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2013-19791

  • [Federal Register Volume 78, Number 158 (Thursday, August 15, 2013)]

    [Rules and Regulations]

    [Pages 49663-49680]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2013-19791]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 39

    RIN 3038-AC98

    Enhanced Risk Management Standards for Systemically Important

    Derivatives Clearing Organizations

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is adopting final regulations to implement enhanced risk

    management standards for systemically important derivatives clearing

    organizations that include increased financial resources requirements

    for systemically important derivatives clearing organizations that are

    involved in activities with a more complex risk profile or that are

    systemically important in multiple jurisdictions, the prohibited use of

    assessments by systemically important derivatives clearing

    organizations in calculating their available default resources, and

    enhanced system safeguards for systemically important derivatives

    clearing organizations for business continuity and disaster recovery

    (``BC-DR''). This final rule also implements special enforcement

    authority over systemically important derivatives clearing

    organizations granted to the Commission under section 807(c) of the

    Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank

    Act'').

    [[Page 49664]]

    DATES: The rules will become effective October 15, 2013. Systemically

    important derivatives clearing organizations must comply with Sec.

    39.29 and Sec. 39.30 no later than December 31, 2013.

    FOR FURTHER INFORMATION CONTACT: Ananda Radhakrishnan, Director, 202-

    418-5188, aradhakrishnan@cftc.gov, Robert B. Wasserman, Chief Counsel,

    202-418-5092, rwasserman@cftc.gov, M. Laura Astrada, Associate Chief

    Counsel, 202-418-7622, lastrada@cftc.gov, or Tracey Wingate, Special

    Counsel, 202-418-5319, twingate@cftc.gov, Division of Clearing and

    Risk, Commodity Futures Trading Commission, Three Lafayette Centre,

    1155 21st Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. Core Principles for DCOs

    B. Designation of Systemically Important Derivatives Clearing

    Organizations Under Title VIII of the Dodd-Frank Act

    C. Standards for SIDCOs Under Title VIII of the Dodd-Frank Act

    D. Principles for Financial Market Infrastructures

    E. Existing Prudential Requirements

    F. Risk Management Standards for SIDCOs

    II. Regulation 39.29

    A. Regulation 39.29(a)

    B. Regulation 39.29(b)

    III. Regulation 39.30

    IV. Regulation 39.31

    V. Compliance Dates

    VI. Consideration of Costs and Benefits

    A. Introduction

    B. Background

    C. Benefits and Costs of the Final Rule

    D. Section 15(a) Factors

    VII. Related Matters

    A. Paperwork Reduction Act

    B. Regulatory Flexibility Act

    VIII. Text of Final Rules

    I. Background

    A. Core Principles for DCOs

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\

    Title VII of the Dodd-Frank Act, entitled the ``Wall Street

    Transparency and Accountability Act of 2010,'' \2\ amended the

    Commodity Exchange Act (``CEA'' or the ``Act'') \3\ to establish a

    comprehensive regulatory framework for over-the-counter (``OTC'')

    derivatives, including swaps. The legislation was enacted to reduce

    risk, increase transparency, and promote market integrity within the

    financial system by, among other things: (1) Providing for the

    registration and comprehensive regulation of swap dealers and major

    swap participants; (2) imposing mandatory clearing and trade execution

    requirements on clearable swap contracts; (3) creating rigorous

    recordkeeping and real-time reporting regimes; and (4) enhancing the

    Commission's rulemaking and enforcement authorities with respect to,

    among others, all registered entities and intermediaries subject to the

    Commission's oversight.

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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.

    \2\ Section 701 of the Dodd-Frank Act.

    \3\ 7 U.S.C. 1 et seq.

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    Section 725(c) of the Dodd-Frank Act amended section 5b(c)(2) of

    the CEA, which sets forth core principles that a derivatives clearing

    organization (``DCO'') must comply with to register and maintain

    registration with the Commission. The core principles were originally

    added to the CEA by the Commodity Futures Modernization Act of 2000

    (``CFMA''),\4\ and in 2001, the Commission issued guidance on DCO

    compliance with these core principles.\5\ However, in furtherance of

    the goals of the Dodd-Frank Act to reduce risk, increase transparency,

    and promote market integrity, the Commission, pursuant to the

    Commission's enhanced rulemaking authority,\6\ withdrew the 2001

    guidance and adopted regulations establishing standards for compliance

    with the DCO core principles.\7\

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    \4\ See Commodity Futures Modernization Act of 2000, Public Law

    106-554, 114 Stat. 2763 (2000).

    \5\ See A New Regulatory Framework for Clearing Organizations,

    66 FR 45604 (Aug. 29, 2001) (final rule) (adopting 17 CFR part 39,

    app. A).

    \6\ See section 725(c) of the Dodd-Frank Act (explicitly giving

    the Commission authority to promulgate rules regarding the core

    principles pursuant to its rulemaking authority under section 8a(5)

    of the CEA, 7 U.S.C. 12a(5)).

    \7\ See Derivatives Clearing Organization General Provisions and

    Core Principles, 76 FR 69334 (Nov. 8, 2011) (final rule).

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    As noted in the preamble to the adopting release for subparts A and

    B of part 39 of the Commission's regulations, the regulations that

    implement the DCO core principles, the Commission sought to provide

    legal certainty for market participants, strengthen the risk management

    practices of DCOs, and increase overall confidence in the financial

    system by assuring the public that DCOs are meeting minimum risk

    management standards.\8\ These risk management standards include, in

    part:

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    \8\ Id. at 69335.

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    (1) With respect to financial resources, (a) Core Principle B,

    which requires DCOs to have ``adequate financial, operational, and

    managerial resources, as determined by the Commission, to discharge

    each responsibility of the [DCO],'' \9\ and (b) Commission regulation

    39.11, which requires a DCO to maintain sufficient financial resources

    to meet its financial obligations to its clearing members

    notwithstanding a default by the clearing member creating the largest

    financial exposure for the DCO in extreme but plausible market

    conditions,\10\ and permits the inclusion of assessment powers to meet

    a limited portion of the DCO's default resources requirement; \11\ and

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    \9\ Core Principle B also expressly requires DCOs to ``possess

    financial resources that, at a minimum, exceed the total amount that

    would (I) enable the organization to meet its financial obligations

    to its members and participants notwithstanding a default by the

    member or participant creating the largest financial exposure for

    that organization in extreme but plausible market conditions; and

    (II) enable the [DCO] to cover operating costs of the [DCO] for a

    period of 1 year (as calculated on a rolling basis).'' Section

    5b(c)(2)(B) of the CEA, 7 U.S.C. 7a-1(c)(2)(B) (emphasis added).

    \10\ 17 CFR 39.11(a)(1) (implementing Core Principle B

    pertaining to financial resources).

    \11\ See 17 CFR 39.11(d)(2)(iii) (requiring a DCO to apply a 30

    percent haircut to the value of potential assessments); see also 17

    CFR 39.11(d)(2)(iv) (permitting a DCO to count the value of

    assessments, after the 30 percent haircut, to meet up to 20 percent

    of its default obligations).

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    (2) with respect to business continuity, (a) Core Principle I,

    which requires DCOs to ``establish and maintain emergency procedures,

    backup facilities, and a plan for disaster recovery that allows for (I)

    the timely recovery and resumption of operations of the [DCO], and (II)

    the fulfillment of each obligation and responsibility of the [DCO],''

    \12\ and (b) Commission regulation 39.18, which requires a DCO to

    maintain a BC-DR plan, emergency procedures, and physical,

    technological, and personnel resources sufficient to enable the DCO to

    resume daily processing, clearing, and settlement no later than the

    next business day following the disruption of its operations.\13\

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    \12\ Core Principle I also requires DCOs to ``establish and

    maintain a program of risk analysis and oversight to identify and

    minimize sources of operational risk through the development of

    appropriate controls and procedures, and automated systems, that are

    reliable, secure, and have adequate scalable capacity,'' and

    ``periodically conduct tests to verify that the backup resources of

    the [DCO] are sufficient to ensure daily processing, clearing, and

    settlement.'' Section 5b(c)(2)(I) of the CEA, 7 U.S.C. 7a-

    1(c)(2)(I).

    \13\ 17 CFR 39.18(e)(3) (implementing Core Principle I

    pertaining to system safeguards).

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    B. Designation of Systemically Important Derivatives Clearing

    Organizations Under Title VIII of the Dodd-Frank Act

    Title VIII of the Dodd-Frank Act, entitled ``Payment, Clearing, and

    Settlement Supervision Act of 2010,'' \14\

    [[Page 49665]]

    was enacted to mitigate systemic risk in the financial system and

    promote financial stability.\15\ Section 804 of the Dodd-Frank Act

    requires the Financial Stability Oversight Council (``Council'') \16\

    to designate those financial market utilities (``FMUs'') that the

    Council determines are, or are likely to become, systemically

    important.\17\ An FMU includes ``any person that manages or operates a

    multilateral system for the purpose of transferring, clearing, or

    settling payments, securities, or other financial transactions among

    financial institutions or between financial institutions and the

    person.'' \18\ As noted by the Council,

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    \14\ Section 801 of the Dodd-Frank Act.

    \15\ Section 802(b) of the Dodd-Frank Act.

    \16\ The Council was established by section 111 of the Dodd-

    Frank Act. In general, the Council is tasked with identifying

    ``risks to the financial stability of the United States that could

    arise from the material financial distress or failure, or ongoing

    activities, of large, interconnected bank holding companies or

    nonbank financial companies, or that could arise outside the

    financial services marketplace,'' promoting ``market discipline, by

    eliminating expectations on the part of shareholders, creditors, and

    counterparties of such companies that the Government will shield

    them from losses in the event of failure,'' and responding ``to

    emerging threats to the stability of the United States financial

    system.'' Section 112(a)(1) of the Dodd-Frank Act.

    \17\ Section 804(a)(1) of the Dodd-Frank Act. The term

    ``systemically important'' means ``a situation where the failure of

    or a disruption to the functioning of a financial market utility . .

    . could create, or increase, the risk of significant liquidity or

    credit problems spreading among financial institutions or markets

    and thereby threaten the stability of the financial system of the

    United States.'' Section 803(9) of the Dodd-Frank Act; see also

    Authority to Designate Financial Market Utilities as Systemically

    Important, 76 FR 44763, 44774 (July 27, 2011) (final rule).

    \18\ Section 803(6)(A) of the Dodd-Frank Act. In section

    803(6)(B) of the Dodd-Frank Act, the term expressly excludes

    designated contract markets, registered futures associations, swap

    data repositories, and swap execution facilities registered under

    the Commodity Exchange Act (7 U.S.C. 1 et seq.), or national

    securities exchanges, national securities associations, alternative

    trading systems, security-based swap data repositories, and swap

    execution facilities registered under the Securities Exchange Act of

    1934 (15 U.S.C. 78a et seq.), solely by reason of their providing

    facilities for comparison of data respecting the terms of settlement

    of securities or futures transactions effected on such exchange or

    by means of any electronic system operated or controlled by such

    entities, provided that the exclusions in this clause apply only

    with respect to the activities that require the entity to be so

    registered; and any broker, dealer, transfer agent, or investment

    company, or any futures commission merchant, introducing broker,

    commodity trading advisor, or commodity pool operator, solely by

    reason of functions performed by such institution as part of

    brokerage, dealing, transfer agency, or investment company

    activities, or solely by reason of acting on behalf of a financial

    market utility or a participant therein in connection with the

    furnishing by the financial market utility of services to its

    participants or the use of services of the financial market utility

    by its participants, provided that services performed by such

    institution do not constitute critical risk management or processing

    functions of the financial market utility.

    FMUs form a critical part of the nation's financial

    infrastructure. They exist in many markets to support and facilitate

    the transfer, clearing or settlement of financial transactions, and

    their smooth operation is integral to the soundness of the financial

    system and the overall economy. However, their function and

    interconnectedness also concentrate a considerable amount of risk in

    the financial system due, in large part, to the interdependencies,

    either directly through operational, contractual or affiliation

    linkages, or indirectly through payment, clearing, and settlement

    processes. In other words, problems at one FMU could trigger

    significant liquidity and credit disruptions at other FMUs or

    financial institutions.\19\

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    \19\ 76 FR at 44763.

    In determining whether an FMU is systemically important, the

    Council uses a two-stage designation process, applying certain

    statutory considerations \20\ and other metrics to assess, among other

    things, ``whether possible disruptions [to the functioning of an FMU]

    are potentially severe, not necessarily in the sense that they

    themselves might trigger damage to the U.S. economy, but because such

    disruptions might reduce the ability of financial institutions or

    markets to perform their normal intermediation functions.'' \21\ On

    July 18, 2012, the Council designated eight FMUs as systemically

    important under Title VIII.\22\ Two of these designated FMUs are CFTC-

    registered DCOs \23\ for which the Commission is the Supervisory

    Agency.\24\ Such designated CFTC-registered DCOs are also known as

    systemically important derivatives clearing organizations

    (``SIDCOs'').\25\

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    \20\ Under section 804(a)(2) of the Dodd-Frank Act, in

    determining whether an FMU is or is likely to become systemically

    important, the Council must take into consideration the following:

    (A) The aggregate monetary value of transactions processed by the

    FMU; (B) the aggregate exposure of an FMU to its counterparties; (C)

    the relationship, interdependencies, or other interactions of the

    FMU with other FMUs or payment, clearing, or settlement activities;

    (D) the effect that the failure of or a disruption to the FMU would

    have on critical markets, financial institutions, or the broader

    financial system; and (E) any other factors the Council deems

    appropriate.

    \21\ 76 FR at 44766.

    \22\ See Press Release, Financial Stability Oversight Council,

    Financial Stability Oversight Council Makes First Designations in

    Effort to Protect Against Future Financial Crises (July 18, 2012),

    available at http://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.

    \23\ Chicago Mercantile Exchange, Inc. (``CME'') and ICE Clear

    Credit LLC (``ICE Clear Credit'') are the CFTC-registered DCOs that

    were designated systemically important by the Council, for which

    CFTC is the Supervisory Agency. While The Options Clearing

    Corporation (``OCC''), a CFTC-registered DCO, was designated

    systemically important by the Council, the Securities and Exchange

    Commission (``SEC'') serves as OCC's Supervisory Agency.

    \24\ See section 803(8)(A) of the Dodd-Frank Act (defining

    ``Supervisory Agency'' as ``the Federal agency that has primary

    jurisdiction over a designated [FMU] under Federal banking,

    securities, or commodity futures laws'').

    \25\ Specifically, under Commission regulations, a systemically

    important derivatives clearing organization is a ``financial market

    utility that is a derivatives clearing organization registered under

    Section 5b of the Act, which has been designated by the Financial

    Stability Oversight Council to be systemically important and for

    which the Commission acts as the Supervisory Agency pursuant to

    Section 803(8) of the [Dodd-Frank Act].'' See 17 CFR 39.2.

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    C. Standards for SIDCOs Under Title VIII of the Dodd-Frank Act

    Section 805 of the Dodd-Frank Act directs the Commission to

    consider relevant international standards and existing prudential

    requirements when prescribing risk management standards governing the

    operations related to payment, clearing, and settlement activities for

    FMUs that are (1) designated as systemically important by the Council,

    and (2) engaged in activities for which the Commission is the

    Supervisory Agency.\26\ Under Title VIII, the objectives and principles

    for these risk management standards are to: (1) Promote risk

    management; (2) promote safety and soundness; (3) reduce systemic

    risks; and (4) support the stability of the broader financial

    system.\27\ As outlined in section 805(c), these standards may address

    such areas as: ``(1) Risk management policies and procedures; (2)

    margin and collateral requirements; (3) participant or counterparty

    default policies and procedures; (4) the ability to complete timely

    clearing and settlement of financial transactions; (5) capital and

    financial resources requirements for designated [FMUs]; and (6) other

    areas that are necessary to achieve the objectives and principles in

    [section 805(b) of the Dodd-Frank Act].''

