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2013-27849

  • Federal Register, Volume 78 Issue 231 (Monday, December 2, 2013)[Federal Register Volume 78, Number 231 (Monday, December 2, 2013)]

    [Rules and Regulations]

    [Pages 72475-72525]

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

    [FR Doc No: 2013-27849]

    [[Page 72475]]

    Vol. 78

    Monday,

    No. 231

    December 2, 2013

    Part VI

    Commodity Futures Trading Commission

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    17 CFR Parts 39, 140, and 190

    Derivatives Clearing Organizations and International Standards; Final

    Rule

    Federal Register / Vol. 78 , No. 231 / Monday, December 2, 2013 /

    Rules and Regulations

    [[Page 72476]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 39, 140, and 190

    RIN 3038-AE06

    Derivatives Clearing Organizations and International Standards

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'') is

    adopting final regulations to establish additional standards for

    compliance with the derivatives clearing organization (``DCO'') core

    principles set forth in the Commodity Exchange Act (``CEA'') for

    systemically important DCOs (``SIDCOs'') and DCOs that elect to opt-in

    to the SIDCO regulatory requirements (``Subpart C DCOs''). Pursuant to

    the new regulations, SIDCOs and Subpart C DCOs are required to comply

    with the requirements applicable to all DCOs, which are set forth in

    the Commission's DCO regulations on compliance with core principles, to

    the extent those requirements are not inconsistent with the new

    requirements set forth herein. The new regulations include provisions

    concerning: procedural requirements for opting in to the regulatory

    regime as well as substantive requirements relating to governance,

    financial resources, system safeguards, special default rules and

    procedures for uncovered losses or shortfalls, risk management,

    additional disclosure requirements, efficiency, and recovery and wind-

    down procedures. These additional requirements are consistent with the

    Principles for Financial Market Infrastructures (``PFMIs'') published

    by the Committee on Payment and Settlement Systems and the Board of the

    International Organization of Securities Commissions (``CPSS-IOSCO'').

    In addition, the Commission is adopting certain delegation provisions

    and certain technical clarifications.

    DATES: This rule is effective December 31, 2013, except for the

    amendments to 17 CFR 39.31 and 140.94, which are effective December 13,

    2013, and the amendments to 190.09, which are effective December 2,

    2013.

    FOR FURTHER INFORMATION CONTACT: Ananda Radhakrishnan, Director,

    Division of Clearing and Risk (``DCR''), at 202-418-5188 or

    aradhakrishnan@cftc.gov; Robert B. Wasserman, Chief Counsel, DCR, at

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

    Counsel, DCR, at 202-418-7622 or lastrada@cftc.gov; Peter A. Kals,

    Special Counsel, DCR, at 202-418-5466 or pkals@cftc.gov; Jocelyn

    Partridge, Special Counsel, DCR, at 202-418-5926 or

    jpartridge@cftc.gov; or Tracey Wingate, Special Counsel, DCR, at 202-

    418-5319 or twingate@cftc.gov, in each case, at the Commodity Futures

    Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,

    Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. Regulatory Framework for Registered DCOs

    B. Designation of DCOs as Systemically Important under Title

    VIII of the Dodd-Frank Act

    C. Existing Standards for SIDCOs

    D. DCO Core Principles and Regulations for Registered DCOs

    E. PFMIs

    F. The Role of the PFMIs in International Banking Standards

    G. New Regulations Applicable to SIDCOs and Subpart C DCOs

    II. Discussion of Revised and New Regulations

    A. Regulation 39.2 (Definitions)

    B. Regulation 39.30 (Scope)

    C. Regulation 39.31 (Election to become subject to the

    provisions of Subpart C)

    D. Regulation 39.32 (Governance for systemically important

    derivatives clearing organizations and subpart C derivatives

    clearing organizations)

    E. Regulation 39.33 (Financial resources requirements for

    systemically important derivatives clearing organizations and

    subpart C derivatives clearing organizations)

    F. Regulation 39.34 (System safeguards for systemically

    important derivatives clearing organizations and subpart C

    derivatives clearing organizations)

    G. Regulation 39.35 (Default rules and procedures for uncovered

    credit losses or liquidity shortfalls (recovery) for systemically

    important derivatives clearing organizations and subpart C

    derivatives clearing organizations)

    H. Regulation 39.36 (Risk management for systemically important

    derivatives clearing organizations and subpart C derivatives

    clearing organizations)

    I. Regulation 39.37 (Additional disclosure for systemically

    important derivatives clearing organizations and subpart C

    derivatives clearing organizations)

    J. Regulation 39.38 (Efficiency for systemically important

    derivatives clearing organizations and subpart C derivatives

    clearing organizations)

    K. Regulation 39.39 (Recovery and wind-down for systemically

    important derivatives clearing organizations and subpart C

    derivatives clearing organizations)

    L. Regulation 39.40 (Consistency with the Principles for

    Financial Market Infrastructures)

    M. Regulation 39.41 (Special enforcement authority for

    systemically important derivatives clearing organizations)

    N. Regulation 39.42 (Advance notice of material risk-related

    rule changes by systemically important derivatives clearing

    organizations)

    O. Regulation 140.94 (Delegation of authority to the Director of

    the Division of Clearing and Risk)

    P. Regulation 190.09 (Member property)

    III. Effective Date

    A. Congressional Review Act

    B. Administrative Procedure Act

    IV. Related Matters

    A. Paperwork Reduction Act

    B. Regulatory Flexibility Act

    C. Consideration of Costs and Benefits

    I. Background

    A. Regulatory Framework for Registered DCOs

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    Reform and Consumer Protection Act (``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.

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    \1\ 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 DCO must comply with

    in order to register and maintain registration with the Commission. 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,\4\ adopted regulations

    establishing standards for compliance with the DCO core principles.\5\

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    \4\ See Section 725(c)(2)(i) of the Dodd-Frank Act (giving the

    Commission explicit 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)).

    \5\ See Derivatives Clearing Organization General Provisions and

    Core Principles, 76 FR 69334 (Nov. 8, 2011). These regulations are

    set forth in Subpart A and Subpart B of part 39 of the Commission's

    regulations (``Subpart A'' and ``Subpart B,'' respectively).

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    B. Designation of DCOs as Systemically Important under Title VIII of

    the Dodd-Frank Act

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

    Settlement Supervision Act of 2010,'' \6\

    [[Page 72477]]

    was enacted to mitigate systemic risk in the financial system and

    promote financial stability.\7\ Section 804 of the Dodd-Frank Act

    requires the Financial Stability Oversight Council (``Council'') to

    designate those financial market utilities (``FMUs'') \8\ that the

    Council determines are, or are likely to become, systemically

    important.\9\

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    \6\ Section 801 of the Dodd-Frank Act.

    \7\ Section 802(b) of the Dodd-Frank Act.

    \8\ 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. Section 803(6)(A) of the Dodd-Frank Act.

    \9\ 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).

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    In determining whether an FMU is systemically important, the

    Council uses a detailed two-stage designations process, using certain

    statutory considerations \10\ 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.'' \11\ On

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

    important under Title VIII.\12\ Two of these are CFTC-registered DCOs

    \13\ for which the Commission is the Supervisory Agency.\14\

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    \10\ 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.

    \11\ 76 FR 44766.

    \12\ 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.

    \13\ While Chicago Mercantile Exchange, Inc. (``CME Clearing''),

    ICE Clear Credit LLC (``ICE Clear Credit''), and The Options

    Clearing Corporation (``OCC'') are the CFTC-registered DCOs that

    were designated as systemically important by the Council, the CFTC

    is the Supervisory Agency only for CME Clearing and ICE Clear

    Credit; the Securities and Exchange Commission (``SEC'') serves as

    OCC's Supervisory Agency.

    \14\ See Section 803(8)(A) of the Dodd-Frank Act (defining

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

    jurisdiction over a designated financial market utility under

    federal banking, securities or commodity futures laws).

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    C. Existing Standards for SIDCOs

    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.\15\ More generally, Section 752 of the Dodd-Frank

    Act directs the Commission to consult and coordinate with foreign

    regulatory authorities on the establishment of consistent international

    standards with respect to the regulation of, among other things, swaps,

    futures, and options on futures.\16\

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    \15\ See Section 805(a)(2) of the Dodd-Frank Act. The Commission

    notes that, under section 805 of the Dodd-Frank Act, the Commission

    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 are engaged in activities for which the

    Commission is the appropriate financial regulator.

    \16\ Section 752(a) of the Dodd-Frank Act, codified at 15 U.S.C.

    8325, provides, in relevant part, that in order to promote effective

    and consistent global regulation of swaps and security based swaps,

    the CFTC, the SEC, and the prudential regulators (as that term is

    defined in section 1a(30) of the CEA), as appropriate, shall consult

    and coordinate with foreign regulatory authorities on the

    establishment of international standards with respect to the

    regulation of swaps and swap entities. In addition, section 752(b)

    of the Dodd-Frank Act states that in order to promote effective and

    consistent global regulation of contracts of sale of a commodity for

    future delivery and options on such contracts, the CFTC shall

    consult and coordinate with foreign regulatory authorities on the

    establishment of international standards with respect to the

    regulation of contracts of a sale of a commodity for future delivery

    and on options on such contracts.

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    In 2013, after careful consideration of the comments on the rules

    that it had proposed for SIDCOs in 2010 and 2011,\17\ and in light of

    domestic and international market and regulatory developments, the

    Commission finalized regulations for SIDCOs in a manner consistent with

    the PFMIs.\18\ Most recently, the Commission proposed the regulations

    for SIDCOs and Subpart C DCOs that are being adopted herein (the

    ``Proposal'').\19\

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    \17\ See Financial Resources Requirements for Derivatives

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

    of proposed rulemaking) and Risk Management Requirements for

    Derivatives Clearing Organizations, 76 FR 3697 (Jan. 20, 2011)

    (notice of proposed rulemaking).

    \18\ Specifically, in that final rulemaking, the Commission

    amended part 39 by creating a Subpart C and adding regulations that

    (1) increased the minimum financial resource requirements for

    SIDCOs, (2) restricted the use of assessments by SIDCOs in meeting

    such financial resource obligations, (3) enhanced the system

    safeguards requirements for SIDCOs, and (4) granted the Commission

    special enforcement authority over SIDCOs pursuant to Section 807 of

    the Dodd-Frank Act. See Enhanced Risk Management Standards for

    Systemically Important Derivatives Clearing Organizations, 78 FR

    49663 (Aug. 15, 2013) (``SIDCO Final Rule'').

    \19\ Derivatives Clearing Organizations and International

    Standards, 78 FR 50260 (Aug. 16, 2013) (notice of proposed

    rulemaking).

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    D. DCO Core Principles and Regulations for Registered DCOs

    As noted in the Proposal, in order to register and maintain

    registration status with the Commission, DCOs must comply with all of

    the DCO core principles set forth in Section 5b(c)(2) of the CEA, as

    amended by Section 725 of the Dodd-Frank Act, as well as all applicable

    Commission regulations. The Proposal did, however, identify and discuss

    those core principles and related Commission regulations that were most

    relevant to the proposed regulations. Specifically, the Proposal

    discussed the following DCO core principles and related Commission

    regulations Core Principle B (Financial Resources) and regulations

    39.11 and 39.29; Core Principle D (Risk Management) and regulation

    39.13; Core Principle G (Default Rules and Procedures) and regulation

    39.16; Core Principle I (System Safeguards) and regulations 39.18 and

    39.30; Core Principle L (Public Information) and regulation 39.21; Core

    Principle O (Governance Fitness Standards); Core Principle P (Conflicts

    of Interest); and Core Principle Q (Composition of Governing

    Boards).\20\

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    \20\ For a summary and description of these core principles and

    Commission regulations, see 78 FR 50262-50263.

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    E. PFMIs

    1. Overview

    In the SIDCO Final Rule, the Commission determined that, for

    purposes of meeting its obligation pursuant to Section 805(a)(2)(A) of

    the Dodd-Frank Act, the PFMIs, which were developed by CPSS-IOSCO over

    a period of several years,\21\ were the

    [[Page 72478]]

    international standards most relevant to the risk management of

    SIDCOs.\22\ The PFMIs set out 24 principles which address the risk

    management and efficiency of a financial market infrastructure's

    (``FMI'') operations.\23\ Assessments of observance with the PFMIs

    focus also on the ``key considerations'' set forth for each of the

    principles.\24\ While Subpart A and Subpart B of part 39 of the

    Commission's regulations incorporate the vast majority of the standards

    set forth in the PFMIs,\25\ the Commission, which is a member of the

    Board of IOSCO, has an obligation under Section 805(a) of the Dodd-

    Frank Act to implement regulations relating to risk management that

    conform with applicable international standards. The PFMIs are such

    standards and, with this rulemaking, the Commission intends to adopt

    rules and regulations that are fully consistent with the standards set

    forth in the PFMIs by the end of 2013. To that end, the Commission has

    recognized that in certain instances, the standards set forth in the

    PFMIs may not be fully covered by the requirements set forth in Subpart

    A and Subpart B of part 39 of the Commission's regulations. Thus, this

    rulemaking revises Subpart C to address those gaps, specifically with

    respect to the following PFMI principles: Principle 2 (Governance);

    Principle 3 (Framework for the comprehensive management of risks);

    Principle 4 (Credit risk); Principle 6 (Margin); Principle 7 (Liquidity

    risk); Principle 9 (Money settlements); Principle 14 (Segregation and

    portability); Principle 15 (General business risk); Principle 16

    (Custody and investment risks); Principle 17 (Operational risk);

    Principle 21 (Efficiency and effectiveness); Principle 22

    (Communication procedures and standards); and Principle 23 (Disclosure

    of rules, key procedures, and market data).\26\

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    \21\ See Committee on Payment and Settlement Systems and the

    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 the Financial Stability Board June 2012

    Third Progress Report on Implementation, 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'').

    \22\ In making this determination, the Commission noted 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

    CCPs.'' See 78 FR 49666.

    \23\ See id., ] 1.19.

    \24\ See Committee on Payment and Settlement Systems and the

    Board of the International Organization of Securities Commissions

    Principles for Financial Market Infrastructures: Disclosure

    Framework and Assessment Methodology (Dec. 2012) (hereinafter

    ``Disclosure Framework and Assessment Methodology''), available at

    http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.

    \25\ Indeed, Subpart A and Subpart B were informed by the

    consultative report for the PFMIs. See generally 76 FR 69334.

    \26\ For a summary and description of these principles, see 78

    FR 50263-50266.

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    F. The Role of the PFMIs in International Banking Standards

    The Commission notes that where a central counterparty (``CCP'') is

    not prudentially supervised in a jurisdiction that has domestic rules

    and regulations that are consistent with the standards set forth in the

    PFMIs, the implementation of certain international banking regulations

    will have significant cost implications for that CCP and its market

    participants. In July of 2012, the Basel Committee on Banking

    Supervision (``BCBS''),\27\ 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.\28\

    The Basel CCP Capital Requirements create financial incentives for

    banks, including their subsidiaries and affiliates,\29\ to clear

    financial derivatives with CCPs that are prudentially supervised in a

    jurisdiction where the relevant regulator has adopted rules or

    regulations that are consistent with the standards set forth in 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.\30\ These incentives

    include (1) lower capital charges for exposures arising from

    derivatives cleared through a qualified CCP (``QCCP'') and (2)

    significantly higher capital charges for exposures arising from

    derivatives cleared through non-qualifying CCPs. A QCCP is defined as

    an entity that (i) is licensed to operate as a CCP, and is permitted by

    the appropriate regulator to operate as such, and (ii) 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.\31\

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    \27\ 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 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.

    \28\ See ``Capital Requirements for Bank Exposures to Central

    Counterparties'' (July 2012), available at www.bis.org/publ/bcbs227.pdf. 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 international banking

    sector.'' See Bank for International Settlement's Web site for

    compilation of documents that form the regulatory framework of Basel

    III, available at http://www.bis.org/bcbs/basel3.htm.

    \29\ ``Bank'' is defined in accordance with the Basel framework

    to mean a 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. 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 DCO.

    \30\ See Basel CCP Capital Requirements, Annex 4, Section II,

    6(i). See generally 78 FR 50266-50267.

    \31\ See Basel CCP Capital Requirements, Section I, A: General

    Terms.

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    The failure of a CCP to achieve QCCP status could result in

    significant costs to its bank customers. As one market participant

    noted, the ``ramifications for failure to achieve QCCP status are

    onerous for banks' CCP exposures and can result in capital charges on

    trade exposures that are 10-20 times larger than capital charges for

    QCCP trade exposures.'' \32\ The increased capital charges for

    transactions through non-qualifying CCPs may have significant business

    and operational implications for U.S. DCOs that operate internationally

    and are not QCCPs. For instance, banks faced with such higher capital

    charges may transfer their clearing business away from such DCOs to a

    QCCP in order to benefit from the preferential capital charges provided

    by the Basel CCP Capital Requirements. Alternatively, banks may reduce

    or discontinue their clearing business altogether. Banks may also pass

    through the higher costs of transacting on a non-qualifying DCO that

    result from the higher capital charges to their customers. Accordingly,

    customers using such banks as intermediaries may transfer their

    business to an intermediary at a QCCP. In short, a DCO's failure to be

    a QCCP may cause it to face a competitive disadvantage in retaining

    members and customers.

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    \32\ CME at 5, n. 18.

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    [[Page 72479]]

    G. New Regulations Applicable to SIDCOs and Subpart C DCOs

    As described in detail in section II below, this final rulemaking

    includes a new defined term, a Subpart C DCO, to allow registered DCOs

    that are not SIDCOs to elect to become subject to the provisions in

    Subpart C of part 39 of the Commission's regulations (``Subpart C'').

    Further, this rulemaking revises Subpart C so that Subpart C applies to

    SIDCOs and Subpart C DCOs, and includes new or revised standards for

    governance, financial resources, system safeguards, default rules and

    procedures for uncovered losses or shortfalls, risk management,

    disclosure, efficiency, and recovery and wind-down procedures. These

    requirements address the remaining gaps between the Commission's

    regulations and the PFMI standards. Thus, Subpart C, together with the

    provisions in Subpart A and Subpart B, establish domestic rules and

    regulations that are consistent with the PFMIs. Because Subparts A, B,

    and C apply to SIDCOs and Subpart C DCOs on a continuing basis, SIDCOs

    and Subpart C DCOs should be QCCPs for purposes of the Basel CCP

    Capital Requirements.\33\

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    \33\ See QCCP definition supra Section I.F.

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

    The Commission received twelve comment letters, nine of which

    commented on the Proposal.\34\ All nine of these letters were generally

    supportive of the Proposal's goals. Given the importance of obtaining

    QCCP status for a U.S.-based DCO, the Commission requested comment on

    additional measures that the Commission should take to help ensure that

    Subpart C DCOs obtain QCCP status. MGEX responded by asserting that

    steps should be taken to ``ensure that the [Commission's] proposed

    regulations will be recognized by applicable regulators as being

    consistent with the PFMIs and that all DCOs subject to those

    regulations would be considered QCCPs in all relevant jurisdictions.''

    \35\ MGEX also requested that the Commission ``coordinate with other

    regulators'' to provide a ``uniform framework that recognizes the

    oversight provided by multiple regulatory jurisdictions so as not to

    unnecessarily burden DCOs with requirements established by multiple

    regulatory jurisdictions.\36\ As noted in the Proposal, the Commission

    believes that the Subpart C regulations in combination with the

    provisions contained in Subpart A and Subpart B would establish

    domestic rules and regulations that are consistent with the PFMIs.

    Because SIDCOs and Subpart C DCOs would have the requirements of

    Subpart A, Subpart B and Subpart C applied to them on a continuing

    basis, such entities should qualify as QCCPs for purposes of the Basel

    CCP Capital Requirements.\37\ In addition, the Commission notes that it

    actively coordinates with other domestic and international regulators

    informally, as required by applicable law (such as through the

    rulemaking consultation process under Title VIII), and through

    participation in several working groups and international organizations

    (such as IOSCO).\38\ ISDA, which expressed support for the Commission's

    goal of implementing regulations for DCOs that are consistent with the

    PFMIs by the end of 2013, suggested that the Commission issue this

    rulemaking as an interim final rule ``so that market participants will

    have an opportunity to provide additional substantive comments.'' \39\

    The Commission declines to do so. As is the case with other

    regulations, part 39 of the Commissions regulations may be reviewed or

    revised by the Commission as necessary.

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    \34\ All comment letters are available through the Commission's

    Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391. Comments addressing the Proposal were

    received from the European Commission and the following parties: CME

    Group Inc. (``CME''); The Futures Industry Association (``FIA'');

    IntercontinentalExchange, Inc. (``ICE''); International Swaps and

    Derivatives Association Inc. (``ISDA''); LCH.Clearnet Group Limited

    (``LCH''); The Minneapolis Grain Exchange (``MGEX''); New York

    Portfolio Clearing LLC (``NYPC''); and Chris Barnard.

    \35\ MGEX at 6.

    \36\ Id. In addition, ISDA's comment letter addressed the

    Commission's examination of SIDCOs and Subpart C DCOs. Specifically,

    ISDA stated that revised Subpart C should specify whether the

    Commission will evaluate a SIDCO's or Subpart C DCO's compliance

    with Subpart C as part of its general rule enforcement review

    program, or whether SIDCOs and Subpart C DCOs will be subject to a

    more rigorous and more frequent (e.g., annual) review process. ISDA

    at 4. This comment does not pertain to any of the proposed

    regulations and is, therefore, outside the scope of the Proposal.

    However, the Commission notes that Section 807(a) of the Dodd-Frank

    Act requires the Commission to examine a SIDCO at least once

    annually.

    \37\ 78 FR 50297.

    \38\ The Commission intends to cooperate with other regulators,

    both domestically and internationally, to foster efficient and

    effective communication and consultation so that we may support each

    other in fulfilling our respective mandates with respect to SIDCOs

    and Subpart C DCOs. See PFMIs, Responsibility E.

    \39\ ISDA at 1.

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

    The following section will address discuss the comments received on

    specific aspects of the Proposal in connection with explaining each of

    the amended and new regulations adopted herein.

    II. Discussion of Revised and New Regulations

    A. Regulation 39.2 (Definitions)

    The Commission proposed amending regulation 39.2 by revising one

    definition and adding six new defined terms. First, the Commission

    proposed a technical amendment to the definition of ``systemically

    important derivatives clearing organization.'' The definition had

    described a SIDCO as a registered DCO ``which has been designated by

    the [Council] to be systemically important . . .'' The proposed

    definition described a SIDCO as a registered DCO ``which is currently

    designated . . .''

    Second, the Commission proposed to add a definition for the phrase

    ``activity with a more complex risk profile,'' to provide greater

    clarity as to the types of activities that would trigger a Cover Two

    financial resources requirement. The Commission proposed to define

    ``activity with a more complex risk profile'' to include clearing

    credit default swaps, credit default futures, and derivatives that

    reference either credit default swaps or credit default futures, as

    well as any other activity designated as such by the Commission. The

    phrase ``activity with a more complex risk profile'' currently appears

    in regulation 39.29 (Financial resources requirements), which the

    Commission proposed to revise and renumber as regulation 39.33.\40\

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

    \40\ See Section II.E., infra.

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

    The Commission also proposed to add a definition for the term

    ``subpart C derivatives clearing organization.'' The proposed

    definition would include any registered DCO that is not a SIDCO and

    that has elected to become subject to Subpart C.

    Finally, the Commission proposed to add definitions for

    ``depository institution,'' ``U.S. branch or agency of a foreign

    banking organization,'' and ``trust company.'' These terms are used in

    the provisions concerning liquidity set forth in paragraphs (c) and (d)

    of revised regulation 39.29, which the Proposal renumbered as

    regulation 39.33.\41\ As proposed, a ``depository institution'' would

    have the meaning set forth in Section 19(b)(1)(A) of the Federal

    Reserve Act (12 U.S.C. 461(b)(1)(A)). A ``U.S. branch or agency of a

    foreign banking organization'' would mean the U.S. branch or agency of

    a foreign banking organization as defined in Section 1(b) of the

    International Banking Act of 1978 (12 U.S.C. 3101). A ``trust company''

    would mean a trust company that is a member of the Federal Reserve

    System, under

    [[Page 72480]]

    Section 1 of the Federal Reserve Act (12 U.S.C. 221), but that does not

    meet the definition of ``depository institution.''

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

    \41\ See id.

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

    The Commission received only one comment on the substance of the

    proposed definitions. Chris Barnard stated that he approved of the fact

    that the definition of ``activity with a more complex risk profile''

    includes credit default swaps and other activities designated as such

    by the Commission under regulation 39.33(a).

    In addition, the Commission received a comment regarding the

    wording of a defined term. MGEX expressed concern regarding the title

    ``Subpart C DCO.'' Specifically, MGEX stated that the title ``itself

    implies to the public that the [Subpart C] DCO is of significantly

    lesser status'' as compared to a SIDCO.\42\ MGEX requested that the

    Commission instead use the term ``Qualified Central Counterparty'' in

    its regulations and to define that term to include any DCO that is held

    to the standards set forth in Subpart C. The Commission declines to

    adopt this suggestion.

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

    \42\ MGEX at 4.

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

    SIDCOs and registered DCOs that elect to opt-in to these heightened

    standards are not identically situated in that a SIDCO is required to

    comply with the standards set forth in Subpart C because of its

    importance to the US financial markets. In other words, a Subpart C DCO

    may rescind its election whereas a SIDCO may not. In addition, there

    may be circumstances in which the Commission may want to apply a

    particular regulation only to SIDCOs. For example, regulation 39.41,

    enacted pursuant to section 807c of the Dodd-Frank Act, grants the

    Commission special enforcement authority over SIDCOs, but not Subpart C

    DCOs. Moreover, SIDCOs are required to comply with regulation 40.10,

    enacted consistent with section 806 of the Dodd-Frank Act, which, among

    other things, requires them to provide notice to the Commission not

    less than 60 days in advance of proposed changes to their rules,

    procedures, or operations that could materially affect the nature or

    level of risks presented by the systemically important derivatives

    clearing organization. This requirement is not imposed on Subpart C

    DCOs. Thus, it is necessary and appropriate for the Commission to

    retain the ability to differentiate between SIDCOs and other registered

    DCOs in its regulations.

    Moreover, as discussed below, MGEX and other commenters have noted

    that the proposed opt-in structure is important in that it allows

    registered DCOs that are not SIDCOs to be eligible for QCCP status.

    Once a Subpart C DCO successfully attains QCCP status, the Commission

    notes that, in general, its regulations do not prohibit a Subpart C DCO

    (or a SIDCO) from stating that it is a QCCP in its marketing materials.

    Indeed, the Commission expects that Subpart C DCOs would market

    themselves as QCCPs, which is why a Subpart C DCO is prohibited from

    marketing itself as a QCCP while in the process of rescinding its

    election.

    For the reasons stated above, the Commission believes that the

    proposed revised and new definitions are appropriate and, therefore, is

    adopting them as proposed.

    B. Regulation 39.30 (Scope)

    The Commission proposed expanding regulation 39.28 (and renumbering

    it regulation 39.30) so that Subpart C would apply to SIDCOs and

    Subpart C DCOs. As described above, the rules proposed in Subpart C

    address the gaps between Commission regulations and the standards set

    forth in the PFMIs.\43\ As such, a DCO that is subject to the

    requirements of Subpart A, Subpart B, and Subpart C should meet the

    requirements for QCCP status and benefit from the lower capital charges

    on clearing member banks and bank customers of clearing members for

    exposures resulting from derivatives cleared through QCCPs.\44\ Such a

    DCO may also be viewed more favorably by potential members or customers

    of members in that it would be seen to be held to international

    standards.

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

    \43\ See also supra Section I.G.

    \44\ See supra Section I.F.

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

    The Commission requested comment on the proposed rules.

    LCH and MGEX argued that the amended and new provisions of Subpart

    C should pertain to all registered DCOs. LCH asserted that the BCBS

    capital rules provide significant incentives for a DCO to meet the high

    standards embodied in the PFMIs or face the real risk that bank

    clearing members will cease to clear through them and therefore all

    DCOs should be required to comply with these standards.\45\ MGEX argued

    that the Commission's proposed opt-in regime grants SIDCOs an unfair

    competitive advantage over other DCOs.\46\ MGEX suggested that the

    Commission consider holding all registered DCOs to these higher

    standards and to provide an ``opt-out'' mechanism for those registered

    DCOs that are not SIDCOs that do not wish to attain QCCP status.\47\ In

    addition, LCH and MGEX requested that, if the Commission elects to

    finalize the proposed regulations with the opt-in regime, DCOs be

    permitted to petition the Commission for additional time to comply with

    all of the Subpart C regulations.\48\

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

    \45\ LCH at 3.

    \46\ MGEX at 2-3.

    \47\ MGEX at 3.

    \48\ LCH at 3-4; MGEX at 4.

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

    The Commission has decided to adopt regulation 39.30 as proposed.

    First, because of the potential benefits resulting from QCCP status, as

    described above, the Commission believes that a DCO that has not been

    designated to be systemically important should have the option to elect

    to become subject to Subpart C.\49\ However, the Commission does not

    believe that a DCO that is not a SIDCO should be required to be held to

    Subpart C if it does not elect to because of the potential costs

    associated with compliance with these standards. In addition, and as

    discussed in more detail below, those DCOs that elect to be held to

    Subpart C may choose the effective date of their election. Because a

    Subpart C DCO is not required to comply with the regulations set forth

    in Subpart C until the specified effective date, a Subpart C DCO has a

    certain amount of control over the date on which it must comply with

    the Subpart C regulations.

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

    \49\ As a technical matter, the Commission proposed to move

    existing paragraph (c) of renumbered regulation 39.30 (requiring a

    SIDCO to 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 SIDCO, in

    accordance with the requirements of regulation 40.10) to proposed

    new regulation 39.42. Because the other provisions of proposed

    regulation 39.30 would pertain exclusively to the scope of Subpart

    C, it would be appropriate for existing paragraph (c) to be codified

    in a separate regulation. See infra Section II.N. for further

    detail.

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

    Further, the Commission concludes that a SIDCO should be required

    to comply with revised Subpart C in order to maintain risk management

    standards that enhance the safety and efficiency of a SIDCO, reduce

    systemic risks, foster transparency, and support the stability of the

    broader financial system.\50\ In order to support financial stability,

    a SIDCO must operate in a safe and sound manner. If it fails to

    measure, monitor, and manage its risks effectively, a SIDCO could pose

    significant risk to its participants and the financial system more

    broadly.\51\ The Commission shares the stated objectives of the PFMIs,

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

    reduce systemic risk and foster transparency and financial

    stability.\52\ As discussed in the Proposal, the PFMIs

    [[Page 72481]]

    have been adopted and implemented by numerous foreign

    jurisdictions.\53\ The Commission notes that none of the commenters

    opposed holding all SIDCOs to the Subpart C regulations. The Commission

    believes that a global, unified set of international risk management

    standards for systemically important CCPs can help support the

    stability of the broader financial system. As such, for the reasons

    described above and in the Proposal, the Commission believes that

    SIDCOs should be required to comply with all of the requirements set

    forth in part 39 of the Commission's regulations, including the

    standards set forth in Subpart C, as revised herein.

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

    \50\ See SIDCO Final Rule (Discussion of risk management

    standards). See also Section 805(b) of the Dodd-Frank Act.

    \51\ See supra Section I.E.

    \52\ PFMIs ] 1.15.

    \53\ See 78 FR 50260, 50268.

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

    C. Regulation 39.31 (Election to become subject to the provisions of

    Subpart C)

    As discussed above and in the Proposal,\54\ the Basel CCP Capital

    Requirements impose significantly higher capital charges on banks

    (including their subsidiaries and affiliates) that clear financial

    derivatives through CCPs that do not qualify as QCCPs (i.e., CCPs that

    are licensed and supervised in a jurisdiction where the relevant

    regulator applies to the CCP, on an ongoing basis, domestic rules and

    regulations that are not consistent with the PFMIs).\55\ Because such

    charges could create incentives for banks to migrate their business to

    CCPs that are QCCPs or to avoid clearing,\56\ U.S. DCOs that operate

    internationally, but are not QCCPs, may face a substantial competitive

    disadvantage. The Subpart C requirements, as amended herein, address

    any remaining gaps between the Commission's existing regulations and

    the PFMI standards.\57\ Accordingly, a DCO that is subject to the

    collective obligations contained in Subpart A, Subpart B and Subpart C

    should be a QCCP for purposes of the Basel CCP Capital

    Requirements.\58\

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

    \54\ See discussion of the role of the PFMIs in international

    banking standards supra Section I.F., 78 FR 50266-9.

    \55\ See Basel CCP Capital Requirements at Section I.A.: General

    Terms.

    \56\ As noted above, banks alternatively may reduce or

    discontinue their clearing business or pass through to their

    customers any higher costs of transacting through a DCO that is not

    a QCCP. See discussion of the role of the PFMIs in International

    Banking Standards supra Section I.F; 78 FR 50267, 50269.

    \57\ See discussion of the new regulations applicable to SIDCOs

    and Subpart C DCOs supra Section I.G.

    \58\ Id.

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

    Regulation 39.31, as proposed, would provide a mechanism whereby a

    DCO that has not been designated by the Council as systemically

    important may elect to become subject to the provisions of Subpart C

    (i.e., may ``opt'' to become subject to the regulations otherwise

    applicable only to SIDCOs) and, thereby, attain QCCP status, should the

    DCO individually determine that the benefits of achieving such status

    outweigh the costs associated with implementing the Subpart C

    regulations. The Commission also proposed procedures for withdrawing or

    rescinding that election.

    The Commission received five comment letters regarding proposed

    regulation 39.31.\59\ These comments generally supported the adoption

    of procedures that would provide non-SIDCO DCOs the opportunity to

    become QCCPs through adherence to an enhanced regulatory regime.\60\

    LCH, for example, ``strongly supported'' the adoption of ``heightened

    regulatory standards that would allow both SIDCOs and non-SIDCOs to be

    QCCPs.'' \61\ The European Commission similarly stated that central

    counterparties ``that wish to operate under safer standards and compete

    on the basis of the quality of their risk-management . . . should not

    be prevented from doing so.'' \62\

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

    \59\ Comments on proposed regulation 39.31 were received from

    the European Commission, FIA, ISDA, LCH and MGEX.

    \60\ See, e.g., European Commission at 1, LCH at 2, MGEX at 1-2.

    \61\ LCH at 1. See also MGEX at 1 (``MGEX applauds the

    Commission for attempting to establish an avenue by which DCOs not

    designated as systemically important could qualify for [QCCP]

    status.'').

    \62\ European Commission at 1.

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

    MGX and LCH disagreed, however, with the proposed ``opt-in''

    approach and suggested alternative means for achieving the Commission's

    objectives.\63\ As mentioned above, both LCH and MGEX suggested that

    the Commission require all currently registered DCOs to be held to the

    enhanced regulatory requirements proposed to be applicable only to

    SIDCOs and Subpart C DCOs.\64\ LCH asserted that ``it is important for

    all CCPs which clear swaps and other derivatives . . . to adhere to the

    higher standards.'' \65\ MGEX claimed that requiring DCOs that have not

    been designated by the Council as systemically important to ``opt-in''

    to Subpart C compliance is ``unnecessarily burdensome and

    discriminatory'' in comparison to the regulatory treatment of

    SIDCOs.\66\ In support of its position, MGEX noted that SIDCOs will be

    held to the same standards as Subpart C DCOs, but will not be required

    to submit a Subpart C Election Form, or to otherwise engage in the

    Subpart C election process in order to become a QCCP.\67\ MGEX

    contended that requiring all currently registered DCOs to be held to

    the enhanced regulatory regime would negate the need for a Subpart C

    Election Form and, therefore, would treat all DCOs identically in terms

    of their registration status and requirements, which would enable DCOs

    to spend the time that they would otherwise spend on preparing a

    Subpart C Election Form on ensuring their compliance with the Subpart C

    regulations.\68\

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

    \63\ See LCH at 2-4, MGEX at 2-6.

    \64\ See LCH at 3, MGEX at 3.

    \65\ LCH at 2.

    \66\ MGEX at 2.

    \67\ Id.

    \68\ MGEX at 3-4.

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

    MGEX recognized, however, ``a number of potential issues'' with

    universal application of the Subpart C requirements.\69\ For example,

    this proposed alternative, by itself, would not provide flexibility for

    DCOs that do not wish to be held to the higher standards and could

    require the Commission to expend ``considerable resources to verify

    compliance for each currently registered DCO shortly after

    implementation'' and to engage in the processes necessary to revoke the

    Subpart C DCO status of those DCOs that fail to satisfy the proposed

    regulations.\70\ Both MGEX and LCH suggested alternatives.

    Specifically, these commenters recommended that the Commission replace

    the proposed ``opt-in'' regime with a regime under which the Subpart C

    standards would be applicable to all DCOs, but a DCO would be permitted

    to ``opt-out'' of the heightened standards, if it believed that

    attaining QCCP status was not important for its business.\71\ Both

    entities recommended that the opt-out regime be accompanied by an

    extension of the compliance deadline \72\ for all or some of the

    substantive proposed Subpart C regulations.\73\ Specifically, LCH and

    MGEX voiced concern that it would be difficult or unlikely for non-

    SIDCO DCOs to satisfy the Subpart C election and implementation

    requirements necessary to achieve QCCP status prior

    [[Page 72482]]

    to December 31, 2013.\74\ LCH specifically stated that additional time

    is necessary to come into compliance with the regulations ``governing

    financial resources, system safeguards, risk management, and recovery

    and wind-down plans.'' \75\ Both MGEX and LCH commented on the

    particular difficulty of developing a recovery and wind down plan

    citing, respectively, the ``complexity and potential effects the

    contents of such a plan would have on the operation of a DCO'' \76\ and

    the fact that the Commission has not previously proposed any

    requirements with respect to such plans.\77\

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

    \69\ MGEX at 3.

