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2013-19845

  • [Federal Register Volume 78, Number 159 (Friday, August 16, 2013)]

    [Proposed Rules]

    [Pages 50259-50311]

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

    [FR Doc No: 2013-19845]

    [[Page 50259]]

    Vol. 78

    Friday,

    No. 159

    August 16, 2013

    Part IV

    Commodity Futures Trading Commission

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    17 CFR Parts 39, 140, and 190

    Derivatives Clearing Organizations and International Standards;

    Proposed Rule

    Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 /

    Proposed Rules

    [[Page 50260]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 39, 140, and 190

    RIN Number 3038-AE06

    Derivatives Clearing Organizations and International Standards

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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

    proposing amendments to its regulations to establish additional

    standards for compliance with the derivatives clearing organization

    (``DCO'') core principles set forth in Section 5b(c)(2) of the

    Commodity Exchange Act (``CEA'') for systemically important DCOs

    (``SIDCOs'') and DCOs that elect to opt-in to the SIDCO regulatory

    requirements (``Subpart C DCOs''). SIDCOs and Subpart C DCOs would be

    required to comply with the requirements applicable to all DCOs, which

    are set forth in the Commission's DCO regulations on compliance with

    core principles, to the extent those requirements are not inconsistent

    with the requirements of the regulations in this proposed rule. The

    proposed amendments include: Procedural requirements for opting in to

    the regulatory regime as well as substantive requirements relating to

    governance, financial resources, system safeguards, special default

    rules and procedures for uncovered losses or shortfalls, risk

    management, additional disclosure requirements, efficiency, and

    recovery and wind-down procedures. These additional requirements would

    also be consistent with the Principles for Financial Market

    Infrastructures (``PFMIs'') published by the Committee on Payment and

    Settlement Systems and the Board of the International Organization of

    Securities Commissions (``CPSS-IOSCO''). In addition, the Commission is

    proposing certain delegation provisions and certain technical

    clarifications.

    DATES: Submit comments on or before September 16, 2013.

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

    AE06, by any of the following methods:

    Agency Web site: http://comments.cftc.gov.

    Mail: 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 may be 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

    Commission regulation 145.

    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: Ananda Radhakrishnan, Director,

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

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

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

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

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

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

    jpartridge@cftc.gov; Tracey Wingate, Special Counsel, DCR, at 202-418-

    5319 or twingate@cftc.gov; or Kathryn L. Ballintine, Attorney-Advisor,

    DCR, at 202-418-5575 or kballintine@cftc.gov, in each case, at the

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

    Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. Regulatory Framework for Registered DCOs

    B. Designation of DCOs as Systemically Important Under Title

    VIII of the Dodd-Frank Act

    C. Existing Standards for SIDCOs

    D. DCO Core Principles and Existing Regulations for Registered

    DCOs

    E. PFMIs

    F. The Role of the PFMIs in International Banking Standards

    G. Proposed Rulemaking Applicable to SIDCOs and Subpart C DCOs

    II. Discussion of Revised and Proposed Rules

    A. Regulation 39.2 (Definitions)

    B. Regulation 39.30 (Scope)

    C. Regulation 39.31 (Election To Become Subject to the

    Provisions of Subpart C)

    D. Regulation 39.32 (Governance for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives

    Clearing Organizations)

    E. Regulation 39.33 (Financial Resources for Systemically

    Important Derivatives Clearing Organizations and Subpart C

    Derivatives Clearing Organizations)

    F. Regulation 39.34 (System Safeguards for Systemically

    Important Derivatives Clearing Organizations and Subpart C

    Derivatives Clearing Organizations)

    G. Regulation 39.35 (Default Rules and Procedures for Uncovered

    Losses or Shortfalls (Recovery) for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives

    Clearing Organizations)

    H. Regulation 39.36 (Risk Management for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives

    Clearing Organizations)

    I. Regulation 39.37 (Additional Disclosure for Systemically

    Important Derivatives Clearing Organizations and Subpart C

    Derivatives Clearing Organizations)

    J. Regulation 39.38 (Efficiency for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives

    Clearing Organizations)

    K. Regulation 39.39 (Recovery and Wind-Down for Systemically

    Important Derivatives Clearing Organizations and Subpart C

    Derivatives Clearing Organizations)

    L. Regulation 39.40 (Consistency With the Principles for

    Financial Market Infrastructures)

    M. Regulation 39.41 (Special Enforcement Authority For

    Systemically Important Derivatives Clearing Organizations)

    N. Regulation 39.42 (Advance Notice of Material Risk-Related

    Rule Changes by Systemically Important Derivatives Clearing

    Organizations)

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

    the Division of Clearing and Risk)

    P. Regulation 190.09 (Member Property)

    III. Effective Date

    IV. Related Matters

    A. Paperwork Reduction Act

    B. Regulatory Flexibility Act

    C. Consideration of Costs and Benefits

    I. Background

    A. Regulatory Framework for Registered DCOs

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

    Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII

    of the

    [[Page 50261]]

    Dodd-Frank Act, entitled the ``Wall Street Transparency and

    Accountability Act of 2010,'' \2\ amended the Commodity Exchange Act

    (``CEA'' or the ``Act'') \3\ to establish a comprehensive regulatory

    framework for over-the-counter (``OTC'') derivatives, including swaps.