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    \26\ See section 805(a)(2) of the Dodd-Frank Act. The Commission

    notes that it also has the authority to prescribe risk management

    standards governing the operations related to payment, clearing, and

    settlement activities for FMUs that are designated as systemically

    important by the Council and that are engaged in activities for

    which the Commission is the appropriate financial regulator.

    Furthermore, section 805 establishes a review mechanism by which the

    Council may intervene if the Board of Governors of the Federal

    Reserve System (the ``Board'') determines that the existing risk

    management standards set by the Commission ``are insufficient to

    prevent or mitigate significant liquidity, credit, operational, or

    other risks to the financial markets or to the financial stability

    of the United States.'' Section 805(a)(2)(B) of the Dodd-Frank Act.

    \27\ Section 805(b) of the Dodd-Frank Act.

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    The Commission has reviewed the risk management standards set forth

    in part 39 of the Commission's regulations in light of recently

    promulgated relevant international standards and existing prudential

    requirements to identify

    [[Page 49666]]

    those areas in which additional risk management standards for SIDCOs

    would be necessary and appropriate.

    D. Principles for Financial Market Infrastructures

    1. Overview

    The Commission has determined that the international standards most

    relevant to the risk management of SIDCOs, for purposes of meeting the

    Commission's obligation pursuant to section 805(a)(2)(A) of the Dodd-

    Frank Act, are the Principles for Financial Market Infrastructures

    (``PFMIs''), which were developed by the Bank for International

    Settlements' Committee on Payment and Settlement Systems (``CPSS'') and

    the Technical Committee of the International Organization of Securities

    Commissions (``IOSCO'') (collectively, ``CPSS-IOSCO'').\28\ The

    Commission notes that the adoption and implementation of the PFMIs by

    numerous foreign jurisdictions highlights the role these principles

    play in creating a global, unified set of international risk management

    standards for central counterparties (``CCPs'').\29\ Moreover, the

    Commission, which is a member of the Board of IOSCO, is working towards

    implementing rules and regulations that are fully consistent with the

    PFMIs by the end of 2013.\30\

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    \28\ See Bank for International Settlements' Committee on

    Payment and Settlement Systems and Technical Committee of the

    International Organization of Securities Commissions, ``Principles

    for Financial Market Infrastructures,'' (April 2012), available at

    http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf; see also

    Financial Stability Board, ``OTC Derivatives Market Reforms: Third

    Progress Report on Implementation,'' (June 15, 2012), available at

    http://www.financialstabilityboard.org/publications/r_120615.pdf

    (noting publication of the PFMIs as achieving ``an important

    milestone in the global development of a sound basis for central

    clearing of all standardised OTC derivatives'').

    \29\ In Asia, Singapore has adopted the PFMIs into its financial

    regulations pertaining to FMIs. See Monetary Authority of Singapore,

    ``Supervision of Financial Market Infrastructures in Singapore,''

    (January 2013), available at http://www.mas.gov.sg/~/media/MAS/

    About%20MAS/Monographs%20and%20information%20papers/MASMonograph--

    Supervision--of--Financial--Market--Infrastructures--in--

    Singapore%202.pdf. In addition, Australia, Canada and the European

    Union have publicly indicated their intent to adopt the PFMIs. See

    Reserve Bank of Australia, ``Consultation on New Financial Stability

    Standards,'' (August 2012), available at http://www.rba.gov.au/payments-system/clearing-settlement/consultations/201208-new-fin-stability-standards/index.html; Canadian Securities Administrators

    Consultation Paper 91-406 ``Derivatives: OTC Central Counterparty

    Clearing,'' (June 20, 2012), available at http://www.osc.gov.on.ca/documents/en/Securities-Category9/csa_20120620_91-406_counterparty-clearing.pdf; and Regulation (EU) No 648/2012 of the

    European Parliament and of the Council on OTC Derivatives, Central

    Counterparties and Trade Repositories, preamble paragraph 90, 2012

    O.J. (L 201), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:FULL:EN:PDF.

    In the United States, the SEC adopted a final rule that

    incorporates heightened risk management standards for CCPs that

    clear security-based swaps, based on, in part, the PFMIs' ``cover

    two'' standard for CCPs engaged in a more complex risk profile or

    that are systemically important in multiple jurisdictions. See 17

    CFR 240.17Ad-22(b)(3) (2013) (requiring, in relevant part, SEC-

    registered clearing agencies (i.e., CCPs) to maintain sufficient

    financial resources to withstand, at a minimum, a default by the

    participant family to which they have the largest exposure in

    extreme but plausible conditions, provided that a security-based

    swap clearing agency, (i.e., a CCP that clears security-based swaps)

    shall maintain sufficient financial resources to withstand, at a

    minimum, a default by the two participant families to which it has

    the largest exposure in extreme but plausible market conditions).

    \30\ Part 39 of the Commission's regulations was informed by the

    consultative report for the PFMIs and incorporates the vast majority

    of the standards set forth in the PFMIs. See Financial Resources

    Requirements for Derivatives Clearing Organizations, 75 FR 63113

    (Oct. 14, 2010); Risk Management Requirements for Derivatives

    Clearing Organizations, 76 FR 3698 (Jan. 20, 2011); see also Bank

    for International Settlements' Committee on Payment and Settlement

    Systems and Technical Committee of the International Organization of

    Securities Commissions, ``Principles for Financial Market

    Infrastructures: Consultative Report,'' (March 2011), available at

    http://www.iosco.org/library/pubdocs/pdf/IOSCOPD350.pdf (``CPSS-

    IOSCO Consultative Report'').

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    The PFMIs establish international risk management standards for

    financial market infrastructures (``FMIs''), including CCPs, that

    facilitate clearing and settlement.\31\ In February 2010, CPSS-IOSCO

    launched a review of the existing sets of international standards for

    FMIs in support of a broader effort by the Financial Stability Board

    (``FSB'') \32\ to strengthen core financial infrastructures and markets

    by ensuring that gaps in international standards are identified and

    addressed.\33\ CPSS-IOSCO endeavored to incorporate in its review

    process lessons from the 2008 financial crisis and the experience of

    using the existing international standards, as well as policy and

    analytical work by other international committees including the Basel

    Committee on Banking Supervision (``BCBS'').\34\ The PFMIs replace

    CPSS-IOSCO's previous recommendations applicable to CCPs.\35\ In

    issuing the PFMIs, CPSS-IOSCO sought to strengthen and harmonize

    existing international standards and incorporate new specifications for

    CCPs clearing OTC derivatives.\36\ The stated objectives of the PFMIs

    are to enhance the safety and efficiency of FMIs and, more broadly,

    reduce systemic risk and foster transparency and financial

    stability.\37\

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    \31\ The PFMIs define a ``financial market infrastructure'' as a

    ``multilateral system among participating institutions, including

    the operator of the system, used for the purposes of clearing,

    settling, or recording payments, securities, derivatives, or other

    financial transactions.'' See PFMIs, Introduction, 1.8.

    \32\ The FSB is an international organization that coordinates

    with national financial authorities and international policy

    organizations to develop and promote effective regulatory,

    supervisory, and other financial sector policies. See generally

    http://www.financialstabilityboard.org.

    \33\ PFMIs, Background, 1.6.

    \34\ Id.

    \35\ The international standards for FMIs, prior to the

    publication of the PFMIs, included the ``Recommendations for

    Securities Settlement Systems'' published by CPSS in 2001, the

    ``Core Principles for Systemically Important Payment Systems''

    published by CPSS-IOSCO in 2001, and the ``Recommendations for

    Central Counterparties'' published by CPSS-IOSCO in 2004

    (collectively the ``CPSS-IOSCO Principles and Recommendations'').

    See PFMIs, Background, 1.4 and 1.5.

    \36\ Id. at Introduction, 1.2.

    \37\ Id. at Background, 1.15.

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    The PFMIs set out 24 principles addressing various risk components

    of an FMI's operations, including, as most relevant to this final rule,

    credit and operational risk.\38\

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    \38\ Pursuant to the PFMIs, key risks faced by FMIs include

    legal, credit, liquidity, general business, custody, investment, and

    operational risks. See id. at Overview of Key Risks in Financial

    Market Infrastructures, 2.1.

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    2. Principle 4: Credit Risk

    Principle 4 addresses the risk that a counterparty to the CCP will

    be unable to fully meet its financial obligations when due.\39\

    Specifically, Principle 4 states that a ``CCP should cover its current

    and potential future exposures to each participant fully with a high

    degree of confidence using margin and other prefunded financial

    resources.'' \40\ Additionally, Principle 4 provides that a CCP

    involved in activities with a more complex risk profile \41\ or that is

    systemically important in multiple jurisdictions should maintain

    additional financial resources sufficient to cover a wide range of

    potential stress scenarios, including, but not limited to, the default

    of the two participants and their affiliates that would potentially

    cause the largest aggregate credit exposure to the CCP in extreme but

    plausible market conditions.\42\

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    \39\ The PFMIs define ``credit risk'' as the ``risk that a

    counterparty, whether a participant or other entity, will be unable

    to meet fully its financial obligations when due, or at any time in

    the future.'' Id. at Annex H: Glossary.

    \40\ Id. at Principle 4: Credit Risk, Key Consideration 4.

    \41\ Such activities ``with a more complex risk profile''

    include clearing financial instruments that are characterized by

    discrete jump-to-default price changes or that are highly correlated

    with potential participant defaults. Id. at Principle 4: Credit

    Risk, Explanatory Note 3.4.19.

    \42\ Id. at Principle 4: Credit Risk. Financial resources

    sufficient to cover the default of the two participants and their

    affiliates creating the largest credit exposure in extreme but

    plausible circumstances are sometimes referred to as cover two. All

    other CCPs, under the PFMIs, are required to maintain financial

    resources sufficient to cover a wide range of potential stress

    scenarios, which includes, but is not limited to, the default of the

    participant and its affiliates that would potentially cause the

    largest aggregate credit exposure to the CCP in extreme but

    plausible market conditions, otherwise known as ``cover one.'' Id.

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    [[Page 49667]]

    More generally, Principle 4 states that all FMIs should establish

    explicit rules and procedures to address any credit losses they may

    face as a result of an individual or combined default among its

    participants with respect to any of their obligations to the FMI.\43\

    These rules and procedures should also address how potentially

    uncovered credit losses would be allocated, how the funds an FMI may

    borrow from liquidity providers would be repaid, and how an FMI would

    replenish the financial resources used during a stress event, such as a

    default, so that the FMI can continue to operate in a safe and sound

    manner.\44\

    ---------------------------------------------------------------------------

    \43\ Id. at Principle 4: Credit Risk, Key Consideration 7.

    \44\ Id.

    ---------------------------------------------------------------------------

    3. Principle 17: Operational Risk

    Principle 17 addresses the risk of deficiencies in information

    systems or internal processes, human errors, management failures, or

    disruptions from external events that will result in the reduction or

    deterioration of services provided by the FMI.\45\ Principle 17 states

    that ``[b]usiness continuity management should aim for timely recovery

    of operations and fulfilment [sic] of the FMI's obligations, including

    in the event of a wide-scale or major disruption.'' \46\ Additionally,

    an FMI's business continuity plan ``should incorporate the use of a

    secondary site and should be designed to ensure that critical

    information technology (IT) systems can resume operations within two

    hours following disruptive events.'' \47\

    ---------------------------------------------------------------------------

    \45\ Id. at Overview of Key Risks in Financial Market

    Infrastructures, 2.9.

    \46\ Id. at Principle 17: Operational Risk.

    \47\ Id. at Key Consideration 6.

    ---------------------------------------------------------------------------

    4. The Role of the PFMIs in International Banking Standards

    Where a CCP is prudentially supervised in a jurisdiction that does

    not have domestic rules and regulations that are consistent with the

    PFMIs, the implementation of certain international banking regulations

    will have significant cost implications for that CCP and its market

    participants.

    In July 2012, the BCBS,\48\ the international body that sets

    standards for the regulation of banks, published the ``Capital

    Requirements for Bank Exposures to Central Counterparties'' (``Basel

    CCP Capital Requirements''), which sets forth interim rules governing

    the capital charges arising from bank exposures to CCPs related to OTC

    derivatives, exchange-traded derivatives, and securities financing

    transactions.\49\ The Basel CCP Capital Requirements create financial

    incentives for banks \50\ to clear financial derivatives with CCPs that

    are licensed in a jurisdiction where the relevant regulator has adopted

    rules or regulations that are consistent with the PFMIs. Specifically,

    the Basel CCP Capital Requirements introduce new capital charges based

    on counterparty risk for banks conducting financial derivatives

    transactions through a CCP.\51\ These new capital charges relate to a

    bank's trade exposure and default fund exposure to a CCP.\52\

    ---------------------------------------------------------------------------

    \48\ The BCBS is comprised of senior representatives of bank

    supervisory authorities and central banks from around the world,

    including Argentina, Australia, Belgium, Brazil, Canada, China,

    France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan,

    Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia,

    Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the

    United Kingdom, and the United States. See Bank for International

    Settlements' Basel Committee on Banking Supervision, ``Basel III: A

    Global Regulatory Framework for More Resilient Banks and Banking

    Systems,'' (December 2010; revised June 2011), available at http://www.bis.org/publ/bcbs189.htm (``Basel III: A Global Regulatory

    Framework'').

    \49\ See Bank for International Settlements' Basel Committee on

    Banking Supervision, ``Capital Requirements for Bank Exposures to

    Central Counterparties,'' (July 2012), available at www.bis.org/publ/bcbs227.pdf (``Basel CCP Capital Requirements''). The Basel CCP

    Capital Requirements are one component of Basel III, a framework

    that is part of ``a comprehensive set of reform measures, developed

    by the [BCBS], to strengthen the regulation, supervision and risk

    management of the banking sector.'' See Bank for International

    Settlements' Web site for a compilation of documents that form the

    regulatory framework of Basel III, available at http://www.bis.org/bcbs/basel3.htm.

    \50\ ``Bank'' is defined in accordance with the Basel framework

    to mean bank, banking group, or other entity (i.e., bank holding

    company) whose capital is being measured. See Basel III: A Global

    Regulatory Framework, Definition of Capital, paragraph 51, at 12.

    The term ``bank,'' as used herein, also includes subsidiaries and

    affiliates of the banking group or other entity. The Commission

    notes that a bank may be a client and/or a clearing member of a

    SIDCO.

    \51\ See Basel CCP Capital Requirements, Annex 4, section II,

    6(i).

    \52\ ``Trade exposure'' is a measure of the amount of loss a

    bank is exposed to based on the size of its position, given a CCP's

    failure. Under the Basel CCP Capital Requirements, ``trade

    exposure'' is defined to include the current and potential future

    exposure of a bank acting as either a clearing member or a client to

    a CCP arising from OTC derivatives, exchange traded derivatives

    transactions, or securities financing transactions, as well as

    initial margin. See Basel CCP Capital Requirements, Annex 4, section

    I, A: General Terms. ``Current exposure'' includes variation margin

    that is owed by the CCP but not yet been received by the clearing

    member or client. Id. at n. 2. ``Default fund exposure'' is a

    measure of the loss a bank acting as a clearing member is exposed to

    arising from the use of its contributions to the CCP's mutualized

    default fund resources. See Basel CCP Capital Requirements, Annex 4,

    section I, A: General Terms. BIS defines ``potential future

    exposure'' as ``the additional exposure that a counterparty might

    potentially assume during the life of a contract or set of contracts

    beyond the current replacement cost of the contract or set of

    contracts.'' See Bank for International Settlements' Committee on

    Payment and Settlement Systems, ``A Glossary of Terms Used in

    Payment and Settlement Systems,'' (March 2003), available at http://www.bis.org/publ/cpss00b.pdf.

