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2010-31029

  • FR Doc 2010-31029[Federal Register: December 13, 2010 (Volume 75, Number 238)]

    [Proposed Rules]

    [Page 77576-77588]

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

    [DOCID:fr13de10-24]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1 and 39

    RIN 3038-AC98

    General Regulations and Derivatives Clearing Organizations

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

    is proposing regulations to implement Title VII of the Dodd-Frank Wall

    Street Reform and Consumer Protection Act (Dodd-Frank Act). These

    proposed amendments would establish the regulatory standards for

    compliance with derivatives clearing organization (DCO) Core Principles

    A (Compliance), H (Rule Enforcement), N (Antitrust Considerations), and

    R (Legal Risk), as well as DCO chief compliance officer (CCO)

    requirements set forth in Section 5b of the Commodity Exchange Act

    (CEA). The proposed amendments also would revise procedures for DCO

    applications, clarify procedures for the transfer of a DCO

    registration, add requirements for approval of DCO rules establishing a

    portfolio margining program for customer accounts carried by a futures

    commission merchant (FCM) that is also registered as a securities

    broker-dealer (FCM/BD), and make certain technical amendments. The

    Commission also is proposing amendments to update the definitions of

    ``clearing member'' and ``clearing organization,'' and to add

    definitions for certain other terms.

    DATES: Submit comments on or before February 11, 2011.

    ADDRESSES: You may submit comments, identified by RIN 3038-AC98, by any

    of the following methods:

    Agency Web site, via its Comments Online process: http://

    comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

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

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.Regulations.gov.

    Follow the instructions for submitting comments.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that you believe is exempt from disclosure under the

    Freedom of Information Act, a petition for confidential treatment of

    the exempt information may be submitted according to the procedures

    established in Sec. 145.9 of the Commission's regulations, 17 CFR

    145.9.\1\

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    \1\ Commission regulations referred to herein are found at 17

    CFR Ch. 1 (2010). They are accessible on the Commission's Web site

    at http://www.cftc.gov.

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    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Phyllis P. Dietz, Associate Director,

    202-418-5449, pdietz@cftc.gov, or Jonathan M. Lave, Special Counsel,

    202-418-5983, jlave@cftc.gov, Division of Clearing and Intermediary

    Oversight, Commodity Futures Trading Commission, Three Lafayette

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

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. Proposed Definitional and Procedural Amendments

    B. Proposed Regulations Implementing Statutory Requirements for

    CCOs

    C. Proposed Regulations Implementing DCO Core Principles

    II. Discussion

    A. Section 1.3 Definitions

    B. Part 39 Scope and Definitions

    1. Scope of Part 39

    2. Definitions

    C. Procedures for Registration as a DCO

    1. Procedures for DCO Applications

    2. Procedures for Transfer of a DCO Registration

    D. Procedures for Submitting DCO Rules To Establish a Portfolio

    Margining Program

    E. Compliance With Core Principles

    F. Rule Enforcement Requirements

    G. Antitrust Considerations

    H. Legal Risk Requirements

    III. Technical Amendments

    IV. Effective Date

    V. Related Matters

    A. Regulatory Flexibility Act

    B. Paperwork Reduction Act

    1. Information Provided by Reporting Entities/Persons

    2. Information Collection Comments

    C. Cost-Benefit Analysis

    I. Background

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

    Reform and Consumer Protection Act.\2\ Title VII of the Dodd-Frank Act

    \3\ amended the CEA \4\ to establish a comprehensive new regulatory

    [[Page 77577]]

    framework for swaps and security-based swaps. The legislation was

    enacted to reduce risk, increase transparency, and promote market

    integrity within the financial system by, among other things: (1)

    Providing for the registration and comprehensive regulation of swap

    dealers and major swap participants; (2) imposing clearing and trade

    execution requirements on standardized derivative products; (3)

    creating rigorous recordkeeping and real-time reporting regimes; and

    (4) enhancing the Commission's rulemaking and enforcement authorities

    with respect to all registered entities and intermediaries subject to

    the Commission's oversight.

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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection

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

    Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/

    OTCDERIVATIVES/index.htm.

    \3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \4\ 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 with which a DCO must comply

    in order to be registered and to maintain registration as a DCO. The

    core principles were added to the CEA by the Commodity Futures

    Modernization Act of 2000 (CFMA).\5\ The Commission did not adopt

    implementing rules and regulations, but instead promulgated guidance

    for DCOs on compliance with the core principles.\6\ Under Section

    5b(c)(2), as amended by the Dodd-Frank Act, Congress expressly

    confirmed that the Commission may adopt implementing rules and

    regulations pursuant to its rulemaking authority under Section 8a(5) of

    the CEA.\7\

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    \5\ See Commodity Futures Modernization Act of 2000, Public Law

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

    \6\ See 17 CFR part 39, app. A.

    \7\ See 7 U.S.C. 7a-1(c)(2). Section 8a(5) of the CEA authorizes

    the Commission to promulgate such regulations ``as, in the judgment

    of the Commission, are reasonably necessary to effectuate any of the

    provisions or to accomplish any of the purposes of [the CEA].'' 7

    U.S.C. 12a(5).

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    The Commission continues to believe that, where possible, each DCO

    should be afforded an appropriate level of discretion in determining

    how to operate its business within the statutory framework. At the same

    time, the Commission recognizes that specific, bright-line regulations

    may be necessary in order to facilitate DCO compliance with a given

    core principle and, ultimately, to protect the integrity of the U.S.

    clearing system. Accordingly, in developing the proposed regulations to

    update the Commission's regulations, streamline administrative

    procedures, and implement the DCO core principles as amended by the

    Dodd-Frank Act, the Commission has endeavored to strike an appropriate

    balance between establishing general prudential standards and

    prescriptive requirements.

    In this notice of proposed rulemaking, the Commission is proposing

    to adopt: (1) Certain definitional and procedural amendments to its

    regulations for DCOs; (2) regulations to implement statutory

    requirements for CCOs; and (3) requirements that would implement four

    DCO core principles.

    A. Proposed Definitional and Procedural Amendments

    The Commission is proposing to amend the definitions of ``clearing

    member'' and ``clearing organization'' in Sec. 1.3 of its regulations

    to make the definitions consistent with terminology currently used in

    the CEA, as amended by the Dodd-Frank Act. It is also proposing to add

    to Sec. 1.3 definitions for the terms ``customer initial margin,''

    ``initial margin,'' ``spread margin,'' ``variation margin,'' and

    ``margin call.'' In addition, the Commission is proposing to amend

    Sec. 39.1 to add definitions of the following terms: ``back test,''

    ``compliance policies and procedures,'' ``key personnel,'' ``stress

    test,'' and ``systemically important derivatives clearing

    organization.''

    Based on its experience in reviewing DCO applications over the past

    nearly ten years, the Commission is proposing to amend Sec. 39.3 to

    streamline the DCO application process by eliminating the 90-day

    expedited application review period. The proposed amendments also would

    clarify the procedures to be followed by a DCO when requesting a

    transfer of its DCO registration due to a corporate change and

    procedures for submission of DCO rules to establish a portfolio

    margining program.

    B. Proposed Regulations Implementing Statutory Requirements for CCOs

    Section 725(b) of the Dodd-Frank Act, codified as Section 5b(i) of

    the CEA,\8\ requires each DCO to designate a CCO and further specifies

    the duties of the CCO.\9\ Among the CCO's responsibilities are the

    preparation and submission to the Commission of an annual compliance

    report. Proposed Sec. 30.10 codifies the statutory requirements for

    CCOs and sets forth additional provisions relating to CCOs.

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    \8\ 7 U.S.C. 7a-1(i).

    \9\ The Dodd-Frank Act established comparable CCO requirements

    for swap data repositories, swap dealers and major swap

    participants, FCMs, and swap execution facilities. See Sections 728,

    731, 732, and 733, respectively, of the Dodd-Frank Act.

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    C. Proposed Regulations Implementing DCO Core Principles

    The Commission is proposing to codify the DCO core principles in

    Commission regulations and implement those statutory standards with

    regulatory requirements to the extent necessary to ensure that DCOs are

    subject to a comprehensive, prudential regulatory regime. This

    rulemaking is one of a series that will, in its entirety, propose

    regulations to implement all 18 DCO core principles.\10\ Section 725(c)

    of the Dodd-Frank Act amended Core Principle A, Compliance, to require

    a DCO to comply with each core principle set forth in Section 5b(c)(2)

    of the CEA and any requirement that the Commission may impose by rule

    or regulation pursuant to Section 8a(5) of the CEA.\11\ Proposed Sec.

    39.10 would implement Core Principle A.

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    \10\ See 75 FR 63732 (Oct. 18, 2010) (proposing regulations to

    implement Core Principle P (Conflicts of Interest)); and 75 FR 63113

    (Oct. 14, 2010) (proposing regulations to implement Core Principle B

    (Financial Resources)). Concurrent with issuing this notice, the

    Commission also is proposing regulations to implement Core

    Principles J (Reporting), K (Recordkeeping), L (Public Information),

    and M (Information Sharing). The Commission expects to issue two

    additional notices of proposed rulemaking to implement DCO core

    principles.

    \11\ Additionally, Section 805(a) of the Dodd-Frank Act allows

    the Commission to prescribe regulations for DCOs that the Financial

    Stability Oversight Council has determined are systemically

    important financial market utilities. In a future notice of proposed

    rulemaking, the Commission intends to propose a provision that would

    require all DCOs, including systemically important DCOs (SIDCOs), to

    comply with the core principles and the regulations thereunder,

    except to the extent that there are special requirements applicable

    to SIDCOs set forth in part 39 of the Commission's regulations.

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    Section 725(c) also amended Core Principle H, Rule Enforcement, to

    require a DCO to report to the Commission rule enforcement activities

    and sanctions imposed against clearing members. Proposed Sec. 39.17

    would implement Core Principle H.

