Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to LCH SA's Risk Governance Framework and Collateral, Financial, Credit, Operational and Third Party Risk Policies

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-104051; File No. SR-LCH SA-2025-007]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to LCH SA's Risk Governance Framework and Collateral, Financial, Credit, Operational and Third Party Risk Policies</SUBJECT> <DATE>September 25, 2025.</DATE> <HD SOURCE="HD1">I. Introduction</HD> On July 15, 2025, Banque Centrale de Compensation, which conducts business under the name LCH SA (“LCH SA”), filed with the Securities and Exchange Commission (the “Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”)  <SU>1</SU> <FTREF/> and Rule 19b-4 thereunder, <SU>2</SU> <FTREF/> a proposed rule change to submit for Commission approval the following risk policies (the “Risk Policies”): (i) the Collateral Risk Policy; (ii) the Financial Resource Adequacy Policy; (iii) the Counterparty Credit Risk Policy; (iv) the Operational Risk Management Policy; (v) the Third Party Risk Management Policy; and (vi) the Risk Governance Framework. The proposed rule change was published for comment in the <E T="04">Federal Register</E> on August 1, 2025. <SU>3</SU> <FTREF/> On September 15, 2025, pursuant to Section 19(b)(2) of the Exchange Act, <SU>4</SU> <FTREF/> the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the proposed rule change. <SU>5</SU> <FTREF/> The Commission did not receive comments regarding the proposed rule change. For the reasons discussed below, the Commission is approving the proposed rule change. <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <FTNT> <SU>3</SU>  Securities Exchange Act Release No. 103573 (July 29, 2025), 90 FR 36257 (Aug. 1, 2025) (File No. SR-LCH SA-2025-007) (“Notice”). </FTNT> <FTNT> <SU>4</SU>  15 U.S.C. 78s(b)(2). </FTNT> <FTNT> <SU>5</SU>  Securities Exchange Act Release No. 103965 (Sept. 15, 2025), 90 FR 45063 (Sept. 18, 2025) (File No. SR-LCH SA-2025-007). </FTNT> <HD SOURCE="HD1">II. Description of the Proposed Rule Change</HD> LCH SA is a clearing agency registered with the Commission. Through its CDSClear business unit, LCH SA provides central counterparty services for security-based swaps, including credit default swaps and options on credit default swaps. LCH SA is an affiliate of LCH, Ltd, through common ownership by LCH Group Holdings Limited (“LCH Group”). LCH SA's ultimate parent company is London Stock Exchange Group. LCH Group issued the Risk Policies, and, thereafter, LCH SA adopted them. LCH SA's Risk Policies formally enact the specific risk management requirements that govern its operations as a clearing agency. The policies and procedures set forth therein clarify the roles and responsibilities within LCH SA for compliance with the Risk Policies. LCH SA's Risk Policies must ensure consistency with all relevant laws and regulations, including the European Markets Infrastructure Regulation (“EMIR”) and, relevant here, Section 17A of the Act  <SU>6</SU> <FTREF/> and the regulations thereunder. <SU>7</SU> <FTREF/> <FTNT> <SU>6</SU>  15 U.S.C. 78q-1. </FTNT> <FTNT> <SU>7</SU>  Each of the Risk Policies generally identify the relevant provisions of law and regulation applicable to that policy. </FTNT> <HD SOURCE="HD2">A. Collateral Risk Policy</HD> The Collateral Risk Policy (“CRP”) sets forth the LCH Group standards for the management of collateral risk at LCH SA, how LCH SA intends to monitor collateral risk, which personnel own the CRP, and the internal review cycle. LCH SA's management of collateral risk is subject to the risk appetite defined in the Risk Governance Framework (“RGF”), which is discussed in greater detail below. Generally, the CRP ensures LCH SA's capability to process and control the collateral posted by its members. With respect to managing collateral risks, the CRP applies to collateral accepted by LCH SA to cover margin requirements and default fund contributions. <SU>8</SU> <FTREF/> The CRP also clarifies the roles and responsibilities within LCH SA for compliance with the CRP. The policy owner is the LCH SA Chief Risk Officer (“CRO”). <FTNT> <SU>8</SU>  Collateral accepted by LCH SA to cover risks associated with (i) securities accepted as part of LCH SA's clearing services ( <E T="03">e.g.,</E> RepoClear and Equity Clear, <E T="03">see</E> note 10 <E T="03">infra</E> ), and (ii) secured cash investments (reverse repurchase agreements or outright purchases) conducted as part of LCH SA's Collateral and Liquidity Management (“CaLM”) team's investment activities, are outside the scope of the CRP and are covered by LCH SA's Financial Resource Adequacy Policy and Investment Risk Policy, respectively. Notice, 90 FR 36259 at n. 7. </FTNT> The CRP also sets forth requirements for the approval of eligible cash and non-cash collateral. In particular, the