    ---------------------------------------------------------------------------

    The capital charges for trade exposure are based upon a function

    that multiplies exposure by risk weight. Risk weight is a measure that

    represents the likelihood that the loss to which the bank is exposed

    will be incurred, and the extent of that loss. The risk weight assigned

    under the BCBS standards varies significantly depending on whether or

    not the counterparty is a ``qualified'' CCP (``QCCP'').\53\ A ``QCCP''

    is defined as an entity that (1) is licensed to operate as a CCP, and

    is permitted by the appropriate regulator to operate as such, and (2)

    is prudentially supervised in a jurisdiction where the relevant

    regulator has established and publicly indicated that it applies to the

    CCP on an ongoing basis, domestic rules and regulations that are

    consistent with the PFMIs.\54\ If a bank transacts through a QCCP

    acting either as (1) a clearing member of a CCP for its own account or

    for clients,\55\ or (2) a client of a clearing member that enters into

    an OTC derivatives transaction with the clearing member acting as a

    financial intermediary, then the risk weight is 2 percent for purposes

    of calculating the counterparty risk.\56\ If

    [[Page 49668]]

    the CCP is non-qualifying, then the risk weight is the same as a

    bilateral OTC derivative trade and the bank applies the corresponding

    bilateral risk-weight treatment, which is at least 20 percent if the

    CCP is a bank, or as high as 100 percent if the CCP is a corporate

    financial institution.\57\

    ---------------------------------------------------------------------------

    \53\ See id. at Annex 4, section IX., Exposures to Qualifying

    CCPs, paragraphs 110-119 (describing the methodology for calculating

    a bank's trade exposure to a qualified CCP); see also id. at

    paragraph 126 (describing the methodology for calculating a bank's

    trade exposure to a non-qualifying CCP).

    \54\ Id. at section I, A: General Terms.

    \55\ The term ``client'' as used herein refers to a customer of

    a bank.

    \56\ Id. at section IX: Central Counterparties, paragraphs 110

    and 114. Client trade exposures are risk-weighted at 2 percent if

    the following two conditions are met: (1) the offsetting

    transactions are identified by the CCP as client transactions and

    collateral to support them is held by the CCP and/or clearing

    member, as applicable, under arrangements that prevent losses to the

    client due to the default or insolvency of the clearing member, or

    the clearing member's other clients, or the joint default or

    insolvency of the clearing member and any of its other clients, and

    (2) relevant laws, regulations, contractual or administrative

    arrangements provide that the offsetting transactions with the

    defaulted or insolvent clearing member are highly likely to continue

    to be indirectly transacted through the CCP, or by the CCP, should

    the clearing member default or become insolvent. However, in certain

    circumstances, risk weight may increase. Specifically, if the first

    condition is not met (i.e., where a client is not protected from

    losses in the case that the clearing member and another client of

    the clearing member jointly default or become jointly insolvent),

    but the second condition is met, the bank's trade exposure is risk-

    weighted at 4 percent. If neither condition is met, the bank must

    capitalize its exposure to the CCP as a bilateral trade. Id. at

    paragraphs 115 and 116.

    \57\ See Bank for International Settlements' Basel Committee on

    Banking Supervision, ``Consultative Document: Capitalisation of Bank

    Exposures to Central Counterparties,'' (November 2011; revised July

    2012), paragraph 28, available at http://www.bis.org/publ/bcbs206.pdf (stating that ``the applicable risk weight [for clearing

    member trades with a non-qualifying CCP] would be at least 20% (if

    the CCP is a bank) or 100% (if it is a corporate financial

    institution according to the definition included in paragraph 272 of

    the Basel framework, revised by Basel III''); see also Basel III: A

    global regulatory framework for more resilient banks and banking

    systems (June 2011), paragraph 102, available at http://www.bis.org/publ/bcbs189.pdf (revising paragraph 272 of the Basel framework).

    ---------------------------------------------------------------------------

    With respect to default fund exposure, whenever a clearing member

    bank is required to capitalize for exposures arising from default fund

    contributions to a QCCP, the clearing member bank may apply one of two

    methodologies for determining the capital requirement: The risk-

    sensitive approach, or the 1250 percent risk-weight approach.\58\ The

    risk-sensitive approach considers various factors in determining the

    risk weight for a bank's default exposure to a QCCP, such as (1) the

    size and quality of a QCCP's financial resources, (2) the counterparty

    credit risk exposures of such CCP, and (3) the application of such

    financial resources via the CCP's loss bearing waterfall in the event

    one or more clearing members default.\59\ The 1250 percent risk-weight

    approach allows a clearing member bank to apply a 1250 percent risk

    weight to its default fund exposures to the QCCP, subject to an overall

    cap of 20 percent on the risk-weighted assets from all trade exposures

    to the QCCP.\60\ In other words, banks with exposures to QCCPs have a

    cap on their default fund exposure. In contrast, a clearing member bank

    with exposures to a non-qualified CCP must apply a risk weight of 1250

    percent with no cap for default fund exposures.\61\

    ---------------------------------------------------------------------------

    \58\ See Basel CCP Capital Requirements, Annex 4, section IX,

    paragraphs 121-125. The Commission notes that the 1250 percent risk

    weight represents the reciprocal of the 8 percent capital ratio,

    which is the percentage of a bank's capital to its risk-weighted

    assets (i.e., 1250 percent times 8 percent equals 100 percent).

    \59\ Id. at paragraph 122.

    \60\ Id. at paragraph 125. See also Basel CCP Capital

    Requirements, Annex 4, section IX, paragraphs 125 (explaining that

    ``More specifically, under [the 1250 percent risk-weight] approach,

    the Risk Weighted Assets (RWA) for both bank i's trade and default

    fund exposures to each CCP are equal to: Min {(2% * TEi + 1250% *

    DFi); (20% * TEi){time} where TEi is bank i's trade exposure to the

    CCP, as measured by the bank according to paragraphs 110 to 112 of

    this Annex; and DFi is bank i's pre-funded contribution to the CCP's

    default fund.'').

    \61\ Id. at paragraph 127.

    ---------------------------------------------------------------------------

    Thus, the Basel CCP Capital Requirements provide incentives for

    banks to clear derivatives through CCPs that are QCCPs by setting lower

    capital charges for exposures arising from derivatives cleared through

    a QCCP and setting significantly higher capital charges for exposures

    arising from derivatives cleared through non-qualifying CCPs. The

    increased capital charges for transactions through non-qualifying CCPs

    may have significant business and operational implications for U.S.

    DCOs, particularly SIDCOs that operate internationally and are not

    QCCPs.\62\ Specifically, banks faced with much higher capital charges

    might transfer their OTC derivatives business away from such SIDCO to a

    QCCP in order to benefit from the preferential capital charges provided

    by the Basel CCP Capital Requirements. Alternatively, banks might

    reduce or discontinue their OTC business altogether. Banks might also

    pass on to their customers the higher costs of transacting with a non-

    qualifying DCO as a result of the higher capital treatment.

    Accordingly, customers using such banks as intermediaries would have an

    incentive to transfer their business to an intermediary that clears at

    a QCCP. In short, a SIDCO's failure to be a QCCP may cause it to face a

    competitive disadvantage retaining members and customers.

    ---------------------------------------------------------------------------

    \62\ The Commission notes that the failure of SIDCOs to be QCCPs

    may negatively impact the broader US derivatives market as well. For

    example, higher clearing costs may result in fewer transactions, and

    less overall liquidity.

    ---------------------------------------------------------------------------

    As discussed further below in Section VI, the incentives noted in

    the foregoing paragraph have important implications for the cost and

    benefit considerations required by section 15(a) of the CEA.

    E. Existing Prudential Requirements

    In April 2011, a year before the PFMIs were published, the Board

    proposed regulation HH, which sets forth, in part, risk management

    standards for those FMUs, for which the Board is the Supervisory

    Agency, that have been designated systemically important by the Council

    under Title VIII.\63\ The Board, in proposing regulation HH, stated

    that the risk management standards most relevant to the risk management

    of FMUs, and the most appropriate basis for setting initial risk

    management standards under Title VIII, were the then-current

    international risk management standards set by CPSS-IOSCO's Principles

    and Recommendations.\64\ The Board did note, in both its proposed and

    final rulemaking, that CPSS-IOSCO intended to update and replace the

    CPSS-IOSCO Principles and Recommendations with the PFMIs, and the Board

    anticipated at that time that it would review the PFMIs, consult with

    other appropriate agencies and the Council, and seek public comment on

    the adoption of the revised international standards.\65\

    ---------------------------------------------------------------------------

    \63\ Notice of Proposed Rulemaking for Financial Market

    Utilities (``Regulation HH''), 76 FR 18445 (April 4, 2011)

    (Financial Market Utilities) (proposing regulation HH in accordance

    with section 805 of the Dodd-Frank Act, which directed the Board to

    establish risk management standards governing the operations related

    to the payment, clearing, and settlement activities of those FMUs

    that have been designated as systemically important by the Council

    for which the Board is the Supervisory Agency. Note, however, that

    FMUs that are registered as clearing agencies with the SEC under

    section 17A of the Securities Exchange Act of 1934, or that are

    registered as DCOs with the CFTC under section 5b of the CEA are

    expressly exempt from regulation HH.).

    \64\ Id. at 18447.

    \65\ Id. at 18448; see also Financial Market Utilities

    (``Regulation HH''), 77 FR 45907, 45908 (Aug. 2, 2012) (final rule).

    ---------------------------------------------------------------------------

    F. Risk Management Standards for SIDCOs

    As noted above, the CEA specifies certain core principles that all

    DCOs must comply with in order to register and maintain registration

    with the Commission. Core Principle B sets out minimum financial

    resources requirements for all DCOs and expressly states that a DCO

    must have ``adequate financial, operational, and managerial resources,

    as determined by the Commission, to discharge each responsibility of

    the DCO.'' \66\ Moreover, under Core Principle I, a DCO must have

    procedures, facilities, and a disaster recovery plan that allow it to,

    on an emergency basis, have a ``timely recovery and resumption'' of its

    operations, and fulfill each of its obligations and

    responsibilities.\67\ In light of the statutory language described

    above, and because the failure of or a disruption to the functioning of

    a SIDCO could ``create, or increase, the risk of significant liquidity

    or credit problems spreading among financial institutions or markets

    and thereby threaten the stability of the financial system of the

    United States,'' \68\ the Commission, in

    [[Page 49669]]

    accordance with section 5b(c)(2) of the Act \69\ and section 805 of the

    Dodd-Frank Act,\70\ proposed heightened requirements to increase the

    minimum financial resources requirements for SIDCOs,\71\ restrict the

    use of assessments in meeting such obligations,\72\ enhance the system

    safeguards for SIDCOs,\73\ and grant the Commission special enforcement

    authority over SIDCOs pursuant to section 807 of the Dodd-Frank

    Act.\74\

    ---------------------------------------------------------------------------

    \66\ Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 7a-1(c)(2)(B)

    (emphasis added).

    \67\ Section 5b(c)(2)(I) of the CEA, 7 U.S.C. 7a-1(c)(2)(I).

    \68\ See supra discussion in n.17.

    \69\ Section 5b(c)(2) of the CEA, 7 U.S.C. 7a-1(c)(2).

    \70\ See section 805(a)(2) of the Dodd-Frank Act.

    \71\ See Financial Resources Requirements for Derivatives

    Clearing Organizations, 75 FR 63113, 63119-63120 (Oct. 14, 2010).

    \72\ Id.

    \73\ See Risk Management Requirements for Derivatives Clearing

    Organizations, 76 FR 3698, 3726-3727 (Jan. 20, 2011).

    \74\ Id. at 3727.

    ---------------------------------------------------------------------------

    First, the Commission proposed to increase the amount of financial

    resources a SIDCO must maintain in order to comply with Core Principle

    B and Commission regulation 39.11.\75\ Regulation 39.11, in part, (1)

    requires a DCO to maintain sufficient financial resources to meet its

    financial obligations to its clearing members notwithstanding a default

    by the clearing member creating the largest financial exposure for the

    DCO in extreme but plausible market conditions, provided that if a

    clearing member controls another clearing member or is under common

    control with another clearing member, affiliated clearing members shall

    be deemed to be a single clearing member for the purposes of this

    provision; \76\ and (2) permits a DCO to include the value of potential

    assessments, subject to a 30 percent haircut, in calculating up to 20

    percent of the default resource requirements.\77\ For SIDCOs, the

    Commission proposed a regulation that would require a SIDCO to (1)

    maintain sufficient financial resources to meet the SIDCO's financial

    obligations to its clearing members notwithstanding a default by the

    two clearing members creating the largest combined financial exposure

    for the SIDCO in extreme but plausible market conditions,\78\ and (2)

    only count the value of assessments, after a 30 percent haircut, to

    meet up to 20 percent of the resources required to meet obligations

    arising from a default by the clearing member creating the second

    largest financial exposure.\79\

    ---------------------------------------------------------------------------

    \75\ See section 5b(c)(2)(B)(ii)(I) of the CEA, 7 U.S.C. 7a-

    1(c)(2)(B)(ii)(I); see also 75 FR at 63116.

    \76\ See 17 CFR 39.11(a)(1); see also 75 FR 63114 (noting that

    for purposes of determining the largest financial exposure for DCOs

    under Core Principle B, the treatment of commonly controlled

    affiliates as a single entity is necessary because the default of

    one affiliate could have an impact on the ability of the other to

    meet its financial obligations to the DCO).

    \77\ 17 CFR 39.11(d)(2)(iii) and (iv).

    \78\ 75 FR at 63119.

    \79\ Id.

    ---------------------------------------------------------------------------

    In addition to financial resources requirements, the Commission

    also proposed to improve system safeguards for SIDCOs by enhancing

    certain BC-DR procedures.\80\ Core Principle I requires a DCO to

    establish and maintain emergency procedures, backup facilities, and a

    plan for disaster recovery that allows for the timely recovery and

    resumption of operations.\81\ Pursuant to Commission regulation 39.18,

    the required recovery time objective would be no later than the next

    business day.\82\ However, because the systemic importance of SIDCOs

    carries with it a responsibility to be reliably available on a near-

    continuous basis to fulfill their obligations, the Commission proposed

    a regulation that would require a SIDCO to have a BC-DR plan with the

    objective of enabling, and the physical, technological, and personnel

    resources sufficient to enable, the SIDCO to recover its operations and

    resume daily processing, clearing, and settlement no later than two

    hours following the disruption, including a wide-scale disruption.\83\

    ---------------------------------------------------------------------------

    \80\ See 76 FR at 3726-3727.

    \81\ See section 5(c)(2)(I)(ii)(I) of the CEA, 7 U.S.C. 7a-

    1(c)(2)(I)(ii)(I).

    \82\ See 17 CFR 39.18(e)(3).

    \83\ 76 FR at 3726. Chicago Mercantile Exchange Inc. (``CME

    Clearing'') and ICC, the two existing SIDCOs, must comply with

    regulation 39.30, including the two-hour recovery time objective

    requirement, by December 31, 2013. Thereafter, any DCO that is

    designated as systemically important by the Council for which the

    Commission is the Supervisory Agency will be required to comply with

    regulation 39.30 within one year after designation by the Council.

    ---------------------------------------------------------------------------

    As part of the Commission's proposed regulations for SIDCOs, the

    Commission also included special enforcement authority over SIDCOs \84\

    pursuant to section 807(c) of the Dodd-Frank Act, which would grant the

    Commission authority under the provisions of subsections (b) through

    (n) of section 8 of the Federal Deposit Insurance Act (``FDIA'') \85\

    in the same manner and to the same extent as if the SIDCO were an

    insured depository institution and the Commission were the appropriate

    federal banking agency for such insured depository institution.\86\

    ---------------------------------------------------------------------------

    \84\ Id. at 3727.

    \85\ See 12 U.S.C. 1818 (b)-(n) (granting authority for

    enforcement powers).

