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  • Re: File No. S7-34-10: Regulation SBSR - Reporting and Dissemination of Security-Based Swap Information

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    LCH.Clearnet supports proposed Regulation SBSR but believes an exception is needed for security-based swap transactions conducted during a clearing member default. Real-time reporting of large default management trades could undermine the process and increase market volatility. Instead, LCH.Clearnet recommends reporting these trades to the SEC in real-time but delaying public dissemination until after default management is complete. An annex provides sample regulatory language for this exception.

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    LCH.Clearnet supports proposed Regulation SBSR but believes an exception is needed for security-based swap transactions conducted during a clearing member default. Real-time reporting of large default management trades could undermine the process and increase market volatility. Instead, LCH.Clearnet recommends reporting these trades to the SEC in real-time but delaying public dissemination until after default management is complete. An annex provides sample regulatory language for this exception.

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    Re: File No. S7-34-10: Regulation SBSR - Reporting and Dissemination of Security-Based Swap Information

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    MarketsWiki
    LCH.Clearnet supports proposed Regulation SBSR but believes an exception is needed for security-based swap transactions conducted during a clearing member default. Real-time reporting of large default management trades could undermine the process and increase market volatility. Instead, LCH.Clearnet recommends reporting these trades to the SEC in real-time but delaying public dissemination until after default management is complete. An annex provides sample regulatory language for this exception.

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    of 4

    January 18, 2011

    Ms. Elizabeth M. Murphy


    Secretary
    Securities and Exchange Commission
    100 F Street, N.E.
    Washington DC 20549-1090

    Re: File No. S7-34-10: Regulation SBSR—Reporting and Dissemination of


    Security-Based Swap Information

    Dear Ms. Murphy:

    LCH.Clearnet Group Limited (“LCH.Clearnet”)1 is pleased to respond to the


    Securities and Exchange Commission’s (“Commission’s”) request for comments on
    proposed Regulation SBSR, which would provide for (i) the reporting of security-
    based swap information to a registered security-based swap data repository or the
    Commission, and (ii) the public dissemination of security-based swap transaction,
    volume, and pricing information by such repository. Information with respect to
    security-based swap transactions would be required to be reported and publicly
    disseminated in “real time,” as prescribed in the proposed regulation.

    LCH.Clearnet was very supportive of the passage of the Dodd-Frank Wall Street
    Reform and Consumer Protection Act, including those provisions designed to ensure
    greater transparency in the swap and security-based swap markets. LCH.Clearnet,
    therefore, generally supports proposed Regulation SBSR. Nonetheless,
    LCH.Clearnet also believes that there are times when real-time reporting to a
    security-based swap data repository, with the information thereafter publicly
    disseminated, will not be in the best interests of market participants and the public
    generally. In these circumstances, an exception from the general rule would be
    appropriate.

    In particular, LCH.Clearnet is concerned that the real time reporting and public
    dissemination of information with respect to security-based swap transactions
    1
    LCH.Clearnet is the world’s leading independent clearinghouse group. It serves major international exchanges
    and platforms, as well as a range of Over-the-Counter (“OTC”) markets. It clears a broad range of asset classes,
    including cash equities, exchange-traded derivatives, energy, freight, interest rate swaps and euro- and British
    pound-denominated bonds and repos. LCH.Clearnet Limited currently clears more than forty percent of the
    interest rate swap market representing trades with a total notional principal of over $248 trillion in 14 currencies.
    Of that amount, approximately $89 trillion is in U.S. dollars.
    LCH.Clearnet was formed out of the merger of The London Clearing House Limited and Clearnet SA and
    continues to operate two clearinghouses, LCH.Clearnet Limited in London and LCH.Clearnet SA in Paris.
    LCH.Clearnet Ltd is regulated by, inter alia, the UK Financial Services Authority and by the US Commodity
    Futures Trading Commission (as a derivatives clearing organization). LCH.Clearnet SA is regulated as a Credit
    Institution and Clearing House by a regulatory college consisting of, amongst others, the market regulators and
    central banks from the jurisdictions of: France, Netherlands, Belgium and Portugal. It is also regulated as a
    Recognised Overseas Clearing House by the UK Financial Services Authority.
    effected in connection with the default management processes of a clearing agency
    upon the default of a clearing member will undermine the default management
    process and have a negative effect on market stability. This is especially true as
    such a default is likely to happen against the backdrop of stressed market conditions.

