8011-01p
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95674; File No. SR-LCH SA-2022-007]
Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change
Relating to Providing Clearing Services for Additional Index and Single Name CDS
September 6, 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 August 29,
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 (“Proposed Rule Change”) described in Items I, II and
III below, which Items have been primarily prepared by LCH SA. The Commission is
publishing this notice to solicit comments on the Proposed Rule Change from interested
persons.
I.

Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule
Change
LCH SA is proposing to expand its CDSClear service to provide clearing services

for additional index and single name credit default swaps (“CDS”). Specifically, LCH
SA is proposing to provide clearing services with regard to the iTraxx Asia ex Japan
Index, the Markit CDX Emerging Markets (“CDX.EM”) Index and the single names that
comprise each index, as well as a list of additional sovereign single names which are not
constituent of an index (all together the “New Products”). To expand its clearing
services in this way, LCH SA is proposing to amend its CDS Clearing Supplement (the
“Supplement”) and Section 2 of the CDS Clearing Procedures (the “Procedures”) to

15 U.S.C. 78s(b)(1).

17 C.F.R. § 240.19b-4.

accommodate these additional indices and single names. LCH SA is further proposing to
amend its CDS Margin Framework and CDS Default Fund Methodology (Guide Stress
Testing) to reflect the addition of the New Products in the scope of instruments eligible
for clearing by members of LCH SA CDSClear service.
The text of the Proposed Rule Change is in Exhibit 5.3
The launch of the various initiatives reflected in the Proposed Rule Change will
be contingent upon LCH SA’s receipt of all necessary regulatory approvals, including the
approval by the Commission of the Proposed Rule Change described herein.
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 such statements.
A.

Clearing Agency’s Statement of the Purpose of, and Statutory Basis for,
the Proposed Rule Change
1.

Purpose

The Proposed Rule change is being adopted to expand LCH SA’s CDSClear
service to provide clearing services for additional index and single name CDS.
Specifically, LCH SA is proposing to provide clearing services with regard to the iTraxx
Asia ex Japan Index, the CDX.EM Index and the single names that comprise each index,
as well as a list of additional sovereign single names which are not constituent of an
index.

Capitalized terms used but not defined herein shall have the meaning specified in
the CDS Clearing Rule Book or the Clearing Supplement, as applicable.

LCH SA has determined that the existing CDSClear risk model currently
appropriately takes into account the risk associated with the New Products but is
proposing to amend both its CDS Margin Framework and CDS Default Fund
Methodology (Guide Stress testing) in order to reflect the addition of the New Products to
the list of instruments eligible for clearing. To accommodate the New Products, LCH SA
is further proposing to amend the Supplement and Section 2 of the Procedures.
(a)

The CDS Clearing Supplement

To accommodate the New Products, LCH SA is proposing to amend the
following definitions set out in Section 1.2 of Part B of the Supplement: (i) “Compression
Cut-off Date”; (ii) “Novation Cut-off Date”; (iii) “Index Cleared Transaction
Confirmation”; and (iv) “Transaction Business Day”.
Specifically, the definitions of “Compression Cut-off Date” and “Novation Cutoff Date” are each being amended to add two additional credit events that are taken into
consideration in determining the “Compression Cut-off Date” and “Novation Cut-off
Date”: (i) the “Obligation Acceleration Credit Event”; and (ii) the
“Repudiation/Moratorium Credit Event”. These credit events, which are both standard
under the 2014 ISDA Credit Derivatives Definitions, are not credit events that apply to
any of the transaction types referenced by CDS that are currently eligible for clearing at
LCH SA and, therefore, did not previously need to be addressed in the Supplement.
These credit events apply to certain transaction types for sovereigns, and are proposed to
be added as a result of index comprising of and single name CDS referencing sovereign
reference entities becoming eligible for clearing.
In addition, the definition of “Index Cleared Transaction Confirmation” is
proposed to be revised to provide that: (i) with regard to any index cleared transaction
that references a Markit iTraxx ex Japan Index Series [27] or above, the confirmation will
be the form of confirmation that incorporates the iTraxx Asia/Pacific Untranched