    The Dodd-Frank Act amended Core Principle N, Antitrust

    Considerations, and Core Principle N now conforms to the amended

    antitrust core principle for designated contract markets (DCMs).

    Proposed Sec. 39.23 would codify and implement Core Principle N.

    Finally, Section 725(c) of the Dodd-Frank Act established a new

    Core Principle R, Legal Risk, which is consistent with the legal risk

    standard recommended by the Committee on Payment and Settlement Systems

    of the central banks of the Group of Ten countries (CPSS) and the

    Technical Committee of the International Organization of Securities

    Commissions (IOSCO).\12\ Proposed Sec. 39.27 would implement Core

    Principle R.

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    \12\ See infra n. 47.

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    The Commission requests comment on all aspects of the proposed

    rules, as well as comments on the specific provisions and issues

    highlighted in the discussion below.

    [[Page 77578]]

    II. Discussion

    A. Section 1.3 Definitions

    The Commission proposes to amend the definitions of ``clearing

    member,'' ``clearing organization,'' and ``customer'' found in Sec.

    1.3 of its regulations to conform them to the concepts and terminology

    of the CEA, as amended. The Commission also is proposing to add to

    Sec. 1.3, definitions for ``clearing initial margin,'' ``customer

    initial margin,'' ``initial margin,'' ``margin call,'' ``spread

    margin,'' and ``variation margin.''

    Clearing member. The term ``clearing member'' is currently defined

    in Sec. 1.3(c) to mean ``any person who is a member of, or enjoys the

    privilege of clearing trades in his own name through, the clearing

    organization of a designated contract market or registered derivatives

    transaction execution facility.'' \13\ The Commission proposes to amend

    Sec. 1.3(c) to define a ``clearing member'' as ``any person \14\ that

    has clearing privileges such that it can process, clear and settle

    trades through a derivatives clearing organization on behalf of itself

    or others.'' This revised definition reflects the fact that a clearing

    member could have clearing privileges in connection with contracts that

    are not traded on a DCM, and it further clarifies that the term

    ``clearing member,'' for purposes of the Commission's regulations, is

    intended to refer to a person who is authorized to clear through a

    registered DCO, even if the DCO is not a membership organization.

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    \13\ 17 CFR 1.3(c).

    \14\ The term ``person'' is defined as an individual,

    association, partnership, corporation, or trust. See Section 1a(38)

    of the CEA; 7 U.S.C. 1a(38); and 17 CFR 1.3(u).

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    Clearing organization. The term ``clearing organization'' is

    currently defined in Sec. 1.3(d) as ``the person or organization which

    acts as a medium for clearing transactions in commodities for future

    delivery or commodity option transactions, or for effecting settlements

    of contracts for future delivery or commodity option transactions, for

    and between members of any designated contract market or registered

    derivatives transaction execution facility.'' \15\ Recognizing that

    there may be CFTC regulations or other issuances that remain in effect

    and use the term ``clearing organization'' instead of ``derivatives

    clearing organization,'' the Commission proposes to include both terms

    as alternatives that have the same meaning. The definition would be the

    same as the definition of ``derivatives clearing organization'' in

    Section 1a(15) of the CEA.\16\ Accordingly, the definition would

    eliminate the references to DCMs and derivatives transaction execution

    facilities, thereby allowing the definition to encompass futures

    contracts and swaps, including swaps traded on a swap execution

    facility (SEF).

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    \15\ 17 CFR 1.3(d).

    \16\ Section 1a(15) of the CEA; 7 U.S.C. 1a(15), defines a

    derivatives clearing organization as follows:

    (A) IN GENERAL.--The term ``derivatives clearing organization''

    means a clearinghouse, clearing association, clearing corporation,

    or similar entity, facility, system, or organization that, with

    respect to an agreement, contract, or transaction--

    (i) enables each party to the agreement, contract, or

    transaction to substitute, through novation or otherwise, the credit

    of the derivatives clearing organization for the credit of the

    parties;

    (ii) arranges or provides, on a multilateral basis, for the

    settlement or netting of obligations resulting from such agreements,

    contracts, or transactions executed by participants in the

    derivatives clearing organization; or

    (iii) otherwise provides clearing services or arrangements that

    mutualize or transfer among participants in the derivatives clearing

    organization the credit risk arising from such agreements,

    contracts, or transactions executed by the participants.

    (B) EXCLUSIONS.--The term ``derivatives clearing organization''

    does not include an entity, facility, system, or organization solely

    because it arranges or provides for--

    (i) settlement, netting, or novation of obligations resulting

    from agreements, contracts, or transactions, on a bilateral basis

    and without a central counterparty;

    (ii) settlement or netting of cash payments through an interbank

    payment system; or

    (iii) settlement, netting, or novation of obligations resulting

    from a sale of a commodity in a transaction in the spot market for

    the commodity.

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    Customer. The Dodd-Frank Act expanded the Commission's regulatory

    authority over swaps. The term ``customer'' in Sec. 1.3(k) is

    currently defined to refer to a customer trading in any commodity.\17\

    The Commission proposes to define customer to refer to trading in any

    commodity or swap as defined in Section 1a(47) of the CEA.

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    \17\ 17 CFR 1.3(k).

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    The Commission also is proposing to amend Sec. 1.3 to add

    definitions of terms that it expects will be used in future proposed

    regulations to implement Core Principle D, Risk Management, as well as

    other provisions of the CEA.

    Clearing initial margin. Proposed Sec. 1.3(jjj) would define the

    term ``clearing initial margin'' to mean initial margin posted by a

    clearing member with a DCO.

    Customer initial margin. Proposed Sec. 1.3(kkk) would define the

    term ``customer initial margin'' to mean initial margin posted by a

    customer with an FCM, or by a non-clearing member FCM with a clearing

    member.

    Initial margin. Proposed Sec. 1.3(lll) would define the term

    ``initial margin'' to mean money, securities, or property posted by a

    party to a futures, option, or swap as performance bond to cover

    potential future exposures arising from changes in the market value of

    the position.

    Margin call. Proposed Sec. 1.3(mmm) would define the term ``margin

    call'' to mean a request from an FCM to a customer to post customer

    initial margin; or a request by a DCO to a clearing member to post

    clearing initial margin or variation margin. This would include margin

    calls for additional funds, sometimes referred to as ``super margin''

    calls or ``special margin'' calls, both of which are effectively calls

    for initial margin.

    Spread margin. Proposed Sec. 1.3(nnn) would define the term

    ``spread margin'' to mean a reduced initial margin that takes into

    account correlations between certain related positions held in a single

    account.

    Variation margin. Proposed Sec. 1.3(ooo) would define the term

    ``variation margin'' to mean a payment made by a party to a futures,

    option, or swap to cover the current exposure arising from changes in

    the market value of the position since the trade was executed or the

    previous time the position was marked to market.

    B. Part 39 Scope and Definitions

    The Commission proposes to revise the statement of the scope of

    part 39 and to add definitions that will appear elsewhere in part 39.

    1. Scope of Part 39

    In a future rulemaking, the Commission intends to reorganize part

    39 into three subparts, with one subpart containing provisions

    applicable only to SIDCOs. Accordingly, the Commission intends to

    revise the statement of scope in a future rulemaking to establish that

    the provisions of subparts A and B of part 39 will apply to all DCOs,

    except to the extent that there are superseding provisions that apply

    to SIDCOs in subpart C.\18\ Because this reorganization is not being

    proposed in the current rulemaking, the Commission is not yet proposing

    any change to the text of Sec. 39.1. However, as a technical matter in

    order to propose certain definitions, the Commission is proposing to

    redesignate the current text of Sec. 39.1 as Sec. 39.1(a) ``Scope,''

    and to add a new paragraph (b) ``Definitions.''

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    \18\ In this future rulemaking, the Commission also expects to

    propose a technical amendment to update the Sec. 39.1 citation to

    the definition of ``derivatives clearing organization'' in the CEA

    (term formerly defined in Section 1a(9) of the CEA; renumbered as

    Section 1a(15) by the Dodd-Frank Act).

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    [[Page 77579]]

    2. Definitions

    Proposed Sec. 39.1(b) would define certain terms, for purposes of

    part 39. Although some of these terms may be defined in Sec. 1.3 or

    other sections of the Commission's regulations, the definitions set

    forth in Sec. 39.1(b) would apply to provisions contained in part 39

    and such other rules as may explicitly cross-reference these

    definitions.

    Back test. The proposed rule would define the term ``back test'' to

    mean a test that compares a DCO's initial margin requirements with

    historical price changes to determine the extent of actual margin

    coverage. The Commission anticipates using this term in regulations

    relating to Core Principle D, Risk Management.\19\

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    \19\ See Section 5b(c)(2)(D) of the CEA; 7 U.S.C. 7a-1(c)(2)(D).

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    Compliance policies and procedures. The proposed rule would define

    the term ``compliance policies and procedures'' to mean all policies,

    procedures, codes, including a code of ethics, safeguards, rules,

    programs, and internal controls that are required to be adopted or

    established by a DCO pursuant to the CEA, Commission regulations, or

    orders. Compliance policies and procedures would include those policies

    and procedures that are not explicitly required by law, such as those

    relating to customer record protection and procedures and safeguards

    for electronic signatures.

    Customer account or customer origin. The proposed rule would define

    these terms to mean a clearing member's account held on behalf of

    customers, as defined in Sec. 1.3(k) of the Commission's regulations.

    A customer account is also a futures account, as that term is defined

    by Sec. 1.3(vv) of the Commission's regulations. The Commission

    proposes to define these terms as distinguishable from a ``house

    account'' or ``house origin,'' in connection with proposed reporting

    and other requirements under part 39, which may make such a

    distinction.\20\

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    \20\ For example, in a separate notice of proposed rulemaking,

    the Commission proposes to require DCOs to provide the Commission

    with a daily report of initial margin requirements and margin on

    deposit for each clearing member, by customer origin and house

    origin.

