                 UNITED STATES ENVIRONMENTAL PROTECTION AGENCY                                   REGION III                                1650 Arch Street                        Philadelphia, Pennsylvania  19103

DATE:            07/24/2014

SUBJECT:	Technical Support Document for the Virginia State Implementation Plan for Section 110(a)(2) of the Clean Air Act Infrastructure Requirements for the 2010 Sulfur Dioxide National Ambient Air Quality Standards

FROM:	Ellen Schmitt, Environmental Scientist  /s/  7/28/2014       Office of Air Program Planning

TO:	File

THRU: 	Cristina Fernandez, Associate Director    /s/ M. Powers 7/24/14             Office of Air Program Planning

A.  INTRODUCTION

	The Environmental Protection Agency (EPA) is taking action on a submittal made by the Commonwealth of Virginia to meet the Clean Air Act (CAA) Section 110(a)(2) requirements of the 2010 sulfur dioxide (SO2) national ambient air quality standards (NAAQS).

B.  BACKGROUND

      On June 22, 2010, EPA promulgated a revised NAAQS for the 1-hour primary SO2 standard at a level of 75 parts per billion (ppb), based on a 3-year average of the annual 99[th] percentile of 1-hour daily maximum concentrations.  75 FR 35520.              Section 110(a) of the CAA requires states to submit State Implementation Plans (SIPs) to provide for the implementation, maintenance, and enforcement of a new or revised NAAQS within three years following the promulgation of such NAAQS or within such shorter period as EPA may prescribe.  Section 110(a) imposes the obligation upon states to make a SIP submission to EPA for a new or revised NAAQS, but the contents of that submission may vary depending upon the facts and circumstances.  In particular, the data and analytical tools available at the time the state develops and submits the SIP for a new or revised NAAQS affects the content of the submission.  The contents of such SIP submissions may also vary depending upon provisions already contained in the state's existing SIP.  More specifically, Section 110(a)(1) provides the procedural and timing requirements for SIPs.  Section 110(a)(2) lists specific elements that states must meet for "infrastructure" SIP requirements related to a newly established or revised NAAQS.  For the 2010 SO2 NAAQS, states typically have met many of the basic program elements required in Section 110(a)(2) of the CAA through earlier SIP submissions in connection with previous SO2 standards.

C.  EPA REQUIREMENTS

      As discussed above, for the 2010 SO2 NAAQS, states must provide SIP submissions, or provide certification that the existing SIP contains provisions addressing relevant infrastructure SIP elements from Sections 110(a)(2)(A) through (M) of the CAA.

D.  STATE'S SUBMITTAL

      On June 23, 2014, Virginia provided a submittal to satisfy the requirements of Section 110(a)(2) of the CAA for the 2010 SO2 NAAQS.  This submittal addressed the following infrastructure elements that EPA is proposing to approve:  Section 110(a)(2)(A), (B), (C), (D)(i)(II) (for prevention of significant deterioration), (D)(ii), (E)(i), (E)(iii), (F), (G), (H), (J) (consultation, public notification, and prevention of significant deterioration), (K), (L), and (M) of the CAA.  EPA is taking separate action on the portions of Section 110(a)(2)(D)(i)(II) and (J) as they relate to visibility protection and (E)(ii) as it relates to State Board requirements under Section 128.  This submittal did not address element (I) which pertains to the nonattainment requirements of part D, Title I of the CAA, since this element is not required to be submitted by the 3-year submission deadline of CAA Section 110(a)(1), and will be addressed in a separate process.  Virginia's submittal also did not include a portion to address Section 110(a)(2)(D)(i)(I) (interstate transport of emissions); therefore, EPA will take later, separate action on Section 110(a)(2)(D)(i)(I) for the 2010 SO2 NAAQS.

E.  EVALUATION OF STATE SUBMITTAL

1.  Section 110(a)(2)(A)

      Virginia's June 23, 2014 SIP submittal for the 2010 SO2 NAAQS cites several state regulations relevant to SO2  that provide for enforceable emission limitations and other control measures, means or techniques, as well as schedules and timetables for compliance.  These regulations include the following 9 VAC 5 Chapters:  40 (Existing Stationary Sources), 50 (New and Modified Stationary Sources), 91 (Motor Vehicle Inspection and Maintenance in Northern Virginia), and 140 (Emissions Trading), all of which have been approved into the Virginia SIP at 40 CFR 52.2420(c).  EPA finds that Virginia has established laws and regulations in its SIP applicable to the 2010 SO2 NAAQS to meet the applicable requirements of CAA Section 110(a)(2)(A) through the measures in these regulations.  Therefore, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(A).              EPA does not consider SIP requirements triggered by the nonattainment area mandates in part D of Title I of the CAA to be governed by the submission deadline of Section 110(a)(1).  Nevertheless, the Commonwealth of Virginia may have included some previously EPA-approved SIP provisions originally submitted in response to part D in its submission documenting its compliance with the requirements of Sections 110(a)(l) and (2) of the CAA.  For the purposes of this action, EPA has reviewed Virginia's 110(a)(2) SIP submittal, which may include rules originally submitted in response to part D, or references thereto, solely for the purposes of determining whether such submittals support a finding that the Commonwealth has met the basic infrastructure requirements under section 110(a)(2).              In this action, EPA is not proposing to approve or disapprove any existing Virginia provisions with regard to excess emissions during Startup, Shutdown, and Malfunction (SSM) of operations at a facility.  EPA believes that a number of states have SSM provisions which are contrary to the CAA and existing EPA guidance (August 11, 1999 Steven Herman and Robert Perciasepe Guidance Memorandum, "State Implementation Plans: Policy Regarding Excess Emissions During Malfunctions, Startup, and Shutdown"), and the Agency is addressing such state regulations in a separate rulemaking.  See 78 FR 12460 (February 22, 2013).  In the meantime, EPA encourages any state having a deficient SSM provision to take steps to correct it as soon as possible.              Also in this action, EPA is not proposing to approve or disapprove any existing Virginia rules with regard to director's discretion or variance provisions.  EPA believes that a number of states have such provisions which are contrary to the CAA and existing EPA guidance (see 52 FR 45109, November 1987), and EPA is addressing such state regulations in a separate rulemaking.  See 78 FR 12460.  In the meantime, EPA encourages any state having a director's discretion or variance provision which is contrary to the CAA and EPA guidance to take steps to correct the deficiency as soon as possible.

2.  Section 110(a)(2)(B)

      Virginia has established and currently operates appropriate devices, methods, systems, and procedures necessary to monitor, compile, and analyze data on ambient air quality.  Virginia maintains and operates a multi-station network of ambient monitors throughout the Commonwealth to measure ambient air quality levels for comparison to each NAAQS as required by 40 CFR 58.  The locations of these monitoring stations can be found in Virginia's Annual Network Review for 2013, the most recent year available at the time of this evaluation, EPA approved Virginia's 2013 Annual Air Quality Monitoring Network Design Plan as meeting 40 CFR 58.10 on December 10, 2013.  Virginia's 2013 Annual Network Review and EPA's December 10, 2013 approval is provided for reference in the docket for this rulemaking action available at www.regulations.gov.               Virginia provides such ambient air quality data to EPA and keeps EPA informed of changes to the sampling network by providing prior notification of any planned changes and seeking approvals of the changes.  Virginia sends EPA an annual summary of all changes to the network, which includes a description, explanation, and other relevant information regarding each change.

      All data is measured using EPA approved methods as either Reference or Equivalent monitors.  All monitors are subjected to the quality assurance requirements of 40 CFR 58, Appendix A, and all samplers are located at sites that have met the minimum siting requirements of 40 CFR 58, Appendix E.  The data is submitted to EPA's Air Quality System (AQS) system, in a timely manner in accordance with the scheduled prescribed by EPA in 40 CFR 58.  Therefore, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(B).

