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2010-17606

  • FR Doc 2010-17606[Federal Register: July 22, 2010 (Volume 75, Number 140)]

    [Proposed Rules]

    [Page 42633-42639]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr22jy10-18]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 38, 39, and 40

    RIN 3038-AC91

    Business Continuity and Disaster Recovery

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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

    ``Commission'') is proposing a rule that would establish standards for

    recovery and resumption of trading and clearing operations by

    designated contract markets (``DCMs'') and registered derivatives

    clearing organizations (``DCOs'') that the Commission determines to be

    critical financial markets or core clearing and settlement

    organizations in the event of a wide-scale disruption affecting such

    entities' trading or clearing operations. These proposed standards

    would require such entities to maintain business continuity and

    disaster recovery resources sufficient to meet a same-day recovery time

    objective for trading and clearing, and maintain geographic dispersal

    of infrastructure and personnel sufficient to enable achievement of a

    same-day recovery time objective, in the event of a wide-scale

    disruption. The proposed amendments also revise application guidance

    and acceptable practices under the Core Principles for DCMs relating to

    business continuity and disaster recovery matters that would harmonize

    acceptable practices for DCMs and DCOs.

    DATES: Comments must be received on or before August 23, 2010.

    ADDRESSES: Comments should be sent to David Stawick, Secretary,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581. Comments may be submitted via e-mail

    at BCDR@cftc.gov. ``Business Continuity and Disaster Recovery'' must be

    in the subject field of responses submitted via e-mail, and clearly

    indicated on written submissions. Comments may also be submitted at

    http://www.regulations.gov. All comments must be submitted in English,

    or if not, accompanied by an English translation.

    FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate

    Director, Division of Clearing and Intermediary Oversight, 202-418-

    5092, rwasserman@cftc.gov; David Taylor, Special Counsel, Division of

    Market Oversight, 202-418-5488, dtaylor@cftc.gov; Jocelyn Partridge,

    Special Counsel, Division of Clearing and Intermediary Oversight, 202-

    418-5926, jpartridge@cftc.gov; or Cody J. Alvarez, Attorney Advisor,

    Division of Market Oversight, 202-418-5404, calvarez@cftc.gov;

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. Introduction

    While the experience of the Commission is that DCMs and DCOs

    registered with it maintain adequate business continuity and disaster

    recovery (``BC-DR'') programs, the Commission believes that additional

    regulatory steps should be taken to further improve the resiliency and

    recovery capabilities of registered entities, particularly those

    organizations which meet the financial sector's accepted definitions of

    ``critical financial markets'' and ``core clearing and settlement

    organizations.'' \1\ These accepted definitions come from the

    Interagency Paper on Sound Practices to Strengthen the Resilience of

    the U.S. Financial System, commonly known as the ``White Paper,'' that

    was issued by the Board of Governors of the Federal Reserve System

    (``Fed''), the Department of the Treasury (``Treasury''), and the

    Securities and Exchange Commission (``SEC'') in 2003.\2\ Although the

    Commission did not participate in the issuance of the White Paper, the

    Commission has determined that it would be appropriate to apply

    standards analogous to those set forth in the White Paper to DCMs and

    DCOs.\3\

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    \1\ See infra note 2.

    \2\ 68 FR 17809 (April 11, 2003). The White Paper considers new

    risks present in the post-September 11 environment, addresses steps

    needed to strengthen the overall resilience of the U.S. financial

    system in the event of a wide-scale disruption, and is the principal

    source of common business continuity and disaster recovery standards

    applicable across the U.S. financial sector.

    \3\ Because there are no Derivatives Transaction Facilities

    (``DTEFs'') currently registered with the Commission, the Commission

    has chosen to refrain from similarly modifying any regulations or

    guidance applicable to DTEFs at this time.

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    B. Standards Established by Regulators of Comparable Financial Entities

    The White Paper explained that critical financial markets are those

    markets that provide the means for financial institutions to adjust

    their cash and securities positions and those of their customers in

    order to manage liquidity, market, and other risks to their

    organizations, and provide support for the provision of a wide range of

    financial services to U.S. businesses and consumers. The White Paper

    defined ``critical financial markets'' as ``markets for [(1)] federal

    funds, foreign exchange, and commercial paper; [(2)] U.S. government

    and agency securities; and [(3)] corporate debt and equity

    securities.'' \4\ ``Core clearing and settlement organizations'' are

    those that (a) provide clearing and settlement services for critical

    financial markets, or (b) act as large-value payment systems operators

    and present systemic risk should they be unable to perform.\5\ This

    proposal would apply these White Paper standards to futures markets

    related to the aforementioned instruments and extend it to futures

    markets for essential physical commodities.

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    \4\ See 68 FR at 17811.

    \5\ See id. at 17811.