    \70\ Id.

    \71\ See LCH at 2-4, MGEX at 3-4.

    \72\ The Commission notes that, there is no general ``compliance

    deadline'' for non-SIDCO DCOs. While a non-SIDCO that wishes to

    become a Subpart C DCO must satisfy all of the Subpart C

    requirements (except the specific obligations for which the DCO is

    permitted to apply for additional time to comply) at the time it

    elects to become subject to Subpart C, a DCO is not required to make

    that election at any particular time or at all, unless it determines

    that the cost of such compliance is usurped by the benefits it would

    receive through Subpart C status.

    \73\ LCH at 2-4, MGEX at 3-4.

    \74\ LCH at 2, MGEX at 2. The Basel III Counterparty Credit Risk

    and Exposures to Central Counterparties-Frequently Asked Questions

    (``Basel III FAQs'') state that, if a CCP's primary regulator has

    publicly stated that it is working towards implementing regulations

    consistent with the PFMIs, then such CCP may be treated as a QCCP

    until December 31, 2013. After December 31, 2013, the Basel III FAQs

    state that the CCP's primary regulator must have implemented

    regulations consistent with the PFMIs and these regulations must be

    applied to the CCP on an ongoing basis in order for such CCP to be

    eligible for QCCP status. See Basel III FAQs, Question 5.6,

    available at: http://www.bis.org/publ/bcbs237.pdf.

    \75\ See LCH at 3, 4.

    \76\ MGEX at 4.

    \77\ See LCH at 3, 4.

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

    In support of their requests for additional time to comply with the

    Subpart C requirements, LCH and MGEX cited the time needed to identify

    gaps between their current rules and procedures and the Subpart C

    regulations, to implement any necessary changes to comply with the

    Subpart C regulations, and to prepare and submit their Subpart C

    Election Forms.\78\ Both entities objected to the amount of time

    between the publication of the Proposal and the time when compliance

    will be required in order to qualify for QCCP status by the end of the

    2013.\79\

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

    \78\ See LCH at 3, MGEX at 3.

    \79\ See LCH at 4, MGEX at 2.

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

    MGEX also objected to the alleged disparate treatment afforded

    SIDCOs which ``have been able to prepare for compliance with the

    enhanced standards at least since the release of the PFMIs in April

    2012.'' \80\ In addition, LCH asserted that, as proposed, the

    Commission would be requiring Subpart C DCOs to come into compliance

    with all aspects of the PFMIS ``prior to many non-US CCPs.'' \81\ LCH

    suggested that adopting the final regulations, but permitting

    compliance at a later date, would allow the Commission to adopt the

    PFMIs prior to the end of 2013 while, at the same time, providing DCOs

    with an ``ability to achieve QCCP status by the end of 2013.'' \82\

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

    \80\ MGEX at 2.

    \81\ LCH at 4. In support of this assertion, however, LCH cites

    to just one aspect of the Subpart C requirements--the recovery and

    wind-down plans--which may not be required of certain EU CCPs in

    order to become and maintain QCCP status. Specifically, LCH asserts

    that ``CCPs in the European Union will not be required to provide

    recovery and wind-down plans to become and remain QCCPs as EMIR,

    which implements the PFMIs in Europe, does not include such a

    requirement. EU legislation implementing the recovery and wind

    resolution aspects of the PMIs is not expected to be proposed by the

    European Commission until early next year'' and ``implementation is

    unlikely before 2016 at the earliest.'' Id. LCH also notes that laws

    in some EU jurisdictions will require CCPs to have recovery plans

    prior to implementation of EU legislation. LCH at 4, n. 4. As noted

    below, the Commission will permit SIDCOs and Subpart C DCOs the

    opportunity to request that the Commission grant the SIDCO or

    Subpart C DCO an extension of the deadline with respect to recovery

    and wind-down plans for up to one year. See infra Section II.K.

    (Regulation 39.39 (Recovery and wind down for systemically important

    derivatives clearing organizations and subpart C derivatives

    clearing organizations)).

    \82\ See LCH at 2, 4. LCH claims that requiring a Subpart C DCO

    to comply with the Subpart C regulations by the end of 2013 would

    ``likely result in Subpart C DCO's not being able to achieve QCCP

    status prior to that time'' and that the failure of a Subpart C DCO

    to achieve QCCP status would put the Subpart C DCO at a completive

    disadvantage to non-QCCPs that are ``grandfathered'' as QCCPs. LCH

    at 2. As noted below, the Commission believes that permitting

    Subpart C DCOs a broad-based opportunity to delay compliance with

    the Subpart C regulations, as suggested by LCH, could put a DCO at

    greater risk of failing to obtain QCCP status.

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

    The Commission continues to believe that non-SIDCO DCOs that are

    willing and able to satisfy the enhanced regulatory requirements

    contained in Subpart C, should, when they are able to do so, be

    afforded the opportunity to attain QCCP status and to reap the benefits

    that may result from that designation \83\ and that the application of

    Subpart C non-SIDCO DCOs that wish to become subject to regulations

    that are consistent with the standards set forth in the PFMIs helps

    promote the international consistency called for in Section 752 of the

    Dodd-Frank Act.\84\ Commenters addressing proposed regulation 39.31

    were unanimously supportive of this objective. Accordingly, the

    Commission has determined to adopt a regulatory framework that permits

    a DCO that has not been designated as systemically important by the

    Council to elect to become subject to the heightened standards set

    forth in Subpart C.

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

    \83\ See 78 FR 50268-50269.

    \84\ See discussion of existing standards for SIDCOs supra

    Section I.C.

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

    In response to the comments recommending that the'' Commission

    apply the regulatory requirements to all DCOs or employ an ``opt-out''

    regime in lieu of the proposed ``opt-out'' procedures, the Commission

    notes that neither commenter advocating such alternatives provided any

    quantitative data or qualitative analyses of the costs and benefits of

    its suggested alternatives, particularly as compared to the

    Commission's Proposal. The Commission believes it would be

    inappropriate to adopt the proffered alternatives absent such analyses

    and without sufficient opportunity for the public to review and comment

    upon them.

    The Commission also is concerned that an ``opt-out'' regime would

    unfairly shift certain costs associated with the Subpart C regulations

    to those non-SIDCO DCOs that do not intend to avail themselves of the

    opportunity to become QCCPs. Specifically, regulation 39.31, as

    proposed and finalized herein, would require only those non-SIDCO DCOs

    that wish to become subject to the Subpart C regulations (and to attain

    the benefits of QCCP status) to complete and file a Subpart C Election

    Form. Non-SIDCO DCOs that do not wish to become subject to the Subpart

    C regulations (nor to obtain the benefits of QCCP status) are not

    obligated to take any further action. In contrast, an ``opt-out''

    regime would impose an obligation to file an opt-out application on

    those DCOs that do not intend to seek the benefit of QCCP status, while

    removing the Subpart C Election Form obligation from those DCOs that

    do.

    In response to commenters' requests for additional time for Subpart

    C DCOs to comply with the new Subpart C regulations, and as discussed

    in more detail below, the Commission has determined that it would be

    appropriate to permit SIDCOs and Subpart C DCOs to request extensions

    of time to comply with the requirements for system safeguards, default

    rules and procedures for uncovered credit losses or liquidity, and

    recovery and wind-down plans contained in regulations 39.34, 39.35 and

    39.39, respectively.\85\ The Commission is declining, however, to

    permit requests from a DCO for, or to generally provide, a wholesale

    extension of time to comply with the new Subpart C regulations. Thus, a

    DCO seeking to become a Subpart C DCO will otherwise be required to be

    in compliance with the Subpart C regulations at the time it makes its

    [[Page 72483]]

    Subpart C election. The new Subpart C regulations finalized herein seek

    to provide DCOs that have not been designated by the Council as

    systemically important the opportunity to qualify as QCCPs. Despite

    LCH's assertion to the contrary,\86\ the Commission is concerned that a

    broad-based extension of the compliance deadline (in contrast to

    individually justified extensions with respect to particular

    requirements) would be more likely to jeopardize the ability of a

    Subpart C DCO to achieve QCCP status. As noted above, rules and

    regulations that are consistent with the PFMIs must be implemented by

    the end of 2013.\87\ Moreover, as noted above, a QCCP is defined, in

    part, as a CCP that is prudentially supervised in a jurisdiction where

    the relevant regulator applies to the CCP, on an ongoing basis,

    domestic rules and regulations that are consistent with the PFMIs.\88\

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

    \85\ See infra Section II.F. (Regulation 39.34 (System

    safeguards for systemically important derivatives clearing

    organizations and subpart C derivatives clearing organizations)),

    Section G (Regulation 39.35 (Default rules or procedures for

    uncovered credit losses or liquidity shortfalls (recovery) for

    systemically important derivatives clearing organizations and

    subpart C derivatives clearing organizations)), and Section II.K

    (Regulation 39.35 (Recovery and wind-down for systemically important

    derivatives clearing organizations and subpart C derivatives

    clearing organizations)).

    \86\ Notwithstanding its timing concerns, LCH has indicated that

    it intends to ``take advantage of the Subpart C election process.

    LCH at 3.

    \87\ See supra n 91.

    \88\ See supra Section I.F. (The Role of the PFMIs in

    International Banking Standards).

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

    The Commission further notes that a non-SIDCO DCO is obligated to

    comply with the Subpart C regulations only if--and when--the DCO

    affirmatively elects to become subject to such regulations, based upon

    its own examination of the benefits (including, but not limited to, the

    opportunity to attain QCCP status) and burdens thereof. No non-SIDCO

    DCO is obligated to elect to become a Subpart C DCO and thereby comply

    with the Subpart C regulations by December 31, 2013 or any other date

    unless it believes that it is prudent to do so in light of its

    particular business. The Commission stands ready to review the

    application of any DCO that is prepared to be held to the Subpart C

    standards, whether the DCO is prepared to do so on December 31, 2013 or

    any later date.

    The Commission also disagrees with commenters' assertions that

    potential Subpart C DCOs have only recently been advised of the nature

    of the additional regulations to which they, if they choose, will be

    subject. The final PFMIs were published in April of 2012. In the same

    month, the Commission and other domestic financial regulators issued a

    joint press release explicitly notifying the public of the publication

    of the final PFMIs.\89\ At a minimum, therefore, DCOs have been on

    notice of the specific requirements of the PFMIs since April 2012.

    Moreover, the Basel CCP Capital Requirements were published in July of

    2012, and as mentioned above, the Basel FAQs, which were published in

    December of 2012, state that 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.\90\ Thus, by December of

    2012, DCOs were on notice of the preferential capital treatment that

    would result from becoming subject to regulations that are consistent

    with the PFMIs by the end of 2013.

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

    \89\ Joint Press Release, Board of Governors of the Federal

    Reserve System, the Commodity Futures Trading Commission and the

    Securities and Exchange Commission, CPSS-IOSCO Issue Final Report on

    Principles for Financial Market Infrastructures'' (April 16, 2012).

    \90\ Basel III FAQs at 23. In the Final SIDCO Rule the

    Commission explicitly advised the public of its intention toward

    implementing regulations that are fully consistent with the PFMIs by

    the end of 2013. See SIDCO Final Rule at 4966 (``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'').

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

    1. Regulation 39.31(a)--Eligibility Requirements

    Regulation 39.31(a), as proposed, set forth the two categories of

    entities that would be eligible to elect to become subject to the

    provisions in Subpart C. As proposed: (1) A DCO that is not a SIDCO

    could request such election using the procedures set forth in proposed

    regulation 39.31(b) and (2) an entity applying for registration as a

    DCO pursuant to regulation 39.3 (``DCO Applicant'') could request the

    election in conjunction with its application for registration

    (``Registration Application'') using the procedures set forth in

    proposed regulation 39.31(c). The Commission did not receive any

    comments specifically addressing proposed regulation 39.31(a).

    Accordingly, for the reasons cited in the Proposal,\91\ the Commission

    is adopting regulation 39.31(a) as proposed.

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

    \91\ 78 FR 50298.

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

    2. Regulation 39.31(b)--Subpart C Election and Withdrawal Procedures

    for Registered DCOs

    Regulation 39.31(b), as proposed, would establish the procedures by

    which a DCO that is already registered could elect to become subject to

    the provisions of Subpart C and the procedure by which the DCO could

    withdraw that election.\92\ Comments generally addressing the Proposal

    to adopt regulations that would permit a DCO to elect to become subject

    to Subpart C (i.e., comments on the ``opt-in'' regime) are discussed

    above.\93\ In addition, the Commission received one comment referencing

    the Subpart C Election Form. MGEX asserted that the Commission should

    ``waive'' the Subpart C Election Form as ``it seems overly burdensome

    and costly for a currently registered DCO to be required to complete an

    entirely new application which calls for submission of the same or

    similar information and analysis that the DCO previously provided [in

    its DCO Application]''.\94\ In support of this request, MGEX cites to a

    statement in the Proposal that the Commission ``anticipates

    considerable overlap between the information and documentation

    contained in the Registration Application files [sic] by a DCO

    Applicant and the information and documentation that would be required

    to be submitted to the Commission as part of the Subpart C Election

    Form.'' \95\ This reference is misplaced. The cited statement was made

    in the portion of the Proposal describing the proposed election and

    withdrawal procedures for new DCO applicants.\96\ The ``overlap in

    information and documentation'' to which the Commission was referring

    is the overlap between the materials that would be submitted by new

    applicants for DCO registration in their DCO applications and the

    materials that a newly registered DCO would supply as part of a Subpart

    C Election Form submitted shortly thereafter.\97\ In contrast, the

    information supplied by a currently registered DCO as part of the Form

    DCO that was filed when such DCO applied for registration is likely to

    be stale and would need to be updated.\98\ Moreover, the Subpart C

    Election Form simply calls for the electing DCO to demonstrate its

    compliance with the requirements of Subpart C, with fairly minimal

    formatting requirements. The form is intended to provide the

    Commission, clearing members, and customers (and, significantly, the

    regulators of such

    [[Page 72484]]

    clearing members and customers) with assurance that the electing DCO

    will be held to and will be required to meet the standards set forth in

    Subpart C.\99\ Thus, the Commission continues to believe that it is

    necessary and appropriate to require DCOs electing to become subject to

    Subpart C to submit such information to the Commission.

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

    \92\ 78 FR 50271, 50298-99.

    \93\ See supra Section II.C. (Regulation 39.31 (Election to

    become subject to the provisions of Subpart C)).

    \94\ MGEX at 5.

    \95\ MGEX at 5 (citing 78 FR 50271).

    \96\ 78 FR 50271.

    \97\ This distinction is even more important in the case of a

    clearing organization, such as MGEX, that was ``grandfathered in''

    to DCO status under the Commodity Futures Modernization Act of 2000

    (Pub. L. No. 106-554, 114 Stat. 2763, sec. 112(f) (adding sec. 5a(b)

    to the CEA) and thus never filed an application for registration as

    a DCO.

    \98\ See Subpart C Election Form, Exhibit Instructions at no 2,

    (``If the [DCO] is an Applicant, in its Form DCO, the [DCO] may

    summarize such information and provide a cross reference to the

    Exhibit in this Subpart C Election Form that contains the required

    information'' (emphasis added)).

    \99\ See 78 FR 50269.

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

    MGEX further asserts that the Subpart C Election Form requirement

    puts Subpart C DCOs at a risk of ``delayed regulatory approval'' not

    borne by SIDCOs, which it claims are ``grandfathered in to Subpart C .

    . . due to their SIDCO status.'' \100\ MGEX states that to ``ensure

    equal treatment'' among all DCOs, any requirements to provide

    information as part of the Subpart C election process should be imposed

    upon SIDCOs as well.\101\ The Commission notes that SIDCOs, having been

    designated as systemically important by the Council, are subject to

    annual examinations under Title VIII and are, therefore, in a different

    position than DCOs that have not been so designated, but wish to elect

    to be held to the same international standards in an effort to attain

    QCCP status. The Commission also notes that SIDCOs, as well as Subpart

    C DCOs, are required by regulation 39.37, as finalized herein, to

    complete and publically disclose their responses to the Disclosure

    Framework.\102\ As such, and since SIDCOs are required to be subject to

    the Subpart C regulations, the Commission does not feel it necessary to

    require SIDCOs to complete a Subpart C Election Form. In addition,

    because the Commission declines to require all DCOs to comply with the

    regulations in Subpart C, the Subpart C Election Form is necessary to

    provide a mechanism by which a registered DCO may elect to become

    subject to Subpart C.

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

    \100\ MGEX at 5.

    \101\ Id.

    \102\ See supra Section II.I. (Regulation 39.37 (Additional

    disclosure for systemically important derivatives clearing

    organizations and subpart C derivatives clearing organizations)).

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

    In its comments on proposed regulation 39.37, MGEX also asserted

    that, while requiring the submission of a Quantitative Disclosure

    Document is ``consistent with the PFMIs,'' the Commission should delay

    implementation of this requirement until the Quantitative Disclosure

    Document is finalized in order to allow DCOs time to review and comment

    upon it or to otherwise prepare for compliance.\103\ The Commission

    confirms that, as noted in the Subpart C Election Form, as proposed and

    finalized herein, completion and publication of the Quantitative

    Information Disclosure will not be required until the criteria for such

    disclosure has been finalized and published, which has not yet

    occurred.

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

    \103\ MGEX at 8-9.

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

    Finally, MGEX responded to the Commission's request for

    comment\104\ on whether or not the Commission should add a requirement

    that the certifications contained in the Subpart C Election Form be

    made under penalty of perjury. MGEX opposed the addition of this

    requirement.\105\ The Commission notes that such a requirement would be

    inconsistent with the current Form DCO, which does not include a

    similar requirement. Therefore, the Commission has decided not to add a

    perjury certification to the Subpart C Election Form.

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

    \104\ 78 FR 50272.

    \105\ MGEX at 5.

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

    Accordingly, after careful review and consideration of the

    comments, and for the reasons cited above and set forth in the

    Proposal,\106\ the Commission is adopting regulation 39.31(b) as

    proposed. The Commission has, however, altered the Subpart C Election

    Form in two respects.

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

    \106\ 78 FR 50268-69.

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

    As discussed further below,\107\ DCOs that seek to become Subpart C

    DCOs (as well as SIDCOs) will be permitted to request an extension of

    up to one year to comply with any of the provisions of regulations

    39.34, 39.35, or 39.39 pursuant to those regulations.\108\ The

    Commission has determined that, to the extent that a DCO elects to

    request any such extensions, it must do so prior to filing the Subpart

    C Election Form and the General Instructions to the Subpart C Election

    Form have been modified accordingly.\109\ The Commission also has made

    technical modifications to the certifications contained in the Subpart

    C Election Form to account for any extensions of time granted pursuant

    to regulation 39.34(d) and/or 39.39(f).

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

    \107\ See infra at sections II.F. (Regulation 39.34--System

    Safeguards), II.G. (Regulation 39.35--Default Rules and Procedures),

    and II.K. (Regulation 39.39 (Recovery and Wind-Down).

    \108\ Regulation 39.34(d), as finalized herein, provides that

    the Commission may, upon request, grant a SIDCO or Subpart C DCO an

    extension of up to one year to comply with any of the provisions of

    regulation 39.34. Regulation 39.39(f), as finalized herein,

    similarly provides that a SIDCO or Subpart C DCO, upon request, may

    be granted an extension of up to one year to comply with the

    provisions of regulations 39.35 and 39.39. Any such requests made by

    a DCO seeking to become a Subpart C DCO will become part of that

    DCO's Subpart C Election Form.

    \109\ The Commission notes that it is not prescribing a

    particular time period elapse between the filing of applications for

    compliance extensions and the filing of the Subpart C Election Form.

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

    As noted in the Proposal,\110\ the Commission emphasizes that,

    consistent with the certification required to be provided by a DCO as

    part of its Subpart C Election Form, a DCO, as of the date that its

    election to become subject to Subpart C becomes effective, would be

    held to the requirements of Subpart C. As of that date, the DCO would

    be subject to examination for compliance with Subpart C and to

    potential enforcement action for non-compliance. This status would

    continue until such time, if any, that the election is properly vacated

    as set forth in regulation 39.31(e), as finalized.\111\ To the extent

    that compliance with Subpart C would require the DCO to implement new

    rules or rule amendments, all such rules or rule amendments must be

    approved or permitted to take effect prior to the effective date of the

    DCO's election.

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

    \110\ 78 FR 50269-50270.

    \111\ See infra Section II.C.5. (Regulation 39.31(e)--

    Rescission).

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

    3. Regulation 39.31(c)--Election and Withdrawal Procedures for DCO

    Applicants

    Regulation 39.31(c), as proposed, sets forth procedures through

    which a DCO Applicant could request to become subject to the provisions

    of Subpart C at the time the DCO Applicant files its Registration

    Application. The Commission did not receive any comments specifically

    addressing proposed regulation 39.31(c).\112\ Accordingly, for the

    reasons cited in the Proposal,\113\ the Commission is adopting

    regulation 39.31(c) as proposed. In the interest of administrative

    economy, the Commission continues to encourage DCO Applicants to make

    their election to become subject to Subpart C at the time that their

    Registration Application is filed. Simultaneous filings would appear to

    allow Commission resources to be used more efficiently and effectively.

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

    \112\ See supra Section II.C. (Regulation 39.31 (Election to

    become Subject to Subpart C) for a discussion of comments regarding

    the proposed opt-in regime and process generally and the Subpart C

    Election Form.

    \113\ 78 FR 50271.

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

    4. Regulation 39.31(d)--Public Information

    Regulation 39.31(d), as proposed, would provide that certain

    portions of the Subpart C Election Form will be considered public

    documents that may routinely be made available for public inspection.

    The Commission did not receive any comments with respect to proposed

    regulation 39.31(d). Accordingly, for the reasons set forth in

    [[Page 72485]]

    the Proposal,\114\ the Commission is adopting regulation 39.31(d) as

    proposed.

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

    \114\ Id.

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

    5. Regulations 39.31(e)--Rescission

    Regulation 39.31(e), as proposed, would permit a Subpart C DCO to

    rescind its election to comply with Subpart C by filing a notice of its

    intent to rescind the election with the Commission. Such rescission

    would, however, be subject to certain conditions. As proposed, the

    rescission of a DCO's election to become subject to Subpart C would

    become effective on the date specified by the Subpart C DCO in its

    notice of intent to rescind the Subpart C election, except that the

    rescission could not become effective any earlier than 90 days after

    the date the notice of intent to rescind is filed with the Commission.

    The Subpart C DCO would be required to comply with all of the

    provisions of Subpart C until such rescission is effective and the

    Commission would retain its authority concerning any activities or

    events occurring during the time that the DCO maintained its status as

    a Subpart C DCO.

    Regulation 39.31(e), as proposed, also would require a Subpart C

    DCO that files a notice of intent to rescind to (1) provide specified

    notices to each of its clearing members, and to have rules in place

    requiring each of its clearing members to provide such notices to each

    of the clearing member's customers; (2) provide specified notices to

    the general public; and (3) remove references to its Subpart C DCO (and

    QCCP) status on its Web site and in other materials that it provides to

    its clearing members and customers, other market participants, or

    members of the public. In addition, the employees and representatives

    of the Subpart C DCO would be prohibited from making any reference to

    the organization as a Subpart C DCO (or QCCP) on and after the date

    that the notice of its intent to rescind is filed.

    The Commission received two comments addressing proposed regulation

    39.31(e). ISDA recommended that the Commission modify the proposed

    regulation to require, as a condition to a Subpart C DCO's rescission

    of its Subpart C election, ``to certify that it has obtained approval

    from clearing members (e.g., by member ballot) to rescind the

    election.'' \115\ In response to ISDA's suggestion, the Commission

    believes that this is a matter of corporate governance and the DCO

    should follow its own policies and procedures with respect to internal

    decisions regarding rescission. The Commission further notes that

    existing regulation 39.3(e) does not require a DCO to certify that it

    has obtained the approval of its clearing members to vacate its DCO

    registration prior to filing with the Commission a request to do so

    \116\ and, thus, requiring the certification suggested by ISDA would be

    in tension with existing regulations. Accordingly, the Commission has

    declined to accept ISDA's recommendation.

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

    \115\ ISDA at 3-4.

    \116\ 17 CFR 39.3(e).

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

    FIA recommended that the Commission extend the time period between

    the date that a DCO files a notice of intent to rescind its election to

    be subject to Subpart C and the date that such rescission could become

    effective from 90 days to 180 days.\117\ In support of its

    recommendation, the FIA agreed with the view voiced by the Commission

    in the Proposal \118\ that a delay in the effective date of the

    rescission is necessary to provide banks and other entities that wish

    to limit their cleared transactions to clearing solely through a QCCP

    sufficient time to transfer their business to another Subpart C DCO or

    a SIDCO.\119\ The FIA expressed concern, however, that the 90 day delay

    is insufficient ``to allow a clearing member to make a determination

    whether to withdraw as a clearing member and, if it elects to do so,

    notify its customers, find one or more clearing members prepared to

    accept each customer and allow the new clearing member and each

    customer to negotiate the terms of their agreement.'' \120\ The

    Commission recognizes that the clearing members of a DCO that has filed

    a notice of intent to rescind its election to become subject to Subpart

    C may need additional time to determine and to effectuate the actions

    they may wish to take in light of such filing and believes that a 180

    day waiting period until such rescission may become effective is

    reasonable. Accordingly, the Commission has decided to lengthen the

    minimum time period between the date a notice of intent to rescind an

    election to become subject to Subpart C is filed and the date that such

    rescission may become effective to 180 days. For the reasons cited

    above and set forth in the Proposal,\121\ the Commission is adopting

    regulation 39.31(e) as proposed in all other respects.

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

    \117\ FIA at 5.

    \118\ 78 FR 50272.

    \119\ FIA at 4.

    \120\ FIA at 4-5.

    \121\ 78 FR 50271-72.

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

    6. Regulations 39.31(f)--Loss of SIDCO Designation

    Regulation 39.31(f), as proposed, would provide that a SIDCO that

    is registered with the Commission, but whose designation of systemic

    importance is rescinded by the Council,\122\ would immediately be

    deemed to be a Subpart C DCO. Such Subpart C DCO would be subject to

    the Subpart C provisions unless and until it elects to rescind its

    status as a Subpart C DCO. The Commission did not receive any comments

    on proposed regulation 39.31(f). Accordingly, for the reasons set forth

    in the Proposal,\123\ the Commission is adopting regulation 39.31(f) as

    proposed.

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

    \122\ See 12 CFR 1320.13(b) (procedure for the Council to

    rescind a designation of systemic importance for a systemically

    important financial market utility).

    \123\ 78 FR 50272.

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

    7. Regulation 39.31(g)

    Regulation 39.31(g), as proposed, provides that all forms and

    notices required by regulation 39.31 shall be filed electronically with

    the Secretary of the Commission in the format and manner specified by

    the Commission. The Commission did not receive any comments on proposed

    regulation 39.31(g) and, thus, is adopting the regulation as proposed.

    D. Regulation 39.32 (Governance for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations)

    The Commission proposed adding regulation 39.32 in order to

    implement DCO Core Principles O (Governance Fitness Standards), P

    (Conflicts of Interest), and Q (Composition of Governing Boards) for

    SIDCOs and Subpart C DCOs in a manner that would be consistent with

    PFMI Principle 2 (Governance).\124\

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

    \124\ In 2010 and 2011, the Commission proposed regulations

    concerning the governance of DCOs (the ``2010/2011 Proposals''). See

    Requirements for Derivatives Clearing Organizations, Designated

    Contract Markets, and Swap Execution Facilities Regarding the

    Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010);

    see also Governance Requirements for Derivatives Clearing

    Organizations, Designated Contract Markets, and Swap Execution

    Facilities, 76 FR 722 (Jan. 8, 2011). The Commission notes that the

    regulations contained in the 2010/2011 Proposals are the subject of

    a separate rulemaking. The Commission is not addressing those

    regulations in this rulemaking.

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

    As discussed above, DCO Core Principle O states that each DCO must

    establish governance arrangements that are transparent to fulfill

    public interest requirements and to permit the

    [[Page 72486]]

    consideration of the views of owners and participants.\125\ DCO Core

    Principle O also requires each DCO to establish and enforce appropriate

    fitness standards for (i) directors, (ii) members of any disciplinary

    committee, (iii) members of the DCO, (iv) any other individual or

    entity with direct access to the settlement or clearing activities of

    the DCO, and (v) any party affiliated with any entity mentioned in (i)-

    (v) above. In addition, DCO Core Principle P requires each DCO to

    establish and enforce rules to minimize conflicts of interest in the

    decision making process of the DCO, and DCO Core Principle Q states

    that each DCO must ensure that the composition of the governing board

    or committee of the DCO includes market participants. These core

    principles are substantively similar to PFMI Principle 2, which states

    that a CCP ``should have governance arrangements that are clear and

    transparent, promote the safety and efficiency of [the CCP], and

    support the stability of the broader financial system, other relevant

    public interest considerations, and the objectives of relevant

    stakeholders.'' Additionally, under PFMI Principle 2, a CCP should have

    procedures for managing conflicts of interest among board members, and

    board members and managers should be required to have ``appropriate

    skills,'' ``incentives,'' and ``experience.'' \126\

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

    \125\ See supra Section I.D.

    \126\ PFMIs at Principle 2, K.C. 4-5.

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

    As proposed, subsection (a) (General rules) would require a SIDCO

    or Subpart C DCO to establish governance arrangements that: (1) Are

    written, clear and transparent, place a high priority on the safety and

    efficiency of the SIDCO or Subpart C DCO, and explicitly support the

    stability of the broader financial system and other relevant public

    interest considerations; (2) ensure that the design, rules, overall

    strategy, and major decisions of the SIDCO or Subpart C DCO

    appropriately reflect the legitimate interests of clearing members,

    customers of clearing members, and other relevant stakeholders; and (3)

    disclose, to an extent consistent with other statutory and regulatory

    requirements on confidentiality and disclosure: (i) Major decisions of

    the board of directors to clearing members, other relevant

    stakeholders, and to the Commission, and (ii) Major decisions of the

    board of directors having a broad market impact to the public.\127\

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

    \127\ The provisions concerning transparency describe which

    information, including the identities of board members, should be

    disclosed to the public and/or the Commission.

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

    As proposed, subsection (b) (Governance arrangements) would require

    the rules and procedures of a SIDCO or Subpart C DCO to: (1) Describe

    the SIDCO's or Subpart C DCO's management structure; (2) clearly

    specify the roles and responsibilities of the board of directors and

    its committees, including the establishment of a clear and documented

    risk management framework; (3) clearly specify the roles and

    responsibilities of management; (4) establish procedures for managing

    conflicts of interest among board members; and (5) assign

    responsibility and accountability for risk decisions and for

    implementing rules concerning default, recovery, and wind-down.

    As proposed, subsection (c) (Fitness standards for the board of

    directors and management) would require that board members and managers

    have the appropriate experience, skills, incentives and integrity; risk

    management and internal control personnel have sufficient independence,

    authority, resources and access to the board of directors; and that the

    board of directors include members who are not executives, officers or

    employees of the SIDCO or Subpart C DCO or of their affiliates.

    The Commission requested comment on proposed regulation 39.32 and

    asked that commenters include a detailed description of any

    alternatives to proposed regulation 39.32 and estimates of the costs

    and benefits of such alternatives. LCH commented that a SIDCO or

    Subpart C DCO should be permitted to petition the Commission for

    additional time to comply with new regulation 39.32 and with all other

    substantive regulations contained in this rulemaking. The Commission

    does not believe that a SIDCO or Subpart C DCO should be permitted to

    petition for additional time to comply with new regulation 39.32 for

    the reasons stated above.\128\

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

    \128\ See supra Section II.C. (Regulation 39.31 (Election to

    become subject to the provisions of Subpart C)).

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

    LCH also requested clarification as to which major decisions of the

    board of directors should be disclosed under new regulation

    39.32(a)(3). LCH stated that a board may make a resolution that is not

    determinative, for example to commence exploratory negotiations for

    making an acquisition. LCH stated that it did not believe Principle 2

    would require it to publish such a decision because Explanatory Note

    3.2.18 to Principle 2 states that an FMI need not disclose a major

    decision where doing so would endanger commercial confidentiality. The

    Commission agrees with LCH that there is a distinction between

    exploratory negotiations and a final decision. The Commission also

    agrees with the suggestion made in Explanatory Note 3.2.18 that it is

    reasonable for a DCO to focus on disclosing the ``outcome'' of

    decisions made by the board rather than decisions that are not

    determinative. It should also be noted that paragraph (a)(3) does not

    require a disclosure that would compromise ``statutory and regulatory

    requirements on confidentiality and disclosure.''

    Similarly, MGEX requested clarification as to: what qualifies as a

    ``major decision'' under proposed paragraph (a)(3); which

    ``information'' the Commission was referring to in footnote 137 of the

    Proposal; and whether the disclosure provision of paragraph (a) is

    intended to be a ``reiteration of existing law[s] or regulation[s].''

    MGEX also suggested that paragraph (a) be amended to include a

    provision stating that a DCO may withhold disclosing a major decision

    of the board of directors if disclosing it would ``stifle candid board

    debate or endanger commercial confidentiality.'' The Commission agrees

    with MGEX that regulation 39.32 affords a DCO reasonable discretion in

    determining which decisions are ``major'' so as to warrant disclosure

    under paragraph (a)(3) and which decisions should not be disclosed due

    to concerns about confidentiality. Moreover, paragraph (a)(3) requires

    disclosure of ``decisions,'' rather than the debate preceding them. The

    Commission concludes that the language of proposed paragraph (a)(3)

    suffices in these regards.

    ISDA commented that regulation 39.32 should address decision-making

    by a SIDCO or Subpart C DCO during a crisis or emergency. Specifically,

    ISDA suggests that there should be a provision requiring a SIDCO or

    Subpart C DCO to obtain the views and approval of member

    representatives (e.g. through the DCO's risk committee or otherwise)

    before taking any material action in response to an emergency. The

    Commission has decided not to include this requested provision because

    the Commission has decided not to impose requirements beyond those

    required by Principle 2 as part of this rulemaking.

    Accordingly, the Commission has decided to finalize regulation

    39.32 as proposed. The governance requirements set forth in the

    proposed regulation were designed to enhance risk management and

    controls by promoting fitness standards for directors and managers,

    promoting transparency of

    [[Page 72487]]

    governance arrangements, and making sure that the interests of a

    SIDCO's or Subpart C DCO's clearing members and, where relevant,

    customers are taken into account. Because of the potential impact that

    a SIDCO's failure could have on the U.S. financial markets, the

    Commission believes that that these requirements should be applicable

    to SIDCOs. Moreover, it would be beneficial to Subpart C DCOs, their

    members and customers, and the financial system generally, for

    regulation 39.32 to apply to Subpart C DCOs.

    E. Regulation 39.33 (Financial resources requirements for systemically

    important derivatives clearing organizations and subpart C derivatives

    clearing organizations)

    In August of 2013, the Commission finalized Regulation 39.29, which

    sets forth financial resource requirements for SIDCOs in a manner that

    parallels the financial resources standard in Principle 4 of the

    PFMIs.\129\ The Commission proposed to amend regulation 39.29 to

    enhance financial resources requirements for SIDCOs and Subpart C DCOs

    and to achieve consistency with the relevant provisions of the PFMIs,

    in particular Principle 4 and Principle 7.

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

    \129\ See SIDCO Final Rule 78 FR 49666.

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

    The Commission first proposed to renumber existing regulation 39.29

    to 39.33 and to apply the requirements set forth therein to Subpart C

    DCOs. The Commission further proposed, for purposes of organization,

    deleting from paragraph (a)(1) the requirement that, where a clearing

    member controls another clearing member or is under common control with

    another clearing member, a SIDCO treat affiliated clearing members as a

    single clearing member (the ``Clearing Member Aggregation

    Requirement''). The Commission proposed to include such language in new

    paragraph (a)(4) to clarify that the Clearing Member Aggregation

    Requirement applies when a SIDCO or Subpart C DCO calculates its

    financial resources requirements under regulation 39.33(a) as well as

    its liquidity resources requirements under regulation 39.33(c).

    The Commission also proposed amending paragraph (a) to state that

    the Commission shall, if it deems appropriate, determine whether a

    SIDCO or Subpart C DCO is systemically important in multiple

    jurisdictions. In making this determination, the Commission would, in

    order to limit such determinations to appropriate cases, review whether

    another jurisdiction had determined the SIDCO or Subpart C DCO to be

    systemically important according to a designations process that

    considers whether the foreseeable effects of a failure or disruption of

    the derivatives clearing organization could threaten the stability of

    each relevant jurisdiction's financial system. In addition, the

    Commission proposed amending paragraph (a) to state that the Commission

    shall also determine, if it deems appropriate, whether any of the

    activities of a SIDCO or Subpart C DCO, in addition to clearing credit

    default swaps, credit default futures, or any derivatives that

    reference either, has a more complex risk profile and that in making

    this determination, the Commission may take into consideration

    characteristics such as non-linear and discrete jump-to-default price

    changes.\130\ The Commission also proposed amending paragraph (b) to

    clarify that the prohibition on including assessments as a financial

    resource applies to calculating financial resources needed to cover the

    default of the largest and, where applicable, second largest clearing

    member, in extreme but plausible circumstances.\131\

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

    \130\ The Commission's amendment to regulation 140.94(a)

    delegates the authority to make these determinations to the Director

    of the Division of Clearing and Risk.

