[Federal Register Volume 82, Number 3 (Thursday, January 5, 2017)]
[Notices]
[Pages 1398-1415]
[FR Doc No: 2016-31940]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79707; File No. 600-36]

Self-Regulatory Organizations; LCH SA; Order Granting Application
for Registration as a Clearing Agency and Request for Exemptive Relief

December 29, 2016.

I. Introduction

    On July 5, 2016, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (``Commission'') a Form CA-1 seeking
registration as a clearing agency under Section 17A of the Securities
Exchange Act of 1934 \1\ (``Exchange Act'' or ``Act'') and Rule 17Ab2-1
thereunder.\2\ LCH SA is seeking to provide central counterparty
(``CCP'') services for U.S. persons for security-based swaps, in
particular single-name credit default swaps (``CDS''), through its
CDSClear business unit.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78q-1.
    \2\ 17 CFR 240.17Ab2-1.
---------------------------------------------------------------------------

    Along with its Form CA-1, LCH SA submitted a request for exemptive
relief (i) from Sections 5 and 6 of the Act \3\ with respect to its
end-of-day pricing process; (ii) from Section 19(b) of the Act \4\ and
Rule 19b-4 thereunder \5\ with respect to filing certain proposed rule
changes relating to its Non-U.S. Business (as defined below); (iii)
from the requirements set forth in the introductory paragraph of Rule
17Ad-22(c)(2) and from Rule 17Ad-22(c)(2)(iii) \6\ with respect to its
annual audited financial statements; and (iv) Rule 17a-22 \7\ with
respect to requirements to provide the Commission with physical copies
of certain materials.\8\ Notice of the application and request for
exemptive relief was published in the Federal Register on October 3,
2016 (``Notice'').\9\ The Commission received no comments on the
Notice. This Order approves LCH SA's application for registration as a
clearing agency and grants LCH SA's request for exemptive relief.
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78e and 78f.
    \4\ 15 U.S.C. 78s(b).
    \5\ 17 CFR 240.19b-4.
    \6\ 17 CFR 240.17Ad-22(c)(2) and 17 CFR 240.17Ad-22(c)(2)(iii).
    \7\ 17 CFR 240.17a-22.
    \8\ See Letter from Christophe H[eacute]mon, CEO, LCH SA, to
Brent J. Fields, Secretary, Securities and Exchange Commission
(August 9, 2016) (hereinafter ``Request for Exemptive Relief'').
    \9\ Securities Exchange Act Release No. 34-78941 (September 27,
2016), 81 FR 68074 (October 3, 2016) (File No. 600-36).
---------------------------------------------------------------------------

II. Overview of LCH SA's Application

    LCH SA maintains its principal office in Paris, France and is a
wholly-owned subsidiary of LCH.Clearnet Group Limited (``LCH
Group'').\10\ LCH SA is regulated as a bank and as a CCP under French
law by the Autorit[eacute] des March[eacute]s Financiers,
Autorit[eacute] de Contr[ocirc]le Prudentiel et de R[eacute]solution,
and Banque de France.\11\ In addition, LCH SA is a CCP authorized to
offer clearing services in the European Union pursuant to the European
Market Infrastructure Regulation (``EMIR'') and is also registered with
the U.S. Commodity Futures Trading Commission (``CFTC'') as a
derivatives clearing organization (``DCO'') to provide clearing
services for broad-based index CDS to U.S. members and their
customers.\12\
---------------------------------------------------------------------------

    \10\ See LCH SA Form CA-1, Exhibit A, 1.
    \11\ See LCH SA Form CA-1, Exhibit J-3 (CDSClear Service
Description), Section 2.3.
    \12\ Id.
---------------------------------------------------------------------------

    In addition to LCH SA's CDSClear service, LCH SA offers clearing
services for derivatives, exchange-traded futures and options, cash
equities, fixed income, and energy instruments through three lines of
CCP services: EquityClear, CommodityClear, and RepoClear.\13\ These
three services constitute LCH SA's non-U.S. business in that they
operate entirely outside the United States and do not have any U.S.
clearing members (``Non-U.S. Business''). LCH SA's CDS clearing
services are entirely located in the CDSClear business unit. LCH SA's
Non-U.S. Business does not provide CDS services. The following sections
describe relevant portions of LCH SA's Form CA-1 application.\14\
---------------------------------------------------------------------------

    \13\ See Request for Exemptive Relief at 4.
    \14\ The titles of the cited rules specify whether the rules are
associated with CDSClear, LCH SA, or others.
---------------------------------------------------------------------------

A. Membership Standards

    LCH SA has established requirements concerning membership, which
include standards for financial responsibility, operational capacity,
business experience, and creditworthiness.\15\ Members must comply with
these requirements on an ongoing basis.\16\
---------------------------------------------------------------------------

    \15\ See LCH SA Form CA-1, Exhibit E-4 (CDSClear CDS Clearing
Rule Book), Section 2.2.1 (hereinafter, ``CDSClear Rulebook'').
    \16\ See id. at Section 2.2.2.
---------------------------------------------------------------------------

    With respect to financial responsibility, LCH SA's CDSClear
Rulebook contains net capital requirements that, among other things,
establish minimum net capital requirements for members that are
scalable based on the risk the members introduce to LCH SA. To assess a
member's creditworthiness, LCH SA uses an internal credit scoring
framework to determine the member's credit risk based on financial and
qualitative factors.\17\
---------------------------------------------------------------------------

    \17\ See id. at Article <IP_ADDRESS>.
---------------------------------------------------------------------------

    Regarding operational capacity and business experience
requirements, a member must be able to demonstrate that it has
sufficient expertise in clearing activities. This demonstration
includes, among other things, that a member's systems and operations
are sufficiently reliable and capable of supporting the performance of
the member in meeting its obligations (including having sufficient
facilities, equipment, personnel, hardware and software systems).
Similarly, any prospective member of LCH SA must also demonstrate that
it has appropriate banking arrangements.\18\
---------------------------------------------------------------------------

    \18\ See id. at Section 2.2.1.
---------------------------------------------------------------------------

    LCH SA ensures ongoing compliance with membership obligations by
monitoring its members and imposing several reporting obligations on
them. LCH SA monitors certain indicators on an ongoing basis, including
but not limited, financial ratios, operational capabilities, external
ratings, and market implied ratings. In addition, each member is
required to notify LCH SA in writing of material changes to itself or
its operations, such as changes in the direct or indirect controlling
ownership, reduction in capital of more than 10%, the occurrence of
insolvency proceedings, the default of any of the member's customers,
and any change to the member's systems or operations that materially
impact the member's ability

to meet its obligations as a member. Furthermore, members are required
to provide LCH SA with audited financial statements on an annual basis,
as well as interim financial statements during the course of the
year.\19\
---------------------------------------------------------------------------

    \19\ See LCH SA Form CA-1, Schedule A at 9; see also CDSClear
Rulebook, Sections 2.3.1 and 2.3.2.
---------------------------------------------------------------------------

B. Capacity To Enforce Rules and Discipline Members in Accordance With
Fair Procedures

    LCH SA has established CDSClear rules and procedures to monitor for
breaches of its membership standards and rules, enforce its rules, and
discipline members. The members are required to notify LCH SA of
certain breaches relating to financial or operational capacity, and are
required to submit to inspections and audits by LCH SA.\20\ In the
event that a member breaches its obligations, LCH SA may impose certain
risk-reducing measures, including restricting a member's ability to
submit additional transactions for clearing, or impose disciplinary
sanctions, such as fines or public censure.\21\ LCH SA also may suspend
or terminate the membership in certain circumstances, such as upon a
member's material breach of its obligations, upon suspension or
termination of a member's membership in another clearing house, or upon
the occurrence of an event that materially impacts the member's ability
to meet its obligations under relevant membership agreements.\22\
---------------------------------------------------------------------------

    \20\ See id. at Section 2.3.3.
    \21\ See id. at Section 2.4.1; and LCH SA Form CA-1, Exhibit E-
6.8 (CDSClear CDS Clearing Procedures, Section 8: Disciplinary
Proceedings) Section 8.4.
    \22\ See CDSClear Rulebook, Article <IP_ADDRESS>.
---------------------------------------------------------------------------

    LCH SA also has established pre-defined procedures for member
discipline and for affording a member the opportunity to dispute a
decision by LCH SA to impose disciplinary measures. These disciplinary
procedures require investigations of an alleged breach and written
notifications to a member regarding the details of the investigation
and an opportunity for the member to object. Such procedures also
provide members with the right to bring to the attention of LCH SA
potential conflicts of interest involving investigative personnel
appointed by LCH SA to perform an investigation of a member's alleged
breach. Following an investigation, LCH SA is required to provide a
written report of its findings to the member and, where LCH SA has
determined to impose disciplinary proceedings, form a disciplinary
committee and provide the member the opportunity to respond to the
report. The disciplinary committee is required to provide the member
with notice of its decision and any sanctions imposed. Members are
permitted to dispute the decision and imposition of sanctions, and to
submit such dispute to arbitration or litigation, as applicable.\23\
---------------------------------------------------------------------------

    \23\ See LCH SA Form CA-1, Exhibit E-6.8 (CDSClear CDS Clearing
Procedures, Section 8: Disciplinary Proceedings).
---------------------------------------------------------------------------

    In addition, LCH SA has established procedures to notify a
membership applicant if the applicant is denied membership. These
procedures require LCH SA to communicate the reason(s) for such denial
by registered mail to the applicant.\24\
---------------------------------------------------------------------------

    \24\ See LCH SA Form CA-1, Exhibit E-6.1 (CDSClear CDS Clearing
Procedures, Section 1: Membership).
---------------------------------------------------------------------------

C. Governance--Fair Representation and Operational and Risk
Transparency

    LCH SA is governed by its Board of Directors (``Board''), which
determines LCH SA's business strategies and oversees implementation of
those strategies. The Terms of Reference of LCH SA's Board of Directors
require the Board to be composed of between three and eighteen
directors and must include a non-executive chair, executive directors,
independent \25\ non-executive directors, at least one director
representing the London Stock Exchange Group plc (``LSEG''),\26\ and
user directors, among other categories of directors.\27\
---------------------------------------------------------------------------

    \25\ Independent director means a director, who satisfies
applicable regulatory requirements regarding independent directors
and who is appointed in accordance with the Nomination Committee
terms of reference. See LCH SA Form CA-1, Exhibit A-2 (LCH SA Terms
of Reference of the Board of Directors), Article 2. Under EMIR, LCH
SA is required to maintain certain minimum number of members of the
board that are independent and EMIR defines an independent member of
the board as ``a member of the board who has no business, family or
other relationship that raises a conflict of interest regarding the
CCP concerned or its controlling shareholders, its management or its
clearing members, and who has had no such relationship during the
five years preceding his membership of the board.'' See Article 27
and Article 2(28), Regulation (EU) No. 648/2012 of the European
Parliament and of the Council of 4 July 2012 on OTC derivatives,
central counterparties and trade repositories, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32012R0648. In
addition, in determining whether a person is fit for appointment as
an independent director, the Nomination Committee will consider
whether such person is independent in character and judgment, and
whether there are relationships or circumstances (including any with
LSEG or any of its subsidiary undertakings and/or with any
significant user or venue shareholder) which are likely to affect,
or could appear to affect, such person's judgment.'' See
LCH.Clearnet Group Limited Terms of Reference of the Nomination
Committee of the Board of Directors, Article 5.3, available at
http://www.lch.com/documents/731485/762675/qccp-status-lch-9+feb-2015.pdf/fa48a090-d90c-4193-91d8-52f8068a4c56.
    \26\ As described in the Notice, LSEG is a majority owner of LCH
Group.
    \27\ See LCH SA Form CA-1, Exhibit A and Exhibit A-2 (LCH SA
Terms of Reference of the Board of Directors), Article 3. A user
director is ``a director who is nominated by a shareholder of [LCH
Group] which is a user or who is otherwise connected to such user
shareholder by virtue of his employment or directorship.'' Id. at
Article 2. For purposes of the definition of a ``user director,''
``users'' include inter-dealer brokers, clearing members, financial
institutions or investors which are buy-side, indirect `users',
including asset managers. See LCH SA Form CA-1, Exhibit E-2 (Special
Resolution of LCH Group), Article 1.1. However, the category of user
directors does not include customer directors, as ``customer'' is
used under the CFTC rules.
---------------------------------------------------------------------------

    LCH SA has also established various Board-level committees to
facilitate the Board's work. Specifically, LCH SA's Board has an Audit
Committee tasked with determining whether LCH SA's management has put
in place adequate internal control systems and assisting the Board in
reviewing LCH SA's audited financial statements, regulatory compliance,
risk governance framework, internal control environment and information
security and business continuity plans.\28\ The Audit Committee is made
up of at least four non-executive directors of the Board, at least
three of whom must be independent.\29\ Additionally, one member of the
Audit Committee must be a member of the Risk Committee (described
below), one must be a user director and one must be recommended or
approved by LSEG so long as LSEG controls at least 20% of the votes of
LCH Group.\30\
---------------------------------------------------------------------------