    It is the clearing agency’s responsibility to manage the defaulting clearing member’s


    portfolio in order to mitigate the risk of loss to the clearing agency, its non-defaulting
    clearing members and the market generally. In this regard, the clearing agency is
    required to hedge the defaulting clearing member’s portfolio. Liquidity is vital and the
    likelihood is that a small number of very large trades will be executed in order to
    neutralise the major risks present. The clearing agency will rely on non-defaulting
    members to provide liquidity for such transactions, and, in a time of market stress,
    their ability to do so will be impaired if these transactions are reported publicly before
    the participating members have had an opportunity to mitigate the risks of such
    transactions.

    Further, when the clearing agency auctions the defaulting clearing member’s
    portfolio, individual prices may not be available and the net positions may be very
    large when compared with average trade sizes seen in “normal” market conditions.
    As a result, no real price discovery may be available. The publication of the portfolio
    price is likely to increase the cost to a clearing agency managing a default as
    additional risks are priced in to the portfolio: liquidity and concentration risk will be
    included in margin. As the price at which a portfolio is liquidated may reflect
    additional factors, the trade details should not be disseminated to the market
    immediately, since both the price and the size of such trades would only serve to fuel
    market volatility when market stability is sought.

    In order to promote market stability and permit the efficient management of a default,
    LCH.Clearnet therefore recommends that, in these circumstances, security-based
    swap transactions entered into in connection with a clearing agency’s default
    management processes be reported in real-time only to the Commission.2
    Information would be reported to the swap data repository and made public once the
    default management process has been completed, as the Commission determines
    appropriate. For the convenience of the Commission, enclosed as an Annex to this
    letter is a suggested regulation that would provide an exception to the requirements
    of proposed Regulation SBSR, as described above.3

    LCH.Clearnet recognizes the hard work undertaken by the Commission in order to


    develop these proposed rules and values its open and thoughtful approach in this
    task. The Group appreciates the opportunity to comment on these important issues
    and would be pleased to enter into a further dialogue with the Commission and its
    staff.

    2
    Such transactions would include: (i) security-based swap transactions entered into by the clearing agency to
    hedge the defaulting clearing member’s portfolio; (ii) security-based swap transactions arising from the auction of
    the defaulting clearing member’s security-based swap portfolio; and (iii) security-based swap transactions entered
    into by non-defaulting clearing members to hedge the risks they assume in connection with transactions effected
    with the clearing agency or in the auction of the defaulting clearing member’s portfolio.
    3
    Among other things, the suggested regulation would provide that a clearing agency would never be a reporting
    party for purposes of the regulation.
    Please do not hesitate to contact Simon Wheatley at (+44) 20 7426 7622 regarding
    any questions raised by this letter or to discuss these comments in greater detail.

    Yours sincerely,

    Roger Liddell

    Chief Executive
    Annex

    File No. S7-34-10: Regulation SBSR—


    Reporting and Dissemination of Security-Based Swap Information

    § 242.912 Reporting Obligations in the Event of Clearing Member Default. In the event of a
    default of a clearing member of a clearing agency, a reporting party shall not be required to report
    to a registered swap data repository, and a registered swap data repository shall not be required
    to publicly disseminate, the information required by §§ 242.900 through 242.911 with respect to
    any security-based swap transaction entered into in connection with the default management
    procedures of the clearing agency, except in such form and at such time as the Commission shall
    thereafter determine. Notwithstanding the foregoing, a reporting party shall report such
    information directly to the Commission within the time provided in § 242.901. In no event shall a
    clearing agency be deemed to be a reporting party.

    LCH.Clearnet Limited Aldgate House, 33 Aldgate High Street, London EC3N 1EA
    Tel: +44 (0)20 7426 7000 Fax: +44 (0)20 7426 7001 www.lchclearnet.com
    LCH.Clearnet Group Limited | LCH.Clearnet Limited | LCH.Clearnet SA

    Registered in England No. 25932 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA Recognised as a Clearing House under the Financial Services and Markets Act 2000.

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