    \131\ The preamble to the SIDCO Final Rule adopting release made

    clear that paragraph (b) applied to both Cover One and Cover Two,

    but the Commission has decided to add clarifying language to the

    regulation text. See generally SIDCO Final Rule.

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

    The PFMI Explanatory Notes explain that liquidity risk arises in an

    FMI (such as a DCO) when settlement obligations are not completed when

    due as part of its settlement process. Liquidity risk can arise in a

    number of ways: between an FMI and its participants, between an FMI and

    other entities (such as the FMI's settlement banks and liquidity

    providers), or between an FMI's participants.\132\ The Commission

    proposed adding paragraphs (c), (d), and (e) to address the liquidity

    of SIDCOs' and Subpart C DCOs' financial resources. The liquidity

    resources discussed in paragraphs (c), (d), and (e) should be

    sufficient to address the different exposures to liquidity risk

    applicable to that DCO.

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

    \132\ See PFMIs, E.N. 3.7.1.

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

    Under proposed paragraph (c)(1), a SIDCO or Subpart C DCO would be

    required to maintain eligible liquidity resources that will enable the

    SIDCO or Subpart C DCO to meet its intraday, same-day, and multiday

    settlement obligations, as defined in regulation 39.14(a), with a high

    degree of confidence under a wide range of stress scenarios, including

    the default of the member creating the largest liquidity requirements

    under extreme but plausible circumstances. Under proposed paragraph

    (c)(2), a SIDCO or Subpart C DCO would be required to maintain

    liquidity resources that are sufficient to satisfy the obligations

    required by new paragraph (c)(1) in all relevant currencies for which

    the SIDCO or Subpart C DCO has settlement obligations to its clearing

    members.

    Under proposed paragraph (c)(3), a SIDCO or Subpart C DCO would be

    limited to using only certain types of liquidity resources to satisfy

    the minimum liquidity requirement set forth in proposed paragraph

    (c)(1).\133\ Among these ``qualifying liquidity resources'' are

    ``committed lines of credit,'' ``committed foreign exchange swaps,''

    and ``committed repurchase agreements.'' ``Committed'' is intended to

    connote a legally binding contract under which a liquidity provider

    agrees to provide the relevant liquidity resource without delay or

    further evaluation of the DCO's creditworthiness, e.g., a line of

    credit that cannot be withdrawn at the election of the liquidity

    provider during times of financial stress, or in the event of the

    default of a member of the SIDCO or Subpart C DCO.\134\

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

    \133\ In determining whether the liquidity resources that are

    eligible under paragraph (c)(3) are sufficient in amount to meet the

    obligation specified under paragraph (c)(1) (resources that

    ``enable'' the DCO to meet its settlement obligations), it is

    important to avoid double counting. For example, one may not count

    both a committed repurchase arrangement and U.S. Treasury Bills that

    would be used to collateralize that arrangement.

    \134\ Times of financial stress and the event of the default of

    a member of the DCO are, of course, the times when reliable

    liquidity arrangements are most needed.

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

    Under proposed paragraph (c)(3)(ii), a SIDCO or Subpart C DCO would

    be required to take appropriate steps to verify that its qualifying

    liquidity arrangements do not include material adverse change

    provisions and are enforceable, and will be highly reliable, even in

    extreme but plausible market conditions.

    Also consistent with Principle 7, under proposed paragraph (c)(4),

    if a SIDCO or Subpart C DCO maintains liquid financial resources in

    addition to those required to satisfy the Cover One requirement, then

    those resources should be in the form of assets that are likely to be

    saleable with proceeds available promptly or acceptable as collateral

    for lines of credit, swaps, or repurchase agreements on an ad hoc

    basis. In addition, Principle 7 provides and proposed paragraph

    39.33(c)(4) requires that a SIDCO or Subpart C DCO should consider

    maintaining collateral with low credit, liquidity, and market

    [[Page 72488]]

    risks that is typically accepted by a central bank of issue for any

    currency in which it may have settlement obligations, but shall not

    assume the availability of emergency central bank credit as a part of

    its liquidity plan.\135\

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

    \135\ It should be noted that the requirement of proposed

    paragraph (c)(4) that a SIDCO or Subpart C DCO consider maintaining

    certain types of collateral, like the requirement of proposed

    paragraph (c)(1)(ii), does not include a requirement as to the

    decision to be made following such consideration.

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

    Pursuant to proposed paragraphs (d)(1)-(2), a SIDCO or Subpart C

    DCO would be required to monitor its liquidity providers in a manner

    consistent with Principle 7. Proposed paragraph (d)(1) would define

    ``liquidity provider'' to mean any of the following: (i) A depository

    institution, a U.S. branch or agency of a foreign banking organization,

    a trust company, or a syndicate of depository institutions, U.S.

    branches or agencies of foreign banking organizations, or a trust

    companies providing a line of credit, foreign exchange swap facility or

    repurchase facility to the SIDCO or Subpart C DCO; and (ii) Any other

    counterparty relied upon by a SIDCO or Subpart C DCO to meet its

    minimum liquidity resources requirement under paragraph (c) of this

    section. In addition, proposed paragraph (d)(4) would require a SIDCO

    or Subpart C DCO to regularly test its procedures for accessing its

    liquidity resources. Finally, pursuant to proposed subsection (e) and

    consistent with Principle 4, a SIDCO or Subpart C DCO would be required

    to document its supporting rationale for, and have appropriate

    governance arrangements relating to, the amount of total financial

    resources it maintains pursuant to regulation 39.33(a) and the amount

    of total liquidity resources it maintains pursuant to regulation

    39.33(c).\136\

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

    \136\ This provision is consistent with PFMI Principle 4, K.C.

    4.

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

    The Commission requested comment on all aspects of proposed

    regulation 39.33. ISDA, MGEX and the European Commission each commented

    on paragraph (a)(1). ISDA requested clarification of the term ``credit

    exposure,'' which the Proposal used to replace the term ``financial

    obligation,'' which currently appears in regulation 39.29 (renumbered

    as regulation 39.33 as part of this rulemaking). In response to this

    comment, the Commission will revert to the term financial obligation.

    MGEX requested clarification that a Subpart C DCO that is neither

    systemically important in multiple jurisdictions nor involved in

    activities with a more complex risk profile would be required to meet

    only the Cover One financial resources requirement,\137\ not the Cover

    Two requirement.\138\ The Commission notes that MGEX understood

    paragraph (a)(1) correctly, and the Commission believes that the

    language in paragraph (a)(1) is sufficiently clear.

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

    \137\ Regulation 39.11 requires DCOs to maintain financial

    resources sufficient to cover a wide range of potential stress

    scenarios, which include, but are not limited to, the default of the

    participant and its affiliates that would potentially cause the

    largest aggregate financial exposure to the CCP in extreme but

    plausible market conditions, otherwise known as ``Cover One.''

    \138\ The term ``Cover Two'' refers to the requirement that a

    DCO 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

    loss (which would include both proprietary and customer accounts)

    for the SIDCO in extreme but plausible market conditions.

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

    The European Commission disagreed with the Commission's decision to

    require a SIDCO or Subpart C DCO to meet the Cover Two financial

    resources requirement only if it is systemically important in multiple

    jurisdictions or is involved in activities with a more complex risk

    profile. The European Commission suggested that all SIDCOs should be

    required to comply with the Cover Two requirement for the following

    reasons. First, any DCO that serves non-US clearing members or non-US

    trading venues is systemically important.\139\ In addition, any DCO

    that is systemically important in the U.S. is systemically important

    internationally.\140\ Second, requiring certain DCOs to meet the Cover

    One requirement while requiring other DCOs to meet the Cover Two

    requirement would be ``detrimental to the object of building equal

    conditions of fair competition'' between U.S.-registered DCOs and DCOs

    registered in other jurisdictions.\141\ Third, banking regulators

    cannot deem various SIDCOs and Subpart C DCOs to all be QCCPs if some

    are required to meet the Cover One requirement while others are

    requirement to meet the Cover Two requirement.\142\ Fourth, differing

    financial resources requirements would make the European Commission's

    equivalence assessment of U.S.-registered DCOs more difficult.\143\

    Fifth, it would be more prudent from a risk management perspective if

    the Cover Two requirement applied to all products and not only those

    ``with a more complex risk profile.'' \144\

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

    \139\ European Commission at 2.

    \140\ Id.

    \141\ Id.

    \142\ Id.

    \143\ European Commission at 2-3.

    \144\ European Commission at 3.

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

    The applicability of the Cover Two requirement in paragraph (a)(1)

    is consistent with Principle 4 of the PFMIs. Further, while the

    European Commission raises important points, further work would need to

    be done to consider the costs versus the benefits of imposing a Cover

    Two financial resources requirements on all DCOs regardless of whether

    that DCO was affirmatively found to be systemically important by the

    Council (or other jurisdictions) and regardless of the types of

    products that DCO clears. Nonetheless, the Commission notes that the

    two existing SIDCOs will, in fact, be subject to a Cover Two financial

    resources requirement.\145\

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

    \145\ As discussed in the final rule on Enhanced Risk Management

    Standards for Systemically Important Derivatives Clearing

    Organizations, ICE Clear Credit clears credit default swaps (which

    is a product with a more complex risk profile) and currently meets a

    Cover Two requirement. See 78 FR 49670. Further, CME Clearing

    currently sizes its guaranty fund for interest rate swaps and its

    guaranty fund for credit default swaps to a Cover Two standard, and

    is required to meet a Cover Two standard for its base guaranty fund

    pursuant to regulation 39.29(a) by the end of 2013 because its

    clears credit default swaps. See 78 FR 49671.

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

    Chris Barnard commented that he supported the language of paragraph

    (a)(3) (determination of whether an activity has a more complex risk

    profile) and that it will appropriately result in higher financial

    resources requirements for such activities. Chris Barnard commented

    further that this should improve the robustness of a DCO's clearing

    system and help protect the financial system from contagion.\146\

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

    \146\ Chris Barnard at 2.

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

    With respect to proposed paragraph (c)(2)(satisfaction of

    settlement in all relevant currencies), LCH commented that it seeks

    confirmation that the provision is intended to pertain to ``material

    currencies only, which are indeed the ones [for which a liquidity

    shortfall would be] likely to disrupt the SIDCO's [or Subpart C DCO's]

    services and impact financial stability.'' \147\

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

    \147\ LCH at 5.

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

    There is no support for the implied assertions that a DCO could

    fail to meet its obligations in certain currencies on time without

    disrupting its services or impacting financial stability, and that a

    DCO could forgo arrangements to meet its obligations in certain

    currencies consistent with Principle 7. Any default by a DCO to meet

    its obligations on time would be likely to disrupt its services and

    impact financial stability. Thus, in this context, new paragraph (c)(2)

    covers those currencies for which the SIDCO or Subpart C DCO has

    obligations to perform settlements, as defined in Sec. 39.14(a)(1), to

    its clearing members.

    [[Page 72489]]

    The Commission believes that this interpretation is consistent with

    Principle 7. To be sure, where an FMI's obligations in a particular

    currency are relatively small, the depth and complexity of the

    arrangements necessary to establish high reliability is likely

    proportionately less demanding.

    In addition, with respect to proposed paragraph (c)(2), CME

    commented that it clears derivatives that settle in approximately 14

    currencies and that it would be difficult to obtain committed credit

    facilities for currencies other than G-7 currencies.\148\ For those

    other currencies, CME claimed that it would be forced to require a

    restrictive set of margin policies, including requiring a clearing

    member to post margin in the same currency as the settlement

    currency.\149\ This, CME argued, would require CME's bank affiliated

    clearing members to face increased capital charges because it may be

    difficult for cash collateral in such currencies to receive bankruptcy

    remote treatment (and, therefore, a smaller capital requirement) unless

    such cash is posted with a central bank.\150\

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

    \148\ CME at 10.

    \149\ Id.

    \150\ Id.

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

    As an initial matter, CME provided no support for the assertion

    that cash collateral would not be bankruptcy remote in the case of a

    DCO. To the contrary, section 761(10) of the Bankruptcy Code defines

    customer property to include both cash and securities, and 761(16)

    defines member property in terms of customer property. Section 766(i)

    provides that, in the case of the insolvency of a clearing

    organization, both customer and member property will be protected.\151\

    A SIDCO or Subpart C DCO will have discretion to determine the most

    efficient means of ensuring sufficient liquidity, which may include

    requiring (or incentivizing) members to post all or a part of their

    collateral in the settlement currency.

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

    \151\ 11 USC 761(i).

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

    With respect to proposed paragraph (c)(3)(i)(E), CME commented that

    it is inconsistent with Principle 7 to require U.S. Treasury

    securities, which are held by a SIDCO or Subpart C DCO for purposes of

    meeting the minimum amount of liquidity resources required under

    proposed paragraph (c)(1), to be subject to ``committed'' funding

    arrangements.\152\ CME commented that it interprets Principle 7 to

    require only ``investments'' to be subject to ``prearranged and highly

    reliable funding arrangements'' and not ``highly marketable

    collateral,'' of which U.S. Treasury securities are an example.\153\

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

    \152\ CME at 10.

    \153\ CME at 3-4.

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

    CME stated further that the European Securities and Markets

    Authority (ESMA), the Monetary Authority of Singapore (MAS), and the

    Reserve Bank of Australia (RBA) have each taken a ``more flexible

    approach'' than proposed paragraph (c)(3)(i)(E) in interpreting the

    qualifying liquid resources provisions of Principle 7.\154\ According

    to CME, these other regulators do not, in some cases, require highly

    marketable collateral such as U.S. Treasury securities to be subject to

    committed funding facilities.\155\ In addition, CME stated that other

    regulators do not, in some cases, require highly marketable collateral

    to be subject to prearranged and highly reliable funding

    arrangements.\156\

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

    \154\ CME at 4.

    \155\ Id.

    \156\ Id.

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

    ISDA commented that it would be neither necessary nor appropriate

    to require that U.S. Treasuries, used to satisfy the minimum liquid

    resources requirement, be subject to prearranged and highly reliable

    funding arrangements.\157\ According to ISDA, such a requirement has

    the potential to exacerbate a liquidity crisis and pass on risk from

    the DCO to its liquidity providers.\158\

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

    \157\ ISDA at 4.

    \158\ Id.

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

    CME further argued that it would be unnecessary to require U.S.

    Treasury securities to be subject to committed funding arrangements

    because the U.S. Treasury market is the world's global standard for

    reliable liquidity and that same-day settlement of U.S. Treasury

    securities is reliably available in material sizes for a negligible

    yield concession of 1-2 basis points per annum.\159\ CME noted that

    banks are permitted to classify U.S. Treasury securities as ``High

    Quality Liquid Assets'' (HQLA) under the Basel III capital rules. CME

    also stated that due to their robust liquidity and eligibility to be

    pledged at the Federal Reserve Bank discount window, U.S. Treasury

    securities are extremely safe for banks to accept under uncommitted

    repurchase agreements.\160\

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

    \159\ CME at 7-8.

    \160\ CME at 8.

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

    CME also argued that there would be several negative consequences

    if the Commission required a DCO to arrange for U.S. Treasury

    securities to be subject to a committed funding arrangement.\161\

    First, CME stated that this provision would necessitate CME to limit

    the amount of U.S. Treasury securities a CME-clearing member could

    deposit to meet initial margin and guaranty fund obligations.\162\ To

    compensate, the clearing members would have to deposit additional cash.

    CME argued that this would be detrimental to bank affiliated clearing

    members because the Basel III capital rules may require banks to take

    higher capital charges for cash collateral than for other types of

    collateral, including U.S. Treasury securities because cash collateral

    is not confirmed to be bankruptcy remote.\163\ CME also stated that

    there would be difficulties establishing a committed liquidity facility

    for U.S. Treasury securities. CME asserted that the banks that are

    affiliated with CME clearing members are the best sources of such

    liquidity resources, and such banks may be prevented from participating

    in a large committed facility because of the risk that they would

    breach their single counterparty exposure limits under proposed Basel

    III capital rules. As a result, bank affiliated clearing members may

    reduce their customer clearing business, which could, in turn, increase

    costs to customers or prevent customers from taking advantage of the

    risk mitigating benefits of central clearing.\164\

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

    \161\ CME at 9-12.

    \162\ CME at 10.

    \163\ CME at 9. As noted above, this assertion is unsupported,

    and is contradicted by Subchapter IV of Chapter 7 of the Bankruptcy

    Code.

    \164\ CME at 11.

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

    Finally, CME suggested that the market for committed liquidity

    facilities may not be large enough to offer a facility that would

    enable CME to satisfy the proposed liquidity provisions of regulation

    39.33(c). CME also discussed a cost estimate for establishing committed

    facilities. This cost estimate is addressed in the cost benefit

    considerations, below.\165\

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

    \165\ CME at 12-13. See also section IV.C., infra.

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

    FIA also commented that U.S. Treasury securities should be

    considered a qualifying liquid resource under paragraph (c)(3), even if

    they are not subject to funding arrangements in accordance with

    proposed subparagraph (E)(2).\166\ FIA argued that, alternatively,

    subparagraph (E)(2) should permit a DCO to arrange for U.S. Treasury

    securities to be subject to uncommitted repurchase agreements. FIA

    supports CME's comment that U.S. Treasury securities are ``high quality

    liquid assets'' under BCBS standards and have remained highly liquid

    during times of stress.\167\

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

    \166\ FIA at 3-4.

    \167\ Id.

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

    However, in appealing to the standards established by other

    jurisdictions, CME acknowledged that

    [[Page 72490]]

    the EMIR Regulatory Technical Standards limit CCPs to ``count[ing]

    `highly marketable financial instruments . . . that the CCP can

    demonstrate are readily available and convertible into cash on a same

    day basis using prearranged and highly reliable funding arrangements,

    including in stressed market conditions.' '' \168\ Similarly, CME

    refers to United Kingdom requirements for a liquidity resource to be

    qualifying that include that the CCP needs to ``demonstrate its ability

    to liquidate the resource for same day cash.'' \169\ The Commission

    agrees that the obligation of a SIDCO or Subpart C DCO with respect to

    highly marketable collateral will be to demonstrate that, as stated in

    subparagraph (E)(2), those assets are, in fact, readily available and

    convertible into cash pursuant to prearranged and highly reliable

    funding arrangements, even in extreme but plausible market conditions.

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

    \168\ CME at 6, quoting European Market Infrastructure

    Regulation Regulatory Technical Standards, Article 33 (emphasis

    supplied here).

    \169\ CME at 6 (emphasis supplied).

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

    ISDA commented that proposed paragraph (c)(3)(ii), which requires a

    SIDCO or Subpart C DCO to take steps to verify that the prearranged and

    highly reliable funding arrangements for U.S. Treasury securities or

    other sovereign bonds do not include material adverse change

    provisions, is unnecessary because the PFMIs do not specifically

    require this.\170\ ISDA also noted that credit arrangements generally

    include such clauses in order to protect the financial institution

    providing the credit, to protect that institution's shareholders, and

    to prevent the spread of risk from a DCO to financial

    institutions.\171\

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

    \170\ ISDA at 4.

    \171\ Id.

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

    In light of these comments, the Commission has decided to make

    minor revisions to the language in 39.33(c)(3)(E)(1) and (E)(2) to more

    closely align with the language used in key consideration 5 to

    Principle 7.

    The purpose of the reference to the material adverse change clauses

    is to ensure that a SIDCO or Subpart C DCO not rely on a credit or

    liquidity arrangement that can be declined (i.e., would not be reliably

    enforceable) at the very point in time when the DCO would, in fact,

    need to use the arrangement. In other words, these funding arrangements

    are intended to ensure that a SIDCO or Subpart C DCO will be able to

    meet its obligations when they come due even after a default in extreme

    but plausible conditions. If a funding arrangement includes a provision

    that there be no material adverse changes as a condition to draw, then

    such funding arrangement will not in fact serve its intended purpose.

    By contrast, a representation that there have been no material adverse

    changes for some period prior to execution of a liquidity arrangement,

    where the truth of such representation is not a condition to

    enforceability of the obligation to provide liquidity, would not be a

    condition that defeats the purpose of the liquidity arrangement. The

    Commission believes this interpretation is consistent with key

    consideration 5 of Principle 7, which states in relevant part that

    ``For the purpose of meeting its minimum liquid resource requirement,

    an FMI's qualifying liquid resources in each currency include . . .

    highly marketable collateral held in custody and investments that are

    readily available and convertible into cash with prearranged and highly

    reliable funding arrangements, even in extreme but plausible market

    conditions.''

    Accordingly, the Commission has decided to modify paragraph

    (c)(3)(ii) to replace the phrase ``material adverse change clause''

    with ``material adverse change condition'' and to add the ``even in

    extreme but plausible market conditions'' language from key

    consideration 5 to clarify this issue and to ensure consistency with

    Principle 7 with respect to this point.

    With respect to proposed paragraph (c)(4), ISDA commented that if a

    SIDCO or Subpart C DCO maintains financial resources in an amount

    greater than the Cover One financial resources requirement, then the

    SIDCO or Subpart C DCO should be required to maintain collateral with a

    low credit risk to cover such greater amount.\172\ ISDA also commented

    that the phrase ``with proceeds available promptly'' should be deleted

    because it does not appear in the PFMIs and is not clearly

    defined.\173\ The Commission notes that the financial resources at

    issue in this paragraph are in excess of those required by Principle 7

    and regulation 39.33(a). Therefore, the Commission believes it is

    appropriate for attendant requirements to be less stringent than those

    that apply to required financial resources. In addition, the

    requirement in paragraph (c)(4) that a SIDCO or Subpart C DCO should

    consider maintaining collateral with low credit risk for any excess

    financial resources is consistent with Principle 7. Moreover, the

    Commission disagrees with ISDA and believe that the concept of ``with

    proceeds available promptly'' is covered by, and consistent with, the

    PFMIs.

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

    \172\ Id.

    \173\ ISDA at 4-5.

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

    In response to the Commission's question as to whether proposed

    paragraph (d)(4) should specify the frequency with which a SIDCO or

    Subpart C DCO must test its procedures for accessing liquidity

    resources, MGEX commented that it believes the proposed language is

    sufficient.\174\ MGEX commented that the proposed language

    appropriately affords a DCO the discretion to determine the frequency

    of testing its procedures for accessing liquidity resources.\175\ MGEX

    stated that a DCO is in the best position to determine this frequency

    and that unnecessary, redundant testing would cause a DCO to incur

    unnecessary costs.\176\

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

    \174\ MGEX at 7.

    \175\ Id.

    \176\ Id.

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

    The Commission has decided to finalize regulation 39.33 as modified

    above. New paragraphs (c), (d), and (e) are intended to address the

    gaps between current part 39 requirements and standards set forth in

    Principle 7.\177\ The Commission believes these new provisions are

    appropriate and will reduce risk for SIDCOs and Subpart C DCOs, their

    clearing members, and customers of clearing members. In particular, new

    paragraph (c)(1) will help prevent a SIDCO or Subpart C DCO from

    defaulting on its obligations to non-defaulting clearing members, which

    is particularly important for a SIDCO because of the potential impact

    that the failure of a SIDCO could have on the U.S. financial markets,

    because

    [[Page 72491]]

    maintaining resources that enable the DCO to meet its intraday, same-

    day, and multiday settlement obligations. New paragraph (c)(2) will

    require a SIDCO to meet its obligations in each relevant currency in a

    timely manner. This is important because if a SIDCO has sufficient

    funds to meet an obligation, but the funds are not in the correct

    currency, then the SIDCO cannot meet that obligation in a timely

    manner, which could lead to a disruption of the SIDCO's services. Such

    disruption could, in turn, have a significant impact on the financial

    stability of the U.S. economy.

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

    \177\ Principle 7, K.C. 2 requires a CCP to measure, monitor,

    and manage liquidity risk effectively. This includes the CCP

    maintaining sufficient liquid resources in all relevant currencies

    in order to effect same-day and, where applicable, intraday and

    multiday settlement of payment obligations in a wide range of

    potential stress scenarios, including the default of the participant

    that would create the largest aggregate payment obligations in

    extreme but plausible market conditions. In addition, Principle 7,

    K. C. 5 limits a CCP to counting only certain qualifying liquid

    resources for the purpose of meeting its financial resources

    requirement. These resources include: cash in the currency of the

    requisite obligations, held either at the central bank of issue or

    at a creditworthy commercial bank; committed lines of credit; or

    high quality, liquid, general obligations of a sovereign nation. In

    addition, Principle 7, K. C. 4 states that a CCP that is

    systemically important in multiple jurisdictions or that is involved

    in activities with a more complex risk profile should consider

    maintaining sufficient qualifying liquid resources to meet the

    default of the two participants that would create the largest

    aggregate payment obligations in such circumstances. Principle 7, K.

    C. 7 also requires a CCP to monitor its liquidity providers,

    including clearing members, by undertaking due diligence to confirm

    that they have sufficient information to understand and manage their

    liquidity risks and have the capacity to perform as required under

    their commitments to the CCP.

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

    New paragraph (c)(1)(ii) will require a SIDCO or Subpart C DCO that

    is systemically important in multiple jurisdictions, or that is

    involved in activities with a more complex risk profile, to consider

    maintaining certain eligible liquidity resources that, at a minimum,

    will enable it to meet its intraday, same-day, and multiday settlement

    obligations, stress scenarios that include a default of the two

    clearing members creating the largest aggregate liquidity obligation

    for the DCO in extreme but plausible market conditions. The proposed

    list of these resources is consistent with those set forth in Principle

    7. The financial integrity of a SIDCOs and or Subpart C DCOs might be

    enhanced if it considers meeting this enhanced standard. The provisions

    of new paragraph (c)(4) (pertaining to, among other issues, the

    liquidity of financial resources held in addition to those financial

    resources required by the Cover One standard) are designed to enhance

    the financial condition of SIDCOs and Subpart C DCOs and help reinforce

    stability.\178\

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

    \178\ See generally Financial Stability Oversight Council 2012

    Annual Report, Appendix A at 163 (finding that ``the contagion

    effect of a CME failure could impose material financial losses on

    CME's clearing members and other market participants (such as

    customers) and could lead to increased liquidity demands and credit

    problems across financial institutions, especially those that are

    active in the futures and options markets.'').

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

    F. Regulation 39.34 (System safeguards for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    In August of 2013, the Commission finalized regulation 39.30, which

    enhanced system safeguards requirements for SIDCOs with respect to

    business continuity and disaster recovery, and included a two-hour

    recovery time objective (``RTO'').\179\ As discussed in the adopting

    release, the two-hour RTO is consistent with Principle 17 of the PFMIs

    and increases the soundness and operating resiliency of the SIDCO,

    which in turn, increases the overall stability of the U.S. financial

    markets.\180\ The Commission proposed renumbering regulation 39.30 as

    regulation 39.34 and amending the regulation to cover Subpart C DCOs in

    addition to SIDCOs. The Commission also made a technical correction to

    paragraph (b) to make clear that subparagraphs (1), (2), and (3)

    concern each activity necessary for the daily processing, clearing, and

    settlement of existing and new contracts. Finally, the Commission

    proposed amending the regulation to allow the Commission to, upon

    request, grant newly designated SIDCOs and Subpart C DCOs up to one

    year to comply with the provisions of regulation 39.34.\181\

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

    \179\ See SIDCO Final Rule 78 FR 49672-49674.

    \180\ Id.

    \181\ In response to comments received, regulation 39.39, as

    finalized herein, will permit the Commission, upon request, to grant

    newly designated SIDCOs and Subpart C DCOs up to one year to comply

    with the provisions of regulation 39.35 and 39.39. To harmonize

    regulation 39.34 with this revision, the Commission has determined

    to make a technical correction to proposed regulation 39.34 that

    replaces the phrase ``upon application'' with the phrase ``upon

    request.''

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

    MGEX commented that it ``appreciates the additional time granted

    for complying'' with regulation 39.34.\182\ The Commission notes that

    MGEX's statement implies an automatic compliance extension, which is

    inaccurate because regulation 39.34(d) permits a SIDCO or Subpart C DCO

    to request that the Commission grant it up to one year to comply with

    regulation 39.34. In reviewing such requests, the Commission will be

    attentive to whether the DCO has a well-developed plan to comply with

    the requirement by the end of the requested extension, with reasonable

    milestones that can be monitored by the Commission. MGEX also commented

    that it would like flexibility in developing a business continuity and

    disaster recovery plan.\183\ MGEX stated that the regulation would

    require it to hire three or four new employees outside of Minneapolis,

    which would be very costly.\184\ MGEX suggested it would be less costly

    to comply with the regulation if it outsourced its business continuity

    compliance, but it does not wish to do that because employees, rather

    than contractors, are more likely to act in the best interests of

    MGEX.\185\

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

    \182\ MGEX at 7.

    \183\ Id.

    \184\ Id.

    \185\ Id.

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

    First, the Commission notes that to facilitate the two-hour RTO,

    regulation 39.34 specifically requires a SIDCO or Subpart C DCO to

    maintain personnel, who live and work outside the relevant area of the

    physical and technological resources the SIDCO or Subpart C DCO

    normally relies upon to conduct its clearing activities. This

    requirement might be met in a number of ways. As MGEX notes, one way is

    to engage outsourced personnel. An alternative would be to base

    employees at a geographically diverse location. In general, a SIDCO or

    Subpart C DCO does have flexibility in designing its business

    continuity and disaster recovery plan, although such plan must comply

    with the requirements set forth in regulation 39.34 as well as any

    other applicable Commission regulations. The Commission expects all

    SIDCOs and Subpart C DCOs to fully comply with these, and all other

    applicable, regulations, and anticipates that a registered DCO would

    carefully weigh any costs associated with compliance with Subpart C

    prior to electing to become subject to Subpart C. Second, the proposed

    amendment to allow the Commission, upon request, to grant newly

    designated SIDCOs and Subpart C DCOs up to one year to comply with the

    provisions of regulation 39.34 was intended to provide flexibility to

    address the time practically required to obtain the necessary physical

    and technological resources, and to organize human resources, as

    appropriate to implement a two-hour RTO. As such, the Commission has

    decided to finalize regulation 39.34 as proposed.

    G. Regulation 39.35 (Default rules and procedures for uncovered credit

    losses or liquidity shortfalls (recovery) for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    The Commission proposed regulation 39.35 in order to add

    requirements pursuant to DCO Core Principle G, to address certain

    potential gaps between Commission regulations and Principles 4 and

    7.\186\ Regulation 39.16 currently requires a DCO to adopt procedures

    permitting it to take timely action to contain losses and liquidity

    pressures and to continue meeting its obligations in the event of a

    default on the obligations of a clearing member to the

    [[Page 72492]]

    DCO.\187\ Under proposed regulation 39.35, SIDCOs and Subpart C DCOs

    would be required to adopt additional procedures to address certain

    issues arising from extraordinary stress events, including the default

    of one or more clearing members. Specifically, consistent with

    Principle 4 of the PFMIs, proposed paragraph (a) would require a SIDCO

    or Subpart C DCO to adopt rules and procedures addressing the

    following:

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

    \186\ DCO Core Principle G requires a DCO to have rules and

    procedures ``designed to allow for the efficient, fair, and safe

    management of events during which [clearing] members or

    participants--(I) become insolvent; or (II) otherwise default on the

    obligations of the members or participants to the [DCO].'' Each DCO

    ``is required to (I) clearly state the default procedures on the

    [DCO]; (II) make publicly available the default rules of the [DCO];

    and (III) ensure that the [DCO] may take timely action--(aa) to

    contain losses and liquidity pressures; and (bb) to continue meeting

    each obligation of the DCO.'' See supra Section I.D. and 78 FR

    50263.

    \187\ 17 CFR 39.16(c).

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

    1. How the SIDCO or Subpart C DCO would allocate losses exceeding

    the financial resources available to the SIDCO or Subpart C DCO;

    2. How the SIDCO or Subpart C DCO would arrange for the repayment

    of any funds the SIDCO or Subpart C DCO may borrow; and

    3. How the SIDCO or Subpart C DCO would replenish any financial

    resources it may employ during such a stress event, so that the SIDCO

    or Subpart C DCO would be able to continue to operate in a safe and

    sound manner.

    Consistent with Principle 7 of the PFMIs, proposed paragraph (b) would

    require a SIDCO or Subpart C DCO to establish rules and procedures

    enabling it to promptly meet all of its settlement obligations, on a

    same day and, where appropriate, on an intraday and multiday basis, in

    the context of the occurrence of either or both of the following

    scenarios: (i) Following an individual or combined default involving

    one or more clearing members' obligations to the SIDCO or Subpart C DCO

    or (ii) if there is an unforeseen liquidity shortfall exceeding the

    financial resources of the SIDCO or Subpart C DCO. Such rules and

    procedures should be established ex ante and may provide for the means

    of: Increasing available assets (e.g. by using assessments) and/or

    reducing the size of liabilities (e.g. by engaging in variation margin

    haircuts or tear-ups); as well as obtaining liquidity from participants

    (e.g. through rules-based repurchase arrangements); employing a

    sequenced application of such tools; and replenishing any credit and

    liquidity resources that may be employed during a stress event.

    The Commission requested comment on all aspects of these proposals.

    MGEX requested additional time to comply with regulation 39.35, along

    the lines of proposed regulation 39.34(d), which permits a SIDCO or

    Subpart C to request that the Commission grant the SIDCO or Subpart C

    DCO additional time of up to one year to comply with regulation 39.34.

    MGEX commented that it would be very difficult, if not impossible, to

    perform the analyses required to satisfy regulation 39.35 by December

    31, 2013. The Commission agrees and has decided to permit a SIDCO or

    Subpart C DCO to request up to a one year extension to comply with

    regulation 39.35.\188\

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

    \188\ The Commission has delegated authority to approve such

    requests. See Section II.O. (discussion of regulation 140.94) infra.

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

    The Commission notes that regulation 39.35 was designed to protect

    SIDCOs, Subpart C DCOs, their clearing members, customers of clearing

    members, and the financial system more broadly by requiring SIDCOs and

    Subpart C DCOs to have plans and procedures to address credit losses

    and liquidity shortfalls beyond their prefunded resources, thus

    promoting their ability to promptly fulfill their obligations and

    continue to perform their critical functions. As proposed, regulation

    39.35 addresses significant consequences that could result from a

    clearing member's default. Specifically, a DCO might not have

    sufficient financial resources following a clearing member's default

    either to cover the default or to fulfill its settlement obligations.

    Similarly, a DCO may be unable to fulfill its settlement obligations

    due to a liquidity shortfall exceeding its financial resources. In

    order to avoid the negative effect on its clearing members, their

    customers, and on the financial system more broadly of a DCO's failure

    promptly to meet its settlement obligations, it would be prudent for a

    DCO to have a recovery plan that addresses these scenarios and, given

    their importance to the U.S. financial system, it is critical for

    SIDCOs to have such plans. In addition, because this plan would be

    specified in the DCO's rules and/or procedures, it would be disclosed

    to clearing members, their customers, and the broader public. Such

    transparency would likely help clearing members, their customers, and

    other market participants properly allocate capital and other resources

    as well as facilitate the development of their own recovery plans.

    For the reasons set forth above and in the Proposal, the Commission

    has decided to finalize regulation 39.35 substantively as proposed but

    will permit a SIDCO or Subpart C DCO to request that the Commission

    grant up to a one year extension to comply with regulation 39.35 and

    regulation 39.39, as discussed below.\189\

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

    \189\ See new paragraph (f) of regulation 39.39 and Section

    II.K., infra (discussing regulation 39.39).

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

    H. Regulation 39.36 (Risk management for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    As proposed, regulation 39.36 would establish additional risk

    management requirements for SIDCOs and Subpart C DCOs. Current

    regulation 39.13 establishes the risk management requirements that a

    DCO must meet in order to comply with Core Principle D \190\ including,

    among other things, specific criteria for stress tests that a DCO must

    conduct.\191\

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

    \190\ See 78 FR 50262-50263. DCO Core Principle D requires each

    DCO to possess the ability to manage the risks associated with

    discharging the responsibilities of the DCO through the use of

    appropriate tools and procedures. It further requires each DCO to

    measure its exposure to loss from the default of each clearing

    member not less than once during each business day and to monitor

    each such exposure periodically during the business day. Core

    Principle D also requires each DCO to limit its exposure to

    potential losses from defaults by clearing members, through margin

    requirements and other risk control mechanisms, to reduce the risk

    that its operations would not be disrupted and that non-defaulting

    clearing members would not be exposed to losses that non-defaulting

    clearing members cannot anticipate or control. Finally, Core

    Principle D requires that the margin that the DCO requires from each

    clearing member be sufficient to cover potential exposures in normal

    market conditions, and that each model and parameter used in setting

    such margin requirements be risk-based and reviewed on a regular

    basis.

    \191\ See supra Section I.D. Moreover, such stress tests should

    enable the SIDCO or Subpart C DCO to address procyclicality initial

    margin requirements and collateral haircuts, consistent with

    Principle 6, K.C. 3 and Principle 5, K.C. 3.

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

    The Commission proposed regulation 39.36 in order to address

    certain gaps between Commission regulations and Principles 4, 6, 7, and

    9.\192\ In particular, proposed regulation 39.36 would require a SIDCO

    or Subpart C DCO to enhance its stress testing procedures in ways that

    will make it more likely that the SIDCO or Subpart C DCO will be able

    to understand the risks posed by its members, so that it can ensure

    that the relationship between its resources and obligations enables it

    to meet its obligations promptly.