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    House account or house origin. The proposed rule would define

    ``house account'' or ``house origin'' to mean a clearing member's

    combined proprietary accounts, as defined in Sec. 1.3(y).

    Key personnel. The proposed rule would define the term ``key

    personnel'' to mean personnel who play a significant role in the

    operation of the DCO, provision of clearing and settlement services,

    risk management, or oversight of compliance with the CEA and Commission

    regulations. Key personnel would include, but would not be limited to,

    those persons who are or perform the functions of any of the following:

    The chief executive officer; president; CCO; 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. The proposed rule would define the term ``stress

    test'' to mean a test that compares the impact of a potential price

    move, change in option volatility, or change in other inputs that

    affect the value of a position, to the financial resources of a DCO,

    clearing member, or large trader to determine the adequacy of such

    financial resources.

    Systemically important derivatives clearing organization. The

    proposed rule would define the term ``systemically important

    derivatives clearing organization'' to mean a financial market utility

    that is a DCO registered under Section 5b of the CEA, and which has

    been designated by the Financial Stability Oversight Council to be

    systemically important. As noted above, the Commission intends that

    certain proposed rules would apply only to SIDCOs.

    C. Procedures for Registration as a DCO

    1. Procedures for DCO Applications

    The proposed rules would remove the 90-day expedited review

    provision. In 2001, the Commission adopted Sec. 39.3 to implement the

    CFMA's core principle regime and to establish registration standards

    and procedures for DCOs, which were then a new category of

    registrant.\21\ Although the CEA does not require the Commission to

    review DCO applications within a prescribed time period or subject to

    any prescribed procedures, the Commission nonetheless adopted the time

    period and procedures specified in Section 6(a) of the CEA for review

    of applications for designation of a contract market or registration of

    a derivatives transaction execution facility.\22\ The Commission

    initially provided for an expedited 60-day review process, which it

    changed to a 90-day review process in 2006.\23\

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    \21\ See 66 FR 45604 (Aug. 29, 2001).

    \22\ See 17 CFR 39.3(a) (providing that the Commission will

    review the application for registration as a DCO pursuant to the

    180-day time frame and procedures specified in Section 6(a) of the

    CEA).

    \23\ See 71 FR 1953 (Jan. 12, 2006) (extending the 60-day review

    period to 90 days based on the Commission's experience in processing

    applications).

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    Since 2006, the Commission has learned that a 90-day expedited

    review period is not practicable in most instances, particularly in

    cases where the margin methodology to be applied or the products to be

    cleared are novel or complex. The proposed amendments to Sec. 39.3

    would therefore eliminate the 90-day expedited review period provided

    under Sec. 39.3(a)(3) and remove related provisions for termination of

    the 90-day review under Sec. 39.3(b). The Commission notes that the

    180-day review period does not preclude it from rendering a decision in

    less than 180 days.

    2. Procedures for Transfer of a DCO Registration

    The Commission is proposing to add a new paragraph (h) to Sec.

    39.3 to formalize the procedures that a DCO must follow when requesting

    the transfer of its DCO registration and positions comprising open

    interest for clearing and settlement, in anticipation of a corporate

    change (e.g., a merger, corporate reorganization, or change in

    corporate domicile), which results in the transfer of all or

    substantially all of the DCO's assets to another legal entity. Under

    proposed Sec. 39.3(h), the DCO would submit to the Commission a

    request for transfer no later than three months prior to the

    anticipated corporate change, in accordance with the reporting

    requirements of proposed Sec. 39.19.\24\ The request would include:

    (1) The underlying agreement that governs the corporate change; (2) a

    narrative description of the corporate change, including the reason for

    the change, its impact on the DCO's financial resources, governance,

    and operations, and its impact on the rights and obligations of

    clearing members and market participants holding the positions that

    comprise the DCO's open interest; (3) a discussion of the transferee's

    ability to comply with the CEA, including the core principles

    applicable to DCOs, and the Commission's regulations thereunder; (4)

    the governing documents of the transferee, including but not limited to

    articles of incorporation and bylaws; (5) the transferee's rules marked

    to show changes from the current rules of the

    [[Page 77580]]

    DCO; and (6) a list of contracts, agreements, transactions, or swaps

    for which the DCO requests transfer of open interest.

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    \24\ In a separate notice of proposed rulemaking, the Commission

    is proposing to require a DCO to notify the Commission of various

    corporate events, all of which would require three months advance

    notice. The Commission is proposing to allow an exception to the

    three-month prior reporting requirement if the DCO does not know and

    reasonably could have not have known of the anticipated change three

    months prior to that change. In such event, the DCO would be

    required to promptly report such change to the Commission as soon as

    it knows of the change.

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    Proposed Sec. 39.3(h) also would require, as a condition of

    approval, that the DCO submit a representation that it is in compliance

    with the CEA, including the DCO core principles, and the Commission's

    regulations. In addition, the DCO would have to submit a representation

    by the transferee that the transferee understands that a DCO is a

    regulated entity that must comply with the CEA, including the DCO core

    principles and the Commission's regulations, in order to maintain its

    registration as a DCO; and further, that the transferee will continue

    to comply with all self-regulatory requirements applicable to a DCO

    under the CEA and the Commission's regulations.

    The Commission would review any requests for transfer of

    registration and open interest as soon as practicable and determine

    whether the transferee would be able to continue to operate the DCO in

    compliance with the CEA and the Commission's regulations. The request

    would be approved or denied pursuant to a Commission order.

    The Commission notes that there are differences in the proposed

    procedures for registration/designation transfer requests for DCOs,

    DCMs, swap execution facilities, and swap data repositories. The

    Commission requests comment on the proposed requirements for

    registration transfer requests under Sec. 39.3(h), generally, and,

    more specifically, solicits comment on the extent to which there should

    be uniformity or differentiation in procedures applied to different

    types of registrants.

    D. Procedures for Submitting DCO Rules To Establish a Portfolio

    Margining Program

    Section 713(a) of the Dodd-Frank Act amended Section 15(c)(3) of

    the Securities Exchange Act of 1934 \25\ to require the SEC to adopt

    rules that permit securities to be held in a portfolio margining

    account that is regulated as a futures account pursuant to a portfolio

    margining program approved by the Commission. Similarly, Section 713(b)

    of the Dodd-Frank Act amended Section 4d of the CEA\26\ to require the

    Commission to adopt rules that permit futures and options on futures to

    be held in a portfolio margining account regulated as a securities

    account pursuant to a portfolio margining program approved by the SEC.

    In both cases, the SEC and the Commission are required to consult with

    each other in the adoption of such rules in order to ensure that the

    relevant transactions and accounts are subject to comparable

    requirements to the extent practicable for similar products.

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

    \25\ 15 U.S.C. 78o(c)(3).

    \26\ 7 U.S.C. 6d.

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

    As a first step towards meeting this goal, the Commission is

    proposing to amend part 39 to include procedural requirements for a DCO

    that intends to offer a portfolio margining program. Under proposed

    Sec. 39.4(e), a DCO seeking to provide clearing and settlement

    services for a futures portfolio margining account that holds

    securities would have to submit its proposed portfolio margining rules

    for Commission approval under Sec. 40.5 of the Commission's

    regulations. This will enable the DCO to satisfy the statutory

    requirement that the futures portfolio margining program be approved by

    the Commission, as a pre-condition to the SEC permitting securities to

    be held in the account. Concurrent with its request for rule approval,

    the DCO also would be required to submit a petition for a related order

    under Section 4d of the CEA.\27\

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

    \27\ An order under Section 4d of the CEA would permit the

    commingling of exchange-traded futures and options on futures with

    securities.

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

    The Commission is proposing only procedural requirements as part of

    this notice. It anticipates consulting with the SEC in the future to

    determine the substantive requirements it would impose in approving a

    futures portfolio margining program and, additionally, in granting an

    exemption under Section 4(c) of the CEA and an order under Section 4d

    of the CEA to permit futures and options on futures to be held in a

    securities portfolio margining account. The Dodd-Frank Act does not set

    a deadline for these actions, and the Commission believes that it is

    important to give this matter due consideration, both in terms of

    consultation with the SEC and, more broadly, in obtaining industry

    views on the topic before proposing substantive regulations or other

    guidance. The Commission requests comment on possible strategies for

    the Commission and the SEC to address issues raised by portfolio

    margining and to facilitate the availability of portfolio margining

    programs for qualified participants.

    E. Compliance With Core Principles

    As noted above, Section 725(c) of the Dodd-Frank Act amended Core

    Principle A to require a registered DCO to comply with each core

    principle set forth in Section 5b(c)(2) of the CEA and any requirement

    that the Commission may impose by rule or regulation pursuant to

    Section 8a(5) of the CEA.\28\ The Dodd-Frank Act also provides a DCO

    with reasonable discretion to establish the manner by which it complies

    with each core principle.\29\ Proposed Sec. Sec. 39.10(a) and 39.10(b)

    would codify these provisions, respectively.

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

    \28\ Core Principle A provides that ``To be registered and to

    maintain registration as a derivatives clearing organization, a

    derivatives clearing organization shall comply with each core

    principle described in this paragraph and any requirement that the

    Commission may impose by rule or regulation pursuant to section

    8a(5).'' 7 U.S.C. 7a-1(c)(2)(A)(i).

    \29\ Core Principle A provides that ``Subject to any rule or

    regulation prescribed by the Commission, a derivatives clearing

    organization shall have reasonable discretion in establishing the

    manner by which the derivatives clearing organization complies with

    each core principle described in this paragraph.'' 7 U.S.C. 7a-

    1(c)(2)(A)(ii).