    \28\ See LCH SA Form CA-1, Exhibit A-5 (LCH SA Terms of
Reference of the Audit Committee of the Board of Directors), Section
1.
    \29\ Id. at Section 2.1.
    \30\ Id.
---------------------------------------------------------------------------

    As noted above, LCH SA's Board also has a Risk Committee to
consider LCH SA's risk appetite, tolerance and strategy. The Risk
Committee reviews on an annual basis LCH SA's operational risk policy
and regularly reviews reports prepared by LCH SA's risk management
department.\31\ Representatives of members and customers are directly
represented on the Risk Committee \32\ and are chosen based on several
factors, including asset classes cleared, volume cleared, contribution
to relevant default funds and whether they have previously been a
voting member of the Risk Committee.\33\ The remainder of the committee
is made up of independent, non-executive directors. The chairman of the
Risk Committee must be an

independent, non-executive director.\34\ Management and additional
member representatives may be invited to attend Risk Committee meetings
in a non-voting capacity.\35\
---------------------------------------------------------------------------

    \31\ See LCH SA Form CA-1, Exhibit A-4 (LCH SA Terms of
Reference of the Risk Committee of the Board of Directors).
    \32\ Id. at Section 1.1.3.
    \33\ Id. at Section 1.7.
    \34\ Id. at Section 1.1.1.
    \35\ Id. at Sections 1.2 and 1.3.
---------------------------------------------------------------------------

    In addition to these internal governance structures, LCH SA also
has established a consultative process for considering external views
regarding changes to its rules, as set forth in its CDSClear Rulebook,
among other material documentation.\36\ When LCH SA is considering
changes to rules that apply to its clearing members, it must first
consult with legal, risk, operational and/or other committees that it
establishes, in which clearing members may request to participate.\37\
If LCH SA determines to pursue the changes after this initial
consultation, it must issue a proposal to all clearing members,
providing at least 14 days for clearing members to comment.\38\
Following the completion of the comment period, LCH SA may publish the
new rule, for effectiveness no sooner than two days after its
publication, presuming LCH SA has complied with all other regulatory
requirements for changing its rules.\39\
---------------------------------------------------------------------------

    \36\ See CDSClear Rulebook, Article 1.2.2. The consultative
process applies to changes in CDS Clearing Documentation, which
includes CDSClear's CDS Admission Agreement, CDS Clearing Rules, CDS
Clearing Supplement Documents, Index Cleared Transaction
Confirmation and Single Name Cleared Transaction Confirmation, among
other documents, as each is individually defined in Section 1.1.1 of
the CDSClear Rulebook.
    \37\ See id. at Article <IP_ADDRESS>.
    \38\ Id. The consultation process is not required, however, for
certain limited, technical, or administrative changes; changes
required to comply with applicable laws; or changes necessary to
manage risks under certain extreme market developments. See CDSClear
Rulebook, Article <IP_ADDRESS>.
    \39\ See CDSClear Rulebook, Article <IP_ADDRESS>.
---------------------------------------------------------------------------

    Furthermore, LCH SA must publish and keep updated on its Web site
its CDSClear Rulebook, as well as other material rules and other
documents concerning CDSClear services.\40\ Similarly, LCH SA must
publish proposals and notices concerning any changes to the provisions
of these documents,\41\ as well as a current schedule of fees.\42\
---------------------------------------------------------------------------

    \40\ See CDSClear Rulebook, Section 1.2.3.
    \41\ See id. at Section 1.2.3.
    \42\ See id. at Article <IP_ADDRESS>.
---------------------------------------------------------------------------

D. Safeguarding of Securities and Funds and Financial Resources

i. Financial Resources
    LCH SA employs a risk-based margin methodology specific to its
CDSClear service to calculate its exposures to CDSClear members and to
set initial margin requirements.\43\ Specifically, LCH SA uses a Value
at Risk (``VaR'') model to calculate member initial margin requirements
sufficient to cover losses under normal market conditions with a 99.7%
confidence interval.\44\ This model takes into account a variety of
risks, including changes to credit spreads, recovery rates, and
interest rates,\45\ and is reviewed on a monthly basis via back testing
and stress testing (including reporting of the results of such review
to risk management personnel). LCH SA performs an independent model
validation annually, which includes a review of the parameters and
assumptions that underlie the model by qualified and independent
personnel. LCH SA imposes additional margin requirements on members to
address position concentrations, wrong way risk, and illiquid positions
over and above that calculated pursuant to its VaR model.\46\ LCH SA
also requires additional margin from members with lower internal credit
scores, as well as for those members whose scores deteriorate or fall
below a certain threshold.\47\ LCH SA requires each member to post
collateral to satisfy its margin requirement, which allows LCH SA to
manage its risk exposure. LCH SA limits eligible collateral to cash and
securities with low credit, liquidity, and market risk; as a further
precaution, LCH SA applies haircuts to collateral posted in the form of
securities.\48\ In addition to its initial margin requirements, to
manage the risk of price fluctuations occurring in a member's open
position, LCH SA and members are required to make cash payments to meet
a variation margin requirement.\49\
---------------------------------------------------------------------------

    \43\ See LCH SA Form CA-1, Exhibit H-1 (LCH SA Audited Financial
Statements for the Year Ended 31 December 2015) at 22.
    \44\ Id.
    \45\ See LCH SA Form CA-1, Exhibit E-6.2 (CDSClear CDS Clearing
Procedures, Section 2: Margin and Price Alignment Interest).
    \46\ Id.
    \47\ See id. at 20 and LCH SA Form CA-1, Exhibit J-3 (CDSClear
Service Description), Section 9.1.
    \48\ See CDSClear Rulebook, Articles <IP_ADDRESS> and <IP_ADDRESS>; see
also LCH SA Form CA-1, Exhibit E-6.3 (CDSClear CDS Clearing
Procedures Section 3: Collateral and Cash Payment), Section 3.9.
    \49\ See LCH SA Form CA-1, Exhibit H-1 (LCH SA Audited Financial
Statements for the Year Ended 31 December 2015), 20; see also
CDSClear Rulebook, Section 4.2.5 and LCH SA Form CA-1, Exhibit E-6.2
(CDSClear CDS Clearing Procedures, Section 2: Margin and Price
Alignment Interest).
---------------------------------------------------------------------------

    To further augment its ability to address a default, LCH SA has
established a mutualized default fund dedicated to the CDSClear
service. This fund is maintained separately from the default funds for
LCH SA's other services.\50\ The default fund is only available for use
to cover losses as a result of, and following, an event of default with
respect to a CDSClear member. LCH SA sizes the default fund to cover
the theoretical losses associated with the default of the two CDSClear
participant families to which LCH SA has the largest exposures in
extreme but plausible market conditions, plus an additional buffer.\51\
Each CDSClear member is required to contribute to the default fund in
an amount that is the greater of the CDSClear member's proportionate
share of the total CDSClear default fund based on the margin
requirements related to positions held in the CDSClear service, or the
minimum contribution of [euro]10 million.\52\ LCH SA calibrates its
CDSClear default fund, and CDSClear member default fund requirements,
on a monthly basis.\53\ LCH SA's Risk Committee reviews results of
stress testing related to the CDSClear default fund on at least a
quarterly basis.\54\
---------------------------------------------------------------------------

    \50\ See CDSClear Rulebook, Article <IP_ADDRESS>.
    \51\ See id. at Articles <IP_ADDRESS> and <IP_ADDRESS>.
    \52\ See id. at Article <IP_ADDRESS>.
    \53\ See LCH SA Form CA-1, Exhibit J-3 (CDSClear Service
Description), Section 11.1.
    \54\ See LCH SA Form CA-1, Exhibit A-4 (LCH SA Terms of
Reference of the Risk Committee of the Board of Directors), Section
9.1.
---------------------------------------------------------------------------

ii. Collateral Policy and Investment of Collateral
    LCH SA restricts the types of collateral that may be provided by
members to satisfy their margin and default fund requirements to cash
(in Euros), foreign exchange (restricted to U.S. Dollars and Pound
Sterling), liquid sovereign debt instruments issued by governments in
Western Europe (specifically, France, Belgium, Portugal, the United
Kingdom, Italy, Spain, Germany, and the Netherlands) and the United
States, as well as equities that are part of the Euro Stoxx 50 Index,
and applies haircuts to all collateral received from members except
cash.\55\ LCH SA has established an investment risk policy to govern
the management of cash collateral posted by members to satisfy their
margin and default fund requirements. The investment risk policy
provides that its objective is to ensure that cash collateral is
invested securely by, among other things, requiring that investments be
made with counterparties that meet certain minimum credit standards
(based on LCH SA's internal credit assessment of the counterparty's
financial condition

and operational capacity).\56\ Furthermore, LCH SA restricts the types
of investments of collateral it is permitted to make by allowing cash
deposits and purchases of securities, where such securities are not
backed by certain governments, to be restricted to an overnight term
only.\57\
---------------------------------------------------------------------------

    \55\ See LCH SA Form CA-1, Exhibit E-6.3 (CDSClear CDS Clearing
Procedures Section 3: Collateral and Cash Payment).
    \56\ See LCA SA Form CA-1, Exhibit H-1 (LCH SA Audited Financial
Statements for the Year Ended 31 December 2015), 20.
    \57\ See LCH Group Risk Management Policy: Investment Risk.
---------------------------------------------------------------------------

iii. Default Management, Loss Allocation, and Recovery
    To manage losses incurred in the event of a member default, LCH
SA's default management process sets forth the steps LCH SA would take
in the event of such an occurrence.\58\ Upon the declaration of an
event of default, LCH SA's default management process begins to
minimize losses and disruption by attempting (i) to hedge against
market risk, (ii) to transfer customer positions to non-defaulting
members, and (iii) to dispose of the defaulting member's portfolio
through a competitive auction process--all within a five-business-day
period.\59\ The only financial resources or recovery tools available to
cover losses resulting from a CDSClear member's default are those
specified in the CDSClear default waterfall.\60\
---------------------------------------------------------------------------

    \58\ See CDSClear Rulebook, Appendix 1 ``CDS Default Management
Process'').
    \59\ See LCH SA Form CA-1, Schedule A, 10-11; see also CDSClear
Rulebook, Appendix 1, Section 2.1.
    \60\ See CDSClear Rulebook, Section 4.4.1.
---------------------------------------------------------------------------

    Under the CDSClear default waterfall, the defaulting CDSClear
member's initial margin, variation margin, and additional margins are
first used to cover losses. If these resources are insufficient to
cover the losses, the defaulting CDSClear member's default fund
contribution is applied. To the extent that losses are still not
covered, LCH SA would utilize its own capital (in the amount
established in the CDSClear default waterfall pursuant to the CDSClear
Rulebook) to cover remaining losses. If losses exceed the financial
resources used up to this point, LCH SA may then access the CDSClear
default fund contributions of non-defaulting CDSClear members and also
may impose additional default fund contribution assessments against
non-defaulting CDSClear members. If these pre-funded resources and
assessments are insufficient to cover losses within a five business-day
period, LCH SA may impose, on a pro rata basis, reductions in daily
settlement payments owed to non-defaulting members (``Variation Margin
Haircutting''), subject to certain limits. The entire default
management process, including the use of Variation Margin Haircutting,
is intended to be completed within five business days following the
declaration of a default.\61\ At any time during the default management
process, if LCH SA determines that it would not have sufficient
resources to meet obligations arising from the default auction or
auctions in accordance with the default waterfall, LCH SA must early
terminate all open contracts and proceed to wind down the CDSClear
service pursuant to the terms set forth in the CDSClear Rulebook.\62\
---------------------------------------------------------------------------

    \61\ See LCH SA Form CA-1, Exhibit J-3 (CDSClear Service
Description), Section 11.2; see also CDSClear Rulebook, Appendix 1.
    \62\ See CDSClear Rulebook, Appendix 1, Clauses 2.1.4 and 8.1.
---------------------------------------------------------------------------

    To manage its liquidity needs resulting from a member's default,
LCH SA monitors and measures its liquidity resources and requirements
daily, at the entity level. In addition to cash collateral, LCH SA may
use its own capital as an immediately available liquidity resource, and
during liquidity stress events, LCH SA also can access central bank
liquidity through the Banque de France, as well as other secured
financing facilities that LCH SA maintains.\63\
---------------------------------------------------------------------------

    \63\ See LCH SA Form CA-1, Exhibit H-1 (LCH SA Audited Financial
Statements for the Year Ended 31 December 2015), 27-28.
---------------------------------------------------------------------------

    LCH SA makes its default policies and procedures available to
members by posting them to its public Web site, in addition to other
key information such as default resources, margin methodology, daily
settlement prices, and open interest and volume, among other
things.\64\
---------------------------------------------------------------------------

    \64\ See CDSClear Rulebook, Title IV, Chapters 3 and 4, and
Appendix 1.
---------------------------------------------------------------------------