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    The Commission believes that some of the registered entities

    regulated by the Commission may be ``critical financial markets'' or

    ``core clearing and settlement organizations.'' They provide the means

    for financial institutions to adjust their financial positions and

    those of their customers in order to manage liquidity, market, and

    other risks, and provide support for provision of a wide range of

    financial services to U.S. businesses and consumers. Their products

    include futures on U.S. government and agency securities, equity

    indexes, foreign exchange and physical commodities that comprise

    critical components of the world financial system. For these reasons,

    it might present unacceptable risks to the U.S. financial system if

    these entities were to become inoperative and unavailable for an

    extended period of time for any reason up to and including a wide-scale

    disruption. The ability of critical financial markets and core clearing

    and settlement organizations to recover and resume trading and clearing

    promptly in the event of a wide-scale

    [[Page 42634]]

    disruption is important to the U.S. economy.

    The White Paper calls for core clearing and settlement

    organizations to have the capacity to meet a same-day recovery time

    objective (``RTO''); that is, the capacity to recover and resume

    clearing and settlement activities within the business day on which the

    disruption occurs.\6\ Further, the White Paper recognizes that the

    ability to meet a same-day RTO during a wide-scale disruption requires

    an appropriate level of geographic diversity between primary and backup

    sites, with the latter as far away as necessary to avoid being subject

    to the same set of risks as the primary site. Backup sites should not

    rely on the same transportation, telecommunications, power, water, or

    other critical infrastructure components as the primary location. In

    addition, operation of the backup site should not be impaired by a

    wide-scale evacuation at, or the inaccessibility of staff that service,

    the primary site. Therefore, the White Paper calls for core clearing

    and settlement organizations to maintain backup facilities that are a

    significant distance away from their primary facilities, a distance

    sufficient to address the risk that a wide-scale disruption could make

    the organization's labor pool across the entire metropolitan or other

    geographic area of the primary site (including adjacent communities

    economically integrated with it) unavailable to support achievement of

    the organization's RTO.\7\

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    \6\ The White Paper also mentions, as an aspirational ``overall

    goal,'' an RTO of two hours for core clearing and settlement

    organizations.

    \7\ See generally, White Paper, 68 FR at 17813.

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    While the White Paper defines critical financial markets, it

    establishes an RTO only for core clearing and settlement organizations.

    The Policy Statement: Business Continuity Planning for Trading Markets

    issued by the Securities and Exchange Commission (``SEC Policy

    Statement'') establishes an RTO and a geographic dispersal of disaster

    recovery resources requirement for U.S. securities markets.\8\ The SEC

    Policy Statement recognizes that U.S. securities markets collectively

    constitute critical financial markets. It establishes a next-day,

    rather than same-day, RTO for securities markets because securities

    trading is ``relatively fungible across markets,'' since most

    securities are traded on more than one market.\9\ As a result, if

    trading on one securities market were incapacitated, that trading could

    be shifted to one or more of the other securities markets. By contrast,

    trading of futures is generally not fungible across markets. The

    geographic dispersal requirement for securities markets set in the SEC

    Policy Statement is the same as that set forth in the White Paper for

    core clearing and settlement organizations.

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    \8\ See 68 FR 56656 (October 1, 2003) (Release No. 34-48545;

    File No. S7-17-03).

    \9\ We understand that an exception to this general observation

    is the listing and trading of certain index option products that may

    be subject to exclusive licensing arrangements.

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    C. Applicable Provisions of the Commodity Exchange Act

    The Commodity Exchange Act (``CEA'' or ``Act'') provides for the

    protection of the ``public interest'' through a system of effective

    self-regulation of trading facilities, clearing systems and markets

    participants under Commission oversight. As specifically set forth in

    the Act, ensuring the integrity of the futures markets and the

    avoidance of systemic risk are critical functions of the

    Commission.\10\ Accordingly, the Commission believes that this proposal

    relating to BC-DR standards is essential for the proper functioning of

    the futures markets and the U.S. financial system.

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    \10\ Section 3(b), 7 U.S.C. 5(c). Congress gave the Commission

    broad authority in Section 8a(5) of the Act, 7 U.S.C. 12a(5), to

    make and promulgate rules, such as those contained in this Proposal,

    that are reasonably necessary to prevent disruptions to market

    integrity, ensure the financial integrity of futures and options

    transactions and promote the avoidance of systemic risk.

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    The BC-DR requirements currently applicable to DCMs are set forth

    in Core Principle 6, Emergency Authority (``Core Principle 6''),\11\

    Core Principle 9, Execution of Transactions (``Core Principle 9''),\12\

    and Part 38 of the Commission's Regulations. The BC-DR requirements

    currently applicable to DCOs are set forth in Core Principle I, System

    Safeguards (``Core Principle I'') \13\ and Part 39 of the Commission's

    Regulations. Pursuant to these provisions, DCMs and DCOs are required

    to have appropriate emergency authority, emergency procedures, backup

    facilities, and disaster recovery plans. Such entities must also ensure

    the proper functioning, adequate capacity, and security of their

    automated trading and clearing systems, and conduct adequate testing

    and review of those systems.

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    \11\ 7 U.S.C. 7(d)(6).

    \12\ 7 U.S.C. 7(d)(9).