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

    Section 725(b) of the Dodd-Frank Act amended Section 5b of the CEA

    to require each DCO to designate an individual as its CCO, responsible

    for the DCO's compliance with Commission regulations and filing an

    annual compliance report.\30\ Proposed Sec. 39.10(c)(1) would require

    each DCO to establish the position of CCO and to designate a CCO. The

    proposed provision also would require that the DCO provide the CCO with

    the responsibility and authority to develop and enforce appropriate

    compliance policies and procedures to fulfill his or her duties.

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

    \30\ See Section 5b(i) of the CEA; 7 U.S.C. 7a-1(i).

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

    Proposed Sec. 39.10(c)(1)(i) would require a DCO to designate an

    individual with the background and skills appropriate for fulfilling

    the responsibilities of the position. The rule also would require the

    person to meet minimum ethical requirements, and prohibit from serving

    as a CCO any person who would be disqualified from registration under

    Sections 8a(2) or 8a(3) of the CEA.\31\

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

    \31\ 7 U.S.C. 12a(2) and (3).

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

    The Dodd-Frank Act requires that a CCO report directly to the board

    of directors or the senior officer of the DCO.\32\ This requirement is

    codified as proposed Sec. 39.10(c)(1)(ii). The proposed rule also

    would require the board of directors or the senior officer to approve

    the compensation of the CCO.

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

    \32\ See Section 5b(i)(2)(A) of the CEA; 7 U.S.C. 7a-1(i)(2)(A).

    Proposed Sec. 1.3(zz) defines the term ``Board of Directors'' to

    mean ``the Board of Directors or Board of Governors of a company or

    organization, or equivalent governing body.'' See 75 FR at 63747.

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

    Proposed Sec. 39.10(c)(1)(iii) would require a CCO to meet with

    the board of directors or the senior officer at least once a year to

    discuss the effectiveness of the DCO's compliance policies and

    [[Page 77581]]

    procedures, as well as the administration of those policies and

    procedures by the CCO. The meeting would afford an opportunity for the

    CCO and the board of directors or the senior officer to speak freely

    about any compliance issues of concern, and would further the

    Commission's goal of promoting self-assessment and internal oversight

    of compliance matters. The Commission notes that the requirement for an

    annual discussion would not preclude the board of directors or the

    senior officer from meeting with the CCO more frequently.\33\

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

    \33\ In addition to the board of directors or the senior

    officer, under the Commission's proposed Sec. 39.13(g), a DCO's

    Risk Management Committee would be required to review the

    performance of the CCO and make recommendations to the board. See 75

    FR at 63750.

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

    Proposed Sec. 39.10(c)(1)(iv) would require that a change in the

    designation of the individual serving as the CCO be reported to the

    Commission, in accordance with the requirements of proposed Sec.

    39.19(c)(4)(xi).\34\

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

    \34\ The notification requirement is being proposed by the

    Commission in a separate notice of proposed rulemaking.

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

    The Dodd-Frank Act sets forth the duties of a CCO,\35\ and proposed

    Sec. 39.10(c)(2) codifies those duties in paragraphs (i)-(vi).\36\ The

    Commission believes the statutory duties are largely self-explanatory,

    but in the interest of clarity, those duties are briefly discussed.

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

    \35\ See Section 5b(i)(2) of the CEA; 7 U.S.C. 7a-1(i)(2).

    \36\ The Commission notes, however, that the first statutory

    requirement identified under the heading ``duties,'' i.e., that the

    CCO report to the board of directors or the senior officer, is

    codified in proposed Sec. 39.10(c)(1)(ii).

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

    Proposed Sec. 39.10(c)(2)(i) would require the CCO to review the

    DCO's compliance with each core principle.

    Under proposed Sec. 39.10(c)(2)(ii), in consultation with the

    board of directors or the senior officer, the CCO also would be

    required to resolve any conflicts of interest that may arise. These

    conflicts would include: Conflicts between business considerations and

    compliance requirements; conflicts between the consideration to

    restrict clearing membership to certain types of clearing members and

    the requirement that a DCO provide fair and open access; conflicts

    between and among different categories of clearing members of the DCO;

    conflicts between a DCO's clearing members and its management; and

    conflicts between a DCO's management and members of the board of

    directors.

    Proposed Sec. Sec. 39.10(c)(2)(iii) and (iv) would require the CCO

    to administer each policy and procedure that is required under Section

    5b of the CEA, and ensure compliance with the CEA and Commission

    regulations relating to agreements, contracts, or transactions, and

    with Commission regulations under Section 5b of the CEA, respectively.

    Under proposed Sec. 39.10(c)(2)(v), the CCO also would establish

    procedures for the remediation of noncompliance issues identified by

    the CCO through a compliance office review, look-back, internal or

    external audit finding, self-reported error, or validated complaint.

    Finally, under proposed Sec. 39.10(c)(2)(vi), a CCO would establish

    and follow appropriate procedures for the handling, management

    response, remediation, retesting, and closing of noncompliance issues.

    In addition to the duties set forth in the Dodd-Frank Act, proposed

    Sec. 39.10(c)(2)(vii) would require a CCO to develop a compliance

    manual designed to promote compliance with the applicable laws, rules,

    and regulations, and a code of ethics designed to prevent ethical

    violations and to promote ethical conduct. The Commission believes that

    these tools are essential to a CCO's ability to fulfill the duties

    imposed by the CEA and the Commission's regulations.

    Section 725(b) of the Dodd-Frank Act requires a CCO to prepare an

    annual report that describes the DCO's compliance with the CEA,

    regulations promulgated under the CEA, and each policy and procedure of

    the DCO, including the code of ethics and conflicts of interest

    policies.\37\ Proposed Sec. 39.10(c)(3) would codify these

    requirements.

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

    \37\ See Section 5b(i)(3) of the CEA; 7 U.S.C. 7a-1(i)(3).

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

    Proposed Sec. 39.10(c)(4) would establish requirements for

    submission of the annual report to the Commission. The rule would

    require the CCO to provide the annual report to the board or the senior

    officer for review prior to submitting the annual report to the

    Commission, and it would require the DCO to record such action in board

    minutes or otherwise, as evidence of compliance with this requirement.

    The proposed rule would further specify that the annual report be

    electronically provided to the Commission not more than 90 days after

    the end of the DCO's fiscal year,\38\ and that it be submitted

    concurrently with the fiscal year-end audited financial statement that

    is required to be furnished to the Commission pursuant to proposed

    Sec. 39.19(c)(3)(ii).\39\

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

    \38\ See also Sec. 1.10(b)(2)(ii) (90-day time period for an

    FCM to submit the Form 1-FR-FCM to the Commission).

    \39\ The annual reporting requirement of proposed Sec.

    39.19(c)(3)(ii) is being proposed by the Commission in a separate

    notice of proposed rulemaking.

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

    The Dodd-Frank Act requires the CCO's annual report to include a

    certification that, under penalty of law, the compliance report is

    accurate and complete.\40\ Proposed Sec. 39.10(c)(4)(ii) would codify

    this certification requirement.

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

    \40\ See Section 5b(i)(3)(B)(ii) of the CEA; 7 U.S.C. 7a-

    1(i)(3)(B)(ii).

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

    Proposed Sec. 39.10(c)(4)(iii) would require a DCO to promptly

    submit an amended annual report if material errors or omissions in the

    report are identified after the report is submitted to the Commission.

    If a DCO is unable to submit an annual report within 90 days after the

    end of the DCO's fiscal year, proposed Sec. 39.10(c)(4)(iv) would

    permit the DCO to request that the Commission extend the deadline,

    provided the DCO's failure to submit the report in a timely manner

    could not be avoided without unreasonable effort or expense. Extensions

    of the deadline would be granted at the discretion of the Commission.

    Proposed Sec. 39.10(c)(5) would require a DCO to maintain: (i) A

    copy of the policies and procedures adopted in furtherance of

    compliance with the CEA and Commission regulations; (ii) copies of

    materials, including written reports provided to the board of directors

    or the senior officer in connection with review of the annual report;

    and (iii) any records relevant to the DCO's annual report, including

    work papers and financial data. These records are designed to provide

    Commission staff with a basis upon which to determine whether the DCO

    has complied with the applicable Commission regulations and DCO rules

    and policies. The DCO would be required to maintain these records in

    accordance with Sec. 1.31 and proposed Sec. 39.20 of the Commission's

    regulations.

    The Commission specifically seeks comment on the degree of

    flexibility in the reporting structure for CCOs that should be afforded

    under the proposed rules. Specifically, the Commission requests comment

    on: (i) Whether it would be more appropriate for a CCO to report to the

    senior officer or the board of directors; (ii) whether the senior

    officer or board of directors generally is a stronger advocate of

    compliance matters within an organization; and (iii) whether the

    proposed rules allow for sufficient flexibility with regard to a DCO's

    business structure.

    The Commission also is seeking comment on whether additional

    limitations should be placed on the persons who may be designated as a

    CCO. For example, should the

    [[Page 77582]]

    Commission restrict the CCO position from being held by an attorney who

    represents the DCO or its board of directors, such as an in-house or

    general counsel? The rationale for such a restriction is based on the

    concern that the interests of defending the DCO would be in conflict

    with the duties of the CCO.

    The Commission specifically seeks comment on whether there is a

    need for a regulation requiring the DCO to insulate a CCO from undue

    pressure and coercion. Is it necessary to adopt rules to address the

    potential conflict between and among compliance interests, commercial

    interests, and ownership interests of a DCO? If there is no need for

    such a provision, how would such potential conflicts be addressed?

    The Commission additionally requests comment on an appropriate

    effective date for the CCO requirements. In particular, for a DCO that

    does not currently have an employee designated to perform the function

    of a CCO, what is a reasonable time frame for hiring a CCO and for

    implementing the required compliance policies and procedures set forth

    in Sec. 39.10?

    F. Rule Enforcement Requirements

    Section 725(c) of the Dodd-Frank Act amended Core Principle H, Rule

    Enforcement, to require a DCO to maintain adequate arrangements and

    resources for the effective monitoring and enforcement of compliance

    with its rules and resolution of disputes.\41\ Proposed Sec.