3.  Section 110(a)(2)(C)

      EPA finds that Virginia has established and currently operates a program in order to meet the applicable requirements of the CAA for Section 110(a)(2)(C).  This program provides for the enforcement, as may be necessary or appropriate, of the emission limitations and other control measures, means, or techniques, as well as schedules and time tables for compliance as previously discussed for Section 110(a)(2)(A).  Virginia states in its infrastructure SIP submittal that enforcement provisions and permit provisions are found in those portions of 9 VAC 5 Chapter 80 (Permits for Stationary Sources) and Part V (Enforcement) of 9 VAC 5 Chapter 170 (General Administration) which are both identified as part of the Federally-approved Virginia SIP at 40 CFR 52.2420.  Other aspects for enforcement are found in the source monitoring, source testing and test methods, and record keeping and reporting provisions of 9 VAC 5 Chapters 40, 50, and 140, which are all part of the Federally-approved Virginia SIP.                Virginia also has an EPA SIP-approved minor new source review (NSR) program located in 9 VAC 5-80-10 (New and Modified Stationary Sources) and 9 VAC 5-80-11 (Stationary source permit exemption levels) which regulate certain modifications and construction of stationary sources within areas covered by its SIP as necessary to assure the NAAQS are achieved.  EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(C) for enforcement and regulation of minor sources and minor modifications.

In addition, Section 110(a)(2)(C) requires each state's SIP to include a program to provide for the regulation of the modification and construction of any stationary source within the areas covered by the plan including a permit program as required in part C of Title I of the CAA.  In Virginia, construction and modification of stationary sources are covered under Article 8, Permits for Major Stationary Sources and Major Modifications Locating in Prevention of Significant Deterioration Areas (9 VAC 5-80-1605 et seq.) which is included in the approved Virginia SIP.  See 40 CFR 52.2420(c).  Article 8 also provides that construction and modification of major stationary sources will not cause or contribute to a violation of any NAAQS (9 VAC 5-80-1635, Ambient Air Increments and 9 VAC 5-80-1645, Ambient Air Ceilings) and requires application of Best Available Control Technology to new or modified sources (9 VAC 5-80-1705, Control Technology Review).

      On February 25, 2014, EPA approved revisions to Virginia's prevention of significant deterioration (PSD) permit program pertaining to preconstruction permitting requirements for sources of fine particulate matter (PM2.5).  See 79 FR 10377.  With these revisions fully approved, EPA finds Virginia's SIP-approved PSD program now contains all of the emission limitations, control measures, and other program elements required by the CAA in part C of Title I and by 40 CFR 51.165 and 51.166 for all required pollutants (and "regulated NSR pollutants"), including PM2.5.  Id. (also approving Virginia's infrastructure SIP submittals for the 1997 8-hour ozone and PM2.5 NAAQS, the 2006 PM2.5 NAAQS, and the 2008 lead NAAQS as meeting PSD requirements in Section 110(a)(2) of the CAA).                Thus, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(C) because the Virginia SIP includes a fully approved PSD permitting program meeting requirements in the CAA and 40 CFR 51.165 and 51.166.

4.  Section 110(a)(2)(D)(i)(I)

      Virginia's June 23, 2014 infrastructure SIP submission for the 2010 SO2 NAAQS did not include a component to address Section 110(a)(2)(D)(i)(I) relating to interstate transport.  Therefore, in this notice, EPA is not proposing to act on element (D)(i)(I) for Virginia's June 23, 2014 submission.  EPA will take later, separate action with respect to this element and any potential obligation Virginia may have.

5.  Section 110(a)(2)(D)(i)(II)

      Section 110(a)(2)(D)(i)(II) consists of what the EPA refers to as prong 3 (interference with PSD) and prong 4 (interference with visibility protection).  Prong 3 requires that each state's SIP must include provisions which will prevent emissions from interfering with the measures required by another state for implementing PSD.  Under 40 CFR 51.166(k)(1), each state's SIP must include requirements for a source impact analysis which requires the owner/operator of each proposed source or modification to demonstrate that the allowable emissions increase from the proposed project will not "cause or contribute to air pollution in violation of:  (i) Any national ambient air quality standard in any air quality control region."  The requirements set forth at 40 CFR 51.166(k)(1) are consistent with, and sufficient to meet, the requirements of prong 3.  In Virginia, the equivalent requirement to 40 CFR 51.166(k)(1) is codified at 9 VAC 5-80-1715, which has been incorporated into the Virginia SIP.  In addition, as discussed above in detail for Section 110(a)(2)(C), Virginia has an approved PSD permitting program in its SIP which meets requirements of the CAA and 40 CFR 51.165 and 51.166 for a permit program meeting part C of Title I of the CAA.  Thus, EPA finds Virginia's infrastructure SIP for the 2010 SO2 NAAQS meets requirements in CAA 110(a)(2)(D)(i)(II) for PSD.

      With respect to prong 4, Section 110(a)(2)(D)(i)(II) requires that SIPs include provisions prohibiting any source or other type of emissions activity in one state from interfering with measures to protect visibility required to be included in another state's SIP.  In describing how its submission meets this requirement, the Commonwealth referred to its October 4, 2012 Regional Haze SIP submittal which included reliance on the Clean Air Interstate Rule (CAIR) for electrical generating units (EGUs).  EPA finalized a limited approval of the Virginia Regional Haze SIP, indicating that, except for its reliance on CAIR the SIP met CAA requirements for the first planning period of the regional haze program (77 FR 35287, June 13, 2012).  EPA issued a limited disapproval of Virginia's regional haze SIP (and other states' regional haze SIPs that similarly relied on CAIR) because EPA believed that full approval of the SIP was not appropriate in light of the United States Court of Appeals for the District of Columbia Circuit's remand of CAIR and the uncertain remaining period of operation of CAIR.  EPA also finalized a limited federal implementation plan (FIP) for Virginia, which merely substituted reliance on EPA's more recent Cross State Air Pollution Rule (CSAPR) nitrogen oxide (NOx) and SO2 trading programs for EGUs for the SIP's reliance on CAIR (77 FR 33642, June 7, 2012).              However, due to recent litigation surrounding CAIR and its replacement CSAPR, EPA is not proposing action at this time on Virginia's infrastructure SIP regarding Section 110(a)(2)(D)(i)(II) for visibility protection for the 2010 SO2 NAAQS.  Although Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS referred to Virginia's Regional Haze SIP for Section 110(a)(2)(D)(i)(II) for visibility protection, EPA intends to take separate action on Virginia's submittal for this specific portion of element (D)(i)(II) at a later date.

6.  Section 110(a)(2)(D)(ii)               EPA finds that the Virginia SIP meets obligations for CAA Section 126, "Interstate Pollution Abatement," which directs each SIP to include provisions requiring a new or modified source to notify neighboring states of potential impacts from that source.  Major stationary sources of SO2 in Virginia are currently subject to PSD and NSR permitting programs which are included in the Virginia SIP and have been approved by EPA as meeting CAA requirements for parts C and D permit programs.  The provisions to implement PSD for part C of Title I of the CAA are in Article 8 (Permits for Major Stationary Sources and Major Modifications Locating in Prevention of Significant Deterioration Areas) of Part II of 9 VAC 5 Chapter 80 and in 9 VAC 5 Chapter 85 (Permits for Stationary Sources Subject to Regulation), which have both been approved in Virginia's SIP in 40 CFR 52.2420(c).  Additionally, 9 VAC 5-80-1775 specifically requires notification to local air pollution control agencies and any state whose lands may be affected by emissions from the source or modification.               EPA concurs with Virginia that Virginia has no currently pending obligations pursuant to CAA Section 126(b) related to the 2010 SO2 NAAQS.  Additionally, there are no findings under CAA section 115, "International Air Pollution", against Virginia with respect to the 2010 SO2 NAAQs.  EPA finds the approved Virginia SIP has adequate provisions insuring future compliance with the requirements of Sections 126 and 115 of the CAA as may be necessary.