    \13\ 7 U.S.C. 7a-1(c)(2)(I).

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    With respect to DCMs, Core Principle 6, Emergency Authority,

    requires DCMs to adopt rules providing for the exercise of emergency

    authority. The Application Guidance set forth in Appendix B to Part 38

    of the Commission's Regulations relating to Core Principle 6 notes that

    this authority should allow the DCM to ``intervene as necessary to

    maintain markets with fair and orderly trading as well as procedures

    for carrying out the intervention.'' \14\ Core Principle 9, Execution

    of Transactions, also requires DCMs to ``provide a competitive, open,

    and efficient market and mechanism for executing transactions.''

    Consistent with Core Principle 9, DCMs are required to periodically

    test and review automated systems to ensure proper system functioning,

    adequate capacity, and security.\15\

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    \14\ See Application Guidance set forth in Appendix B to Part 38

    of the Commission's Regulations relating to Core Principle 6.

    \15\ See Application Guidance set forth in Appendix B to Part 38

    of the Commission's Regulations relating to Core Principle 9.

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    With respect to DCOs, Core Principle I, System Safeguards, requires

    DCOs to maintain ``a program of oversight and risk analysis to ensure

    that the automated systems of the [DCO] function properly and have

    adequate capacity and security.'' It also requires DCOs to ``maintain

    emergency procedures and a plan for disaster recovery, and to

    periodically test backup facilities sufficient to ensure daily

    processing, clearing, and settlement of transactions.'' \16\

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    \16\ See Section 5b(c)(2)(I) of the Act, 7 U.S.C. 7a-1(c)(2)(I).

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    In the near-decade that has passed since the Act's Core Principles

    were established by the Commodity Futures Modernization Act of 2000

    (``CFMA''),\17\ historical events have resulted in substantial and

    important changes in BC-DR standards for financial sector

    organizations. The events of September 11, 2001, the Northeast regional

    power outages of 2003, the economic events of 2008-2009, and the

    current rise in cyber threats have resulted in important lessons

    learned, and in changed thinking about how normal financial institution

    operations could be disrupted, and the preparedness principles that

    should be followed to ensure the financial sector's ability to recover

    and resume operations promptly after a disruption. In light of these

    developments, and of the vital importance of critical financial markets

    and core clearing and settlement organizations to the national economy,

    the Commission believes that the additional, new standards proposed for

    those DCMs and DCOs that the Commission may determine to be critical

    financial markets or core clearing and settlement organizations are

    essential to ensure the capacity of such entities to recover and resume

    operations promptly in the event they are affected by a wide-scale

    disruption.

    [[Page 42635]]

    The Commission also believes that, to better ensure the resiliency of

    futures and options trading and the ability of the industry to respond

    to current threats to its operations, the application guidance and

    acceptable practices language concerning BC-DR standards applicable to

    all DCMs should be updated and harmonized with the BC-DR standards

    applicable to DCOs. The proposed amendments to the existing BC-DR

    standards for all DCMs also seek to better explain those standards

    through the use of current terms of art with respect to BC-DR matters.

    The Commission believes the approach to BC-DR standards taken by the

    White Paper and the SEC Policy Statement, particularly with respect to

    the recovery time objective and geographic dispersal requirements

    needed to provide resiliency in the event of a wide-scale disruption,

    is appropriate for the Commission to take in adopting requirements

    applicable to registered entities that are critical financial markets

    or core clearing and settlement organizations.

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    \17\ See Public Law 106-554 (December 21, 2000).

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    The Commission believes that certain DCMs and DCOs may be critical

    financial markets or core clearing and settlement organizations. Some

    DCMs and DCOs provide the means for financial institutions to adjust

    their financial positions and those of their customers in order to

    manage liquidity, market, and other risks, and provide support for

    provision of a wide range of financial services to U.S. businesses and

    consumers. The available products include futures contracts and related

    options on U.S. government and agency securities, equity indexes,

    foreign exchange and physical commodities that comprise critical

    components of the world financial system. For these reasons, it might

    present unacceptable risks to the U.S. financial system if such DCMs or

    DCOs were to become inoperative and unavailable for an extended period

    of time for any reason up to and including a wide-scale disruption, and

    their ability to recover and resume trading and clearing promptly in

    the event of a wide-scale disruption may be critically important to the

    U.S. economy. Mitigating systemic risk through the application of

    consistent, same-day RTOs for clearing and settlement activities across

    the nation's critical financial markets in the event of a wide-scale

    disruption may be important to financial sector resiliency. Sufficient

    geographic dispersal of BC-DR resources, including both technology and

    personnel, is an essential means of ensuring that critical financial

    markets and core clearing and settlement organizations have the ability

    to recover and resume trading and clearing within a same-day RTO.

