[Federal Register Volume 87, Number 133 (Wednesday, July 13, 2022)]
[Notices]
[Pages 41788-41791]
[FR Doc No: 2022-14879]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95207; File No. SR-LCH SA-2022-004]

Self-Regulatory Organizations; LCH SA; Notice of Filing of
Proposed Rule Change Relating to the Clearing of Markit iTraxx[supreg]
Australia Indices and the Associated Single Name Constituents and
Remediation of WWR Margin Instability

July 7, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder \2\ notice
is hereby given that on June 30, 2022, Banque Centrale de Compensation,
which conducts business under the name LCH SA (``LCH SA''), filed with
the Securities and Exchange Commission (``Commission'' or ``SEC'') the
proposed rule change described in Items I, II, and III below, which
Items have been prepared primarily by LCH SA. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    (a) LCH SA is proposing to amend its CDSClear Risk methodology and
its CDS Clearing Supplement (the ``Clearing Supplement'') to allow LCH
SA to enhance and expand its clearing services as follows: LCH SA
intends to (i) permit the clearing of Markit iTraxx[supreg] Australia
indices and the associated single name constituents, (the ``iTraxx
Change'') and (ii) provide a remediation to one independent model
validation recommendation regarding the Wrong Way Risk (WWR) margin
instability (the ``WWR Change'') (all together the ``Proposed Rule
Change'').
    The text of the Proposed Rule Change is in Exhibit 5.\3\
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    \3\ All capitalized terms not defined herein have the same
definition as in the CDS Clearing Rule Book, Supplement or
Procedures, as applicable.
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    The implementation of the Proposed Rule Change will be contingent
on LCH SA's receipt of all necessary regulatory approvals.
    (b) Not applicable.
    (c) Not applicable.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

    In its filing with the Commission, LCH SA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. LCH SA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of these statements.

A. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

(a) Purpose

    The purpose of the Proposed Rule Change is to revise LCH SA's
rules, procedures and supplement to (1) permit the clearing of Markit
iTraxx[supreg] Australia indices and the associated single name
constituents and (2) provide the remediation to the WWR margin
instability.
(1) Proposed Amendments To Permit the Clearing of Markit iTraxx[supreg]
Australia Indices
(a) Amendments to the Clearing Supplement
    The Clearing Supplement has been amended in order to include the
relevant provisions to allow the clearing of the new Markit
iTraxx[supreg] Australia indices.
    In Part B of the Clearing Supplement, Section 1.2 (Terms defined in
the CDS Clearing Supplement) has been amended to include a new sub-
paragraph (a) to the definition of an ``Index Cleared Transaction
Confirmation'' in order to make a reference to the form of confirmation
which incorporates the iTraxx[supreg] Asia/Pacific Untranched Standard
Terms Supplement. As a consequence, the sub-paragraphs (a), (b), (c),
and (d) have been re-lettered as (b), (c), (d), (e), respectively.
    Section 2.2 (Index Cleared Transaction Confirmation) of Part B of
the Clearing Supplement has been also amended to make appropriate
references

to any Index Cleared Transaction that is a Markit iTraxx[supreg]
Australia Index in paragraphs (a)(i), (b)(i), (c)(i) and (f)(i).
(b) Proposed Amendments to the CDSClear Risk Framework
    LCH SA is proposing to amend its Methodology Services Reference
Guide: CDS Margin Framework (``CDSClear Risk Methodology'') under
Section <IP_ADDRESS> (Interest Rate Curve) to proceed with the removal of
the interest rate curve name used with the International Swaps and
Derivatives Association, Inc. (ISDA) standard model pricer (used as a
converter between upfront cash and quoted spread in basis points, as
described on www.cdsmodel.com) that does not need to be clearly
specified in such risk documentation. The objective now is to refer to
the original website when the market moves to the new Risk Free Rates,
so that the CDSClear Risk Methodology always automatically refers to
the latest state in the market without risking becoming outdated.
    For clarity purposes only, LCH SA is proposing to remove ``through
a CDS index'' under the provisions of Section 3.2 (Self-referencing
margin risk) as the Self-Referencing Margin would apply as soon as the
clearing member sells protection on itself whatever the financial
instrument used.
    The other proposed change specified under Section 3.4.5 (Portfolio
Margining) is intended to add iTraxx[supreg] Australia to the list of
indices on which index basis packages can be cleared.
    As there are financial single name constituents in the
iTraxx[supreg] Australia index family, positions on this index will be
subject to the Wrong Way Risk margin, a margin that aims at capturing
the potential contagion effect off the default of a clearing member
(that is a financial institution) on instruments with open positions in
the defaulter's portfolio. Here, it would be the risk that Australian
financials credit spreads may widen following the default of a clearing
member, to an extent that goes beyond the spread move already covered
by the spread margin. This requirement, coupled with the need to
address a recommendation raised by the independent risk model
validation on the instability of the Wrong Way Risk margin component,
result in LCH SA also proposing to amend the provisions under Section
3.8 of the CDSClear Risk Methodology about the Wrong Way Risk margin to
introduce the following updates:

--the introduction of the shocks applied to Australian entities in
Section <IP_ADDRESS> (Spread parallel moves), alongside the shocks applied
to existing products.
--a generalisation of the calculation to all indices under Section
<IP_ADDRESS> (Index Shocks) instead of just referring to Senior Financial or
its parent index Main as it was previously in Section <IP_ADDRESS>.
--a description of the way the shocks on indices are defined in Section
<IP_ADDRESS> (Index Shocks), being derived directly from the shocks applied
on constituents as a spread and CS01 weighted average. This would apply
to iTraxx[supreg] Australia as well as other indices containing
financial names, although no financial impact is expected since index
shocks are currently already calibrated as the average shock of their
constituents.
--As required to address the recommendation raised by the Independent
Model Validation, a specification that the contribution to the spread
margin used to derive the spread_SM under Sections <IP_ADDRESS> (Wrong-Way/
Right-Way P&L) and <IP_ADDRESS> (Instrument level Expected Shortfall) would
now consider the contribution of a single tenor, instead of the joint
contribution of all tenors on a given product, to address the WWR
margin instability observed with curve trades.
--the introduction of iTraxx[supreg] Australia alongside other regions
under Section <IP_ADDRESS> (Trigger) when aggregating Wrong way and Right
way across regions.
--Some of the existing provisions under Sections 3.8.2 (Offsets inter-
region) and 3.8.3 (Final WWR Margin) have been moved to the general
Section 3.8.1 explaining the overall WWR calculation. The shocks
defined when extending to CDX products are now part of the table inside
Section <IP_ADDRESS> (Spread parallel moves) and the relevant provision has
been moved at the end of this same section. The provision about Sub
Financials has been moved to the Section <IP_ADDRESS> (Sub Financials) as a
subsection of 3.8.1 (WWR: Parallel Move).

    Further, the provisions of Section 4 on Additional Margin are
proposed to be updated for the Liquidity and Concentration Risk Margin
under paragraphs 4.1.2 (Macro Hedging Phase) and <IP_ADDRESS>
(Diversification Ratio) to specify that iTraxx[supreg] Australia index
would be used for hedging and would define an additional sub-portfolio
when considering liquidation costs.
    Finally, LCH SA is also taking this opportunity to propose changes
for consistency purposes by removing from its CDSClear Risk methodology
documentation any reference to IBOR curves in Section <IP_ADDRESS>, and
refer instead to the cdsmodel.com website which details the pricer used
by all market participants to convert from quoted spreads to upfronts
in parallel to the cessation of IBOR and the transition to Risk Free
Rates, and also clarify in Section 1, Introduction that the short
charge can cover 1 or 2 credit events, as the CDX.HY component does
cover 2 defaults and was not correctly reflected in the introduction.
(b) Statutory Basis
    LCH SA believes that the Proposed Rule Change is consistent with
the requirements of Section 17A of the Act \4\ and regulations
thereunder applicable to it, including Commission Rule 17Ad-22(e).\5\
In particular, Section 17A(b)(3)(F) of the Act requires, inter alia,
that the rules of a clearing agency be designed to ``promote the prompt
and accurate clearance and settlement of . . . derivatives agreements,
contracts, and transactions''.\6\ By proposing to amend its CDS
Clearing Supplement to authorize the acceptance of the new
iTraxx[supreg] Australia transactions, on the terms and conditions set
out in the Proposed Rule Change, LCH SA considers that this would
encourage Clearing Members to clear additional indices and single name
CDS through its CDSClear service, which, in turn, should promote the
prompt and accurate clearance and settlement of those instruments
within the meaning of Section 17A(b)(3)(F) of the Act.\7\
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    \4\ 15 U.S.C. 78q-1.
    \5\ 17 CFR 240.17Ad-22.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    By improving the stability of the WWR margin in order for LCH SA
CDSClear to collect the appropriate level of margin amount required for
any clearing member portfolio, the proposed WWR Change is also
consistent with the SEC requirement for accurate clearance and
settlement of transactions cleared by LCH SA.
    Further, from the perspective of financial risk management and
margin requirements, the clearing of the proposed new iTraxx[supreg]
Australia index and the associated single name constituents would not
require changes to LCH SA's existing margin methodology, default
management policies and procedures and operational process, as the
proposed products do not include any new risk factor compared to the
Corporates and Financials indices or single names already cleared by
the LCH SA CDSClear service. The iTraxx[supreg] Australia transactions
would be cleared pursuant to LCH SA's existing clearing