E. Operational Risk Management

    LCH SA manages its operational risk pursuant to, among other
policies and procedures, an operational risk policy applicable to each
entity within LCH Group. The operational risk policy lists regulatory
operational risk standards applicable to LCH SA; assigns roles and
responsibilities to the business departments, Operational Risk
Department, and Audit Department for the identification, assessment,
and mitigation of operational risks; and establishes regularly
scheduled reviews of the framework by management and applicable
committees of the Board of Directors. The operational risk management
policy requires ongoing self-assessment, monitoring, and reporting of
risks (including to relevant Board of Directors and business control
committees), as well as the development and implementation of risk
mitigation plans when necessary. LCH SA's rules and procedures also
provide for regular testing of its various systems as part of its
operation risk management process.\65\
---------------------------------------------------------------------------

    \65\ See LCH SA Form CA-1, Exhibit K (LCH SA Security Measures
and Operational Safeguards).
---------------------------------------------------------------------------

    LCH SA's policies and procedures establish governance processes to
reinforce controls and procedures for operational risk management. For
example, the operational risk management framework establishes
monitoring and reporting obligations by the risk owners and Operational
Risk Department to applicable Board committees. The Terms of Reference
of the Audit Committee and Risk Committee, respectively, dictate the
Committees' responsibilities to oversee various aspects of LCH SA's
operational risk management. The Risk Committee, among other things,
considers the risk controls related to new markets and contracts;
reviews LCH SA's money settlement arrangements; and reviews LCH SA's
Operational Risk Policy.\66\ The Audit Committee has responsibility for
determining whether management has put in place adequate internal
control systems that provide reasonable assurance that corporate
objectives will be achieved and that LCH SA complies with applicable
regulatory requirements.\67\
---------------------------------------------------------------------------

    \66\ See LCH SA Form CA-1, Exhibit A-4 (LCH SA Terms of
Reference of the Risk Committee of the Board of Directors).
    \67\ See LCH SA Form CA-1, Exhibit A-5 (LCH SA Terms of
Reference of the Audit Committee of the Board of Directors).
---------------------------------------------------------------------------

    LCH SA has established multiple policies, standards, procedures,
and operational guidelines pertaining to system reliability,
resiliency, and security. For example, LCH SA's business continuity and
disaster recovery plans address threat assessments and monitoring,
systems testing, and possible responses to potential threats, including
the migration of main operational and data systems to back-up systems
and sites.\68\ LCH SA maintains multiple systems and data centers in
support of maintaining operational capacity and resilience. In
addition, LCH SA's rules require its clearing members to participate in
technical and operational tests organized by LCH SA to ensure the
continuity and orderly functioning of the CDS Clearing Service.\69\
Moreover, LCH SA also maintains an ongoing self-assessment policy to
continually

monitor and assess operational risk, such as security risk, and provide
for the mitigation of such risks when they exceed applicable
tolerances.\70\ Furthermore, LCH SA has established policies and
procedures regarding information security that provide for requirements
with respect to employee access and use of business and customer
information, as well as the maintenance of confidentiality of sensitive
information.\71\ Additionally, LCH SA is subject to group-wide policies
and procedures that that govern personal trading of employees for their
own account.\72\
---------------------------------------------------------------------------

    \68\ See LCH SA Form CA-1, Exhibit K-2 (LCH Group Business
Continuity Management Policy).
    \69\ See generally, CDSClear Rulebook, Section 2.2.8
    \70\ See, e.g., LCH SA Form CA-1, Ex. K-3 (LCH. Clearnet Group
Information Security Strategy/Maturity Self-assessment tool); LCH
Clearnet Group Operational Risk Policy--Operational Risk Management.
    \71\ See LCH SA Form CA-1, Exhibits K-1.1 (LSEG Employee
Information Security Policy) and K-1.2 (Technical Information
Security Policy).
    \72\ See LCH.Clearnet Group Confidentiality Policy; Group
Personal Account Dealing Policy; and Group Market Abuse Policy.
---------------------------------------------------------------------------

F. Fees, Dues, and Charges

    LCH SA charges transaction fees linked to products and annual
membership fees, which are generally usage-based and apply equally to
all members using LCH SA's CDSClear service. LCH SA also imposes annual
account structure fees for individually segregated accounts and omnibus
segregated accounts that are equally applicable to all members.\73\
---------------------------------------------------------------------------

    \73\ See LCH SA Form CA-1, Exhibit Q (LCH SA Schedule of Prices,
Rates or Fees Fixed by Registrant for Services Rendered by its
Participants).
---------------------------------------------------------------------------

III. Discussion

    Section 17A(b)(1) of the Act requires a clearing agency to register
with the Commission prior to performing the functions of a clearing
agency.\74\ The Commission shall grant a clearing agency's registration
if it finds that the requirements of the Act and the rules and
regulations thereunder with respect to the clearing agency are met.\75\
Section 17A(b)(3) of the Act requires that the Commission make a number
of determinations with respect to the clearing agency's organization,
capacity, and rules,\76\ including, among other things, determining
whether a clearing agency is ``so organized and [has] the capacity to
be able to facilitate the prompt and accurate clearance and settlement
of securities transactions and derivative agreements, contracts, and
transactions for which it is responsible, to safeguard securities and
funds in its custody or control or for which it is responsible, [and]
to comply with the provisions of [the Act] and the rules and
regulations thereunder.'' \77\ The Commission discusses below the
applicable requirements under the Exchange Act and rules and
regulations thereunder, and its findings regarding whether these
requirements are met.
---------------------------------------------------------------------------

    \74\ 15 U.S.C. 78q-1(b)(1).
    \75\ 15 U.S.C. 78s(a)(1); 15 U.S.C. 78q-1(b)(3). Among other
requirements, registered clearing agencies are subject to Exchange
Act Rule 17Ad-22. In 2012, the Commission adopted standards
establishing minimum requirements regarding registered clearing
agencies' risk management procedures and controls. See Securities
Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2,
2012). On September 28, 2016, the Commission adopted amendments to
Rule 17Ad-22 establishing enhanced standards for the operation and
governance of those clearing agencies registered with the Commission
that meet the definition of covered clearing agency. See Securities
Exchange Act Release No. 78961 (Sep. 28, 2016), 81 FR 70786 (Oct.
13, 2016) (compliance date April 11, 2017). See also Definition of
Covered Clearing Agency, Proposed Rule Amendments, Securities
Exchange Act Release No. 78963 (Sept. 28, 2016), 81 FR 70744 (Oct.
13, 2016).
    \76\ 15 U.S.C. 78q-1(b)(3).
    \77\ 15 U.S.C. 78q-1(b)(3)(A).
---------------------------------------------------------------------------

A. Membership Standards

1. Exchange Act Requirements
    Section 17A(b)(3)(B) of the Act provides that the rules of a
clearing agency must permit certain enumerated categories of persons to
be eligible for membership: Registered brokers or dealers, registered
clearing agencies, registered investment companies, banks, and
insurance companies.\78\
---------------------------------------------------------------------------

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

    Section 17A(b)(4)(B) of the Act allows a registered clearing agency
to deny, or condition participation of, any member or any category of
members listed in Section 17A(b)(3)(B) of the Act if such persons do
not meet the financial responsibility, operational capability,
experience, and competence standards set forth by the clearing
agency.\79\ In addition, Section 17A(b)(3)(F) of the Act requires that
the rules of the clearing agency must not be designed to permit unfair
discrimination in the admission of members or among members in the use
of the clearing agency.\80\ Similarly, Section 17A(b)(3)(I) provides
that the rules of a clearing agency may not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of section 17A.\81\
---------------------------------------------------------------------------

    \79\ 15 U.S.C. 78q-1(b)(4)(B).
    \80\ 15 U.S.C. 78q-1(b)(3)(F).
    \81\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Rules 17Ad-22(b)(5) and (6) further require that a registered
clearing agency establish, implement, maintain, and enforce written
policies and procedures that do not limit membership to dealers and do
not impose any specific portfolio size or transaction volume
minimums.\82\ Rule 17Ad-22(b)(7) \83\ requires that a registered
clearing agency establish, implement, maintain, and enforce written
policies and procedures that provide a person who maintains net capital
equal to or greater than $50 million with the ability to obtain
membership at the clearing agency, so long as the net capital
requirement is scalable to the risk posed by the participant's
activities. In addition, Rule 17Ad-22(d)(2) requires that a registered
clearing agency establish, implement, maintain, and enforce written
policies and procedures to require participants to have sufficient
financial resources and robust operational capacity to meet obligations
arising from participation in the clearing agency; have procedures in
place to monitor that participation requirements are met on an ongoing
basis; and have participation requirements that are objective and
publicly disclosed, and permit fair and open access.\84\
---------------------------------------------------------------------------

    \82\ 17 CFR 240.17Ad-22(b)(5) and (6).
    \83\ 17 CFR 240.17Ad-22(b)(7).
    \84\ 17 CFR 240.17Ad-22(d)(2).
---------------------------------------------------------------------------

2. Commission Findings
    The Commission finds that LCH SA's membership standards, as
described in the application, are consistent with Exchange Act Section
17A and the relevant provisions of Rule 17Ad-22.
i. Access to the Clearing Services
    With respect to providing access to CDSClear services, LCH SA has
established a general membership category for non-EU persons \85\ that
includes the categories of persons enumerated in Section
17A(b)(3)(B).\86\ Therefore, as described in the application, LCH SA's
rules are

consistent with Section 17A(b)(3)(B).\87\ In addition, LCH SA's rules
do not tie CDSClear membership to providing any specific dealer
service, maintaining a portfolio of any minimum size or maintaining any
particular transaction volume. Therefore, LCH SA's rules, as described
in the application, are consistent with Rules 17Ad-22(b)(5) and
(6).\88\ Finally, LCH SA's rules contemplate a minimum net capital
requirement of $50 million for U.S. FCM clearing members or [euro]37
million for other clearing members of CDSClear.\89\ The rules
specifically give LCH SA discretion to scale (a) a CDSClear member's
net capital requirement in accordance with the level of risk it
introduces to LCH SA, and (b) a CDSClear member's level of risk it
introduces to LCH SA in accordance with its net capital
requirement.\90\ Therefore, LCH SA's rules, as described in the
application, provide that any net capital requirements are scalable so
that they are proportional to the risk posed by the participant's
activities to the clearing agency, consistent with Rule 17Ad-
22(b)(7).\91\
---------------------------------------------------------------------------

    \85\ See CDSClear Rulebook, Section <IP_ADDRESS>(v).
    \86\ 15 U.S.C. 78q-1(b)(3)(B). Article <IP_ADDRESS>(v) of the
CDSClear Rulebook refers to ``Credit Institutions'' and ``Investment
Firms'' not having their head office in a ``Member State'' of the
European Economic Area, as well as legal persons whose principal or
sole object is the clearing of financial instruments.
    The terms ``Investment Firm'' and ``Credit Institution,'' as
defined in relevant European directives, substantially overlap with
the categories of persons enumerated in Section 17A(b)(3)(B), as
defined in the Exchange Act and, where incorporated by reference in
the Exchange Act, the Investment Company Act of 1940. Compare
definitions of ``Investment Firm'' (Directive 2004/39/EC Article
4(1)(1) and Annex I, Section A) and ``Credit Institution (Directive
2006/48/EC, Article 4(1)(a)) with definitions of ``broker'' (15
U.S.C. 78c(a)(4)), ``dealer'' (15 U.S.C. 78c(a)(5)), ``clearing
agency'' (15 U.S.C. 78c(a)(23)), ``investment company'' (15 U.S.C.
80a-3(a)(1)), ``insurance company'' (15 U.S.C. 80a-2(a)(17)) and
``bank'' (15 U.S.C. 78c(a)(6)). Thus, CDSClear's general admission
category for non-European persons would include persons who are
seeking clearing membership and are brokers, dealers, clearing
agencies, investment companies, banks, and insurance companies.
    \87\ 15 U.S.C. 78q-1(b)(3)(B).
    \88\ 17 CFR 240.17Ad-22(b)(5) and (6).
    \89\ See CDSClear Rulebook, Section 2.2.3.
    \90\ See id. at Section 2.2.3.
    \91\ 17 CFR 240.17Ad-22(b)(7).
---------------------------------------------------------------------------

ii. Capacity To Perform Obligations to Clearing Agency
    With respect to clearing membership standards, the Commission finds
that LCH SA's rules establish standards for CDSClear membership that
are consistent with Sections 17A(b)(4)(B), 17A(b)(3)(F), and
17A(b)(3)(I).\92\ Specifically, LCH SA's rules provide that an
applicant for CDSClear membership must be able to pay amounts required
by LCH SA, including margin and default fund contributions. An
applicant must also satisfy a minimum internal credit score that is
based on quantitative and qualitative data,\93\ have sufficient
expertise in relation to clearing activities, and have systems and
personnel required to support performance as a participant.\94\
Further, LCH SA has the authority under its rules to deny participation
if a CDSClear applicant does not meet these standards.\95\ Although LCH
SA's rules permit LCH SA to impose, amend or withdraw additional
requirements in relation to its CDSClear membership standards, LCH SA
may do so only if such additional requirements are non-discriminatory
and their objective is to control the risk members pose to LCH SA.\96\
These rules, along with the others addressing a member's continuing
obligations,\97\ provide standards for members' financial
responsibility, operational capability, experience, and competence,
consistent with Exchange Act Section 17A(b)(4)(B).\98\ In addition, the
Commission finds that these rules are not designed to permit unfair
discrimination in the admission of members or among members' use of the
clearing agency, and any burden they impose on competition is necessary
or appropriate in furtherance of the purposes of Section 17A; they
therefore satisfy the requirements of Exchange Act Sections
17A(b)(3)(F) and 17A(b)(3)(I).\99\
---------------------------------------------------------------------------