    II. Proposed New Regulation 40.9

    The Commission proposes amendments to Part 40 of its Regulations as

    follows: (1) The addition of new definitions in Regulation 40.1; (2)

    adoption of new Regulation 40.9 setting forth same-day RTO and

    geographic dispersal requirements for critical financial markets and

    core clearing and settlement organizations; and (3) the adoption of new

    Appendix E providing guidance regarding the Commission's determination

    of critical financial markets and core clearing and settlement

    organizations. The Commission also proposes to amend the application

    guidance provided in Appendix B to Part 38 and Appendix A to Part 39 of

    the Commission's regulations to incorporate the new Part 40

    requirements.

    Five new definitions are proposed to be added to Regulation 40.1.

    The terms defined include ``critical financial market,'' ``core

    clearing and settlement organization,'' ``relevant area,'' ``recovery

    time objective,'' and ``wide-scale disruption.''

    Proposed Regulation 40.1(j) would define ``critical financial

    market'' to mean a DCM that provides the means for financial

    institutions to adjust their financial positions and those of their

    customers in order to manage liquidity, market, and other risks to

    their organizations, and provides support for the provision of a wide

    range of financial services to businesses and consumers in the United

    States, particularly including markets whose trading impacts federal

    funds, foreign exchange, commercial paper, U.S. government and agency

    securities, corporate debt, equity securities, or physical commodities

    of broad, major importance to the national or international economy.

    Proposed Regulation 40.1(k) would define ``core clearing and

    settlement organization'' as a DCO that provides clearing and

    settlement services integral to a critical financial market (or to

    multiple DCMs that are critical financial markets on a collective

    rather than individual basis).

    Proposed Regulation 40.1(l) would define ``relevant area,'' for the

    purposes of Part 40, as the metropolitan or other geographic area

    within which a critical financial market or core clearing and

    settlement organization has physical infrastructure or personnel

    necessary for it to, as appropriate, (a) conduct electronic trading,

    (b) disseminate market data and provide price reporting, (c) conduct

    electronic surveillance and maintain access to audit trail information,

    or (d) conduct activities necessary to the clearance and settlement of

    existing and new contracts, including communities economically

    integrated with, adjacent to, or within normal commuting distance of

    that metropolitan or other geographic area.

    Proposed Regulation 40.1(m) would define ``recovery time

    objective'' as the time period within which an entity should be able to

    achieve recovery and resumption of, as appropriate, (a) electronic

    trading, (b) market data dissemination and price reporting, (c) access

    to audit trail information and electronic surveillance tools, or (d)

    clearing and settlement of existing and new contracts, after those

    capabilities become temporarily inoperable for any reason up to or

    including a wide-scale disruption.

    Proposed Regulation 40.1(n) would define ``wide-scale disruption''

    to mean an event that causes a severe disruption or destruction of

    transportation, telecommunications, power, water, or other critical

    infrastructure components in a relevant area, or an event that results

    in the evacuation or unavailability of the population in a relevant

    area.

    Proposed Regulation 40.9(a) would require any registered entity

    that the Commission determines is a critical financial market or core

    clearing and settlement organization to maintain a disaster recovery

    plan and BC-DR resources, including infrastructure and personnel,

    sufficient to enable it to achieve a same-day RTO in the event of a

    wide-scale disruption affecting the relevant area of any of its normal-

    use trading or clearing operations.

    Proposed Regulation 40.9(b) would provide that a same-day RTO is

    one calling for recovery and resumption of trading and clearing within

    the business day on which the disruption occurs.\18\

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    \18\ The same-day RTO is not intended to mandate the specific

    response of a particular entity to a particular disaster. Rather,

    the objective is intended to establish the recovery goal that the

    BC-DR plans of certain registrants must be designed to meet and, in

    turn, the resources that such registrants are expected to allocate

    to ensure that they are capable of achieving the objective. The

    Commission recognizes that a wide-scale disruption could occur near

    the close of a business day, and would interpret this requirement in

    a practical manner in such an event.

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    Proposed Regulation 40.9(c) would set forth the minimal

    requirements for geographic dispersal of infrastructure and personnel

    needed to meet a same-day RTO. It would provide that infrastructure

    sufficient to enable a critical financial market or core clearing

    [[Page 42636]]

    and settlement organization to meet a same-day recovery time objective

    after interruption of normal trading and clearing by a wide-scale

    disruption must be located outside the relevant area of the

    infrastructure the entity normally relies upon to (a) conduct

    electronic trading, (b) disseminate market data and provide price

    reporting, (c) conduct electronic surveillance and maintain access to

    audit trail information, or (d) conduct activities necessary to the

    clearance and settlement of existing and new contracts, and may not

    rely on the same critical transportation, telecommunications, power,

    water, or other critical infrastructure components as the

    infrastructure the entity normally relies upon for such activities. It

    would also provide that personnel sufficient to enable the critical

    financial market or core clearing and settlement organization to meet a

    same-day recovery time objective, after interruption of normal trading

    or clearing by a wide-scale disruption affecting the relevant area in

    which the personnel the entity normally relies upon to engage in such

    activities are located, must live and work outside that relevant area,

    so that they will not be made unavailable by a wide-scale evacuation or

    unavailability of personnel who live or work in that relevant area.