      Based upon EPA's review of the submittal, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA section 110(a)(2)(D)(II).                 7.  Section 110(a)(2)(E)(i)                     EPA finds Virginia has demonstrated it has adequate personnel to carry out its implementation plan with respect to the 2010 SO2NAAQS.  The Code of Virginia Title 10.1 Chapter 13, "Air Pollution Control Board" gives broad authority to develop, implement and enforce the SIP.  The resources to carry out the SIP are provided through Virginia's General Funds, Title V funds, and the Section 103 and 105 grant process.  Title V fees are collected under the authority of Code of Virginia Title 10.1-1322.  Virginia's Title V fee requirements are located in Article 2 (Permit Program Emissions Fees for Stationary Sources) of 9 VAC 5-80 (Permits for Stationary Sources).  These regulations are part of Virginia's federally approved Title V program and are codified in Appendix A of 40 CFR Part 70, Approval Status of State and Local Operating Permits Programs.  Therefore, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(E)(i).

8.  Section 110(a)(2)(E)(ii)

      EPA will take separate action on this portion of Section 110(a)(2)(E) for the 2010 SO2 NAAQS as it relates to CAA Section 128, "State Boards."

9.  Section 110(a)(2)(E)(iii)

      Virginia does not rely on localities for specific SIP implementation.  Therefore, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(E)(iii).

10.  Section 110(a)(2)(F)                     Specific monitoring requirements governing the Control of Air Pollution are found throughout the Virginia Administrative Code, including 9 VAC 5 Chapters 20, 40, 50, and 80.  These regulations are included in Virginia's approved SIP and are listed in 40 CFR 52.2420 and also apply to the 2010 SO2 NAAQS.

      Requirements for periodic reports on the nature, amounts of emissions, and emissions-related data are included in 9 VAC 5-20-160 (Registration).  This data is also required by Part I of 9 VAC 5 Chapter 40 (Existing Stationary Sources) as well as Parts I and II of 9 VAC 5 Chapter 50 (New and Modified Stationary Sources).  The correlation of such reports is included in Part I of 9 VAC 5 Chapter 40 and Part II of 9 VAC 5 Chapter 50.  In addition, 9 VAC 5-170-60 (Availability of information) of Part II of 9 VAC 5 Chapter 170 (Regulation for General Administration) requires that these reports be publicly available.  These SIP provisions are approved under 40 CFR 52.2420 as part of the Virginia SIP.              Therefore, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(F).

11.  Section 110(a)(2)(G)

      Section 10.1-1309 B under Code of Virginia, Title 10.1, Chapter 13, Air Pollution Control Board, authorizes the board to declare a state of emergency and issue without hearing an emergency special order directing the owner to cease such pollution immediately upon finding that any owner is unreasonably affecting the public health, safety or welfare; the health of animal or plant life; or property.  Section 10.1-1309.1 authorizes the board to issue special orders requiring plans to abate, control, prevent, remove, or contain any substantial and imminent threat to public health or the environment that is reasonably likely to occur if such source ceases operations.                All areas of Virginia are classified as Priority III areas, except the Eastern Tennessee-Southwestern Virginia and the National Capital Interstate Air Quality Control Regions which are classified as Priority I, and the Hampton Roads Intrastate Air Quality Control Region, which is classified as Priority II.              Virginia's emergency plans are found in 9 VAC 5 Chapter 70 (Air Pollution Prevention) and are SIP-approved in 40 CFR 52.2420.  These plans meet all the current requirements as promulgated in 40 CFR 51, subpart H.  Accordingly, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(G).

12.  Section 110(a)(2)(H)

      Virginia has demonstrated that it has adequate authority to revise the SIP under the Code of Virginia, Title 10.1, Chapter 13, Air Pollution Control Board, specifically 10.1-1306.  This provision provides authority for the board to act reasonably to achieve and maintain levels of air quality that will protect human health, welfare, and safety.  Also, section 10.1-1307 provides for the development of a comprehensive program for the study, abatement, and control of all sources of air pollution in the Commonwealth.  Section 10.1-1308 provides authority to promulgate regulations to abate, control, and prohibit air pollution throughout the Commonwealth in accordance with the provisions of Virginia's Administrative Process Act.              These submissions also provide EPA with adequate assurances that Virginia will review and revise its SIP from time to time as may be necessary to take account of revisions of such primary or secondary NAAQS or the availability of improved or more expeditious methods of attaining such standards and, whenever the Administrator finds, on the basis of information available to the Administrator, that the plan is substantially inadequate to attain the NAAQS which it implements, or to otherwise comply with any additional requirements established under the CAA.  Therefore, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(H).

13.  Section 110(a)(2)(I)

      Virginia's June 23, 2014 SIP submittal for the 2010 SO2 NAAQS did not include or address Section 110(a)(2)(I) of the CAA which pertains to the nonattainment requirements of part D, Title I of the CAA.  EPA does not expect infrastructure SIP submissions to address this element because nonattainment area plans required under part D are required on a different schedule from the CAA Section 110(a)(2) infrastructure elements and, thus, will be reviewed and acted upon through a separate process as required.

14.  Section 110(a)(2)(J)

      Section 121 (relating to consultation).  All Virginia SIP revisions undergo public notice and opportunity for public hearing, which provides for comment by the public and includes local political subdivisions.  Further, all regulations promulgated in Virginia are subject to the Administrative Process Act (Code of Virginia, Title 2.2, Administration of Government, Chapter 40).  Regulations promulgated by the State Air Pollution Control Board are also governed by 9 VAC 5 Chapter 5, Public Participation Guidelines.

      Virginia also provides opportunity for consultation with federal land managers through Article 8 (Permits for Major Stationary Sources and Major Modifications Locating in Prevention of Significant Deterioration Areas), Part II of 9 VAC 5 Chapter 80 (Permits for Stationary Sources) specifically through 9 VAC 5-80-1765 (Sources affecting federal class I areas  -  additional requirements).

Section 127 (relating to public notification).  Air quality data from Virginia's monitoring network is published on the Department of Environmental Quality website.  As part of the Section 105 grant process, Virginia is required to submit monitoring data to the AQS in a timely manner.  Virginia publishes an annual summary of all monitoring data on the DEQ website, including monitoring locations, exceedances, and violations of standards.                Part C (relating to visibility protection).  With regard to the visibility protection aspect of 110(a)(2)(J), EPA recognizes that states are subject to visibility and regional haze program requirements under part C of the Act (which includes sections 169A and 169B).  In the event of the establishment of a new NAAQS, however, the visibility and regional haze program requirements under part C do not change.  Thus, EPA finds that there are no applicable visibility obligations under part C "triggered" under section 110(a)(2)(J) when a new NAAQS becomes effective.  Virginia has submitted SIP revisions to satisfy the requirements of the CAA Section 169A and 169B, and the regional haze and BART rules contained in 40 CFR 51.308.                On June 13, 2012, EPA published a final rulemaking regarding Virginia's regional haze program, consisting of a limited approval and a limited disapproval.  See 77 FR 35287.  However, due to litigation involving CAIR and CSAPR which are involved in Virginia's regional haze plan, EPA is not proposing action on Virginia's infrastructure SIP submittal regarding 110(a)(2)(J) for visibility protection at this time.  EPA will take later, separate action on Virginia's submittal regarding this element.  See Section 110(a)(2)(D)(i)(II) for additional discussion pertaining to visibility protection.

      EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(J) relating to consultation, public notification, and the part C permitting program.

