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

[email protected]; Robert B. Wasserman, Chief Counsel, DCR, at

202-418-5092 or [email protected]; M. Laura Astrada, Associate Chief

Counsel, DCR, at 202-418-7622 or [email protected]; Peter A. Kals,

Special Counsel, DCR, at 202-418-5466 or [email protected]; Jocelyn

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

[email protected]; or Tracey Wingate, Special Counsel, DCR, at 202-

418-5319 or [email protected], 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/idc/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\

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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

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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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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.

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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.

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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\

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

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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.

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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.

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\42\ MGEX at 4.

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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.

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\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\

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\45\ LCH at 3.

\46\ MGEX at 2-3.

\47\ MGEX at 3.

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

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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.

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\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.

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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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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

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

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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.

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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.

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\83\ See 78 FR 50268-50269.

\84\ See discussion of existing standards for SIDCOs supra

Section I.C.

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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'').

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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.

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\91\ 78 FR 50298.

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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.

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\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.

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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.

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\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)).

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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.

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\103\ MGEX at 8-9.

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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.

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\104\ 78 FR 50272.

\105\ MGEX at 5.

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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.

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\106\ 78 FR 50268-69.

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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).

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\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.

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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.

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\110\ 78 FR 50269-50270.

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

Rescission).

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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.

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\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.

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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.

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\114\ Id.

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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.

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\115\ ISDA at 3-4.

\116\ 17 CFR 39.3(e).

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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.

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\117\ FIA at 5.

\118\ 78 FR 50272.

\119\ FIA at 4.

\120\ FIA at 4-5.

\121\ 78 FR 50271-72.

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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.

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\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.

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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\

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\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.

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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\

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\125\ See supra Section I.D.

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

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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\

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\127\ The provisions concerning transparency describe which

information, including the identities of board members, should be

disclosed to the public and/or the Commission.

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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\

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

become subject to the provisions of Subpart C)).

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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.

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\129\ See SIDCO Final Rule 78 FR 49666.

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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\

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\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.

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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.

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\132\ See PFMIs, E.N. 3.7.1.

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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\

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\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.

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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\

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\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\

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\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.

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\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.

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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\

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\139\ European Commission at 2.

\140\ Id.

\141\ Id.

\142\ Id.

\143\ European Commission at 2-3.

\144\ European Commission at 3.

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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\

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\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.

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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.

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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.

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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.

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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.

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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.

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\172\ Id.

\173\ ISDA at 4-5.

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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\

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\174\ MGEX at 7.

\175\ Id.

\176\ Id.

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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.

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\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\

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\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.'').

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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\

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\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.''

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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\

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\182\ MGEX at 7.

\183\ Id.

\184\ Id.

\185\ Id.

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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:

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\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).

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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\

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\188\ The Commission has delegated authority to approve such

requests. See Section II.O. (discussion of regulation 140.94) infra.

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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\

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\189\ See new paragraph (f) of regulation 39.39 and Section

II.K., infra (discussing regulation 39.39).

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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\

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\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.

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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.

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\192\ See discussion of Principles 4 and 6 supra Section I.E.1.

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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.

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\193\ MGEX at 8.

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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\

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\194\ European Commission at 3.

\195\ Id.

\196\ Id.

\197\ European Commission at 3-4.

\198\ European Commission at 4.

\199\ Id.

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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.

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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.

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\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.

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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\

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\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).

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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.

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\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.

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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.

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\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.

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\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\

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\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.

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\225\ 78 FR 50282.

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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\

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\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).

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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.

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\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.

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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.

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\231\ MGEX at 10.

\232\ MGEX at 9-10.

\233\ Id.

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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.

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\236\ See new paragraph (d) of regulation 39.39 and Section

II.G. supra (discussing regulation 39.35).

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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.

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\237\ See SIDCO Final Rule.

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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.

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\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).

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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.

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\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.

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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.

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\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).

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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.

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\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).

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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.

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\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).

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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.

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\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.

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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.

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\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.

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\254\ See 35 U.S.C. 3501(2) and (3).

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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:

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\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:

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\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.

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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\

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\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\

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\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.

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\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).

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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.

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\326\ See Section 802(a)(4) of the Dodd-Frank Act (Congressional

findings).

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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