    Proposed Regulation 40.9(d) would require every registered entity

    that the Commission determines is a critical financial market or core

    clearing and settlement organization to conduct regular, periodic tests

    of its business continuity and disaster recovery plans and resources

    and its capacity to achieve a same-day RTO in the event of a wide-scale

    disruption.

    New Appendix E to Part 40 would provide guidance on the process the

    Commission will follow, and the factors it will consider, to determine

    that a registered entity is a critical financial market or a core

    clearing and settlement organization. Appendix E would also describe

    the notice and opportunity for comment that the Commission would

    provide in this connection.

    In connection with its proposal to adopt new Regulation 40.9, the

    Commission has also proposed conforming amendments to certain

    application guidance provisions of Commission Regulations relating to

    various Core Principles. Specifically, Appendix B to Part 38 and

    Appendix A to Part 39 are proposed to be amended to revise acceptable

    practices provisions under Core Principle 6 and Core Principle 9 in

    Part 38 and application guidance under Core Principle I in Part 39, to

    note that Proposed Regulation 40.9 would govern the obligations of

    registered entities that the Commission determines to be critical

    financial markets or core clearing and settlement organizations, with

    respect to maintenance and geographic dispersal of disaster recovery

    resources sufficient to meet a same-day RTO in the event of a wide-

    scale disruption. These proposed revisions would further note that,

    therefore, Proposed Regulation 40.9 itself would establish the

    application guidance and acceptable practices for core principle

    compliance relating to those matters set forth in Regulation 40.9.

    As previously discussed, the Commission in this proposal would

    amend the acceptable practices provisions for Core Principle 9 set

    forth in Appendix B to Part 38, to harmonize the language of those

    provisions regarding BC-DR matters with the language of the parallel

    application guidance provisions for Core Principle I in Part 39.

    Moreover, the proposed revisions would also better explain the BC-DR

    standards currently applicable to DCMs. DCMs that have not been

    determined to be critical financial markets would be subject to the

    generally applicable BC-DR requirements set forth in these revisions,

    but would not be required to comply with the additional obligations

    imposed on critical markets by new Regulation 40.9. The Commission is

    aware that proposed legislation pending before Congress would amend the

    Act,\19\ including certain portions that govern DCMs and DCOs.\20\ At

    the time the Commission approved this proposed rulemaking, that

    legislation contained provisions that would create a new Core Principle

    20, System Safeguards, explicitly setting forth BC-DR requirements for

    all DCMs. In the event that this pending legislation is enacted into

    law, the proposed application guidance and acceptable practices

    provisions relating to Core Principle 9 set forth below may be

    considered by the Commission in connection with creation of application

    guidance and acceptable practices provisions relating to Core Principle

    20.

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    \19\ 1 U.S.C. 1 et seq.

    \20\ Dodd-Frank Wall Street Reform and Consumer Protection Act,

    H.R. 4173, 111th Cong. (2010).

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    III. Proposed Effective Date

    The Commission requests comment on a reasonable date for the

    proposed amendments to become effective.

    IV. Solicitation of Comments

    The Commission requests comments on all aspects of the proposed

    rule amendments, including the question of what RTO (e.g., the proposed

    same-day RTO or the aspirational two-hour RTO also mentioned in the

    White Paper) is appropriate. As noted above, at the time that the

    Commission approved this proposal, legislation was pending before

    Congress that would amend the CEA. The Commission specifically requests

    comment on the effect, if any, the legislation would have on this

    proposal.

    V. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that Federal

    agencies, in proposing rules, consider the impact of those rules on

    small businesses.\21\ New requirements related to the proposed rule

    amendments would fall on DCMs and DCOs which the Commission may

    determine to be critical financial markets or core clearing and

    settlement organizations. The Commission has previously determined that

    DCMs and DCOs are not small entities for purposes of the RFA.\22\

    Accordingly, the Commission does not expect the rules proposed herein

    to have a significant economic impact on any small entities. Therefore,

    the Chairman, on behalf of the Commission, hereby certifies, pursuant

    to 5 U.S.C. 605(b), that the actions proposed to be taken herein will

    not have a significant economic impact on a substantial number of small

    entities.

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    \21\ 5 U.S.C. 601 et seq.

    \22\ See 47 FR 18618 at 18619 (April 30, 1982) with respect to

    DCMs, and 66 FR 45604 at 45609 (August 29, 2001) with respect to

    DCOs.

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    B. Paperwork Reduction Act

    These proposed rule amendments will not impose any new

    recordkeeping or information collection requirements, or other

    collections of information that require approval of the Office of

    Management and Budget under the Paperwork Reduction Act.\23\ All

    recordkeeping or information collection requirements relevant to the

    subject of this proposed rulemaking, or discussed herein, already exist

    under current law. Accordingly, the Paperwork Reduction Act does not

    apply. The Commission invites public comment on the accuracy of its

    estimate that no additional recordkeeping or information collection

    requirements or changes to existing collection requirements would

    result from the amendments proposed herein.

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    \23\ 44 U.S.C. 3501 et seq.