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

    \192\ See discussion of Principles 4 and 6 supra Section I.E.1.

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

    The Commission requested comment on all aspects of proposed

    regulation 39.36.

    MGEX, the European Commission, and Chris Barnard commented on

    proposed regulation 39.36(a)(stress tests of financial resources). MGEX

    stated that the regulation should permit a SIDCO or Subpart C DCO to

    have the flexibility to use stress test parameters that can be

    justified by relevant data and to select relevant time periods to

    review when conducting stress tests.\193\ DCOs do have such

    flexibility, so long as the

    [[Page 72493]]

    meet the performance standards set forth in the regulation.

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

    \193\ MGEX at 8.

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

    The European Commission stated that regulation 39.36 should be more

    detailed in order to set a meaningful benchmark for all SIDCOs and

    Subpart C DCOs.\194\ For example, the European Commission suggests that

    SIDCOs and Subpart C DCOs should be required to conduct an assessment

    of the theoretical and empirical properties of the margin model and

    that such requirement, should prescribe minimum liquidation periods for

    each type of product.\195\ The European Commission noted that

    explanatory note 3.6.7 to Principle 6 states that ``close-out periods

    should be set on a product-specific basis'' because less liquid

    products may require longer close-out periods.\196\ The European

    Commission opined that there should be a minimum liquidation period of

    two-days for ``listed derivatives'' (i.e., futures and options) rather

    than the one-day minimum prescribed in current regulation

    39.13(g)(2)(ii)(A).\197\ The European Commission also stated more

    generally that its rules and this Commission's rules diverge in the

    area of initial margin requirements and that this divergence ``is a

    source of competitive distortion between the E.U.- and U.S.-listed

    derivative markets as well as a threat to global financial stability.''

    \198\ The European Commission also stressed that this Commission's risk

    management rules should do more to ``mitigate the pro-cyclicality

    inherent to initial margin.'' \199\

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

    \194\ European Commission at 3.

    \195\ Id.

    \196\ Id.

    \197\ European Commission at 3-4.

    \198\ European Commission at 4.

    \199\ Id.

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

    Regulation 39.13(g)(2) already sets out minimum liquidation times

    for swaps, futures, and swaps on agricultural commodities, energy

    commodities, and metals. In addition, pursuant to regulation

    39.13(g)(2), a DCO is already required to use ``[s]uch longer

    liquidation time as is appropriate based on the specific

    characteristics of a particular product or portfolio'' and the

    Commission expressly reserved the right to establish, by order, shorter

    or longer liquidation times for particular products or portfolios.

    Moreover, under that regulation, all DCOs are obligated to consider the

    appropriateness of liquidation times in light of the specific

    characteristics of particular products or portfolios. Reg.

    39.36(b)(2)(i) has been amended to clarify this point with respect to

    SIDCOs and Subpart C DCOs.

    Chris Barnard suggested that DCOs should be required to stress test

    the liquidity of its financial resources in such a way that considers

    market stress, idiosyncratic stress, combinations thereof.\200\ In

    addition, Chris Barnard stated that assets used to offset projected

    funding needs should be discounted to reflect their credit risk and

    market volatility.\201\ In response, the Commission notes that

    regulation 39.36(a), as proposed, would require a SIDCO or Subpart C

    DCO to address these topics.

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

    \200\ Chris Barnard at 2.

    \201\ Id.

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

    With regard to paragraph (c)(6) (reporting stress test results to

    the risk management committee or board of directors), MGEX suggested

    that this provision should be amended to permit the reporting of high-

    level summaries, redacted versions, or subsets of stress test

    results.\202\ Otherwise, MGEX stated that this provision would create

    conflicts of interest because stress test results reveal confidential

    information about MGEX clearing members, and members of the MGEX risk

    management committee or board of directors may also be MGEX clearing

    members.\203\ The Commission expects that stress-tests will be reported

    to the board of directors at a summary level. In complying with new

    paragraph (c)(6), a DCO should structure its reporting and governance

    arrangements in such a way that balances effective governance and risk

    management with confidentiality considerations.

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

    \202\ MGEX at 8.

    \203\ Id.

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

    With respect to proposed regulation 39.36(e) (annual validation of

    financial and liquidity risk management models), Chris Barnard

    commented that persons responsible for the development, implementation,

    or operation of the systems and models being tested not carry out the

    annual validation.\204\ The Commission agrees that would be a prudent

    aspect of an appropriately designed validation process.

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

    \204\ Chris Barnard at 2.

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

    The Commission has decided to finalize regulation 39.36 as amended

    with the clarification discussed above for the reasons discussed above

    and in the Proposal.

    I. Regulation 39.37 (Additional disclosure for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    The Commission proposed regulation 39.37 to set forth additional

    public disclosure requirements for SIDCOs and Subpart C DCOs.\205\

    These requirements were intended to address differences between current

    requirements and PFMI Principles 14 and 23. In particular, proposed

    regulation 39.37 was designed to enable members of SIDCOs and Subpart C

    DCOs, their customers, and the general public to understand the risk of

    exposures to such DCOs, and to promote their ability to evaluate the

    quality of such DCOs, thereby enhancing competition and market

    discipline.

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

    \205\ Public disclosure requirements for all registered DCOs are

    set forth in Regulation 39.21, which implements DCO Core Principle L

    (Public Information), and requires DCOs to provide to market

    participants sufficient information to enable them to identify and

    evaluate accurately the risks and costs associated with using the

    services of the DCO.

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

    Specifically, proposed regulation 39.37 would require SIDCOs and

    Subpart C DCOs to disclose certain information to the public and to the

    Commission. First, consistent with Principle 23, a SIDCO or Subpart C

    DCO would be required to disclose its responses to the CPSS-IOSCO

    Disclosure Framework.\206\ Further, to ensure the continued accuracy

    and usefulness of a SIDCO or Subpart C DCO's responses, a SIDCO or

    Subpart C DCO would be required to review and update them (a) at least

    every two years and (b) following material changes to the SIDCO's or

    Subpart C DCO's system or its environment.\207\ A material change to

    the SIDCO's or Subpart C DCO's system or environment is a change that

    would significantly change the accuracy and usefulness of the SIDCO's

    or Subpart C DCO's existing responses. Under proposed regulation

    39.37(c), a SIDCO or Subpart C DCO would also be required to disclose,

    publicly and to the Commission, relevant basic data on transaction

    volume and values. This requirement is intended to be consistent with

    the Quantitative Information Disclosure that CPSS-IOSCO are in the

    process of developing.\208\

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

    \206\ See also section II.C.2, supra.

    \207\ Available at: http://www.bis.org/publ/cpss106.pdf.

    \208\ See supra section II.C.2. for a discussion of the

    Quantitative Information Disclosure (referencing section 2.5 of the

    CPSS-IOSCO Disclosure Framework).

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

    Also under proposed regulation 39.37, a SIDCO or Subpart C DCO

    would be required, consistent with Principle 14, to publish its rules,

    policies, and procedures describing whether customer funds are

    protected on an individual or omnibus basis and whether customer funds

    are subject to any legal or operational constraints that may impair the

    ability of the SIDCO or Subpart C DCO to segregate or port the

    [[Page 72494]]

    positions and related collateral of a clearing member's customers.

    The Commission requested comment on all aspects of these proposals.

    MGEX commented that it is premature for regulation 39.37(c) to require

    a SIDCO or Subpart C DCO to complete the CPSS-IOSCO Quantitative

    Disclosure Document because that document has not yet been made

    available for public comment.\209\ It is for this reason that MGEX also

    stated that it cannot comment on the potential costs of complying with

    regulation 39.37(c).\210\ The Commission notes that regulation 39.37(c)

    requires the disclosure of relevant basic data on transaction volume

    and values, which requirement is consistent with key consideration 5 in

    Principle 23. Further, given the Commission's goal of establishing

    regulations that are consistent with the PFMIs,\211\ to the extent that

    final international standards are established for the disclosure of

    relevant basic data on transaction volume and values, SIDCOs and

    Subpart C DCOs should look to such standards in complying with the

    requirements set forth in regulation 39.37(c). Further, the Commission

    notes that on October 15, 2013, CPSS-IOSCO published a consultative

    document on public quantitative disclosure standards for central

    counterparties.\212\ Moreover, CPSS-IOSCO states that these

    quantitative disclosures, together with the PFMI Disclosure framework

    also published by CPSS-IOSCO, would form the minimum disclosures

    expected of CCPs under Principle 23, Key Consideration 5, of the

    Principles.\213\ Thus, if and when such public quantitative disclosure

    standards are finalized, the Commission would expect SIDCOs and Subpart

    C DCOs to look to such standards in complying with the requirements set

    forth in regulation 39.37(c). Moreover, the Commission notes that MGEX

    is not obligated to comply with regulation 39.37(c) unless and until

    MGEX elects to become subject to Subpart C. As discussed above, a DCO

    that is not a SIDCO may submit a Subpart C Election Form any time on or

    after the effective date of these final rules and may, should it so

    choose, delay such submission until such time as the public

    quantitative disclosure standards for central counterparties are

    finalized.

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

    \209\ MGEX at 8-9.

    \210\ Id.

    \211\ See Section II.L. discussing Regulation 39.40 (Consistency

    with the Principles for Financial Market Infrastructures).

    \212\ CPSS-IOSCO, Consultative Report, Public Quantitative

    Disclosure Standards for Central Counterparties, October 15, 2013,

    available at http://www.bis.org/publ/cpss114.pdf.

    \213\ Id. at 1.

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

    The new additional disclosures will help regulators and market

    participants assess SIDCOs and Subpart C DCOs, particularly with

    respect to a SIDCO's or Subpart C DCO's compliance with the PFMIs.

    Because of a SIDCO's importance to the U.S. financial markets, such

    public assessment should help provide confidence to market

    participants, which could prove to be a stabilizing force in times of

    severe market stress. For the reasons set forth herein, and in the

    Proposal, the Commission has decided to adopt regulation 39.37 as

    proposed.

    J. Regulation 39.38 (Efficiency for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations)

    Consistent with Principle 21, the Commission proposed regulation

    39.38 in order to require a SIDCO or Subpart C DCO efficiently and

    effectively to design its clearing and settlement arrangements,

    operating structure and procedures, product scope, and use of

    technology. Further, under proposed regulation 39.38, a SIDCO or

    Subpart C DCO would be required to establish clearly defined goals and

    objectives that are measurable and achievable, including goals with

    regards to minimum service levels, risk management expectations, and

    business priorities. Moreover, a SIDCO or Subpart C DCO would be

    required to facilitate efficient payment, clearing, and settlement by

    accommodating internationally accepted communication procedures and

    standards. The explanatory notes to Principle 21 observe that an

    efficient CCP has the required resources to perform its functions \214\

    and the efficiency of the CCP depends on the choice of clearing and

    settlement arrangement, operating structure, scope of products cleared

    or settled, and integration of technology and procedures.\215\ In

    addition, the explanatory notes state that an effective CCP reliably

    meets its obligations in a timely manner and achieves the public policy

    goals of safety and efficiency for participants and the markets it

    serves.\216\ Finally, consistent with Principle 22, proposed regulation

    39.38(d) would require each SIDCO and Subpart C DCO to facilitate

    efficient payment, clearing, and settlement by accommodating

    internationally accepted communication procedures and standards.

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

    \214\ See PFMIs at E.N. 3.21.1.

    \215\ PFMIs at E.N. 3.21.2.

    \216\ PFMIs at E.N. 3.21.5.

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

    The Commission requested comment on all aspects of these proposals.

    MGEX commented that regulation 39.38(d) should permit a SIDCO or

    Subpart C DCO to make independent business decisions for establishing

    communication methods that best serve its clearing members and market

    participants.\217\ MGEX stated it is unclear as to whom or what

    organization is responsible for establishing international

    communication standards and would expect that there may be multiple

    acceptable communication methods.\218\ MGEX suggested that the

    Commission take a flexible approach in reviewing the efficiency of a

    DCO's methods of communication.\219\ The Commission notes that

    regulation 39.38(d) refers broadly to ``internationally accepted

    communication procedures and standards.'' Therefore, the Commission

    believes that there may be more than one way for a SIDCO or Subpart C

    DCO to comply with regulation 39.38(d). The Commission appreciates MGEX

    suggestion regarding flexibility, but as examinations are fact

    specific, the Commission declines to discuss what approach it would or

    would not take in a particular review in the abstract.

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

    \217\ MGEX at 9.

    \218\ Id.

    \219\ Id.

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

    It would appear to be prudent for SIDCOs and Subpart C DCOs to

    comply with such international standards of efficiency and

    effectiveness. A SIDCO or Subpart C DCO that is inefficient or

    ineffective could distort financial activity and market structure,

    increasing financial and other risks to the SIDCO's or Subpart C DCO's

    participants.\220\ For the reasons set forth in the foregoing

    discussion, and in the Proposal, the Commission has decided to finalize

    regulation 39.38 as proposed.

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

    \220\ PFMIs at E.N. 3.21.1.

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

    K. Regulation 39.39 (Recovery and wind-down for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    The Commission proposed regulation 39.39 to require a SIDCO or

    Subpart C DCO to maintain viable plans for recovery and orderly wind-

    down. In particular, regulation 39.39 was designed to protect the

    members of such DCOs and their customers, as well as the financial

    system more broadly from the consequences of a disorderly failure of

    such a DCO.

    [[Page 72495]]

    As noted above, Principle 3 requires a CCP to have a sound risk

    management framework for comprehensively managing legal, credit,

    liquidity, operational, and other risks.\221\ Under Principle 3, such a

    framework would include identifying scenarios that may prevent the CCP

    from providing critical operations and services as a going concern and

    would assess the effectiveness of a full range of options for recovery

    or orderly wind-down. Similarly, Principle 15 requires a CCP to

    identify, monitor, and manage its general business risk and hold

    sufficient liquid net assets funded by equity to cover potential

    general business losses so that the CCP can continue operations and

    services as a going concern if those losses materialize.\222\ Further,

    these liquid net assets should, at all times, be sufficient to allow

    for recovery or orderly wind-down of critical operations and

    services.\223\ Although there is no Core Principle that pertains

    directly to the establishment of a recovery and wind-down plan,

    proposed regulation 39.37 promotes concepts set forth in Core

    Principles B (Financial Resources), D (Risk Management), G (Default

    Rules and Procedures), and I (System Safeguards).\224\

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

    \221\ See supra Section I.E.1.

    \222\ See supra id.

    \223\ See id.

    \224\ See supra Section I.D.

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

    Accordingly, under proposed regulation 39.39, a SIDCO or Subpart C

    DCO would be required to develop additional plans that specifically

    address ``recovery'' and ``wind-down.'' The Commission proposed

    defining ``recovery'' as the actions of a SIDCO or Subpart C DCO,

    consistent with its rules, procedures, and other ex-ante contractual

    arrangements, to address any uncovered credit loss, liquidity

    shortfall, capital inadequacy, or business, operational or other

    structural weakness, including the replenishment of any depleted pre-

    funded financial resources and liquidity arrangements, as necessary to

    maintain the SIDCO's or Subpart C DCO's viability as a going concern so

    that it can continue to provide its critical services without requiring

    the commencement of an insolvency proceeding or the use of resolution

    powers by the Federal Deposit Insurance Corporation or any other

    relevant resolution authority. The Commission proposed defining ``wind-

    down'' as the actions of a SIDCO or Subpart C DCO to effect the

    permanent cessation or sale or transfer of one or more services. The

    Commission also proposed adding a definition for ``general business

    risk,'' which would mean any potential impairment of a SIDCO's or

    Subpart C DCO's financial position, as a business concern, as a

    consequence of a decline in its revenues or an increase in its

    expenses, such that expenses exceed revenues and result in a loss that

    the SIDCO or Subpart C DCO must charge against capital. In addition,

    the Commission proposed defining ``operational risk'' to mean the risk

    that deficiencies in information systems or internal processes, human

    errors, management failures or disruptions from external events will

    result in the reduction, deterioration, or breakdown of services

    provided by a SIDCO or Subpart C DCO. Furthermore, the Commission

    proposed defining ``unencumbered liquid financial assets'' to include

    cash and highly liquid securities. These proposed definitions were

    designed to be consistent with the meaning of such terms in the PFMIs.

    The Commission requested comment as to whether these definitions were

    appropriate. Specifically, the Commission requested comment on whether

    the definition of ``recovery'' is appropriate in light of emerging

    international consensus.

    The Commission proposed requiring each SIDCO and Subpart C DCO to

    maintain viable plans for: (i) Recovery or orderly wind-down,

    necessitated by credit losses or liquidity shortfalls; and (ii)

    recovery or orderly wind-down, necessitated by general business risk,

    operational risk, or any other risk that threatens the SIDCO's or

    Subpart C DCO's viability as a going concern. The Commission also

    proposed requiring that the recovery and wind-down plans of SIDCOs and

    Subpart C DCOs meet certain standards, set forth in proposed subsection

    (c).\225\ Under proposed regulation 39.39(d), a SIDCO or Subpart C DCO

    would be required to establish recovery and wind-down plans that are

    supported by certain resources.

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

    \225\ 78 FR 50282.

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

    The Commission requested comment on all aspects of these proposals.

    In their comment letters, LCH, MGEX, and NYPC suggested that the

    Commission provide additional time to a SIDCO or Subpart C DCO for

    developing recovery and wind-down plans in accordance with regulation

    39.39.\226\ Further, NYPC suggested that a SIDCO or Subpart C not be

    required to comply with regulation 39.39 until (1) CPSS-IOSCO and the

    Financial Stability Board finalize their reports on CCP recovery and

    resolution and (2) CCPs have been allowed a reasonable amount of time

    to implement the guidance included in such reports.\227\ Because

    reports on CCP recovery and resolution are still under consideration by

    the relevant international bodies, and further work in these areas may

    inform the Commission's views on a SIDCO's or Subpart C DCO's recovery

    or wind-down plans, the Commission has decided to permit a SIDCO or

    Subpart C DCO to request that the Commission grant the SIDCO or Subpart

    C DCO up to one year to comply with regulation 39.39 and 39.35 (Default

    rules and procedures), in a similar manner to the process by which a

    SIDCO or Subpart DCO may request that the Commission grant the SIDCO or

    Subpart C additional time for complying with regulations 39.34 (System

    safeguards).\228\

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

    \226\ LCH at 2-4, MGEX at 9, and NYPC at 2.

    \227\ NYPC at 1-2.

    \228\ See new paragraph (f) of regulation 39.39, new paragraph

    (d) of regulation 39.34, footnote 108 supra, and Section II.G. supra

    (discussing regulation 39.35).

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

    ISDA suggested that regulation 39.39 include more details about the

    required recovery and wind-down plans, such as the details provided in

    CPSS-IOSCO's Consultative Report, ``Recovery of Financial Market

    Infrastructures.'' \229\ The Commission notes that the Consultative

    Report lists suggested tools, not mandatory standards.\230\ This

    rulemaking, by contrast, is intended to address what the PFMIs require.

    Therefore, it would be inappropriate for Subpart C to reflect the

    Consultative Report.

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

    \229\ ISDA at 1-2.

    \230\ The Consultative Report notes that it ``is not intended to

    create additional standards for FMIs, or authorities, beyond those

    set out in the CPSS-IOSCO `Principles for financial market

    infrastructures'.'' Id. at 1.

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

    With respect to proposed regulation 39.39(b)(2), MGEX commented

    that the Commission should delete the phrase ``or any other risk that

    threatens the DCO's viability as a going concern.'' \231\ MGEX stated

    that Principle 15 requires a DCO to establish recovery and orderly

    wind-down plans necessitated only by general business risk or

    operational risk.\232\ MGEX commented further that this phrase is

    ambiguous.\233\ Although the phrase does not appear in Principle 15,

    the Commission notes that key consideration 3 of Principle 3

    specifically requires an FMI to ``identify scenarios that may

    potentially prevent it from being able to provide its critical

    operations and services as a going concern and assess the effectiveness

    of a full range of options for recovery or orderly wind-down.'' Thus,

    the inclusion of the phrase ``or any other risk that threatens the

    DCO's viability as

    [[Page 72496]]

    a going concern'' is consistent with the PFMIs. Moreover, a SIDCO or

    Subpart C DCO should be aware of, and have plans to address, the risks

    that threaten their viability without being limited in their analysis

    to pre-defined risks.

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

    \231\ MGEX at 10.

    \232\ MGEX at 9-10.

    \233\ Id.

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

    With respect to proposed regulation 39.39(d)(2), MGEX commented

    that a SIDCO or Subpart C DCO that demonstrates adequate liquidity

    capabilities should be permitted to use an established line of credit

    for meeting potential business losses, particularly if the line of

    credit is offered on the basis that the DCO meet ``certain equity

    covenants.'' \234\ The Commission notes that, so long as the DCO has

    sufficient assets funded by the equity of its owners, arrangements such

    as this one may be effective in providing a DCO with a tool that would

    be adequate for providing the related liquidity necessary to comply

    with regulation 39.39(d)(2). A DCO would need to demonstrate that such

    an arrangement would: (i) enable the DCO to have sufficient

    unencumbered liquid financial assets to fund its recovery and wind-down

    plans and (ii) make that liquidity available to the DCO even in a

    scenario in which the DCO is facing recovery or wind-down. The

    Commission notes that regulation 39.39(d)(2) uses the phrase ``funded

    by equity . . .'' to connote financial resources that are part of the

    SIDCO's or Subpart C DCO's owners' equity/shareholder capital.\235\

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

    \234\ Id.

    \235\ As mentioned earlier in this section, the phrase ``funded

    by equity'' comes from Principle 15. See also supra Section I.E.1.

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

    For the reasons set forth above and in the Proposal, the Commission

    has decided to finalize regulation 39.39 substantively as proposed but,

    as discussed above, will permit a SIDCO or Subpart C DCO to request

    that the Commission grant the SIDCO or Subpart C DCO up to one year to

    comply with regulation 39.39.\236\ This new regulation is intended to

    address certain differences between existing Commission regulations and

    the standards set forth in the PFMIs. In addition, it would appear to

    be necessary for a SIDCO to maintain and (as part of such maintenance,

    regularly update) a recovery and wind-down plan so as to reduce, or

    attempt to control, the potential impact a failure or disruption of the

    SIDCO's operations would have on the stability of the U.S. financial

    markets.

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

    \236\ See new paragraph (d) of regulation 39.39 and Section

    II.G. supra (discussing regulation 39.35).

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

    L. Regulation 39.40 (Consistency with the Principles for Financial

    Market Infrastructures)

    Proposed regulation 39.40 was intended to make clear that Subpart C

    is intended to establish regulations that, together with Subpart A and

    Subpart B, are consistent with the DCO Core Principles set forth in

    Section 5b(c)(2) of the CEA and the PFMIs. Specifically, to the extent

    of any ambiguity, the Commission intends to interpret the regulations

    set forth in part 39 in a manner that is consistent with the standards

    set forth in the PFMIs.

    The Commission requested comment on all aspects of this proposal.

    ISDA commented that regulation 39.40 should state that subpart C is

    intended to be consistent with the PFMIs ``except to the extent

    inconsistent with other regulations of the Commission.'' According to

    ISDA, this would make clear that part 22, which pertains to the

    protection of Cleared Swaps Customer Collateral by DCOs and FCMs, would

    not be trumped by any future international standards, such as the CPSS-

    IOSCO Consultative Report, ``Recovery of Financial Market

    Infrastructures.'' The Commission notes that regulation 39.40 requires

    consistency with both the CEA and with the PFMIs. Thus, ISDA's

    suggested language is not necessary because an international standard

    that is not consistent with the CEA would not trump a Commission

    regulation that implements or derives from the CEA.

    Consistency between part 39 and the PFMIs would appear to promote

    international harmonization and is intended to allow the bank clearing

    members and bank customers of SIDCOs and Subpart C DCOs to receive the

    more favorable capital treatment under the Basel CCP Capital

    Requirements. For the reasons set forth above and in the Proposal, the

    Commission has decided to finalize regulation 39.40 as proposed.

    M. Regulation 39.41 (Special enforcement authority for systemically

    important derivatives clearing organizations)

    In August of 2013, the Commission adopted regulation 39.31, which

    implemented special enforcement authority over SIDCOs granted to the

    Commission under section 807(c) of the Dodd-Frank Act.\237\ In the

    Proposal, the Commission renumbered regulation 39.31 as regulation

    39.41 and did not propose any other changes. The Commission did not

    receive any comments on regulation 39.41 and thus, as part of this

    final rulemaking, the Commission is adopting regulation 39.41 as

    proposed.

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

    \237\ See SIDCO Final Rule.

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

    N. Regulation 39.42 (Advance notice of material risk-related rule

    changes by systemically important derivatives clearing organizations)

    The Commission proposed moving existing paragraph (c) of regulation

    39.30 (Scope) to proposed regulation 39.42.\238\ This paragraph

    instructs a SIDCO to provide advance notice to the Commission of any

    proposed change to its rules, procedures, or operations that could

    materially affect the nature or level of risks presented by the SIDCO,

    in accordance with regulation 40.10.\239\ Because the other provisions

    of proposed revised regulation 39.28 (renumbered as regulation 39.30)

    pertain to the scope of Subpart C,\240\ it would be appropriate for

    paragraph (d) to be codified in a separate regulation. The Proposal did

    not suggest any substantive amendments to this provision. The

    Commission did not receive any comments on regulation 39.41 and thus,

    as part of this final rulemaking, the Commission is moving the

    provision to regulation 39.42 as proposed.

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

    \238\ See supra Section II.B. and note 111.

    \239\ The Commission promulgated this provision as part of the

    SIDCO Final Rule.

    \240\ See supra Section II.B. (discussing proposed revised

    regulation 39.28, renumbered as regulation 39.30).

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

    O. Regulation 140.94 (Delegation of authority to the Director of the

    Division of Clearing and Risk)

    The Commission proposed amending regulation 140.94 so that certain

    Commission functions contained in these proposed regulations would be

    delegated to the Director of the Division of Clearing and Risk and to

    such staff members as the Director may designate. Specifically, the

    Commission proposed to delegate all functions reserved to the

    Commission in proposed regulation 39.31 including, for example, the

    authority to request that a DCO provide information supplementing a

    Subpart C Election Form that it has filed with the Commission; to

    determine whether an election to be subject to Subpart C should be

    permitted to become effective, stayed or denied; and to provide any

    notices regarding the foregoing. The Commission also proposed to

    delegate to the Director of the Division of Clearing and Risk and to

    his or her designees the decision described in regulation 39.34(d)

    (whether to grant a SIDCO or a Subpart C DCO up to one year to comply

    with any provision of regulation 39.34).

    [[Page 72497]]

    As discussed above, in response to comments from LCH, MGEX, and

    NYPC, the Commission has decided to permit a SIDCO or Subpart C DCO to

    request that the Commission grant the SIDCO or Subpart C DCO additional

    time of up to one year to comply with the requirements to establish

    default rules and procedures for uncovered losses or shortfalls

    pursuant to new regulation 39.35 and to establish recovery and wind-

    down plans pursuant to new regulation 39.39.\241\ In this connection,

    just as proposed amended regulation 140.94 would delegate the

    disposition of such a request concerning compliance with regulation

    39.34 to the Director of the Division of Clearing and Risk, the

    Commission has decided to delegate the disposition of a request for

    delayed compliance with regulation 39.39 to the Director of the

    Division of Clearing and Risk.\242\ Otherwise, the Commission believes

    that the proposed amendments to regulation 140.94 provide appropriate

    delegations to the Director of the Division of Clearing and Risk.

    Therefore, the Commission has decided to finalize the other amendments

    as proposed.

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

    \241\ See Sections II.G. and II.K, supra.

    \242\ Regulation 140.94(c)(13), as finalized, replaces the term

    ``applications'' with ``requests'' to comport with the language used

    in final regulations 39.34 and 39.39.

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

    P. Regulation 190.09 (Member property)

    Certain of the proposed requirements for SIDCOs and Subpart C DCOs

    necessitated certain clarifications to part 190 of the Commission's

    regulations. Specifically, new regulation 39.35(a) requires a SIDCO or

    Subpart C DCO to ``adopt explicit rules and procedures that address

    fully any loss arising from any individual or combined default relating

    to any clearing members' obligations to the SIDCO or Subpart C DCO.''

    New regulation 39.39(b) requires a SIDCO or Subpart C DCO to maintain

    viable plans for recovery and orderly wind-down. In addition, SIDCOs

    and Subpart C DCOs must comply with Core Principle R, which require all

    registered DCOs to ``have a well-founded, transparent, and enforceable

    legal framework for each aspect of the activities of the DCO.''

    Recognizing the diversity of financial safeguard arrangements among

    DCOs, the Commission noted in the Proposal that it would appear to be

    prudent to clarify certain language in part 190 to materially aid

    compliance with Core Principle R and the proposed regulations specified

    above.

    The Commission proposed amending paragraph (b) of regulation 190.09

    to clarify that the scope of member property will be determined based

    on the by-laws and rules of the relevant DCO.

    The Commission requested comment on all aspects of this proposal.

    The Commission did not receive any comments on the proposed amendments

    to regulation 190.09. The Commission believes that the proposed

    amendments to regulation 190.09(b) make appropriate clarifications, as

    described above. For the reasons set forth herein and in the Proposal,

    the Commission has decided to finalize the amendments to regulation

    190.09(b) as proposed.

    III. Effective Date

    A. Congressional Review Act

    This final rulemaking is a major rule for purposes of the

    Congressional Review Act (``CRA'').\243\ Generally, under the CRA, a

    major rule takes effect 60 days after the date on which the rule is

    published in the Federal Register.\244\ However, Section 808(2) of the

    CRA provides that any rule which an agency for good cause finds that

    notice and public procedure thereon are impracticable, unnecessary, or

    contrary to the public interest (and incorporates the finding and a

    brief statement of reasons therefore in the rule issued), shall take

    effect at such time as the federal agency promulgating the rule

    determines.\245\ For the regulations in this final rule, the Commission

    has determined that good cause exists to waive the CRA effective date

    requirement and make the regulations effective in less than 60 days.

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

    \243\ See 5 U.S.C. 804(2) (defining a ``major rule'' for

    purposes of the Congressional Review Act).

    \244\ Id. at 801(a)(3).

    \245\ Id. at 808(2).

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

    For revised regulation 190.09, the Commission is making the

    regulation effective upon publication. In accordance with section

    808(2), the Commission finds good cause to make this provision

    effective upon publication because the regulation does not impose any

    new, substantive obligations on regulated entities and only serves to

    clarify an existing regulation in order to aid DCOs in their compliance

    with Commission regulations, including the final rules adopted herein.

    Moreover, the final regulation is being adopted as proposed, including

    the effective date. Market participants are thus familiar with the

    clarification and the timing of its implementation. Furthermore, the

    Commission received no comments on any aspect of revised regulation

    190.09. Therefore, the Commission has determined that good cause exists

    to make revised regulation 190.09 effective upon publication.

    Regarding regulation 39.31, the Commission is making this

    regulation effective as of December 13, 2013. In accordance with

    section 808(2), the Commission finds that a 60 day effective date for

    this regulation is contrary to the public interest because such delay

    will cause public harm by significantly increasing (for the reasons

    discussed below) the costs for market participants to clear OTC and

    exchange-traded derivatives with DCOs. More broadly, the increase in

    costs will have an adverse effect on competition and may lead to a

    disruption in the financial markets. Regulation 39.31 does not impose

    any requirements on regulated entities; rather it is a permissive

    provision that gives DCOs that have not been designated as systemically

    important by the Council the opportunity to opt-into and become subject

    to the provisions of an enhanced regulatory scheme that is otherwise

    only applicable to SIDCOs.\246\ Compliance with this enhanced

    regulatory scheme as well as existing Commission regulations is

    necessary for such DCOs to be subject to standards that are consistent

    with the PFMIs, and thus enable them to gain QCCP status.\247\

    Attaining QCCP status will increase a DCO's ability to compete in the

    global financial markets by allowing such DCO to offer lower capital

    charges to banks (including their subsidiaries and affiliates) that

    clear derivative transactions with the DCO.\248\ Banks that transact

    with U.S. DCOs that do not have QCCP status will be charged

    substantially higher capital charges which they may pass along to their

    bank customers.\249\ In order to benefit from QCCP status by December

    31, 2013,\250\

    [[Page 72498]]

    the Commission must receive a DCO's election form, as set out in

    regulation 39.31, by December 13, 2013. This date is necessary to allow

    the Commission a review period to stay, deny or permit the election by

    December 31, 2013. For those DCOs that wish to gain QCCP status, an

    effective date beyond December 13, 2013, would delay the election

    process and cause financial harm by adversely impacting the ability of

    these DCOs to compete with CCPs that have attained QCCP status by the

    end of 2013. Therefore the Commission has determined that good cause

    exists to make regulation 39.31 effective as of December 13, 2013.

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

    \246\ See supra Sections I.B. and I.C.

    \247\ See supra Section I.F.

    \248\ Id.

    \249\ Id. See also CME at 5, n. 18 (stating that the

    ``ramifications for failure to achieve QCCP status are onerous for

    banks' CCP exposures and can result in capital charges on trade

    exposures that are 10-20 times larger than capital charges for QCCP

    trade exposures.'').

    \250\ See CME at 5, n. 18 (stating that ``in order for banks to

    achieve preferential QCCP capital treatment for their exposures to

    given CCPs, the CCP's primary regulator, among other things, must

    have implemented the PFMIs by January 1, 2014.'' See also ``Basel

    III Counterparty Credit Risk and Exposures to Central

    Counterparties-Frequently Asked Questions'' (December 2012)

    available at http://www.bis.org/publ/bcbs237.pdf (stating that

    during 2013, if a CCP's primary regulator has publicly stated that

    it is working towards implementing regulations consistent with the

    PFMIs, then such CCP may be treated as a QCCP until the December 31,

    2013. After December 31, 2013, the CCP's primary regulator must have

    implemented regulations consistent with the PFMIs and these

    regulations must be applied to the CCP on an ongoing basis in order

    for such CCP to be eligible for QCCP status).

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

    The Commission is also making regulation 140.94 effective as of

    December 13, 2013. In accordance with section 804(3), the Commission

    finds that this provision is not covered by the CRA as it concerns

    agency management and procedures.\251\ Nevertheless, in accordance with

    section 808(2), the Commission finds that a 60 day effective date for

    this regulation is not necessary because regulation 140.94 imposes no

    requirements on DCOs. Rather it amends the current regulation 140.94 to

    allow certain functions set forth in regulation 39.31 to be delegated

    to Commission staff, for which there is no need to provide for a

    delayed effective date. Therefore the Commission has determined that

    good cause exists to make regulation 140.94 effective as of December

    13, 2013.

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

    \251\ See 5 U.S.C. 804(3) (defining the term ``rule'' for

    purposes of the CRA not to include any rule relating to agency

    management or personnel or any rule of agency organization,

    procedure, or practice).

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

    The remaining regulations, adopted herein,\252\ require SIDCOs to

    establish additional enhanced standards, which along with existing

    Commission regulations, will enable SIDCOs to be compliant with the

    PFMIs and thus, be able to attain QCCP status and offer the lower

    capital charges to banks, their subsidiaries and/or affiliates. For

    these regulations, the Commission is making the effective date as of

    December 31, 2013. For SIDCOs, a delay in attaining QCCP status beyond

    that date could create significant business and operational losses

    which in turn, could constrain the availability of liquidity and

    credit, thereby destabilizing the US financial markets. In accordance

    with section 808(2), the Commission finds that a 60 day effective date

    for these regulations is contrary to the public interest because such

    delay in obtaining QCCP status will cause public harm by significantly

    increasing the costs for market participants to clear OTC and exchange-

    traded derivatives with SIDCOs and hindering the ability of SIDCOs to

    compete with internationally similarly situated CCPs, which would be

    contrary to public interest. Therefore the Commission has determined

    that good cause exists to make the remaining regulations effective as

    of December 31, 2013.

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

    \252\ These regulations set forth enhanced regulatory standards

    relating to governance, financial resources, system safeguards, risk

    management, special default rules and procedures for uncovered

    losses or shortfalls, additional disclosure requirements,

    efficiency, and recovery and wind-down procedures. Pursuant to Title

    VIII of the Dodd-Frank Act, the Commission prescribed these

    regulations in consultation with the Council and the Board. See

    Section 805 of the Dodd-Frank Act.

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

    B. Administrative Procedure Act

    The Administrative Procedure Act (``APA'') generally requires that

    the rules promulgated by an agency not be made effective less than 30

    days after publication in the Federal Register, except for, inter alia,

    interpretative rules and statements of policy and as otherwise provided

    by the agency for good cause found.\253\ For the same reasons cited

    above, the Commission also finds that good cause exists under the APA

    to make revised regulation 190.09, regulation 39.31 and regulation

    140.94 effective on the dates set forth by the Commission.

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

    \253\ See generally 5 U.S.C. 553(d).

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

    Specifically, the Commission concludes that good cause exists to

    waive the 30 day effective date for revised regulation 190.09 because

    the regulation does not impose any new, substantive obligations on

    regulated entities and only clarifies the scope of an existing

    regulation. Thus, the Commission is of the view that this provision is

    not subject to the 30-day effective date requirement. Furthermore,

    because market participants are familiar with the regulation and no

    comments were received on the proposed change to the regulation, the

    Commission believes that a 30 day effective date is unnecessary and

    that good cause exists to make regulation 190.09 effective upon

    publication.