    39.17(a)(1) would codify these requirements. Section 725(c) of the

    Dodd-Frank Act also required a DCO to have the authority and ability to

    discipline, limit, suspend, or terminate the activities of a member or

    participant due to a violation by the member or participant of any rule

    of the derivatives clearing organization.\42\ Proposed Sec.

    39.17(a)(2) would codify this requirement. Additionally, pursuant to

    the reporting requirement of Core Principle H, proposed Sec.

    39.17(a)(3) would cross-reference the proposed rule enforcement

    reporting requirements of proposed Sec. 39.19(c)(4)(xiii).\43\

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

    \41\ Core Principle H provides that:

    Each derivatives clearing organization shall--

    (i) maintain adequate arrangements and resources for--

    (I) the effective monitoring and enforcement of compliance with

    the rules of the derivatives clearing organization; and

    (II) the resolution of disputes;

    (ii) have the authority and ability to discipline, limit,

    suspend, or terminate the activities of a member or participant due

    to a violation by the member or participant of any rule of the

    derivatives clearing organization; and

    (iii) report to the Commission regarding rule enforcement

    activities and sanctions imposed against members and participants as

    provided in clause (ii).

    See Section 5b(c)(2)(H) of the CEA; 7 U.S.C. 7a-1(c)(2)(H).

    \42\ Id.

    \43\ The Commission is proposing reporting requirements in a

    separate notice of proposed rulemaking.

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

    Under proposed Sec. 39.17(b), the board of directors of a DCO may

    delegate to the DCO's Risk Management Committee responsibility for

    compliance with the requirements of paragraph (a) of Sec. 39.17,

    unless the responsibilities are otherwise required to be carried out by

    the CCO.

    Finally, proposed Sec. 39.17(c) would cross-reference proposed

    Sec. 39.10(c)(2)(ii), which provides the CCO with the duty to resolve

    conflicts of interest.\44\

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

    \44\ See supra Section II.E. of this notice.

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

    G. Antitrust Considerations

    Section 725(c) of the Dodd-Frank Act amended Core Principle N,

    Antitrust Considerations, conforming the standard for DCOs to the

    standard applied to DCMs under Core Principle 19.\45\ Proposed Sec.

    39.23 would codify Core Principle N as amended by the Dodd-Frank Act.

    The Commission is taking the same approach with respect to DCM Core

    Principle 19, but requests comment on whether there are additional

    standards or requirements that should be imposed to more effectively

    implement the purposes of DCO Core Principle N.

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

    \45\ Core Principle N provides as follows: ``Unless necessary or

    appropriate to achieve the purposes of this Act, a derivatives

    clearing organization shall not--(i) adopt any rule or take any

    action that results in any unreasonable restraint of trade; or (ii)

    impose any material anticompetitive burden.'' See Section

    5b(c)(2)(N) of the CEA; 7 U.S.C. 7a-1(c)(2)(N). See also Section

    5(d)(19) of the CEA; 7 U.S.C. 7(d)(19) (DCM Core Principle 19); and

    proposed Sec. 38.100 of the Commission's regulations, which is

    being proposed by the Commission in a separate notice of proposed

    rulemaking.

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

    H. Legal Risk Requirements

    Section 725(c) of the Dodd-Frank Act set forth a new Core Principle

    R, Legal Risk. Pursuant to Core Principle R, ``[e]ach derivatives

    clearing organization shall have a well-founded, transparent, and

    enforceable legal framework for each aspect of the activities of the

    derivatives clearing organization.'' \46\ This core principle is

    consistent with the recommendations of CPSS-IOSCO, which conclude that

    ``if the legal framework [of a central counterparty (CCP), in this

    case, a DCO] is underdeveloped, opaque or inconsistent, the resulting

    legal risk could undermine the [CCP]'s ability to operate

    effectively,'' and increase the likelihood that market participants may

    suffer a loss because the CCP's rules, procedures, and contracts that

    support its activities, property rights, and other interests are not

    supported by relevant laws and regulations.\47\

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

    \46\ Section 5b(c)(2)(R) of the CEA; 7 U.S.C. 7a-1(c)(2)(R).

    \47\ See Comm. on Payment & Settlement Sys. & Technical Comm. of

    the Int'l Org. of the Sec. Comm'ns CPSS-IOSCO, Recommendations for

    Central Counterparties, at 13, CPSS Publication No. 64 (Nov. 2004).

    In November 2004, the CPSS-IOSCO Task Force on Securities Settlement

    Systems issued Recommendations for Central Counterparties. The CPSS-

    IOSCO recommendations identify legal risk as the risk that a CCP's

    rules, procedures, and contracts are not supported by relevant laws

    and regulations. Id. at 9. Under CPSS-IOSCO Recommendation 1, a CCP

    should mitigate legal risk through the development of a sound, legal

    framework. Id. at 4, 13. The Commission notes that CPSS and IOSCO

    are currently reviewing this standard and it may be revised.

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

    Proposed Sec. 39.27(a) would address these concerns, in part, by

    requiring a DCO to be duly organized, legally authorized to conduct

    clearing business in the relevant jurisdiction, and to remain in good

    standing at all times. The proposed rule also would require a DCO that

    provides clearing services outside the United States to be duly

    organized to conduct business in the relevant jurisdiction, to remain

    in good standing at all times, and to be authorized by the appropriate

    foreign licensing authority.

    Proposed Sec. 39.27 would set forth requirements for various

    activities of a DCO, as applicable. Proposed Sec. 39.27(b)(1) would

    require the legal framework of a DCO to provide for the DCO to act as a

    counterparty, including novation. Through novation, the DCO is

    substituted as the counterparty to both the buyer and the seller of the

    original contract.

    Proposed Sec. 39.27(b)(2) would require the legal framework of a

    DCO to address netting arrangements. Netting reduces the number and

    value of deliveries and payments needed to settle a set of transactions

    and reduces the potential losses to a DCO in the event of a clearing

    member's default.

    Proposed Sec. 39.27(b)(3) would require the legal framework to

    provide for the DCO's interest in collateral. Generally, collateral

    arrangements involve either a pledge or a title transfer. In either

    case, a DCO should have a high degree of assurance that its interest

    has been validly created in the relevant jurisdiction, validly

    perfected, if necessary, and is enforceable under applicable law.

    Proposed Sec. 39.27(b)(4) would require the legal framework to

    provide for the steps that the DCO would take to address the default of

    a clearing member, including but not limited to, the unimpeded ability

    to liquidate

    [[Page 77583]]

    collateral and close out or transfer positions in a timely manner. A

    DCO must act quickly in the event of a clearing member's default, and

    ambiguity over the enforceability of its procedures could delay, and

    possibly prevent altogether, a DCO from taking actions that fulfill its

    obligations to non-defaulting clearing members or minimize its

    potential losses.

    A critical issue in a DCO's settlement arrangements is the timing

    of the finality of funds transfers between the DCO's settlement

    accounts and the accounts of its clearing members. To address this,

    proposed Sec. 39.27(b)(5) would require the legal framework of a DCO

    to ensure that its settlement bank arrangements provide that funds

    transfers are final, i.e., irrevocable and unconditional, when the

    DCO's accounts are debited and credited.

    In circumstances where a DCO crosses borders through linkages,

    remote clearing members, or the taking of collateral, the rules

    governing the DCO's activities should clearly indicate the law that is

    intended to apply to each aspect of a DCO's operations. Potential

    conflicts of law should be identified and the DCO should address

    conflict of law issues when there is a difference in the substantive

    laws of the jurisdictions that have potential interests in a DCO's

    activities. Proposed Sec. 39.27(c)(1) would require the legal

    framework of a DCO that provides clearing services outside the United

    States to identify and address any conflict of law issues and, in

    entering into cross-border agreements, to specify a choice of law.

    Proposed Sec. 39.27(c)(2) would require a DCO to be able to

    demonstrate the enforceability of its choice of law in relevant

    jurisdictions and that its rules, procedures and contracts are

    enforceable in all relevant jurisdictions. This could be accomplished,

    for example, by means of a legal opinion.

    The Commission solicits comment as to the legal risks addressed in

    proposed Sec. 39.27 and whether the rule should address additional

    legal risks.

    III. Technical Amendments

    Section 39.3(a) currently requires that an organization applying

    for DCO registration must ``file electronically an application for

    registration with the Secretary of the Commission at its Washington,

    DC, headquarters.'' The Commission is proposing to revise this

    provision and Sec. Sec. 39.3(c) (withdrawal of an application for

    registration) and 39.3(f) (request for vacation of registration) by

    instructing applicants to file electronically an application for

    registration with the Secretary in the form and manner provided by the

    Commission. Given the shift from paper-based to electronic submissions,

    it is no longer necessary to specify the location of the Secretary.

    Moreover, because the Commission may modify procedures for electronic

    submissions from time to time, the proposed rule would not specify

    filing instructions. The Commission's filing procedures will be posted

    on its Web site and any further questions can be addressed to the

    Office of the Secretary.

    The Commission also is proposing conforming amendments to

    paragraphs (a)(1), (c), (e), and (g) of Sec. 39.3, to reflect the

    deletion of current paragraphs (a)(3) and (b) related to the

    elimination of the 90-day expedited review period for DCO applications.

    In addition, the Commission is proposing amendments to the

    delegation provision of current paragraph (g), to correct the reference

    to ``delegates,'' by substituting the word ``designee,'' in reference

    to action taken by the Director of the Division of Clearing and

    Intermediary Oversight or the Director's designee with the concurrence

    of the General Counsel or the General Counsel's designee.

    The Commission is proposing to revise Sec. 39.4(c)(2) to remove

    the reference to accepting for clearing a new product that is not

    traded on a ``derivatives transaction execution facility'' and

    inserting in its place a reference to a ``swap execution facility.''

