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Federal Register / Vol. 86, No. 164 / Friday, August 27, 2021 / Notices
lotter on DSK11XQN23PROD with NOTICES1

and a clearing member having exercised its option to transfer Eligible Collateral to LCH SA through a Belgian law security interest. Accordingly, the definition of Pledged Eligible Collateral in Section 1.1.1 of the CDS
Clearing Rule Book will be revised to provide that the term Pledged Eligible Collateral means Eligible Collateral as described in a Clearing Notice which is pledged in accordance with a Pledge Agreement.
Separately, LCH SA is proposing to revise Section 3 of its CDS Clearing ProceduresCollateral, Variation Margin and Cash Payment, in several places to add Clearstream Banking Luxembourg as a central securities depository for LCH SA.7 Finally, as noted above, LCH SA is also proposing to amend the Framework to take into account the expanded list of Eligible Collateral. The Framework is one of several policies and procedures that LCH SA maintains to manage its liquidity risk, i.e., the risk that LCH SA
will not have enough cash available, in extreme but plausible circumstances, to settle margin payments or delivery obligations when they become due, in particular upon the default of a clearing member. The Framework describes the Liquidity Stress Testing framework by which the Collateral and Liquidity Risk Management department CaLRM of LCH Group Holdings Limited LCH
Group assures that LCH SA has enough cash available to meet any financial obligations, both expected and unexpected, that may arise over the liquidation period for each of the clearing services that LCH SA offers.8
In particular, because the European Central Bank will not convert the additional non-Euro Eligible Collateral to Euros and LCH SA currently does not otherwise have the operational capacity to convert the additional non-Euro Eligible Collateral to Euros, LCH SA is proposing to amend Section 4.1.3 and Section 4.1.4 of the Framework to make clear that the additional non-Euro Eligible Collateral will be excluded from the calculation of LCH SAs liquidity resources.9
7 See, Paragraph 3.4di; Paragraph 3.10a, b and c; and Paragraph 3.12b of Section 3 of the CDS Clearing Procedures.
8 In addition to its CDSClear service, LCH SA
provides clearing services in connection with cash equities and derivatives listed for trading on Euronext EquityClear, commodity derivatives listed for trading on Euronext CommodityClear, and triparty and bilateral Repo transactions EuroGC+ and RepoClear.
9 See, also, Section 5.2.1.1, Assumptions, footnotes 20 and 2; Section 5.3.5, LCR Calculation, footnote 26; and Section 5.4.3, CC&G LCR
Calculation.

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Unrelated to the expansion of nonEuro Eligible Collateral, LCH SA is also proposing to amend the Framework to clarify certain Sections and update certain tables and formula. In this regard:
Section 4.1.1, Description of sources of liquidity, will be revised to clarify that, with limited exceptions,10
LCH SA generally receives Collateral on a full title transfer basis, which permits LCH SA to use such collateral, to offset it with all related claims and to consider such Collateral available for liquidity purposes.
Section 4.1.3, Assessment of assets liquidity, will be revised to clarify that Collateral deposited under the pledge regime may be used for liquidity purposes only if the clearing member pledging such Collateral has defaulted.11
Section 4.2.1.4, Update of the figures of the liquidity injected in the settlement system to smooth settlement activity. Figures are updated periodically in line with the flow observed on the CSD and ICSD.
Section 5.1.1, Overview of the Monitoring liquidity, will be revised to clarify that LCH SA has a group policy that allows LCH SA to perform an extraordinary margin call if liquidity deteriorates.
Section 5.3.1, Liquidity Coverage Ratio LCR, Overview, will be revised to explain that the LCR is an internal ratio similar, but not equivalent, to the banking metric defined in the Basel III
framework and is used to ensure compliance with EMIR.
Section 5.3.1.1, Liquidity requirements Assumptions per clearing services RepoClear, will be revised to update the formula for calculating market risk in RepoClear transactions.
Section 5.3.1.3, Cash Equity, will be revised to clarify the treatment of settlement risk to account for early exercise of American-style options.
Sections 5.3.1.4, Listed derivatives, 5.3.1.5, Credit Default Swaps, and 5.3.4, Cover 2 selection, will be revised to clarify that the calculation of LCR
liability components include spread shifts and implied volatility shifts.
Section 5.3.4, Clarification that for cover 2 selection the calculation of stressed VM for Cash Equity and Listed Derivatives includes scenario based on price shifts and implied volatility shifts.
Section 5.3.5, A note will be added to specify that the new non cash 10 The two exceptions are: i Collateral deposited under the regime of pledge; and ii Collateral deposited through a central bank guarantee.
11 This clarification is repeated in Section 4.1.4, Synthesis.

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securities will be excluded from the LCR assets, in line with amendment in section 4.1.3.
Section 5.4.3, A will be added to specify that in line with general Cover 2 LCR also for the CC&G LCR the new non euro securities will be excluded from the liquid assets, in line amendments in sections 4.1.3. and 5.3.5.
Section 5.5, A duplicated sentence was deleted.
Section 5.5.1, will be revised to clarify that Non Euro non cash collateral are not European Central Bank eligible assets and that when considering multiple defaults the clearing members with the worst credit quality are assumed defaulting first.
Appendix 3 and 5 will be updated to add of the overdraft facility in place with Citibank that allows the CCP to source non Euro currencies in case of liquidity needs.
2. Statutory Basis LCH SA has determined that the Proposed Rule Change is consistent with the requirements of Section 17A of the Act 12 and regulations thereunder applicable to it. Section 17Ab3F of the Act requires, inter alia, that the rules of a clearing agency should be designed to assure the safeguarding of securities and funds that are in its custody or control or for which it is responsible. 13
In addition, Regulation 17Ad 22e4ii requires a central counterparty CCP that is involved in activities with a more complex risk profile, e.g., that provides CCP services for security-based swaps, to maintain and enforce written policies and procedures reasonably designed to effectively measure, monitor, and manage its credit exposures from its payment, clearing and settlement processes to assure that it maintains additional financial resources to enable it to cover a wide range of stress scenarios that include the default of two participant family clearing members that would potentially cause the largest aggregate liquidity exposure for the CCP
in extreme but plausible market conditions.14 Further, Regulation 17Ad 22e5 requires a CCP to limit the assets that it accepts as collateral to those with low credit, liquidity and market risks and enforce appropriately conservative haircuts and concentration limits.15
The additional non-Euro Eligible Collateral that LCH SA is proposing to permit clearing members to post with 12 15

U.S.C. 78q1.
U.S.C. 78q1b3F.
14 17 CFR 240.17Ad22e4ii.
15 17 CFR 240.17Ad22e5.
13 15

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