    The Commission also concludes that good cause exists to waive the

    30 day effective date for regulation 39.31 because a 30 day effective

    date would cause public financial harm by constraining the ability of

    certain DCOs to compete with other CCPs, particularly in global

    markets, which in turn, may substantially increase costs for market

    participants that transact in OTC and exchange traded derivatives.

    Moreover, as discussed above, regulation 39.31 does not impose any

    requirements on regulated entities or alter the status quo in any way;

    rather it is a permissive provision that gives DCOs that have not been

    designated as systemically important by the Council the opportunity to

    opt-into and become subject to the provisions of an enhanced regulatory

    scheme that is otherwise only applicable to SIDCOs. Compliance with

    this enhanced regulatory scheme as well as existing Commission

    regulations is necessary for such DCOs to be subject to standards that

    are consistent with the PFMIs, and thus enable them to gain QCCP

    status. Attaining QCCP status will increase a DCO's ability to compete

    in the global financial markets by allowing such DCO to offer lower

    capital charges to banks (including their subsidiaries and affiliates)

    that clear derivative transactions with the DCO. Banks that transact

    with U.S. DCOs that do not have QCCP status will be charged

    substantially higher capital charges which they may pass along to their

    bank customers. In order to benefit from QCCP status by December 31,

    2013, the Commission must receive a DCO's election form, as set out in

    regulation 39.31, by December 13, 2013. This date is necessary to allow

    the Commission a review period to stay, deny or permit the election by

    December 31, 2013. For those DCOs that wish to gain QCCP status by

    December 31, 2013, an effective date beyond December 13, 2013, would

    delay the election process and cause financial harm by adversely

    impacting the ability of these DCOs to compete with CCPs that have

    attained QCCP status by the end of 2013. Therefore, the Commission has

    determined that good cause exists to make regulation 39.31 effective as

    of December 13, 2013.

    Lastly, the Commission concludes that good cause exists to waive

    the 30 day effective date requirement for regulation 140.94 because the

    regulation pertains to agency management and procedures and imposes no

    duty on the Commission's regulated entities. Rather it amends the

    current regulation 140.94 to allow certain functions set forth in

    regulation 39.31 to be delegated to Commission staff, for which there

    is no need to provide for a delayed effective date. Therefore, the

    Commission has determined that good cause exists to make regulation

    140.94 effective as of December 13, 2013. The effective date for the

    remaining regulations is December 31, 2013 in accordance with the APA.

    [[Page 72499]]

    IV. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA''), 44 U.S.C. 3501 et seq.,

    provides that an agency may not conduct or sponsor, and a person is not

    required to respond to, a collection of information unless it displays

    a valid control number from the Office of Management and Budget

    (``OMB''). This rulemaking contains recordkeeping and reporting

    requirements that are collections of information within the meaning of

    the PRA. Although the Commission does not anticipate that more than ten

    persons will respond initially to this collection of information, the

    term ``ten or more persons,'' which triggers PRA compliance, has been

    deemed to apply to ``[a]ny recordkeeping, reporting, or disclosure

    requirement contained in a rule of general applicability.'' 5 C.F.R.

    1320.3(c)(4). This rule amends existing OMB control number 3038-0081,

    titled ``General Regulations and Derivatives Clearing Organizations.''

    Therefore, the Commission has submitted this notice of final rulemaking

    along with supporting documentation for OMB's review in accordance with

    44 U.S.C. 3507(d) and 5 CFR 1320.11.

    This rulemaking contains many provisions that would qualify as

    collections of information, for which the Commission has already sought

    and obtained a control number from OMB. The burden hours associated

    with those provisions are not replicated here because the Commission is

    obligated to account for PRA burden once, and the PRA encourages

    multiple applications of a single collection.\254\ Accordingly, the

    burdens associated with the collections contained in this rulemaking,

    and the information collection request that has been submitted to OMB,

    have been estimated only to the extent that the rulemaking imposes

    collections of information that OMB has not yet reviewed and approved.

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

    \254\ See 35 U.S.C. 3501(2) and (3).

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

    It should be noted that among the thirteen DCOs presently

    registered with the Commission, only two are SIDCOs. Moreover, not all

    remaining DCOs or all DCO Applicants are likely to elect to become

    Subpart C DCOs (for example, DCOs that are based outside of the U.S.

    may seek to obtain QCCP status through regulation by their home country

    regulator). Thus, the burden calculations herein are based on an

    estimate of how many DCOs are SIDCOs and how many DCOs and DCO

    Applicants are likely to elect to become Subpart C DCOs. Additionally,

    many of the collections herein, in particular those related to electing

    Subpart C DCO status, are expected to be one-time events for a DCO. It

    is anticipated that three DCOs will elect to become subject to Subpart

    C in the year following the adoption of these final rules, with

    possibly one or two additional elections thereafter.

    Finally, it is not possible to precisely estimate the reporting and

    recordkeeping burden for the SIDCOs and Subpart C DCOs that will be

    affected by the collections contained in this rulemaking, as the actual

    burden will be dependent on the operations and staffing of each

    particular SIDCO and Subpart C DCO and the manner in which they choose

    to implement compliance with certain requirements. Therefore, the

    burden estimates below are meant to be a composite of the burdens that

    will be absorbed across all SIDCOs and Subpart C DCOs, to the extent

    that the provisions for which information collection burdens are

    applicable.

    1. Collections Only Applicable to Subpart C DCOs

    Regulations 39.31(b) and 39.31(c), as proposed and adopted,

    establish the process whereby DCO and DCO Applicants, respectively, may

    elect to become Subpart C DCOs subject to the provisions of Subpart C.

    The election involves filing the Subpart C Election Form that would be

    contained in appendix B to part 39 of the Commission's regulations. The

    Subpart C Election Form involves completing the certifications therein,

    providing exhibits A through G, and drafting and publishing the DCO's

    responses to the Disclosure Framework, and, when applicable, the DCO's

    Quantitative Information Disclosure. Additionally, regulation

    39.31(b)(2) and (c)(3), as proposed and adopted, provide for Commission

    requests for supplemental information from those requesting Subpart C

    DCO status; regulation 39.31(b)(3) and (c)(4), as proposed and adopted,

    require amendments to the Subpart C Election Form in the event that a

    DCO or DCO Applicant, respectively, discovers a material omission or

    error in, or if there is a material change in, the information provided

    in the Subpart C Election Form; regulation 39.31 (b)(7) and (c)(5), as

    proposed and adopted, permit a DCO or DCO Applicant, respectively, to

    submit a notice of withdrawal to the Commission in the event the DCO or

    DCO Applicant determines not to seek Subpart C DCO status prior to such

    status becoming effective; and regulation 39.31(e), as proposed and

    adopted, establishes the procedures by which a Subpart C DCO may

    rescind its Subpart C DCO status after it has been permitted to take

    effect. Each of these requirements implies recordkeeping that would be

    produced by a DCO to the Commission on an occasional basis to

    demonstrate compliance with the rules. As noted above, the relevant

    final regulations were adopted as proposed and did not include any

    additional information collection requirements that would warrant a

    revision of the burden hour estimates.

    The Proposal noted that, while it was is likely that only three

    DCOs will elect to become Subpart C DCOs, it was conservatively

    estimated that, collectively, five DCOs or DCO Applicants may elect to

    become Subpart C DCOs. The Proposal also noted that, while it is

    unlikely that any DCO or DCO Applicant will withdraw its election to

    become subject to Subpart C prior to such election becoming effective,

    an estimate of compliance with the withdrawal procedures by one DCO was

    included in the burden hours for the information collection. Finally,

    the Proposal estimated that, while it is likely that none of the

    Subpart C DCOs will elect to rescind its election, the Commission

    conservatively estimated that one Subpart C DCO may rescind its

    election.

    The Commission received one comment that referenced the estimated

    burden hours of the collection of information in this rulemaking.

    Specifically, MGEX referenced the ``Commission's estimate'' of the

    ``1,020 hours'' that ``would be required to complete the Subpart C

    Election Form'' and the ``1,125 hours estimated for responding to

    requests for supplemental information.'' \255\ MGEX did not, however,

    indicate that it disagreed with the burden hour assessments set forth

    in the Proposal. Accordingly, the Commission has not altered its

    calculations. The Commission did not receive any additional comments on

    its original hour burden estimates and believes that those estimates,

    as set forth below, remain appropriate for PRA purposes:

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

    \255\ MGEX at 2.

    Reporting--Certifications--Subpart C Election Form

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 1

    Average number of hours per report: 25

    Estimated gross annual reporting burden: 125

    Reporting--Exhibits A through G--Subpart C Election Form

    [[Page 72500]]

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 1

    Average number of hours per report: 155

    Estimated gross annual reporting burden: 775

    Reporting--Preparing and Publishing Disclosure Framework Responses

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 1

    Average number of hours per report: 200

    Estimated gross annual reporting burden: 1,000

    Reporting--Preparing Quantitative Information Disclosures

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 1

    Average number of hours per report: 80

    Estimated gross annual reporting burden: 400

    Reporting--Requests for Supplemental Information

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 5

    Average number of hours per report: 45

    Estimated gross annual reporting burden: 1,125

    Reporting--Amendments to Subpart C Election Form

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 3

    Average number of hours per report: 8

    Estimated gross annual reporting burden: 120

    Reporting--Withdrawal Notices

    Estimated number of reporters: 1

    Estimated number of reports per reporter: 1

    Average number of hours per report: 2

    Estimated gross annual reporting burden: 2

    Reporting--Rescission Notices

    Estimated number of reporters: 1

    Estimated number of reports per reporter: 75

    Average number of hours per report: 3

    Estimated gross annual reporting burden: 225

    Recordkeeping

    Estimated number of recordkeepers: 5

    Estimated number of records per recordkeeper: 82

    Average number of hours per record: 1

    Estimated gross annual recordkeeping burden: 410

    2. Collections Applicable Both to SIDCOs and Subpart C DCOs

    Regulations 39.32(a) and (b), as proposed and adopted, establish

    governance requirements applicable to each SIDCO and Subpart C DCO,

    including specific provisions requiring written and disclosed

    governance arrangements and the disclosure of certain decisions on

    particular, not regularly scheduled, occasions, to the Commission, the

    SIDCO or Subpart C DCO's clearing members, other relevant stakeholders

    and/or the public. Regulation 39.33(d), as proposed and adopted,

    requires a SIDCO or Subpart C DCO to conduct due diligence on its

    liquidity providers and to conduct periodic testing with respect to its

    access to liquidity resources. Regulation 39.33(e), as proposed and

    adopted, establishes documentation requirements with respect to the

    supporting rationale for the financial and liquidity resources it

    maintains pursuant to regulations 39.33(a) and 39.33(c), respectively.

    Regulation 39.36(c)(6), as proposed and adopted, requires each

    SIDCO and Subpart C DCO to report stress test results to its risk

    management committee or board of directors. Regulation 39.37(a), as

    proposed and adopted, requires each SIDCO and Subpart C DCO to complete

    and to publicly disclose its responses to the Disclosure Framework and,

    when applicable, to complete and disclose a Quantitative Information

    Disclosure. As described above and as accounted for in the previous

    portion of this PRA burden estimate, these tasks will be conducted by

    Subpart C DCOs as part of their election to become subject to Subpart

    C. SIDCOs and DCOs also are required to update their Disclosure

    Framework responses and Quantitative Information Disclosure every two

    years. Regulations 39.37(c) and (d), as proposed and adopted, require

    each SIDCO or Subpart C DCO to disclose, publicly and to the

    Commission, certain data on transaction volume and values and their

    rules, policies, and procedures related to the segregation and the

    portability of customers' positions and funds.

    Regulation 39.38, as proposed and adopted, requires each SIDCO or

    Subpart C DCO to establish a process to review the efficiency and

    effectiveness of its clearing and settlement arrangements, operating

    structure and procedures, scope of products cleared and use of

    technology. Finally, regulations 39.39(b) and (c), as proposed and

    adopted, require each SIDCO and Subpart C DCO to develop and maintain

    viable plans for the recovery or wind-down of the SIDCO or Subpart C

    DCO necessitated by certain circumstances. Each of these requirements

    implies recordkeeping that would be produced by the SIDCO or Subpart C

    DCO to the Commission on an occasional basis to demonstrate compliance

    with the proposed rules.

    It is not possible to estimate with precision how many DCOs may, in

    the future, be determined to be SIDCOs and how many may elect to become

    Subpart C DCOs, but it was conservatively estimated in the Proposal

    that, collectively, a total of seven DCOs may be determined to be

    SIDCOs or may opt to become Subpart C DCOs. Presently, there are two

    SIDCOs and it has been estimated that five DCOs will elect to become

    Subpart C DCOs.

    The Commission did not receive any comments on the estimated costs

    or burden hours of this collection of information and the Commission

    believes that its original estimates, as set forth below and in the

    Proposal,\256\ remain appropriate for PRA purposes:

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

    \256\ 78 FR 50285-86.

    Reporting--Governance Requirements--Written Governance Arrangements

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 200

    Estimated gross annual reporting burden: 1,400

    Reporting--Governance Requirements--Required Disclosures

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 6

    Average number of hours per report: 3

    Estimated gross annual reporting burden: 126

    Reporting--Financial and Liquidity Resource Documentation

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 120

    Estimated gross annual reporting burden: 840

    Reporting--Stress Test Results

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 16

    Average number of hours per report: 14

    Estimated gross annual reporting burden: 1,568

    Reporting--Preparing and Publishing Disclosure Framework Responses

    (SIDCOs only)

    Estimated number of reporters: 2

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 200

    Estimated gross annual reporting burden: 400

    Reporting--Updating and Republishing Disclosure Framework Responses

    (SIDCOs and Subpart C DCOs)

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 80 Estimated gross annual

    reporting burden: 560

    Reporting--Preparing and Publishing Quantitative Information

    Disclosures (SIDCOs only)

    Estimated number of reporters: 2

    Estimated number of reports per reporter: 1

    Average number of hours per report: 80

    Estimated gross annual reporting burden: 160

    Reporting--Updating and Republishing Quantitative Information

    Disclosures (SIDCOs and Subpart C DCOs)

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    [[Page 72501]]

    Average number of hours per report: 35

    Estimated gross annual reporting burden: 245

    Reporting--Transaction, Segregation, Portability Disclosures

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 2

    Average number of hours per report: 35

    Estimated gross annual reporting burden: 490

    Reporting--Efficiency and Effectiveness Review

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 3

    Estimated gross annual reporting burden: 21

    Reporting--Recovery and Wind-Down Plan

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 480

    Estimated gross annual reporting burden: 3,360

    Recordkeeping--Liquidity Resource Due Diligence and Testing

    Estimated number of recordkeepers: 7

    Estimated number of records per recordkeeper: 4

    Average number of hours per record: 10

    Estimated gross annual recordkeeping burden: 280

    Recordkeeping--Financial and Liquidity Resources, Excluding Due

    Diligence and Testing

    Estimated number of recordkeepers: 7

    Estimated number of records per recordkeeper: 4

    Average number of hours per record: 10

    Estimated gross annual recordkeeping burden: 280

    Recordkeeping--Generally

    Estimated number of recordkeepers: 7

    Estimated number of records per recordkeeper: 28

    Average number of hours per record: 10

    Estimated gross annual recordkeeping burden: 1960

    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.\257\

    The rules adopted herein will only affect DCOs. 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.\258\ The Commission has

    previously determined that DCOs are not small entities for the purpose

    of the RFA.\259\ Accordingly, the Chairman, on behalf of the

    Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the rules

    adopted herein will not have a significant economic impact on a

    substantial number of small entities. The Chairman made the same

    certification in the proposed rulemaking, and the Commission did not

    receive any comments on the RFA.

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

    \257\ 5 U.S.C 601 et seq.

    \258\ Policy Statement and Establishment of Definitions of

    ``Small Entities'' for Purposes of the Regulatory Flexibility Act,

    47 FR 18618 (Apr. 30, 1982).

    \259\ See 66 FR 45609.

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

    C. Consideration of Costs and Benefits

    1. 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.\260\ 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.

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

    \260\ 7 U.S.C. 19(a).

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

    2. Background

    In this final rulemaking, the Commission is adopting regulations to

    (1) address gaps between part 39 of the Commission's regulations and

    the standards set forth in the PFMIs, (2) provide a mechanism for DCOs

    to elect to opt-in the SIDCO enhanced regulatory framework set out in

    the provisions of Subpart C; and (3) make related technical amendments

    to regulations 140.94 and 190.09. As finalized herein, revised Subpart

    C, together with Subpart A and Subpart B, will establish regulations

    that are consistent with the PFMIs \261\ and provide SIDCOs and Subpart

    C DCOs with the opportunity to become QCCPs for purposes of the Basel

    CCP Capital Requirements.\262\

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

    \261\ See supra Section I.G.

    \262\ See supra Section I.F. (discussion of the Basel CCP

    Capital Requirements).

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

    In promulgating the final rule, the Commission considered the

    following alternatives: (1) not to adopt any of the proposed additional

    standards for SIDCOs, (2) to adopt the proposed additional standards

    for SIDCOs only, (3) to adopt the proposed additional standards for

    SIDCOs and also for DCOs that have not been designated as systemically

    important by the Council but that seek adherence to the enhanced

    regulatory framework for purposes of gaining QCCP status, or (4) to

    adopt the proposed additional standards for all DCOs. As detailed

    above, the Commission has concluded it is necessary and appropriate to

    adopt regulations which set forth enhanced regulatory standards for

    SIDCOs and also to extend this framework to DCOs that have not been

    designated systemically important in order to provide the opportunity

    to for all DCOs to become QCCPs.

    The Commission invited public comment on all aspects of the

    proposed rulemaking, including (1) the competitive impact, the costs as

    well as benefits, resulting from, or arising out of, requiring SIDCOs

    to comply with the provisions set forth in Subpart C, while permitting

    other registered DCOs to elect to become subject to these requirements

    (or to forego such election), (2) the potential costs and benefits to a

    SIDCO or Subpart C DCO to comply with all aspects of the proposed rule,

    (3) alternative means to establish, for Subpart C DCOs, requirements

    consistent with the PFMIs and the costs (or cost savings) and benefits

    associated with such alternatives, and (4) any costs that would be

    imposed on and any benefits that would be conferred on other market

    participants or the financial system more broadly. As discussed above

    in more detail, the Commission received comment letters which generally

    supported the proposed rule and the Commission's objective to harmonize

    U.S. regulations with the international standards set forth by the

    PFMIs.\263\ However, the Commission received only one comment that

    provided quantitative data from which the Commission could calculate

    the costs and benefits of the proposed regulations.\264\ The remainder

    of the comment letters provided qualitative comments on the

    Commission's proposed consideration of costs and benefits, generally,

    as well as specifically with regard to certain proposed regulations.

    These comments are summarized below in connection with the Commission's

    consideration of costs and benefits on the final rules being

    promulgated herein pursuant to section 15(a) of the CEA.

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

    \263\ See generally Chris Barnard, NYPC, FIA, ICE, ISDA,

    European Commission, CME, LCH and MGEX comment letters.

    \264\ See generally CME comment letter.

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

    3. Costs and Benefits of the Final Rule

    a. Costs

    The Commission requested quantitative data or specific cost

    [[Page 72502]]

    estimates associated with the proposed regulations but commenters,

    other than CME, did not provide this information. Commenters did

    address the costs and benefits of the proposed rule in qualitative

    terms, as described below.\265\

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

    \265\ See generally MGEX and LCH comment letters.

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

    As noted in the cost-benefit discussion in the Proposal,\266\ the

    Commission recognizes that the regulations in this final rulemaking are

    comprehensive and that, compared against the status quo (the DCO

    regulatory framework set forth in Subpart A and B of part 39 of the

    Commission's regulations), these regulations may impose important costs

    on SIDCOs and Subpart C DCOs depending, in particular, on the SIDCO's

    or Subpart C DCO's current financial and liquid resources, and risk

    management framework. In particular, these regulations may require

    SIDCOs and Subpart C DCOs to undertake a comprehensive review and

    analysis of their current policies, procedures, and systems in order to

    determine where it may be necessary to design and implement additional

    or alternative policies, procedures, and systems. Such costs are likely

    to increase operational, administrative, and compliance costs for

    SIDCOs or Subpart C DCOs.

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

    \266\ 78 FR 50287.

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

    In addition to the costs for SIDCOs and Subpart C DCOs, the

    Commission has considered the costs these regulations may impose upon

    market participants and the public. To the extent costs increase, the

    Commission notes that higher trading prices for market participants

    (i.e., increased clearing fees, guaranty fund contributions, 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 the

    regulations in this final rulemaking are not adopted. Significantly,

    without these regulations to ensure that SIDCOs operate under certain

    enhanced risk management standards, in a manner consistent with

    internationally accepted standards, the security of the U.S. financial

    markets would be at a greater risk relative to international markets.

    This could affect the attractiveness of the U.S. financial markets

    subject to the Commission's jurisdiction as compared to foreign

    competitors. Moreover, SIDCOS and DCOs that wish to opt-into the

    enhanced regulatory framework 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.

    i. Regulation 39.31 (Election to become subject to the provisions of

    subpart C)

    Regulation 39.31 sets forth the procedures a DCO will be required

    to follow to elect to become subject to the provisions of Subpart

    C.\267\ Specifically, paragraph (b) requires a registered DCO to file a

    completed Subpart C Election Form with the Commission. The form appears

    in Appendix B to Subpart C and is modeled after Form DCO, which the

    Commission promulgated in 2011 as part of the DCO General Provisions

    and Core Principles final rule.\268\ Paragraph (c) requires the same of

    a DCO that applies for registration with the Commission and that wants

    to be subject to the provisions of Subpart C as of the date the DCO is

    registered with the Commission. The Subpart C Election Form includes

    disclosures and exhibits wherein the DCO is required to provide the

    following: a regulatory compliance chart; citations to the relevant

    rules, policies, and procedures of the DCO that addresses each Subpart

    C regulation; and a summary of the manner in which the DCO will comply

    with each regulation. In addition, the DCO is required to provide, in

    separate exhibits, all documents that demonstrate the DCO's compliance

    with regulations 39.32 through 39.36 and regulation 39.39, as finalized

    herein. A DCO is also required to complete responses to the Disclosure

    Framework and publish a copy of its responses on its Web site.

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

    \267\ See supra Section II.C. (discussing regulation 39.31).

    \268\ See 76 FR 69448.

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

    The Commission notes that regulation 39.31 only applies to a DCO

    that the Council has not designated to be systemically important and

    that elects to become subject to the provisions of Subpart C. By

    providing an opt-in procedure and a procedure to rescind such election,

    regulation 39.31, as adopted, offers the benefit of permitting a DCO

    that is not systemically important to compare the benefit of attaining

    QCCP status with the costs of preparing a comprehensive and complete

    Subpart C Election Form (in accordance with the requirements set forth

    in regulation 39.31) and complying with the requirements set forth in

    Subpart C and, thus, to decide for itself whether to become subject to

    Subpart C.

    As discussed above in more detail, the Commission received 4

    comment letters addressing the costs associated with specific

    regulations in the proposed rule.\269\ All of the commenters expressed

    support for the Commission's efforts to provide DCOs with the

    opportunity to become eligible for QCCP status by adhering to an

    enhanced regulatory scheme.\270\ However, MGEX referred to the

    application process set forth in proposed regulation 39.31 as

    ``burdensome'' and ``discriminatory'' towards DCOs that have not been

    designated as systemically important.\271\ In addition, MGEX suggested

    to the Commission two alternatives methods to more efficiently

    implement regulations that are consistent with the PFMIs: (1) require

    all DCOs to be subject to the enhanced regulatory requirements in

    Subpart C and grant an extended compliance schedule beyond December 31,

    2013 or (2) provide an ``opt-out'' process for those DCOs that do not

    wish to be held to the higher regulatory standards and grant compliance

    extensions for those regulations that would be difficult for DCOs to

    implement by December 31, 2013.\272\ LCH suggested that the Commission

    consider requiring the enhanced regulatory standards to apply to all

    DCOs and allow DCOs to petition the Commission for extended compliance

    with ``more complex rules.''\273\ LCH also suggested an opt-out process

    for those DCOs that believe QCCP status is not important for their

    business.\274\ As MGEX itself pointed out in its comment letter,

    requiring all DCOs to adhere to the enhanced requirements in Subpart C

    would impose considerable costs on DCOs that may not seek QCCP

    status.\275\ The Commission believes a DCO should have the flexibility

    to determine what level of regulatory standard is appropriate for its

    particular business model. Regarding the suggested alternative opt-out

    provision, as stated previously, the Commission does not have

    quantitative data on the costs associated with implementing the

    regulations in this final rule but it is aware that costs may be

    significant. Further, the Commission is aware that imposing an enhanced

    regulatory framework on all DCOs even with an opt-out provision,

    without the necessary quantitative analysis, would be inappropriate and

    could result in financial harm to certain DCOs. Moreover, without a

    detailed quantitative analysis comparing the

    [[Page 72503]]

    costs for each DCO that elects to opt-in (under the proposed rule) with

    the costs of each DCO that elects to opt-out of Subpart C compliance

    (under MGEX's alternative), the Commission cannot determine whether

    establishing an opt-out regime would be a more efficient means of

    implementing the PFMIs than the Commission's proposed opt-in regime.

    Hence, at this time, the Commission cannot justify the cost burden that

    would result for DCOs if every DCO were required to comply with the

    Subpart C regulations.

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

    \269\ See generally MGEX, CME, LCH and European Commission

    comment letters.

    \270\ MGEX at 1-2; CME at 1, LCH at 2, and European Commission

    at 1.

    \271\ MGEX at 2.

    \272\ Id. at 3.

    \273\ LCH at 3.

    \274\ Id.

    \275\ MGEX at 3.

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

    MGEX and LCH also both suggested that to alleviate the compressed

    timeline for compliance, the Commission should allow compliance

    extensions. Specifically, LCH requested that ``more complex rules, such

    as those governing financial resources, system safeguards, risk

    management, and recovery and wind-down plans'' be given additional time

    for compliance.\276\ Similarly, MGEX suggested ``granting compliance

    extensions for those regulations that may be particularly difficult to

    implement by the December 31, 2013 deadline.'' \277\ As highlighted by

    both MGEX and LCH, the Commission has already proposed an extended

    deadline for regulation 39.34 regarding system safeguards. The

    Commission is also extending the deadline for compliance with

    regulation 39.35 regarding default rules and procedures and regulation

    39.39 regarding recovery and wind-down by permitting a SIDCO or Subpart

    C DCO to request that the Commission grant the SIDCO or Subpart C DCO

    up to a one year extension to comply with these regulations. However,

    because the very purpose of this final rule is to align the

    Commission's regulations with the PFMIs and to provide DCOs the

    opportunity to become QCCPs, inherently a DCO must comply with all of

    the regulations. An extended compliance date for all the regulations or

    a large subset of the regulations, would call into the question whether

    the Commission has rules and regulations in place consistent with the

    PFMIs and is applying these rules to the DCO on an ongoing basis as of

    December 31, 2013. Extending the compliance date could delay the

    ability of a Subpart C DCO or SIDCO to gain QCCP status and thus,

    increase costs for the DCO's clearing member banks and the customers of

    these banks. While the Commission recognizes the concerns expressed by

    the commenters regarding the compliance deadline for purposes of

    achieving QCCP status, the Commission notes that for DCOs that are not

    SIDCOs, it is ultimately the decision of the DCO as to whether to elect

    to become a Subpart C DCO and if so, when to make such an election.

    Thus, the compliance dates proposed in this regulation are permissive

    and not mandatory for such DCOs.

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

    \276\ LCH at 3.

    \277\ MGEX at 3.

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

    The Commission requested comments regarding the costs associated

    with the actual opt-in process. However, although MGEX stated that the

    Subpart C Election Form would be overly burdensome, neither MGEX nor

    any other commenter provided comments quantifying the cost of opting-

    in, the costs associated with rescinding an opt-in (including the

    notices required), or the costs associated with the completion and

    publication of responses to the Disclosure Framework.

    The Commission notes that pursuant to paragraph (e), a Subpart C

    DCO is permitted, subject to a 180 day notice period, to rescind its

    election to become subject to the provisions of Subpart C. As a result

    of the rescission, the DCO would no longer be considered a QCCP, which

    would likely create important costs for bank clearing members and the

    bank customers of the DCO's clearing members due to the higher capital

    costs that they would incur as a result of clearing transactions

    through the DCO that is no longer a QCCP.\278\ Alternatively, clearing

    members and their customers may choose to end their clearing activities

    and transact through another DCO that is a QCCP. Either choice would

    impose costs on those clearing members and their customers.

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

    \278\ See supra Section I.F. (discussing the treatment for non-

    QCCP clearing members under the Basel CCP Capital Requirements).

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

    As the Commission has previously noted, a Subpart C DCO's

    compliance with the provisions of Subpart C will cause the Subpart C

    DCO to incur certain costs. Some of these costs may then be incurred,

    indirectly, by the Subpart C DCO's clearing members and their

    customers. The Commission requested but did not receive any comments

    concerning how these costs may be mitigated. Nor did the Commission

    receive any comments about the extent to which a DCO's analysis of the

    costs and benefits of being a Subpart C DCO could be affected by the

    possibility that some of the costs may be incurred indirectly by

    clearing members and their customers.

    In the absence of input from market participants, the Commission

    lacks critical information necessary to make a reasonable assessment or

    quantify dollar costs associated with regulation 39.31. Each DCO has

    its own internal cost structure, management system, and existing

    regulatory compliance framework. Thus, the way in which regulation

    39.31 impacts each Subpart C DCO with respect to costs likely will

    vary. Accordingly, the Commission is unable to provide a reliable

    quantification of the costs associated with regulation 39.31, because,

    among other things, such a determination would require information

    concerning the business model and strategies of individual DCOs, about

    which the Commission did not receive information during the comment

    period. The Commission has no reason to believe, however, that the

    costs associated with the regulation would be unreasonable or

    inappropriate to achieve the regulatory objective of providing an

    opportunity for DCOs to opt-in to Subpart C. In addition, the

    Commission believes that the costs the regulation imposes would not, to

    any unnecessary extent, impede a DCO from electing to be subject to

    Subpart C.

    ii. Regulation 39.32 (Governance for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations)

    Regulation 39.32 establishes governance requirements for SIDCOs and

    Subpart C DCOs that are consistent with the PFMIs and establish rules

    and procedures concerning conflicts of interest, compensation policies,

    organizational structure, and fitness standards for directors and

    officers.\279\ Specifically, SIDCOs and Subpart C DCOs are required to

    have written governance arrangements that are clear and transparent,

    that place a high priority on the safety and efficiency of SIDCOs or

    Subpart C DCOs, and that explicitly support the stability of the

    broader financial system and other relevant public interest

    considerations of clearing members, customers of clearing members, and

    other relevant stakeholders. In addition, these governance arrangements

    are required to reflect the legitimate interests of clearing members,

    customers of clearing members, and other relevant stakeholders. To an

    extent consistent with other statutory and regulatory requirements on

    confidentiality and disclosure, SIDCOs and Subpart C DCOs are also

    required to disclose major decisions of the board.\280\ Regulation

    39.32 requires the rules and procedures of SIDCOs and Subpart C DCOs

    to: (1) Describe the SIDCO's or Subpart C DCO's management structure;

    (2) clearly specify the roles and responsibilities of

    [[Page 72504]]

    the board of directors and its committees, including the establishment

    of a clear and documented risk management framework; (3) clearly

    specify the roles and responsibilities of management; (4) establish

    appropriate compensation policies; (5) establish procedures for

    managing conflicts of interest among board members; and (6) assign

    responsibility and accountability for risk decisions and for

    implementing rules concerning default, recovery, and wind-down.

    Finally, regulation 39.32 requires that the board members and managers

    of SIDCOs and Subpart C DCOs have the appropriate experience, skills,

    incentives and integrity; risk management and internal control

    personnel have sufficient independence, authority, resources and access

    to the board of directors; and that the board of directors include

    members who are not executives, officers or employees of the SIDCO or

    Subpart C DCO or of their affiliates.

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

    \279\ See supra Section II.D. (discussing regulation 39.32).

    \280\ Id.

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

    As noted in the cost benefit section of the Proposal,\281\ to the

    extent these requirements affect the behavior of a DCO, costs could

    arise from additional hours a DCO's employees might need to spend

    analyzing the compliance of the DCO's rules and procedures with these

    requirements, designing and drafting new or amended rules and

    procedures where the analysis indicates that these are necessary, and

    implementing these new or amended rules and procedures. The Commission

    continues to believe that these categories accurately summarize the

    sources of material costs that may be incurred in complying with

    regulation 39.32.

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

    \281\ 78 FR 50287.

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

    In the Proposal, the Commission requested comment on the potential

    costs to a SIDCO or Subpart C DCO to comply with all aspects of

    proposed regulation 39.32, and any costs that would be imposed on other

    market participants or the financial system more broadly. The

    Commission specifically requested comment on any alternative means to

    satisfy the requirements of regulation 39.32 in a manner consistent

    with the PFMIs and for costs or cost savings associated with such

    alternatives.\282\ The Commission did not receive any comments in

    response to these requests.

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

    \282\ Id. at 50288.

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

    In the absence of input from market participants, the Commission

    lacks critical information necessary to make a reasonable assessment or

    quantify dollar costs associated with regulation 39.32. The Commission

    notes that regulation 39.32 grants a DCO a certain amount of discretion

    in determining the specifics of the rules and procedures that should be

    adopted to comply with the regulation. Moreover, each DCO has its own

    internal cost structure, management system, and existing regulatory

    compliance framework. Thus, the way in which regulation 39.32 impacts

    each DCO with respect to initial and ongoing costs likely will vary.

    For example, some DCOs may already have rules and processes that comply

    with the regulation, in whole or in part, while other DCOs may not.

    Accordingly, the Commission is unable to provide a reliable

    quantification of the costs associated with regulation 39.32, because,

    among other things, such a determination would require information

    concerning the business model and strategies of individual DCOs, about

    which the Commission did not receive information during the comment

    period. The Commission has no reason to believe, however, that the

    costs associated with the regulation would be unreasonable or

    inappropriate to achieve the regulatory objective of implementing the

    PFMI standards for SIDCOs and Subpart C DCOs. In addition, the

    Commission believes that the costs the regulation imposes would not, to

    any unnecessary extent, impede a DCO from electing to be subject to

    Subpart C.

    iii. Regulation 39.33 (Financial resources for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    a.) Regulation 39.33(a): Cover Two

    As discussed above, regulation 39.33(a), as revised, requires a

    Subpart C DCO to comply with the Cover Two minimum financial resource

    standard for all of its activities if the Subpart C DCO: (1) is

    involved in activities with a more complex risk profile or (2) is

    systemically important in multiple jurisdictions. This regulation

    currently applies to SIDCOs.\283\

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

    \283\ See supra Section II.E. (discussing revised regulation

    39.33).

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

    The cost of the Cover Two requirement for a Subpart C DCO that

    meets either or both of the two criteria described above \284\ includes

    the opportunity cost \285\ of the additional financial resources needed

    to satisfy the guaranty fund requirements for the risk of loss

    resulting from the default of the clearing member creating the second

    largest financial exposure.\286\ In addition, the possibility exists

    that some market participants will transfer their positions from a

    Subpart C DCO that either (1) is deemed systemically important in

    multiple jurisdictions or (2) clears products of a more complex risk

    profile to another DCO for which neither (1) nor (2) applies, 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 SIDCOs or Subpart C 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 and Subpart

    C DCOs that operate under Cover Two. However, the potential cost to a

    SIDCO or a Subpart C DCO subject to the Cover Two requirement and to

    the goal of systemic risk reduction would likely be mitigated because:

    (a) not every product offered by a SIDCO or Subpart C DCO would be

    available at other DCOs and (b) a SIDCO or Subpart C DCO may offer

    benefits not available to a DCO that operates under Cover One because

    it does not elect to become subject to the provisions of Subpart C, and

    is not designated as systemically important, and/or does not clear

    products with a more complex risk profile. This would therefore reduce

    the likelihood that market participants would transfer their positions

    to other DCOs.

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

    \284\ All Subpart C DCOs would bear the administrative cost of

    determining whether they meet either of the criteria.

    \285\ For Subpart C DCOs that are not deemed systemically

    important in multiple jurisdictions or that do not clear products

    with a more complex risk profile, the Cover One financial resources

    requirement would continue to apply, and therefore, these Subpart C

    DCOs would not face increased opportunity costs associated with the

    regulation.

    \286\ In the event that these additional resources would need to

    be raised by the Subpart C DCO, as opposed to reallocated, this cost

    would be the funding cost for raising these additional resources.

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

    b.) Regulation 39.33(b): Valuation of Financial Resources

    As discussed above, regulation 39.33(b) prohibits SIDCOs and

    Subpart C DCOs from including assessments as part of their calculation

    of the financial resources available to cover the default of the

    clearing member creating the largest financial exposure and, where

    applicable, the default of the two clearing members creating the

    largest aggregate financial exposure, in extreme but plausible

    circumstances, i.e., Cover One or Cover Two.\287\ This prohibition

    currently applies to SIDCOs and would be expanded to include Subpart C

    DCOs. The costs associated with the prohibition on the use of

    assessments by a Subpart C DCO in calculating its obligations under

    regulation 39.33(a)

    [[Page 72505]]

    would include the opportunity cost of the additional pre-funded

    financial resources needed to replace the value of such assessments,

    which may require an infusion of additional capital. In addition, as

    with the Cover Two requirement, market participant demand may shift

    from a SIDCO or a Subpart C DCO subject to the Cover Two requirement to

    a DCO with a lower capitalization requirement.

