Margin
in section 6.2 of its Reference Guide: CDS Margin Framework.
LCH SA is proposing to amend its Reference Guide: CDS Margin
Framework to permit the clearing of iTraxx MSCI ESG Screened Europe
index contracts. As further detailed below, LCH SA is also making a
number of other minor changes unrelated to the clearing of iTraxx MSCI
ESG Screened Europe index CDS transactions.
The text of the proposed rule change has been annexed as Exhibit
5.\3\
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\3\ All capitalized terms not defined herein have the same
definition as the Rule Book, Supplement or Procedures, as
applicable.
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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 these statements.
A. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
LCH SA is proposing to amend its Reference Guide: CDS Margin
Framework in order to introduce clearing of the iTraxx MSCI ESG
Screened Europe index CDS transactions.
Markit launched the iTraxx MSCI ESG Screened Europe Index (``iTraxx
ESG Index'') on March 20th, 2020. This index is a subset of the iTraxx
Europe Main index. The constituents of the iTraxx MSCI ESG Screened
Europe index must meet various Corporate Responsibility Criteria. The
first series that launched on March 20th, 2020 (Series 33) has 81
constituents, all are constituents of the iTraxx Europe Main index
Series 33.
To permit participants to submit for clearing iTraxx ESG Index
contracts, LCH SA needs to modify its Reference Guide: CDS Margin
Framework.
In this regard, LCH SA has made the following changes to the
Reference Guide: CDS Margin Framework:
(i) Removing references to specific indices in the document and
replacing them with a generic reference to an index in sections
2.3.3, and 3.8.1.3,
(ii) removing the fixed 24% value and changing the spread shock
formula for it to be applicable more generically to both iTraxx Main
index and any of its sub index including financial Single Names.
Clearing of the new iTraxx ESG Index contracts will not require any
other changes to LCH SA CDSClearing Rule Book or risk management
framework or other policies and procedures constituting rules within
the meaning of the Securities Exchange Act of 1934 (``Act'').
LCH SA is also taking this opportunity to make the following
changes which are unrelated to the clearing of iTraxx MSCI ESG Screened
Europe index CDS transactions;
(i) removing the list of Dealers in section 2.3.3 as LCH SA may
contact a broader list of Dealers than that currently listed in this
section;
(ii) correction in section 3.2 of a typing error to confirm the
relevant application of the Wrong Way Risk Margin to Options;
(iii) correction of the worst 5 day P&L value per date and the
worst P&L value aggregated per date formulae in section 3.5.6. to
reflect the fact that the same date is selected to calculate the
portfolio P&L for all contracts in the portfolio;
(iv) the 9M curve has been removed from the Interest Rate Risk
Margin calculation in section 3.6, reflecting the change of interest
rate curve imposed by ISDA within the framework of the risk-free
rate benchmark review;
(v) clarification under section 3.8 that the short charge is
covering the risk that at least one entity defaults;
(vi) the Wrong Way Risk formulae in section 3.8.1 were
incomplete, the second value ``0'' to be used to derive the maximum
resulting from these formulae has been added.
At the request of LCH SA Risk Model Validation team so that the
CDSClear risk framework can be better assessed, LCH SA is making the
relevant clarifications specified under the below subsections (vii) to
(xii):
(vii) Adding a note in section 3.8.1.2 that clarifies that the
recovery rate for a Senior Unsecured Debt (Corporate/Financial)/
Foreign Currency Sovereign Debt (Government) (SNRFOR) and Senior
Loss Absorbing Capacity (SNRLAC) seniorities are considered as if
they were two different instruments;
(viii) adding a note in section 3.8.2 to explicit the
calibration of the shocks displayed in the table;
(ix) adding a note in section 4.1.3.1 to describe the parameters
used in the formula;
(x) the Average Liquidity Score formula has been amended and a
note inserted in order to clarify which days are used to compute the
Average Liquidity Score;
(xi) the net notional for the index basis product p, tenor t
used in the formula for the sum of the 5Y equivalent notional has
been amended to an absolute value;
(xii) in view of the upcoming supervisory/regulatory transition
from the Euro Overnight Index Average (EONIA) to the new Euro Short-
Term Rate (ESTER or [euro]STR) and the Fed Funds to the Secured
Overnight Financing Rate (SOFR), references to the interest rate
applied to the Price Alignment Interest in section 5.2 have been
removed.
2. Statutory Basis
LCH SA has determined that Proposed Rule Change is consistent with
the requirements of Section 17A of the Securities Exchange Act
(``Act'') \4\ 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 . . . and,
in general, to protect investors and the public interest.'' \5\
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\4\ 15 U.S.C. 78q-1.
\5\ 15 U.S.C. 78q-1(b)(3)(F).