    The legislation was enacted to reduce risk, increase transparency, and

    promote market integrity within the financial system by, among other

    things: (1) Providing for the registration and comprehensive regulation

    of swap dealers and major swap participants; (2) imposing mandatory

    clearing and trade execution requirements on clearable swap contracts;

    (3) creating rigorous recordkeeping and real-time reporting regimes;

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

    authorities with respect to, among others, all registered entities and

    intermediaries subject to the Commission's oversight.

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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,

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

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

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

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

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

    the CEA, which sets forth core principles that a DCO must comply with

    in order to register and maintain registration with the Commission. The

    core principles were originally added to the CEA by the Commodity

    Futures Modernization Act of 2000,\4\ and, in 2001, the Commission

    issued guidance on DCO compliance with these core principles.\5\

    However, in furtherance of the goals of the Dodd-Frank Act to reduce

    risk, increase transparency, and promote market integrity, the

    Commission, pursuant to the Commission's enhanced rulemaking

    authority,\6\ withdrew the 2001 guidance and adopted regulations

    establishing standards for compliance with the DCO core principles.\7\

    As noted in the preamble to the final rule for Subpart A and Subpart B

    of part 39 of the Commission's regulations (``Subpart A'' and ``Subpart

    B,'' respectively), the implementing regulations of the DCO core

    principles, the Commission sought to provide legal certainty for market

    participants, strengthen the risk management practices of DCOs, and

    increase overall confidence in the financial system by assuring

    ``market participants and the public that DCOs are meeting minimum risk

    management standards.'' \8\

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

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

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

    66 FR 45604 (Aug. 29, 2001) (adopting 17 CFR Part 39, Appendix A).

    \6\ See Section 725(c)(2)(i) of the Dodd Frank Act (giving the

    Commission explicit authority to promulgate rules regarding the core

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

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

    \7\ See Derivatives Clearing Organization General Provisions and

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

    \8\ Id. at 69335.

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

    the Dodd-Frank Act

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

    Settlement Supervision Act of 2010,'' \9\ was enacted to mitigate

    systemic risk in the financial system and promote financial

    stability.\10\ Section 804 of the Dodd-Frank Act requires the Financial

    Stability Oversight Council (``Council'') to designate those financial

    market utilities (``FMUs'') \11\ that the Council determines are, or

    are likely to become, systemically important.\12\

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    \9\ Section 801 of the Dodd-Frank Act.

    \10\ Section 802(b) of the Dodd-Frank Act.

    \11\ An FMU includes ``any person that manages or operates a

    multilateral system for the purpose of transferring, clearing, or

    settling payments, securities, or other financial transactions among

    financial institutions or between financial institutions and the

    person.'' Section 803(6)(A) of the Dodd-Frank Act.

    \12\ Section 804(a)(1) of the Dodd-Frank Act. The term

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

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

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

    credit problems spreading among financial institutions or markets

    and thereby threaten the stability of the financial system of the

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

    Authority to Designate Financial Market Utilities as Systemically

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

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    In determining whether an FMU is systemically important, the

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

    statutory considerations \13\ and other metrics to assesses, among

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

    FMU] are potentially severe, not necessarily in the sense that they

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

    disruptions might reduce the ability of financial institutions or

    markets to perform their normal intermediation functions.'' \14\ On

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

    important under Title VIII.\15\ Two of these designated FMUs are CFTC-

    registered DCOs \16\ for which the Commission is the Supervisory

    Agency.\17\

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    \13\ Under Section 804(a)(2) of the Dodd-Frank Act, in

    determining whether an FMU is or is likely to become systemically

    important, the Council must take into consideration the following:

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

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

    the relationship, interdependencies, or other interactions of the

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

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

    have on critical markets, financial institutions or the broader

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

    appropriate.

    \14\ 76 FR at 44766.

    \15\ See Press Release, Financial Stability Oversight Council,

    Financial Stability Oversight Council Makes First Designations in

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

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

    \16\ While Chicago Mercantile Exchange, Inc. (``CME''), ICE

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

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

    designated as systemically important by the Council, the CFTC is the

    Supervisory Agency only for CME and ICE Clear Credit, the SEC serves

    as OCC's Supervisory Agency.

    \17\ See Section 803(8)(A) of the Dodd-Frank Act (defining

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

    jurisdiction over a designated financial market utility under

    federal banking, securities or commodity futures laws).

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    C. Existing Standards for SIDCOs

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

    consider relevant international standards and existing prudential

    requirements when prescribing risk management standards governing the

    operations related to payment, clearing, and settlement activities for

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

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

    Supervisory Agency.\18\ More generally, Section 752 of the Dodd-Frank

    Act directs the Commission to consult and coordinate with foreign

    regulatory authorities on the establishment of consistent international

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

    futures, and options on futures.\19\

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    \18\ See Section 805(a)(2) of the Dodd-Frank Act. The Commission

    notes that under section 805 of the Dodd-Frank Act it also has the

    authority to prescribe risk management standards governing the

    operations related to payment, clearing, and settlement activities

    for FMUs that are designated as systemically important by the

    Council and are engaged in activities for which the Commission is

    the appropriate financial regulator.