    IV. Effective Date

    The Commission is proposing that the effective date for the

    proposed regulations, except those relating to the CCO under proposed

    Sec. 39.3(c), be 30 days after publication of final rules in the

    Federal Register. The Commission is proposing that the requirements for

    CCOs become effective not more than 180 days from the date the final

    rules are published in the Federal Register. The Commission believes

    that this would give DCOs adequate time to implement the CCO

    regulations which, depending on the DCO, might include hiring a CCO and

    putting into place a compliance program. The Commission requests

    comment on whether the proposed effective dates are appropriate and, if

    not, the Commission further requests comment on possible alternative

    effective dates and the basis for any such alternative dates.

    V. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \48\ requires Federal

    agencies, in promulgating regulations, to consider the impact of those

    regulations on small businesses. The regulations adopted herein will

    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,\49\ and it has previously determined that DCOs

    are not small entities for the purpose of the RFA.\50\ Accordingly,

    pursuant to 5 U.S.C. 605(b), the Chairman, on behalf of the Commission,

    certifies that the proposed regulations will not have a significant

    economic impact on a substantial number of small entities.

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

    \48\ 5 U.S.C. 601 et seq.

    \49\ ``Policy Statement and Establishment of Definitions of

    ``Small Entities'' for Purposes of the Regulatory Flexibility Act,''

    47 FR 18618 (Apr. 30, 1982).

    \50\ See ``A New Regulatory Framework for Clearing

    Organizations,'' 66 FR 45604, 45609 (Aug. 29, 2001).

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

    B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \51\ imposes certain

    requirements on Federal agencies in connection with their conducting or

    sponsoring any collection of information as defined by the PRA. An

    agency may not conduct or sponsor, and a person is not required to

    respond to, a collection of information unless it displays a currently

    valid control number. OMB has not yet assigned a control number to the

    new collection.

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

    \51\ 44 U.S.C. 3501 et seq.

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

    This proposed rulemaking would result in new collection of

    information requirements within the meaning of the PRA. The Commission

    therefore is submitting this proposal to the Office of Management and

    Budget (``OMB'') for review. If adopted, responses to this collection

    of information would be mandatory.

    The Commission will protect proprietary information according to

    the Freedom of Information Act and 17 CFR part 145, ``Commission

    Records and Information.'' In addition, Section 8(a)(1) of the Act

    strictly prohibits the Commission, unless specifically authorized by

    the Act, from making public ``data and information that would

    separately disclose the business transactions or market positions of

    any person and trade secrets or names of customers.'' The Commission

    also is required to protect certain information contained in a

    government system of records according to the Privacy Act of 1974, 5

    U.S.C. 552a.

    1. Information Provided by Reporting Entities/Persons

    Section 725 of the Dodd-Frank Act and proposed regulations require

    each

    [[Page 77584]]

    respondent to file an annual report with the Commission. Commission

    staff estimates that each respondent would expend 40-80 hours to

    prepare each annual report, depending on the size of the DCO.

    Commission staff estimates that respondents could expend $4,000 to

    $8,000 annually, based on an hourly cost of $100, to comply with the

    proposed regulations.

    The proposed regulations also require each respondent to retain

    certain records. Each respondent must retain: (1) A copy of the

    policies and procedures adopted in furtherance of compliance with the

    CEA; (2) copies of materials, including written reports provided to the

    board of directors in connection with the board's review of the annual

    report; and (3) any records relevant to the annual report, including,

    but not limited to, work papers and other documents that form the basis

    of the report, and memoranda, correspondence, other documents, and

    records that are (a) created, sent or received in connection with the

    annual report and (b) contain conclusions, opinions, analyses, or

    financial data related to the annual report. Staff believes the cost of

    keeping these electronic documents will not exceed more than $1000

    annually.

    2. Information Collection Comments

    The Commission invites the public and other federal agencies to

    comment on any aspect of the reporting and recordkeeping burdens

    discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission

    solicits comments in order to: (i) Evaluate whether the proposed

    collection of information is necessary for the proper performance of

    the functions of the Commission, including whether the information will

    have practical utility; (ii) evaluate the accuracy of the Commission's

    estimate of the burden of the proposed collection of information; (iii)

    determine whether there are ways to enhance the quality, utility, and

    clarity of the information to be collected; and (iv) minimize the

    burden of the collection of information on those who are to respond,

    including through the use of automated collection techniques or other

    forms of information technology.

    Comments may be submitted directly to the Office of Information and

    Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at

    OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy

    of submitted comments so that they can be summarized and addressed in

    the final rule. Refer to the Addresses section of this notice of

    proposed rulemaking for comment submission instructions to the

    Commission. A copy of the supporting statements for the collections of

    information discussed above may be obtained by visiting RegInfo.gov.

    OMB is required to make a decision concerning the collection of

    information between 30 and 60 days after publication of this release.

    Consequently, a comment to OMB is most assured of being fully effective

    if received by OMB (and the Commission) within 30 days after

    publication of this notice of proposed rulemaking.

    C. Cost-Benefit Analysis

    Section 15(a) of the CEA \52\ requires the Commission to consider

    the costs and benefits of its actions before issuing a rulemaking under

    the CEA. By its terms, Section 15(a) does not require the Commission to

    quantify the costs and benefits of a rule or to determine whether the

    benefits of the rulemaking outweigh its costs; rather, it requires that

    the Commission ``consider'' the costs and benefits of its action.

    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 may in its discretion give

    greater weight to any one of the five enumerated areas and could in its

    discretion 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 accomplish any of the purposes of

    the CEA.

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

    \52\ 7 U.S.C. 19(a).

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

    Summary of Proposed Requirements

    Proposed amendments to part 39 of the Commission's regulations

    would establish the regulatory standards for compliance with DCO core

    principles regarding compliance, rule enforcement, antitrust, and legal

    risk, as well as CCO requirements set forth in Section 5b of the CEA.

    The proposed amendments to part 39 also would revise procedures for DCO

    applications, clarify procedures for the transfer of a DCO

    registration, and add requirements for approval of DCO rules

    establishing a portfolio margining program for customer accounts

    carried by an FCM/BD.

    Costs

    The Commission has determined that the cost to market participants

    and the public if these rules are not adopted could be substantial.

    Significantly, without these rules to promote a culture of

    institutional ethics and compliance, sound risk management and the

    financial integrity of the futures markets would not be strengthened,

    to the detriment of market participants and the public. Moreover,

    competitiveness would be affected without the prohibition against DCO

    rules and other actions that would result in unreasonable restraints of

    trade or material, anticompetitive burdens.

    Benefits

    With respect to benefits, the Commission has determined that the

    benefits of the proposed rules are many and substantial. DCO

    registration applications will be processed transparently and

    efficiently, making clearing services available to the futures and swap

    markets, in order to protect the integrity of these markets through the

    sound risk management practices associated with clearing and the

    efficiency that competition between clearinghouses will foster. The

    protection of market participants, financial integrity of the markets,

    and sound risk management will further be promoted by the compliance of

    each DCO with the rules and standards that are being adopted to

    implement the core principles, notably those associated with conflicts

    of interest, portfolio margining, financial safeguards, and legal

    certainty regarding margin, member defaults, settlement and funds

    transfers, and conflicts of law.

    Public Comment. The Commission invites public comment on its cost-

    benefit considerations. Commenters are also invited to submit any data

    or other information that they may have quantifying or qualifying the

    costs and benefits of the Proposal with their comment letters.

    List of Subjects

    17 CFR Part 1

    Definitions, Commodity futures, and Swaps.

    17 CFR Part 39

    Definitions, Commodity futures, Reporting and recordkeeping

    requirements, and Swaps.

    In light of the foregoing, the Commission hereby proposes to amend

    parts 1 and 39 of Title 17 of the Code of Federal Regulations as

    follows:

    [[Page 77585]]

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    Authority and Issuance

    1. The authority for part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,

    6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c,

    13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Dodd-

    Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-

    203, 124 Stat. 1376 (2010).

    2. Amend Sec. 1.3 by revising paragraphs (c), (d), and (k), and

    adding paragraphs (jjj), (kkk), (lll), (mmm), (nnn), and (ooo) to read

    as follows:

    Sec. 1.3 Definitions.

    * * * * *

    (c) Clearing member. This term means any person that has clearing

    privileges such that it can process, clear and settle trades through a

    derivatives clearing organization on behalf of itself or others. The

    derivatives clearing organization need not be organized as a membership

    organization.

    (d) Clearing organization or derivatives clearing organization.

    This term means a clearinghouse, clearing association, clearing

    corporation, or similar entity, facility, system, or organization that,

    with respect to an agreement, contract, or transaction--

    (1) Enables each party to the agreement, contract, or transaction

    to substitute, through novation or otherwise, the credit of the

    derivatives clearing organization for the credit of the parties;

    (2) Arranges or provides, on a multilateral basis, for the

    settlement or netting of obligations resulting from such agreements,

    contracts, or transactions executed by participants in the derivatives

    clearing organization; or

    (3) Otherwise provides clearing services or arrangements that

    mutualize or transfer among participants in the derivatives clearing

    organization the credit risk arising from such agreements, contracts,

    or transactions executed by the participants.

    (4) Exclusions. The terms clearing organization and derivatives

    clearing organization do not include an entity, facility, system, or

    organization solely because it arranges or provides for--

    (i) Settlement, netting, or novation of obligations resulting from

    agreements, contracts or transactions, on a bilateral basis and without

    a central counterparty;

    (ii) Settlement or netting of cash payments through an interbank

    payment system; or

    (iii) Settlement, netting, or novation of obligations resulting

    from a sale of a commodity in a transaction in the spot market for the

    commodity.