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LCH SA believes that acceptance of the new iTraxx ESG Index
contracts, on the terms and conditions set out in the Rules, is
consistent with the prompt and accurate clearance and settlement of
securities transactions and derivative agreements, contracts and
transactions cleared by LCH SA, the safeguarding of securities and
funds in the custody or control of LCH SA or for which it is
responsible, and the protection of investors and the public interest,
within the meaning of Section 17A(b)(3)(F) of the Act. Indeed, the new
iTraxx ESG Index contracts proposed for clearing are similar to the
other European Indices contracts currently cleared by LCH SA CDSClear,
and will be cleared pursuant to LCH SA's existing clearing arrangements
and related financial safeguards, protections and risk management
procedures.
Clearing of the iTraxx ESG Index contracts will also satisfy the
relevant requirements of Rule 17Ad-22,\6\ as set forth in the following
discussion.
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\6\ 17 CFR 240.17Ad-22.
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Margin Requirements. Rule 17Ad-22(e)(4) \7\ requires LCH SA to
effectively identify, measure, monitor, and manage its credit exposures
to participants and
[[Page 42961]]
those arising from its payment, clearing, and settlement processes. In
terms of financial resources, LCH SA will apply its existing margin
methodology--including its Wrong Way Risk margin framework--to the new
iTraxx ESG Index, which are similar to the European indices currently
cleared by LCH SA. LCH SA believes that this model will provide
sufficient margin requirements to cover its credit exposure to its
clearing members from clearing such contracts, consistent with the
requirements of Rule 17Ad-22(e)(4).
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\7\ 17 CFR 240.17Ad-22(e)(4).
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Financial Resources. Rule 17Ad-22(e)(4)(i) \8\ requires LCH SA to
maintain sufficient financial resources to cover its credit exposure to
each participant fully with a high degree of confidence and to the
extent not already maintained pursuant to paragraph (e)(4)(i), Rule
17Ad-22(e)(4)(ii) \9\ requires LCH SA to maintain additional financial
resources at the minimum to enable it to cover a wide range of
foreseeable stress scenarios that include, but are not limited to, the
default of the two participant families that would potentially cause
the largest aggregate credit exposure for the covered clearing agency
in extreme but plausible market conditions. LCH SA believes its Default
Fund, under its existing methodology, will, together with the required
margin, provide sufficient financial resources to support the clearing
of the iTraxx ESG Index contracts, consistent with the requirements of
Rule 17Ad-22(e)(4).
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\8\ 17 CFR 240.17Ad-22(e)(4)(i).
\9\ 17 CFR 240.17Ad-22(e)(4)(ii).
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Operational Resources. Rule 17Ad-22(e)(3) \10\ requires LCH SA 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. LCH SA believes that its existing operational and
managerial resources will be sufficient for clearing of the iTraxx ESG
Index contracts, consistent with the requirements of Rule 17Ad-
22(e)(3), as this new index contract is substantially the same from an
operational perspective as the existing index contracts.
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\10\ 17 CFR 240.17Ad-22(e).
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LCH SA will also apply its existing default management policies and
procedures for the iTraxx ESG Index contracts. LCH SA believes that
these procedures allow for it to take timely action to contain losses
and liquidity pressures and to continue meeting its obligations in the
event of clearing member insolvencies or defaults in respect of the
additional single names, in accordance with Rule 17Ad-22(e)(13).
The proposed change regarding the transition from EONIA which does
not comply with the recently introduced EU Benchmarks Regulation to
ESTER is intended to comply with this European Central Bank (ECB)
initiative supported by regulators. Rule 17Ad-22(e)(1) \11\ requires a
covered clearing agency to provide for a well-founded, clear,
transparent and enforceable legal basis for each aspect of its
activities in all relevant jurisdictions. Rule 17Ad-22(e)(2)(iii) \12\
also requires to support the objectives of participants.
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\11\ 17 CFR 240.17Ad-22 (e)(1).
\12\ 17 CFR 240.17Ad-22(e)(iii).
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For all these reasons, LCH SA believes that the Proposed Rule
Change is consistent with the requirements of Section 17A of the Act
and the regulations thereunder, including the standards under Rule
17Ad-22.
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.\13\ The iTraxx
ESG Index contracts will be available to all LCH SA's CDSClear
participants for clearing. The clearing of these new iTraxx ESG Index
contracts by LCH SA does not preclude the offering of the iTraxx ESG
Index contracts for clearing by other market participants. Accordingly,
LCH SA does not believe that clearance of the new iTraxx ESG Index
contracts will impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
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\13\ 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:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-LCH SA-2020-002 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-LCH SA-2020-002. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of LCH SA and on LCH SA's website
at: https://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
[[Page 42962]]
to make available publicly. All submissions should refer to File Number
SR-LCH SA-2020-002 and should be submitted on or before August 5, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15205 Filed 7-14-20; 8:45 am]
BILLING CODE 8011-01-P