15.  Section 110(a)(2)(K)

EPA finds Virginia has the authority and technical capability to conduct air quality modeling in order to assess the effect on ambient air quality relevant pollutant emissions and will continue to perform such modeling.  Article 8, Permits for Major Stationary Sources and Major Modifications Locating in Prevention of Significant Deterioration Areas (9 VAC 5-80-1605 et seq.) of 9 VAC 5-80 (Permits for Stationary Sources) contains requirements for pre-construction and post-construction monitoring and modeling.  9 VAC 5-80-1715 (Source impact analysis), 9 VAC 5-80-1725 (Air quality models), and 9 VAC 5-80-1735 (Air quality analysis) provide detail on modeling requirements.  Article 8 is included as part of the Virginia SIP as noted in 40 CFR 52.2420.  Virginia will continue to submit to EPA the air quality modeling data as part of Virginia's relevant SIP submissions, permit actions, and through Federal grant commitments or in other ways that EPA may request.  Therefore, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(K).

16.  Section 110(a)(2)(L)

      EPA finds Virginia's submission adequately addresses this requirement by explaining that these requirements are located in Article 2, Permit Program Fees for Stationary Sources (9 VAC 5-80-310 et seq.) of 9 VAC 5-80 (Permits for Stationary Sources).  These regulations are part of Virginia's federally approved Title V program and are codified in Appendix A of 40 CFR Part 70, Approval Status of State and Local Operating Permits Programs.  Virginia's Title V program fees are used to fund programs such as the permitting of new and existing sources of air pollution, compliance and enforcement of sources of air pollution including program development and SO2 plan implementation as discussed above in Section 110(a)(2)(E).

      Therefore, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(L).

17.  Section 110(a)(2)(M)               All SIP revisions undergo public participation following 40 CFR 51.102 and provide for comment by the public including local political subdivisions.  Additionally, the Code of Virginia under § 10.1-1307A requires advising, consulting, and cooperating with all agencies of the Commonwealth, political subdivisions, private industries, and any other affected groups when developing programs to improve or maintain air quality.  Further, all regulations in Virginia are subject to the Administrative Process Act (Code of Virginia, Title 2.2, Administration of Government, Chapter 40).  Regulations promulgated by the State Air Pollution Control Board are also governed by 9 VAC 5 Chapter 5, Public Participation Guidelines.  Therefore, EPA finds Virginia's infrastructure SIP submittal for the 2010 SO2 NAAQS meets the requirements of CAA Section 110(a)(2)(M).

F.  CONCLUSIONS AND RECOMMENDED AGENCY ACTION

      EPA's analysis of Virginia's infrastructure submittal for the 2010 SO2 NAAQS concludes that Virginia's submittal meet the requirements of Section 110(a)(2)(A), (B), (C), (D)(i)(II) (for prevention of significant deterioration), (D)(ii), (E)(i), (E)(iii), (F), (G), (H), (J) (relating to consultation, public notification, and prevention of significant deterioration), (K), (L), and (M).  It is recommended that a notice of proposed rulemaking be prepared approving Virginia's infrastructure submittal for the 2010 SO2 NAAQS for the elements listed above and discussed herein.  EPA will take later, separate action on the following infrastructure SIP submission elements for the 2010 SO2 NAAQS:  Section 110(a)(2)(D)(i)(I) (interstate transport), (D)(i)(II) (visibility protection), (E)(ii) (Section 128, State Boards), and (J) (visibility protection).


[Federal Register Volume 83, Number 3 (Thursday, January 4, 2018)]
[Notices]
[Pages 557-562]
[FR Doc No: 2017-28492]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82421; File No. SR-LCH SA-2017-010]

Self-Regulatory Organizations; LCH SA; Order Granting Accelerated
Approval of a Proposed Rule Change Relating to the Implementation of
the Markets in Financial Instruments Regulation

December 29, 2017.

I. Introduction

    On November 21, 2017, Banque Centrale de Compensation, which
conducts business under the name LCH SA (``LCH SA''), filed with the
Securities and Exchange Commission (``SEC'' or ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
make conforming and clarifying changes necessary to implement certain
provisions of the European Union's Markets in Financial Instruments
Regulation (``MiFIR'').\3\ The proposed rule change was published for
comment in the Federal Register on December 7, 2017.\4\ The Commission
received no comment letters regarding the proposed rule change. For the
reasons discussed below, the Commission is approving the proposed rule
change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Regulation (EU) No 600/2014 of the European Parliament and
of the Council of 15 May 2014 on markets in financial instruments
and amending Regulation (EU) No 648/2012.
    \4\ Securities Exchange Act Release No. 34-82194 (December 1,
2017), 82 FR 57803 (December 7, 2017) (SR-LCH-2017-010)
(``Notice'').
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II. Description of the Proposed Rule Change

a. Overview

    The principal purpose of this proposed rule change is to amend LCH
SA's CDS Clearing Rulebook (the ``Rulebook'') and CDS Clearing
Procedures (the ``Procedures'') to implement provisions of MiFIR that
are applicable to central counterparties (``CCPs'') authorized under
the European Markets Infrastructure Regulation (``EMIR'') \5\ (each
such CCP, an ``authorized CCP'').\6\ In particular, the proposed rule
changes are intended to implement Article 29 of MiFIR, which the
Commission understands requires authorized CCPs to establish effective
systems, procedures and arrangements to ensure that cleared derivatives
transactions are submitted and accepted for clearing on a straight-
through processing (``STP'') basis,\7\ and Article 30 of MiFIR, which
the Commission understands requires authorized CCPs to establish
indirect clearing arrangements with respect to exchange-traded
derivatives (``ETDs'') that are of ``equivalent effect'' to the
corresponding requirements under EMIR.\8\
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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 reporting.
    \6\ Capitalized terms not otherwise defined herein have the
meanings ascribed to them in the Rulebook.
    \7\ In this context, the Commission understands STP to mean that
an authorized CCP must have systems, procedures, and arrangements in
place to ensure derivatives are cleared as quickly as
technologically practicable using automated systems. Notice, 82 FR
at 57804. The Commission understands that RTS 26 provides detailed
additional requirements regarding the transfer of information and
related authorized CCP rulebook requirements, as well as timelines
for the transfer of information, among other things. See id. at
57803 & n.5 (citing RTS 26).
    \8\ Notice, 82 FR at 57803.
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    In addition, the Commission understands that the European
Commission has adopted regulatory technical standards to set more
specific requirements that authorized CCPs must meet in order to comply
with MiFIR. The regulatory technical standards for straight-through
processing (``RTS 26'') were adopted in 2016.\9\ More recently, the
European Commission adopted regulatory technical standards, which align
the indirect clearing requirements under EMIR and MiFIR (``Indirect
Clearing RTS'').\10\ MiFIR takes effect January 3, 2018 and it is
expected that the Indirect Clearing RTS will also take effect on the
same date.
---------------------------------------------------------------------------

    \9\ Commission Delegated Regulation (EU) 2017/582 of 29.6.2016
supplementing Regulation (EU) No 600/2014 of the European Parliament
and of the Council with regard to regulatory technical standards
specifying the obligation to clear derivatives traded on regulated
markets and timing of acceptance for clearing.
    \10\ Commission Delegated Regulation (EU) of 22.9.2017 amending
Commission Delegated Regulation (EU) No 149/2013 with regard to
regulatory technical standards on indirect clearing arrangements. A
separate, but identical, set of RTS apply to indirect clearing of
exchange-traded derivatives. See, Commission Delegated Regulation
(EU) of 22.9.2017 supplementing Regulation (EU) No 600/2014 with
regard to regulatory technical standards on indirect clearing
arrangements.
---------------------------------------------------------------------------

b. Straight-Through Processing

    The Commission understands that RTS 26 establishes the specific
requirements with which authorized CCPs, trading venues,\11\ and
clearing

members \12\ must comply in order to ensure that transactions in
cleared derivatives are submitted and accepted for clearing ``as soon
as technologically practicable using automated systems,'' as required
by Article 29(2) of MiFIR. LCH SA stated that it must comply with the
RTS 26 requirements applicable to authorized CCPs.\13\ These
requirements can be conceptually divided as: (i) A CCP's information
requirements; (ii) cleared derivatives transactions concluded on a
trading venue; (iii) cleared derivatives transactions concluded
bilaterally; (iv) resubmission of cleared derivatives transactions in
the event of clerical error or technical problems; and (v) backloading
transactions.
---------------------------------------------------------------------------