    * * * * *

    (k) Customer; commodity customer; swap customer. These terms have

    the same meaning and refer to a customer trading in any commodity named

    in the definition of commodity herein, or in any swap as defined in

    section 1a(47) of the Act: Provided, however, an owner or holder of a

    proprietary account as defined in paragraph (y) of 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, and such an owner or holder of such a proprietary account

    shall otherwise be deemed to be a customer within the meaning of the

    Act and Sec. Sec. 1.37 and 1.46 and all other sections of these rules,

    regulations, and orders which do not implement sections 4d and 4f of

    the Act.

    * * * * *

    (jjj) Clearing initial margin. This term means initial margin

    posted by a clearing member with a derivatives clearing organization.

    (kkk) Customer initial margin. This term means initial margin

    posted by a customer with a futures commission merchant, or by a non-

    clearing member futures commission merchant with a clearing member.

    (lll) Initial margin. This term means money, securities, or

    property posted by a party to a futures, option, or swap as performance

    bond to cover potential future exposures arising from changes in the

    market value of the position.

    (mmm) Margin call. This term means a request from a futures

    commission merchant to a customer to post customer initial margin; or a

    request by a derivatives clearing organization to a clearing member to

    post clearing initial margin or variation margin.

    (nnn) Spread margin. This term means reduced initial margin that

    takes into account correlations between certain related positions held

    in a single account.

    (ooo) Variation margin. This term means a payment made by a party

    to a futures, option, or swap to cover the current exposure arising

    from changes in the market value of the position since the trade was

    executed or the previous time the position was marked to market.

    PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    Authority and Issuance

    3. The authority for part 39 is revised to read as follows:

    Authority: 7 U.S.C. 2, 5, 6, 6d, 7a-1,7a-2, and 7b as amended

    by the Dodd-Frank Wall Street Reform and Consumer Protection Act,

    Pub. L. 111-203, 124 Stat. 1376 (2010).

    4. Amend Sec. 39.1 by:

    a. Redesignating the existing text as paragraph (a);

    b. Adding a new heading to newly designated paragraph (a); and

    c. Adding a new paragraph (b) to read as follows:

    Sec. 39.1 Scope and Definitions.

    (a) Scope. * * *

    (b) Definitions. For the purposes of this part,

    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.

    Compliance policies and procedures means all policies, procedures,

    codes, including a code of ethics, safeguards, rules, programs, and

    internal controls that are required to be adopted or established by a

    derivatives clearing organization pursuant to the Act, Commission

    regulations, or orders, or that otherwise facilitate compliance with

    the Act and Commission regulations.

    Customer account or customer origin means a clearing member's

    account held on behalf of customers, as defined in Sec. 1.3(k) of this

    chapter. A customer account is also a futures account, as that term is

    defined by Sec. 1.3(vv) of this chapter.

    House account or house origin means a clearing member's combined

    proprietary accounts, as defined in Sec. 1.3(y) of this chapter.

    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 a potential

    price move, change in option volatility, or change 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

    [[Page 77586]]

    determine the adequacy of such financial resources.

    Systemically important derivatives clearing organization means a

    financial market utility that is a derivatives clearing organization

    registered under section 5b of the Act (7 U.S.C. 7a-1), which has been

    designated by the Financial Stability Oversight Council to be

    systemically important.

    5. Amend Sec. 39.3 by revising paragraph (a)(1), removing

    paragraph (a)(3), removing and reserving paragraph (b), revising

    paragraphs (c), (e), (f), and (g)(1), and adding paragraph (h) to read

    as follows:

    Sec. 39.3 Procedures for registration.

    (a) * * *

    (1) An organization desiring to be registered as a derivatives

    clearing organization shall file electronically an application for

    registration with the Secretary of the Commission in the form and

    manner provided by the Commission. The Commission will review the

    application for registration as a derivatives clearing organization

    pursuant to the 180-day timeframe and procedures specified in section

    6(a) of the Act. The Commission may approve or deny the application or,

    if deemed appropriate, register the applicant as a derivatives clearing

    organization subject to conditions.

    * * *

    (b) [Reserved].

    (c) Withdrawal of application for registration. An applicant for

    registration may withdraw its application submitted pursuant to

    paragraph (a) of this section by filing electronically such a request

    with the Secretary of the Commission in the form and manner provided by

    the Commission. Withdrawal of an application for registration shall not

    affect any action taken or to be taken by the Commission based upon

    actions, activities, or events occurring during the time that the

    application for registration was pending with the Commission.

    * * * * *

    (e) Reinstatement of dormant registration. Before listing or

    relisting contracts for clearing, a dormant registered derivatives

    clearing organization as defined in Sec. 40.1 of this chapter must

    reinstate its registration under the procedures of paragraph (a) of

    this section; provided, however, that an application for reinstatement

    may rely upon previously submitted materials that still pertain to, and

    accurately describe, current conditions.

    (f) Request for vacation of registration. A registered derivatives

    clearing organization may vacate its registration under section 7 of

    the Act by filing electronically such a request with the Secretary of

    the Commission in the form and manner provided by the Commission.

    Vacation of registration shall not affect any action taken or to be

    taken by the Commission based upon actions, activities or events

    occurring during the time that the facility was registered by the

    Commission.

    (g) * * *

    (1) The Commission hereby delegates, until it orders otherwise, to

    the Director of the Division of Clearing and Intermediary Oversight or

    the Director's designee, with the concurrence of the General Counsel or

    the General Counsel's designee, the authority to notify an applicant

    seeking designation under section 6(a) of the Act that the application

    is materially incomplete and the running of the 180-day period is

    stayed.

    * * * * *

    (h) Request for transfer of registration and open interest. (1) In

    anticipation of a corporate change that will result in the transfer of

    all or substantially all of a derivatives clearing organization's

    assets to another legal entity, the derivatives clearing organization

    shall submit a request for approval to transfer the derivatives

    clearing organization's registration and positions comprising open

    interest for clearing and settlement.

    (2) Timing of submission and other procedural requirements. (i) The

    request shall be submitted no later than three months prior to the

    anticipated corporate change, or as otherwise permitted under Sec.

    39.19(c)(4)(x)(C) of this part.

    (ii) The derivatives clearing organization shall submit a request

    for transfer by filing electronically such a request with the Secretary

    of the Commission in the form and manner provided by the Commission.

    (iii) The derivatives clearing organization shall submit a

    confirmation of change report pursuant to Sec. 39.19(c)(4)(x)(D) of

    this part.

    (3) Required information. The request shall include the following:

    (i) The underlying agreement that governs the corporate change;

    (ii) A narrative description of the corporate change, including the

    reason for the change and its impact on the derivatives clearing

    organization's financial resources, governance, and operations, and its

    impact on the rights and obligations of clearing members and market

    participants holding the positions that comprise the derivatives

    clearing organization's open interest;

    (iii) A discussion of the transferee's ability to comply with the

    Act, including the core principles applicable to derivatives clearing

    organizations, and the Commission's regulations thereunder;

    (iv) The governing documents of the transferee, including but not

    limited to articles of incorporation and bylaws;

    (v) The transferee's rules marked to show changes from the current

    rules of the derivatives clearing organization;

    (vi) A list of contracts, agreements, transactions or swaps for

    which the DCO requests transfer of open interest;

    (vii) A representation by the derivatives clearing organization

    that it is in compliance with the Act, including the core principles

    applicable to derivatives clearing organizations, and the Commission's

    regulations thereunder; and

    (viii) A representation by the transferee that it understands that

    the derivatives clearing organization is a regulated entity that must

    comply with the Act, including the core principles applicable to

    derivatives clearing organizations, and the Commission's regulations

    thereunder, in order to maintain its registration as a derivatives

    clearing organization; and further, that the transferee will continue

    to comply with all self-regulatory requirements applicable to a

    derivatives clearing organization under the Act and the Commission's

    regulations thereunder.

    (4) Commission determination. The Commission will review a request

    as soon as practicable, and based on the Commission's determination as

    to the transferee's ability to continue to operate the DCO in

    compliance with the Act and the Commission's regulations thereunder,

    such request will be approved or denied pursuant to a Commission order.

    6. Amend Sec. 39.4 by revising paragraph (c)(2) and adding

    paragraph (e) to read as follows:

    Sec. 39.4 Procedures for implementing derivatives clearing

    organization rules and clearing new products.

    * * * * *

    (c) * * *

    (2) Acceptance of certain new products for clearing. A derivatives

    clearing organization that accepts for clearing a new product that is

    not traded on a designated contract market or a registered swap

    execution facility must submit to the Commission any rules establishing

    the terms and conditions of the product that make it acceptable for

    clearing with a certification that the clearing of the product and the

    rules and terms and conditions comply with the Act and the rules

    thereunder

    [[Page 77587]]

    pursuant to the procedures of Sec. 40.2 of this chapter.

    * * * * *

    (e) Holding securities in a futures portfolio margining account. A

    derivatives clearing organization seeking to provide a portfolio

    margining program under which securities would be held in a futures

    account as defined in Sec. 1.3(vv) of this chapter, shall submit rules

    to implement such portfolio margining program for Commission approval

    in accordance with Sec. 40.5 of this chapter. Concurrent with the

    submission of such rules for Commission approval, the derivatives

    clearing organization shall petition the Commission for an order under

    section 4d of the Act.

    7. Add Sec. 39.10 to read as follows:

    Sec. 39.10 Compliance with Core Principles.

    (a) To be registered and to maintain registration as a derivatives

    clearing organization, a derivatives clearing organization shall comply

    with each core principle set forth in section 5b(c)(2) of the Act and

    any requirement that the Commission may impose by rule or regulation

    pursuant to section 8a(5) of the Act; and

    (b) Subject to any rule or regulation prescribed by the Commission,

    a registered derivatives clearing organization shall have reasonable

    discretion in establishing the manner by which it complies with each

    core principle.

    (c) Chief Compliance Officer. (1) Designation. Each derivatives

    clearing organization shall establish the position of chief compliance

    officer, designate an individual to serve as the chief compliance

    officer, and provide the chief compliance officer with the full

    responsibility and authority to develop and enforce, in consultation

    with the board of directors or the senior officer, appropriate

    compliance policies and procedures, as defined in Sec. 39.1(b), to

    fulfill the duties set forth in the Act and Commission regulations.