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    C. Cost-Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the

    costs and benefits of its actions before issuing a

    [[Page 42637]]

    new regulation or order under the Act.\24\ By its terms, Section 15(a)

    does not require the Commission to quantify the costs and benefits of a

    new rule or to determine whether the benefits of the adopted rule

    outweigh its costs. Rather, section 15(a) requires the Commission to

    ``consider the costs and benefits'' of a subject rule. Section 15(a)

    further specifies that the costs and benefits of proposed rules 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. In conducting its analysis, the Commission

    may, in its discretion, give greater weight to any one of the five

    enumerated areas of concern and may determine that, notwithstanding its

    costs, a particular rule is necessary or appropriate to protect the

    public interest or to effectuate any of the provisions or to accomplish

    any of the purposes of the Act.\25\

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    \24\ 7 U.S.C. 19(a).

    \25\ E.g., Fishermen's Dock Co-op., Inc. v. Brown, 75 F3d 164

    (4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336 (DC

    Cir. 1985) (agency has discretion to weigh factors in undertaking

    cost-benefit analyses).

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    As discussed above, the proposed rule amendments would require DCMs

    and DCOs that the Commission determines to be critical financial

    markets or core clearing and settlement organizations to (1) maintain

    business continuity and disaster recovery resources sufficient to meet

    a same-day RTO for trading and clearing, and (2) maintain geographic

    dispersal of infrastructure and personnel sufficient to enable

    achievement of a same-day RTO in the event of a wide-scale disruption.

    The Commission cannot fully quantify the costs that would be borne by

    such entities in complying with the proposed rule amendments, as the

    Commission has not yet determined which entities are critical financial

    markets or core clearing or settlement organizations. Moreover, the

    cost to comply with the proposed rule amendments would be likely to

    vary depending on the nature and location of infrastructure and

    personnel available to enable achievement of a same-day RTO that are

    presently maintained by each such entity.

    Notwithstanding the potential costs that could be incurred by DCMs

    or DCOs that the Commission determines to be critical financial markets

    or core clearing and settlement organizations in complying with the

    proposed rule amendments, the Commission believes the benefits of the

    proposed rule amendments are significant and important. The ability of

    critical financial markets and core clearing and settlement

    organizations to recover and resume trading and clearing promptly in

    the event of a wide-scale disruption is significant to the U.S.

    economy. Therefore, the proposed rule amendments may be crucially

    important to sound risk management practices for such markets, an area

    of concern that may deserve great weight in this connection. As such,

    they may be needed to protect market participants and ensure the

    continued efficiency, competitiveness, financial integrity, and price

    discovery function of such markets in the event of a wide-scale

    disruption. Accordingly, the Commission believes that the proposal is

    consistent with the Act and would serve to protect the public interest

    by promoting market integrity and the avoidance of systemic risk.

    After considering the costs and benefits noted above, the

    Commission has determined to issue the proposed rule amendments. The

    Commission invites public comment on its application of the cost-

    benefit provision. Commenters are also invited to submit any data that

    they may have quantifying the costs and benefits of the proposed rule

    amendments with their comment letter.

    VI. Text of Proposed Amendments

    List of Subjects

    17 CFR Part 38

    Commodity futures, Reporting and recordkeeping requirements.

    17 CFR Part 39

    Commodity futures, Consumer protection, Reporting and recordkeeping

    requirements.

    17 CFR Part 40

    Commodity futures, Reporting and recordkeeping requirements.

    In light of the foregoing, and pursuant to the authority in the

    Act, and in particular Sections 3, 5, 5c(a) and 8a(5) of the Act, the

    Commission hereby proposes to amend Parts 38, 39, and 40 of Title 17 of

    the Code of Federal Regulations as follows:

    PART 38--DESIGNATED CONTRACT MARKETS

    1. The authority citation for part 38 continues to read as follows:

    Authority: 7 U.S.C. 2, 5, 6, 6c, 7, 7a-2 and 12a, as amended by

    Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

    2. Amend Appendix B to Part 38 by revising paragraph (b) of Core

    Principle 6; and paragraph (a)(2) and paragraph (b) of Core Principle

    9, to read as follows:

    Appendix B to Part 38--Guidance on, and Acceptable Practices in,

    Compliance With Core Principles

    * * * * *

    Core Principle 6 of section 5(d) of the Act: EMERGENCY AUTHORITY

    * * *

    * * * * *

    (b) Acceptable practices. Commission Regulation 40.9 governs the

    obligations of designated contract markets that the Commission has

    determined to be critical financial markets with respect to

    maintenance and geographic dispersal of disaster recovery resources

    sufficient to meet a same-day recovery time objective in the event

    of a wide-scale disruption. Therefore, Regulation 40.9 itself

    establishes the guidance and acceptable practices for core principle

    compliance in that respect.