    \92\ 15 U.S.C. 78q-1(b)(3)(B), (F) and (I).
    \93\ See CDSClear Rulebook, Section 2.2.4.
    \94\ See id. at Section 2.2.1.
    \95\ See id. at Article <IP_ADDRESS>.
    \96\ Id. at Article <IP_ADDRESS>.
    \97\ See id. at Article <IP_ADDRESS>.
    \98\ 15 U.S.C. 78q-1(b)(4)(B).
    \99\ 15 U.S.C. 78q-1(b)(3)(F) and (I).
---------------------------------------------------------------------------

    The Commission believes that LCH SA's rules with respect to the
CDSClear service also satisfy the requirement in Rule 17Ad-22(d)(2)
that a registered clearing agency establish, implement, maintain, and
enforce written policies and procedures reasonably designed to require
participants to have sufficient financial resources and robust
operational capacity to meet obligations arising from participation in
the clearing agency, are objective and publicly disclosed, and permit
fair and open access.\100\ As described above, LCH SA's rules prescribe
standards with respect to members' financial responsibility,
operational capability, experience, and competence designed to manage
risks to the clearing agency. These standards require participants to
have sufficient financial resources and robust operational capacity to
meet their obligations because LCH SA can set and monitor financial
requirements and operational capacity commensurate with LCH SA's
business and risk management needs. Specifically, LCH SA can apply
scalable capital requirements \101\ and assesses its members' credit
risk; \102\ clearing members must pay amounts required by LCH SA,
specifically margin and default fund requirements and cash payment
obligations; \103\ clearing members must not be subject to insolvency
proceedings; \104\ and clearing members must satisfy LCH SA that they
have sufficient expertise in relation to clearing activities and that
their systems and operations are operationally reliable and capable of
supporting proper performance of its business as a clearing
member.\105\ These standards apply equally to all applicants for
CDSClear membership and existing CDSClear members and are publicly
disclosed in the CDSClear Rulebook. Therefore, the Commission finds
that LCH SA's CDSClear membership standards meet Rule 17Ad-22(d)(2)'s
requirement that standards be reasonably designed to be objective, are
publicly disclosed, and permit fair and open access.
---------------------------------------------------------------------------

    \100\ See 17 CFR 240.17Ad-22(d)(2).
    \101\ CDSClear Rulebook, Article <IP_ADDRESS>.
    \102\ See id. at Article <IP_ADDRESS>. CDS Clear assigns clearing
members an internal credit score. This score is based on data
including financial analysis, external market data and implicit or
external support available to the clearing member. Id.
    \103\ See id. at Article <IP_ADDRESS>(xiii).
    \104\ Id. at Article <IP_ADDRESS>(vii).
    \105\ Id. at Article <IP_ADDRESS>(x).
---------------------------------------------------------------------------

    LCH SA requires its CDSClear members to maintain on-going
compliance with the standards described above, subject to on-going
monitoring by LCH SA.\106\ For example, LCH SA's rules require clearing
participants to report significant events \107\ and file regularly
certain financial information with LCH SA.\108\ In addition to
monitoring various forward-looking indicators; \109\ LCH SA's rules
require that participants agree to submit clearing activity to
inspections reasonably requested by LCH SA,\110\ and participate in
technical and operational tests.\111\ The Commission therefore finds
that LCH SA meets the requirement in Rule 17Ad-22(d)(2) to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to have procedures in place to monitor that
participation requirements are met on an ongoing basis.\112\
---------------------------------------------------------------------------

    \106\ Id. at Article <IP_ADDRESS>.
    \107\ Id. at Article <IP_ADDRESS>.
    \108\ Id. at Article <IP_ADDRESS>.
    \109\ Id. at Section 2.3.2.
    \110\ Id. at Section 2.3.3.
    \111\ Id. at Article <IP_ADDRESS>.
    \112\ 17 CFR 240.17Ad-22(d)(2).
---------------------------------------------------------------------------

B. Capacity To Enforce Rules and Discipline Members in Accordance With
Fair Procedures

1. Exchange Act Requirements
    Section 17A(b)(3)(A) of the Act provides that a clearing agency
must be organized and have the capacity to enforce compliance by its
members with the rules of the clearing agency.\113\ Section
17A(b)(3)(G) of the Act requires that the rules of a clearing agency
provide that its members shall be appropriately disciplined for
violations of any provision of those rules by expulsion, suspension, a
limitation of activities, functions, and operations, fine, censure, or
any other fitting

sanction.\114\ Section 17A(b)(3)(H) of the Act requires that the rules
of the clearing agency be in accordance with the provisions of Section
17A(b)(5), and, in general, provide a fair procedure with respect to
the disciplining of members, the denial of membership, and the
prohibition or limitation by the clearing agency of any person with
respect access to the services offered by the clearing agency.\115\
Section 17A(b)(5) generally requires a clearing agency to bring
specific charges, notify a disciplined participant of them, give a
disciplined participant an opportunity to defend against such charges,
and keep a record in determining whether a participant should be
disciplined.\116\
---------------------------------------------------------------------------

    \113\ 15 U.S.C. 78q-1(b)(3)(A).
    \114\ 15 U.S.C. 78q-1(b)(3)(G).
    \115\ 15 U.S.C. 78q-1(b)(3)(H).
    \116\ 15 U.S.C. 78q-1(b)(5).
---------------------------------------------------------------------------

2. Commission Findings
    The Commission finds that LCH SA meets the above-described
requirements with respect to its CDSClear service. As part of the CDS
Admission Agreement, CDSClear members must abide by relevant LCH SA
rules and procedures.\117\ Pursuant to these rules and procedures, LCH
SA has the ability to (i) notify members that it believes they may have
violated LCH SA's rules, (ii) conduct an investigation of alleged
breaches, (iii) communicate its investigation results with the members,
(iv) form a disciplinary committee, (v) grant an opportunity for
members to contest the allegations, and (vi) impose disciplinary
measures accompanied by details of the grounds supporting the decision
and sanctions imposed, if any.\118\ Moreover, LCH SA's rules and
procedures confer on it the discretion to tailor its disciplinary
measures to the nature and severity of the infraction at issue: In
accordance with its rules and procedures, LCH SA may choose to suspend
or terminate any member of CDSClear, convey a public or private
reprimand, impose sanctions, or impose fines.\119\ The breadth of
disciplinary measures available to LCH SA and the flexibility to tailor
these measures to the nature and severity of any infractions of its
rules, coupled with the procedural safeguards--described more fully
below--conferred on members accused of violations, taken together,
enable LCH SA to ``appropriately'' discipline members for violations of
its rules. Therefore, the Commission finds that LCH SA's rules provide
for appropriate disciplinary measures and sanctions of its members for
violations of LCH SA's rules.
---------------------------------------------------------------------------

    \117\ See LCH SA Form CA-1, Exhibit P-2 (LCH SA CDS Admission
Agreement).
    \118\ See CDSClear Rulebook, Sections 2.3 and 2.4 and Exhibit E-
6.8 (CDSClear CDS Clearing Proceedings, Section 8: Disciplinary
Proceedings).
    \119\ See id.
---------------------------------------------------------------------------

    With their significant procedural protections described in Section
II.B, LCH SA's rules also satisfy applicable fairness requirements.
Among other things, members have the right to notice of any alleged
violation, the right to respond, the right to a hearing, and the right
to an explanation of the grounds supporting the discipline
imposed.\120\ In addition, LCH SA's rules are designed to avoid
conflicts of interest by permitting members to object to personnel
selected by LCH SA to lead an investigation of the member on the basis
of the existence of a conflict of interest and by allowing members to
refuse access to their offices by LCH SA's personnel when a
substantiated conflict of interest exists.\121\ If disciplinary
measures are imposed, a member has the right to contest them by
arbitration or litigation pursuant to LCH SA's procedures.\122\
Similarly, if LCH SA denies membership to an applicant, LCH SA will
provide the reasons for the denial of access.\123\ Members are
permitted to dispute the decision and imposition of sanctions, and to
submit such dispute to arbitration or litigation, as applicable.\124\
Taken together, the procedural protections in LCH SA's rules ensure, at
a minimum, that targets of discipline are informed of the charges
pending against them, have the ability to contest those charges, will
receive an explanation of the discipline imposed, if any, and will have
the opportunity to appeal any adverse decision.
---------------------------------------------------------------------------

    \120\ See LCH SA Form CA-1, Exhibit E-6.8 (CDSClear CDS Clearing
Procedures, Section 8: Disciplinary Proceedings).
    \121\ See id. at Section 8.2(a)(iii) and (v).
    \122\ See LCH SA Form CA-1, Exhibit E-6.8 (CDSClear CDS Clearing
Procedures, Section 8: Disciplinary Proceedings).
    \123\ See LCH SA Form CA-1, Exhibit E-6.1 (CDSClear CDS Clearing
Procedures, Section 1: Membership).
    \124\ See LCH SA Form CA-1, Exhibit E-6.8 (CDSClear CDS Clearing
Procedures, Section 8: Disciplinary Proceedings).
---------------------------------------------------------------------------

    Therefore, the Commission finds that LCH SA's rules, policies, and
procedures, as described in the application, meet the requirements
under Exchange Act Section 17A(b)(3)(A) (regarding the capacity to
enforce compliance by its members with the rules of the clearing
agency), Section 17A(b)(3)(H) (regarding providing a fair procedure
with respect to the disciplining of members, the denial of membership,
and the prohibition or limitation with respect to access to the
services offered by the clearing agency), and Section 17A(b)(5)
(regarding bringing charges against members, disciplinary notification,
affording members with an opportunity to defend against charges, and
recordkeeping relating to disciplinary determinations).

C. Governance--Fair Representation and Operational and Risk
Transparency

1. Exchange Act Requirements
    Section 17A(b)(3)(C) of the Act requires that the rules of a
clearing agency assure fair representation of the clearing agency's
shareholders (or members) and participants in the selection of the
clearing agency's directors and in the administration of the clearing
agency's affairs.\125\ In addition, Rule 17Ad-22(d)(8) requires that a
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to, as applicable, have
governance arrangements that are clear and transparent to fulfil the
public interest requirements in Section 17A of the Act applicable to
clearing agencies, to support the objectives of owners and
participants, and to promote the effectiveness of the clearing agency's
risk management procedures.\126\ Rule 17Ad-22(d)(9) provides that a
clearing agency must establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide market
participants with sufficient information for them to identify and
evaluate the risks and costs associated with using the clearing
agency's services.\127\
---------------------------------------------------------------------------

    \125\ 15 U.S.C. 78q-1(b)(3)(C).
    \126\ 17 CFR 240.17Ad-22(d)(8).
    \127\ 17 CFR 240.17Ad-22(d)(9).
---------------------------------------------------------------------------

2. Commission Findings
    The Commission finds that LCH SA's rules meet the above-described
requirements under the Exchange Act. With respect to the selection of
directors, the Terms of Reference of the LCH SA Board provide that the
Board is composed of three through eighteen directors in the categories
of a non-executive Chairman, independent non-executive directors,
executive directors, venue directors, user directors, and one director
representing LSEG.\128\ Currently, LCH SA's Board consists of fourteen
directors, three of whom are affiliated with clearing participants.
Although LCH SA's rules do not specify the number of directors in each
category, the Board's Terms of Reference specify that these categories
and numbers of directors within each category are subject to change to
comply with any applicable legal or regulatory

requirements from time to time (including the appointment of additional
directors as may be required from time to time).\129\ Therefore, LCH
SA's rules are designed to ensure that the numbers of the directors in
each category, including user directors, satisfy the fair
representation requirements in the Exchange Act and enable LCH SA to
adapt the composition of its Board to any evolving regulatory
requirements. The Commission finds that users have the opportunity to
provide meaningful input in the nomination for appointment of user
directors.\130\ Taken together, LCH SA's rules meet the requirement to
assure fair representation of its shareholders and participants in the
selection of its directors under Section 17A(b)(3)(C) of the Act.\131\
---------------------------------------------------------------------------

    \128\ See LCH SA Form CA-1, Exhibit A-2 (LCH SA Terms of
Reference of the Board of Directors), Article 3.
    \129\ Id. The Board's proposal for appointment of each director
at a shareholders' meeting must be based on recommendations made by
the Nomination Committee, which is required to recommend two user
directors out of an aggregate of ten directors that the Nomination
Committee is required to recommend to the Board for appointment as
directors. See LCH.Clearnet Group Limited Terms of Reference of the
Nomination Committee of the Board of Directors, Article 2.4,
available at http://www.lch.com/documents/731485/762675/qccp-status-lch-9+feb-2015.pdf/fa48a090-d90c-4193-91d8-52f8068a4c56. Therefore,
users will be represented by at least two directors on the Board.
    \130\ In formulating its recommendation for user director
nominees, the user member sitting on the Nomination Committee must
be present to satisfy a quorum, and the rules further allow the
seventeen largest user shareholders of LCH Group who are not
connected with an existing director to submit names to the
Nomination Committee for consideration as a user director. See
LCH.Clearnet Group Limited Terms of Reference of the Nomination
Committee of the Board of Directors, Appendix, available at http://www.lch.com/documents/731485/762675/qccp-status-lch-9+feb-2015.pdf/fa48a090-d90c-4193-91d8-52f8068a4c56. Therefore, users will have the
opportunity to provide meaningful input in the nomination of user
directors.
    \131\ 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