    (i) The individual designated to serve as chief compliance officer

    shall have the background and skills appropriate for fulfilling the

    responsibilities of the position. No individual who would be

    disqualified from registration under sections 8a(2) or 8a(3) of the Act

    may serve as a chief compliance officer.

    (ii) The chief compliance officer shall report to the board of

    directors or the senior officer of the derivatives clearing

    organization. The board of directors or the senior officer shall

    approve the compensation of the chief compliance officer.

    (iii) The chief compliance officer shall meet with the board of

    directors or the senior officer at least once a year to discuss the

    effectiveness of the compliance policies and procedures, as well as the

    administration of those policies and procedures by the chief compliance

    officer.

    (iv) A change in the designation of the individual serving as the

    chief compliance officer of the derivatives clearing organization shall

    be reported to the Commission in accordance with the requirements of

    Sec. 39.19(c)(4)(xi) of this part.

    (2) Chief Compliance Officer Duties. The chief compliance officer's

    duties shall include, but are not limited to:

    (i) Reviewing the derivatives clearing organization's compliance

    with the core principles set forth in section 5b of the Act (7 U.S.C.

    7a-1), and the Commission's regulations thereunder;

    (ii) In consultation with the board of directors or the senior

    officer, resolving any conflicts of interest that may arise;

    (iii) Administering each policy and procedure that is required

    under section 5b of the Act (7 U.S.C. 7a-1);

    (iv) Ensuring compliance with the Act and Commission regulations

    relating to agreements, contracts, or transactions, and with Commission

    regulations prescribed under section 5b of the Act (7 U.S.C. 7a-1);

    (v) Establishing procedures for the remediation of noncompliance

    issues identified by the chief compliance officer through any

    compliance office review, look-back, internal or external audit

    finding, self-reported error, or validated complaint;

    (vi) Establishing and following appropriate procedures for the

    handling, management response, remediation, retesting, and closing of

    noncompliance issues; and

    (vii) Establishing a compliance manual designed to promote

    compliance with the applicable laws, rules, and regulations and a code

    of ethics designed to prevent ethical violations and to promote ethical

    conduct.

    (3) Annual report. The chief compliance officer shall, not less

    than annually, prepare and sign a written report that covers the most

    recently completed fiscal year of the derivatives clearing

    organization, and provide the annual report to the board of directors

    or the senior officer. The annual report shall, at a minimum:

    (i) Contain a description of the derivatives clearing

    organization's compliance with respect to the Act and Commission

    regulations, and each of the derivative clearing organization's

    compliance policies and procedures, including the code of ethics and

    conflict of interest policies;

    (ii) Review each core principle, and with respect to each:

    (A) Identify the compliance policies and procedures that ensure

    compliance with the core principle;

    (B) Provide an assessment as to the effectiveness of these policies

    and procedures;

    (C) Discuss areas for improvement, and recommend potential or

    prospective changes or improvements to the DCO's compliance program and

    resources allocated to compliance;

    (iii) List any material changes to compliance policies and

    procedures since the last annual report;

    (iv) Describe the financial, managerial, and operational resources

    set aside for compliance with the Act and Commission regulations;

    (v) Describe any material compliance matters, including incidents

    of noncompliance, since the date of the last annual report and describe

    the corresponding action taken; and

    (vi) Delineate the roles and responsibilities of the DCO's board of

    directors, relevant board committees, and staff in addressing any

    conflict of interest, including any necessary coordination with, or

    notification of, other entities, including regulators.

    (4) Submission of Annual Report to the Commission. (i) Prior to

    submitting the annual report to the Commission, the chief compliance

    officer shall provide the annual report to the board of directors or

    the senior officer of the derivatives clearing organization for review.

    Submission of the report to the board of directors or the senior

    officer shall be recorded in the board minutes or otherwise, as

    evidence of compliance with this requirement.

    (ii) The annual report shall be submitted electronically to the

    Commission not more than 90 days after the end of the derivatives

    clearing organization's fiscal year, concurrently with submission of

    the fiscal year-end audited financial statement that is required to be

    furnished to the Commission pursuant to Sec. 39.19(c)(3)(ii) of this

    part. The report shall include a certification by the chief compliance

    officer that, to the best of his or her knowledge and reasonable

    belief, and under penalty of law, the annual report is accurate and

    complete.

    (iii) The derivatives clearing organization shall promptly submit

    an amended annual report if material errors or omissions in the report

    are identified after submission. An amendment must contain the

    certification required under subparagraph (c)(4)(ii) of this section.

    (iv) A derivatives clearing organization may request from the

    Commission an extension of time to

    [[Page 77588]]

    submit its annual report in accordance with Sec. 39.19(c)(3) of this

    part.

    (5) Recordkeeping. (i) The derivatives clearing organization shall

    maintain:

    (A) A copy of the compliance policies and procedures, as defined in

    Sec. 39.1(b), and all other policies and procedures adopted in

    furtherance of compliance with the Act and Commission regulations;

    (B) Copies of materials, including written reports provided to the

    board of directors or the senior officer in connection with the review

    of the annual report under paragraph (c)(4)(i) of this section; and

    (C) Any records relevant to the annual report, including, but not

    limited to, work papers and other documents that form the basis of the

    report, and memoranda, correspondence, other documents, and records

    that are created, sent, or received in connection with the annual

    report and contain conclusions, opinions, analyses, or financial data

    related to the annual report.

    (ii) The derivatives clearing organization shall maintain records

    in accordance with Sec. 1.31 of this chapter and Sec. 39.20 of this

    part.

    8. Add Sec. 39.17 to read as follows:

    Sec. 39.17 Rule enforcement requirements.

    (a) In general. Each derivatives clearing organization shall: (1)

    Maintain adequate arrangements and resources for the effective

    monitoring and enforcement of compliance with the rules of the

    derivatives clearing organization and the resolution of disputes;

    (2) Have the authority and ability to discipline, limit, suspend,

    or terminate the activities of a clearing member due to a violation by

    the clearing member of any rule of the derivatives clearing

    organization; and

    (3) Report to the Commission regarding rule enforcement activities

    and sanctions imposed against clearing members as provided in paragraph

    (a) (2) of this section, in accordance with Sec. 39.19(c)(4)(xiii) of

    this part.

    (b) Authority to enforce rules. The board of directors of the

    derivatives clearing organization may delegate responsibility for

    compliance with the requirements of paragraph (a) of this section to

    the Risk Management Committee, unless the responsibilities are

    otherwise required to be carried out by the chief compliance officer

    pursuant to the Act or this part.

    9. Add Sec. 39.23 to read as follows:

    Sec. 39.23 Antitrust considerations.

    Unless necessary or appropriate to achieve the purposes of the Act,

    a derivatives clearing organization shall not adopt any rule or take

    any action that results in any unreasonable restraint of trade, or

    impose any material anticompetitive burden.

    10. Add Sec. 39.27 to read as follows:

    Sec. 39.27 Legal risk considerations.

    (a) Legal Authorization. A derivatives clearing organization shall

    be duly organized, legally authorized to conduct business, and remain

    in good standing at all times in the relevant jurisdictions. If the

    derivatives clearing organization provides clearing services outside

    the United States, it shall be duly organized to conduct business and

    remain in good standing at all times in the relevant jurisdictions, and

    be authorized by the appropriate foreign licensing authority.

    (b) Legal framework. A derivatives clearing organization shall

    operate pursuant to a well-founded, transparent, and enforceable legal

    framework that addresses each aspect of the activities of the

    derivatives clearing organization. As applicable, the framework shall

    provide for:

    (1) The derivatives clearing organization to act as a counterparty,

    including novation;

    (2) Netting arrangements;

    (3) The derivatives clearing organization's interest in collateral;

    (4) The steps that a derivatives clearing organization would take

    to address a default of a clearing member, including but not limited

    to, the unimpeded ability to liquidate collateral and close out or

    transfer positions in a timely manner;

    (5) Finality of settlement and funds transfers that are irrevocable

    and unconditional when effected (when a derivatives clearing

    organization's accounts are debited and credited); and

    (6) Other significant aspects of the derivatives clearing

    organization's operations, risk management procedures, and related

    requirements.

    (c) Conflict of Laws. If a derivatives clearing organization

    provides clearing services outside the United States:

    (1) The derivatives clearing organization shall identify and

    address any conflict of law issues. The derivatives clearing

    organization's contractual agreements shall specify a choice of law.

    (2) The derivatives clearing organization shall be able to

    demonstrate the enforceability of its choice of law in relevant

    jurisdictions and that its rules, procedures, and contracts are

    enforceable in all relevant jurisdictions.

    Issued in Washington, DC, on December 1, 2010 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to General Regulations and Derivatives Clearing

    Organizations--Commission Voting Summary and Statement of Chairman Gary

    Gensler

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn,

    Sommers, Chilton and O'Malia voted in the affirmative. No

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rule on legal and compliance matters for

    clearinghouses, which would revise procedures for derivatives

    clearing organization (DCO) applications, clarify procedures for the

    transfer of a DCO registration and add requirements for approval of

    DCO rules for portfolio margining of futures and securities in a

    futures account.

    The rule is intended to ensure that sufficient resources are

    devoted to compliance with laws and regulations, which is a core

    component of sound risk management practices. It would fulfill the

    Dodd-Frank Act's requirement that each DCO have a chief compliance

    officer who is responsible for establishing and administering

    compliance policies, as well as resolving certain conflicts of

    interest.

    Finally, the proposed rulemaking would implement DCO Core

    Principles for compliance, rule enforcement, antitrust consideration

    and legal risk, which would promote compliance with the CEA and

    would enhance the integrity of the clearing and settlement process.

    [FR Doc. 2010-31029 Filed 12-10-10; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 13, 2010



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