    * * * * *

    Core Principle 9 of section 5(d) of the Act: EXECUTION OF

    TRANSACTIONS * * *

    * * * * *

    (a) * * *

    (2) The board of trade shall:

    (i) Establish and maintain a program of risk analysis and

    oversight to identify and minimize sources of operational risk,

    through the development of appropriate controls and procedures;

    (ii) Establish and maintain a program of regular, periodic

    testing to ensure that all automated systems used by the board of

    trade function properly and have adequate security and capacity; and

    (iii) Establish and maintain emergency procedures, backup

    facilities, a disaster recovery plan, and regular, periodic testing

    to ensure timely recovery and resumption of order processing and

    trade matching, market data dissemination and price reporting,

    market and trade practice surveillance, and maintenance of a

    comprehensive and accurate audit trail.

    * * * * *

    (b) Acceptable practices. (1) Testing and review of automated

    systems should be conducted by qualified, independent professionals.

    Such qualified independent professionals may be independent

    contractors or employees of the board of trade, but should not be

    persons responsible for development or operation of the systems

    being tested. Pursuant to the provisions of Commission Regulations

    Sections 1.31 and 1.35, the board of trade must keep records of all

    such tests, and make all test results available to the Commission

    upon request.

    (2) In fulfilling its obligations set forth in the Application

    Guidance above with respect to its automated systems, the board of

    trade should follow the guidelines issued by the International

    Organization of Securities Commissions (``IOSCO'') in 1990 (the

    ``IOSCO Principles''), and adopted by the Commission on November 21,

    1990 (55 FR 48670), as supplemented and amended, and any similar

    guidelines issued by the Commission or its staff.

    [[Page 42638]]

    (3) Commission Regulation 40.9 governs the obligations of

    registered entities that the Commission has determined to be

    critical financial markets, with respect to maintenance and

    geographic dispersal of disaster recovery resources sufficient to

    meet a same-day recovery time objective in the event of a wide-scale

    disruption. Therefore, Regulation 40.9 itself establishes the

    guidance and acceptable practices for core principle compliance in

    that respect.

    * * * * *

    PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    3. The authority citation for part 39 continues to read as follows:

    Authority: 7 U.S.C. 7b as added by Appendix E of Pub. L. 106-

    554, 114 Stat. 2763A-365.

    4. Amend Appendix A to Part 39 by adding a new paragraph 3 after

    paragraph 2.b. of the guidance under Core Principle I, as follows:

    Appendix A to Part 39--Application Guidance and Compliance With Core

    Principles

    * * * * *

    Core Principle I: SYSTEM SAFEGUARDS * * *

    * * * * *

    2. * * *

    b. * * *

    3. Commission Regulation 40.9 governs the obligations of

    derivatives clearing organizations that the Commission determines to

    be core clearing and settlement organizations, with respect to

    maintenance and geographic dispersal of disaster recovery resources

    sufficient to meet a same-day recovery time objective in the event

    of a wide-scale disruption. Therefore, Regulation 40.9 itself

    establishes the guidance for core principle compliance in that

    respect.

    * * * * *

    PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES

    5. The authority citation for part 40 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as

    amended by Title XIII of the Food, Conservation and Energy Act of

    2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 2008).

    6. Amend Sec. 40.1 by adding paragraphs (j) through (n) to read as

    follows:

    Sec. 40.1 Definitions.

    * * * * *

    (j) Critical financial market means a designated contract market

    that provides the means for financial institutions to adjust their

    financial positions and those of their customers in order to manage

    liquidity, market, and other risks to their organizations, and provides

    support for the provision of a wide range of financial services to

    businesses and consumers in the United States, particularly including

    markets whose trading impacts federal funds, foreign exchange,

    commercial paper, U.S. government and agency securities, corporate

    debt, equity securities, or physical commodities of broad, major

    importance to the national and international economy. Guidance as to

    how the Commission will determine whether a registered entity is a

    critical financial market is set forth in Appendix E to Part 40.

    (k) Core clearing and settlement organization means a derivatives

    clearing organization that provides clearing and settlement services

    integral to a critical financial market (or to multiple designated

    contract markets that are critical financial markets on a collective

    rather than individual basis). Guidance as to how the Commission will

    determine whether a derivatives clearing organization is a core

    clearing and settlement organization is set forth in Appendix E to Part

    40.

    (l) Relevant area means the metropolitan or other geographic area

    within which a critical financial market or core clearing and

    settlement organization has physical infrastructure or personnel

    necessary for it to, as appropriate, conduct electronic trading,

    disseminate market data and provide price reporting, conduct electronic

    surveillance and maintain access to audit trail information, or conduct

    activities necessary to the clearance and settlement of existing and

    new contracts; including communities economically integrated with,

    adjacent to, or within normal commuting distance of that metropolitan

    or other geographic area.

    (m) Recovery time objective means the time period within which an

    entity should be able to achieve recovery and resumption of, as

    appropriate, electronic trading, market data dissemination and price

    reporting, access to audit trail information and electronic

    surveillance tools, or clearing and settlement of existing and new

    contracts, after those capabilities become temporarily inoperable for

    any reason up to or including a wide-scale disruption.

    (n) Wide-scale disruption means an event that causes a severe

    disruption or destruction of transportation, telecommunications, power,

    water, or other critical infrastructure components in a relevant area,

    or an event that results in an evacuation or unavailability of the

    population in a relevant area.