    \19\ Section 752 of the Dodd-Frank Act, codified at 15 U.S.C.

    8325, provides:

    (a) In order to promote effective and consistent global

    regulation of swaps and security based swaps, the [CFTC], the

    Securities and Exchange Commission, and the prudential regulators

    (as that term is defined in section 1a(30) of the [CEA], as

    appropriate, shall consult and coordinate with foreign regulatory

    authorities on the establishment of international standards with

    respect to the regulation * * * of swaps * * * [and] swap entities *

    * *.

    (b) In order to promote effective and consistent global

    regulation of contracts of sale of a commodity for future delivery

    and options on such contracts, the [CFTC] shall consult and

    coordinate with foreign regulatory authorities on the establishment

    of international standards with respect to the regulation of

    contracts of a sale of a commodity for future delivery and on

    options on such contracts.

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    The Commission has previously reviewed the risk management

    [[Page 50262]]

    standards set forth in part 39 of the Commission's regulations in light

    of relevant international standards and existing prudential

    requirements to identify those areas in which additional risk

    management standards for SIDCOs would be appropriate. In 2010, the

    Commission proposed enhanced financial resource requirements for SIDCOs

    that would have required a SIDCO to (1) maintain sufficient financial

    resources to meet the SIDCO's financial obligations to its clearing

    members notwithstanding a default by the two clearing members creating

    the largest combined financial exposure for the SIDCO in extreme but

    plausible market conditions,\20\ and (2) only count the value of

    assessments, after a 30% haircut, to meet up to 20% of the resources

    required to meet obligations arising from a default by the clearing

    member creating the second largest financial exposure.\21\ In addition,

    in 2011 the Commission proposed to improve system safeguards for SIDCOs

    by enhancing certain business continuity and disaster recovery

    procedures.\22\

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    \20\ Financial Resources Requirements for Derivatives Clearing

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

    proposed rulemaking).

    \21\ Id.

    \22\ See Risk Management Requirements for Derivatives Clearing

    Organizations, 76 FR 3697, 3726-3727 (Jan. 20, 2011) (notice of

    proposed rulemaking). The proposal also implemented special

    enforcement authority over SIDCOs that, pursuant to section 807(c)

    of the Dodd-Frank Act, would have granted the Commission authority

    under the provisions of subsections (b) through (n) of section 8 of

    the Federal Deposit Insurance Act in the same manner and to the same

    extent as if the SIDCO were an insured depository institution and

    the Commission were the appropriate federal banking agency for such

    insured depository institution. See 76 FR at 3727.

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    Because efforts to finalize the PFMIs were ongoing at the time the

    Commission adopted certain amendments to part 39 applicable to DCOs,

    rules specific to SIDCOs could have put SIDCOs at a competitive

    disadvantage vis-[agrave]-vis foreign central counterparties (``CCPs'')

    not yet subject to comparable rules. Moreover, at the time, because no

    DCO had been designated as systemically important by the Council, the

    Commission concluded it would be premature to finalize the SIDCO

    regulations in the Derivatives Clearing Organization General Provisions

    and Core Principles adopting release.\23\ Instead, the Commission

    decided, consistent with Section 805(a)(1) of the Dodd-Frank Act,\24\

    to monitor domestic and international developments concerning CCPs and

    reconsider the proposed SIDCO regulations in light of such

    developments. In 2013, after careful consideration of the comments on

    the 2010 proposed SIDCO rules and in light of domestic and

    international market and regulatory developments, the Commission

    finalized these proposed regulations in a manner consistent with the

    PFMIs.\25\ Specifically, in the final rules the Commission amended part

    39 by creating a Subpart C and adding regulations that (1) increased

    the minimum financial resource requirements for SIDCOs, (2) restricted

    the use of assessments by SIDCOs in meeting such financial resource

    obligations, (3) enhanced the system safeguards requirements for

    SIDCOs, and (4) granted the Commission special enforcement authority

    over SIDCOs pursuant to Section 807 of the Dodd-Frank Act.\26\

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    \23\ See 76 FR at 69352.

    \24\ The Commission notes again that Section 805(a)(1) of the

    Dodd-Frank Act requires the Commission to consider international

    standards in promulgating risk management rules.

    \25\ Enhanced Risk Management Standards for Systemically

    Important Derivatives Clearing Organizations, (final rule published

    in the Federal Register August 15, 2013) (``SIDCO Final Rule'').

    \26\ Id.

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    D. DCO Core Principles and Regulations for Registered DCOs

    As noted above, in order to register and maintain registration

    status with the Commission, DCOs must comply with all of the DCO core

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

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

    regulations. However, for purposes of this proposal, the Commission

    would like to highlight the following requirements set forth in the

    core principles and related Commission regulations: Core Principle B

    (Financial Resources) and regulations 39.11 and 39.29; Core Principle D

    (Risk Management) and regulation 39.13; Core Principle G (Default Rules

    and Procedures) and regulation 39.16; Core Principle I (System

    Safeguards) and regulations 39.18 and 39.30; Core Principle L (Public

    Information) and regulation 39.21; Core Principle O (Governance Fitness

    Standards); Core Principle P (Conflicts of Interest); and Core

    Principle Q (Composition of Governing Boards).