arrangements and related financial safeguards, protections and risk
management procedures which are consistent with Exchange Act Rule 17Ad-
22(e)(17),\8\ requiring a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to manage the covered clearing agency's operational
risks by, among other things, identifying the plausible sources of
operational risk, both internal and external, and mitigating their
impact through the use of appropriate systems, policies, procedures,
and controls.
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    \8\ 17 CFR 240.17Ad-22(e)(17).
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    Adopting rules to facilitate the clearing of the iTraxx[supreg]
Australia transactions would also be consistent with other relevant
requirements of Rule 17Ad-22(e),\9\ as set forth in the following
discussion.
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    \9\ 17 CFR 240.17Ad-22(e).
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    Margin Requirements. Rule 17Ad-22(e)(4) \10\ requires LCH SA to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes, among
other requirements. In terms of financial resources, LCH SA would apply
its existing margin methodology--including its Wrong Way Risk margin
framework--to the new iTraxx[supreg] Australia Index, which are similar
to the European indices currently cleared by LCH SA. LCH SA believes
that the proposed rules that would apply this risk model to the new
iTraxx[supreg] Australia Index will provide sufficient margin
requirements to cover its credit exposure to its clearing members from
clearing such contracts, consistent with the requirements of Rule 17Ad-
22(e)(4).\11\
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    \10\ 17 CFR 240.17Ad-22(e)(4).
    \11\ 17 CFR 240.17Ad-22(e)4.
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    Financial Resources. Rule 17Ad-22(e)(4)(i) \12\ requires LCH SA to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes by
maintaining sufficient financial resources to cover its credit exposure
to each participant fully with a high degree of confidence. To the
extent not already maintained pursuant to paragraph (e)(4)(i), Rule
17Ad-22(e)(4)(ii) \13\ requires LCH SA's policies and procedures be
reasonably designed to maintain additional financial resources at the
minimum to enable it to cover a wide range of foreseeable stress
scenarios that include, but are not limited to, the default of the two
participant families that would potentially cause the largest aggregate
credit exposure for the covered clearing agency in extreme but
plausible market conditions. As explained in the above paragraph on
Margin Requirements, LCH SA also believes its Default Fund, under its
existing methodology, will, together with the required margin, provide
sufficient financial resources to support the clearing of the new
iTraxx[supreg] Australia Index contracts, consistent with the
requirements of Rules 17Ad22(e)(4)(i) and (ii).
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    \12\ 17 CFR 240.17Ad-22(e)(4)(i).
    \13\ 17 CFR 240.17Ad-22(e)(4)(ii).
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    Operational Resources. Rule 17Ad-22(e)(3) \14\ requires LCH SA to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to maintain a sound risk management
framework for comprehensively managing legal, credit, liquidity,
operational, general business, investment, custody, and other risks
that arise in or are borne by the covered clearing agency. LCH SA
believes that its existing operational and risk management resources
will be sufficient for clearing of the iTraxx Australia transactions,
consistent with the requirements of Rule 17Ad-22(e)(3),\15\ as this new
index contract is substantially the same from an operational and risk
management perspective as the existing index contracts.
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    \14\ 17 CFR 240.17Ad-22(e)(3).
    \15\ 17 CFR 240.17Ad-22(e)(3).
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    LCH SA will also apply its existing default management policies and
procedures for the iTraxx[supreg] Australia transactions. As with
current CDSClear products with similar risk profile, LCH SA believes
that these procedures allow for it to take timely action to contain
losses and liquidity pressures and to continue meeting its obligations
in the event of clearing member insolvencies or defaults in respect of
the additional single names, in accordance with Rule 17Ad-22(e)(3).\16\
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    \16\ 17 CFR 240.17Ad-22(e)(3).
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    Exchange Act Rule 17Ad-22(e)(1) \17\ requires that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to provide for a well-
founded, clear, transparent, and enforceable legal basis for each
aspect of its activities in all relevant jurisdictions. As described
above, the proposed [iuml]Traxx Change is also modifying the CDSClear
framework for indices and single names CDS to take into account the new
product iTraxx[supreg] Australia indices and the associated single name
constituents and provide for a clear and transparent legal basis for
LCH SA's CDS Clearing rules consistent with the requirements of
Exchange Act Rule 17Ad-22(e)(1).\18\
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    \17\ 17 CFR 240.17Ad-22(e)(1).
    \18\ 17 CFR 240.17Ad-22(e)(1).
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    Following the recommendation raised by the LCH SA CDSClear Risk
model validation, the proposed WWR Change is improving the stability
and accuracy of the WWR margin so that LCH SA can determine and duly
collect the full margin amount required for the level of risk exposure
of any clearing member portfolio. Therefore LCH SA believes it is
consistent with Rule 17Ad-22(e)(6)(i),\19\ requiring a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.
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    \19\ 17 CFR 240. 17Ad-22(e)(6).
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    Credit default swap (CDS) is an over-the-counter (OTC) market on
which participants can be active at any time in the context of market
stress. The LCH SA CDSClear risk model is considering 5-d moves of
unhedged portfolios and the back testing results confirmed that the
margins were sufficient to cover the exposure in the interval between
the last margin collection and the close out of the portfolio a
defaulting cleating member which is consistent with the requirements of
SEC Rule 17Ad-22(e)(6)(iii).\20\
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    \20\ 17 CFR 240. 17Ad-22(e)(6)(iii).
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    For all these reasons, LCH SA believes that the Proposed Rule
Change is consistent with the requirements of Section 17A of the Act
and the regulations thereunder, including the standards under Rule
17Ad-22 \21\ as discussed above.
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    \21\ 17 CFR 240.17Ad-22.
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B. Clearing Agency's Statement on Burden on Competition
    Section 17A(b)(3)(I) of the Exchange Act requires that the rules of
a clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\22\
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    \22\ 15 U.S.C. 78q-1(b)(3)(I).
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    LCH SA does not believe that its proposed clearing of Markit
iTraxx[supreg] Australia indices and the associated single name
constituents will adversely