    \11\ The Commission understands that the term ``trading venue,''
as used in RTS 26, refers to EU-based venues only (i.e., regulated
markets, multilateral trading facilities and organized trading
facilities). LCH SA therefore represents that third-country venues
(e.g., U.S. swap execution facilities, security-based swap execution
facilities, designated contract markets and national securities
exchanges) are not required to comply with the RTS 26 provisions
applicable to trading venues. Notwithstanding this definition, LCH
SA explains that it proposes to apply the STP amendments described
herein with respect to all derivatives transactions concluded on
swap execution facilities and designated contract markets registered
with the U.S. Commodity Futures Trading Commission (``CFTC'') and
the definition of the term ``Trading Venue'' in the Rulebook has
been amended accordingly (See Section 1.1.1 of the Rulebook).
Notice, 82 FR at 57803, n. 7.
    \12\ The Commission understands that the term ``clearing
member'' is not defined in RTS 26. However, Article 29 of MiFIR
refers to ``investment firms which act as clearing members in
accordance with'' EMIR. LCH SA represents that the term ``investment
firm'' refers only to those EU firms which are required to be
authorized under the revised Markets in Financial Instruments
Directive (``MiFID II'') and, therefore, third-country firms that
are clearing members of authorized CCPs (e.g., SEC-registered broker
dealers (``BDs'') and futures commission merchants (``FCM'')
registered with the CFTC) are not required to comply with the RTS 26
provisions applicable to clearing members. In any event, LCH SA
proposes to apply the STP requirements discussed herein to all
derivatives transactions submitted for clearing by any Clearing
Member, including a Clearing Member that is a BD or FCM. Notice, 82
FR at 57804, n. 8.
    \13\ Notice, 82 FR at 57803-04.
---------------------------------------------------------------------------

i. CCP Information Requirements
    Article 1(2) of RTS 26 requires an authorized CCP to detail in its
rules the information it needs from trading venues and counterparties
to clear derivatives transactions, and the format such information must
take, in order for the authorized CCP to accept that transaction for
clearing.\14\
---------------------------------------------------------------------------

    \14\ Id. at 57804.
---------------------------------------------------------------------------

    The Commission understands that the Rulebook currently provides
that all clearing members must be participants of at least one Approved
Trade Source System, i.e., a middleware provider, which receives
Original Transaction Data relating to Intraday Transactions from the
relevant Clearing Members or the relevant Trading Venue. The Approved
Trade Source System is then responsible for ensuring that this data is
then submitted to LCH SA. To give effect to the CCP information
requirements of Article 1(2) of RTS 26, LCH SA proposed to amend
Article <IP_ADDRESS> of the Rulebook to confirm that the data relating to
such submission must be made in a format acceptable to, or required by,
the relevant Approved Trade Source System.\15\
---------------------------------------------------------------------------

    \15\ Id.
---------------------------------------------------------------------------

ii. Cleared Derivatives Transactions Concluded on a Trading Venue
    Article 3(4) of RTS 26 requires an authorized CCP to accept or
reject a cleared derivatives transaction concluded on a trading venue
for clearing within 10 seconds of receipt of the relevant information
from the trading venue.\16\ Where the authorized CCP determines to
reject the transaction for clearing, it is required to inform the
clearing member and the trading venue on a real-time basis.\17\
---------------------------------------------------------------------------

    \16\ LCH SA represents that as a CFTC-registered derivatives
clearing organization, LCH SA is currently subject to this same
requirement in connection with its CDS Clearing Service. See, 17 CFR
39.12(b)(7); CFTC Staff Guidance of Straight-Through Processing,
dated September 26, 2013, available at<EMAIL_ADDRESS>Notice, 82
FR at 57804, n. 9.
    \17\ Notice, 82 FR at 57804.
---------------------------------------------------------------------------

    LCH SA noted that it has traditionally imposed a series of controls
on Intraday Transactions, including the following:
     Eligibility Controls, which verify the completeness of the
information relating to the Original Transaction and to determine
whether the Original Transaction meets LCH SA's Eligibility
Requirements;
     Client Transaction Checks, which verify whether, in
respect of an Original Transaction that is a Client Transaction, the
relevant Clearing Member has consented to the registration of the trade
on behalf of its Client; and
     Notional and Collateral Checks, which verify whether
accepting the trade for clearing would exceed the relevant Clearing
Member's Maximum Notional Amount and/or whether the Clearing Member has
sufficient collateral available to satisfy the margin requirement
associated with clearing the trade.\18\
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

    LCH SA proposed to amend Section 5.3 of the Procedures to confirm
that, in accordance with Article 3(4) of RTS 26, the relevant Clearing
Member(s) are not required to provide their consent to the acceptance
of a Trading Venue Transaction for clearing.\19\ LCH SA noted that it
will, however, apply the Notional and Collateral Checks to Trading
Venue Transactions.\20\ LCH SA also proposed to amend Article <IP_ADDRESS>
of the Rulebook to make clear that all stages of the intraday clearing
process must occur within the timeframe required by Applicable Law,
meaning that LCH SA must perform the Notional and Collateral Checks
within the 10 second time-frame prescribed by Article 3(4) of RTS
26.\21\
---------------------------------------------------------------------------

    \19\ Id.
    \20\ Id.
    \21\ Id.
---------------------------------------------------------------------------

    Finally, LCH SA proposed to amend Article <IP_ADDRESS> of the Rulebook
to clarify that notice of a Rejected Transaction will be provided to
the relevant Trading Venue and/or Approved Trade Source System in
accordance with Applicable Law.\22\
---------------------------------------------------------------------------

    \22\ Id.
---------------------------------------------------------------------------

iii. Cleared Derivatives Transactions Concluded Bilaterally
    The Commission understands that Article 4(2) of RTS 26 requires an
authorized CCP to send information concerning a cleared derivatives
transaction concluded bilaterally between counterparties it receives
from such counterparties to the relevant clearing member(s) within 60
seconds of receipt of such information. Moreover, LCH SA stated that
Article 4(3) of RTS 26 requires the authorized CCP to accept or reject
such a bilateral transaction for clearing within 10 seconds of receipt
of the acceptance or non-acceptance by such clearing member(s), and
where the authorized CCP determines to reject the transaction for
clearing it is required to inform the clearing member on a real-time
basis.\23\
---------------------------------------------------------------------------

    \23\ Id.
---------------------------------------------------------------------------

    LCH SA proposed to amend Section 5.3 of the Procedures to clarify
that cleared derivatives transactions concluded bilaterally will be
subject to the Client Transaction Checks referred to above. In
particular, LCH SA proposed that, upon successful completion of the
Eligibility Controls, it will send a Consent Request to the relevant
Clearing Member(s). Pursuant to Article <IP_ADDRESS> of the Rulebook, LCH SA
is required to send each such Consent Request in accordance with the
timeframe required by Applicable Law (i.e., 60 seconds).\24\
---------------------------------------------------------------------------

    \24\ Id.
---------------------------------------------------------------------------

    Once LCH SA has delivered a Consent Request, a Clearing Member then
has a choice regarding how to respond. It may opt for a so-called
``Automatic Take-Up Process,'' whereby the Clearing Member effectively
pre-approves specific Clients for automatic acceptance of Consent
Requests; in such circumstances, the Clearing Member will not be
required to

respond to the Consent Request.\25\ A Clearing Member may also opt for
a ``Manual Take-Up Process,'' whereby it must affirmatively respond
within the time frame required by Applicable Law (i.e., 60 seconds) or
otherwise by the end of the real-time clearing session on that day, as
set forth in the amendments proposed by LCH SA.\26\ The proposed
changes would then require LCH SA to accept or reject the trade, and
make the relevant notifications, within the timeframe required under
Applicable Law.\27\
---------------------------------------------------------------------------