    7. Add Sec. 40.9 to read as follows:

    Sec. 40.9 Disaster recovery requirements for critical financial

    markets and core clearing and settlement organizations.

    (a) Each designated contract market or derivatives clearing

    organization that the Commission determines is a critical financial

    market or a core clearing and settlement organization must maintain a

    disaster recovery plan and business continuity and disaster recovery

    resources, including infrastructure and personnel, sufficient to enable

    it to achieve a same-day recovery time objective in the event that its

    normal trading or clearing and settlement capabilities become

    temporarily inoperable for any reason up to and including a wide-scale

    disruption.

    (b) A same-day recovery time objective is a recovery time objective

    within the same business day on which normal trading or clearing and

    settlement capabilities become temporarily inoperable for any reason up

    to and including a wide-scale disruption.

    (c) To ensure its ability to achieve a same-day recovery time

    objective in the event of a wide-scale disruption, each designated

    contract market or derivatives clearing organization that the

    Commission determines is a critical financial market or a core clearing

    and settlement organization must maintain a degree of geographic

    dispersal of both infrastructure and personnel such that:

    (1) Infrastructure sufficient to enable the entity to meet a same-

    day recovery time objective after interruption of normal trading and

    clearing by a wide-scale disruption is located outside the relevant

    area of the infrastructure the entity normally relies upon to conduct

    electronic trading, disseminate market data and provide price

    reporting, conduct electronic surveillance and maintain access to audit

    trail information, or conduct activities necessary to the clearance and

    settlement of existing and new contracts, and does not rely on the same

    critical transportation, telecommunications, power, water, or other

    critical infrastructure components the entity normally relies upon for

    such activities; and

    (2) Personnel sufficient to enable the entity to meet a same-day

    recovery time objective, after interruption of normal trading or

    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, live and work outside that relevant area.

    (d) Each registered entity that the Commission determines is a

    critical financial market or core clearing and settlement organization

    must conduct

    [[Page 42639]]

    regular, periodic tests of its business continuity and disaster

    recovery plans and resources and its capacity to achieve a same-day

    recovery time objective in the event of a wide-scale disruption.

    * * * * *

    8. Add Appendix E to Part 40 to read as follows:

    Appendix E to Part 40--Guidance on Critical Financial Market and Core

    Clearing and Settlement Organization Determination

    (a) Critical financial market determination. (1) The Commission

    may determine, in its discretion, whether a designated contract

    market is a critical financial market. In making such a

    determination, the Commission will evaluate each such entity on a

    case-by-case basis, giving consideration to whether the entity

    provides the means for financial institutions to adjust their

    financial positions and those of their customers in order to manage

    liquidity, market, and other risks to their organizations, and

    provides support for the provision of a wide range of financial

    services to businesses and consumers in the United States; or

    whether the entity conducts trading that impacts Federal funds,

    foreign exchange, commercial paper, U.S. government and agency

    securities, corporate debt, equity securities, or physical

    commodities of broad, major importance to the national and

    international economy. The Commission may also consider other

    relevant factors that it finds important.

    (2) The Commission will notify the designated contract market

    that it intends to undertake a determination with respect to whether

    it is a critical financial market. The entity may provide written

    data, views, and arguments relevant to the Commission's

    determination. Any such written data, views, and arguments shall be

    filed with the Secretary of the Commission, in the form and manner

    specified by the Commission, within 30 calendar days of receiving

    notice or within such other time specified by the Commission. After

    prompt consideration of all relevant information, the Commission

    will issue an order directly to the designated contract market

    explaining the Commission's determination of whether it is a

    critical financial market as defined by Sec. 40.1(j).

    (b) Core clearing and settlement organization determination. (1)

    The Commission may determine, in its discretion, whether a

    derivatives clearing organization is a core clearing and settlement

    organization. In making such a determination, the Commission will

    evaluate each such entity on a case-by-case basis, giving

    consideration to whether the entity provides clearing and settlement

    services integral to a critical financial market (or to multiple

    designated contract markets that are critical financial markets on a

    collective rather than individual basis). The Commission may also

    consider other relevant factors that it finds important.

    (2) The Commission will notify the derivatives clearing

    organization that it intends to undertake a determination with

    respect to whether it is a core clearing and settlement

    organization. The entity may provide written data, views, and

    arguments relevant to the Commission's determination. Any such

    written data, views, and arguments shall be filed with the Secretary

    of the Commission, in the form and manner specified by the

    Commission, within 30 calendar days of receiving notice or within

    such other time specified by the Commission. After prompt

    consideration of all relevant information, the Commission will issue

    an order directly to the derivatives clearing organization

    explaining the Commission's determination of whether it is a core

    clearing and settlement organization as defined by Sec. 40.1(k).

    Issued in Washington, DC, on July 14, 2010, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2010-17606 Filed 7-21-10; 8:45 am]

    BILLING CODE P

    Last Updated: July 22, 2010



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