    With respect to the administration of its affairs, LCH SA's rules
establish a consultative process for considering clearing member views
regarding material changes to LCH SA's rules that apply to clearing
members, as described in Section II.C above. Additionally, as described
in Section II.C and discussed further below, the Audit and Risk
Committees have substantial roles in risk management oversight and
informing the full Board on risk management activities. Because there
are roles for clearing members and customers on the Risk Committee and
for the user director on the Audit Committee, the Commission believes
LCH SA assures that participants have fair representation in the
administration of LCH SA's affairs, as required by Section 17A(b)(3)(C)
of the Act.\132\
---------------------------------------------------------------------------

    \132\ Id.
---------------------------------------------------------------------------

    In particular, LCH SA's Board has established an Audit Committee
and a Risk Committee, which are tasked with engagement in and oversight
of various aspects of LCH SA's financial and operational risk
management. For example, as described in Section II.C, the Audit
Committee oversees internal control systems and assists the Board in
reviewing LCH SA's audited financial statements, regulatory compliance,
risk governance framework, internal control environment, and
information security and business continuity plans.\133\ Among other
things, the Audit Committee also monitors the quality and effectiveness
of the internal Audit Department,\134\ reviews the process for annual
validations of LCH SA's risk management models,\135\ commissions and
reviews audit reports relating to the risk management of LCH SA,\136\
and establishes and annually reviews LCH SA's operational risk
policy.\137\ The Audit Committee must also ensure that the Board is
regularly informed of the adequacy of key control systems in the
financial, operational and compliance-related areas.\138\
---------------------------------------------------------------------------

    \133\ See LCH SA Form CA-1, Exhibit A-5 (LCH SA Terms of
Reference of the Audit Committee of the Board of Directors), Section
1.
    \134\ Id. at Section 3.3.3(c).
    \135\ Id. at Section 3.3.5(a).
    \136\ Id. at Section 3.3.5(c).
    \137\ Id. at Section 3.3.9(a).
    \138\ Id. at Section 5.4.
---------------------------------------------------------------------------

    Additionally, LCH SA's Board has established a Risk Committee,\139\
which includes members and customer representatives.\140\ The Risk
Committee considers LCH SA's risk appetite, tolerance, and strategy.
Among other things, the Risk Committee also reviews initial and ongoing
membership requirements and decisions on membership applications,\141\
the decision to clear a new product or contract,\142\ margin
methodology adequacy and changes,\143\ and default fund adequacy and
changes to stress testing scenarios.\144\
---------------------------------------------------------------------------

    \139\ See LCH SA Form CA-1, Exhibit A-4 (LCH SA Terms of
Reference of the Risk Committee of the Board of Directors).
    \140\ Id. at Section 1.1.
    \141\ Id. at Section 6.
    \142\ Id. at Section 7.
    \143\ Id. at Section 8.
    \144\ Id. at Section 9.
---------------------------------------------------------------------------

    To ensure that LCH SA's governance structure and important
decisions are clear and transparent to the public, the Risk Committee
is also tasked with ensuring publication on LCH SA's Web site summaries
of significant decisions arising from its operations that implicate the
public interest, including decisions relating to open access,
membership and the determination to accept a new product for
clearing.\145\ Therefore, the Commission believes that LCH SA has
governance arrangements that are clear and transparent to fulfil the
public interest requirements in Section 17A of the Act applicable to
clearing agencies, to support the objectives of owners and
participants, and to promote the effectiveness of the clearing agency's
risk management procedures, as required by Rule 17Ad-22(d)(8).\146\
---------------------------------------------------------------------------

    \145\ Id. at Section 14.
    \146\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    Similarly, the Commission further believes that LCH SA provides
sufficient transparency to market participants with respect to the
costs and risks associated with using CDSClear. LCH SA achieves this
transparency by making available to members and the public information
regarding the fees and costs associated with using CDSClear (including
disclosure of product specific fees for self and customer clearing, and
account structures fees), as well as the CDSClear Rulebook (which
includes key default management provisions).\147\ LCH SA also publishes
information regarding daily settlement prices, volume and open
interest.\148\ This information provides current and potential members
with the opportunity to assess costs and risks associated with
membership, allowing for informed decision making with respect to
continuing or commencing membership in the CDSClear service.
Furthermore, based on the public disclosure of significant decisions
described above, as well as publication of the clearing procedures, and
governance arrangements, the Commission finds that, as described in the
application, LCH SA meets the requirement to provide market
participants with sufficient information for them to identify and
evaluate the risks and costs associated with using the clearing
agency's services, as required by Rule 17Ad-22(d)(9).\149\
---------------------------------------------------------------------------

    \147\ See http://www.lch.com/asset-classes/otc-credit-default-swaps/fees and http://www.lch.com/rules-regulations/rulebooks/sa.
    \148\ See http://www.lch.com/asset-classes/cdsclear.
    \149\ 17 CFR 240.17Ad-22(d)(9).
---------------------------------------------------------------------------

D. Safeguarding of Securities and Funds and Financial Resources

1. Exchange Act Requirements
    Sections 17A(b)(3)(A) and (F) of the Act, in part, require that a
clearing agency be duly organized and not only have the capacity to
safeguard securities

and funds over which it has custody and control, or for which it is
responsible, but also implement rules designed to do so.\150\ In
addition, under Section 17A(b)(3)(F), a clearing agency's rules must be
designed to promote the prompt and accurate clearance and settlement of
securities transactions and, in general, to protect investors and the
public interest.\151\ Moreover, rule 17Ad-22 requires a clearing agency
to establish, implement, maintain, and enforce reasonably designed
policies and procedures pertaining to the maintenance of sufficient
financial resources, the investment of cash collateral, liquidity risk
management, and default management.
---------------------------------------------------------------------------

    \150\ 15 U.S.C. 78q-1(b)(3)(A) and (F).
    \151\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

i. Financial Resources
    Rule 17Ad-22(b)(2) requires a registered cleared agency that
performs CCP services to establish, implement, maintain, and enforce
written policies and procedures reasonably designed to use margin
requirements to limit its credit exposures to participants under normal
market conditions, use risk-based models and parameters to set margin
requirements, and review such margin requirements and the related risk-
based models and parameters at least monthly.\152\ Rule 17Ad-22(b)(3)
requires a registered clearing agency acting as a CCP for security-
based swaps to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to maintain sufficient
financial resources to withstand, at a minimum, a default by the two
participant families to which it has the largest exposures in extreme
but plausible market conditions, in its capacity as a CCP for security-
based swaps.\153\ Rule 17Ad-22(b)(4) requires registered clearing
agencies to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to provide for an annual
model validation consisting of evaluating the performance of the
clearing agency's margin models and the related parameters and
assumptions associated with such models by a qualified person who is
free from influence from the persons responsible for the development or
operation of the models being validated.\154\
---------------------------------------------------------------------------

    \152\ 17 CFR 240.17Ad-22(b)(2).
    \153\ 17 CFR 240.17Ad-22(b)(3).
    \154\ 17 CFR 240.17Ad-22(b)(4).
---------------------------------------------------------------------------

ii. Collateral Policy and Investment of Cash Collateral
    Rule 17Ad-22(d)(3) requires registered clearing agencies to have
policies and procedures reasonably designed to ensure that the clearing
agency (i) holds assets in a manner that minimizes the risk of loss or
of delay in their access, and (ii) invests assets in instruments with
minimal credit, market and liquidity risks.\155\
---------------------------------------------------------------------------

    \155\ 17 CFR 240.17Ad-22(d)(3).
---------------------------------------------------------------------------

iii. Default Management, Loss Allocation, and Recovery
    With respect to managing a member default, Section 17A(b)(3)(F) of
the Act requires a registered clearing agency to assure the
safeguarding of securities and funds, promote the prompt and accurate
settlement of securities transactions, and, in general, protect
investors and the public interest.\156\ In addition, Rule 17Ad-
22(d)(11) provides that such clearing agency must have policies and
procedures to make key aspects of its default procedures publicly
available and establish default procedures that ensure that the
clearing agency can take timely action to contain losses and liquidity
pressures and to continue meeting its obligations in the event of a
participant default.\157\
---------------------------------------------------------------------------

    \156\ 15 U.S.C. 78q-1(b)(3)(F).
    \157\ 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------

2. Commission Findings
i. Financial Resources
    As described in Section II.D.i above, LCH SA has policies and
procedures that provide for the use of a VaR model to calculate margin
requirements for members and for the review of the model on a monthly
basis. These policies and procedures provide that the CDSClear model
take into consideration a variety of risks relevant to clearing
security-based swaps, including, but not limited to, changes in credit
spreads, recovery rates, and interest rates, in order to appropriately
measure LCH SA's exposures to CDSClear members under normal market
conditions.\158\ In addition to the margin requirements calculated
using the model, LCH SA also imposes additional margin charges on
members to address concentration risk, wrong way risk, and liquidity
risk, which exist under normal market conditions, and imposes
additional margin on members with lower credit ratings. LCH SA's
policies and procedures require CDSClear members to post collateral to
meet these margin requirements, and to also post variation margin.
Additionally, the CDSClear rules establish a mutualized default fund
that, together with the margin requirements, is sized to maintain
sufficient financial resources sufficient to withstand, at a minimum,
the default by the two CDSClear member families to which LCH SA has the
largest exposures in extreme but plausible market conditions (the
``cover-two standard''). In addition, LCH SA also has policies and
procedures that establish monthly back testing to evaluate the
performance of the CDSClear margin methodology and stress testing to
ensure maintenance of sufficient financial resources to meet the cover-
two standard. Finally, as noted above, LCH SA has policies and
procedures that require an annual validation of its margin model by
independent personnel that are qualified to perform such a validation.
This validation must include a review of the parameters and assumptions
underlying the model, as well as the reporting of the results of such
model validation to risk management personnel.
---------------------------------------------------------------------------

    \158\ See LCH SA Form CA-1, Exhibit H-1 (LCH SA Audited
Financial Statements for the Year Ended 31 December 2015), 18; see
also CDSClear Rulebook, Section 4.2.5 and Exhibit E-6.2 (CDSClear
CDS Clearing Procedures, Section 2: Margin and Price Alignment
Interest).
---------------------------------------------------------------------------

    Based on the above, the Commission finds that, as described in the
application, LCH SA has both the capacity to ensure that LCH SA
maintains the required financial resources, and policies and procedures
reasonably designed to do so, as required by Exchange Act sections
17A(b)(3)(A) and 17A(b)(3)(F), as well as Rules 17Ad-22(b)(2), (b)(3),
and (b)(4) thereunder.\159\
---------------------------------------------------------------------------

    \159\ 15 U.S.C. 78q-1(b)(3)(A) and (F); 17 CFR 240.17Ad-
22(b)(2), (3), and (4).
---------------------------------------------------------------------------

ii. Collateral Policy and Investment of Cash Collateral
    As described in Section II.D.ii above, LCH SA maintains a
collateral policy that requires it to accept cash (in Euros), foreign
currency, and highly liquid debt and equity securities as collateral,
with all collateral except Euros subject to a haircut to minimize LCH
SA's exposure to market risk. With respect to cash collateral, LCH SA
has in place an investment policy that requires LCH SA to invest or
deposit assets received as collateral only with counterparties that
meet certain minimum credit standards. LCH SA monitors its
counterparties, in furtherance of ensuring that such counterparties
will be able to meet their obligations to LCH SA with respect to such
assets, and that LCH SA will have access to such assets when needed. In
addition, LCH SA has policies and procedures that require it to invest
its assets in highly liquid instruments backed by creditworthy issuers.
The term of investment permitted may depend on the type of asset and
creditworthiness of the issuer. For

example, cash deposits and securities of issuers not explicitly
guaranteed by the US, UK, or a European government are restricted to an
overnight term. For these reasons, the Commission finds that LCH SA's
policies and procedures, as described in the application, are
reasonably designed to ensure that LCH SA holds assets in a manner that
minimizes the risk of loss or of delay in their access, and invests in
instruments with minimal credit, market and liquidity risks, as
required by Exchange Act Sections 17A(b)(3)(A) and 17A(b)(3)(F), as
well as Rule 17Ad-22(d)(3).\160\
---------------------------------------------------------------------------