    1. Core Principle B: Financial Resources

    Core Principle B requires DCOs to have ``adequate financial,

    operational, and managerial resources, as determined by the Commission,

    to discharge each responsibility of the [DCO].'' \27\ Specifically,

    Core Principle B requires a DCO to possess financial resources that, at

    a minimum, exceed the total amount that would enable the DCO to meet

    its financial obligations to its clearing members, notwithstanding a

    default by the clearing member creating the largest financial exposure

    for the DCO in extreme but plausible market conditions and to cover its

    operating costs for a period of one year, as calculated on a rolling

    basis. Regulation 39.11 codifies these minimum requirements for all

    DCOs.\28\ Pursuant to regulation 39.29, however, a SIDCO that is

    systemically important in multiple jurisdictions or that is involved in

    activities with a more-complex risk profile must maintain financial

    resources sufficient to enable it to meet its financial obligations to

    its clearing members notwithstanding a default by the two clearing

    members creating the largest combined financial exposure for the SIDCO

    in extreme but plausible market conditions.\29\

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    \27\ Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 7a-1(c)(2)(B).

    \28\ Specifically, regulation 39.11 requires registered DCOs to

    maintain financial resources sufficient to cover a wide range of

    potential stress scenarios, which include, but are not limited to,

    the default of the participant and its affiliates that would

    potentially cause the largest aggregate credit exposure to the CCP

    in extreme but plausible market conditions, otherwise known as

    ``Cover One.''

    \29\ Financial resources sufficient to cover the default of the

    two participants creating the largest credit exposure in extreme but

    plausible circumstances is known as ``over two.'' See also infra

    note 70.

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    2. Core Principle D: Risk Management

    Core Principle D requires a DCO to ensure that it possesses the

    ability to manage the risks associated with discharging the

    responsibilities of the DCO through the use of appropriate tools and

    procedures. It further requires a DCO to measure its credit exposures

    to each clearing member not less than once each business day and to

    monitor each such exposure periodically during the business day. Core

    Principle D also requires a DCO to limit its exposure to potential

    losses from defaults by clearing members through margin requirements

    and other risk control mechanisms, to ensure that the DCO's operations

    would not be disrupted and non-defaulting clearing members would not be

    exposed to losses that non-defaulting clearing members cannot

    anticipate or control. Finally, Core Principle D provides that a DCO

    must require margin from each clearing member sufficient to cover

    potential exposures in normal market conditions and that each model and

    parameter used in setting such margin requirements must be risk-based

    and reviewed on a regular basis. Regulation 39.13

    [[Page 50263]]

    establishes the requirements that a DCO must meet in order to comply

    with Core Principle D, including documentation requirements, the

    methodology for the calculation and coverage of margin requirements,

    and the criteria and timing of stress tests that a DCO must

    conduct.\30\

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    \30\ The Commission also requires that a DCO's actual coverage

    of its initial margin requirements meet an established confidence

    level of at least 99%, based on data from an appropriate historic

    time period. See generally 17 CFR 39.13(g)(2)(iii).

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    3. Core Principle G: Default Rules and Procedures

    Core Principle G requires a DCO to have rules and procedures

    designed to allow for the efficient, fair, and safe management of

    events during which clearing members become insolvent or otherwise

    default on their obligations to the DCO. In addition, Core Principle G

    requires a DCO to clearly state its default procedures, make its

    default rules publicly available, and ensure that it may take timely

    action to contain losses and liquidity pressures and to continue

    meeting its obligations. Regulation 39.16 establishes the minimum

    requirements that a DCO must meet in order to comply with Core

    Principle G, including the requirements for the DCO's default

    management plan and the procedures for dealing with the default and

    insolvency of a clearing member.

    4. Core Principle I: System Safeguards

    Core Principle I requires a DCO to establish and maintain a program

    of risk analysis and oversight that identifies and minimizes sources of

    operational risk through the development of appropriate controls and

    procedures, and automated systems that are reliable, secure, and have

    adequate scalable capacity. Core Principle I also requires that the

    emergency procedures, back-up facilities, and disaster recovery plans

    that a DCO is obligated to establish and maintain specifically allow

    for the timely recovery and resumption of the DCO's operations and the

    fulfillment of each obligation and responsibility of the DCO. Finally,

    Core Principle I requires that a DCO periodically conduct tests to

    verify that the DCO's back-up resources are sufficient to ensure daily

    processing, clearing, and settlement. Regulation 39.18 delineates the

    minimum requirements that a DCO must satisfy in order to comply with

    Core Principle I, including a recovery time objective of the next

    business day. In addition, regulation 39.30 requires a SIDCO to have a

    business continuity and disaster recovery plan with a recovery time

    objective of not later than two hours following the disruption.