CRP establishes that margin requirements can be covered by a mixture of cash and eligible non-cash collateral ( <E T="03">i.e.,</E> traded securities and bank guarantees), subject to the criteria set out in the policy. LCH SA primarily, but not exclusively, accepts EUR, GBP, and USD as the currencies for margin and default fund contributions. Further, the policy requires default fund contributions to be met by cash  <SU>9</SU> <FTREF/> in the primary currencies designated by each Clearing Service. <SU>10</SU> <FTREF/> <FTNT> <SU>9</SU>  LCH SA's CRP provides that default fund contributions can also be met by collateral equivalent to cash in the case of default such as Central Bank Guarantees, where authorized by the LCH SA Rulebook. </FTNT> <FTNT> <SU>10</SU>  LCH SA currently maintains three separate Clearing Services: (i) CDSClear, which provides clearing services for credit default swaps; (ii) RepoClear SA, which provides clearing services in respect of repo and cash transactions on Euro-denominated government and supra-national debts across 13 markets, as well as a basket collateral service through the Euro GC+ clearing service; and (iii) DigitalAssetClear SA, which provides clearing services for cash-settled Bitcoin index futures and options contracts traded on GFO-X. </FTNT> With regards to non-cash collateral, the CRP provides that all traded securities must meet certain credit, liquidity and market risk requirements to be eligible as collateral for margin. <SU>11</SU> The CRP includes a full list of traded securities that qualify as eligible non-cash collateral. The CRP also provides that central bank guarantees are eligible as collateral accepted as margin? if they are issued by central banks in countries that are approved for investments LCH SA's Collateral and Liquidity Management team (“CaLM”). Commercial bank guarantees are not eligible. The CRP also addresses changes to collateral eligibility, providing that for new currencies and new issuers within an approved collateral type to be accepted as collateral, discretionary approval from the LCH SA Executive Committee (“ERCo”) is required. <SU>12</SU> <FTREF/> New types of collateral that pose new or novel risk features, or that require a change to existing risk controls, require additional scrutiny from the LCH SA Risk Committee and LCH SA Board approval. Where the ERCo and/or Risk Committee promulgate new collateral guidance, the CRP requires, where possible, that LCH SA provide a notice period to its clearing members to allow them sufficient time to adjust the portfolio of collateral lodged. <FTNT> <SU>12</SU>  In addition, the CRP requires appropriate regulatory approval to be obtained prior to LCH SA accepting new currencies. The ERCo may also request that new issuers be reviewed by the LCH SA Risk Committee and approved by the LCH SA Board. </FTNT> The CRP also establishes a framework for monitoring market, credit, concentration/liquidity, wrong way and FX risks. Such risks are covered by baseline haircuts, haircut add-ons, limits, and/or price adjustments, as detailed in the policy. The policy provides that the ability of LCH SA to realize the value of collateral lodged by its member within the assumed holding period is affected by the collateral's market liquidity and the size of the position to be liquidated. The CRP further provides that the ERCo may impose haircut add-ons and/or impose new limits or price adjustments on certain types of non-cash collateral based on their market liquidity, and, in particular, CaLM's ability to realize the value of the securities in the event of a default. In addition, the ERCo has the discretion to assess haircut add-ons on clearing members, based on their exposures, domicile, or portfolio of collateral posted, to protect LCH SA's financial resources and liquidity position. Collateral haircuts are subject to daily stress testing with any exceptions to be notified to the ERCo. <SU>13</SU> <FTREF/> <FTNT> <SU>13</SU>  Under the CRP, the Stress Resting Regime must include the following elements: (i) historical risk factor moves beyond the 99.7% level; (ii) theoretical scenarios which are extreme but plausible are to be used to complement the historical scenarios and provide better coverage of the tail losses of collateral portfolios. To the extent that similar securities are cleared by LCH SA, the same stress test scenarios applied on the clearing positions may be used to stress test collateral haircuts. </FTNT> The Executive Responsible for the CRP is the Chief Executive Officer (“CEO”), and the CRP policy owner is the Chief Risk Officer (“CRO”). The CRO's responsibilities include, in part, ensuring the monthly review of published collateral haircuts, <SU>14</SU> <FTREF/> and of changes which the CRO must submit ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 55k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━