    \160\ 15 U.S.C. 78q-1(b)(3)(A) and (F); 17 CFR 240.17Ad-
22(d)(3).
---------------------------------------------------------------------------

iii. Default Management, Loss Allocation, and Recovery
    As described in Section II.D.iii. above, LCH SA has rules,
policies, and procedures regarding the management of losses resulting
from a CDSClear member default. Specifically, LCH SA's rules, policies
and procedures require LCH SA, upon the declaration of a CDSClear
member's default, (i) to take action to hedge against market risk of
the defaulting member's portfolio, (ii) to transfer customer positions
to non-defaulting members, if the applicable provisions of LCH SA's
rules are met, and (iii) to dispose of the defaulting member's
portfolio through a competitive auction process. The Commission finds
that LCH SA's rules allowing for the porting of customer positions are
designed to safeguard securities and funds and protect investors,
consistent with Section 17A(b)(3)(F) of the Act.\161\ The hedging and
disposition of the defaulting member's positions through default
auction procedures further safeguards LCH SA's securities and funds by
allowing LCH SA to limit the amount of losses that either LCH SA or its
non-defaulting clearing members must bear as a result of the member's
default.
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    This entire default management process must be completed within
five business days. These policies and procedures provide for the use
of financial resources in accordance with the CDSClear default
waterfall, to cover losses associated with the member's default while
LCH SA conducts the competitive auction process in order to dispose of
the defaulting member's portfolio. The only financial resources or
recovery tools available to cover losses resulting from a CDSClear
member's default are those specified in the CDSClear default waterfall.
Furthermore, to manage liquidity pressures associated with a member's
default, LCH SA monitors and measures its liquidity resources and
requirements daily. To continue meeting its obligations, LCH SA may use
cash collateral, other collateral it is able to liquidate in a timely
manner, or its own capital as an immediately available liquidity
resource. LCH SA may also access central bank liquidity through the
Banque de France, as well as other secured financing facilities that
LCH SA maintains. The Commission finds that, taken together, these
tools allow LCH SA to contain losses within the CDSClear service and
manage liquidity pressures associated with a member's default, while
continuing to meet its obligations, thereby allowing LCH SA to
safeguard securities and funds and to continue to facilitate prompt and
accurate clearance and settlement, in accordance with Section
17A(b)(3)(F) of the Act.\162\ The Commission finds that these tools are
designed to mitigate the risk of financial loss contagion and therefore
are consistent with the public interest requirement under Section
17A(b)(3)(F).
---------------------------------------------------------------------------

    \162\ Id.
---------------------------------------------------------------------------

    Finally, the Commission notes that LCH SA's policies and procedures
regarding its CDSClear default management process are available on its
public Web site and can be reviewed by members and the general public
alike. Based on the above, the Commission finds that LCH SA has
established default procedures reasonably designed to ensure that it
can take timely action to contain losses and liquidity pressures and to
continue meeting its obligations in the event of a participant default,
and to make key aspects of its default procedures publicly available,
in accordance with the requirements of Rule 17Ad-22(d)(11), as well as
the applicable requirements of Section 17A(b)(3)(F) of the Act.\163\
---------------------------------------------------------------------------

    \163\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------

E. Operational Risk Management

1. Exchange Act Requirements
    Section 17A(b)(3)(A) of the Act provides that a clearing agency
shall not be registered unless the Commission determines that such
clearing agency has the capacity to be able to facilitate prompt and
accurate clearance and settlement and the safeguarding of securities
and funds. In this regard, Rule 17Ad-22(d)(4) requires a registered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to, as applicable, identify
sources of operational risk and minimize them through the development
of appropriate systems, controls, and procedures; implement systems
that are reliable, resilient and secure, and have adequate, scalable
capacity; and have business continuity plans that allow for timely
recovery of operations and fulfillment of a clearing agency's
obligations.\164\
---------------------------------------------------------------------------

    \164\ 17 CFR 240.17Ad-22(d)(4).
---------------------------------------------------------------------------

2. Commission Findings
    As described in Section II.E above, LCH SA has established written
policies and procedures that address the self-assessment, monitoring,
measuring, reporting, and mitigation of operational risks to LCH SA.
LCH SA's operational risk framework assigns roles and responsibilities
to the business departments, Operational Risk Department, and Audit
Department for the identification, monitoring, reporting, mitigation,
and oversight of operational risks. The Audit Committee and Risk
Committee are assigned oversight responsibilities for specific aspects
of LCH SA's internal controls and the implementation of LCH SA's
operational risk management processes. Thus, LCH SA's policies and
procedures provide for multiple lines of defense and layers of
oversight over operational risk management.
    In addition, LCH SA maintains written policies and procedures
reasonably designed to ensure that LCH SA's systems are reliable,
resilient and secure; and have business continuity plans that allow for
timely recovery of operations and fulfillment of its operations. For
example, LCH SA's business continuity policies provide for, among other
things, regular threat assessments, operational and business continuity
testing involving member participation, multiple systems and data
centers at geographically dispersed locations, and the migration of
data and functionality in the event of various types of business
disruption.\165\ The Commission believes that the business continuity
management policies, along with the maintenance and use of redundant
systems at multiple back-up sites, will provide LCH SA with the
capacity to timely recover its operations and fulfill its obligations
in the event of a disruption. Moreover, as described above, LCH SA also
maintains an ongoing self-assessment policy to continually monitor and
assess operational risk, such as security risk, and provide for the
mitigation of such risk when it exceeds applicable

tolerances.\166\ The Commission believes that the operational risk and
business continuity testing required under LCH SA's rules, policies,
and procedures will further assist LCH SA in identifying and minimizing
sources of operational risk, as well as gain facility in responding to
business disruption or disaster recovery scenarios. Additionally, as
described above, the Commission believes that the information security
policies and procedures adopted by LCH SA will assist LCH SA in
ensuring that sensitive information is appropriately protected and that
confidentiality of such information is maintained, that only authorized
employees and other select entities are able to access and use such
information, and that no such employees trade on this information for
their personal accounts. Given the above, the Commission finds that LCH
SA has established, implemented, and maintained operational risk
management and business continuity policies that are reasonably
designed to identify sources of operational risk and minimize them
through appropriate systems, controls, and procedures; implement
systems that are reliable, resilient and secure, and have adequate,
scalable capacity; and allow for timely recovery of operations and
fulfillment of LCH SA's obligations.
---------------------------------------------------------------------------

    \165\ See LCH SA Form CA-1, Exhibit K-2 (LCH Group Business
Continuity Management Policy); LCH SA Form CA-1, Exhibit E-6.7
(CDSClear CDS Clearing Procedures, Section 7: Business Continuity).
    \166\ See, e.g., LCH SA Form CA-1, Ex. K-3 (LCH. Clearnet Group
Information Security Strategy/Maturity Self-assessment tool); LCH
Clearnet Group Operational Risk Policy--Operational Risk Management.
---------------------------------------------------------------------------

    For the reasons above, the Commission finds that LCH SA's
governance and operational risk policies and procedures are designed to
meet the requirements of Section 17A(b)(3)(A) concerning the capacity
to facilitate the prompt and accurate clearance and settlement of
securities transactions and the safeguarding of securities and funds,
as well as the operational risk requirements under Rule 17Ad-22(d)(4).

F. Fees, Dues, and Charges

1. Exchange Act Requirements
    Sections 17A(b)(3)(D) and (E) of the Act require a clearing
agency's rules to provide for the equitable allocation of reasonable
dues, fees and other charges among its participants and prohibit the
rules of a clearing agency from imposing any schedule of prices, or
fixing rates or other fees for services rendered by its
participants.\167\ Section 17A(b)(3)(I) provides that the rules of a
clearing agency may not impose any burden on competition not necessary
or appropriate in furtherance of the purposes of Section 17A.\168\
---------------------------------------------------------------------------

    \167\ 15 U.S.C. 78q-1(b)(3)(D) and (E).
    \168\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

2. Commission Findings
    In connection with its CDSClear service, LCH SA charges transaction
fees linked to products, which are generally usage-based, as well as
annual membership fees, which apply equally to all CDSClear members.
LCH SA also imposes annual account structure fees for individually
segregated accounts and omnibus segregated accounts that are equally
applicable to all CDSClear members based on usage.\169\ The Commission
finds that these fees apply equally to all members, that LCH SA does
not impose any schedule of fees for services rendered by its
participants and that these fees are not imposed in an attempt to
burden competition. Accordingly, the Commission finds that LCH SA's
CDSClear rules governing fees, dues, and charges are consistent with
the requirements of Sections 17A(D), (E), and (I) of the Act.\170\
---------------------------------------------------------------------------

    \169\ See LCH SA Form CA-1, Exhibit Q (LCH SA Schedule of
Prices, Rates or Fees Fixed by Registrant for Services Rendered by
its Participants).
    \170\ 15 U.S.C. 78q-1(b)(3)(D), (E), and (I).
---------------------------------------------------------------------------

G. Prompt and Accurate Clearance and Settlement

1. Exchange Act Requirements
    Section 17A(b)(3)(A) of the Act \171\ provides that a clearing
agency shall not be registered unless the Commission finds that the
clearing agency is so organized and has the capacity to facilitate the
prompt and accurate clearance and settlement of securities transactions
and derivative agreements, contracts, and transactions for which it is
responsible. Similarly, Exchange Act Section 17A(b)(3)(F) requires a
clearing agency to have rules designed to promote these same
goals.\172\
---------------------------------------------------------------------------

    \171\ 15 U.S.C. 78q-1(b)(3)(A).
    \172\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

2. Commission Findings
    The Commission finds that, based on LCH SA's rules, policies, and
procedures described above pertaining to its CDSClear membership
standards; capacity to enforce rules and discipline CDSClear members;
governance, particularly in connection with financial and operational
risk management responsibilities of the Audit and Risk Committees;
financial resources; investment of cash collateral and liquidity risk
management; and CDSClear default management loss allocation and
recovery, taken together, LCH SA is so organized and has the capacity
to facilitate the prompt and accurate clearance and settlement and has
rules designed to promote these same goals, in accordance with Sections
17A(b)(3)(A) and 17A(b)(3)(F) of the Act.\173\
---------------------------------------------------------------------------

    \173\ 15 U.S.C. 78q-1(b)(3)(A) and (F).
---------------------------------------------------------------------------

    As a first line of defense, LCH SA's CDSClear membership standards
seek to ensure that applicants will not be accepted if they lack the
ability to meet obligations to LCH SA for operational or financial
reasons. Similarly, LCH SA's policies and procedures that establish its
authority to enforce its rules and discipline members are designed to
minimize risks from existing members to LCH SA's ability to facilitate
prompt and accurate clearance and settlement. LCH SA's governance
structure, which creates multiple lines of oversight over specific
responsibilities of--and interactions among--its business departments,
control departments, Board-level committees, and ultimately Board of
Directors, is designed to identify, minimize, mitigate, and oversee the
management of operational and financial risks both external to and
inherent in LCH SA. If a financial risk emerges in the form of a member
default, for example, LCH SA's rules, policies, and procedures, as
described in the application, contemplate the ability to cover losses
consistent with the cover two standard using pre-funded resources. To
the extent CDSClear pre-funded resources are insufficient, LCH SA may
draw on assessment powers and loss allocation and recovery tools
established in accordance with its rules, policies, and procedures, to
continue meeting clearance and settlement obligations. In addition, LCH
SA's CDSClear rules are designed to ensure that, during the default
management process, which may last no longer than five business days,
LCH SA may continue to offer CDSClear services only if its financial
resources, including assessment powers and Variation Margin
Haircutting, are sufficient to support a successful disposition of the
defaulting member's portfolio through auction and meet LCH SA's daily
settlement obligations.
    Based on the foregoing, the Commission believes that LCH SA's
rules, policies and procedures meet the requirements of Sections
17A(b)(3)(A) and 17A(b)(3)(F) of the Exchange Act.\174\
---------------------------------------------------------------------------

    \174\ Id.
---------------------------------------------------------------------------

IV. Request for Exemptive Relief

    In connection with its application for registration as a clearing
agency, as described above, LCH SA has submitted a Request for
Exemptive Relief from certain requirements of the Exchange

Act and the rules thereunder.\175\ Section 36 of the Act authorizes the
Commission to conditionally or unconditionally exempt any person,
security, or transaction, or any class or classes of persons,
securities, or transactions, from certain provisions of the Exchange
Act or certain rules or regulations thereunder, to the extent that such
exemption is necessary or appropriate in the public interest, and is
consistent with the protection of investors.\176\ After careful
consideration, as further discussed below, the Commission concludes
that the conditional exemptive relief requested by LCH SA is necessary
or appropriate in the public interest, and is consistent with the
protection of investors.
---------------------------------------------------------------------------

    \175\ See supra note 8 and accompanying text.
    \176\ 15 U.S.C. 78mm.
---------------------------------------------------------------------------