    Regulation 39.30 also requires a SIDCO to have geographic diversity in

    the resources used to enable the SIDCO to meet its recovery time

    objective.

    5. Core Principle L: Public Information

    Core Principle L requires a DCO to provide market participants

    sufficient information to enable the market participants to identify

    and evaluate accurately the risks and costs associated with using the

    DCO's services. More specifically, a DCO is required to make available

    to market participants information concerning the rules and operating

    and default procedures governing its clearing and settlement systems

    and also to disclose publicly and to the Commission the terms and

    conditions of each contract, agreement, and transaction cleared and

    settled by the DCO; each clearing and other fee charged to members; the

    DCO's margin-setting methodology; daily settlement prices; and other

    matters relevant to participation in the DCO's clearing and settlement

    activities. Regulation 39.21 sets forth the requirements a DCO must

    meet in order to comply with Core Principle L and details the

    information to be disclosed to the public and requirements regarding

    the method and timing of such disclosure.

    6. Core Principle O: Governance Fitness Standards

    Core Principle O requires a DCO to establish transparent governing

    arrangements to both fulfill public interest requirements and to permit

    the consideration of the views of owners and participants. In addition,

    Core Principle O requires a DCO to establish and enforce appropriate

    fitness standards for directors, members of any disciplinary committee,

    members of the DCO, any other individual or entity with direct access

    to the settlement or clearing activities of the DCO, and affiliated

    parties.

    7. Core Principle P: Conflicts of Interest

    Core Principle P requires a DCO to establish and enforce rules to

    minimize conflicts of interest in the decision making process of the

    DCO. Core Principle P further requires a DCO to establish a process for

    resolving conflicts of interest.

    8. Core Principle Q: Composition of Governing Boards

    Core Principle Q requires a DCO to ensure that the composition of

    the governing board or committee of the DCO includes market

    participants.

    E. PFMIs

    1. Overview

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

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

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

    a period of several years,\31\ were the international standards most

    relevant to the risk management of SIDCOs.\32\

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    \31\ See Committee on Payment and Settlement Systems and the

    Technical Committee of the International Organization of Securities

    Commissions, Principles for Financial Market Infrastructures, (April

    2012) available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf. See also the Financial Stability Board June 2012

    Third Progress Report on Implementation, available at http://www.financialstabilityboard.org/publications/r_120615.pdf (Noting

    publication of the PFMIs as achieving ``an important milestone in

    the global development of a sound basis for central clearing of all

    standardised OTC derivatives'').

    \32\ In making this determination, the Commission noted that

    ``the adoption and implementation of the PFMIs by numerous foreign

    jurisdictions highlights the role these principles play in creating

    a global, unified set of international risk management standards for

    CCPs.'' See SIDCO Final Rule.

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

    In February 2010, CPSS-IOSCO launched a review of the existing sets

    of international standards for financial market infrastructures

    (``FMIs'') in support of a broader effort by the Financial Stability

    Board (``FSB'') \33\ to strengthen core financial infrastructures and

    markets by ensuring that gaps in international standards were

    identified and addressed.\34\ CPSS-IOSCO endeavored to incorporate in

    the review process lessons from the 2008 financial crisis and the

    experience of using the existing international standards, as well as

    policy and analytical work by other international committees including

    the Basel Committee on Banking Supervision (``BCBS'').\35\ The PFMIs

    replace CPSS-IOSCO's previous international standards applicable to

    CCPs,\36\ and establish international risk management standards for

    FMIs, including CCPs, that facilitate clearing

    [[Page 50264]]

    and settlement.\37\ In issuing the PFMIs, CPSS-IOSCO sought to

    strengthen and harmonize existing international standards and

    incorporate new specifications for CCPs clearing OTC derivatives.\38\

    The objectives of the PFMIs are to enhance the safety and efficiency of

    FMIs and, more broadly, reduce systemic risk andfoster transparency and

    financial stability.\39\

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

    \33\ The FSB is an international organization that coordinates

    with national financial authorities and international policy

    organizations to develop and promote effective regulatory,

    supervisory and other financial sector policies. See generally

    http://www.financialstabilityboard.org.

    \34\ PFMIs, ] 1.6.

    \35\ Id.

    \36\ The international standards for FMIs, prior to the

    publication of the PFMIs, included, the Core Principles for

    Systemically Important Payment Systems published by CPSS in 2001,

    the Recommendations for Securities Settlement Systems published by

    CPSS-IOSCO in 2001, and the Recommendations for Central

    Counterparties published by CPSS-IOSCO in 2004 (collectively all

    three are referred to as the ``CPSS-IOSCO Principles and

    Recommendations''). See PFMIs, ]] 1.4-1.5.

    \37\ The PFMIs define a ``financial market infrastructure'' as a

    ``multilateral system among participating institutions, including

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

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

    financial transactions.'' See PFMIs, ] 1.8.

    \38\ See id., ] 1.2.

    \39\ Id., ] 1.15.