    \86\ 76 FR at 3727.

    ---------------------------------------------------------------------------

    The Commission requested comments on the proposed regulations,\87\

    including comments on the potential competitive effects of imposing

    higher risk standards on SIDCOs as a subset of DCOs.\88\ The Commission

    received thirteen comment letters from the public regarding the

    proposed SIDCO rules. Several commenters advocated that any new

    Commission regulations correspond with applicable international

    standards.\89\

    ---------------------------------------------------------------------------

    \87\ The comment period for the proposed rule on Financial

    Resources Requirements for Derivatives Clearing Organizations, which

    proposed the increased financial resources requirements for SIDCOs,

    initially closed on December 13, 2010, but was extended until June

    3, 2011. The comment period for the proposed rule on Risk Management

    Requirements for Derivatives Clearing Organizations, which proposed

    a two hour recovery time and special enforcement authority, closed

    on April 25, 2011.

    \88\ See 75 FR at 63117.

    \89\ See infra n. 110 and 125.

    ---------------------------------------------------------------------------

    Because efforts to finalize the PFMIs were ongoing, new rules could

    have put SIDCOs at a competitive disadvantage vis-[agrave]-vis foreign

    CCPs not yet subject to comparable rules, and, at the time, no DCO had

    been designated as systemically important by the Council, the

    Commission concluded it would be premature to finalize the SIDCO

    regulations in the Derivatives Clearing Organization Core Principles

    adopting release.\90\ Instead, the Commission decided, consistent with

    section 805(a)(1) of the Dodd-Frank Act,\91\ to monitor domestic and

    international developments concerning CCPs and reconsider the proposed

    SIDCO regulations in light of such developments.\92\

    ---------------------------------------------------------------------------

    \90\ See 76 FR at 69352 (Derivatives Clearing Organization Core

    Principles) (final rule).

    \91\ The Commission notes again that section 805(a)(1) of the

    Dodd-Frank Act requires the Commission to consider international

    standards in promulgating risk management rules.

    \92\ Id.

    ---------------------------------------------------------------------------

    As discussed above, since the final adoption of subparts A and B of

    part 39 of the Commission's regulations implementing the DCO core

    principles, there have been significant domestic and international

    developments, including (1) the publication of the final PFMIs in April

    2012,\93\ (2) the designation of two registered DCOs for which the

    Commission is the Supervisory Agency, as systemically important by the

    Council,\94\ and (3) the adoption of the Basel CCP Capital Requirements

    in July 2012,\95\ which provide for significantly less favorable

    capital treatment for bank exposures to CCPs unless the relevant

    regulator of the CCP establishes regulations that are consistent with

    the PFMIs by the end of

    [[Page 49670]]

    2013.\96\ Given these developments and requests from market

    participants to harmonize CFTC regulations with the PFMIs,\97\ the

    Commission believes the time is ripe to finalize the previously

    proposed SIDCO regulations.

    ---------------------------------------------------------------------------

    \93\ See supra n. 28.

    \94\ See supra n. 23, 24.

    \95\ See supra n. 48; see also discussion in section I. D. 4.

    \96\ See Bank for International Settlements' Basel Committee on

    Banking Supervision, ``Basel III Counterparty Credit Risk and

    Exposures to Central Counterparties--Frequently Asked Questions,''

    (November 2012; revised December 2012), available at http://www.bis.org/publ/bcbs237.pdf) (stating that if (1) a CCP regulator

    has provided a public statement on the status of a CCP (QCCP or non-

    qualifying), then banks will treat exposures to this CCP

    accordingly. Otherwise, the bank will determine whether a CCP is

    qualifying based on the criteria in the definition of a QCCP in

    Annex 4, Section 1 of the Basel CCP Capital Requirements; (2) during

    2013, if a CCP regulator has not yet implemented the PFMIs, but has

    publicly stated that it is working towards implementing these

    principles, the CCPs that are regulated by the CCP regulator may be

    treated as QCCPs. However, a CCP regulator may still declare a

    specific CCP non-qualifying; and (3) after 2013, if a CCP regulator

    has yet to implement the PFMIs, then the bank will determine whether

    a CCP subject to such a CCP regulator's jurisdiction is qualifying

    on the basis of the criteria outlined in the definition of a QCCP in

    Annex 4, Section 1 of the Basel CCP Capital Requirements.).

    \97\ See, e.g., CME Group Inc., letter dated May 3, 2013 (``CME

    2013 Letter'') (stating that the PFMIs establish ``more demanding

    international risk management and related standards for payment,

    clearing and settlement systems, including central counterparties''

    and that in recognition of ``the systemic protections and robustness

    of designated CCPs who adhere to the PFMIs,'' the Basel CCP Capital

    Requirements provide ``capital incentives for exposures to such

    QCCPs relative to non-Qualified CCPs.'' Moreover, the letter states

    that it ``is important to [Chicago Mercantile Exchange Inc.] to be

    designated a QCCP . . . in order for [its] market participants to

    obtain optimal capital treatment for their business at [Chicago

    Mercantile Exchange Inc. . . .]'').

    ---------------------------------------------------------------------------

    II. Regulation 39.29

    A. Proposed Regulation 39.29(a)

    Regulation 39.29(a), as proposed, would have required SIDCOs to

    maintain sufficient financial resources to meet financial obligations

    to its clearing members notwithstanding a default by the two clearing

    members creating the largest combined financial exposure for the SIDCO

    in extreme but plausible market conditions.\98\

    ---------------------------------------------------------------------------

    \98\ See 75 FR at 63119.

    ---------------------------------------------------------------------------

    The Commission received nine comment letters from market

    participants regarding the specific requirements set forth in proposed

    regulation 39.29(a).\99\ The majority of these commenters expressed

    concern that heightened requirements for SIDCOs could place them at a

    competitive disadvantage vis-[agrave]-vis other DCOs and foreign CCPs

    that clear and settle similar OTC derivatives.\100\

    ---------------------------------------------------------------------------

    \99\ Comments on proposed regulation 39.29(a) include the

    following: See The Options Clearing Corporation, December 10, 2010

    letter (``OCC December Letter''); Michael Greenberger, December 10,

    2010 letter (``Greenberger Letter''); CME Group Inc., letter dated

    December 13, 2010 (``CME December Letter''); CME 2013 Letter;

    International Swaps and Derivatives Association, Inc., letter dated

    December 10, 2010) (``ISDA Letter''); Americans for Financial

    Reform, letter dated December 13, 2010 (``AFR Letter''); Futures

    Industry Association, letter dated December 13, 2010 (``FIA

    Letter''); LCH. Clearnet Group Limited, letter dated December 10,

    2010 (``LCH December Letter''); ICE Clear Credit LLC, letter dated

    April 26, 2013 (``ICC Letter''). The comment files for each proposed

    rulemaking can be found on the Commission's Web site at

    www.cftc.gov.

    \100\ See CME December Letter at 7; FIA Letter at 2; LCH

    December Letter at 1. More broadly, Chris Barnard argued that all

    DCOs are SIDCOs ``[g]iven their aggregate nature and high levels of

    interconnectedness.'' See Chris Barnard, letter, dated May 10, 2011,

    (``Barnard Letter'') at 2.

    ---------------------------------------------------------------------------

    Two commenters, Mr. Michael Greenberger and LCH. Clearnet Group

    Limited (``LCH''), generally supported the proposed financial resources

    requirements for SIDCOs.\101\ ICE Clear Credit LLC (``ICC''), one of

    the two existing SIDCOs, stated that it currently is in compliance with

    the proposed cover two requirement and acknowledged ``the importance of

    clearing houses with more complex risk management requirements

    maintaining robust financial resources.'' \102\ Both the International

    Swaps and Derivatives Association (``ISDA'') and Americans for

    Financial Reform (``AFR'') suggested alternative approaches to the

    proposed cover two requirement for SIDCOs.\103\ ISDA encouraged the

    Commission to consider ``whether the appropriate size of a SIDCO's

    financial resources should be determined following an assessment by the

    Commission of the specific risks posed by the relevant SIDCO and the

    individual products it clears, rather than set to a uniform level that

    may be either insufficient or overly conservative.'' \104\ AFR stated

    that a SIDCO's minimum financial resources requirements should be based

    on risk exposure as well as the number of defaults because while in ``a

    concentrated market, a single default can have great consequence,'' and

    in ``a more diverse market, the probability of multiple defaults is

    greater and is a more meaningful scenario.'' \105\

    ---------------------------------------------------------------------------

    \101\ See Greenberger Letter at 6; LCH December Letter at 3.

    \102\ See ICC Letter at 2.

    \103\ See ISDA Letter at 8; AFR Letter at 3.

    \104\ See ISDA Letter at 8.

    \105\ See AFR Letter at 3.

    ---------------------------------------------------------------------------

    OCC, however, disagreed with the necessity to impose a cover two

    requirement on all SIDCOs.\106\ OCC argued that the Commission should

    not impose a rigid financial resources requirement on every SIDCO

    because mandating the default of the two largest clearing members for

    purposes of calculating the financial resources requirement does not

    necessarily have a beneficial result in that ``it restricts the ability

    of a DCO to measure its resources against those contingencies that it

    deems to be the most likely threats to its liquidity and solvency.''

    \107\ OCC agreed that all clearing organizations should consider

    possible simultaneous defaults by multiple clearing members but that

    the simultaneous defaults of a clearing organization's two largest

    clearing members, at least in the context of how that might occur

    within OCC, seem extremely implausible.\108\ OCC did state that ``the

    clearing of OTC derivatives presents unique risk management concerns,

    and, depending on the particular product and applicable risk management

    framework, perhaps even heightened concerns that warrant special

    regulatory treatment.'' \109\ Additionally, OCC argued for

    international consistency on this issue, and encouraged the Commission

    to follow the PFMIs and ``avoid taking final action on the Proposed

    Rules prior to receiving greater clarity in terms of the positions and

    proposals that European and U.K. legislators and regulators and CPSS[-

    ]IOSCO eventually adopt.'' \110\

    ---------------------------------------------------------------------------

    \106\ See OCC December Letter at 2, 5, and 6.

    \107\ Id. at 2. In addition, OCC argued that the proposed

    regulation did not fully consider the costs associated with meeting

    the cover two standard nor the risk of driving clearing volume to

    clearinghouses that are not required to meet the cover two standard.

    Id.

    \108\ Id. at 6.

    \109\ Id. at 5.

    \110\ Id. at 12.

    ---------------------------------------------------------------------------

    The Futures Industry Association (``FIA'') and, in its initial

    comment letter, CME commented that the proposed cover two requirement

    for SIDCOs could competitively disadvantage SIDCOs in both domestic and

    international markets.\111\ FIA stated that the proposed regulation

    would create a two-tier system between those DCOs designated as

    systemically important and those DCOs that are not designated as

    such.\112\ FIA believes that the two-tier system could put SIDCOs ``at

    a competitive disadvantage to the extent that they need to increase

    margin or guaranty fund requirements to cover the additional cost of

    covering the risk of loss resulting from the default of the second

    largest clearing member.'' \113\ In this regard, FIA recommended that

    the Commission require all DCOs, not just SIDCOs, to maintain

    sufficient financial resources to withstand the default of the two

    clearing members creating the largest combined financial exposure for

    [[Page 49671]]

    the DCO in extreme but plausible market conditions.\114\

    ---------------------------------------------------------------------------

    \111\ See FIA Letter at 2, CME December Letter at 7-8.

    \112\ See FIA Letter at 2.

    \113\ Id.

    \114\ Id.

    ---------------------------------------------------------------------------

    CME's initial comment letter echoed FIA's approach, arguing that

    having lower financial resources requirements for DCOs that are not

    SIDCOs would allow those DCOs to offer lower guaranty fund and margin

    requirements.\115\ According to CME, this ``would likely attract

    additional volume to at least some non-systemically important DCOs and

    transform them into de facto SIDCOs.'' \116\ CME argued that until such

    time as a ``de facto SIDCO'' was designated as systemically important

    by the Council, SIDCOs would be competitively disadvantaged because the

    ``de facto SIDCO'' would be operating under the lower and less costly

    general regulatory standards for DCOs.\117\ CME argued that such a

    result would disregard the objectives of Title VIII.\118\ CME suggested

    that the Commission, in lieu of adopting the proposed regulation, adopt

    a regulation that subjects SIDCOs to more frequent stress testing

    (e.g., bi-monthly rather than monthly) and reporting requirements

    (e.g., monthly rather than quarterly).\119\ Following publication of

    the PFMIs and the Basel CCP Capital Requirements, CME submitted a

    supplemental comment letter stating that its subsidiary, CME Clearing

    began offering clearing services for the interest rate swap and credit

    default swap markets.\120\ As a result, CME Clearing has three distinct

    guaranty funds: one for interest rate swap products (``IRS Guaranty

    Fund''), one for credit default swap products (``CDS Guaranty Fund''),

    and one for futures and other cleared OTC products (``Base Guaranty

    Fund'').\121\ Moreover, CME stated that the IRS Guaranty Fund and the

    CDS Guaranty Fund are already sized to the cover two standard.\122\

    While CME stated that it is satisfied with the size of the Base

    Guaranty Fund, which is currently set to meet a cover one standard, CME

    anticipates that the Commission will promulgate a cover two standard as

    part of the Commission's implementation of the standards set forth in

    the PFMIs.\123\ As such, CME requested that the Commission ``consider

    the impact to clearing firms when specifying the timelines associated

    with compliance with the cover [two] standard and suggests as long a

    time horizon as possible for implementation,'' with ``an effective date

    of the end of 2013, or later to the extent practicable to maintain QCCP

    status in accordance with BCBS 227, which we believe would assist in

    minimizing the impact to the clearing firm community.'' \124\

    ---------------------------------------------------------------------------

    \115\ See CME December Letter at 7.

    \116\ Id.

    \117\ Id. at 7-8.

    \118\ Id. at 8.

    \119\ Id.

    \120\ CME 2013 Letter at 2.

    \121\ CME 2013 Letter at 2-3.

    \122\ CME 2013 Letter at 3.

    \123\ Id.

    \124\ Id.

    ---------------------------------------------------------------------------

    Additionally, LCH, which was supportive of the proposal, urged the

    Commission ``to minimize the divergence'' between U.S.-regulated CCPs

    and other CCPs and ensure a level playing field between SIDCOs and

    other large CCPs around the world by conforming as much as possible the

    Commission's final rules on SIDCOs to the global standards set forth by

    the PFMIs.\125\

    ---------------------------------------------------------------------------

    \125\ See LCH December Letter at 1-2 (citing to the Bank for

    International Settlements' Committee on Payment and Settlement

    Systems September 2010 report entitled Market Structure Developments

    in the Clearing Industry: Implications for Financial Stability for

    the opinion that ``regulatory complexity, and with it the potential

    for regulatory arbitrage, may increase, especially when competing

    CCPs are regulated by different authorities and/or are located in

    different jurisdictions.'' Id. at 4.

    ---------------------------------------------------------------------------

    The Commission notes that Core Principle B requires DCOs to have

    ``adequate financial, operational, and managerial resources, as

    determined by the Commission, to discharge each responsibility of the

    DCO.'' \126\ Pursuant to Core Principle B, at a minimum, DCOs must be

    able to meet a cover one requirement. As discussed above, because of

    the impact that the failure of or a disruption to the operations of a

    SIDCO could have on the U.S. financial markets, the Commission proposed

    increased standards for SIDCOs. However, after consideration of the

    comments, and consistent with the directive in section 805 of the Dodd-

    Frank Act to consider relevant international standards and existing

    prudential requirements, the Commission is adopting regulation 39.29(a)

    with a revision in order to harmonize U.S. regulations with

    international CCP risk management standards.\127\

    ---------------------------------------------------------------------------

    \126\ Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 7a-1(c)(2)(B).

    \127\ The Commission finds the comments arguing for

    international regulatory consistency to be persuasive and recognizes

    the importance of harmonizing U.S. regulations with international

    CCP risk management standards.