A. Exemptive Relief from Sections 5 and 6 of the Act

1. Background
    Section 5 of the Act prohibits any broker, dealer, or exchange from
using any facility of an exchange to effect any transaction in a
security, or to report any such transaction, unless such exchange is
registered as a national securities exchange.\177\ Section 6 of the Act
sets out the terms and conditions for registration of an exchange.\178\
LCH SA has requested exemptive relief (i) from the requirements of
Sections 5 and 6 of the Act with respect to its ``forced trade''
mechanism used in the calculation of settlement prices for open
positions in cleared CDS; and (ii) for each of its CDSClear members
that are brokers or dealers, from Section 5 of the Act with respect to
their participation in the forced trade mechanism.\179\ LCH SA
represents that, as part of its clearing and risk management processes
for cleared CDS transactions in its CDSClear services, including
single-name CDS cleared by LCH SA (``Single-Name CDS''), it computes
the end-of-day settlement price for each contract in which any of its
members has a cleared position, based on off-market prices submitted by
its clearing members, and uses those prices to establish a daily mark
on which to base margin calculations. To promote the integrity of these
price submissions, LCH SA employs a forced trade mechanism pursuant to
which its members are required at certain times to execute CDS trades
based on their price submissions.\180\
---------------------------------------------------------------------------

    \177\ 15 U.S.C. 78e et seq.
    \178\ 15 U.S.C. 78f et seq.
    \179\ See Request for Exemptive Relief at 2.
    \180\ See id. at 3-4.
---------------------------------------------------------------------------

2. LCH SA's Representations
    LCH SA acknowledges that, absent an exemption, LCH SA's forced
trade mechanism would cause LCH SA to meet the criteria of Rule 3b-16
under the Act \181\ and, as a result, would require LCH SA to register
with the Commission as a national securities exchange under Sections 5
and 6 of the Act or obtain an appropriate an exemption therefrom.
Additionally, any clearing member that is a broker or dealer would not
be permitted to utilize LCH SA to effect any transaction in a security,
or to report any such transaction, unless LCH SA were registered as a
national securities exchange or had obtained an appropriate exemption.
---------------------------------------------------------------------------

    \181\ 17 CFR 240.3b-16.
---------------------------------------------------------------------------

3. Commission Findings
    The Commission notes that it previously has granted the temporary,
conditional exemptive relief that LCH SA has requested under Sections 5
and 6 of the Act to CDS clearing agencies ICE Clear Credit, ICE Clear
Europe, and CME.\182\ The Commission notes that LCH SA's procedures for
calculating end-of-day settlement prices and LCH SA's forced trade
mechanism are substantially similar to the other CDS clearing agencies
and does not believe that any differences between LCH SA's forced trade
mechanism and those of the other CDS clearing agencies warrant
different treatment in the consideration of LCH SA's requested relief
from the requirements of Sections 5 and 6 of the Act. In light of the
risk management benefits of the forced trade mechanism in maintaining
the integrity of the pricing process, the Commission finds it necessary
or appropriate in the public interest and consistent with the
protection of investors to grant a temporary conditional exemption to
LCH SA from the requirements of Sections 5 and 6 of the Act, and to its
CDSClear clearing members from the requirements of Section 5 of the
Act, subject to the conditions described below. These exemptions are
solely with respect to the forced trade mechanism used in connection
with the calculation of settlement prices for cleared CDS. As with the
exemptions granted to other CDS clearing agencies in the Commission's
Temporary Exemptions Release, the exemptions from Section 5 and 6
applicable to LCH SA and to its clearing members that are brokers or
dealers will remain in effect until the earliest compliance date set
forth in any of the final rules regarding the registration of security-
based swap execution facilities and will be subject to the following
conditions: \183\
---------------------------------------------------------------------------

    \182\ See Order Granting Temporary Exemptions under the
Securities Exchange Act of 1934 in Connection with the Pending
Revision of the Definition of ``Security'' to Encompass Security-
Based Swaps, and Request for Comment, Securities Exchange Act Rel.
No. 34-64795 (Jul. 1, 2011), 76 FR 39927, 39934 (Jul. 7, 2011)
(``Temporary Exemptions Release'').
    \183\ See id. at 39934.
---------------------------------------------------------------------------

    First, LCH SA shall report to the Commission the following
information with respect to its calculation of settlement prices for
Single-Name CDS within thirty (30) calendar days of the end of each
quarter, and to electronically preserve such reports for a period of
ten (10) years: (a) The total dollar volume of transactions executed
during the quarter, broken down by reference entity; and (b) the total
unit volume and/or notional amount executed during the quarter, broken
down by reference entity. Reporting of this information will assist the
Commission in carrying out its responsibility to supervise and regulate
the securities markets.
    Second, LCH SA shall establish and maintain adequate safeguards and
procedures to protect clearing members' confidential trading
information, including: (a) Limiting access to the confidential trading
information of clearing members to those employees of LCH SA who are
operating the systems or are responsible for their compliance with this
exemption or any other applicable rules; and (b) establishing and
maintaining standards controlling LCH SA employees who trade for their
own accounts.\184\ LCH SA shall establish and maintain adequate
oversight procedures to ensure that the safeguards and procedures
established pursuant to this condition are followed. This condition is
designed to prevent any misuse of trading information that may be
available to LCH SA in connection with the forced trade mechanism. This
condition is expected to strengthen confidence in LCH SA's protections
of confidential trading information, thus promoting participation.
---------------------------------------------------------------------------

    \184\ See supra notes 70 and 71. As discussed above LCH SA
currently has policies and procedures in place that control access
to confidential information, including confidential information
relating to LCH SA clearing members, and that control the personal
trading of LCH SA employees.
---------------------------------------------------------------------------

    Third, LCH SA shall directly or indirectly make available to the
public on terms that are fair and reasonable and not unreasonably
discriminatory: (a) All end-of-day settlement prices and any other
prices with respect to Single-Name CDS that it may establish to
calculate mark-to-market margin requirements for its clearing members;

and (b) any other pricing or valuation information with respect to
Single-Name CDS as is published or distributed by LCH SA. This
condition is designed to make relevant pricing data available to the
public on terms that are fair and reasonable and not unreasonably
discriminatory.
    Finally, LCH SA shall implement policies and procedures designed to
ensure compliance with these terms and conditions relating to the
requested exemptive relief from Sections 5 and 6 of the Act, and shall
conduct periodic internal reviews related to its compliance program.

B. Exemptive Relief from Section 19(b) of the Act and Rule 19b-4
Thereunder

1. Background
    Pursuant to Section 19(b)(1) of the Exchange Act, self-regulatory
organizations (``SROs''), including registered clearing agencies, are
required to file with the Commission copies of any proposed rule,\185\
or any addition to or deletion from their existing rules (a ``proposed
rule change'').\186\ LCH SA has requested exemptive relief from the
requirements of Section 19(b) of the Act and Rule 19b-4 thereunder with
respect to filing certain proposed rule changes that (i) primarily
affect its clearing operations with respect to its Non-U.S. Business,
and (ii) do not significantly affect any CDSClear operations or any
rights or obligations of LCH SA with respect to the CDSClear services
or persons using such services (``Non-U.S. Business Rule
Changes'').\187\ As a condition of the requested relief, LCH SA has
proposed to provide notice of its Non-U.S. Business Rule Changes to
Commission staff in lieu of filing such changes under Section 19(b) and
Rule 19b-4 once such changes are duly approved by its national
competent authorities.
---------------------------------------------------------------------------

    \185\ See 15 U.S.C. 78c(a)(27) (defining ``rules of a clearing
agency'') and (28) (defining ``rules of a self-regulatory
organization'').
    \186\ See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4(a)(4)
(defining ``proposed rule change'').
    \187\ See Request for Exemptive Relief at 2-3.
---------------------------------------------------------------------------

    As described above, LCH SA represents that its Non-U.S. Business is
comprised of clearing services offered completely offshore entirely to
non-U.S. persons outside of the United States that would not otherwise
implicate the Commission's registration requirements under the Act, nor
those of the CFTC.\188\
---------------------------------------------------------------------------

    \188\ See Request for Exemptive Relief at 5-12. As noted above,
LCH SA currently provides clearing services for equities, exchange-
traded futures and options, as well as fixed income instruments and
commodity products traded on European exchanges and multilateral
trading facilities in which no U.S. persons participate as clearing
members, i.e. its Non-U.S. Businesses.
    Specifically, LCH SA's Non-U.S. Business currently includes: (i)
``EquityClear'', which refers to clearing services in respect of
equities, debt instruments and futures contracts traded on the
Euronext, Equiduct, and Bourse de Luxembourg trading platforms; (ii)
``CommodityClear'', which refers to clearing services in respect of
futures and options for agricultural and energy products on
Euronext; and (iii) ``RepoClear'', which refers to clearing services
in respect of repo transactions on French, Italian and Spanish
government debt as well as corporate debt, and also includes the
Euro GC+ clearing service. LCH SA may expand its Non-U.S. Business
to include other new services. At all times, the Non-U.S. Business
does not and will not have any U.S. clearing members or extend
membership to any U.S. persons. See LCH SA Form CA-1, Exhibit C;
Request for Exemptive Relief at 6-8 & n.22.
---------------------------------------------------------------------------

    LCH SA also represents that its CDSClear service, from which it
intends to offer clearing services for Single-Name CDS to U.S. persons,
will be maintained separate and apart from its Non-U.S. Business.
Specifically, LCH SA's Non-U.S. Business has: (1) Separate rules,
including policies and procedures; (2) distinct financial safeguards
and default arrangements; and (3) significant numbers of exclusively
dedicated personnel and information technology services. LCH SA
maintains that such separation will ensure that the rights and
obligations of a U.S. person participating in the CDSClear services
would not be affected by a member default or operational risk occurring
in the Non-U.S. Business. In other words, LCH SA represents that
``there is no possibility of risk contagion or mutualization . . . [to
U.S. persons participating in CDSClear] in the event of a member
default in the other services provided by the Non-U.S. Business.''
\189\
---------------------------------------------------------------------------

    \189\ Request for Exemptive Relief at 11.
---------------------------------------------------------------------------

    LCH SA nonetheless acknowledges that CDSClear is not totally
separated from the rest of its business. Among other things, LCH SA's
overall governance framework applies equally to CDSClear and the other
services provided by the Non-U.S. Business.\190\ Similarly, LCH SA's
risk management framework requires certain functions to be shared
across all of its various business lines in order for risks to be
adequately managed while maintaining an appropriate segregation of
duties. LCH SA represents that CDSClear and the Non-U.S. Business
jointly rely on certain resources (collectively, ``Shared Support
Functions''), which include second-line risk management, treasury/
liquidity management, legal and compliance, systems safeguards/
security/business continuity, internal audit, finance and human
resources.
---------------------------------------------------------------------------

    \190\ LCH SA's Board of Directors maintains overall
responsibility for risk management of all clearing services;
subcommittees of the Board, including the Audit Committee, Risk
Committee and Remuneration Committee, exercise their functions
across all clearing services. In addition, LCH SA maintains an
executive committee, known as the ``Local Management Committee'',
which has overall responsibility for LCH SA's risk function. The LCH
Group has also established certain risk committees with joint
oversight responsibility across LCH SA, LCH Limited and LCH LLC,
including the Executive Risk Committee, Market Risk Management
Committee, and Credit Risk Management Committee.
---------------------------------------------------------------------------

    In recognition of CDSClear's relationship to its Non-U.S. Business,
LCH SA does not seek an exemption from filing all rule changes
pertaining to its Non-U.S. Business. Specifically, LCH SA does not seek
exemption from filing rule changes which significantly affect any
CDSClear operations or any rights or obligations of LCH SA with respect
to the CDSClear services or persons using such services. Thus, even if
LCH SA's request for exemptive relief were granted, LCH SA would
nonetheless be required to file, pursuant to Section 19(b) and Rule
19b-4, rule changes that do not explicitly pertain to the CDSClear
services, but have a significant impact on the CDSClear operations,
such as proposed rule changes relating to Shared Support Functions.
2. LCH SA's Representations
    LCH SA contends that the exemptive relief it has proposed is
consistent with Section 36 of the Act because such relief is necessary
or appropriate in the public interest, and is consistent with the
protection of investors. In particular, LCH SA argues that relief is
necessary or appropriate in the public interest because applying rule
filing requirements under Section 19(b) of the Act and Rule 19b-4
thereunder would not advance the Commission's regulatory interests, as
applied to its Non-U.S. Business Rule Changes. Additionally, in light
of the separation between CDSClear and its Non-U.S. Business, LCH SA
maintains that this exemption is consistent with the protection of
investors because it would not compromise the Commission's oversight
responsibility with respect to LCH SA as a whole.
    LCH SA believes that the existing rule filing framework, as applied
to its Non-U.S. Business Rule Changes, is both burdensome and would not
advance the Commission's regulatory interests. In particular, LCH SA
asserts that it is registered with the CFTC for the purposes of
clearing index CDS (which are swaps) and with the Commission for the
purpose of clearing single-name CDS (which are security-based swaps).
LCH SA notes that clearing agencies that are also registered with the
CFTC as a DCO (``Dually-Registered Clearing Agencies'') are permitted
to rely on Rule 19b-

4(f)(4)(ii) to file certain proposed rule changes under Section
19(b)(3)(A) of the Act.\191\ That rule is designed to eliminate
unnecessary delays that could arise from the differences between the
Commission's rule filing process and the CFTC's self-certification
process for rule changes primarily affecting clearing with respect to
swaps, futures, options on futures and forwards regulated by the CFTC
that also do not significantly affect any securities clearing
operations or the rights or obligations of the clearing agency with
respect to securities clearing or persons using the securities-clearing
service.\192\
---------------------------------------------------------------------------