    \25\ Id.
    \26\ Id.
    \27\ Id.
---------------------------------------------------------------------------

    Finally, LCH SA proposed to amend Article <IP_ADDRESS> of the Rulebook
to clarify that notice of a Rejected Transaction will be provided to
the relevant Clearing Member and/or Approved Trade Source System in
accordance with Applicable Law.\28\
---------------------------------------------------------------------------

    \28\ Id.
---------------------------------------------------------------------------

iv. Resubmission
    Where the non-acceptance of a cleared derivatives transaction for
clearing is due to a clerical or technical error, Article 5(3) of RTS
26 permits the trade to be resubmitted within one hour, provided the
original counterparties to the trade agree to such resubmission.\29\
Accordingly, LCH SA proposed to amend Article <IP_ADDRESS> of the Rulebook
to state that a Rejected Transaction may be resubmitted for clearing in
accordance with Applicable Law.
---------------------------------------------------------------------------

    \29\ Id. at 57805.
---------------------------------------------------------------------------

v. Treatment of Backloading Transactions
    The Commission understands that STP requirements apply to ``cleared
derivatives transactions,'' which are defined in Article 29(2) of MiFIR
to include derivatives that are concluded on an EU-regulated market,
all OTC derivatives that are subject to an EMIR mandatory clearing
requirement, and all other derivatives which are agreed by the relevant
counterparties to be cleared.\30\ LCH SA proposed to amend the Rulebook
to designate Backloading Transactions as outside of the scope of
MiFIR's STP requirements. Specifically, Article <IP_ADDRESS> would be
amended to provide that LCH SA is entitled to assume that any
Backloading Transaction submitted for clearing by LCH SA was either
entered into prior to the effective date of MiFIR (i.e., January 3,
2018) or is otherwise not subject to an EMIR mandatory clearing
requirement and that the parties to the Backloading Transaction did not
agree at the time of execution for the Backloading Transaction to be
subject to clearing.\31\
---------------------------------------------------------------------------

    \30\ Id.
    \31\ Id.
---------------------------------------------------------------------------

c. Indirect Clearing Arrangements
i. Indirect Clearing RTS
    The Commission understands that Article 4(3) of EMIR requires that
indirect clearing arrangements should not increase counterparty risk
and ensure protections that are of ``equivalent effect'' to the
protections for client clearing set out in Articles 39 and 48 of
EMIR.\32\ For these purposes, the term ``indirect clearing
arrangement'' refers to a set of relationships--also called a
``chain''--where at least two intermediaries are interposed between an
end-client and the relevant authorized CCP. The most basic indirect
clearing chain therefore involves the following four entities: An
authorized CCP; a clearing member of the authorized CCP; the client of
the Clearing Member that is itself an intermediary (``Direct Client'');
and the client of such Direct Client (``Indirect Client''). The
Commission also understands that longer chains are permitted in certain
circumstances. \33\
---------------------------------------------------------------------------

    \32\ Id.
    \33\ Id.
---------------------------------------------------------------------------

    LCH SA noted that the majority of the obligations under the
Indirect Clearing RTS fall to Clearing Members and Direct Clients, but
that authorized CCPs must comply with certain new requirements relating
to account structures, default management, and risk management.\34\
Because indirect clearing was a concept introduced in EMIR, LCH SA
stated that its Rulebook already had a number of features implementing
the initial set of indirect clearing requirements. LCH SA proposed the
following conforming amendments to reflect the updated requirements of
the Indirect Clearing RTS.\35\
---------------------------------------------------------------------------

    \34\ LCH SA represented that the indirect clearing arrangements
for OTC derivatives described herein, in particular, the
requirements relating to account structures and default management,
generally will not be applicable to Clearing Members that are FCM
Clearing Members or U.S. Clearing Members, i.e., BDs. LCH SA further
represented that, in connection with the CDS Clearing Service, FCM
Clearing Members will continue to be required to maintain cleared
swaps customer accounts in accordance with the segregation
requirements set out in Section 4d(f) of the Commodity Exchange Act
and Part 22 of the CFTC's rules, 17 CFR 22.1 et seq. Similarly, LCH
SA explained that a U.S. Clearing Member that is not also an FCM
Clearing Member will be required to maintain customer security-based
swap accounts in accordance with 17 CFR 240.15c3-3. See Notice, 82
FR at 57805.
    \35\ Notice, 82 FR at 57805.
---------------------------------------------------------------------------

ii. Indirect Client Account Structures
    An authorized CCP must permit a clearing member to open and
maintain at least the following two types of accounts for its Direct
Client(s) that have Indirect Client(s):
     One omnibus segregated account for all Indirect Clients of
all such Direct Clients (``CCP OSA''); and
     one gross (position and margin) segregated account per
Direct Client for all Indirect Clients of that Direct Client that
choose gross segregation (a ``CCP GOSA'').
    Therefore, an authorized CCP is expected to maintain at least: (i)
One CCP OSA per clearing member; plus (ii) the requisite number of
Direct Client-specific CCP GOSAs per clearing member.\36\
---------------------------------------------------------------------------

    \36\ Id.
---------------------------------------------------------------------------

    The principal indirect clearing-related amendment to the Rulebook
that LCH SA proposed is the introduction of two new account structures
that are putatively designed to reflect the requirements of the
Indirect Clearing RTS. Specifically, LCH SA proposed to introduce a new
CCM Indirect Client Net Segregated Account Structure (i.e., a CCP OSA)
as well as a new CCM Indirect Client Gross Segregated Account Structure
(i.e., a CCP GOSA), collectively referred to as CCM Indirect Client
Segregated Account Structures.\37\
---------------------------------------------------------------------------

    \37\ Id.
---------------------------------------------------------------------------

    LCH SA also proposed to amend Title V, Chapter 2 of the Rulebook to
specify the circumstances in which such Account Structures may be
opened. In particular, Article <IP_ADDRESS> would be amended to clarify that
a given CCM Client that provides indirect clearing services to CCM
Indirect Clients must be allocated to one CCM Indirect Client Net
Segregated Account Structure but may, upon request, be allocated to one
CCM Indirect Client Gross Segregated Account Structure.\38\
---------------------------------------------------------------------------

    \38\ Id. at 57805-06.
---------------------------------------------------------------------------

iii. Default Management
    LCH SA noted that the Indirect Clearing RTS primarily addresses a
Clearing Member's default management of an insolvent Direct Client and
therefore does not specifically address an authorized CCP's treatment
of CCP OSAs and CCP GOSAs in the event of a Clearing Member default.
Nevertheless, LCH SA stated that it believes that these accounts should
be held, to the extent possible, in accordance with the requirements of
EMIR Articles 39 and 48.\39\ As a result, LCH SA proposed the following
amendments to the Rulebook to address the treatment of CCM Indirect
Client Segregated Account Structures in the

event of the default of the CCM, the CCM Client and of LCH SA itself:
---------------------------------------------------------------------------

    \39\ Id. at 57806.
---------------------------------------------------------------------------