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

    \287\ See supra Section II.E. (discussing revised regulation

    39.33).

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

    c.) Regulation 39.33(c), (d) and (e): Liquidity

    As discussed above, regulation 39.33(c) requires a SIDCO and a

    Subpart C DCO to maintain eligible liquidity resources that will enable

    it to meet its intraday, same-day and multiday settlement obligations,

    in all relevant currencies, with a high degree of confidence under a

    wide range of stress scenarios notwithstanding a default by the

    clearing member creating the largest aggregate liquidity obligation.

    Eligible resources are limited to cash in the currency of the requisite

    obligation, held at the central bank of issue or a creditworthy

    commercial bank, certain highly marketable collateral, including high

    quality, liquid, general obligations of a sovereign nation (subject to

    certain prearranged and highly reliable funding arrangements), and

    various committed liquidity arrangements. These arrangements must be

    reliable and enforceable in extreme but plausible market conditions,

    and must not contain material adverse change clauses.

    In addition, a SIDCO or Subpart C DCO that is systemically

    important in multiple jurisdictions or that is involved in activities

    with a more complex risk profile is required to consider maintaining

    liquidity resources that would enable it to meet the default of the two

    clearing members creating the largest aggregate payment obligation. If

    a SIDCO or Subpart C DCO maintains liquid financial resources in

    addition to those required to satisfy the minimum financial resources

    requirement set forth in regulation 39.11(a)(1) and proposed regulation

    39.33(a), then those resources should be in the form of assets that are

    likely to be saleable or acceptable as collateral for lines of credit,

    swaps, or repurchase agreements on an ad hoc basis.\288\

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

    \288\ Id.

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

    Regulation 39.33(d) imposes a duty on SIDCOs and Subpart C DCOs to

    perform due diligence on their liquidity providers in order to

    determine their ability to perform reliably their commitments to

    provide liquidity. Finally, regulation 39.33(e) requires SIDCOs and

    Subpart C DCOs to document their supporting rationale for the amount of

    financial resources they maintain pursuant to regulation 39.33(a) and

    the amount of liquidity resources they maintain pursuant to regulation

    39.33(c).\289\

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

    \289\ Id.

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

    Regulations 39.33(c)-(e) may result in additional costs for a SIDCO

    or Subpart C DCO with respect to analyzing and measuring intra-day,

    same-day, and multiday liquidity requirements in all relevant

    currencies, developing plans to meet those requirements, obtaining

    eligible liquidity resources and making eligible liquidity

    arrangements, reviewing and monitoring each liquidity provider's risks

    and reliability (including through periodic testing of access to

    liquidity), and documenting the DCO's basis for conclusions with

    respect to its financial resources and liquidity resources

    requirements. These regulations also will require stress testing and

    other analysis of such resources as compared with the DCO's liquidity

    needs. Specifically, with regards to regulation 39.33(c), there may be

    costs involved in obtaining cash in the relevant currencies or

    arranging for qualifying liquidity commitments, such as a committed

    line of credit, to satisfy the minimum financial resources requirement

    set forth in regulation 39.11(a)(1) (i.e. Cover One). Obtaining these

    committed financial resources may involve administrative expenses such

    as the negotiation and drafting of committed arrangements, as well as

    costs arising from the payment of fees to liquidity providers. In

    addition, there may be operational costs involved in calculating the

    liquidity resources requirements at the Cover One level on an intraday,

    same-day, and multiday basis over the course of a default. This

    calculation may require undertaking a complex analysis of the SIDCO's

    or Subpart C DCO's exposures and processes, including various models.

    Where appropriate, this calculation may also require designing and

    implementing changes to either create or modify existing internal

    processes. The Commission notes that while this analysis may involve

    costs, it will improve the SIDCO's or Subpart C DCO's financial

    condition, as described below in section 2.b.iii. of the benefits

    section.

    CME estimated that if it had to obtain committed funding

    arrangements to comply with regulation 39.33(c), its liquidity costs

    would approximately double.\290\ This increase is based on their

    ``assumption that the cost of committed liquidity or committed

    repurchase facilities is approximately $3 million for every $1 billion

    of required committed facilities'' or 30 basis points.\291\

    Additionally, CME commented that given the global clearing mandate

    slated to take effect over the next two years, liquidity requirements

    will significantly increase, which could potentially result in CME's

    liquidity costs increasing to $120 to $160 million per year.\292\

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

    \290\ CME at 13.

    \291\ Id. Current and historic returns available on high quality

    sovereign bonds suggest that the actual costs of liquidity service

    may be less than the 30 basis points that CME estimates and

    therefore, CME's total liquidity costs would be lower than $120 to

    $160 million.

    \292\ CME at 13.

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

    Based on CME's 30 basis point estimate, their increase in liquidity

    costs would translate into a liquidity exposure from the default of a

    single participant, including affiliates, (i.e., Cover One) of $40

    billion to $53 billion. The size of this potential exposure highlights

    the systemic importance of SIDCOs, such as CME, and how critical it is

    for a SIDCO to meet all of its obligations promptly even in extreme but

    plausible conditions. Consequently, while there may be costs associated

    with obtaining prearranged, highly reliable funding, these costs must

    be weighed against the potential disruptions and damage to the U.S.

    financial system if, during extreme but plausible market conditions, a

    SIDCO does not maintain sufficient liquidity to meet its financial

    obligations to its non-defaulting members promptly.

    Moreover, as discussed above in more detail, the standard SIDCOs

    and Subpart C DCOs must meet under regulation 39.33(c) is to

    demonstrate the reliability of the requisite liquidity arrangements,

    even in extreme but plausible conditions. To the extent that a DCO is

    able to meet this burden through tools other than the use of a

    committed funding arrangement, and chooses to so, then the DCO would

    bear the cost of such an alternative arrangement, which may be lower

    than the costs of a committed funding arrangement.

    Regulation 39.33(d) may increase administrative costs to the extent

    that a SIDCO or a Subpart C DCO is required to review and monitor its

    liquidity provider's capacity and reliability to perform its liquidity

    obligations to the DCO. In addition, regulation 39.33(e) may impose an

    administrative cost to document the SIDCO or Subpart C DCO's rationale

    for the financial resources it maintains.

    [[Page 72506]]

    iv. Regulation 39.34 (System safeguards for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    As discussed above regulation 39.34, as revised, expands the

    enhanced system safeguards requirements already applicable to SIDCOs to

    include Subpart C DCOs.\293\ As noted in the cost benefit section of

    the Proposal,\294\ the regulation may increase operational costs for

    Subpart C DCOs by requiring additional resources, including, technology

    (e.g., hardware and software) and the purchase or rental of premises in

    order to achieve geographic dispersal of resources. Moreover, business

    continuity planning inherently requires that personnel be trained in

    their roles and responsibilities under the plan, and this training

    consumes time and related resources.

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

    \293\ See supra Section II.F. (discussing regulation 39.34).

    \294\ 78 FR 50290.

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

    The costs of moving from a next-day RTO, the minimum standard

    established by the DCO core principles and current regulation 39.18, to

    a two-hour RTO as required by proposed regulation 39.34, may be

    significant. Additionally, the implementation of a two-hour RTO may

    impose one-time costs to establish the enhanced resources and recurring

    costs to operate the additional resources. The Commission continues to

    believe that these categories accurately summarize the sources of

    material costs that may be incurred in complying with regulation 39.34.

    In the Proposal, the Commission requested comment on the potential

    costs to a Subpart C DCO to comply with all aspects of proposed

    regulation 39.34 and any costs that would be imposed on other market

    participants or the financial system more broadly. The Commission

    specifically requested comment on any alternative means to satisfy the

    requirements of regulation 39.34 in a manner consistent with the PFMIs

    and for costs or cost savings associated with such alternatives.\295\

    The Commission received one comment in response. MGEX stated that it

    would require three or four additional employees to comply with the

    geographic diversity requirements of this rule, unless MGEX were to

    engage outsourced personnel.

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

    \295\ Id.

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

    The Commission notes that MGEX could, alternatively, relocate

    existing positions (rather than increase its headcount). This would

    require MGEX to incur either relocation or hiring costs, as well as

    office space for the geographically diverse employees. MGEX provided no

    estimates of the costs it might incur.

    In the absence of input from market participants, the Commission

    lacks critical information necessary to make a reasonable assessment or

    quantify dollar costs associated with regulation 39.34. The Commission

    notes that regulation 39.34 grants a DCO a significant amount of

    discretion in determining how to comply with the regulation. Moreover,

    it is possible that each DCO has its own internal cost structure,

    management system, and existing regulatory compliance framework. Thus,

    the way in which regulation 39.34 impacts each DCO with respect to

    initial and ongoing costs likely will vary. For example, some DCOs may

    already have resources in place that comply with the regulation, in

    whole or in part, while other DCOs may not.

    Accordingly, the Commission is unable to provide a reliable

    quantification of the costs associated with regulation 39.34, because,

    among other things, such a determination would require information

    concerning the business model and strategies of individual DCOs, about

    which the Commission did not receive information during the comment

    period. The Commission has no reason to believe, however, that the

    costs associated with the regulation would be unreasonable or

    inappropriate to achieve the regulatory objective of implementing the

    PFMI standards for Subpart C DCOs. In addition, the Commission believes

    that the costs the regulation imposes would not, to any unnecessary

    extent, impede a DCO from electing to be subject to Subpart C.

    v. Regulation 39.35 (Default rules and procedures for uncovered losses

    or shortfalls (recovery) for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations)

    As discussed above, regulation 39.35 requires SIDCOs and Subpart C

    DCOs to adopt rules and procedures to address certain issues arising

    from extraordinary stress events, including the default of one or more

    clearing members.\296\ Such default rules and procedures must

    sufficiently (1) allocate uncovered credit losses and (2) enable a

    SIDCO or Subpart C DCO promptly to meet all of its obligations in the

    event of a default by one or more clearing members or an unforeseen

    liquidity shortfall exceeding the financial resources of the SIDCO or

    Subpart C DCO. As noted in the cost benefit section of the

    Proposal,\297\ the costs associated with these default rules and

    procedures may include administrative costs to: review and analyze

    current policies and procedures; design and draft new or amended

    policies and procedures; and implement the new or amended policies and

    procedures. The tools that a SIDCO or Subpart C DCO chooses to include

    in its default rules and procedures may involve capital costs. The

    Commission continues to believe that these categories accurately

    summarize the sources of material costs that may be incurred in

    complying with regulation 39.35.

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

    \296\ See supra Section II.G. (discussing regulation 39.35).

    \297\ 78 FR 50290.

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

    In the Proposal, the Commission requested comment on the potential

    costs to a SIDCO or Subpart C DCO to comply with all aspects of

    proposed regulation 39.35, and any costs that would be imposed on other

    market participants or the financial system more broadly. The

    Commission specifically requested comment on any alternative means to

    satisfy the requirements of regulation 39.35 in a manner consistent

    with the PFMIs and for costs or cost savings associated with such

    alternatives.\298\ The Commission did not receive any comments in

    response to these requests.

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

    \298\ Id.

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

    In the absence of input from market participants, the Commission

    lacks critical information necessary to make a reasonable assessment or

    quantify dollar costs associated with regulation 39.35. The Commission

    notes that regulation 39.35 grants a DCO a certain amount of discretion

    in determining the specifics of the rules and procedures that should be

    adopted to comply with the regulation. Moreover, each DCO has its own

    internal cost structure, management system, and existing regulatory

    compliance framework. Thus, the way in which regulation 39.35 impacts

    each DCO with respect to initial and ongoing costs likely will vary.

    For example, some DCOs may already have rules and procedures that

    comply with the regulation, in whole or in part, while other DCOs may

    not.

    Accordingly, the Commission is unable to provide a reliable

    quantification of the costs associated with regulation 39.35, because,

    among other things, such a determination would require information

    concerning the business model and strategies of individual DCOs, about

    which the Commission did not receive information during the comment

    period. The Commission has no reason to believe, however, that the

    costs associated with

    [[Page 72507]]

    the regulation would be unreasonable or inappropriate to achieve the

    regulatory objective of implementing the PFMI standards for SIDCOs and

    Subpart C DCOs. In addition, the Commission believes that the costs the

    regulation imposes would not, to any unnecessary extent, impede a DCO

    from electing to be subject to Subpart C.

    vi. Regulation 39.36 (Risk management for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    Regulation 39.36 sets forth enhanced risk management requirements

    for a SIDCO or Subpart C DCO, including, but not limited to, specific

    criteria for stress tests of financial resources, specific criteria for

    sensitivity analysis of margin models, specific criteria for stress

    tests of liquidity resources, requirements surrounding the monitoring

    and management of credit and liquidity risks arising out of settlement

    banks, and requirements surrounding the custody and investment of a

    SIDCO's or Subpart C DCO's own funds and assets.\299\ As noted in the

    Proposal,\300\ complying with this regulation may involve operational

    costs to perform the required testing, monitoring and analyses, which

    may include: a comprehensive analysis of existing stress testing

    scenarios; the design of new and/or alternative stress testing

    scenarios; and the design of a sensitivity analysis; the creation of a

    system for comprehensively monitoring, managing and limiting credit and

    liquidity risks arising out of settlement banks; and the implementation

    of controls surrounding the custody and investment of a SIDCO's or

    Subpart C DCO's own funds and assets. In addition, there may be costs

    associated with the modification and/or creation of processes necessary

    to support the enhanced risk management requirements in the proposed

    regulation. There will also be ongoing costs to conduct such risk

    management, analyze the results, and take action based on such results.

    In particular, to the extent that the analyses and monitoring reveal

    the need for additional financial or liquidity resources, there would

    be costs associated with obtaining such resources. In addition, there

    may be administrative and other costs associated with the management of

    a SIDCO's or Subpart C DCO's settlement bank exposure. The Commission

    continues to believe that these categories accurately summarize the

    sources of material costs that may be incurred in complying with

    regulation 39.36.

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

    \299\ See supra Section II.H. (discussing regulation 39.36).

    \300\ 78 FR 50290.

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

    In the Proposal, the Commission requested comment on the potential

    costs to a SIDCO or Subpart C DCO to comply with all aspects of

    proposed regulation 39.36, and any costs that would be imposed on other

    market participants or the financial system more broadly. The

    Commission specifically requested comment on any alternative means to

    satisfy the requirements of regulation 39.36 in a manner consistent

    with the PFMIs and for costs or cost savings associated with such

    alternatives.\301\ The Commission did not receive any comments in

    response to these requests.

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

    \301\ Id.

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

    In the absence of input from market participants, the Commission

    lacks critical information necessary to make a reasonable assessment or

    quantify dollar costs associated with regulation 39.36. The Commission

    notes that regulation 39.36 grants a DCO a certain amount of discretion

    in determining the specifics of the processes that should be adopted to

    comply with the regulation. Moreover, each DCO has its own internal

    cost structure, management system, and existing regulatory compliance

    framework. Thus, the way in which regulation 39.36 impacts each DCO

    with respect to initial and ongoing costs likely will vary. For

    example, some DCOs may already have processes that comply with

    regulation 39.36, in whole or in part, while other DCOs may not.

    Accordingly, the Commission is unable to provide a reliable

    quantification of the costs associated with regulation 39.36, because,

    among other things, such a determination would require information

    concerning the operations of individual DCOs, about which the

    Commission did not receive information during the comment period. The

    Commission has no reason to believe, however, that the costs associated

    with the regulation would be unreasonable or inappropriate to achieve

    the regulatory objective of implementing the PFMI standards for SIDCOs

    and Subpart C DCOs. In addition, the Commission believes that the costs

    the regulation imposes would not, to any unnecessary extent, impede a

    DCO from electing to be subject to Subpart C.

    vii. Regulation 39.37 (Additional disclosure for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    As discussed above, regulation 39.37 sets forth additional public

    disclosure requirements for a SIDCO and Subpart C DCO, including the

    disclosure of, and updates to, the DCO's responses to the Disclosure

    Framework for FMIs.\302\ As noted in the Proposal,\303\ complying with

    this regulation may impose administrative costs to conduct a

    comprehensive analysis of the SIDCO or Subpart C DCO's policies,

    procedures and systems as well as the costs associated with the design,

    drafting and implementation of any new or modified policies, procedures

    and systems that would be necessary to comply with the proposed

    regulation. The Commission continues to believe that these categories

    accurately summarize the sources of material costs that may be incurred

    in complying with regulation 39.37.

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

    \302\ See supra Section II.I. (discussing regulation 39.37).

    \303\ 78 FR 50290-50291.

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

    In the Proposal, the Commission requested comment on the potential

    costs to a SIDCO or Subpart C to comply with all aspects of proposed

    regulation 39.37, and any costs that would be imposed on other market

    participants or the financial system more broadly. The Commission

    specifically requested comment on any alternative means to satisfy the

    requirements of regulation 39.37 in a manner consistent with the PFMIs

    and for costs or cost savings associated with such alternatives.\304\

    The Commission did not receive any comments in response to these

    requests.

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

    \304\ Id.

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

    In the absence of input from market participants, the Commission

    lacks critical information necessary to make a reasonable assessment or

    quantify dollar costs associated with regulation 39.37. The Commission

    notes that regulation 39.37 grants a DCO a certain amount of discretion

    in determining the specifics of the procedures that should be adopted

    to comply with the regulation. Moreover, each DCO has its own internal

    cost structure, management system, and existing regulatory compliance

    framework. Thus, the way in which regulation 39.37 impacts each DCO

    with respect to initial and ongoing costs likely will vary. For

    example, some DCOs may already have rules and processes that comply

    with the regulation, in whole or in part, while other DCOs may not.

    [[Page 72508]]

    Accordingly, the Commission is unable to provide a reliable

    quantification of the costs associated with regulation 39.37, because,

    among other things, such a determination would require information

    concerning the business model and strategies of individual DCOs, about

    which the Commission did not receive information during the comment

    period. The Commission has no reason to believe, however, that the

    costs associated with the regulation would be unreasonable or

    inappropriate to achieve the regulatory objective of implementing the

    PFMI standards for SIDCOs and Subpart C DCOs. In addition, the

    Commission believes that the costs the regulation imposes would not, to

    any unnecessary extent, impede a DCO from electing to be subject to

    Subpart C.

    viii. Regulation 39.38 (Efficiency for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    As discussed above, regulation 39.38 requires a SIDCO or a Subpart

    C DCO to comply with certain efficiency standards regarding its

    clearing and settlement arrangements, operating structure and

    procedures, product scope, and use of technology. In addition, a SIDCO

    or Subpart C DCO is required to establish clearly defined goals and

    objectives that are measureable and achievable, including minimum

    service levels, risk management expectations, and business

    priorities.\305\ SIDCOs and Subpart C DCOs are also required to

    facilitate efficient payment, clearing and settlement by accommodating

    internationally accepted communication procedures and standards. As

    outlined in the cost benefit section of the Proposal,\306\ the costs

    associated with the regulation may include the administrative costs of

    conducting a comprehensive review and analysis of the SIDCO's or

    Subpart C DCO's policies, procedures and systems, and where

    appropriate, the design, drafting and implementation of new or modified

    policies, procedures and systems to establish the goals and objectives

    necessary to comply with this regulation. There may also be

    administrative costs associated with establishing a mechanism to review

    the DCO's compliance with the regulation, as well as operational costs

    associated with designing and implementing processes to accommodate

    internationally accepted communications standards. The Commission

    continues to believe that these categories accurately summarize the

    sources of material costs that may be incurred in complying with

    regulation 39.38.

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

    \305\ See supra Section II.J. (discussing regulation 39.38).

    \306\ 78 FR 50291.

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

    In the Proposal, the Commission requested comment on the potential

    costs to a SIDCO or Subpart C DCO to comply with all aspects of

    proposed regulation 39.38, and any costs that would be imposed on other

    market participants or the financial system more broadly. The

    Commission specifically requested comment on any alternative means to

    satisfy the requirements of regulation 39.38 in a manner consistent

    with the PFMIs and for costs or cost savings associated with such

    alternatives.\307\ The Commission did not receive any comments in

    response to those requests.

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

    \307\ Id.

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

    In the absence of input from market participants, the Commission

    lacks critical information necessary to make a reasonable assessment or

    quantify dollar costs associated with regulation 39.38. The Commission

    notes that efficiency is inherently difficult to measure.

    The Commission also notes that regulation 39.38 grants a DCO a

    certain amount of discretion in determining the specifics of the

    processes that should be adopted to comply with the regulation.

    Moreover, each DCO has its own internal cost structure and management

    system. Thus, the way in which regulation 39.38 impacts each DCO with

    respect to initial and ongoing costs likely will vary.

    Accordingly, the Commission is unable to provide a reliable

    quantification of the costs associated with regulation 39.38, because,

    among other things, such a determination would require information

    concerning the business model and strategies of individual DCOs, about

    which the Commission did not receive information during the comment

    period. The Commission has no reason to believe, however, that the

    costs associated with the regulation would be unreasonable or

    inappropriate to achieve the regulatory objective of implementing the

    PFMI standards for SIDCOs and Subpart C DCOs. In addition, the

    Commission believes that the costs the regulation imposes would not, to

    any unnecessary extent, impede a DCO from electing to be subject to

    Subpart C.

    ix. Regulation 39.39 (Recovery and wind-down for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    As discussed above, regulation 39.39 requires a SIDCO or Subpart C

    DCO to maintain viable plans for recovery and orderly wind-down, in

    cases necessitated by (1) credit losses or liquidity shortfalls and (2)

    general business risk, operational risk, or any other risk that

    threatens the DCO's viability as a going concern. This requires the DCO

    to identify scenarios that may prevent a SIDCO or Subpart C DCO from

    being able to provide its critical operations and services as a going

    concern and to assess the effectiveness of a full range of options for

    recovery or orderly wind-down. The regulation also requires a SIDCO or

    Subpart C DCO to evaluate the resources available to meet the plan to

    cover credit losses and liquidity shortfalls, and to maintain

    sufficient unencumbered liquid financial assets to implement the plan

    to cover other risks. The latter point requires a SIDCO or Subpart C

    DCO to analyze whether its particular circumstances and risks require

    it to maintain liquid net assets to fund the plan that are in addition

    to those resources currently required by regulation 39.11(a)(2).

    As noted in the Proposal,\308\ regulation 39.39 may impose costs on

    a SIDCO or Subpart C DCO to the extent it will be necessary to

    undertake a comprehensive qualitative and quantitative analysis of the

    credit, liquidity, general business, operational and other risks that

    may threaten the DCO's ability to provide its critical operations and

    services as a going concern, to design and draft plans to mitigate and

    address those risks, to analyze whether the DCO's resources allocated

    to recovery and/or wind-down are sufficient to implement those plans.

    This analysis may lead to the design of alternative and/or additional

    scenarios to be included in stress testing, the drafting of new or

    revised policies for a recovery and/or wind-down plan, and potentially

    the necessity of maintaining additional resources or procedures to

    obtain such resources in the event they are needed. Moreover, the

    regulation prohibits the double counting of available resources--that

    is, resources considered as available to meet the recovery and orderly

    wind-down plan for credit losses and liquidity shortfalls cannot be

    considered as available to meet the recovery and orderly wind-

    [[Page 72509]]

    down plan for general business risk, operational risk, and other risks

    (or vice-versa). This may result in the need to maintain a larger

    quantum of total resources to meet both plans which, depending on the

    resources maintained, may involve costs arising from factors such as

    greater use of capital by the DCO, or greater capital charges for

    clearing members arising out of their commitments to contribute default

    resources. The Commission continues to believe that these categories

    accurately summarize the sources of material costs that may be incurred

    in complying with regulation 39.39.

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

    \308\ 78 FR 50291.

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

    In the Proposal, the Commission requested comment on the potential

    costs to a SIDCO or Subpart C DCO to comply with all aspects of

    proposed regulation 39.39, and any costs that would be imposed on other

    market participants or the financial system more broadly. The

    Commission specifically requested comment on any alternative means to

    satisfy the requirements of regulation 39.39 in a manner consistent

    with the PFMIs and for costs or cost savings associated with such

    alternatives.\309\ The Commission did not receive any comments in

    response to these requests.

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

    \309\ Id.

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

    In the absence of input from market participants, the Commission

    lacks critical information necessary to make a reasonable assessment or

    quantify dollar costs associated with regulation 39.39. The Commission

    notes that regulation 39.39 grants a DCO a certain amount of discretion

    in determining the specifics of the rules, procedures, and arrangements

    that should be adopted to comply with the regulation. Moreover, each

    DCO has its own internal cost structure, management system, and

    existing regulatory compliance framework. Thus, the way in which

    regulation 39.39 impacts each DCO with respect to initial and ongoing

    costs likely will vary. For example, some DCOs may already have rules,

    processes, and arrangements that comply with the regulation, in whole

    or in part, while other DCOs may not.

    Accordingly, the Commission is unable to provide a reliable

    quantification of the costs associated with regulation 39.39, because,

    among other things, such a determination would require information

    concerning the business model and strategies of individual DCOs, about

    which the Commission did not receive information during the comment

    period. The Commission has no reason to believe, however, that the

    costs associated with the regulation would be unreasonable or

    inappropriate to achieve the regulatory objective of implementing the

    PFMI standards for SIDCOs and Subpart C DCOs. In addition, the

    Commission believes that the costs the regulation imposes would not, to

    any unnecessary extent, impede a DCO from electing to be subject to

    Subpart C.

    b. Benefits

    As explained in the subsections that follow, this final rule holds

    SIDCOs and Subpart C DCOs to enhanced regulatory standards, which are

    designed to promote the financial strength, operational integrity,

    security, and reliability of these organizations and to reduce the

    likelihood of their disruption or failure. This, in turn, increases the

    overall stability of the U.S. financial markets. As the PFMIs note,

    FMIs, including CCPs (i.e. DCOs), play a critical role in fostering

    financial stability.\310\ This is particularly the case with respect to

    SIDCOs. The Council has determined that 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 U.S.

    financial system.\311\ Thus, the final rule offers a substantial

    benefit vis-[agrave]-vis the status quo.

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

    \310\ PFMIs, E.N. 1.1.

    \311\ See http://www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx (describing the designations of CME and ICE Clear

    Credit to be systemically important financial market utilities) and

    see supra Section I.C.

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

    In addition, the regulations adopted in this final rulemaking are

    consistent with the international standards set forth in the PFMIs and

    address the remaining divergences between part 39 of the Commission's

    regulations and the PFMIs. These regulations will help ensure that

    SIDCOs and Subpart C DCOs are held to international standards in order

    to provide them with the opportunity to gain QCCP status. As discussed

    above, attaining QCCP status will provide clearing members that are

    banks, as well as banks that are customers of clearing members, with

    the benefit of complying with less onerous capital requirements,

    pursuant to the Basel CCP Capital Requirements, than if the SIDCO or

    Subpart C DCO were not a QCCP.\312\ In turn, this may increase a SIDCO

    or Subpart C DCO's competitiveness vis-[agrave]-vis non-US clearing

    organizations that demonstrate compliance with international standards

    and are QCCPs.

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

    \312\ See supra Section I.F.

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

    i. Regulation 39.31 (Election To Become Subject to the Provisions of

    Subpart C)

    The procedures set forth in regulation 39.31, together with the

    Subpart C Election Form, are intended to promote the protection of

    market participants and the public. These procedures require the

    Commission's staff to conduct a review of a DCO that elects to become

    subject to the provisions of Subpart C. The Subpart C Election Form

    provides the Commission, clearing members, and customers (and,

    significantly, the regulators of such clearing members and customers)

    with assurance that the electing DCO will be held to and will be

    required to meet the standards set forth in Subpart C.\313\ Without

    regulation 39.31, a DCO that is not designated by the Council as being

    systemically important will not have the opportunity to gain QCCP

    status, thereby potentially putting such a DCO at a significant

    competitive disadvantage compared to SIDCOs and non-U.S. clearing

    organizations. This would ultimately be to the detriment of such a

    DCO's clearing members and their customers.\314\ The Commission also

    notes that by clearing through a Subpart C DCO, a clearing member and

    its customers will be afforded the benefits of clearing through a DCO

    subject to enhanced risk management, operational, and other standards.

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

    \313\ See 78 FR 50269.

    \314\ See supra Section I.F. (discussing QCCP status and the

    Basel CCP Capital Requirements); see also supra Section II.C.

    (discussing regulation 39.31).

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

    Regulation 39.31, as adopted herein, provides a benefit to a

    Subpart C DCO by allowing the Subpart C DCO the opportunity to weigh

    for itself the costs and benefits and to determine whether to maintain

    QCCP status. The notice requirements set forth in the regulation

    provide important benefits to clearing members of the rescinding

    Subpart C DCO (and their customers), particularly those that are banks

    or bank affiliates, by providing them with advance notice to permit

    them to assess their options and take any actions they deem appropriate

    with respect to clearing at a DCO that has acted to rescind its

    election to be held to the standards of Subpart C (and thus to renounce

    status as a QCCP).

    ii. Regulation 39.32 (Governance for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations)

    The requirements set forth in regulation 39.32 are beneficial to

    the extent that they cause a SIDCO or Subpart C DCO to internalize and/

    or more appropriately allocate certain costs

    [[Page 72510]]

    that would otherwise be borne by clearing members, customers of

    clearing members, and other relevant stakeholders. Such requirements

    also promote market stability because the governance arrangements of

    SIDCOs and Subpart C DCOs are required to explicitly support the

    stability of the financial system and other relevant public interest

    considerations of clearing members, customers of clearing members, and

    other relevant stakeholders,\315\ and reflect the legitimate interests

    of clearing members, customers of clearing members, and other relevant

    stakeholders. Finally, the governance arrangements required by

    regulation 39.32 promote a more efficient, effective, and reliable DCO

    risk management and operating structure.

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

    \315\ See supra Section II.D. (discussing regulation 39.32).

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

    As noted above, the Commission did not receive any comments focused

    specifically on the cost and benefit considerations relevant to

    regulation 39.32.

    iii. Regulation 39.33 (Financial resources for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    As described above, regulation 39.33(a), as revised, expands the

    Cover Two minimum financial resources requirement to include Subpart C

    DCOs that engage in an activity with a more complex risk profile (e.g.,

    clearing credit default swaps or credit default futures), or that are

    systemically important in multiple jurisdictions.\316\ This proposed

    regulation currently applies to SIDCOs. Regulation 39.33(a), as

    finalized herein, increases the financial stability of Subpart C DCOs

    subject to this regulation by requiring compliance with enhanced

    minimum financial resource requirements. Compliance with such

    standards, in turn, increases the overall stability of the U.S.

    financial markets because enhancing a Subpart C DCO's financial

    resources requirements from the minimum of Cover One to a more

    stringent Cover Two standard helps to ensure the affected Subpart C DCO

    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

    Subpart C DCO's failure which, in times of market turmoil, could

    increase the risk to the stability of the U.S. financial system.\317\

    By bolstering certain Subpart C DCO's resources, regulation 39.33(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 the Subpart C DCO's failure or disruption. In

    addition, the 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.

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

    \316\ See supra Section II.E. (discussing revised regulation

    39.33).

    \317\ See supra Section I.B.

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

    As discussed above, regulation 39.33(a)(2) provides the Commission

    with the ability to determine whether a SIDCO or a Subpart C DCO is

    systemically important in multiple jurisdictions. In making such a

    determination, the Commission will consider whether the DCO is a SIDCO

    and whether the DCO has been determined to be systemically important by

    one or more foreign jurisdictions pursuant to a designation process

    that considers whether the foreseeable effects of a failure or

    disruption of the SIDCO or Subpart C DCO could threaten the stability

    of each relevant jurisdiction's financial system. Moreover, regulation

    39.33(a)(3) also provides the Commission with the ability to expand the

    definition of ``activity with a more complex risk profile'' beyond

    clearing credit default swaps or credit default futures. These

    provisions give the Commission the flexibility to determine, under

    appropriate circumstances, what particular SIDCOs or Subpart C DCOs (or

    DCOs that engage in certain activities) would need to maintain Cover

    Two default resources. Such a decision would help to ensure that the

    affected SIDCO or Subpart C DCO would 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 would decrease the likelihood that the SIDCO or Subpart C DCO

    would fail, thus contributing to the integrity and stability of the

    financial markets.

    Regulation 39.33(b) prohibits a Subpart C DCO from using

    assessments to meets its default resource obligations, i.e., those

    under regulations 39.11(a)(1) and 39.33(a). This prohibition currently

    applies to SIDCOs. Prohibiting the use of assessments by a Subpart C

    DCO in meeting its default resource requirement increases the financial

    stability of the Subpart C DCO, which in turn, will increase 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 Subpart C DCO is sufficiently large to

    deplete (1) the collateral posted by the defaulting clearing member,

    (2) the defaulting clearing member's guaranty fund contribution, and

    (3) the remaining pre-funded default fund contributions, a Subpart C

    DCO's exercise of assessment powers over the non-defaulting clearing

    members may exacerbate a presumably already weakened financial market.

    The demand by a Subpart C DCO 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 Subpart C DCO. 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 Subpart C DCO in meeting default resources

    requirements is intended to require the Subpart C DCO 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 Subpart C

    DCO may increase costs to clearing members of that Subpart C DCO (e.g.,

    requiring clearing members to post additional funds with the Subpart C

    DCO), but it also reduces the likelihood that the Subpart C DCO 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 Subpart C DCO

    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 39.33(b)

    increases the financial security and reliability of the Subpart C DCO,

    which will, therefore, further increase the overall stability of the

    U.S. financial markets.

    As described above, regulations 39.33(c), (d) and (e) increase the

    likelihood that a SIDCO or Subpart C DCO will promptly meet its

    settlement

    [[Page 72511]]

    obligations in a variety of market conditions. Liquidity arrangements

    that are highly reliable in stressed market conditions are important to

    enable the SIDCO or Subpart C DCO to promptly meet its cash obligations

    to its members. Ensuring that the SIDCO or Subpart C DCO can meet those

    obligations promptly, particularly in stressed market conditions, is an

    important firebreak to avoid loss of market confidence and cascading

    defaults.

    Specifically, regulation 39.33(c) requires a SIDCO or Subpart C DCO

    to maintain a minimum level of eligible liquidity resources that would

    permit the DCO to satisfy its intraday, same-day, and multi-day

    settlement obligations in all relevant currencies. Regulation 39.33(d)

    requires a SIDCO or Subpart C DCO to undertake due diligence to confirm

    that each liquidity provider upon which the DCO relies has the capacity

    to perform its commitments to provide liquidity (and to regularly test

    its own procedures for accessing its liquidity resources). Proposed

    regulation 39.33(e) requires a SIDCO or Subpart C DCO to document its

    supporting rationale for, and to have adequate governance arrangements

    relating to, the amount of total financial resources it maintains and

    the amount of total liquidity resources it maintains.

    In determining the resources that would be necessary to meet the

    qualifying liquid resources requirements, a SIDCO or Subpart C DCO may

    need to undertake a complex analysis of the SIDCO's or Subpart C DCO's

    exposures and processes, including various models, and, where

    appropriate, designing and implementing changes to either create or

    modify existing internal processes and documenting the rationale for

    the amount of total financial and total liquidity resources the SIDCO

    or Subpart C DCO maintains. These efforts are likely to contribute to a

    better ex ante understanding by the SIDCO's or Subpart C DCO's

    management of the liquidity risks the DCO is likely to face in a stress

    scenario, resources that are calculated to enable the DCO to completely

    meets its settlement obligations on a prompt basis despite the default

    of a clearing member, and better assurance of its ability to rely on

    the commitments of its liquidity providers. The result of this analysis

    and these enhanced resources is likely to be better preparation to meet

    liquidity challenges promptly, and a greater likelihood that the DCO

    would efficiently and effectively meet its obligations promptly in a

    default scenario. This improved preparation and enhanced likelihood of

    the SIDCO or Subpart C DCO's prompt meeting of its own obligations will

    benefit the DCO's clearing members and their customers by avoiding an

    inability to meet settlement obligations that might cause cascading

    liquidity problems to such clearing members and their customers. The

    harm to clearing members and customers from a failure of a SIDCO or

    Subpart C DCO to meet its obligations promptly would be especially

    serious in a time of general financial stress. The assurance of the DCO

    meeting its settlement obligations promptly would also redound to the

    benefit of the larger financial system by mitigating systemic risk.

    iv. Regulation 39.34 (System safeguards for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    As discussed above, regulation 39.34, as revised, requires SIDCOs

    and Subpart C DCOs to comply with enhanced system safeguards

    requirements, including a two-hour RTO.\318\ While SIDCOs are already

    subject to these requirements, the Commission expanded this regulation

    to include Subpart C DCOs. A two-hour RTO in a Subpart C DCO's BC-DR

    plan will increase the soundness and operating resiliency of the

    Subpart C DCO. The two-hour RTO ensures that even in the event of a

    wide-scale disruption, the potential negative effects upon U.S.

    financial markets would be minimized because the affected Subpart C DCO

    would recover rapidly and resume its critical market functions. This

    would allow other market participants to process their transactions,

    including those participants in locations not directly affected by the

    disruption. The two-hour RTO would increase a Subpart C DCO's

    resiliency by requiring the Subpart C DCO to have the resources and

    technology necessary to resume operations promptly. This resiliency, in

    turn, will increase the overall stability of the U.S. financial

    markets.

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

    \318\ See supra Section II.F. (discussing regulation 39.34).