    ---------------------------------------------------------------------------

    Specifically, rather than apply the cover two requirement to all

    SIDCOs, the revised regulation 39.29(a) would parallel the financial

    resources standard in Principle 4 of the PFMIs and only require a SIDCO

    that is systemically important in multiple jurisdictions or that is

    involved in activities with a more complex risk profile to maintain

    financial resources sufficient to enable it to meet its financial

    obligations to its clearing members notwithstanding a default by the

    two clearing members creating the largest combined financial exposure

    for the SIDCO in extreme but plausible market conditions, provided that

    if a clearing member controls another clearing member or is under

    common control with another clearing member, affiliated clearing

    members shall be deemed to be a single clearing member for the purposes

    of this provision.\128\

    ---------------------------------------------------------------------------

    \128\ See supra n. 41, 42. Moreover, the same proviso regarding

    the treatment of affiliate clearing members as set out in

    39.11(a)(1), i.e., that ``if a clearing member controls another

    clearing member or is under common control with another clearing

    member, affiliated clearing members shall be deemed to be a single

    clearing member for the purposes of this provision'' is incorporated

    in regulation 39.29(a) and is repeated in the rule text for clarity.

    See also 75 FR 63116 (stating that as DCOs, SIDCOs are still subject

    to Title VII and the regulations thereunder, except to the extent

    that the Commission proposes higher standards pursuant to Title

    VIII).

    ---------------------------------------------------------------------------

    Thus, regulation 39.29(a) will promote consistency and efficiency

    in the financial markets by holding SIDCOs to the same cover two

    standard as similarly situated foreign CCPs. Additionally, because the

    PFMIs set forth international risk management standards for CCPs, this

    international harmonization should mitigate some of the competition

    concerns raised by the commenters. Moreover, adoption of this revised

    regulation is part of the Commission's broader efforts to adopt and

    implement regulations that are consistent with the PFMIs so that SIDCOs

    operating internationally can be considered QCCPs. Such QCCP status

    should help a SIDCO avoid competitive harm internationally by providing

    bank clearing members and clients with the opportunity to obtain the

    more favorable capital charges set forth by the Basel CCP Capital

    Requirements.\129\

    ---------------------------------------------------------------------------

    \129\ See supra section I.D.4. for a more detailed discussion on

    the role of the PFMIs in international banking. See also CME 2013

    Letter at 2 (stating that ``it is important to CME [Clearing] to be

    designated a QCCP . . . in order for [its] market participants to

    obtain optimal capital treatment for their business at CME

    [Clearing] . . .'').

    ---------------------------------------------------------------------------

    After careful review and consideration of the comments, and in

    light of international standards and prudential regulations, the

    Commission is adopting a regulation 39.29(a), as revised, to require

    the cover two standard for those SIDCOs that are systemically important

    in multiple jurisdictions or that are involved in activities with a

    more complex risk profile.

    [[Page 49672]]

    B. Proposed Regulation 39.29(b)

    Regulation 39.29(b), as proposed, would have precluded SIDCOs from

    counting the value of assessments in calculating the resources

    available to meet the obligations arising from a default by the

    clearing member creating the single largest financial exposure,\130\

    but would have permitted SIDCOs to count the value of assessments,

    after a 30 percent haircut, in calculating the resources available to

    meet up to 20 percent of the obligations arising from a default of the

    clearing member creating the second largest financial exposure.\131\

    ---------------------------------------------------------------------------

    \130\ See 75 FR at 63117. Accordingly, SIDCOs would have to hold

    a greater percentage of financial resources in margin and guaranty

    funds. Id.

    \131\ Id.

    ---------------------------------------------------------------------------

    The Commission received five comment letters from market

    participants regarding the specific requirements set forth in proposed

    regulation 39.29(b).\132\ FIA agreed with the Commission's proposed

    limitation on the use of assessments by SIDCOs, stating that the

    proposed limitation was reasonable, prudent, and sufficient to ensure

    that a SIDCO does not unduly rely on its assessment power.\133\ In

    contrast, AFR argued that the use of assessments in calculating the

    resources available to meet a SIDCO's obligations under proposed

    regulation 39.29(b) should be prohibited.\134\ AFR emphasized that a

    DCO should be financially viable at all times, regardless of whether it

    might be able to call on its members to provide additional

    capital.\135\ In addition, ICC, one of the two existing SIDCOs, stated

    that it does not rely upon its right of assessment to meet the cover

    two standard \136\ and CME, the parent company of the other existing

    SIDCO, stated that ``each of [CME Clearing's] guaranty funds are pre-

    funded by the respective clearing members.'' \137\ More broadly, Chris

    Barnard commented that the use of assessments by DCOs may cause pro-

    cyclical problems and increase systemic risk in times of financial

    stress.\138\

    ---------------------------------------------------------------------------

    \132\ See AFR Letter; FIA Letter; Barnard Letter; ICC Letter;

    CME 2013 Letter.

    \133\ See FIA Letter at 3.

    \134\ See AFR Letter at 3.

    \135\ Id. AFR also argued that DCOs should be prohibited from

    including assessments in meeting their financial resources

    requirements as well.

    \136\ See ICC Letter at 2.

    \137\ See CME 2013 Letter at 3, n.7.

    \138\ See Barnard Letter at 2.

    ---------------------------------------------------------------------------

    The Commission recognizes the potential pro-cyclical effects of

    assessments and agrees that a SIDCO should not be permitted to use the

    value of assessments in calculating the resources available to meet its

    obligations under regulation 39.29(a). ``Pro-cyclicality,'' as defined

    in the PFMIs, refers to ``changes in risk-management practices that are

    positively correlated with market, business, or credit cycle

    fluctuations and that may cause or exacerbate financial instability.''

    \139\ In the context of assessments, a SIDCO's call for additional

    capital from its clearing members in order to cover any losses in a

    default scenario (generally needed on an expedited basis) may trigger

    greater distress on the financial markets, which presumably have

    already been weakened. In other words, in a stressed market where

    credit is tightening and margin calls are increased, a SIDCO's

    assessment of additional claims upon its clearing members may well

    exacerbate already weakened financial markets by potentially forcing

    clearing members and/or their customers to deleverage in falling asset

    markets, which will further drive down asset prices and stifle

    liquidity, or force clearing members to default in their obligations to

    the SIDCO. This in turn could start a downward spiral which, combined

    with restricted credit, might lead to additional defaults of clearing

    members and/or their customers, and would play a significant role in

    the destabilization of the financial markets. In striking a balance

    between the need for SIDCOs to effectively and efficiently use their

    resources and the mitigation of pro-cyclical behaviors, the Commission

    believes prefunding default obligations is the appropriate mechanism

    for SIDCOs to meet their default resource obligations.

    ---------------------------------------------------------------------------

    \139\ See PFMIs, Definitions; see also Principle 5: Collateral,

    Explanatory Note 3.5.6; see also Bank for International Settlements'

    Committee on the Global Financial System, ``The Role of Margin

    Requirements and Haircuts in Procyclicality,'' CGFS Papers No. 36

    (March 2010), available at http://www.bis.org/publ/cgfs36.htm.

    ---------------------------------------------------------------------------

    As discussed above, Core Principle B requires DCOs to have

    ``adequate financial, operational, and managerial resources, as

    determined by the Commission, to discharge each responsibility of the

    DCO.'' \140\ Moreover, the PFMIs require a CCP to use prefunded

    financial resources to cover current and potential future

    exposures,\141\ which may include initial margin, contributions to a

    prefunded default arrangement (e.g., a guaranty fund), and a specified

    portion of the CCP's own funds.\142\ In addition, the PFMIs encourage

    CCPs to address pro-cyclicality in their margin arrangements \143\ and

    state that ``a CCP could consider increasing the size of its prefunded

    default arrangements to limit the need and likelihood of large or

    unexpected margin calls in times of market stress.'' \144\ Prefunding

    financial resources requires market participants to pay more during

    times of relative market stability and low-market volatility through

    prefunded default arrangement contributions.\145\ However, paying more

    during a period of economic stability or even an upturn may ``result in

    additional protection and [be] potentially less costly and less

    disruptive adjustments in periods of high market volatility.'' \146\

    ---------------------------------------------------------------------------

    \140\ Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 7a-1(c)(2)(B).

    \141\ See supra n. 40 and accompanying text.

    \142\ See PFMIs, Principle 4: Credit Risk, Explanatory Note

    3.4.17 (stating that a CCP typically uses a sequence of prefunded

    financial resources, often referred to as a ``waterfall,'' to manage

    its losses caused by participant defaults. The waterfall may include

    a defaulter's initial margin, the defaulter's contribution to a

    prefunded default arrangement, a specified portion of the CCP's own

    funds, and other participants' contributions to a prefunded default

    arrangement).

    \143\ Id. at Principle 6: Margin, Explanatory Note 3.6.10.

    \144\ Id.

    \145\ Id.

    \146\ Id.

    ---------------------------------------------------------------------------

    The Commission believes the role of a SIDCO, in part, is to add

    stability and confidence in the financial markets, and to the extent

    that the prohibition of the inclusion of the value of assessments by

    SIDCOs in meeting their default resource requirements helps to stem

    pro-cyclicality and the potential weakening of financial markets, the

    Commission is in favor of this approach. Moreover, prohibition of the

    inclusion of the value of assessments will help ensure that a SIDCO

    has, when needed, adequate resources to discharge each of its

    responsibilities.

    Accordingly, after consideration of the comments, relevant

    international standards, and existing prudential requirements, the

    Commission is adopting regulation 39.29(b) with a revision to prohibit

    the use of assessments by SIDCOs in calculating financial resources

    available to meet the SIDCO's obligations under regulation 39.29(a).

    III. Regulation 39.30

    Regulation 39.30(a), as proposed, would have required a SIDCO to

    have a BC-DR plan, that has the objective of, and the physical,

    technological, and personnel resources sufficient to, enable the SIDCO

    to recover operations and resume daily processing, clearing, and

    settlement no later than two hours following a disruption,\147\

    including a wide-scale disruption.\148\

    ---------------------------------------------------------------------------

    \147\ See 76 FR at 3726.

    \148\ The following definitions pertaining to system safeguards

    were codified at 17 CFR 39.18(a):

    A ``recovery time objective'' is defined as ``the time period

    within which an entity should be able to achieve recovery and

    resumption of clearing and settlement of existing and new products,

    after those capabilities become temporarily inoperable for any

    reason up to or including a wide-scale disruption.'' A ``wide-scale

    disruption'' is defined as ``an event that causes a severe

    disruption or destruction of transportation, telecommunications,

    power, water, or other critical infrastructure components in a

    relevant area, or an event that results in an evacuation or

    unavailability of the population in a relevant area.'' ``Relevant

    area'' is defined as ``the metropolitan or other geographic area

    within which a derivatives clearing organization has physical

    infrastructure or personnel necessary for it to conduct activities

    necessary to the clearing and settlement of existing and new

    products. The term `relevant area' also includes communities

    economically integrated with, adjacent to, or within normal

    commuting distance of that metropolitan or other geographic area.''

    ---------------------------------------------------------------------------

    [[Page 49673]]

    In order to achieve the specified recovery time objective (``RTO'')

    in proposed regulation 39.30(a), proposed regulation 39.30(b) would

    have required SIDCOs to maintain a geographic dispersal of physical,

    technological, and personnel resources.\149\ Pursuant to proposed

    regulation 39.30(b)(1), physical and technological resources would have

    to be located outside the relevant area of the infrastructure the

    entity normally relies upon to conduct activities necessary to the

    clearance and settlement of existing and new contracts, and the entity

    could not rely on the same critical transportation, telecommunications,

    power, water, or other critical infrastructure components the entity

    normally relies upon for such activities.\150\ Additionally, proposed

    regulation 39.30(b)(2) would have required SIDCOs to maintain personnel

    sufficient to meet the RTO after interruption of normal clearing by a

    wide-scale disruption affecting the relevant area, who live and work

    outside the relevant area.\151\ To avoid duplication and maximize

    flexibility, proposed regulation 39.30(b)(3) \152\ provided that SIDCOs

    could use the outsourcing provisions applicable to non-SIDCO DCOs as

    set forth in regulation 39.18(f).\153\

    ---------------------------------------------------------------------------

    \149\ See 76 FR at 3726-3727.

    \150\ Id.

    \151\ Id. at 3727.

    \152\ Id.

    \153\ See 17 CFR 39.18(f) (stating, in relevant part, that a DCO

    may maintain the resources required under BC-DR procedures

    enumerated in regulation 39.18(e)(1) by ``either (1) Using its own

    employees as personnel, and property that it owns, licenses, or

    leases (own property); or (2) Through written contractual

    arrangements with another derivatives clearing organization or other

    service provider (outsourcing).'')

    ---------------------------------------------------------------------------

    Regulation 39.30(c), as proposed, would have required that each

    SIDCO conduct regular, periodic tests of its BC-DR plans and resources,

    and of its capacity to achieve the required RTO in the event of a wide-

    scale disruption.\154\ Additionally, proposed regulation 39.30(c)

    incorporated the provisions of regulation 39.18(j) concerning testing

    by DCOs, including the purpose of the testing, the conduct of the

    testing, and reporting and review of the testing.\155\

    ---------------------------------------------------------------------------

    \154\ See 76 FR at 3727.

    \155\ See id; see also 17 CFR 39.18(j).

    ---------------------------------------------------------------------------

    The Commission received five comment letters regarding the specific

    requirements set forth in proposed regulation 39.30(a).\156\ One

    commenter stated that the recovery time for its technology systems is

    currently approximately two hours based upon past disaster recovery

    tests,\157\ and three commenters opposed the two-hour RTO.\158\ ICC,

    one of the two existing SIDCOs, acknowledged ``the importance of

    maintaining market integrity during disruptive events'' and noted that

    a two-hour RTO is consistent with Principle 17 of the PFMIs.\159\ In

    addition, ICC stated that the ``two-hour benchmark is unlikely to

    require [it] to hire additional personnel or to require a different

    level of cross-training related to its wide-scale disruption plan,''

    and that it ``is unlikely that [ICC] will incur any additional backup

    technology costs related to the CFTC's proposed RTO.\160\

    ---------------------------------------------------------------------------

    \156\ Comments on proposed regulation 39.30 include the

    following: See Intercontinental Exchange, Inc. letter dated March

    21, 2011 (``ICE Letter''); OCC letter dated March 21, 2011 (``OCC

    Letter''); CME Group Inc., letter dated March 21, 2011 (``CME March

    Letter''); ICC Letter; and CME 2013 Letter. The Commission received

    no comments regarding proposed regulation 39.30(b) or 39.30(c).

    \157\ See ICC Letter at 2.

    \158\ See ICE Letter at 7-8; CME March Letter at 14-15; OCC

    Letter at 19-20.

    \159\ ICC Letter at 2.

    \160\ Id.

    ---------------------------------------------------------------------------

    Both Intercontinental Exchange, Inc. (``ICE'') and CME, on the

    other hand, expressed concern that requiring a more stringent RTO for

    SIDCOs would impose significant costs.\161\ ICE argued that ``assigning

    an RTO to a SIDCO instead of assigning the objective the RTO is

    intended to achieve adds significant cost to a SIDCO's business

    continuity program but does not necessarily increase overall resilience

    of the financial system.'' \162\ ICE and CME also highlighted the

    approach referenced in the Interagency Paper on Sound Practices to

    Strengthen the Resilience of the U.S. Financial System (the ``Sound

    Practices Paper''),\163\ published in 2003, which argued for a same-

    business-day RTO with a two-hour RTO as an aspirational goal for

    clearing and settlement organizations.\164\ CME urged the Commission to

    adopt the same approach as the Sound Practices Paper for SIDCOs, i.e.,

    the same-business-day RTO with a two-hour RTO on a voluntary

    basis.\165\ In addition, CME stated that ``[m]oving to a 2-hour RTO

    would impose enormous costs on SIDCOs, and the CFTC has provided no

    cost/benefit analysis in connection with this aspect of the proposed

    Regulation.'' \166\ Nonetheless, in a supplemental comment letter, CME

    stated that ``in light of the systemic importance of CME [Clearing]'s

    clearing functions and the intended benefits, including compliance with

    the PFMI requirements for critical information technology, CME

    [Clearing] has obtained budget approval and allocated resources towards

    a two hour RTO and will be working throughout 2013 towards achieving a

    two hour RTO.'' \167\

    ---------------------------------------------------------------------------

    \161\ See ICE Letter at 7; CME March Letter at 14.