Standard Terms Supplement; and (ii) with regard to any index cleared transaction that
references a Markit CDX.EM Index Series [27] or above, the form of confirmation that
incorporates the CDX Emerging Markets Untranched Transactions Standard Terms
Supplement, in each case being the latest version in force as published by Markit North
America, Inc.
The definition of a “Transaction Business Day” is currently defined to mean a
“Business Day”, as defined in the Index Cleared Transaction Confirmation or the Single
Name Cleared Transaction Confirmation, as applicable. This term is proposed to be
amended to take into account the situation where such confirmations could include
different definitions of the term “Business Day” depending on the circumstances by
providing that, “if the relevant Index Cleared Transaction Confirmation or Single Name
Cleared Transaction Confirmation defines such term differently depending upon its use,
such distinction shall also apply to the use of the term Transaction Business Day herein.”
In Section 2 of Part B of the Supplement, LCH SA is proposing to amend Section
2.2 (Index Cleared Transaction Confirmation) which specifies the manner in which an
Index Cleared Transaction Confirmation is amended, supplemented and completed
depending on the index CDS that is cleared to include, in addition to the indices currently
set out in the section, the iTraxx Asia ex Japan Index and the CDX.EM Index and provide
for the necessary amendments to be made to the relevant confirmations depending on the
index. Section 2.2 is also proposed to be amended to provide that “The applicable
Physical Settlement Matrix is the version of the Physical Settlement Matrix which is in
force on the Clearing Day on which the Index Cleared Transaction is registered by LCH
SA” in a new indent (i) of paragraph (f). The purpose of this amendment is to ensure that
the Additional Provisions for Certain Russian Entities published by ISDA on March 25,
2022 will apply to the relevant cleared trades, including the trades submitted through the
backloading cycle that could have been entered into before the implementation date of

these Additional Provisions and updated Physical Settlement Matrix and for which one of
the parties, or both, did not adhere to the ISDA 2022 Russia Additional Provisions
Protocol published by ISDA on March 29, 2022.
In Section 4 of Part B of the Supplement, LCH SA is proposing to amend Section
4.1(b) to add a “Repudiation/Moratorium Extension Notice” to the types of notices that
neither LCH SA nor a clearing member is entitled to deliver with regard to an M(M)R
Restructuring in accordance with the terms of any Restructuring Cleared Transaction. As
above, a “Repudiation/Moratorium Extension Notice” is standard under the 2014 ISDA
Credit Derivatives Definitions and is being proposed to be added as a result of index
comprising of and single name CDS referencing sovereigns becoming eligible for
clearing.4
In Section 6 of Part B of the Supplement, Section 6.5(c) is proposed to be
amended to add “Package Observable Bond” to the types of asset packages that can be
identified in a Notice of Physical Settlement (“NOPS”) or a NOPS Amendment Notice.
The Package Observable Bond provisions in the 2014 ISDA Credit Derivatives
Definitions only apply to transactions referencing sovereigns. As a result, they did not
previously need to be referenced in the Supplement.
LCH SA is also proposing to add a new section 6.8(c) entitled “Buy-in of Bonds –
Cap on Settlement” for the purposes of clarifying how the “60 Business Day Cap on
Settlement”, which is relevant for transactions derived from the CDX EM Index amongst
others, will apply to CCM Client Transactions in respect of the Matched Contracts of a
Settlement Matched Pair. This proposed amendments consist in making an adjustment as
to the manner in which Section 9.10 of the 2014 ISDA Credit Derivatives Definitions

For the same reason, “Repudiation/Moratorium Extension Notice” is proposed to
be added to Section 5(b) of Appendix XIII of Part B of the Supplement (CCM
Client Transaction Requirements).

works between Matched Buyer and Matched Seller to ensure that the extension of the
Termination Date provided for by Section 9.10 will apply when there has been a notice
delivered to Matched Seller by its client under a CCM Client Transaction. This is to
ensure that the Termination Date of the Cleared Transactions and related CCM Client
Transaction is the same.5
(b)

Section 2 of the Procedures

LCH SA is also proposing to make one minor technical amendment to Section 2
of the Procedures (Margin, NPV Payment and Price Alignment). Specifically, the initial
sentence of Section 2.7(c) currently provides, inter alia, that, where a Clearing Member
is acting as a CDS Seller, Short Charge Margin will be required to cover the risk that the
Clearing Member is subject to an event of default at the same time that a credit event
occurs “with respect to a Reference Entity”. Recognizing that a credit event may occur
with respect to more than one Reference Entity, this sentence is proposed to be revised to
refer to “one or more Reference Entities”.
(c)