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

    The PFMIs set out 24 principles which address the risk and

    efficiency of an FMI's operations.\40\ Assessments of observance with

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

    of the principles.\41\ While Subpart A and Subpart B incorporate the

    vast majority of the standards set forth in the PFMIs,\42\ the

    Commission, which is a member of the Board of IOSCO, intends to

    implement rules and regulations that are fully consistent with the

    standards set forth in the PFMIs by the end of 2013. To that end, the

    Commission has recognized that in certain instances, the standards set

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

    forth in Subpart A and Subpart B. Thus, this rulemaking would revise

    Subpart C to address those gaps, specifically with respect to the

    following PFMI principles: Principle 2 (Governance); Principle 3

    (Framework for the comprehensive management of risks); Principle 4

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

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

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

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

    Principle 21 (Efficiency and effectiveness); Principle 22

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

    of rules, key procedures, and market data).

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

    \40\ See id., ] 1.19.

    \41\ See Committee on Payment and Settlement Systems and the

    Board of the International Organization of Securities Commissions

    Principles for Financial Market Infrastructures: Disclosure

    Framework and Assessment Methodology (Dec. 2012) (hereinafter

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

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

    \42\ Indeed, Subpart A and Subpart B were informed by the

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

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

    2. Principle 2: Governance

    Principle 2 addresses the governance arrangements of an FMI.\43\

    Specifically, it states that the governance arrangements of an FMI

    should be ``clear and transparent, promote the safety and efficiency of

    the FMI, and support the stability of the broader financial system.''

    \44\ An FMI's governance arrangements must be documented and set forth

    ``direct lines of responsibility and accountability,'' which are

    disclosed to owners, regulators, clearing members and their customers,

    and the public.\45\ In addition, an FMI must clearly specify the roles

    and responsibilities of the board of directors and management, ensure

    that the board of directors and management have appropriate experience,

    design procedures to identify and resolve conflicts of interest for

    members of the board of directors, and regularly review the performance

    of the board of directors as a whole and individual directors.\46\ In

    order to ensure that the board of directors has the appropriate

    incentive to fulfill its multiple roles, the board must typically

    include non-executive board members.\47\ Further, the FMI's risk

    management framework must be clear, documented and reflect the risk-

    tolerance policy, assign responsibility and accountability for risk

    decisions, and specify how decisions will be made in crises and

    emergencies.\48\ Finally, Principle 2 requires the FMI's ``design,

    rules, overall strategy, and decisions to reflect appropriately the

    legitimate interests of its direct and indirect participants and other

    relevant stakeholders,'' and requires that ``major decisions'' be

    ``clearly disclosed to relevant stakeholders'' and to the public when

    there is ``a broad market impact.'' \49\

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

    \43\ The PFMIs define ``governance'' as ``the set of

    relationships between an FMI's owners, board of directors (or

    equivalent), management, and other relevant parties, including

    participants, authorities, and other stakeholders (such as

    participants' customers, other interdependent FMIs, and the broader

    market).'' PFMIs at Annex H: Glossary.

    \44\ See PFMIs at Principle 2.

    \45\ Id. at Principle 2, Key Consideration (hereinafter,

    ``K.C.'') 2.

    \46\ Id. at Principle 2, K.C. 3, 5.

    \47\ Id. at Principle 2, K.C. 4.

    \48\ See id. at Principle 2, K.C. 6.

    \49\ Id. at Principle 2, K.C. 7.

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

    3. Principle 3: Framework for the Comprehensive Management of Risks

    Principle 3 addresses an FMI's risk management framework, requiring

    it to ``comprehensively manag[e] legal, credit, liquidity, operational,

    and other risks.'' \50\ In addition, as part of its risk management

    framework, an FMI ``must regularly review'' and develop tools to

    address ``the material risks it bears from and poses to other entities

    . . . as a result of interdependencies,'' \51\ and ``identify scenarios

    that may potentially prevent it from being able to provide its critical

    operations and services as a going concern.\52\ Principle 3 further

    requires an FMI to ``assess the effectiveness of a full range of

    options for recovery or orderly wind-down'' and to ``prepare

    appropriate plans for its recovery or orderly wind-down as a result of

    that assessment.'' \53\ An FMI is required to ``provide incentives'' so

    that its participants and their customers ``manage and contain the

    risks they pose to the FMI.'' \54\ Finally, Principle 3 requires an

    FMI's risk management framework to be periodically reviewed.\55\

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

    \50\ PFMIs at Principle 3.

    \51\ PFMIs at Principle 3, K.C. 3.

    \52\ PFMIs at Principle 3, K.C. 4.

    \53\ Id.

    \54\ PFMIs at Principle 3, K.C. 2.

    \55\ PFMIs at Principle 3, K.C. 1.

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

    4. Principle 4: Credit Risk

    Principle 4 addresses an FMI's credit risk, that is, the risk that

    a counterparty to the CCP will be unable to fully meet its financial

    obligations when due.\56\ Generally, Principle 4 requires all FMIs to

    establish explicit rules and procedures to address any credit losses

    they may face as a result of an individual or combined default among

    its participants with respect to any of their obligations to the

    FMI.\57\ These rules and procedures should also address how potentially

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

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

    replenish its financial resources that it may use during a stress

    event, such as a default, so that it can continue to operate in a safe

    and sound manner.\58\ More specifically, Principle 4 states that ``a

    CCP should cover its current and potential future exposures to each

    participant fully with a high degree of confidence using margin and

    other prefunded financial resources.'' \59\ Additionally, Principle 4

    provides that a CCP involved in activities with a more complex risk

    profile \60\ or that is

    [[Page 50265]]

    systemically important in multiple jurisdictions should maintain

    additional financial resources sufficient to cover a wide range of

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

    of the two participants and their affiliates that would potentially

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

    plausible market conditions.