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

    v. Regulation 39.35 (Default rules and procedures for uncovered losses

    or shortfalls (recovery) for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations)

    Regulation 39.35, as detailed above, requires SIDCOs and Subpart C

    DCOs to adopt explicit rules and procedures for: i) allocating

    uncovered credit losses and ii) meeting all settlement obligations in a

    variety of market conditions. \319\ The analysis SIDCOs and Subpart C

    DCOs will need to perform to create these rules and procedures are

    likely to contribute to a better ex ante understanding by the SIDCO or

    Subpart C DCO of the scenarios that would lead to uncovered credit

    losses or liquidity shortfalls. This analysis will also enable the

    SIDCO or Subpart C DCO to more effectively and efficiently meet its

    obligations promptly, thereby avoiding harm to clearing members and

    their customers from a default. In addition, requiring SIDCOs and

    Subpart C DCOs to have clear rules and procedures addressing such

    scenarios will be beneficial for clearing members and their customers

    in that these rules and procedures will provide clearing members with a

    better understanding of the members' own obligations, and the extent to

    which the SIDCO or Subpart C DCO would perform its obligations to its

    clearing members during periods of market stress. This understanding

    will, in turn, contribute to the ability of clearing members and their

    customers to tailor their own contingency plans to address those

    circumstances. Improved preparation by SIDCOs, Subpart C DCOs, and

    their clearing members will also redound to the benefit of the larger

    financial system by mitigating systemic risk.

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

    \319\ See supra Section II.G. (discussing regulation 39.35).

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

    vi. Regulation 39.36 (Risk management for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    As discussed above, Regulation 39.36 establishes enhanced risk

    management requirements designed to help SIDCOs and Subpart C DCOs

    manage their risk exposure.\320\ These requirements include the stress

    testing of their financial resources, the stress testing of their

    liquidity resources, and conducting regular sensitivity analyses of

    their margin methodologies. The analyses performed to comply with this

    regulation will increase the DCO's ability to mitigate and address

    credit risks, and to create proper incentives for members with respect

    to the exposures they create to the SIDCO or Subpart C DCO by enabling

    the DCO to tie risk exposures to margin requirements. In addition,

    regulation 39.36 requires a SIDCO or Subpart C DCO to monitor, manage

    and limit its credit and liquidity risks arising from its settlement

    banks, as well invest its own funds and assets

    [[Page 72512]]

    in instruments with minimal credit, market, and liquidity risks.

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

    \320\ See supra Section II.H. (discussing regulation 39.36).

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

    Regulation 39.36, as adopted herein, increases the SIDCO's or

    Subpart C DCO's ability to mitigate and address the probability of

    being exposed to a settlement bank's failure and the potential losses

    and liquidity pressures to which the SIDCO or Subpart C DCO would be

    exposed in the event of such a failure. This, in turn, will benefit

    members of such DCOs and their customers, as discussed above. By

    enhancing the reliability and stability of SIDCOs and Subpart C DCOs,

    regulation 39.36 strengthens the overall stability of the U.S.

    financial markets.

    vii. Regulation 39.37 (Additional disclosure for systemically

    important derivatives clearing organizations and subpart C derivatives

    clearing organizations)

    The disclosure requirements set forth in regulation 39.37 \321\

    benefit clearing members of SIDCOs and Subpart C DCOs, as well as

    customers of clearing members, because they provide transparency and

    certainty concerning the processes, operations and exposures of these

    DCOs. In particular, paragraph (d) requires a SIDCO or Subpart C DCO to

    publicly disclose its policies and procedures concerning the

    segregation and portability of customers' positions and funds. These

    disclosures will enable clearing members and their customers to better

    understand their respective exposures to the SIDCO or Subpart C DCO, to

    better choose a DCO that fits their needs, and, in turn, to create

    incentives for safe and effective operations of SIDCOs and Subpart C

    DCOs.

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

    \321\ See supra Section II.I. (discussing regulation 39.37).

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

    viii. Regulation 39.38 (Efficiency for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    The efficiency requirements set forth in regulation 39.38 will be

    beneficial to clearing members of SIDCOs and Subpart C DCOs, as well as

    to customers of clearing members, because they will require these DCOs

    to regularly endeavor to improve their clearing and settlement

    arrangements, operating structures and procedures, product offerings,

    and use of technology. In addition, under this regulation, SIDCOs and

    Subpart C DCOs are required to facilitate efficient payment, clearing

    and settlement by accommodating internationally accepted communication

    procedures and standards, which may result in operational efficiency

    for market participants. Accordingly, members of such DCOs and their

    customers, as well as the marketplace more broadly, may be offered more

    efficient clearing services that may be easier to access at an

    operational level.

    ix. Regulation 39.39 (Recovery and wind-down for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations)

    Regulation 39.39, as described in detail above, requires a SIDCO

    and Subpart C DCO to maintain viable plans for recovery and orderly

    wind-down, in cases necessitated by (1) credit losses or liquidity

    shortfalls and (2) general business risk, operational risk, or any

    other risk that threatens the derivatives clearing organization's

    viability as a going concern. This requires the DCO to identify

    scenarios that may prevent a SIDCO or Subpart C DCO from being able to

    provide its critical operations and services as a going concern and to

    assess the effectiveness of a full range of options for recovery or

    orderly wind-down.

    Regulation 39.39 also requires a SIDCO or Subpart C DCO to evaluate

    the resources available to meet the plan to cover credit losses and

    liquidity shortfalls, and to maintain sufficient unencumbered liquid

    financial assets to implement the plan to cover other risks. The latter

    point requires a SIDCO or Subpart C DCO to analyze whether its

    particular circumstances and risks require it to maintain liquid net

    assets to fund the plan that are in addition to those resources

    currently required by regulation 39.11(a)(2).\322\

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

    \322\ See supra Section II.K. (discussing regulation 39.39).

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

    The complex analysis and plan preparation that a SIDCO or Subpart C

    DCO will undertake to comply with this regulation, including designing

    and implementing changes to existing plans, are likely to contribute to

    a better ex ante understanding by the SIDCO's or Subpart C DCO's

    management of the challenges the DCO would face in a recovery or wind-

    down scenario, and thus better preparation to meet those challenges.

    This improved preparation will help reduce the possibility of market

    disruptions and financial losses to clearing members and their

    customers. By maintaining and regularly updating recovery and wind-down

    plans, and maintaining resources and arrangements designed to meet the

    requirements of such plans, the DCO will better be able to mitigate the

    impact that a threat to, or a disruption of, a SIDCO's or Subpart C

    DCO's operations would have on customers, clearing members, and, more

    broadly, the stability of the U.S. financial markets. By reducing the

    possibility that a DCO would default in a disorganized fashion,

    regulation 39.39, as adopted herein, also helps to reduce the

    likelihood of a failure by the DCO to meet its obligations to its

    members, thereby enhancing protection for members of such a DCO and

    their customers, as well as helping to avoid the systemic effects of

    DCO failure.

    4. Section 15(a) Factors

    a. Protection of Market Participants and the Public

    The regulations finalized herein create additional standards for

    compliance with the CEA, which include governance standards, enhanced

    financial resources and liquidity resource requirements, system

    safeguard requirements, special default rules and procedures for

    uncovered losses or shortfalls, enhanced risk management requirements,

    additional disclosure requirements, efficiency standards, and standards

    for recovery and wind-down procedures. They also include procedures for

    Subpart C DCOs to elect to be held to such additional standards, and

    procedures to rescind such election. These standards and procedures

    will further the protection of members of SIDCOs and Subpart C DCOs,

    customers of such members, as well as other market participants and the

    public by increasing the financial stability and operational security

    of SIDCOs and Subpart C DCOs. Additionally, these regulations may, 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 these regulations, the increased costs associated

    with the implementation of the final rule for Subpart C DCOs would be

    borne only by those DCOs that have not been designated systemically

    important under Title VIII and that elect to become subject to the

    provisions of Subpart C. Some of those costs would ultimately be borne

    by clearing

    [[Page 72513]]

    members of such Subpart C DCOs, and by customers of such clearing

    members.

    The costs of this final rulemaking will likely be mitigated by the

    countervailing benefits of stronger resources, improved design, more

    efficient and effective processes, and enhanced planning that would

    lead to increased safety and soundness of SIDCOs and the reduction of

    systemic risk, which protect market participants and the public from

    the adverse consequences, including loss of market confidence or

    potentially cascading defaults, that would result from a SIDCO's

    failure to promptly meet its obligations to its members, or a

    disruption in its functioning. Similarly, the regulations will increase

    the safety and soundness of Subpart C DCOs so that they may continue to

    operate even in extreme circumstances, which would, in turn, better

    protect members of such DCOs, their customers, and also market

    participants and the public, particularly during time of severe market

    stress.

    b. Efficiency, Competitiveness, and Financial Integrity

    The regulations set forth in this final rulemaking promote the

    financial strength and stability of SIDCOs and Subpart C DCOs, as well

    as, more broadly, efficiency and greater competition in the global

    markets. Regulation 39.38, as finalized herein, expressly promotes

    efficiency in the design of a SIDCO's or Subpart C DCO's settlement and

    clearing arrangements, operating structure and procedures, scope of

    products cleared, and use of technology. The regulation also requires

    SIDCOs and Subpart C DCOs to accommodate internationally accepted

    communication procedures and standards to facilitate efficient payment,

    clearing, and settlement. In addition, the regulations finalized herein

    promote efficiency insofar as SIDCOs and Subpart C DCOs that operate

    with enhanced financial and liquidity resources, enhanced risk

    management requirements, increased system safeguards, and wind-down or

    recovery plans are more secure and are less likely to fail.

    These regulations also promote competition because they are

    consistent with the international standards set forth in the PFMIs and

    will help to ensure that SIDCOs are held to international standards and

    thus are enabled to gain QCCP status and accordingly avoid an important

    competitive disadvantage relative to similarly situated foreign CCPs

    that meet international standards and are QCCPs. Moreover, by allowing

    other DCOs to elect to become subject to the provisions of Subpart C

    and thus the opportunity to meet international standards and to gain

    QCCP status, these regulations promote competition among registered

    DCOs, and between registered DCOs and foreign CCPs that meet

    international standards and are QCCPs. Conversely, the Commission notes

    that these enhanced financial resources and risk management standards

    are also associated with additional costs and to the extent that SIDCOs

    and Subpart C DCOs pass along the additional costs to their clearing

    members and, indirectly, those clearing members' customers,

    participation in the affected markets may decrease and have a negative

    impact on price discovery. However, it would appear that such higher

    transactional costs should (at least in the case of clearing members

    and customers that are banks or bank affiliates) be offset by the lower

    capital charges granted to bank or bank affiliated clearing members and

    customers for exposures resulting from transactions that are cleared

    through SIDCOs and Subpart C DCOs that are also QCCPs.

    Additionally, enhanced risk management and operational standards

    promote financial integrity by leading to SIDCOs and Subpart C DCOs to

    be more secure and less likely to fail. By increasing the stability and

    strength of the SIDCOs and Subpart C DCOs, the regulations in this

    final rulemaking will would help SIDCOs and Subpart C DCOs to meet

    their obligations in extreme circumstances and be able to resume

    operations even in the face of wide-scale disruption, which contributes

    to the financial integrity of the financial markets. Moreover, in

    requiring (1) more financial resources to be pre-funded by expanding

    the potential losses those resources are intended to cover and

    restricting the means for satisfying those resource requirements, and

    (2) requiring greater liquidity resources, the requirements of these

    regulations seek to lessen the incidence of pro-cyclical demands for

    additional resources and, in so doing, promote both financial integrity

    and market stability. By promoting the ability of SIDCOs and Subpart C

    DCOs to promptly meet their obligations to members, including in times

    of extreme market stress, they will mitigate the potential loss of

    market confidence, and the potential for cascading defaults. These

    efforts will redound to the benefit of clearing members and their

    customers, as well as the financial system more broadly.

    c. Price Discovery

    The regulations in this final rulemaking will enhance financial

    resources, liquidity resources, risk management standards, disclosure

    standards, and recovery planning for SIDCOs and Subpart C DCOs which

    may result in increased public confidence, which, in turn, might lead

    to expanded participation in the affected markets (including markets

    with products with a more complex risk profile). The expanded

    participation in these markets (i.e., greater transactional volume) may

    have a positive impact on price discovery. Conversely, the Commission

    notes that these regulations are also associated with additional costs

    and to the extent that SIDCOs and Subpart C DCOs pass along the

    additional costs to their clearing members and, indirectly, to their

    clearing members' 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

    offset by the lower capital charges granted to clearing members and

    customers with exposures resulting from transactions cleared through

    SIDCOs and Subpart C DCOs that are deemed QCCPs.

    d. Sound Risk Management Practices

    The regulations in this final rulemaking contribute to the sound

    risk management practices of SIDCOs and Subpart C DCOs because the

    requirements promote the safety and soundness of SIDCOs and Subpart C

    DCOs by: (1) Enhancing the financial resources requirements and

    liquidity resource requirements; (2) enhancing understanding of credit

    and liquidity risks and related governance arrangements; (3) enhancing

    system safeguards to facilitate the continuous operation and rapid

    recovery of activities; \323\ (4) enhancing risk management standards

    by creating new stress testing and sensitivity analysis requirements;

    (5) promoting the active management of credit and liquidity risks

    arising from settlement banks; \324\ and (6) enhancing risk management

    by establishing rules and procedures addressing uncovered credit losses

    or liquidity shortfalls, and recovery and wind-down planning for credit

    risks and for business continuity and operational risks.\325\ In

    addition, by strengthening

    [[Page 72514]]

    financial and liquidity resource requirements, enhancing risk

    management standards, and enhancing disclosure and recovery planning

    requirements, the regulations in this final rule provide greater

    certainty for clearing members of such DCOs, their customers, and other

    market participants that obligations of the SIDCOs and Subpart C DCOs

    will be honored promptly (thereby facilitating market participants own

    management of risks, including mitigating the risk that participants

    will be faced, at a time of market stress, with a failure by the SIDCO

    or Subpart C DCO to promptly meet its obligations to them), and 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.

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

    \323\ As mentioned above, this rulemaking would extend to

    Subpart C DCOs the system safeguards requirements currently

    applicable to SIDCOs. See supra Section II.F. (discussing revised

    regulation 39.34 (system safeguards)).

    \324\ See supra Section II.H. (discussing regulation 39.36).

    \325\ See supra Section II.G. (discussing regulation 39.35); see

    also supra Section II.K. (discussing regulation 39.39).

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

    e. 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 final rulemaking,

    SIDCOs and Subpart C DCOs that are held to international standards and

    that gain QCCP status might hold a competitive advantage in the

    financial markets by, inter alia, helping bank clearing members and

    bank customers avoid the much higher capital charges imposed by the

    Basel CCP Capital Requirements on exposures to non-QCCPs. 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,'' \326\

    adopting the regulations in this final rule will promote the public

    interest in a more stable broader financial system.

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

    \326\ See Section 802(a)(4) of the Dodd-Frank Act (Congressional

    findings).

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

    List of Subjects

    17 CFR Part 39

    Commodity futures, Consumer protection, Default rules and

    procedures, Reporting and recordkeeping requirements, Risk management,

    Settlement procedures, System safeguards.

    17 CFR Part 140

    Authority delegations (Government agencies), Conflict of interests,

    Organization and functions (Government agencies).

    17 CFR Part 190

    Bankruptcy, Brokers, Commodity futures, Reporting and recordkeeping

    requirements.

    For the reasons stated in the preamble, the Commodity Futures

    Trading Commission amends 17 CFR parts 39, 140, and 190 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, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C.

    8325.

    0

    2. Revise Sec. 39.2 to read as follows:

    Sec. 39.2 Definitions.

    For the purposes of this part:

    Activity with a more complex risk profile includes:

    (1) Clearing credit default swaps, credit default futures, or

    derivatives that reference either credit default swaps or credit

    default futures and

    (2) Any other activity designated as such by the Commission

    pursuant to Sec. 39.33(a)(3).

    Back test means a test that compares a derivatives clearing

    organization's initial margin requirements with historical price

    changes to determine the extent of actual margin coverage.

    Customer means a person trading in any commodity named in the

    definition of commodity in section 1a(9) of the Act or in Sec. 1.3 of

    this chapter, or in any swap as defined in section 1a(47) of the Act or

    in Sec. 1.3 of this chapter; Provided, however, an owner or holder of

    a house account as defined in this section shall not be deemed to be a

    customer within the meaning of section 4d of the Act, the regulations

    that implement sections 4d and 4f of the Act and Sec. 1.35 of this

    chapter, and such an owner or holder of such a house account shall

    otherwise be deemed to be a customer within the meaning of the Act and

    Sec. Sec. 1.37 and 1.46 of this chapter and all other sections of

    these rules, regulations, and orders which do not implement sections 4d

    and 4f of the Act.

    Customer account or customer origin means a clearing member account

    held on behalf of customers, as that term is defined in this section,

    and which is subject to section 4d(a) or section 4d(f) of the Act.

    Depository institution has the meaning set forth in section

    19(b)(1)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)).

    House account or house origin means a clearing member account which

    is not subject to section 4d(a) or 4d(f) of the Act.

    Key personnel means derivatives clearing organization personnel who

    play a significant role in the operations of the derivatives clearing

    organization, the provision of clearing and settlement services, risk

    management, or oversight of compliance with the Act and Commission

    regulations and orders. Key personnel include, but are not limited to,

    those persons who are or perform the functions of any of the following:

    chief executive officer; president; chief compliance officer; chief

    operating officer; chief risk officer; chief financial officer; chief

    technology officer; and emergency contacts or persons who are

    responsible for business continuity or disaster recovery planning or

    program execution.

    Stress test means a test that compares the impact of potential

    extreme price moves, changes in option volatility, and/or changes in

    other inputs that affect the value of a position, to the financial

    resources of a derivatives clearing organization, clearing member, or

    large trader, to determine the adequacy of the financial resources of

    such entities.

    Subpart C derivatives clearing organization means any derivatives

    clearing organization, as defined in section 1a(15) of the Act and

    Sec. 1.3(d) of this chapter, which:

    (1) Is registered as a derivatives clearing organization under

    section 5b of the Act;

    (2) Is not a systemically important derivatives clearing

    organization; and

    (3) Has become subject to the provisions of subpart C of this part,

    pursuant to Sec. 39.31.

    Systemically important derivatives clearing organization means a

    financial market utility that is a derivatives clearing organization

    registered under section 5b of the Act, which is currently designated

    by the Financial Stability Oversight Council to be systemically

    important and for which the Commission acts as the Supervisory Agency

    pursuant to 12 U.S.C. 5462(8).

    U.S. branch or agency of a foreign banking organization means the

    U.S. branch or agency of a foreign banking organization as defined in

    section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).

    Trust company means a trust company that is a member of the Federal

    Reserve System, under section 1 of the Federal Reserve Act (12 U.S.C.

    221), but that does not meet the definition of depository institution.

    0

    3. Revise subpart C to read as follows:

    [[Page 72515]]

    Subpart C--Provisions Applicable to Systemically Important

    Derivatives Clearing Organizations and Derivatives Clearing

    Organizations That Elect To Be Subject to the Provisions of This

    Subpart

    Sec.

    39.30 Scope.

    39.31 Election to become subject to the provisions of this subpart.

    39.32 Governance for systemically important derivatives clearing

    organizations and subpart C derivatives clearing organizations.

    39.33 Financial resources for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    39.34 System safeguards for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    39.35 Default rules and procedures for uncovered credit losses or

    liquidity shortfalls (recovery) for systemically important

    derivatives clearing organizations and subpart C derivatives

    clearing organizations.

    39.36 Risk management for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    39.37 Additional disclosure for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    39.38 Efficiency for systemically important derivatives clearing

    organizations and subpart C derivatives clearing organizations.

    39.39 Recovery and wind-down for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    39.40 Consistency with the Principles for Financial Market

    Infrastructures.

    39.41 Special enforcement authority for systemically important

    derivatives clearing organizations.

    39.42 Advance notice of material risk-related rule changes by

    systemically important derivatives clearing organizations.

    Appendix A to Part 39--Form DCO Derivatives Clearing Organization

    Application for Registration

    Appendix B to Part 39--Subpart C Election Form

    Sec. 39.30 Scope.

    (a) The provisions of this subpart apply to each of the following:

    a subpart C derivatives clearing organization, a systemically important

    derivatives clearing organization, and any derivatives clearing

    organization, as defined under section 1a(15) of the Act and Sec.

    1.3(d) of this chapter, seeking to become a subpart C derivatives

    clearing organization pursuant to Sec. 39.31.

    (b) A systemically important derivatives clearing organization is

    subject to the provisions of subparts A and B of this part in addition

    to the provisions of this subpart.

    (c) A subpart C derivatives clearing organization is subject to the

    provisions of subparts A and B of this part in addition to the

    provisions of this subpart except for Sec. Sec. 39.41 and 39.42.

    Sec. 39.31 Election to become subject to the provisions of this

    subpart.

    (a) Election eligibility. (1) A derivatives clearing organization

    that is registered with the Commission and that is not a systemically

    important derivatives clearing organization may elect to become a

    subpart C derivatives clearing organization subject to the provisions

    of this subpart, using the procedures set forth in paragraph (b) of

    this section.

    (2) An applicant for registration as a derivatives clearing

    organization pursuant to Sec. 39.3 may elect to become a subpart C

    derivatives clearing organization subject to the provisions of this

    subpart as part of its application for registration using the

    procedures set forth in paragraph (c) of this section.

    (b) Election and withdrawal procedures applicable to registered

    derivatives clearing organizations--(1) Election. A derivatives

    clearing organization that is registered with the Commission and that

    is not a systemically important derivatives clearing organization may

    request that the Commission accept its election to become a subpart C

    derivatives clearing organization by filing with the Commission a

    completed Subpart C Election Form. The Subpart C Election Form shall

    include the election and all certifications, disclosures and exhibits,

    as provided in appendix B to this part and any amendments or

    supplements thereto filed with the Commission pursuant to paragraphs

    (b)(2) and (3) of this section.

    (2) Submission of supplemental information. The filing of a Subpart

    C Election Form does not create a presumption that the Subpart C

    Election Form is materially complete or that supplemental information

    will not be required. The Commission, at any time prior to the

    effective date, as provided in paragraph (b)(4) of this section, may

    request that the derivatives clearing organization submit supplemental

    information in order for the Commission to process the Subpart C

    Election Form, and the derivatives clearing organization shall file

    such supplemental information with the Commission.

    (3) Amendments. A derivatives clearing organization shall promptly

    amend its Subpart C Election Form if it discovers a material omission

    or error in, or if there is a material change in, the information

    provided to the Commission in the Subpart C Election Form or other

    information provided in connection with the Subpart C Election Form.

    (4) Effective date. A derivatives clearing organization's election

    to become a subpart C derivatives clearing organization shall become

    effective:

    (i) Upon the later of the following, provided the Commission has

    neither stayed nor denied such election as set forth in paragraph

    (b)(5) of this section.

    (A) The effective date specified by the derivatives clearing

    organization in its Subpart C Election Form; or

    (B) Ten business days after the derivatives clearing organization

    files its Subpart C Election Form with the Commission;

    (ii) Or upon the effective date set forth in written notification

    from the Commission that it shall permit the election to take effect

    after a stay issued pursuant to paragraph (b)(5) of this section.

    (5) Stay or denial of election. Prior to the effective date set

    forth in paragraph (b)(4)(i) of this section, the Commission may stay

    or deny a derivatives clearing organization's election to become a

    subpart C derivatives clearing organization by issuing a written

    notification thereof to the derivatives clearing organization.

    (6) Commission acknowledgement. The Commission may acknowledge, in

    writing, that it has received a Subpart C Election Form filed by a

    derivatives clearing organization and that it has permitted the

    derivatives clearing organization's election to become subject to the

    provisions of this subpart to take effect, and the effective date of

    such election.

    (7) Withdrawal of election. A derivatives clearing organization

    that has filed a Subpart C Election Form may withdraw an election to

    become subject to the provisions of this subpart at any time prior to

    the date that the election is permitted to take effect by filing with

    the Commission a notice of the withdrawal of election.

    (c) Election and withdrawal procedures applicable to applicants for

    registration as derivatives clearing organization--(1) Election. An

    applicant for registration as a derivatives clearing organization that

    requests an election to become subject to the provisions of this

    subpart may make that request by attaching a completed Subpart C

    Election Form to the Form DCO that it files pursuant to Sec. 39.3. The

    Subpart C Election Form shall include the election and all

    certifications, disclosures and exhibits, as provided in appendix B of

    [[Page 72516]]

    this part, and any amendments or supplements thereto filed with the

    Commission pursuant to paragraphs (c)(3) or (4) of this section.

    (2) Election review and effective date. The Commission shall review

    the applicant's Subpart C Election Form as part of the Commission's

    review of its application for registration pursuant to Sec. 39.3(a).

    The Commission may permit the applicant's election to take effect at

    the time it approves the applicant's application for registration by

    providing written notice thereof to the applicant. The Commission shall

    not approve any application for registration filed pursuant to Sec.

    39.3(a) for which a Subpart C Election Form is pending, if the

    Commission determines that the applicant's election to become subject

    to this subpart should not become effective because the applicant has

    not demonstrated its ability to comply with the applicable provisions

    of this subpart.

    (3) Submission of supplemental information. The filing of a Subpart

    C Election Form does not create a presumption that the Subpart C

    Election Form is materially complete or that supplemental information

    will not be required. At any time during the Commission's review of the

    Subpart C Election Form, the Commission may request that the applicant

    submit supplemental information in order for the Commission to process

    the Subpart C Election Form and the applicant shall file such

    supplemental information with the Commission.

    (4) Amendments. An applicant for registration as a derivatives

    clearing organization shall promptly amend its Subpart C Election Form

    if it discovers a material omission or error in, or if there is a

    material change in, the information provided to the Commission in the

    Subpart C Election Form or other information provided in connection

    with the Subpart C Election Form.

    (5) Withdrawal of election. An applicant for registration as a

    derivatives clearing organization may withdraw an election to become

    subject to the provisions of this subpart by filing with the Commission

    a notice of the withdrawal of its Subpart C Election Form at any time

    prior to the date that the Commission approves its application for

    registration as a derivatives clearing organization. The applicant may

    withdraw its Subpart C Election Form without withdrawing its Form DCO.

    (d) Public information. The following portions of the Subpart C

    Election Form will be public: The Elections and Certifications and

    Disclosures in the Subpart C Election Form, the rules of the

    derivatives clearing organization, the regulatory compliance chart, and

    any other portion of the Subpart C Election Form not covered by a

    request for confidential treatment complying with the requirements of

    Sec. 145.9 of this chapter.

    (e) Rescission of election. (1) Notice of intent to rescind. A

    subpart C derivatives clearing organization may rescind its election to

    be subject to the provisions of this subpart and terminate its status

    as a subpart C derivatives clearing organization by filing with the

    Commission a notice of its intent to rescind such election. The notice

    of intent to rescind the election shall include:

    (i) The effective date of the rescission; and

    (ii) A certification signed by the relevant duly authorized

    representative of the subpart C derivatives clearing organization, as

    specified in paragraph three of the General Instructions to the Subpart

    C Election Form, stating that the subpart C derivatives clearing

    organization:

    (A) Has provided the notice to its clearing members required by

    paragraph (e)(3)(i)(A) of this section;

    (B) Will provide the notice to its clearing members required by

    paragraph (e)(3)(i)(B) of this section;

    (C) Has provided the notice to the general public required by

    paragraph (e)(3)(ii)(A) of this section;

    (D) Will provide notice to the general public required by paragraph

    (e)(3)(ii)(B) of this section; and

    (E) Has removed all references to the organization as a subpart C

    derivatives clearing organization and a qualifying central counterparty

    on its Web site and in all other material that it provides to its

    clearing members and customers, other market participants or members of

    the public, as required by paragraph (e)(3)(ii)(C) of this section.

    (2) Effective date. The rescission of the election to be subject to

    the provisions of this subpart shall become effective on the date set

    forth in the notice of intent to rescind the election filed by the

    subpart C derivatives clearing organization pursuant to paragraph

    (e)(1) of this section, provided that the rescission may become

    effective no earlier than 180 days after the notice of intent to

    rescind the election is filed with the Commission. The subpart C

    derivatives clearing organization shall continue to comply with all of

    the provisions of this subpart until such effective date.

    (3) Additional notice requirements. (i) A subpart C derivatives

    clearing organization shall provide the following notices, at the

    following times, to each of its clearing members and shall have rules

    in place requiring each of its clearing members to provide the

    following notices to each of the clearing member's customers:

    (A) No later than the filing of a notice of its intent to rescind

    its election to be subject to the provisions of this subpart, written

    notice that it intends to file such notice with the Commission and the

    effective date thereof; and

    (B) On the effective date of the rescission of its election to be

    subject to the provisions of this subpart, written notice that the

    rescission has become effective.

    (ii) A subpart C derivatives clearing organization shall:

    (A) No later than the filing of a notice of its intent to rescind

    its election to be subject to the provisions of this subpart, provide

    notice to the general public, displayed prominently on its Web site, of

    its intent to rescind its election to be subject to the provisions of

    this subpart;

    (B) On and after the effective date of the rescission of its

    election to be subject to the provisions of this subpart, provide

    notice to the general public, displayed prominently on its Web site,

    that the rescission has become effective; and

    (C) Prior to the filing of a notice of its intent to rescind its

    election to become subject to the provisions of this subpart, remove

    all references to the derivatives clearing organization's status as a

    subpart C derivatives clearing organization and a qualifying central

    counterparty on its Web site and in all other materials that it

    provides to its clearing members and customers, other market

    participants, or the general public.

    (iii) The employees and representatives of a derivatives clearing

    organization that has filed a notice of its intent to rescind its

    election to be subject to the provisions of this subpart shall refrain

    from referring to the organization as a subpart C derivatives clearing

    organization and a qualifying central counterparty on and after the

    date that the notice of intent to rescind the election is filed.

    (4) Effect of rescission. The rescission of a subpart C derivatives

    clearing organization's election to be subject to the provisions of

    this subpart shall not affect the authority of the Commission

    concerning any activities or events occurring during the time that the

    derivatives clearing organization maintained its status as a subpart C

    derivatives clearing organization.

    (f) Loss of designation as a systemically important derivatives

    clearing organization. A systemically

    [[Page 72517]]

    important derivatives clearing organization whose designation of

    systemic importance is rescinded by the Financial Stability Oversight

    Council, shall immediately be deemed to be a subpart C derivatives

    clearing organization and shall continue to comply with the provisions

    of this subpart unless such derivatives clearing organization elects to

    rescind its status as a subpart C derivatives clearing organization in

    accordance with the requirements of paragraph (e) of this section.

    (g) All forms and notices required by this section shall be filed

    electronically with the Secretary of the Commission in the format and

    manner specified by the Commission.

    Sec. 39.32 Governance for systemically important derivatives clearing

    organizations and subpart C derivatives clearing organizations.

    (a) General rules. (1) Each systemically important derivatives

    clearing organization and subpart C derivatives clearing organization

    shall have governance arrangements that:

    (i) Are written;

    (ii) Are clear and transparent;

    (iii) Place a high priority on the safety and efficiency of the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization; and

    (iv) Explicitly support the stability of the broader financial

    system and other relevant public interest considerations of clearing

    members, customers of clearing members, and other relevant

    stakeholders.

    (2) The board of directors shall make certain that the systemically

    important derivatives clearing organization's or subpart C derivatives

    clearing organization's design, rules, overall strategy, and major

    decisions appropriately reflect the legitimate interests of clearing

    members, customers of clearing members, and other relevant

    stakeholders.

    (3) To an extent consistent with other statutory and regulatory

    requirements on confidentiality and disclosure:

    (i) Major decisions of the board of directors should be clearly

    disclosed to clearing members, other relevant stakeholders, and to the

    Commission; and

    (ii) Major decisions of the board of directors having a broad

    market impact should be clearly disclosed to the public;

    (b) Governance arrangements. Each systemically important

    derivatives clearing organization and subpart C derivatives clearing

    organization shall have governance arrangements that:

    (1) Are clear and documented;

    (2) To an extent consistent with other statutory and regulatory

    requirements on confidentiality and disclosure, are disclosed, as

    appropriate, to the Commission and to other relevant authorities, to

    clearing members and to customers of clearing members, to the owners of

    the systemically important derivatives clearing organization or subpart

    C derivatives clearing organization, and to the public;

    (3) Describe the structure pursuant to which the board of

    directors, committees, and management operate;

    (4) Include clear and direct lines of responsibility and

    accountability;

    (5) Clearly specify the roles and responsibilities of the board of

    directors and its committees, including the establishment of a clear

    and documented risk management framework;

    (6) Clearly specify the roles and responsibilities of management;

    (7) Describe procedures for identifying, addressing, and managing

    conflicts of interest involving members of the board of directors;

    (8) Describe procedures pursuant to which the board of directors

    oversees the chief risk officer, risk management committee, and

    material risk decisions;

    (9) Assign responsibility and accountability for risk decisions,

    including in crises and emergencies; and

    (10) Assign responsibility for implementing the:

    (i) Default rules and procedures required by Sec. Sec. 39.16 and

    39.35;

    (ii) System safeguard rules and procedures required by Sec. Sec.

    39.18 and 39.34; and

    (iii) Recovery and wind-down plans required by Sec. 39.39.

    (c) Fitness standards for board of directors and management. Each

    systemically important derivatives clearing organization and subpart C

    derivatives clearing organization shall maintain policies to make

    certain that:

    (1) The board of directors consists of suitable individuals having

    appropriate skills and incentives;

    (2) The board of directors includes individuals who are not

    executives, officers or employees of the systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization or an affiliate thereof;

    (3) The performance of the board of directors and the performance

    of individual directors are reviewed on a regular basis;

    (4) Managers have the appropriate experience, skills, and integrity

    necessary to discharge operational and risk management

    responsibilities; and

    (5) Risk management and internal control personnel have sufficient

    independence, authority, resources, and access to the board of

    directors so that the operations of the systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization are consistent with the risk management framework

    established by the board of directors.

    Sec. 39.33 Financial resources requirements for systemically

    important derivatives clearing organizations and subpart C derivatives

    clearing organizations.

    (a) General rule. (1) Notwithstanding the requirements of Sec.

    39.11(a)(1), each systemically important derivatives clearing

    organization and subpart C derivatives clearing organization that, in

    either case, is systemically important in multiple jurisdictions or 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 loss to the

    derivatives clearing organization in extreme but plausible market

    conditions.

    (2) The Commission shall, if it deems appropriate, determine

    whether a systemically important derivatives clearing organization or

    subpart C derivatives clearing organization is systemically important

    in multiple jurisdictions. In determining whether a systemically

    important derivatives clearing organization or subpart C derivatives

    clearing organization is systemically important in multiple

    jurisdictions, the Commission shall consider whether the derivatives

    clearing organization:

    (i) Is a systemically important derivatives clearing organization,

    as defined by Sec. 39.2; or

    (ii) Has been determined to be systemically important by one or

    more jurisdictions other than the United States pursuant to a

    designation process that considers whether the foreseeable effects of a

    failure or disruption of the derivatives clearing organization could

    threaten the stability of each relevant jurisdiction's financial

    system.

    (3) The Commission shall, if it deems appropriate, determine

    whether any of the activities of a systemically important derivatives

    clearing organization or a subpart C derivatives clearing organization,

    in addition to clearing credit default swaps, credit default futures,

    and any derivatives that reference either credit default swaps or

    credit default futures, has a more complex risk profile. In determining

    whether an activity has a more complex

    [[Page 72518]]

    risk profile, the Commission will consider characteristics such as

    discrete jump-to-default price changes or high correlations with

    potential participant defaults as factors supporting (though not

    necessary for) a finding of a more complex risk profile.

    (4) For purposes of this section, if a clearing member controls

    another clearing member or is under common control with another

    clearing member, such affiliated clearing members shall be deemed to be

    a single clearing member.

    (b) Valuation of financial resources. Notwithstanding the

    provisions of Sec. 39.11(d)(2), assessments for additional guaranty

    fund contributions (i.e., guaranty 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 or subpart C derivatives clearing organization's

    obligations under paragraph (a) of this section or Sec. 39.11(a)(1).

    (c) Liquidity resources. (1) Minimum amount of liquidity resources.

    (i) Notwithstanding the provisions of Sec. 39.11(e)(1)(ii), each

    systemically important derivatives clearing organization and subpart C

    derivatives clearing organization shall maintain eligible liquidity

    resources that, at a minimum, will enable it to meet its intraday,

    same-day, and multiday obligations to perform settlements, as defined

    in Sec. 39.14(a)(1), with a high degree of confidence under a wide

    range of stress scenarios that should include, but not be limited to, a

    default by the clearing member creating the largest aggregate liquidity

    obligation for the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization in extreme

    but plausible market conditions.

    (ii) A systemically important derivatives clearing organization and

    subpart C derivatives clearing organization that is subject to Sec.

    39.33(a)(1) shall consider maintaining eligible liquidity resources

    that, at a minimum, will enable it to meet its intraday, same-day, and

    multiday obligations to perform settlements, as defined in Sec.

    39.14(a)(1), with a high degree of confidence under a wide range of

    stress scenarios that should include, but not be limited to, a default

    of the two clearing members creating the largest aggregate liquidity

    obligation for the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization in extreme

    but plausible market conditions.

    (2) Satisfaction of settlement in all relevant currencies. Each

    systemically important derivatives clearing organization and subpart C

    derivatives clearing organization shall maintain liquidity resources

    that are sufficient to satisfy the obligations required by paragraph

    (c)(1) of this section in all relevant currencies for which the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization has obligations to perform

    settlements, as defined in Sec. 39.14(a)(1), to its clearing members.