    \162\ ICE Letter at 8.

    \163\ See the Federal Reserve Board, the Office of the

    Comptroller of the Currency and the Securities and Exchange

    Commission, ``Interagency Paper on Sound Practices to Strengthen the

    Resilience of the U.S. Financial System'' (the ``Sound Practices

    Paper''), 68 FR 17809 (April 11, 2003).

    \164\ Id. at 17812 (stating that core clearing and settlement

    organizations should develop the capacity to recover and resume

    clearing and settlement activities within the business day on which

    the disruption occurs with the overall goal of achieving recovery

    and resumption within two hours after an event).

    \165\ CME March Letter at 15.

    \166\ CME March Letter at 14.

    \167\ CME 2013 Letter at 4 (CME also acknowledges that

    ``Principle 17 of the PFMIs states that a BC-DR Plan should be

    designed to ensure that critical information technology systems can

    resume operations within two hours following disruptive events.'')

    (emphasis added).

    ---------------------------------------------------------------------------

    OCC commented that, though a laudable goal, a two-hour RTO was not

    consistently achievable without sacrificing core DCO functions and

    increasing the risks of error and backlogs.\168\ In addition, OCC

    argued that in its experience, it often takes three hours to fully

    recover and meet its responsibilities and avoid significant market

    disruption.\169\ OCC also argued that further efforts to reduce RTO

    would not be cost-effective and could increase rather than decrease

    reliability risk.\170\

    ---------------------------------------------------------------------------

    \168\ OCC Letter at 19.

    \169\ Id.

    \170\ Id.

    ---------------------------------------------------------------------------

    With respect to commenters' concerns that the proposed regulation

    will significantly increase costs on SIDCOs, the Commission recognizes

    these concerns but notes that a systemic importance designation under

    Title VIII means that the failure of a SIDCO to meet its obligations

    will have a greater impact on the U.S. financial system than the

    failure of a DCO not so designated. Thus, the Commission believes the

    financial system has a vested interest in enhancing risk management

    requirements for SIDCOs to increase a SIDCO's financial resiliency and

    to

    [[Page 49674]]

    mitigate the risk of significant liquidity or credit problems spreading

    among financial institutions or markets, threatening the stability of

    the U.S. financial system. In the event of a wide-scale disruption, the

    resiliency of the U.S. financial markets might depend on the rapid

    recovery of SIDCOs to support critical market functions and thereby

    allow other market participants (i.e., the counterparties) to process

    their transactions. In addition, in such a scenario, it is reasonable

    to assume that there will be other market participants in locations not

    affected by the disruption that will need to clear and settle pending

    transactions as well. In short, the failure of a SIDCO to complete core

    clearing and settlement functions within a rapid period could create

    systemic liquidity and credit dislocations on a global scale.

    Additionally, the Commission notes that while it may be true that a

    two-hour RTO was an aspirational goal in 2003, standards and technology

    have advanced in the last ten years. As discussed above, the current

    international standard for CCPs, as set forth by the PFMIs, is to have

    a BC-DR plan that incorporates a two-hour RTO.\171\ Specifically, the

    PFMIs state that an FMI's business continuity plan ``should incorporate

    the use of a secondary site and should be designed to ensure that

    critical information technology systems can resume operations within

    two hours following disruptive events.'' \172\ Because the two-hour RTO

    is the international standard and foreign CCPs are anticipated to

    operate under this timeframe, any competitive disadvantages to SIDCOs

    in implementing this regulation should be mitigated because all

    similarly situated CCPs will likely be operating under this standard.

    Indeed, ICC, one of the two existing SIDCOs, has stated that it is

    unlikely that it will need to hire additional personnel or incur

    additional technology costs to meet this standard.\173\ Moreover, as

    discussed above, CME Clearing, the other existing SIDCO, ``has obtained

    budget approval and allocated resources towards a two hour RTO and will

    be working throughout 2013 towards achieving a two hour RTO.'' \174\

    ---------------------------------------------------------------------------

    \171\ See supra n. 46, 47 (referring to the PFMIs, Principle 17:

    Operational Risk).

    \172\ Id.

    \173\ See supra n. 160 and accompanying text.

    \174\ CME 2013 Letter at 4.

    ---------------------------------------------------------------------------

    The Commission believes that enhancing the system safeguard

    requirements a SIDCO must maintain under Core Principle I will increase

    stability in the financial markets and is therefore consistent with

    Title VIII's objectives. Moreover, regulation 39.30(a) will promote

    regulatory consistency for SIDCOs and similarly situated CCPs because

    the two-hour RTO is the international standard, under the PFMIs, for

    CCPs operating in other jurisdictions. As discussed above, the

    Commission is fully committed to adopting and implementing regulations

    that are consistent with the PFMIs to ensure that SIDCOs are QCCPs

    under the Basel CCP Capital Requirements so that banks transacting

    through SIDCOs can receive preferential capital treatment.\175\

    Therefore, the Commission is adopting regulation 39.30(a) as proposed.

    ---------------------------------------------------------------------------

    \175\ See supra section I.D.4.

    ---------------------------------------------------------------------------

    The Commission did not receive any comments regarding proposed

    regulations 39.30(b) or 39.30(c). Therefore, for reasons stated in the

    proposal, the Commission is adopting regulations 39.30(b) and 39.30(c)

    as proposed.\176\ However, to mitigate costs, the Commission notes that

    regulation 39.30(b) should be interpreted in a manner consistent with

    the PFMIs, which state ``[a] particular site may be primary for certain

    functions and secondary for others. It is not intended that an FMI

    would be required to have numerous separate secondary sites for each of

    its essential functions.'' \177\

    ---------------------------------------------------------------------------

    \176\ See 76 FR at 3726-3727.

    \177\ See PFMIs, Principle 17: Operations Risk.

    ---------------------------------------------------------------------------

    IV. Regulation 39.31

    Regulation 39.31 proposed to codify the special enforcement

    authority granted to the Commission over SIDCOs pursuant to section

    807(c) of the Dodd-Frank Act, which states that for purposes of

    enforcing the provisions of Title VIII of the Dodd-Frank Act, a SIDCO

    is subject to, and the Commission has authority under, provisions (b)

    through (n) of section 8 of the FDIA\178\ in the same manner and to the

    same extent as if the SIDCO were an insured depository institution and

    the Commission were the appropriate Federal banking agency for such

    insured depository institution.\179\ The Commission did not receive any

    comment letters on this proposed regulation, which tracks the statutory

    text in section 807 of the Dodd-Frank Act. Therefore, for reasons

    stated in the proposal, the Commission is adopting regulation 39.31 as

    proposed.

    ---------------------------------------------------------------------------

    \178\ See also 12 U.S.C. 1818(b)-(n) (granting authority for

    enforcement powers).

    \179\ 76 FR at 3727. The Commission notes that Title VIII

    preserved and expanded the CFTC's examination and enforcement

    authority with respect to designated entities within its

    jurisdiction. See Cong. Rec. 156 S5924-5 (daily ed. July 14, 2010)

    (statement of Sen. Lincoln that Title VIII ``preserves and expands

    the CFTC's and SEC's examination and enforcement authorities with

    respect to designated entities within their respective

    jurisdictions,'' and that ``the authorities granted in Title VIII

    are intended to be both additive and complementary to the

    authorities granted to the CFTC and SEC in Title VII and to those

    agencies' already existing legal authorities. The authority provided

    in Title VIII to the CFTC and SEC with respect to designated

    clearing entities and financial institutions engaged in designated

    activities would not and is not intended to displace the CFTC's and

    SEC's regulatory regime that would apply to these institutions or

    activities.'').

    ---------------------------------------------------------------------------

    V. Effective Date and Compliance Dates

    For purposes of publication in the Code of Federal Regulations, all

    of the rules adopted herein will have an effective date of 60 days

    after publication in the Federal Register. The Commission received

    three comments, however, requesting additional time to come into

    compliance with these rules. Regarding the compliance date of

    regulation 39.29, OCC requested that DCOs be afforded a reasonable

    amount of time to raise ``any material amount of additional resources''

    and requested a delayed implementation of two years.\180\ CME stated

    that the financial resources that DCOs are required to maintain will

    increase dramatically and requested an implementation period of no less

    than 180 days.\181\ Regarding the compliance date of regulation 39.30,

    the Commission had proposed a compliance date of one year after

    publication of the final rules or July 12, 2012.\182\ OCC commented

    that this is a short and burdensome deadline that will be difficult to

    meet and encouraged the Commission to adopt a two-year compliance

    period for the requirements applicable to SIDCOs.\183\ The Commission

    received no comments regarding regulation 39.31.

    ---------------------------------------------------------------------------

    \180\ OCC December Letter at 11.

    \181\ CME December Letter at 8.

    \182\ See 76 FR at 3714.

    \183\ OCC March Letter at 21.

    ---------------------------------------------------------------------------

    Given the mandate to implement these standards, and the necessity

    of SIDCOs to fulfill their obligations on a near continuous basis,

    after careful consideration of the comments received, the Commission is

    extending the compliance date for regulations 39.29 and 39.30 to

    December 31, 2013.

    VI. Consideration of Costs and Benefits

    A. Introduction

    Section 15(a) requires the Commission to consider the costs and

    benefits of its actions before promulgating a regulation under the CEA

    or issuing certain orders.\184\

    [[Page 49675]]

    Section 15(a) further specifies that the costs and benefits shall be

    evaluated in light of five broad areas of market and public concern:

    (1) Protection of market participants and the public; (2) efficiency,

    competitiveness, and financial integrity of futures markets; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission's cost and benefit

    considerations in accordance with section 15(a) are discussed below.

    ---------------------------------------------------------------------------

    \184\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    B. Background

    In this final rulemaking, the Commission is adopting regulations to

    implement enhanced risk management standards for SIDCOs.\185\

    ---------------------------------------------------------------------------

    \185\ See supra section I.A. through I.F. for a more detailed

    discussion on the risk management standards for SIDCOs, including

    the designation process for SIDCOs and standards for SIDCOs under

    Title VIII of the Dodd-Frank Act.

    ---------------------------------------------------------------------------

    As noted above, consistent with the DCO core principles and section

    805 of the Dodd-Frank Act, which requires the Commission to consider

    relevant international and existing prudential requirements when

    prescribing risk management standards for SIDCOs, the Commission

    proposed the following enhanced requirements for SIDCOs: \186\

    ---------------------------------------------------------------------------

    \186\ See supra section I.F. for discussion on the risk

    management standards for SIDCOs proposed by the Commission.

    ---------------------------------------------------------------------------

    (1) Regulation 39.29(a) which would require a SIDCO to maintain

    sufficient resources to meet a ``cover two'' standard in order to

    comply with Core Principle B; \187\ (2) regulation 39.29(b) which would

    strictly limit the value of assessments that could be used in meeting

    that requirement; \188\ (3) regulation 39.30 which would require a

    SIDCO to have a BC-DR plan with a two-hour RTO in order to comply with

    Core Principle I (``two-hour RTO''); \189\ and (4) regulation 39.31

    which, under section 807(c) of the Dodd-Frank Act, grants the

    Commission special enforcement authority over SIDCOs.\190\

    ---------------------------------------------------------------------------

    \187\ Id.

    \188\ Id.

    \189\ Id.

    \190\ Id.

    ---------------------------------------------------------------------------

    As also discussed above, after the Commission proposed the SIDCO

    risk management standards and received comments, the PFMIs were

    published.\191\ The PFMIs establish international risk management

    standards for FMIs, including CCPs, that facilitate clearing and

    settlement.\192\ The PFMIs also play a significant role in the Basel

    CCP Capital Requirements, which introduce new capital charges based on

    counter party risk for banks conducting financial derivatives

    transactions through a CCP.\193\ These capital charges vary

    significantly depending on whether or not the counterparty is a QCCP,

    that is, a CCP that is subject to regulations consistent with the

    PFMIs.\194\ Effectively, the Basel CCP Capital Requirements incentivize

    banks to clear derivatives through QCCPs by setting lower capital

    charges for exposures arising from derivatives cleared through a QCCP

    and setting significantly higher capital charges for exposures arising

    from derivatives cleared through non-qualifying CCPs.\195\ As discussed

    further below, these differences in capital charges are extremely

    important in considering whether to adopt requirements for SIDCOs,

    which are consistent with the PFMIs, or requirements that fall short of

    that standard.

    ---------------------------------------------------------------------------

    \191\ See supra section I.D.1. for a general discussion on the

    PFMIs.

    \192\ Id.

    \193\ See supra section I.D.4. for a discussion on the role of

    the PFMIs in international banking standards.

    \194\ Id.

    \195\ Id.

    ---------------------------------------------------------------------------

    In light of the directive of section 805 of the Dodd-Frank Act to

    consider relevant international standards and existing prudential

    requirements when prescribing risk management standards for designated

    systemically important FMUs, as well as the recent publication of the

    PFMIs, and public comments on the proposed SIDCO regulations, the

    Commission has determined it is necessary and appropriate to finalize

    the proposed enhanced risk management standards for SIDCOs. However, in

    order to harmonize the proposed regulations with the existing

    international standards set forth by the PFMIs, as requested by some

    commenters,\196\ the Commission has revised proposed regulation

    39.29(a) and 39.29(b). Rather than apply the cover two requirement to

    all SIDCOs, revised regulation 39.29(a) parallels the financial

    resources standard in Principle 4 of the PFMIs and only requires a

    SIDCO that is systemically important in multiple jurisdictions or that

    is involved in activities with a more complex risk profile to maintain

    financial resources sufficient to meet the cover two requirement.\197\

    Revised regulation 39.29(b), which is also consistent with Principle 4

    of the PFMIs, prohibits a SIDCO from the use of assessments in

    calculating its financial resources available to meet the SIDCO's

    obligations under regulation 39.29(a).\198\

    ---------------------------------------------------------------------------

    \196\ See OCC December Letter at 12 (OCC requesting that the

    Commission avoid taking final action on the proposed SIDCO

    regulations until the adoption of the PFMIs to ensure consistency

    with international regulations) and LCH December Letter at 1-2 (LCH

    urging the Commission to conform as much as possible the

    Commission's final rules on SIDCOs to the global standards set forth

    in the PFMIs).

    \197\ See supra section II. for a discussion on the proposed and

    revised rule text of regulation 39.29.

    \198\ Id.

    ---------------------------------------------------------------------------

    The Commission considered the following alternatives: (1) Not to

    adopt any of the proposed SIDCO risk management regulations, (2) to

    adopt the SIDCO risk management regulations only as proposed, or (3) to

    adopt the proposed SIDCO risk management regulations with revisions

    consistent with relevant international standards and existing

    prudential requirements. As detailed above, the Commission has

    concluded it is necessary and appropriate in this final rulemaking to

    adopt regulation 39.29, as revised, regulation 39.30, as proposed, and

    regulation 39.31, as proposed.\199\

    ---------------------------------------------------------------------------

    \199\ See supra discussion I.C. and I.F.

    ---------------------------------------------------------------------------

    In the discussion that follows, the Commission considers the costs

    and benefits of the final rulemaking in light of the comments it

    received and section 15(a) of the CEA. As the requirement in regulation

    39.31 is imposed by the Dodd-Frank Act, any associated costs and

    benefits are the result of statutory directives as determined by

    Congress, not an act of Commission discretion.