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

    \56\ The PFMIs define ``credit risk'' as the risk that a

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

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

    the future. PFMIs at Annex H: Glossary.

    \57\ See PFMIs at Principle 4, K.C. 7.

    \58\ See id.

    \59\ Id. at Principle 4, K.C. 4.

    \60\ Activities ``with a more complex risk profile'' include

    clearing financial instruments that are characterized by discrete

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

    potential participant defaults. Id. at Explanatory Note

    (hereinafter, ``E.N.'') 3.4.19.

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

    5. Principle 6: Margin

    Principle 6 addresses an FMI's margin requirements and requires a

    CCP to use ``an effective margin system that is risk-based and

    regularly reviewed'' to ``cover its credit exposures to its

    participants for all products.'' \61\ Specifically, Principle 6

    requires a CCP's margin system to take into account the ``risks and

    particular attributes of each product, portfolio and market that it

    serves'' and be calibrated accordingly.\62\ Further, a CCP's margin

    system must have reliably sourced and timely price data.\63\ A CCP's

    regular reviews of its margin models and coverage must include, at

    minimum, (i) rigorous daily backtesting, (ii) monthly sensitivity

    analyses, and (iii) regular ``assessment of the theoretical and

    empirical properties'' of the margin models, which consider a wide

    range of possible market conditions ``including the most-volatile

    periods that have been experienced by the markets it serves and extreme

    changes in the correlation between prices.'' \64\ Principle 6 also

    states that ``[a] CCP should have the authority and operational

    capacity to make intraday margin calls and payments, both scheduled and

    unscheduled, to participants.'' \65\

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

    \61\ PFMIs at Principle 6.

    \62\ Id. at Principle 6, K.C. 1.

    \63\ See id. at Principle 6, K.C. 2.

    \64\ Id. at Principle 6, K.C. 6.

    \65\ Id. at Principle 6, K.C. 4.

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

    6. Principle 7: Liquidity risk

    Principle 7 addresses the risk that an FMI may not have sufficient

    funds to meet its financial obligations as and when due.\66\

    Specifically, Principle 7 provides that an FMI manage its liquidity

    risks from a variety of sources, including participants, settlement

    banks, custodian banks, and liquidity providers \67\ on an ongoing and

    timely basis \68\ and regularly test the sufficiency of liquidity

    resources through rigorous stress testing.\69\ Additionally, Principle

    7 provides that the minimum liquid resource requirement for CCPs should

    be resources that would permit Cover One, but a CCP that is involved in

    activities with a more complex risk profile or that is systemically

    important in multiple jurisdictions should ``maintain additional

    liquidity resources sufficient to cover a wider range of potential

    stress scenarios,'' including resources that would permit Cover

    Two.\70\ Principle 7 also sets forth specifications for qualifying

    liquidity resources which may be used to meet the minimum liquid

    resource requirement.\71\

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

    \66\ The PFMIs define ``liquidity risk'' as ``the risk that a

    counterparty, whether a participant or other entity, will have

    insufficient funds to meet its financial obligations as and when

    expected, although it may be able to do so in the future.'' Id. at

    Annex H: Glossary.

    \67\ See PFMIs at Principle 7, K.C. 1.

    \68\ See PFMIs at Principle 7, K.C. 2.

    \69\ See PFMIs at Principle 7, K.C. 9.

    \70\ PFMIs at Principle 7, K.C. 4. The term ``Cover Two'' refers

    to the requirement that a CCP maintain financial resources

    sufficient to enable it to meet its financial obligations to its

    clearing members notwithstanding a default by the two clearing

    members creating the largest combined financial exposure for the

    SIDCO in extreme but plausible market conditions.

    \71\ See PFMIs at Principle 7, K.C. 5-8.

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

    7. Principle 9: Money Settlements

    Principle 9 addresses money settlements, stating that an FMI should

    minimize and strictly control the credit and liquidity risk arising

    from the use of commercial bank money.\72\ In other words, an FMI

    should ``monitor, manage, and limit its credit and liquidity risks

    arising from commercial settlement banks,'' by (i) establishing and

    monitoring ``adherence to strict criteria for its settlement banks that

    take into account of, among other things, their regulation and

    supervision, creditworthiness, capitalization, access to liquidity, and

    operational reliability;'' \73\ and (ii) monitoring and managing ``the

    concentration credit and liquidity exposures to its commercial

    settlement banks.'' \74\

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

    \72\ Id.

    \73\ See PFMIs at Principle 7, K.C. 3.

    \74\ See id.