affect competition in the trading market for those contracts or CDS
generally. By allowing LCH SA to clear Markit iTraxx[supreg] Australia
indices and the associated single name constituents, market
participants will have additional choices on where to clear and which
products to use for risk management purposes, which, in turn, will
promote competition and further the development of CDS for risk
management.
    In addition, LCH SA will continue to apply its existing fair and
open access criteria to the clearing of these additional products and
will apply the same criteria to every clearing member or client who
proposes to enter into this clearing activity.
    Further, as explained above, the WWR Change is proposed to improve
the stability and accuracy of the WWR margin so that LCH SA can collect
the full margin amount as duly and equally required for any CDSClear
market participant.
    Accordingly, LCH SA does not believe that the Proposed Rule Change
would impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
C. Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
    Written comments relating to the proposed rule change have not been
solicited or received. LCH SA will notify the Commission of any written
comments received by LCH SA.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include
File Number SR-LCH SA-2022-004 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-LCH SA-2022-004. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of LCH SA and on LCH SA's website
at: https://www.lch.com/resources/rulebooks/proposed-rule-changes. All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-LCH SA-2022-004 and should
be submitted on or before August 3, 2022.
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    \23\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-14879 Filed 7-12-22; 8:45 am]
BILLING CODE 8011-01-P


From:  D'Angelo, Wayne J<EMAIL_ADDRESS>Sent: Wednesday, March 8, 2023 11:15 AM To:  Jones, DonnaLee<EMAIL_ADDRESS>French, Chuck<EMAIL_ADDRESS> Cc: Stuart, Eric<EMAIL_ADDRESS>Balserak, Paul<EMAIL_ADDRESS>Green, Joseph J<EMAIL_ADDRESS>Ranajit Sahu<EMAIL_ADDRESS>Subject:  RBLC Entries identifying 6% shop opacity as BACT

Dr. Jones and Mr. French,   Thank you again for a helpful and constructive conversation on the proposed EAF/AOD NSPS revisions last week.  As a minor follow-up to your request during that conference, I've attached a list of the RBLC references to 6% shop opacity as BACT.  I've included the RBLC identification numbers so you can find easily find these entries if you want to review them directly.      Please let me know if you have any questions or if I can help in any other way.   Best, Wayne      WAYNE D'ANGELO Partner

Kelley Drye & Warren LLP Washington Harbour 3050 K Street NW, Suite 400 Washington, DC 20007 Tel:<PHONE_NUMBER> Cell:<PHONE_NUMBER>

<EMAIL_ADDRESS>

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