    For the remaining regulations in this rulemaking, 39.29(a) (cover

    two), 39.29(b) (prohibition of assessments) and 39.30 (two-hour RTO),

    the Commission considers the costs and benefits attributable to these

    enhanced requirements against the DCO regulatory framework established

    in part 39, which provides minimum risk standards for DCOs and sets the

    baseline for cost and benefit considerations. Specifically, regulation

    39.11 (implementing DCO Core Principle B) sets a cover one standard as

    the minimum financial resources requirement for all DCOs whereas

    regulation 39.29(a) sets a cover two financial resources requirement

    for all SIDCOs engaged activities with a more complex risk profile or

    that are systemically important in multiple jurisdictions. Regulation

    39.11 permits the inclusion of assessment powers, to a limited extent,

    in calculating whether a DCO meets its default resources requirement,

    whereas regulation 39.29(b) prohibits the use of assessments by SIDCOs

    in meeting those obligations. Regulation 39.18 requires a DCO to have

    an RTO of no later than the next business day following the disruption

    of its operations whereas regulation 39.30 (implementing DCO Core

    Principle I) requires SIDCOs to have a BC-DR plan with a two-hour

    [[Page 49676]]

    RTO following the disruption of its operations.

    The Commission invited public comment on all aspects of the

    proposed SIDCO rulemaking but did not receive any comments with

    quantitative data from which the Commission could calculate the costs

    and benefits of the proposed enhanced requirements. The Commission did

    receive qualitative comments on the Commission's proposed consideration

    of costs and benefits generally, as well as specifically to the

    requirements central to this final rule: Cover two, use of assessments

    and two-hour RTO. These comments are summarized below in connection

    with the Commission's consideration of the costs and benefits of the

    final rules being promulgated herein.

    C. Benefits and Costs of the Final Rule

    1. Benefits

    As explained in the subsections that follow, this final rule

    promotes the financial strength, operational security and reliability

    of SIDCOs, reduces systemic risk, and increases the stability of the

    broader U.S. financial system. In addition, the regulations harmonize

    U.S regulations with international standards which will, in important

    ways, place SIDCOs on a level playing field with their competitors in

    the global financial markets:

    a. Regulation 39.29(a): Cover Two

    The cover two requirement increases the financial stability of

    certain SIDCOs which, in turn, increases the overall stability of the

    US financial markets. This is so because enhancing a SIDCO's financial

    resources requirements from the minimum of cover one to a more

    stringent cover two standard helps to ensure the affected SIDCO will

    have greater financial resources to meet its obligations to market

    participants, including in the case of defaults by multiple clearing

    members. These added financial resources lessen the likelihood of the

    SIDCO's failure which, given the designation of systemically important,

    could threaten the stability of the US financial system.\200\ By

    bolstering certain SIDCOs' resources, regulation 39.29(a) contributes

    to the financial integrity of the financial markets and reduces the

    likelihood of systemic risk from spreading through the financial

    markets due to one of those SIDCOs' failure or disruption.

    ---------------------------------------------------------------------------

    \200\ See supra section I.B.

    ---------------------------------------------------------------------------

    According to commenters, existing SIDCOs already fund their default

    resources using a cover two standard for products with a more complex

    risk profile.\201\ Although the benefit associated with regulation

    39.29(a) is somewhat lessened by the already established practice of

    cover two by the relevant SIDCOs, there is a long-term benefit of

    setting the cover two standard as the new regulatory minimum to ensure

    that even in periods of apparent stability and low market volatility,

    these SIDCOs will continue to have increased financial resource

    requirements and, ultimately, greater financial stability. This

    approach of obtaining resources in such low-stress periods avoids the

    need to call for additional resources from clearing members during less

    stable, more volatile times, which would have pro-cyclical effects on

    the U.S. financial markets.\202\ In addition, the cover two requirement

    will apply to SIDCOs deemed systemically important in multiple

    jurisdictions.

    ---------------------------------------------------------------------------

    \201\ See ICC Letter at 1. See also CME 2013 Letter at 2-3.

    \202\ See supra section II.B. for discussion on the pro-cyclical

    impact of assessments.

    ---------------------------------------------------------------------------

    b. Regulation 39.29(b): Prohibited Use of Assessments To Meet

    Regulation 39.29(a) Obligations

    As discussed below and throughout this release, the Commission

    believes that prohibiting the use of assessments by a SIDCO in meeting

    its default resource obligations (i.e. those under regulations

    39.11(a)(1) and 39.29(a)) increases the financial stability of the

    SIDCO, which in turn, increases the overall stability of the U.S.

    financial markets.

    Assessment powers are more likely to be exercised during periods of

    financial market stress. If during such a period, a clearing member

    defaults and the loss to the SIDCO is sufficiently large to deplete (1)

    the collateral posted by the defaulting entity, (2) the defaulting

    entity's default fund contribution, and (3) the remaining pre-funded

    default fund contributions, a SIDCO's exercise of assessment powers

    over the non-defaulting clearing members may exacerbate a presumably

    already weakened financial market. The demand by a SIDCO for more

    capital from its clearing members could force one or more additional

    clearing members into default because they cannot meet the assessment.

    The inability to meet the assessment could lead clearing members and/or

    their customers to de-leverage (i.e., sell off their positions) in

    falling asset markets, which further drives down asset prices and may

    result in clearing members and/or their customers defaulting on their

    obligations to each other and/or to the SIDCO. In such extreme

    circumstances, assessments could trigger a downward spiral and lead to

    the destabilization of the financial markets. Prohibiting the use of

    assessments by a SIDCO in meeting default resources obligations is

    intended to require the SIDCO to retain more financial resources

    upfront, i.e. to prefund its financial resources requirement to cover

    its potential exposure.

    The increase in prefunding of financial resources by a SIDCO may

    increase costs to clearing members of that SIDCO (e.g. requiring

    clearing members to post additional funds with the SIDCO),\203\ but it

    also reduces the likelihood that the SIDCO will require additional

    capital infusions during a time of financial stress when raising such

    additional capital is expensive relative to market norms. By increasing

    prefunded financial resources, a SIDCO becomes less reliant on the

    ability of its clearing members to pay an assessment, more secure in

    its ability to meets its obligations, and more viable in any given

    situation, even in the case of multiple defaults of clearing members.

    Accordingly, regulation 39.29(b) increases the financial security and

    reliability of the SIDCO which will thereby further increase the

    overall the stability of the U.S. financial markets.

    ---------------------------------------------------------------------------

    \203\ Id.

    ---------------------------------------------------------------------------

    c. Regulation 39.30: Two-Hour RTO

    A two-hour RTO in a SIDCO's BC-DR plan increases the soundness and

    operating resiliency of the SIDCO, which in turn, increases the overall

    stability of the U.S. financial markets.

    Given the significant role SIDCOs play within the financial market

    infrastructure and the need to preserve, to the greatest extent

    practicable, their near-continuous operation, regulation 39.30

    prescribes an enhanced RTO of two hours. The two-hour RTO ensures that

    even in the event of a wide-scale disruption, the potential negative

    effects upon U.S. financial markets be minimized because the affected

    SIDCO will recover rapidly and resume its critical market functions,

    thereby allowing other market participants to process their

    transactions, even those participants in locations not directly

    affected by the disruption. The two-hour RTO increases a SIDCO's

    operational resiliency by requiring the SIDCO to have the resources and

    technology necessary to resume operations promptly. This resiliency, in

    turn, increases the overall stability of the U.S. financial markets.

    [[Page 49677]]

    d. Benefits of QCCP Status

    As discussed above,\204\ the international Basel CCP Capital

    Requirements provide incentives for banks to clear derivatives through

    CCPs that are qualified CCPs or ``QCCPs'' by setting lower capital

    charges for exposures arising from derivatives cleared through a QCCP

    and setting significantly higher capital charges for exposures arising

    from derivatives cleared through non-qualifying CCPs.\205\ The enhanced

    risk management standards for SIDCOs adopted in this final rulemaking

    are consistent with the international standards set forth in the PFMIs

    and address part of the remaining divergences between part 39 of the

    Commission's regulations and the PFMIs, which will provide an

    opportunity for SIDCOs to gain QCCP status. The Commission believes

    there is a benefit for a SIDCO if it is able to offer to its clearing

    members and their customers the favorable capital treatment under the

    Basel CCP Capital Requirements.

    ---------------------------------------------------------------------------

    \204\ See supra section I. D. 4. for a discussion of the Basel

    CCP Capital Requirements.

    \205\ Id.

    ---------------------------------------------------------------------------

    2. Costs

    The Commission requested but did not receive any quantitative data

    or specific cost estimates associated with the proposed regulations.

    However, in qualitative terms, the Commission recognizes that this

    final rule may impose important costs on SIDCOs depending on the

    financial resources requirements and system safeguards procedures the

    SIDCOs currently implement. In other words, the costs range from

    minimal (to the extent SIDCOs are already operating, or planning to

    operate, consistent with the final rules) to significant (for those who

    are not).\206\

    ---------------------------------------------------------------------------

    \206\ For example, ICC, one of the two existing SIDCOs, stated

    that it already implements the ``cover two'' requirement, that it

    does not rely upon its right of assessment in meeting that

    requirement, and that it is unlikely to incur significant costs in

    implementing the two hour RTO. See ICC Letter at 1-2. In addition,

    CME Clearing, the other existing SIDCO, implements the ``cover two''

    requirement for two of its three guaranty funds, has each of its

    guaranty funds pre-funded by the respective clearing members, and,

    though the cost will be significant, has already ``obtained budget

    approval and allocated resources towards a two hour RTO.'' See CME

    2013 Letter at 2-4.

    ---------------------------------------------------------------------------

    To the extent costs increase, the Commission has considered that

    higher trading costs for market participants (i.e. increased clearing

    fees, guaranty fund contributions, and margin fees, etc.) may

    discourage market participation and result in decreased liquidity and

    reduced price discovery. However, the Commission has also considered

    the costs to market participants and the public if these regulations

    are not adopted. Significantly, without these regulations to ensure

    that SIDCOs operate under certain enhanced risk management standards,

    in a manner that is consistent with internationally accepted standards,

    the financial integrity and security of the U.S. financial markets

    would be at a greater risk relative to international markets. This,

    too, could adversely affect the attractiveness of the U.S. financial

    markets subject to the Commission's jurisdiction as compared to foreign

    competitors. In addition, without the final rule, SIDCOs would not have

    the opportunity to gain QCCP status, thereby putting them at a

    significant competitive disadvantage in the global financial markets

    which, again, would be to the detriment of their clearing members and

    their customers. The Commission notes that to the extent it addresses

    the remaining divergences between part 39 of the Commission's

    regulations and the PFMIs through future rulemakings, and these

    rulemakings, along with the regulations adopted herein, do not provide

    an opportunity for non-SIDCO DCOs to obtain QCCP status, this would

    place such non-SIDCO DCOs at a competitive disadvantage to SIDCOs.

    Moreover, the resulting cost to the DCOs would be the inability to

    offer the favorable capital treatment under the Basel CCP Capital

    Requirements to their customers and clearing members.

    a. Regulation 39.29(a): Cover Two

    The cost of the cover two requirement for certain SIDCOs includes

    the opportunity cost of the additional financial resources needed to

    satisfy the guaranty fund requirements for the risk of loss resulting

    from the default of the second largest clearing member.\207\

    ---------------------------------------------------------------------------

    \207\ In the event that these additional resources need to be

    raised by the SIDCO, as opposed to reallocated, this cost is the

    funding cost for raising these additional resources. In addition, to

    the extent that there is uncertainty over whether cover two applies

    (for example, as in the case of whether a DCO gets deemed to be

    systemically important in multiple jurisdictions or whether a given

    product is, indeed, of a more complex risk profile), the cost of

    cover two is the opportunity cost (funding cost) of the additional

    financial resources weighted by the likelihood that cover two will

    apply.

    ---------------------------------------------------------------------------

    As discussed above in more detail, the Commission received comments

    from market participants addressing the costs associated with a cover

    two standard.\208\ OCC argued that if heightened risk management

    standards are imposed on a DCO in such a way as to substantially

    increase the costs for clearing members and their customers to clear

    transactions through a SIDCO rather than a non-SIDCO, there is risk of

    undermining the goals of both Titles VII and VIII of the Dodd-Frank Act

    by driving clearing volume to less-regulated clearinghouses.\209\ FIA

    commented that the cover two requirement would put SIDCOs at a

    competitive disadvantage to other DCOs to the extent that they need to

    increase margin or guaranty fund requirements to cover the default of

    the second largest clearing member.\210\ FIA recommended that the

    Commission adopt an alternative approach by extending the cover two

    requirement to all DCOs, not just SIDCOs, and allow ample time for DCOs

    to come into compliance.\211\ CME stated that a cover two requirement

    would allow some DCOs to offer lower guaranty fund and margin

    requirements, which would attract additional volume to that DCO and

    make it a de facto SIDCO. SIDCOs would then be at a competitive

    disadvantage relative to the de facto SIDCO until such time as the de

    facto SIDCO was designated as a SIDCO.\212\ ICC, one of the two

    existing SIDCOs, on the other hand, is in compliance with the cover two

    requirement and therefore, would not incur additional costs to meet the

    cover two requirement.\213\

    ---------------------------------------------------------------------------

    \208\ See section II. for a discussion on comments received on

    the proposed regulation 39.29(a).

    \209\ Id.

    \210\ Id.

    \211\ Id.

    \212\ Id.

    \213\ ICC Letter at 2.

    ---------------------------------------------------------------------------

    As noted above, and in comment letters from CME and ICC,\214\

    SIDCOs already implement the cover two standard for products with a

    more complex risk profile, and therefore, the costs of compliance with

    cover two should be mitigated given these existing practices.\215\

    ---------------------------------------------------------------------------

    \214\ See supra n. 23 (designation of CME and ICC as SIDCOs).

    \215\ See ICC Letter at 1-2. See also CME 2013 Letter at 2-3.

    ---------------------------------------------------------------------------

    However, there are likely to be costs associated with the

    uncertainty as to whether a SIDCO is deemed systemically important in

    multiple jurisdictions and what constitutes a product with a more

    complex risk profile. These costs are associated with business

    planning, i.e. how to fund a cover two requirement. In addition, the

    possibility exists that some market participants will port their

    positions from a SIDCO that either (1) is deemed systemically important

    in multiple jurisdictions or (2) clears products of a more complex risk

    profile to another SIDCO for which neither (1) nor (2) applies or to

    another DCO that is not

    [[Page 49678]]

    systemically important because the value of the cover two protection to

    these market participants is less than the price at which that

    protection is being offered. These market participants will transact

    with DCOs that operate under cover one, which is a lower financial

    resources requirement, and thus, get the benefit of lower transactional

    fees and forego the enhanced protections associated with the SIDCOs.

    Such an event adversely impacts the reduction in systemic risk that the

    cover two standard affords. However, the potential cost to the SIDCO

    and to the goal of systemic risk reduction is likely mitigated because

    (a) not every product offered by the SIDCO is available at other DCOs

    and (b) a SIDCO may offer benefits not available to a DCO that is not

    designated as systemically important,\216\ thereby reducing the

    likelihood that market participants will port their positions to other

    DCOs.

    ---------------------------------------------------------------------------

    \216\ For example under Title VIII, a SIDCO may establish and

    maintain an account with the Federal Reserve Bank if permitted to do

    so by such Federal Reserve Bank and by the Board. See section 806(a)

    of the Dodd-Frank Act.