    \191\ 17 CFR 240.19b-4(f)(4)(ii).
    \192\ Amendment to Rule Filing Requirements for Dually-
Registered Clearing Agencies, 78 FR 21046, 21048 (April 9, 2013),
hereinafter referred to as ``Dually Registered Clearing Agency
Release'').
---------------------------------------------------------------------------

    Nonetheless, LCH SA maintains that this framework does not
adequately consider its status as a foreign clearing agency registered
with--and subject to supervision by--its own national competent
authority. In light of the significant separation it maintains between
CDSClear and its Non-U.S. Business, LCH SA seeks an exemption from
filing its Non-U.S. Business Rule Changes. LCH SA asserts that its Non-
U.S. Business would not otherwise require it to register with the
Commission as a clearing agency but for the fact that LCH SA intends to
expand its CDSClear business to offer clearing services for Single-Name
CDS to U.S. persons.\193\ Thus, LCH SA argues that because CDSClear
participants are ring-fenced from risks associated with its Non-U.S.
Business and the Commission would not regulate its Non-U.S. Business
standing alone, requiring the filing of Non-U.S. Business Rule Changes
``would not serve the SEC's regulatory interest.'' \194\
---------------------------------------------------------------------------

    \193\ Request for Exemptive Relief at 6 & n.21.
    \194\ Request for Exemptive Relief at 11-12.
---------------------------------------------------------------------------

    In addition, LCH SA maintains that it has tailored its exemption
request to ensure that the Commission's regulatory interests in
overseeing LCH SA on an entity-wide basis are not compromised. As
described above, LCH SA notes that rule changes to its Non-U.S.
Business clearing which significantly affect any CDSClear operations or
any rights or obligations of LCH SA with respect to the CDSClear
services or persons using such services will nonetheless be filed with
the Commission pursuant to Section 19(b) of the Exchange Act and Rule
19b-4. In addition, as a condition of the exemptive relief it seeks,
LCH SA will provide Commission staff notice of and copies of all Non-
U.S. Business Rule Changes once such changes are duly approved by its
national competent authorities in lieu of filing such changes under
Section 19(b) and Rule 19b-4. Taken as whole, LCH SA maintains that its
exemptive request does not compromise the Commission's historical
approach of overseeing clearing agencies on an entity-wide basis.
Accordingly, LCH SA maintains that an exemption from filing its Non-
U.S. Business Rule Changes with the Commission is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.
3. Commission Findings
    The Commission notes that its oversight responsibility over
registered clearing agencies extends to the clearing agency as a whole
and is entity-based, rather than product-based. \195\ Therefore, absent
exemptive or other relief, a registered clearing agency is required to
comply with all applicable requirements under the Exchange Act,
including filing all proposed rule changes with the Commission. The
Commission has previously explained that a clearing agency's failure to
submit proposed rule changes would prevent the Commission from
discharging its statutory responsibilities.\196\ After careful
consideration of the specific facts and circumstances of LCH's request
for exemptive relief, and as further described below, the Commission
concludes that granting to LCH SA a conditional exemption from Section
19(b) of the Act and Rule 19b-4 thereunder in connection with LCH SA's
Non-U.S. Business Rule Changes is necessary or appropriate in the
public interest, and is consistent with the protection of investors,
subject to the condition that LCH SA will provide notice of such Non-
U.S. Business Rule Changes to the Commission staff within three
business days of being duly approved by LCH SA's national competent
authorities.
---------------------------------------------------------------------------

    \195\ The Commission has explained that its oversight
responsibility over registered clearing agencies ``extends to the
clearing agency as a whole and is entity based, rather than product-
based.'' Dually Registered Clearing Agency Release, 78 FR at 21050 &
n.52.
    \196\ See id.
---------------------------------------------------------------------------

    First, the Commission finds that requiring LCH SA to file Non-U.S.
Business Rule Changes would not advance the Commission's regulatory
interest in overseeing registered clearing agencies. In the Dually
Registered Clearing Agency Release, the Commission explained that a
proposed rule change ``primarily affects'' a clearing agency's clearing
operation with respect to products that are not securities ``when it is
targeted to matters related only to the clearing of those products.''
\197\ Therefore, for a proposed rule change to primarily affect LCH
SA's clearing operations with respect to its Non-U.S. Business, it must
be targeted to matters related only to the clearing of the products
offered by the services provided in the Non-U.S. Business. As such, the
Non-U.S. Business Rule Changes would be targeted to matters concerning
LCH SA's offshore business in which U.S. persons do not participate.
Further, LCH SA has represented that its Non-U.S. Business will not
extend membership to any U.S. persons.\198\ In addition, as described
above, LCH has represented that it has a structure that essentially
ring-fences its CDSClear business in which U.S. persons will
participate from its Non-U.S. Businesses.\199\ Therefore, U.S. persons
participating in CDSClear will not be exposed to risks resulting from
LCH SA's Non-U.S. Business Rule Changes. Taken together, the Commission
concludes that reviewing LCH SA's Non-U.S. Business Rule Changes for
purposes of approval or disapproval would not materially advance its
regulatory interests. \200\
---------------------------------------------------------------------------

    \197\ See id.
    \198\ Request for Exemptive Relief at 6, n.22.
    \199\ Id. at 11 & n.34. LCH SA acknowledges that U.S. persons
remain at risk from a default in treasury management, and for that
reason rule changes involving that function, along with other Shared
Support Functions, are not subject to the exemption. Id.
    \200\ See Securities Exchange Act Release Nos. 34-43775 (Dec.
28, 2000), 66 FR 819 (Jan. 4, 2001) (order exempting Euroclear Bank
from clearing agency registration) and 34-39643 (Feb. 18, 1998), 63
FR 8232 (Feb. 18, 1998) (order exempting Euroclear Bank's
predecessor, Morgan Guaranty Trust Company, as operator of the
Euroclear system, from clearing agency registration); Securities
Exchange Act Release No. 34-38328 (Feb. 24, 1997), 62 FR 9225 (Feb.
28, 1997) (order exempting Clearstream Bank, formerly Cedel Bank,
from clearing agency registration); and Exemption of Certain Foreign
Brokers or Dealers, Proposed Rule, 73 FR 39182, 39198 (July 8,
2008).
---------------------------------------------------------------------------

    Second, the Commission finds that allowing LCH not to file these
rule changes would not compromise the Commission's oversight
responsibilities over registered clearing agencies on an entity basis.
\201\ As stated in the Dually Registered Clearing Agency Release, the
Commission would not consider rules of general applicability that would
apply equally to CDSClear operations and Non-U.S. Business to be
``primarily affecting'' LCH SA's clearing operations with respect to
the Non-U.S. Business.\202\ Therefore, this exemptive relief would not
relieve LCH SA from the obligation of filing rules of general

applicability in accordance with Section 19(b). For example, to the
extent a proposed rule change regarding the Shared Support Functions
constitutes a rule of general applicability that would apply equally to
CDSClear operations and the Non-U.S. Business, it would not be
considered to primarily affect LCH SA's Non-U.S. Business, and LCH SA
would be required to file such proposed rule change for the
Commission's review in accordance with Section 19(b).\203\
---------------------------------------------------------------------------

    \201\ See, e.g., Dually Registered Clearing Agency Release at
21050. (``The Commission's oversight responsibility over [registered
clearing agencies] extends to the clearing agency as a whole and is
entity-based, rather than product based'').
    \202\ See id.
    \203\ This is consistent with the Commission's approach taken in
the Dually Registered Clearing Agency Release, where the Commission
stated that ``rules of general applicability that would apply
equally to securities clearing operations, including security-based
swaps, would not be considered to primarily affect a Registered
Clearing Agency's non-securities clearing operations.'' See id.
---------------------------------------------------------------------------

    Similarly, consistent with the Dually Registered Clearing Agency
Release, changes to general provisions in the constitution, articles,
or bylaws of LCH SA that address the operations of the entire clearing
agency would also affect CDSClear.\204\ Therefore, LCH SA would be
required to file any proposed rule changes to its constitution,
articles, bylaws, or other rule changes that address its operations on
an entity-wide basis, with the Commission in accordance with Section
19(b) and Rule 19b-4.
---------------------------------------------------------------------------

    \204\ Id.
---------------------------------------------------------------------------

    Furthermore, Non-U.S. Business Rule Changes would not include
proposed rule changes that would ``significantly affect'' LCH SA's
CDSClear Services. As the Commission stated in the Dually Registered
Clearing Agency Release, a proposed rule change may significantly
affect securities clearing operations, ``even in circumstances when
such effects may be indirect.'' \205\ Therefore, LCH SA would be
required to file a proposed rule change that significantly affects its
CDSClear operations with the Commission, even in circumstances where
the effects of such proposed rule change on the CDSClear operations are
indirect.
---------------------------------------------------------------------------

    \205\ Id.; see also id. at n.50.
---------------------------------------------------------------------------

    Based on the above, the Commission believes that granting LCH SA
exemptive relief from the rule filing requirement with respect to the
Non-U.S. Business Rule Changes is necessary or appropriate in the
public interest, and consistent with the protection of investors,
because doing so would preserve the Commission's regulatory interest in
protecting the rights and obligations of U.S. persons participating in
the CDSClear services and facilitate LCH SA's operational, risk
management, and other changes pertaining to the Non-U.S. Business as
effected by Non-U.S. Business Rule Changes, without compromising the
Commission's oversight of LCH SA on an entity basis.
    To monitor LCH SA's implementation of the exemptive relief, a
condition of the exemptive relief is that LCH SA provide notice to
Commission staff of its Non-U.S. Business Rule Changes within three
business days once duly approved by LCH SA's national competent
authorities. This requirement will provide the Commission with the
ability to review LCH SA's determination of what constitutes Non-U.S.
Business Rule Changes and to ensure that such determination is
consistent with the scope of this exemptive relief such that the
exemptive relief does not undermine the Commission's oversight over LCH
SA under the Exchange Act.

C. Exemptive Relief From Rules 17Ad-22(c)(2) and 17Ad-22(c)(2)(iii)

    LCH SA requests exemptive relief from the requirements of the
introductory paragraph of Rule 17Ad-22(c)(2) and from Rule 17Ad-
22(c)(2)(iii) with respect to its financial statements for fiscal years
2014 and 2015.\206\ The introductory paragraph of Rule 17Ad-22(c)(2)
requires that, within 60 days after the end of a clearing agency's
fiscal year, the clearing agency must post its annual audited financial
statements to its Web site.\207\ Rule 17Ad-22(c)(2)(iii) also requires
that financial statements for the past two years be audited in
accordance with the standards of the Public Company Accounting
Oversight Board (``PCAOB'') by a registered public accounting firm that
is qualified and independent in accordance with 17 CFR 210.2-01 (the
``PCAOB Standards'').\208\
---------------------------------------------------------------------------

    \206\ See Request for Exemptive Relief at 4.
    \207\ 17 CFR 240.17Ad-22(c)(2).
    \208\ 17 CFR 240.17Ad-22(c)(2)(iii).
---------------------------------------------------------------------------

1. Background
    As a factual matter, LCH SA represents that pursuant to the listing
rules to which its indirect parent company LSEG is subject, LCH SA is
not permitted to publish its own financial statements prior to the
publication of LSEG's financial statements.\209\ Given the scope of
LSEG's business activities, LCH SA represents that it is ``not
possible'' for LSEG to publish its financial statements within 60 days
of the end of its fiscal year, nor would LCH SA have control over when
such financial statements ultimately would be published.\210\ LCH SA
has requested instead that it post such annual audited financial
statements no later than the first quarter following its fiscal year-
end.
---------------------------------------------------------------------------

    \209\ See Request for Exemptive Relief at 15.
    \210\ Id.
---------------------------------------------------------------------------

    In addition, LCH SA represents that it currently prepares its
financial statements in accordance with International Financial
Reporting Standards (``IFRS''), and its financial statements are
audited in accordance with International Standards on Auditing
(``ISA''). Additionally, LCH SA states that, under French law, it is
required to maintain two statutory auditing firms that jointly sign the
annual audited accounts.\211\ LCH SA represents that it has made
arrangements to ensure that, beginning in 2016, its annual financial
statements will be audited in accordance with Public Company Accounting
Oversight Board (``PCAOB'') standards and will be signed by auditors
who meet the relevant PCAOB qualifications.\212\
---------------------------------------------------------------------------

    \211\ See Request for Exemptive Relief at 14.
    \212\ Id. at 13.
---------------------------------------------------------------------------

    However, absent exemptive relief, upon registration with the
Commission in 2016, LCH SA would be required to have its 2014 and 2015
annual financial statements audited in accordance with PCAOB standards.
LCH SA represents that its 2014 and 2015 financial records would need
to be re-analyzed (including reviewing past judgments regarding
accounting figures), and that re-opening its audit files in such a
manner would present practical and potentially legal challenges. In
addition, compliance with Rule 17Ad-22(c)(2)(iii) prior to the end of
the calendar year would impose material burdens on LCH SA, its staff