The Reference Guide: CDS Margin Framework

LCH SA is proposing to amend the Margin Framework to reflect the addition of
the new single names. For example, Section 3.4.5, Portfolio Margining, which, inter
alia, lists the various combinations of instruments that can constitute an index basis
package, is proposed to be revised to add to the list (i) the CDX.EM Index vs All Single
Names Constituents of the index and (ii) the iTraxx Asia ex Japan vs All Single Names
Constituents of the index. In addition, LCH SA is proposing to amend Section 3.1.1,

For the same reason, the provisions of section 6.8(c) are effectively repeated in
Section 7.8 and Section 7.18 of Appendix XIII of Part B of the Supplement (CCM
Client Transaction Requirements). Separately, Section 7.15 of Appendix XIII,
Alternative Procedures relating to Loans in respect of Matched Contracts, and
Section 7.17 of Appendix XIII, Alternative Procedures relating to Assets Not
Delivered, are proposed to be amended to remove as unnecessary the phrase “for
the purposes of the Matched Contracts of the related Settlement Matched Pair”
and also to use the correct defined term “Settlement Matched Pair”.

Recovery Rate for Short Charge to note that the recovery rate for state-owned enterprises
(“SOE”) is 70 percent. LCH is also proposing to move the provisions of current Section
3.5.2, Short Charge Calculation, to a new Section 3.5.3. A new Section 3.5.2, Sovereign
Exposures, is proposed to be added, which notes the high level of correlation between
SOEs and their sovereign entities. As a result, an SOE that is more than 50 percent
owned by a sovereign entity would be defaulted jointly with its sovereign entity when the
positions are not risk reducing. Further, exposures for SOEs will be calculated using a
fixed 70 percent recovery rate.
LCH SA is also proposing to amend Section 3.8.1, Offsets inter-region, to expand
the regional pairs that LCH SA will consider in calculating wrong way risk to include: (i)
Europe/US; (ii) Europe/Australia; (iii) Europe/Asia; (iv) US/Australia; (v) US/Asia; and
(vi) Asia/Australia.
LCH SA is proposing to amend Section 4.1.1, Liquidity Charge for Linear
Portfolio, to note that the liquidation cost of a sub-portfolio composed of a single 5 year
position in the principal on the run index is simply the sum of the macro hedging cost.
Further, single names without a parent index are considered a sub-portfolio for which
LCH SA charges the cost of unwinding a non-hedged sub-portfolio. Finally, Section
4.1.2, Macro Hedging Phase, which, inter alia, sets out a list of sub-portfolios
corresponding to indices and their components is proposed to be revised to add: (i) the
CDX.EM sub-portfolio; (ii) the iTraxx Asia ex Japan IG sub-portfolio, and (iii) the No
parent index sub-portfolio.
LCH SA is proposing to amend Section 4.1.7 to update the existing thresholds
and include more cleared indexes in the table for volume thresholds based on calibrations
done in December 2021. A dedicated liquidity grid has also been added for sovereign
single names in order to reflect their tighter bid-ask spreads and higher liquidity profiles.

LCH SA is also proposing to amend the CDS Default Fund Methodology (Guide
Stress Testing) in a number of sections, to reflect the extension of the product offer as
well as to introduce a Sovereign Stressed Short Charge component aimed to capture a
potential joint default of a member and its country:
- the last paragraph of section 2.2 adds to the list of index families covered to
reflect the addition of CDX.EM and iTraxx Asia. It also adds iTraxx Australia, as this
should have been updated when introducing that index.
- section 2.4.1 details how State-Owned Entities’ exposures should be added to
the exposure on the sovereign name only if risk increasing
- section 2.4.2 introduces a Sovereign Stressed Short Charge, considering jointly
the top exposure across the portfolio and if relevant the exposure on the sovereign name
corresponding to the member’s jurisdiction
- section 2.4.3. and 2.7.2 describe the same Sovereign Stressed Short Charge with
formulas instead of plain text
- section 2.6.1. and 2.6.3 extend the logic of exercise decisions to consider the
Sovereign Stressed Short Charge when relevant
2.