CCM Default
     In the event of a CCM default, Clause 4.3 of the CDS
Default Management Process would be amended to provide that LCH SA will
attempt, in the first instance, to port the Client Cleared Transactions
of a CCM Indirect Gross Segregated Account Client to a single Backup
Clearing Member, provided that certain conditions are met, including
that the Backup Clearing Member has unconditionally agreed to act as
Backup Clearing Member and that the instruction is received within the
prescribed timeframe--referred to as the ``Porting Window''--
established by LCH SA for this purpose. If these conditions are not
met, LCH SA proposed to liquidate the existing Client Cleared
Transactions and re-establish them with the Backup Clearing Member. LCH
SA also proposed, upon instruction, to transfer the associated
Collateral to the Backup Clearing Member.
     In respect of Client Cleared Transactions in a CCM
Indirect Client Net Segregated Account Structure (or where porting is
not achieved in respect of Client Cleared Transactions in a in a CCM
Indirect Client Gross Segregated Account Structure), LCH SA proposed to
amend Clause 4.4.3 of the CDS Default Management Process, which
requires LCH SA to calculate an amount--called the ``CDS Client
Clearing Entitlement''--equal to: (1) The pro rata share of the
liquidation of the Non-Ported Cleared Transactions; plus (2) the pro
rata share of the liquidation value of the Client Assets recorded in
the relevant Client Collateral Account; minus (3) the pro rata share of
the costs of any hedging undertaken; minus (4) the pro rata share of
the costs, expenses and liabilities of LCH SA in implementing the CDS
Client Default Management Process, in each case where such pro rata
share is attributable to a given CCM Indirect Client to reference
Indirect Client Segregated Account Structures.
     Upon a CCM default, LCH SA proposed to amend Article
<IP_ADDRESS> of the Rulebook to clarify that CCM Indirect Clients belonging
to a CCM Indirect Client Gross Segregated Account Structure bear no
fellow-customer risk: Only the value of the Collateral referable to a
given CCM Indirect Client--called the ``CCM Indirect Client Gross
Account Balance''--will be available to satisfy any Damages
attributable to the liquidation of any Non-Ported Cleared Transactions
referable to such CCM Indirect Client.\40\
---------------------------------------------------------------------------

    \40\ Id.
---------------------------------------------------------------------------

CCM Client Default
    In the event of the default of a CCM Client that has CCM Indirect
Clients, LCH SA's normal default management arrangements for CCMs will
not apply. Instead, LCH SA proposed that the defaulting CCM Client will
be default managed by the CCM, which will determine whether to
liquidate the Client Cleared Transactions registered in the relevant
CCM Indirect Client Segregated Account Structures or to attempt to port
the Client Cleared Transactions of the CCM Indirect Clients belonging
to a CCM Indirect Client Gross Segregated Account Structure to a Backup
Client. LCH SA also proposed amendments that provide that porting may
occur on a consolidated basis, i.e., where all the CCM Indirect Clients
appoint a single Backup Client, or on a per-CCM Client Trade Account
basis, i.e., where a given CCM Indirect Client appoints a single Backup
Client specific to that CCM Indirect Client. LCH SA proposed to amend
Article <IP_ADDRESS> of the Rulebook to provide that LCH SA will make the
relevant transfers in its records at the instruction of the CCM
undertaking the default management of its defaulting CCM Client.\41\
---------------------------------------------------------------------------

    \41\ Id.
---------------------------------------------------------------------------

LCH SA Default
    LCH SA proposed to amend Article <IP_ADDRESS> of the Rulebook to clarify
that, following a default by LCH SA, CCMs shall calculate a separate
CCM Client Termination Amount in respect of each CCM Indirect Client
Net Segregated Account Structure and each CCM Indirect Client Gross
Segregated Account Structure it holds with LCH SA.\42\
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

iv. Miscellaneous
    The Commission understands that Article 3(3) of the Indirect
Clearing RTS requires an authorized CCP to identify, monitor and manage
any ``material risks'' arising from the provision of indirect clearing
services that may affect the resilience of the authorized CCP to
adverse market developments, and Article 2(3) of the Indirect Clearing
RTS states that an authorized CCP may not ``prevent the conclusion of''
indirect clearing arrangements that are entered into on reasonable
commercial terms.\43\ Based on these requirements, LCH SA proposed to
amend Article <IP_ADDRESS> of the Rulebook to clarify that a CCM may permit
its CCM Clients to offer clearing services to their CCM Indirect
Clients, provided certain conditions are met. Specifically, the
proposed amendments would clarify that the contractual terms of the
indirect clearing arrangements must comply with the relevant
requirements of EMIR and MiFIR and must further provide for the
establishment of CCM Indirect Client Segregated Account Structures
(described in greater detail above), in accordance with the wishes of
the relevant CCM Indirect Clients.\44\
---------------------------------------------------------------------------

    \43\ Id.
    \44\ Id.
---------------------------------------------------------------------------

    Furthermore, LCH SA proposed to amend Article <IP_ADDRESS> of the
Rulebook to include an express recognition that a given CCM Client may
be acting in the capacity of clearing its own proprietary transactions
as well as in the capacity of providing clearing services to its CCM
Indirect Clients. Finally, LCH SA proposed amendments to Title V,
Chapter 3 of the Rulebook to provide for non-default transfers of all
Client Cleared Transactions in a given CCM Indirect Client Segregated
Account Structure (accompanied by the associated Client Assets upon
request) or partial transfers of Client Cleared Transactions in a given
CCM Indirect Client Segregated Account Structure (without the
associated Client Assets) to the relevant accounts of a Receiving
Clearing Member.\45\
---------------------------------------------------------------------------

    \45\ Id. at 57806-07.
---------------------------------------------------------------------------

d. Certain Clarifying Amendments
    LCH SA also proposed certain clarifying revisions to the Rulebook,
Procedures, and Clearing Notice as described below.
i. Auction Member Representation
    LCH SA proposed amendments to various provisions of the CDS Default
Management Process (Annex 1 of the Rulebook) to clarify the
responsibilities between a Non-Defaulting Clearing Member and the
Auction Member Representative appointed by the Non-Defaulting Clearing
Member to act in such Clearing Member's place in the competitive
bidding process as described in Clause 5.4 of the CDS Default
Management Process.\46\
---------------------------------------------------------------------------

    \46\ Id. at 57807.
---------------------------------------------------------------------------

ii. Member Uncovered Risk
    LCH SA proposed to replace the definition of ``Member Uncovered
Risk'' with ``Group Member Uncovered Risk'' to take into account the
relevant LCH Group Risk Policy, which considers whether Clearing
Members belong to the same group for purposes of the relevant

risk calculations, including calculation of margin and Default Fund
requirements. The proposed revisions are set out in Section <IP_ADDRESS> and
Section <IP_ADDRESS> of the Rulebook and Sections 2.12, 2.16, and 6.4 of the
Procedures.\47\
---------------------------------------------------------------------------

    \47\ Id.
---------------------------------------------------------------------------

iii. Calculation of Contributed Prices
    LCH SA proposed amendments to Section 5.18.2 of the Procedures to
reflect changes made to the methodology with regard to the application
of the bid-ask restraint in the calculation of contributed prices. In
addition, LCH SA proposed to remove the references to a particular time
in the Rulebook regarding the price contribution process. Consequently,
the definition of ``End of Day'' would be removed from the Rulebook.
LCH SA proposed to amend Article <IP_ADDRESS> of the Rulebook and Section
5.18.5 (b) and (d) of Procedure 5 accordingly.\48\
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

iv. New Approved Trade Source System
    LCH SA proposed to amend Clearing Notice no. 2017/064 regarding the
Approved Trade Source Systems to add a new Approved Trade Source
System, Bloomberg Trade Facility Ltd.\49\
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

III. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change

    Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\50\ Section 17A(b)(3)(F) of the Act requires, among other
things, that the rules of a clearing agency be designed to promote the
prompt and accurate clearance and settlement of securities transactions
and, in general, to protect investors and the public interest.\51\ Rule
17Ad-22(e)(1) requires that each covered clearing agency establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for a well-founded, clear, transparent,
and enforceable legal basis for each aspect of its activities in all
relevant jurisdictions.\52\ Rule 17Ad-22(e)(4) requires, in relevant
part, that each covered clearing agency establish, implement, maintain
and enforce written policies and procedures reasonably designed to
effectively identify, measure, monitor, and manage its credit exposures
to participants.\53\ Rule 17Ad-22(e)(6) requires, in relevant part, a
covered clearing agency that provides central counterparty services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.\54\ For the reasons discussed below, the Commission finds
that the proposed rule change is consistent with Section 17A of the Act
and Rule 17Ad-22(e) thereunder.
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78s(b)(2)(C).
    \51\ 15 U.S.C. 78q-1(b)(3)(F).
    \52\ 17 CFR 240.17Ad-22(e)(1).
    \53\ 17 CFR 240.17Ad-22(e)(4).
    \54\ 17 CFR 240.17Ad-22(e)(6).
---------------------------------------------------------------------------

a. Straight-Through Processing

    The Commission understands that MiFIR and RTS 26 require LCH SA to
implement the provisions described above regarding STP. By so amending
its Rulebook and Clearing Procedures, LCH SA indicated that it will be
able to better ensure that transactions are submitted, accepted, and
cleared without undue delay. As a result, the Commission finds that the
proposed rule change regarding STP promotes the prompt and accurate
clearance and settlement of securities transactions consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\55\ Moreover, the
Commission further finds the proposed rule change protects investors
and the public interest, consistent with Section 17A(b)(3)(F) of the
Act \56\ because the expeditious processing of transactions in cleared
derivatives reduces the possibility of those transactions being
disrupted by intervening events, such as a technological breakdown or a
reduction in the financial condition of one of the counterparties.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78q-1(b)(3)(F).
    \56\ Id.
---------------------------------------------------------------------------

    In addition, because these amendments will maintain the consistency
of LCH SA's Rulebook and Procedures with MiFIR and RTS 26, the
Commission finds the provisions with regard to STP will help ensure
that LCH SA's policies and procedures provide for a well-founded,
clear, transparent, and enforceable legal basis for each aspect of its
activities in all relevant jurisdictions, consistent with Rule 17Ad-
22(e)(1).

b. Indirect Clearing

    The Commission similarly finds that the portions of the proposed
rule change that seek to implement MiFIR and the Indirect Clearing RTS
are consistent with Rule 17Ad-22(e)(1). As noted above, the Commission
understands that MiFIR and the Indirect Clearing RTS require LCH SA to
implement provisions regarding indirect clearing, which include
establishing two types of indirect clearing accounts and establishing
the process for handling the assets of indirect clearing clients in the
event of the default of the CCM, the CCM Client, or LCH SA.
Furthermore, as noted above, LCH SA has clarified the changes relating
to indirect client clearing will not be applicable to LCH SA's FCM
Clearing Members or its U.S. Clearing Members, i.e. broker-dealers
registered with the Commission. LCH SA has explained that FCM Clearing
Members ``will continue to be required to maintain cleared swaps
customer accounts in accordance with the segregation requirements set
out in Section 4d(f) of the Commodity Exchange Act and Part 22 of the
CFTC's rules, 17 CFR 22.1 et seq.'' \57\ Similarly, LCH SA explained
that a U.S. Clearing Member that is not also an FCM Clearing Member
will be required to maintain customer security-based swap accounts in
accordance with Commission Rule 15c3-3.\58\ The Commission relies on
these particular representations and explanations by LCH SA, and notes
that it does not expect LCH SA to create CCP OSAs or CCP GOSAs for its
FCM Clearing Members or U.S. Clearing Members. Instead, accounts for
LCH SA's FCM Clearing Members or U.S. Clearing Members will be subject
to the applicable provisions of the Commodity Exchange Act and the
rules and regulations promulgated thereunder and/or the Act and the
rules and regulations promulgated thereunder.
---------------------------------------------------------------------------

    \57\ See supra note 34.
    \58\ 17 CFR 240.15c-3-3.
---------------------------------------------------------------------------

    The Commission further understands that the proposed amendments to
LCH SA's Rulebook and Procedures will bring LCH SA into compliance with
the indirect clearing requirements of MiFIR and the related Indirect
Clearing RTS while at the same time leaving unmodified the account
structure used for LCH SA's FCM Clearing Members and its U.S. Clearing
Members. Therefore, the Commission finds the provisions with regard to
STP will help ensure that LCH SA's policies and procedures provide for
a well-founded, clear, transparent, and enforceable legal basis for
each aspect of its activities in

all relevant jurisdictions, consistent with Rule 17Ad-22(e)(1).\59\
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    \59\ 17 CFR 240.17Ad-22(e)(1).
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c. Other Provisions

    With respect to the proposed rule change replacing the definition
of ``Member Uncovered Risk'' with ``Group Member Uncovered Risk,'' the
Commission believes the proposed changes will improve LCH SA's ability
to identify and measure the risks associated with clearing processes by
taking into account the relevant LCH Group Risk Policy and considering
whether Clearing Members belong to the same group for purposes of the
relevant risk calculations As a result, the Commission believes that
LCH SA will be better situated to collect the level of resources
commensurate with the risks associated with affiliated Clearing Members
and will thereby be able to more appropriately cover its credit
exposures to its participants. Therefore, the Commission finds that the
proposed rule change regarding the definition of Group Member Uncovered
Risk will further the protection of investors and the public interest,
consistent with Section 17A(b)(3)(F) of the Act.\60\ For the same
reasons, the Commission also finds that the proposed rule change
regarding the definition of Group Member Uncovered Risk is consistent
with the applicable requirements of Rules 17Ad-22(e)(4) and (e)(6).\61\
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    \60\ 15 U.S.C. 78q-1(b)(3)(F).
    \61\ 17 CFR 240.17Ad-22(e)(4) and (6).
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    The proposed rule change also revises LCH SA's CDS Default
Management Process to clarify the responsibilities between a Non-
Defaulting Clearing Member and the Auction Member Representative
appointed by the Non-Defaulting Clearing Member to act in such Clearing
Member's place in the competitive bidding process. In doing so, the
Commission finds the proposed rule change facilitates LCH SA's CDS
Default Management Process, thereby enabling LCH SA to limit its
exposures to potential losses from defaults by its participants and the
exposures of non-defaulting participants to losses that they cannot
anticipate or control. As a result, the Commission finds that the
proposed rule change regarding the responsibilities between a Non-
Defaulting Clearing Member and the Auction Member Representative
appointed by the Non-Defaulting Clearing Member further the protection
of investors and the public interest consistent with Section
17A(b)(3)(F) of the Act.\62\
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    \62\ 15 U.S.C. 78q-1(b)(3)(F).
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    In its filing, LCH SA requested that the Commission grant
accelerated approval of the proposed rule change pursuant to Section
19(b)(2)(C)(iii) of the Exchange Act.\63\ Under Section
19(b)(2)(C)(iii) of the Act,\64\ the Commission may grant accelerated
approval of a proposed rule change if the Commission finds good cause
for doing so. LCH SA believes that accelerated approval is warranted
because the proposed rule change is required as of January 3, 2018 in
order to comply with the requirements of MiFIR.
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    \63\ 15 U.S.C. 78s(b)(2)(C)(iii).
    \64\ Id.
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    The Commission finds good cause, pursuant to Section
19(b)(2)(C)(iii) of the Act,\65\ for approving the proposed rule change
on an accelerated basis, prior to the 30th day after the date of
publication of notice in the Federal Register, because the proposed
rule change is required as of January 3, 2018 in order to facilitate
LCH SA's efforts to comply with MiFIR, RTS 26, and the Indirect
Clearing RTS. Additionally, the Commission notes that the proposed
changes regarding indirect clearing do not apply to U.S. customers, and
that LCH SA has represented that amending its Rulebook and Procedures
to comply with requirements regarding indirect clearing do not impede
compliance with relevant U.S. law, including Section 17A(b)(3)(F) of
the Act.
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    \65\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \66\ and the
rules and regulations thereunder.
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    \66\ 15 U.S.C. 78q-1.
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act
\67\ that the proposed rule change (SR-LCH SA-2017-010) be, and hereby
is, approved on an accelerated basis.\68\
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    \67\ 15 U.S.C. 78s(b)(2).
    \68\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\69\
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    \69\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-28492 Filed 1-3-18; 8:45 am]
 BILLING CODE 8011-01-P