    (3) Qualifying liquidity resources. (i) Only the following

    liquidity resources are eligible for the purpose of meeting the

    requirement of paragraph (c)(1) of this section:

    (A) Cash in the currency of the requisite obligations, held either

    at the central bank of issue or at a creditworthy commercial bank;

    (B) Committed lines of credit;

    (C) Committed foreign exchange swaps;

    (D) Committed repurchase agreements; or

    (E) (1) Highly marketable collateral, including high quality,

    liquid, general obligations of a sovereign nation.

    (2) The assets described in paragraph (c)(3)(i)(E)(1) of this

    section must be readily available and convertible into cash pursuant to

    prearranged and highly reliable funding arrangements, even in extreme

    but plausible market conditions.

    (ii) With respect to the arrangements described in paragraph

    (c)(3)(i) of this section, the systemically important derivatives

    clearing organization or subpart C derivatives clearing organization

    must take appropriate steps to verify that such arrangements do not

    include material adverse change conditions and are enforceable, and

    will be highly reliable, in extreme but plausible market conditions.

    (4) Additional liquidity resources. If a systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization maintains financial resources in addition to those

    required to satisfy paragraph (c)(1) of this section, then those

    resources should be in the form of assets that are likely to be

    saleable with proceeds available promptly or acceptable as collateral

    for lines of credit, swaps, or repurchase agreements on an ad hoc

    basis. A systemically important derivatives clearing organization or

    subpart C derivatives clearing organization should consider maintaining

    collateral with low credit, liquidity, and market risks that is

    typically accepted by a central bank of issue for any currency in which

    it may have settlement obligations, but shall not assume the

    availability of emergency central bank credit as a part of its

    liquidity plan.

    (d) Liquidity providers. (1) For the purposes of this paragraph, a

    liquidity provider means:

    (i) A depository institution, a U.S. branch or agency of a foreign

    banking organization, a trust company, or a syndicate of depository

    institutions, U.S. branches or agencies of foreign banking

    organizations, or trust companies providing a line of credit, foreign

    exchange swap facility or repurchase facility to a systemically

    important derivatives clearing organization or subpart C derivatives

    clearing organization;

    (ii) Any other counterparty relied upon by a systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization to meet its minimum liquidity resources requirement under

    paragraph (c) of this section.

    (2) In fulfilling its obligations under paragraph (c) of this

    section, each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall undertake due

    diligence to confirm that each of its liquidity providers, whether or

    not such liquidity provider is a clearing member, has:

    (i) Sufficient information to understand and manage the liquidity

    provider's liquidity risks; and

    (ii) The capacity to perform as required under its commitments to

    provide liquidity to the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization.

    (3) Where relevant to a liquidity provider's ability reliably to

    perform its commitments with respect to a particular currency, the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization may take into account the liquidity

    provider's access to the central bank of issue of that currency.

    (4) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall regularly test

    its procedures for accessing its liquidity resources under paragraph

    (c)(3)(i) of this section, including testing its arrangements under

    paragraph (c)(3)(ii) and its relevant liquidity provider(s) under

    paragraph (d)(1) of this section.

    (e) Documentation of financial resources and liquidity resources.

    Each systemically important derivatives clearing organization and

    subpart C

    [[Page 72519]]

    derivatives clearing organization shall document its supporting

    rationale for, and have appropriate governance arrangements relating

    to, the amount of total financial resources it maintains pursuant to

    paragraph (a) of this section and the amount of total liquidity

    resources it maintains pursuant to paragraph (c) of this section.

    Sec. 39.34 System safeguards for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    (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 and subpart C

    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 systemically

    important derivatives clearing organization or subpart C 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 facilitate 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 and subpart C derivatives clearing organization must

    maintain a degree of geographic dispersal of physical, technological

    and personnel resources consistent with the following for each activity

    necessary for the daily processing, clearing, and settlement of

    existing and new contracts:

    (1) Physical and technological resources (including a secondary

    site), 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 physical

    and technological resources the systemically important derivatives

    clearing organization or subpart C derivatives clearing organization

    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, who live and work outside that relevant area,

    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;

    (3) The provisions of Sec. 39.18(f) shall apply to these resource

    requirements.

    (c) Each systemically important derivatives clearing organization

    and subpart C 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 Commission may, upon request, grant an entity, which has

    been designated as a systemically important derivatives clearing

    organization or that has elected to become subject to subpart C, up to

    one year to comply with any provision of this section.

    Sec. 39.35 Default rules and procedures for uncovered credit losses

    or liquidity shortfalls (recovery) for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations.

    (a) Allocation of uncovered credit losses. Each systemically

    important derivatives clearing organization and subpart C derivatives

    clearing organization shall adopt explicit rules and procedures that

    address fully any loss arising from any individual or combined default

    relating to any clearing members' obligations to the systemically

    important derivatives clearing organization or subpart C derivatives

    clearing organization. Such rules and procedures shall address how the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization would:

    (1) Allocate losses exceeding the financial resources available to

    the systemically important derivatives clearing organization or subpart

    C derivatives clearing organization;

    (2) Repay any funds it may borrow; and

    (3) Replenish any financial resources it may employ during such a

    stress event, so that the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization can

    continue to operate in a safe and sound manner.

    (b) Allocation of uncovered liquidity shortfalls. (1) Each

    systemically important derivatives clearing organization and subpart C

    derivatives clearing organization shall establish rules and/or

    procedures that enable it promptly to meet all of its settlement

    obligations, on a same day and, as appropriate, intraday and multiday

    basis, in the context of the occurrence of either or both of the

    following scenarios:

    (i) An individual or combined default involving one or more

    clearing members' obligations to the systemically important derivatives

    clearing organization or subpart C derivatives clearing organization;

    or

    (ii) A liquidity shortfall exceeding the financial resources of the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization.

    (2) The rules and procedures described in paragraph (b)(1) of this

    section shall:

    (i) Enable the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization promptly to

    meet its payment obligations in all relevant currencies;

    (ii) Be designed to enable the systemically important derivatives

    clearing organization or subpart C derivatives clearing organization to

    avoid unwinding, revoking, or delaying the same-day settlement of

    payment obligations; and

    (iii) Address the systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's process

    to replenish any liquidity resources it may employ during a stress

    event so that it can continue to operate in a safe and sound manner.

    Sec. 39.36 Risk management for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    (a) Stress tests of financial resources. In addition to conducting

    stress tests pursuant to Sec. 39.13(h)(3), each systemically important

    derivatives clearing organization and subpart C derivatives clearing

    organization shall conduct stress tests of its financial resources in

    accordance with the following standards and practices:

    (1) Perform, on a daily basis, stress testing of its financial

    resources using predetermined parameters and assumptions;

    (2) Perform comprehensive analyses of stress testing scenarios and

    underlying parameters to ascertain their appropriateness for

    determining the systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's

    required level of financial resources in current and evolving market

    conditions;

    (3) Perform the analyses required by paragraph (a)(2) of this

    section at least

    [[Page 72520]]

    monthly and when products cleared or markets served display high

    volatility or become less liquid, when the size or concentration of

    positions held by clearing members increases significantly, or as

    otherwise appropriate, evaluate the stress testing scenarios, models,

    and underlying parameters more frequently than once a month;

    (4) For the analyses required by paragraphs (a)(1) and (2) of this

    section, include a range of relevant stress scenarios, in terms of both

    defaulting clearing members' positions and possible price changes in

    liquidation periods. The scenarios considered shall include, but are

    not limited to, the following:

    (i) Relevant peak historic price volatilities;

    (ii) Shifts in other market factors including, as appropriate,

    price determinants and yield curves;

    (iii) Multiple defaults over various time horizons;

    (iv) Simultaneous pressures in funding and asset markets; and

    (v) A range of forward-looking stress scenarios in a variety of

    extreme but plausible market conditions.

    (5) Establish procedures for:

    (i) Reporting stress test results to its risk management committee

    or board of directors, as applicable; and

    (ii) Using the results to assess the adequacy of, and to adjust,

    its total amount of financial resources; and

    (6) Use the results of stress tests to support compliance with the

    minimum financial resources requirement set forth in Sec. 39.33(a).

    (b) Sensitivity analysis of margin model. (1) Each systemically

    important derivatives clearing organization and subpart C derivatives

    clearing organization shall, at least monthly and more frequently as

    appropriate, conduct a sensitivity analysis of its margin models to

    analyze and monitor model performance and overall margin coverage.

    Sensitivity analysis shall be conducted on both actual and hypothetical

    positions.

    (2) For the purposes of this paragraph (b), a sensitivity analysis

    of a margin model includes:

    (i) Reviewing a wide range of parameter settings and assumptions

    that reflect possible market conditions in order to understand how the

    level of margin coverage might be affected by highly stressed market

    conditions. The range of parameters and assumptions should capture a

    variety of historical and hypothetical conditions, including the most

    volatile periods that have been experienced by the markets served by

    the systemically important derivatives clearing organization or subpart

    C derivatives clearing organization and extreme changes in the

    correlations between prices. The parameters and assumptions should be

    appropriate in light of the specific characteristics, considered on a

    current basis, of particular products and portfolios cleared.

    (ii) Testing of the ability of the models or model components to

    produce accurate results using actual or hypothetical datasets and

    assessing the impact of different model parameter settings.

    (iii) Evaluating potential losses in clearing members' proprietary

    positions and, where appropriate, customer positions.

    (3) A systemically important derivatives clearing organization or

    subpart C derivatives clearing organization involved in activities with

    a more complex risk profile shall take into consideration parameter

    settings that reflect the potential impact of the simultaneous default

    of clearing members and, where applicable, the underlying credit

    instruments.

    (c) Stress tests of liquidity resources. Each systemically

    important derivatives clearing organization and subpart C derivatives

    clearing organization shall conduct stress tests of its liquidity

    resources in accordance with the following standards and practices:

    (1) Perform, on a daily basis, stress testing of its liquidity

    resources using predetermined parameters and assumptions;

    (2) Perform comprehensive analyses of stress testing scenarios and

    underlying parameters to ascertain their appropriateness for

    determining the systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's

    required level of liquidity resources in current and evolving market

    conditions;

    (3) Perform the analyses required by paragraph (c)(2) of this

    section at least monthly and when products cleared or markets served

    display high volatility or become less liquid, when the size or

    concentration of positions held by clearing members increases

    significantly, or as otherwise appropriate, evaluate its stress testing

    scenarios, models, and underlying parameters more frequently than once

    a month;

    (4) For the analyses required by paragraphs (c)(1) and (2) of this

    section, include a range of relevant stress scenarios, in terms of both

    defaulting clearing members' positions and possible price changes in

    liquidation periods. The scenarios considered shall include, but are

    not limited to, the following:

    (i) Relevant peak historic price volatilities;

    (ii) Shifts in other market factors including, as appropriate,

    price determinants and yield curves;

    (iii) Multiple defaults over various time horizons;

    (iv) Simultaneous pressures in funding and asset markets; and

    (v) A range of forward-looking stress scenarios in a variety of

    extreme but plausible market conditions.

    (5) For the scenarios enumerated in paragraph (c)(4) of this

    section, consider the following:

    (i) All entities that might pose material liquidity risks to the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization, including settlement banks,

    permitted depositories, liquidity providers, and other entities,

    (ii) Multiday scenarios as appropriate,

    (iii) Inter-linkages between its clearing members and the multiple

    roles that they may play in the systemically important derivatives

    clearing organization's or subpart C derivatives clearing

    organization's risk management; and

    (iv) The probability of multiple failures and contagion effect

    among clearing members.

    (6) Establish procedures for:

    (i) Reporting stress test results to its risk management committee

    or board of directors, as applicable; and

    (ii) Using the results to assess the adequacy of, and to adjust its

    total amount of liquidity resources.

    (7) Use the results of stress tests to support compliance with the

    liquidity resources requirement set forth in Sec. 39.33(c).

    (d) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall regularly conduct

    an assessment of the theoretical and empirical properties of its margin

    model for all products it clears.

    (e) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall perform, on an

    annual basis, a full validation of its financial risk management model

    and its liquidity risk management model.

    (f) Custody and investment risk. Custody and investment

    arrangements of a systemically important derivatives clearing

    organization's and subpart C derivatives clearing organization's own

    funds and assets shall be subject to the same requirements as those

    specified in Sec. 39.15 for the funds and assets of

    [[Page 72521]]

    clearing members, and shall apply to the derivatives clearing

    organization's own funds and assets to the same extent as if such funds

    and assets belonged to clearing members.

    (g) Settlement banks. Each systemically important derivatives

    clearing organization and subpart C derivatives clearing organization

    shall:

    (1) Monitor, manage, and limit its credit and liquidity risks

    arising from its settlement banks;

    (2) Establish, and monitor adherence to, strict criteria for its

    settlement banks that take account of, among other things, their

    regulation and supervision, creditworthiness, capitalization, access to

    liquidity, and operational reliability; and

    (3) Monitor and manage the concentration of credit and liquidity

    exposures to its settlement banks.

    Sec. 39.37 Additional disclosure for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations.

    In addition to the requirements of Sec. 39.21, each systemically

    important derivatives clearing organization and subpart C derivatives

    clearing organization shall:

    (a) Complete and publicly disclose its responses to the Disclosure

    Framework for Financial Market Infrastructures published by the

    Committee on Payment and Settlement Systems and the Board of the

    International Organization of Securities Commissions;

    (b) Review and update its responses disclosed as required by

    paragraph (a) of this section at least every two years and following

    material changes to the systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's system

    or the environment in which it operates. A material change to the

    systemically important derivatives clearing organization's or subpart C

    derivatives clearing organization's system or the environment in which

    it operates is a change that would significantly change the accuracy

    and usefulness of the existing responses;

    (c) Disclose, publicly and to the Commission, relevant basic data

    on transaction volume and values; and

    (d) Disclose, publicly and to the Commission, rules, policies, and

    procedures concerning segregation and portability of customers'

    positions and funds, including whether each of:

    (1) Futures customer funds, as defined in Sec. 1.3(jjjj) of this

    chapter;

    (2) Cleared Swaps Customer Collateral, as defined in Sec. 22.1 of

    this chapter; or

    (3) Foreign futures or foreign options secured amount, as defined

    in Sec. 1.3(rr) of this chapter is:

    (i) Protected on an individual or omnibus basis or

    (ii) Subject to any constraints, including any legal or operational

    constraints that may impair the ability of the systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization to segregate or transfer the positions and related

    collateral of a clearing member's customers.

    Sec. 39.38 Efficiency for systemically important derivatives clearing

    organizations and subpart C derivatives clearing organizations.

    (a) General rule. In order to meet the needs of clearing members

    and markets, each systemically important derivatives clearing

    organization and subpart C derivatives clearing organization should

    efficiently and effectively design its:

    (1) Clearing and settlement arrangements;

    (2) Operating structure and procedures;

    (3) Scope of products cleared; and

    (4) Use of technology.

    (b) Review of efficiency. Each systemically important derivatives

    clearing organization and subpart C derivatives clearing organization

    should establish a mechanism to review, on a regular basis, its

    compliance with paragraph (a) of this section.

    (c) Clear goals and objectives. Each systemically important

    derivatives clearing organization and subpart C derivatives clearing

    organization should have clearly defined goals and objectives that are

    measurable and achievable, including in the areas of minimum service

    levels, risk management expectations, and business priorities.

    (d) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall facilitate

    efficient payment, clearing and settlement by accommodating

    internationally accepted communication procedures and standards.

    Sec. 39.39 Recovery and wind-down for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations.

    (a) Definitions. For purposes of this section:

    (1) General business risk means any potential impairment of a

    systemically important derivatives clearing organization's or subpart C

    derivatives clearing organization's financial position, as a business

    concern, as a consequence of a decline in its revenues or an increase

    in its expenses, such that expenses exceed revenues and result in a

    loss that the derivatives clearing organization must charge against

    capital.

    (2) Wind-down means the actions of a systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization to effect the permanent cessation or sale or transfer or

    one or more services.

    (3) Recovery means the actions of a systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization, consistent with its rules, procedures, and other ex-ante

    contractual arrangements, to address any uncovered credit loss,

    liquidity shortfall, capital inadequacy, or business, operational or

    other structural weakness, including the replenishment of any depleted

    pre-funded financial resources and liquidity arrangements, as necessary

    to maintain the systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's

    viability as a going concern.

    (4) Operational risk means the risk that deficiencies in

    information systems or internal processes, human errors, management

    failures or disruptions from external events will result in the

    reduction, deterioration, or breakdown of services provided by a

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization.

    (5) Unencumbered liquid financial assets include cash and highly

    liquid securities.

    (b) Recovery and wind-down plan. Each systemically important

    derivatives clearing organization and subpart C derivatives clearing

    organization shall maintain viable plans for:

    (1) Recovery or orderly wind-down, necessitated by uncovered credit

    losses or liquidity shortfalls; and, separately,

    (2) Recovery or orderly wind-down necessitated by general business

    risk, operational risk, or any other risk that threatens the

    derivatives clearing organization's viability as a going concern.

    (c)(1) In developing the plans specified in paragraph (b) of this

    section, the systemically important derivatives clearing organization

    or subpart C derivatives clearing organization shall identify scenarios

    that may potentially prevent it from being able to meet its

    obligations, provide its critical operations and services as a going

    concern and assess the effectiveness of a full range of options for

    recovery or orderly wind-down. The plans shall include procedures for

    informing the

    [[Page 72522]]

    Commission, as soon as practicable, when the recovery plan is initiated

    or wind-down is pending.

    (2) A systemically important derivatives clearing organization or

    subpart C derivatives clearing organization shall have procedures for

    providing the Commission and the Federal Deposit Insurance Corporation

    with information needed for purposes of resolution planning.

    (d) Financial resources to support the recovery and wind-down plan.

    (1) In evaluating the resources available to cover an uncovered

    credit loss or liquidity shortfall as part of its recovery plans

    pursuant to paragraph (b)(1) of this section, a systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization may consider, among other things, assessments of

    additional resources provided for under its rules that it reasonably

    expects to collect from non-defaulting clearing members.

    (2) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall maintain

    sufficient unencumbered liquid financial assets, funded by the equity

    of its owners, to implement its recovery or wind-down plans pursuant to

    paragraph (b)(2) of this section. In general, the financial resources

    required by Sec. 39.11(a)(2) may be sufficient, but the systemically

    important derivatives clearing organization or subpart C derivatives

    clearing organization shall analyze its particular circumstances and

    risks and maintain any additional resources that may be necessary to

    implement the plans. In allocating sufficient financial resources to

    implement the plans, the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization shall

    comply with Sec. 39.11(e)(2). The plan shall include evidence and

    analysis to support the conclusion that the amount considered necessary

    is, in fact, sufficient to implement the plans.

    (3) Resources counted in meeting the requirements of Sec. Sec.

    39.11(a)(1) and 39.33 may not be allocated, in whole or in part, to the

    recovery plans required by paragraph (b)(2) of this section. Other

    resources may be allocated, in whole or in part, to the recovery plans

    required by either paragraphs (b)(1) or (2) of this section, but not

    both paragraphs, and only to the extent the use of such resources is

    not otherwise limited by the Act, Commission regulations, the

    systemically important derivatives clearing organization's or subpart C

    derivatives clearing organization's rules, or any contractual

    arrangements to which the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization is a party.

    (e) Plan for raising additional financial resources. All

    systemically important derivatives clearing organizations and subpart C

    derivatives clearing organizations shall maintain viable plans for

    raising additional financial resources, including, where appropriate,

    capital, in a scenario in which the systemically important derivatives

    clearing organization or subpart C derivatives clearing organization is

    unable, or virtually unable, to comply with any financial resources

    requirements set forth in this part. This plan shall be approved by the

    board of directors and be updated regularly.

    (f) The Commission may, upon request, grant an entity, which has

    been designated as a systemically important derivatives clearing

    organization or that has elected to become subject to subpart C, up to

    one year to comply with any provision of this section or of Sec.

    39.35.

    Sec. 39.40 Consistency with the Principles for Financial Market

    Infrastructures.

    This subpart C is intended to establish standards which, together

    with subparts A and B of this part, are consistent with section 5b(c)

    of the Act and the Principles for Financial Market Infrastructures

    published by the Committee on Payment and Settlement Systems and the

    Board of the International Organization of Securities Commissions and

    should be interpreted in that context.

    Sec. 39.41 Special enforcement authority for systemically important

    derivatives clearing organizations.

    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.

    Sec. 39.42 Advance notice of material risk-related rule changes by

    systemically important derivatives clearing organizations.

    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.

    Sec. Sec. 39.28 and 39.29 [Added and Reserved]

    0

    4. In subpart B, add reserved Sec. Sec. 39.28 and 39.29.

    Appendix to Part 39 [Redesignated as Appendix A to Part 39]

    0

    5. Redesignate the Appendix to Part 39--Form DCO Derivatives Clearing

    Organization Application for Registrations as Appendix A to Part 39--

    Form DCO Derivatives Clearing Organization Application for

    Registrations.

    0

    6. Add appendix B to part 39 to read as follows:

    Appendix B to Part 39--Subpart C Election Form

    COMMODITY FUTURES TRADING COMMISSION

    SUBPART C ELECTION FORM

    GENERAL INSTRUCTIONS

    GENERAL INSTRUCTIONS: Intentional misstatements or omissions of fact

    may constitute federal criminal violations (7 U.S.C. 13 and 18

    U.S.C. 1001).

    DEFINITIONS

    Unless the context requires otherwise, all terms used in this

    Subpart C Election Form have the same meaning as in the Commodity

    Exchange Act (``Act''), and in the General Rules and Regulations of

    the Commodity Futures Trading Commission (``Commission'')

    thereunder. All references to Commission regulations are found at 17

    CFR Ch. 1.

    For purposes of this Subpart C Election Form, the term

    ``Applicant'' shall mean a derivatives clearing organization that is

    filing this Subpart C Election Form with a Form DCO as part of an

    application for registration as a derivatives clearing organization

    pursuant to Section 5b of the Act and 17 CFR 39.3(a).

    GENERAL INSTRUCTIONS

    1. Any derivatives clearing organization requesting an election

    to become subject to subpart C of part 39 of the Commission's

    regulations must file this Subpart C Election Form. The Subpart C

    Election Form includes the election to be subject to the provisions

    of subpart C of part 39 of the Commission's regulations, certain

    required certifications, disclosures, and exhibits, and any

    supplements or amendments thereto filed pursuant to 17 CFR 39.31(b)

    or (c) (collectively, the ``Subpart C Election Form'').

    2. Any derivatives clearing organization wishing to request an

    extension of up to one year to comply with any of the provisions of

    17 CFR 39.34, 17 CFR 39.35 or 17 CFR 39.39, pursuant to 17 CFR

    39.34(d) or 17 CFR 39.39(f) must do so prior to filing this

    [[Page 72523]]

    Subpart C Election Form. Such requests shall become part of this

    Subpart C Election Form.

    3. Individuals' names, except the executing signature, shall be

    given in full (Last Name, First Name, Middle Name).

    4. The signatures required in this Subpart C Election Form shall

    be the manual signatures of: a duly authorized representative of the

    derivatives clearing organization as follows: If the Subpart C

    Election Form is filed by a corporation, it must be signed in the

    name of the corporation by a principal officer duly authorized; if

    filed by a limited liability company, it must be signed in the name

    of the limited liability company by a manager or member duly

    authorized to sign on the limited liability company's behalf; if

    filed by a partnership, it must be signed in the name of the

    partnership by a general partner duly authorized; if filed by an

    unincorporated organization or association which is not a

    partnership, it must be signed in the name of such organization or

    association by the managing agent, i.e., a duly authorized person

    who directs or manages or who participates in the directing or

    managing of its affairs.

    5. All applicable items must be answered in full.

    6. Under Section 5b of the Act and the Commission's regulations

    thereunder, the Commission is authorized to solicit the information

    required to be supplied by this Subpart C Election Form from any

    Applicant seeking registration as a derivatives clearing

    organization and from any registered derivatives clearing

    organization.

    7. Disclosure of the information specified in this Subpart C

    Election Form is mandatory prior to the processing of the election

    to become a derivatives clearing organization subject to the

    provisions of subpart C of part 39 of the Commission's regulations.

    The Commission may determine that additional information is required

    in order to process such election.

    8. A Subpart C Election Form that is not prepared and executed

    in compliance with applicable requirements and instructions may be

    returned as not acceptable for filing. Acceptance of this Subpart C

    Election Form, however, shall not constitute a finding that the

    Subpart C Election Form is acceptable as filed or that the

    information is true, current or complete.

    9. Except as provided in 17 CFR 39.31(d), in cases where a

    derivatives clearing organization submits a request for confidential

    treatment with the Secretary of the Commission pursuant to the

    Freedom of Information Act and 17 CFR 145.9, information supplied in

    this Subpart C Election Form will be included routinely in the

    public files of the Commission and will be made available for

    inspection by any interested person.

    APPLICATION AMENDMENTS

    17 CFR 39.31(b)(3) and (c)(4) require a derivatives clearing

    organization that has submitted a Subpart C Election Form to

    promptly amend its Subpart C Election Form if it discovers a

    material omission or error in, or if there is a material change in,

    the information provided to the Commission in the Subpart C Election

    Form or other information provided in connection with the Subpart C

    Election Form. When amending a Subpart C Election Form, a

    derivatives clearing organization must re-file the Election and

    Certifications page, amended if necessary, and including all

    required executing signatures, and attach thereto revised exhibits

    or other materials marked to show changes, as applicable.

    WHERE TO FILE

    This Subpart C Election Form must be filed electronically with

    the Secretary of the Commission in the format and manner specified

    by the Commission.

    COMMODITY FUTURES TRADING COMMISSION

    SUBPART C ELECTION FORM

    ELECTION AND CERTIFICATIONS

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

    Exact Name of the Derivatives Clearing Organization (as set forth in

    its charter, if an Applicant, or as set forth in its most recent order

    of registration, if registered with the Commission)

    [square] Check here and complete sections 1 and 3 below, if the

    organization is an Applicant.

    [square] Check here and complete sections 2 and 3 below, if the

    organization currently is registered with the Commission as a

    derivatives clearing organization.

    1. The derivatives clearing organization named above hereby elects

    to become subject to the provisions of subpart C of part 39 of the

    Commission's regulations in the event that the Commission approves its

    application for registration as a derivatives clearing organization.

    The derivatives clearing organization and the undersigned each

    certify that, in the event that the Commission approves the derivatives

    clearing organization's application for registration and permits its

    election to become subject to subpart C of part 39 of the Commission's

    regulations:

    a. The derivatives clearing organization will be in compliance with

    such regulations as of the date set forth in the notice thereof

    provided by the Commission pursuant to 17 CFR 39.31(c)(2), except to

    the limited extent that the Commission has granted the derivatives

    clearing organization an extension of time to comply with: (1)

    specified provisions of 17 CFR 39.34, pursuant to 17 CFR 39.34(d) and/

    or (2) specified provisions of 17 CFR 39.35 and/or 17 CFR 39.39,

    pursuant to 17 CFR 39.39(f);

    b. The derivatives clearing organization will be in compliance with

    all provisions of 17 CFR 39.34, 39.35 and/or 39.39 for which the

    Commission, pursuant to 17 CFR 39.34(d) and/or 17 CFR 39.39(f), has

    granted an extension of time to comply in accordance with the terms of

    such extensions; and

    c. The derivatives clearing organization will remain in compliance

    with the provisions contained in subpart C of part 39 of the

    Commission's regulations until this election is rescinded pursuant to

    17 CFR 39.31(e).

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

    Name of Derivatives Clearing Organization

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

    Manual Signature of Duly Authorized Person

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

    Print Name and Title of Signatory

    2. The derivatives clearing organization named above hereby elects

    to become subject to the provisions of subpart C of part 39 of the

    Commission's regulations as of:

    -------------------- (``Effective Date'') [insert date, which must

    be at least 10 business days after the date this Subpart C Election

    Form is filed with the Commission].

    The derivatives clearing organization and the undersigned each

    certify that:

    a. As of the Effective Date set forth above, the derivatives

    clearing organization shall be in compliance with subpart C of part 39

    of the Commission's regulations, except to the limited extent that the

    Commission has granted the derivatives clearing organization an

    extension of time to comply with: (1) specified provisions of 17 CFR

    39.34, pursuant to 17 CFR 39.34(d) and/or (2) specified provisions of

    17 CFR 39.35 and/or 17 CFR 39.39, pursuant to 17 CFR 39.39(f);

    b. The derivatives clearing organization will be in compliance with

    all provisions of 17 CFR 39.34, 39.35 and/or 39.39 for which the

    Commission, pursuant to 17 CFR 39.34(d) and/or 17 CFR 39.39(f), has

    granted an extension of time to comply in accordance with the terms of

    such extensions; and

    c. The derivatives clearing organization will remain in compliance

    with provisions contained in subpart C of part 39 of the Commission's

    regulations until this election is rescinded pursuant to 17 CFR

    39.31(e).

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

    Name of Derivatives Clearing Organization

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

    Manual Signature of Duly Authorized Person

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

    Print Name and Title of Signatory

    3. The derivatives clearing organization named above has duly

    caused this Subpart C Election Form (which includes, as an integral

    part thereof, the Election and Certifications and all Disclosures and

    Exhibits) to be signed on its behalf by its duly authorized

    representative as of the ------ day of ----------, 20----. The

    [[Page 72524]]

    derivatives clearing organization and the undersigned each represent

    hereby that, to the best of their knowledge, all information contained

    in this Subpart C Election Form is true, current and complete in all

    material respects. It is understood that all required items including,

    without limitation, the Election and Certifications and Disclosures and

    Exhibits, are considered integral parts of this Subpart C Election

    Form.

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

    Name of Derivatives Clearing Organization

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

    Manual Signature of Duly Authorized Person

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

    Print Name and Title of Signatory

    COMMODITY FUTURES TRADING COMMISSION

    PART 39, SUBPART C ELECTION FORM

    DISCLOSURES AND EXHIBITS

    Each derivatives clearing organization that requests an election

    to become subject to the provisions set forth in subpart C of part

    39 of the Commission's regulations shall provide the Disclosures and

    Exhibits set forth below:

    DISCLOSURES:

    The derivatives clearing organization shall:

    1. Publish on its Web site in a readily identifiable location

    the derivatives clearing organization's responses to the Disclosure

    Framework for Financial Market Infrastructures (``Disclosure

    Framework''), published by the Committee on Payment and Settlement

    Systems (``CPSS'') and the Board of International Organization of

    Securities Commissions (``IOSCO'') that are required to be completed

    pursuant to 17 CFR 39.37. The derivatives clearing organization's

    responses must be completed in accordance with section 2.0 and Annex

    A of the Disclosure Framework and must fully explain how the

    derivatives clearing organization observes the Principles for

    Financial Market Infrastructures (``PFMIs'') published by CPSS and

    IOSCO.

    Provide the URL to the specific page on the derivatives clearing

    organization's Web site where its responses to the Disclosure

    Framework may be found:

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

    2. In the event that CPSS and IOSCO publish final criteria for

    the disclosure by a Financial Market Infrastructure (``FMI'') of

    quantitative information to enable stakeholders to evaluate FMIs and

    to make cross comparisons referenced in section 2.5 of the

    Disclosure Framework (``Quantitative Information Disclosure''),

    publish such Quantitative Information Disclosure in a readily

    identifiable location on the derivatives clearing organization's Web

    site.

    If applicable, provide the URL to the specific page on the

    derivatives clearing organization's Web site where its Quantitative

    Information Disclosure may be found:

    EXHIBITS:

    EXHIBIT INSTRUCTIONS:

    1. The derivatives clearing organization must include a Table of

    Contents listing each Exhibit required by this Subpart C Election

    Form.

    2. If the derivatives clearing organization is an Applicant, in

    its Form DCO, the derivatives clearing organization may summarize

    such information and provide a cross-reference to the Exhibit in

    this Subpart C Election Form that contains the required information.

    The derivatives clearing organization shall provide the

    following Exhibits to this Subpart C Election Form:

    EXHIBIT A--COMPLIANCE WITH SUBPART C

    Attach, as Exhibit A, a regulatory compliance chart that

    separately sets forth for Sec. Sec. 39.32-39.39 of the Commission's

    regulations, citations to the relevant rules, policies, and

    procedures of the derivatives clearing organization that address

    each such regulation and a summary of the manner in which the

    derivatives clearing organization will comply with each regulation.

    All citations and compliance summaries shall be separated by

    individual regulation and shall be clearly labeled with the

    corresponding regulation.

    EXHBIT B--GOVERNANCE

    Attach, as Exhibit B, documents that demonstrate compliance with

    the governance requirements set forth in Sec. 39.32 of the

    Commission's regulations.

    EXHIBIT C--FINANCIAL RESOURCES

    Attach, as Exhibit C, documents that demonstrate compliance with

    the financial resource requirements set forth in Sec. 39.33 of the

    Commission's regulations.

    EXHIBIT D--SYSTEM SAFEGUARDS

    Attach, as Exhibit D, documents that demonstrate compliance with

    the system safeguard requirements set forth in Sec. 39.34 of the

    Commission's regulations.

    EXHIBIT E--DEFAULT RULES AND PROCEDURES FOR UNCOVERED LOSSES OR

    SHORTFALLS

    Attach, as Exhibit E, documents that demonstrate compliance with

    the requirements for default rules and procedures for uncovered

    losses or shortfalls set forth in Sec. 39.35 of the Commission's

    regulations.

    EXHIBIT F--RISK MANAGEMENT

    Attach, as Exhibit F, documents that demonstrate compliance with

    the risk management requirements set forth in Sec. 39.36 of the

    Commission's regulations.

    EXHIBIT G--RECOVERY AND WIND-DOWN

    Attach, as Exhibit G, documents that demonstrate compliance with

    the recovery and wind-down requirements set forth in Sec. 39.39 of

    the Commission's regulations.

    PART 140--ORGANIZATION, FUNCTIONS AND PROCEDURES OF THE COMMISSION

    0

    7. The authority citation for part 140 continues to read as follows:

    Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and

    16(b).

    0

    8. Amend Sec. 140.94 to add new paragraphs (c)(12) and (c)(13) to read

    as follows:

    Sec. 140.94 Delegation of authority to the Director of the Division

    of Swap Dealer and Intermediary Oversight and the Director of the

    Division of Clearing and Risk.

    * * * * *

    (c) * * *

    (12) All functions reserved to the Commission in Sec. 39.31 of

    this chapter; and

    (13) The authority to approve the requests described in Sec. Sec.

    39.34(d) and 39.39(f) of this chapter.

    * * * * *

    PART 190--BANKRUPTCY

    0

    9. The authority citation for part 190 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24,

    and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise

    noted.

    0

    10. In Sec. 190.09, revise paragraph (b) to read as follows:

    Sec. 190.09 Member property.

    * * * * *

    (b) Scope of member property. Member property shall include all

    money, securities and property received, acquired, or held by a

    clearing organization to margin, guarantee or secure, on behalf of a

    clearing member, the proprietary account, as defined in Sec. 1.3 of

    this chapter, any account not belonging to a foreign futures or foreign

    options customer pursuant to the proviso in Sec. 30.1(c) of this

    chapter, and any Cleared Swaps Proprietary Account, as defined in Sec.

    22.1 of this chapter: Provided, however, that any guaranty deposit or

    similar payment or deposit made by such member and any capital stock,

    or membership of such member in the clearing organization shall also be

    included in member property after payment in full, in each case in

    accordance with the by-laws or rules of the clearing organization, of

    that portion of:

    (1) The net equity claim of the member based on its customer

    account; and

    (2) Any obligations due to the clearing organization which may be

    paid therefrom, including any obligations due from the clearing

    organization to the customers of other members.

    [[Page 72525]]

    Issued in Washington, DC, on November 15, 2013, by the

    Commission.

    Melissa D. Jurgens,

    Secretary of the Commission.

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendices to Derivatives Clearing Organizations and International

    Standards--Commission Voting Summary and Statement of Chairman

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton,

    O'Malia, and Wetjen voted in the affirmative; no Commissioner voted

    in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final rule to complete the process of bringing

    clearinghouse risk management rules in line with international

    standards.

    In the fall of 2011, the Commission adopted a comprehensive set

    of rules for the risk management of clearinghouses. These final

    rules were consistent with international standards, as evidenced by

    the Principles for Financial Market Infrastructures (PFMIs)

    consultative document that had been published by the Committee on

    Payment and Settlement Systems and the International Organization of

    Securities Commissions (CPSS-IOSCO).

    In April of 2012, CPSS-IOSCO issued final principles. Based upon

    these final principles, it was appropriate to augment our rules in

    certain areas to meet those standards, particularly relating to

    systemically important clearinghouses.

    These final rules will implement the remaining items from the

    PFMIs in our clearinghouse rules. They will enable clearinghouses

    designated by the Financial Stability Oversight Council as

    systemically important (SIDCOs) to be qualifying central

    counterparties for the purposes of international bank capital

    standards. This permits banks and bank affiliates that are members

    (or customers of members) of the SIDCOs to benefit from favorable

    capital treatment for their exposures to these SIDCOs. The final

    rules also implement an opt-in mechanism to permit other

    clearinghouses to elect to be held to these additional standards,

    and thus benefit from the same capital treatment.

    [FR Doc. 2013-27849 Filed 11-29-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 2, 2013



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