Statutory Basis

LCH SA believes that the Proposed Rule Change is consistent with the
requirements of Section 17A of the Act6 and regulations thereunder applicable to it,
including Commission Rule 17Ad-22(e).7 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,

15 U.S.C. 78q-1.

17 C.F.R. §240.17Ad-22.

and transactions”.8 By proposing to amend its CDS Clearing Supplement to authorize the
expansion of LCH SA’s CDSClear Service to provide clearing services with regard to the
New Products, 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.9. The Proposed Rule Change, in particular, the
amendments to the CDS Clearing Supplement, therefore, are consistent with the
requirements of Section 17A(b)(3)(F) of the Act.
Further, from the perspective of financial risk management and margin
requirements, the clearing of the New Products would not require changes to LCH SA’s
existing margin methodology, default management policies and procedures and
operational process, as LCH SA determined that the current margin framework for its
CDSClear service already appropriately captures the risk associated to the New
Products. The New Products 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),10 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.

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

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

17 CFR 240.17Ad-22(e)(17).

Adopting rules to facilitate the clearing of the New Products would also be
consistent with other relevant requirements of Rule 17Ad-22(e),11 as set forth in the
following discussion.
Margin Requirements. Rule 17Ad-22(e)(4)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, among other
requirements. In terms of financial resources, LCH SA would apply its existing margin
methodology to the New Products. LCH SA believes that the proposed rules that would
apply this risk model to the New Products 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-22I(4).13 [sic]
Financial Resources. Rule 17Ad-22I(4)(i)14 [sic] 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)15 requires LCH SA’s policies and procedures be
reasonably designed to maintain additional financial resources at the minimum to enable

17 CFR 240.17Ad-22(e).

17 CFR 240.17Ad-22(e)(4).

17 CFR 240.17Ad-22(e)4.

17 CFR 240.17Ad-22(e)(4)(i).

17 CFR 240.17Ad-22(e)(4)(ii).

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 above, LCH SA is proposing to make some changes to
its CDS Default Fund Methodology documentation (Guide Stress Testing) in order to
reflect the extension of the product list as well as to introduce a Sovereign Stressed Short
Charge component aimed to capture a potential joint default of a member and its country.
LCH SA believes that with the proposed changes in its stress testing framework, its
Default Fund will, together with the required margin, provide sufficient financial
resources to support the clearing of the New Products, consistent with the requirements of
Rules 17Ad22(e)(4)(i) and (ii).
Operational Resources. Rule 17Ad-22(e)(3)16 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 New
Products, consistent with the requirements of Rule 17Ad-22(e)(3)17, as these new
contracts are substantially the same from an operational and risk management perspective
as the existing CDS contracts cleared by LCH SA CDSClear.
LCH SA will also apply its existing default management policies and procedures
for the New Products. 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

17 CFR 240.17Ad-22(e)(3).

17 CFR 240.17Ad-22(e)(3).

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). 18
Exchange Act Rule 17Ad-22(e)(1)19 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 Change is also modifying the Supplement to take into account the New
Products 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)20.
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 for the New Products 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)21.

17 CFR 240.17Ad-22(e)(3).

17 CFR 240.17Ad-22(e)(1).

17 CFR 240.17Ad-22(e)(1).

17 CFR 240. 17Ad-22(e)(6)(iii).

B.

Clearing Agency’s Statement on Burden on Competition

Section 17A(b)(3)(I) of the Act requires that the rules of a clearing agency not
impose any burden on competition not necessary or appropriate in furtherance of the
purposes of the Act.22
LCH SA does not believe that its proposed clearing of the New Products will
adversely affect competition in the trading market for those contracts or CDS generally.
By allowing LCH SA to clear the New Products, 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.
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

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

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:
ï‚·

Use the Commission’s Internet comment form
(http://www.sec.gov/rules/sro.shtml); or

ï‚·

Send an e-mail to rule-comments@sec.gov. Please include File Number SR-LCH
SA-2022-007 on the subject line.

Paper Comments:
ï‚·

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-2022-007. This file number
should be included on the subject line if e-mail 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 am and
3:00 pm. 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-2022-007
and should be submitted on or before [Commission to insert date 21 days from
publication in the Federal Register].
For the Commission, by the Division of Trading and Markets, pursuant to
delegated authority. 23

J. Matthew DeLesDernier,
Deputy Secretary.

[FR Doc. 2022-19579 Filed: 9/9/2022 8:45 am; Publication Date: 9/12/2022]

17 CFR 200.30-3(a)(12).