    ---------------------------------------------------------------------------

    b. Regulation 39.29(b): Prohibition on the Use of Assessments in

    Calculation of Default Resources To Meet Obligations Under Regulation

    39.29(a)

    The costs associated with the prohibited use of assessments by

    SIDCOs in calculating the SIDCO's obligations under regulation 39.29(a)

    include the opportunity cost of the additional financial resources

    needed to replace the value of such assessments. This may require an

    infusion of additional capital. The cost of this regulation should be

    mitigated for SIDCOs because neither CME Clearing nor ICC, the two

    existing SIDCOs, rely on assessments to meet their default fund

    obligations for products with a more complex risk profile.\217\

    Additionally, analogous to the case with the cover two standard, market

    participant demand may shift from a SIDCO to a DCO with a lower

    capitalization requirement.

    ---------------------------------------------------------------------------

    \217\ See ICC Letter at 2 (stating that ICC ``does not rely upon

    (count) [its] right of assessment to meet the [``cover two''

    requirement]''). See also CME 2013 Letter at 3, n.7.

    ---------------------------------------------------------------------------

    c. Regulation 39.30: Two-Hour RTO

    The Commission recognizes that a two-hour RTO may increase

    operational costs for SIDCOs by requiring additional resources,

    including personnel, technological and geographically dispersed

    resources, in order to comply with the final rule. Moreover, the

    implementation of a two-hour RTO is expected to impose one-time costs

    to set up the enhanced resources as well as recurring costs to operate

    the additional resources. However, as noted above, the Commission

    requested but did not receive quantitative data from which to estimate

    the dollar costs associated with implementing a two-hour RTO, and in

    particular the costs of moving from a next day RTO, the minimum

    standard established by the DCO core principles and regulation 39.18,

    to a two-hour RTO as required by regulation 39.30. The Commission did,

    however, receive qualitative comments regarding the costs associated

    with the two-hour RTO, which are discussed in more detail above. For

    example, CME, ICE and OCC all initially opposed the enhanced RTO,

    citing to the increase of costs associated with the proposed regulation

    39.30. However, more recently, the Commission received comments from

    CME and ICC acknowledging the importance of the two-hour RTO and their

    intent to implement a two-hour RTO.\218\

    ---------------------------------------------------------------------------

    \218\ See ICC Letter at 2 (noting that the two-hour RTO is

    consistent with Principle 17 of the PFMIs, and stating that it is

    unlikely to incur ``any significant additional personnel training

    cost associated with the CFTC's proposed RTO of two hours'' or ``any

    additional backup technology costs related to the CFTC's proposed

    RTO.''). See also CME 2013 Letter at 4 (noting that ``in light of

    the systemic importance of CME [Clearing]'s clearing functions and

    the intended benefits, including compliance with the PFMI

    requirements for critical information technology, CME [Clearing] has

    obtained budget approval and allocated resources towards a two hour

    RTO and will be working throughout 2013 towards achieving a two hour

    RTO.'').

    ---------------------------------------------------------------------------

    D. Section 15(a) Factors

    1. Protection of Market Participants and the Public

    The enhanced financial resources requirements and system safeguard

    requirements for SIDCOs, as set forth in this final rulemaking, will

    further the protection of market participants and the public by

    increasing the financial stability and operational security of SIDCOs,

    and more broadly, increase the stability of the U.S. financial markets.

    A designation of systemic importance under Title VIII means the failure

    of a SIDCO or the disruption of its clearing and settlement activities

    could create or increase the risk of significant liquidity or credit

    problems spreading among financial institutions or markets, thereby

    threatening the stability of the U.S. financial markets. The

    regulations contained in this final rule are designed to help ensure

    that SIDCOs continue to function even in extreme circumstances,

    including multiple defaults by clearing members and wide-scale

    disruptions. While there may be increased costs associated with the

    implementation of the final rules, these costs are mitigated by the

    countervailing benefits of the increased safety and soundness of the

    SIDCOs and the reduction of systemic risk, which protect market

    participants and the public form the adverse consequences that would

    result from a SIDCO failure or a disruption in its functioning.

    2. Efficiency, Competitiveness, and Financial Integrity

    The regulations set forth in this final rulemaking will promote

    financial strength and stability of SIDCOs, as well as, more broadly,

    efficiency and greater competition in the global markets. The

    regulations promote efficiency insofar as SIDCOs that operate with

    enhanced financial resources as well as increased system safeguards are

    more secure and are less likely to fail. The regulations promote

    competition because they are consistent with the international

    standards set forth in the PFMIs and will help to ensure that SIDCOs

    are afforded the opportunity to gain QCCP status and thus avoid an

    important competitive disadvantage relative to similarly situated

    foreign CCPs that are QCCPs. Additionally, by increasing the stability

    and strength of the SIDCOs, the regulations in the final rule help to

    ensure that SIDCOs can meet their obligations in the most extreme

    circumstances and can resume operations even in the face of wide-scale

    disruption, which contributes to the financial integrity of the

    financial markets. In requiring more SIDCO financial resources to be

    pre-funded by (1) expanding the potential losses those resources are

    intended to cover and (2) restricting the means for satisfying those

    resource requirements, i.e. through prohibiting the use of assessments

    in determining guarantee fund contributions, the requirements of this

    final rule seek to lessen the incidence of pro-cyclical demands for

    additional funding resources and, in so doing, promote both financial

    integrity and market stability.\219\

    ---------------------------------------------------------------------------

    \219\ See supra n. 139 and accompanying text for a discussion of

    pro-cyclicality.

    ---------------------------------------------------------------------------

    3. Price Discovery

    The regulations in the final rulemaking enhance risk management

    standards for SIDCOs which may result in increased public confidence,

    which, in turn, might lead to expanded participation in the affected

    markets, i.e. products with a more complex risk profile. The expanded

    participation in these markets (i.e. greater transactional

    [[Page 49679]]

    volume) may have a positive impact on price discovery. Conversely, the

    Commission notes that these enhanced risk management standards are also

    associated with additional costs and to the extent that SIDCOs pass

    along the additional costs to their clearing members and customers,

    participation in the affected markets may decrease and have a negative

    impact on price discovery. However, it is the Commission's belief that

    such higher transactional costs should be greatly offset by the lower

    capital charges granted to clearing members and customers clearing

    derivative transactions through SIDCOs that are deemed QCCPs.

    4. Sound Risk Management Practices

    The regulations in the final rulemaking contribute to the sound

    risk management practices of SIDCOs because the requirements promote

    the safety and soundness of the SIDCOs by (1) enhancing the financial

    resources requirements, which provide greater certainty for market

    participants that all obligations will be honored by the SIDCOs and (2)

    enhancing system safeguards to facilitate the continuous operation and

    rapid recovery of activities, which provide certainty and security to

    market participants that potential disruptions will be reduced and, by

    extension, the risk of loss of capital and liquidity will be reduced.

    5. Other Public Interest Considerations

    The Commission notes the strong public interest for jurisdictions

    to either adopt the PFMIs or establish standards consistent with the

    PFMIs in order to allow CCPs licensed in the relevant jurisdiction to

    gain QCCP status. As emphasized throughout this rulemaking, SIDCOs that

    gain QCCP status will avoid a competitive disadvantage in the financial

    markets by avoiding the much higher capital charges imposed by the

    Basel CCP Capital Requirements. Moreover, because ``enhancements to the

    regulation and supervision of systemically important financial market

    utilities . . . are necessary . . . to support the stability of the

    broader financial system,'' \220\ adopting these rules promotes the

    public interest in a more stable broader financial system.

    ---------------------------------------------------------------------------

    \220\ See section 804(a)(4) of the Dodd-Frank Act (Congressional

    findings).

    ---------------------------------------------------------------------------

    VII. Related Matters

    A. Paperwork Reduction Act

    The Commission may not conduct or sponsor, and a registered entity

    is not required to respond to, a collection of information unless it

    displays a currently valid Office of Management and Budget (OMB)

    control number. The Commission's adoption of Sec. Sec. 39.28, 39.29,

    39.30, and 39.31 (DCO) imposes no new information collection

    requirements on registered entities within the meaning of the Paperwork

    Reduction Act.\221\ The OMB has previously assigned control numbers for

    the required collections of information under a prior related final

    rulemaking to which this rulemaking relates.\222\ The titles for the

    previous collections of information are ``Part 40, Provisions Common to

    Registered Entities'', OMB control number 3038-0093, ``Financial

    Resources Requirements for Derivatives Clearing Organizations, OMB

    control number 3038-0066,'' ``Information Management Requirements for

    Derivatives Clearing Organizations, OMB control number 3038-0069,''

    ``General Regulations and Derivatives Clearing Organizations, OMB

    control number 3038-0081,'' and ``Risk Management Requirements for

    Derivatives Clearing Organizations, OMB control number 3038-0076.''

    This rulemaking is applicable to a subset of DCOs designated as SIDCOs,

    who must comply with existing information collection requirements for

    DCOs.

    ---------------------------------------------------------------------------

    \221\ 44 U.S.C. 3501 et seq.

    \222\ 76 FR 69334 at 69428.

    ---------------------------------------------------------------------------

    B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that agencies

    consider whether the rules they propose will have a significant

    economic impact on a substantial number of small entities and, if so,

    provide a regulatory flexibility analysis respecting the impact. The

    rules proposed by the Commission will affect only DCOs designated as

    SIDCOs. The Commission has previously established certain definitions

    of ``small entities'' to be used by the Commission in evaluating the

    impact of its regulations on small entities in accordance with the RFA.

    The Commission has previously determined that DCOs are not small

    entities for the purpose of the RFA.\223\ Accordingly, the Chairman, on

    behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)

    that the proposed rules will not have a significant economic impact on

    a substantial number of small entities.

    ---------------------------------------------------------------------------

    \223\ See ``A New Regulatory Framework for Clearing

    Organizations,'' 66 FR 45604, 45609 (Aug. 29, 2001), ``17 CFR part

    40 Provisions Common to Registered Entities,'' 75 FR 67282 (November

    2, 2010), and ``Provisions Common to Registered Entities,'' 76 FR

    44776, 44789 (July 27, 2011).

    ---------------------------------------------------------------------------

    List of Subjects in 17 CFR Part 39

    Commodity futures, Consumer protection, Enforcement authority,

    Financial resources, Reporting and recordkeeping requirements, Risk

    management.

    For the reasons stated in the preamble, amend 17 CFR part 39 as

    follows:

    PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    0

    1. The authority citation for part 39 is revised to read as follows:

    Authority: 7 U.S.C. 2 and 7a-1 as amended by the Dodd-Frank Wall

    Street Reform and Consumer Protection Act, Pub. L. 111-203, 124

    Stat. 1376; Subpart C also issued under 12 U.S.C. 5464.

    0

    2. Add subpart C to read as follows:

    Subpart C--Provisions Applicable to Systemically Important Derivatives

    Clearing Organizations

    Sec.

    39.28 Scope.

    39.29 Financial resources requirements.

    39.30 System safeguards.

    39.31 Special enforcement authority.

    Subpart C--Provisions Applicable to Systemically Important

    Derivatives Clearing Organizations

    Sec. 39.28 Scope.

    (a) The provisions of this subpart C apply to any derivatives

    clearing organization, as defined in section 1a(15) of the Act and

    Sec. 1.3(d) of this chapter,

    (1) Which is registered or deemed to be registered with the

    Commission as a derivatives clearing organization, is required to

    register as such with the Commission pursuant to section 5b(a) of the

    Act, or which voluntarily registers as such with the Commission

    pursuant to section 5b(b) or otherwise; and

    (2) Which is a systemically important derivatives clearing

    organization as defined in Sec. 39.2.

    (b) A systemically important derivatives clearing organization is

    subject to the provisions of subparts A and B of this part 39 except to

    the extent different requirements are imposed by provisions of this

    subpart C.

    (c) A systemically important derivatives clearing organization

    shall provide notice to the Commission in advance of any proposed

    change to its rules, procedures, or operations that could materially

    affect the nature or level of risks presented by the systemically

    important derivatives clearing organization, in accordance with the

    requirements of Sec. 40.10 of this chapter.

    [[Page 49680]]

    Sec. 39.29 Financial resources requirements.

    (a) General rule. Notwithstanding the requirements of Sec.

    39.11(a)(1), a systemically important derivatives clearing organization

    that is systemically important in multiple jurisdictions or that is

    involved in activities with a more complex risk profile shall maintain

    financial resources sufficient to enable it to meet its financial

    obligations to its clearing members notwithstanding a default by the

    two clearing members creating the largest combined financial exposure

    for the systemically important derivatives clearing organization in

    extreme but plausible market conditions; Provided that if a clearing

    member controls another clearing member or is under common control with

    another clearing member, affiliated clearing members shall be deemed to

    be a single clearing member for the purposes of this provision.

    (b) Valuation of financial resources. Notwithstanding the

    requirements of Sec. 39.11(d)(2), assessments for additional guaranty

    fund contributions (i.e., guarantee fund contributions that are not

    pre-funded) shall not be included in calculating the financial

    resources available to meet a systemically important derivatives

    clearing organization's obligations under paragraph (a) of this

    section.

    Sec. 39.30 System safeguards.

    (a) Notwithstanding Sec. 39.18(e)(3), the business continuity and

    disaster recovery plan described in Sec. 39.18(e)(1) for each

    systemically important derivatives clearing organization shall have the

    objective of enabling, and the physical, technological, and personnel

    resources described in Sec. 39.18(e)(1) shall be sufficient to enable,

    the derivatives clearing organization to recover its operations and

    resume daily processing, clearing, and settlement no later than two

    hours following the disruption, for any disruption including a wide-

    scale disruption.

    (b) To ensure its ability to achieve the recovery time objective

    specified in paragraph (a) of this section in the event of a wide-scale

    disruption, each systemically important derivatives clearing

    organization must maintain a degree of geographic dispersal of

    physical, technological and personnel resources consistent with the

    following:

    (1) For each activity necessary to the clearance and settlement of

    existing and new contracts, physical and technological resources,

    sufficient to enable the entity to meet the recovery time objective

    after interruption of normal clearing by a wide-scale disruption, must

    be located outside the relevant area of the infrastructure the entity

    normally relies upon to conduct that activity, and must not rely on the

    same critical transportation, telecommunications, power, water, or

    other critical infrastructure components the entity normally relies

    upon for such activities;

    (2) Personnel, sufficient to enable the entity to meet the recovery

    time objective after interruption of normal clearing by a wide-scale

    disruption affecting the relevant area in which the personnel the

    entity normally relies upon to engage in such activities are located,

    must live and work outside that relevant area;

    (3) The provisions of Sec. 39.18(f) shall apply to these resource

    requirements.

    (c) Each systemically important derivatives clearing organization

    must conduct regular, periodic tests of its business continuity and

    disaster recovery plans and resources and its capacity to achieve the

    required recovery time objective in the event of a wide-scale

    disruption. The provisions of Sec. 39.18(j) apply to such testing.

    (d) The requirements of this section shall apply to a derivatives

    clearing organization not earlier than one year after such derivatives

    clearing organization is designated as systemically important.

    Sec. 39.31 Special enforcement authority.

    For purposes of enforcing the provisions of Title VIII of the Dodd-

    Frank Act, a systemically important derivatives clearing organization

    shall be subject to, and the Commission has authority under the

    provisions of subsections (b) through (n) of section 8 of the Federal

    Deposit Insurance Act (12 U.S.C. 1818) in the same manner and to the

    same extent as if the systemically important derivatives clearing

    organization were an insured depository institution and the Commission

    were the appropriate Federal banking agency for such insured depository

    institution.

    Issued in Washington, DC, on August 9, 2013, by the Commission.

    Melissa D. Jurgens,

    Secretary of the Commission.

    Appendix to Final Rule on Enhanced Risk Management Standards for

    Systemically Important Derivatives Clearing Organizations--Commission

    Voting Summary

    Note: The following appendix will not appear in the Code of

    Federal Regulations

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton,

    O'Malia, and Wetjen voted in the affirmative.

    [FR Doc. 2013-19791 Filed 8-14-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: August 15, 2013



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