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

    8. Principle 14: Segregation and Portability

    Principle 14 addresses segregation and portability, stating that

    ``a CCP should have rules and procedures that enable the segregation

    and portability of a participant's customers and the collateral

    provided to the CCP with respect to those positions.'' \75\ A CCP's

    segregation and portability rules should, at a minimum, ``effectively

    protect a participant's customers' positions and related collateral

    from the default or insolvency of that participant.'' \76\ Further,

    Principle 14 states that a CCP's segregation and portability

    arrangements should be disclosed, including whether the protection

    provided for customer collateral is on an individual or omnibus basis

    and whether there are any ``constraints, such as legal or operational

    constraints'' that may impair its ability to segregate or port a

    participant's customers' positions and related collateral.'' \77\

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

    \75\ PFMIs at Principle 14.

    \76\ Id. at K.C. 1.

    \77\ PFMIs at Principle 14, K.C. 4.

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

    9. Principle 15: General Business Risk

    Principle 15 addresses general business risk, the inability of an

    FMI to continue as a going concern, requiring an FMI to ``hold

    sufficient liquid net assets funded by equity to cover potential

    general business losses.'' \78\ The liquid net assets should be

    sufficient, at all times, ``to ensure a recovery or orderly wind-down

    of critical operations and services.'' \79\ Specifically, ``an FMI

    should maintain a viable recovery or orderly wind-down plan'' that is

    supported by ``liquid net assets funded by equity equal to at least six

    months of current operating expenses.'' \80\

    10. Principle 16: Custody and Investment Risk

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

    \78\ The PFMIs define ``general business risk'' as ``any

    potential impairment of the FMI's financial position (as a business

    concern) as a consequence of a decline in its revenues or an

    increase in its expenses, such that expenses exceed revenues and

    result in a loss that must be charged against capital.'' PFMIs at

    Annex H: Glossary.

    \79\ PFMIs at Principle 15.

    \80\ Id. at K.C. 3. Such liquid net assets used to support the

    recovery and orderly wind-down plan should be held in addition to

    the assets required to cover participant defaults and other risks.

    Id.

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

    Principle 16 addresses custody and investment risks, stating that

    an FMI should safeguard its own assets as well as the assets of its

    participants.\81\ Specifically, the FMI should minimize the risk of

    loss on and delay in access to these assets.\82\ In addition, the FMI's

    investments should be in instruments with minimal credit, market and

    liquidity risks.\83\

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

    \81\ PFMIs at Principle 16.

    \82\ Id.

    \83\ Id.

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

    11. Principle 17: Operational Risk

    Principle 17 addresses the risk of deficiencies in information

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

    disruptions from external events that will result in the reduction or

    deterioration of services provided by the FMI.\84\ Principle 17 states

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

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

    in the event of a wide-scale or

    [[Page 50266]]

    major disruption.'' \85\ Additionally, an FMI's business continuity

    plan ``should incorporate the use of a secondary site and should be

    designed to ensure that critical information technology (``IT'')

    systems can resume operations within two hours following disruptive

    events.'' \86\

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

    \84\ PFMIs, ] 2.9.

    \85\ PFMIs at Principle 17.

    \86\ Id. at Principle 17, K.C. 6.

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

    12. Principle 21: Efficiency and Effectiveness

    Principle 21 addresses the efficiency and effectiveness of an FMI.

    An FMI should be designed to meet the needs of its participants and the

    markets it serves, in particular, with regard to choice of clearing and

    settlement arrangement, operating structure, scope of products cleared

    or settled and integration of technology and procedures.\87\ An

    effective CCP reliably meets its obligations in a timely manner and

    achieves the public policy goals of safety and efficiency for

    participants and the markets it serves.\88\

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

    \87\ PFMIs at Principle 21, K.C. 1.

    \88\ Id. at Principle 21, K.C. 2-3.

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

    13. Principle 22: Communication Procedures and Standards

    Principle 22 addresses communication procedures and standards. An

    FMI should use, or at a minimum accommodate, internationally accepted

    communication procedures and standards.\89\ These include common sets

    of rules across systems for exchange messages, standardized messaging

    formats, and reference data standards for identifying financial

    instruments and counterparties.

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

    \89\ PFMIs at Principle 22, K.C. 1.

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

    14. Principle 23: Disclosure of Rules, Key Procedures, and Market Data

    Principle 23 addresses the disclosure of an FMI's rules and

    procedures to participants and the public. An FMI should disclose its

    rules and procedures to participants, so that participants can have an

    ``accurate understanding of the risks, fees, and other material costs

    they incur by participating in the FMI.'' \90\ Further, the FMI should

    make disclosures to the public regarding fees, basic operational

    information, and other relevant information, such as the responses to

    the Disclosure Framework published by CPSS-IOSCO,\91\ so that

    prospective participants can also assess the risks, fees, and other

    material costs incurred by participating in the FMI.\92\

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

    \90\ PFMIs at Principle 23.

    \91\ See Disclosure Framework and Assessment Methodology, supra

    note 41.

    \92\ See PFMIs at E.N. 3.23.1.

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

    F. The Role of the PFMIs in International Banking Standards

    The Commission notes that where a CCP is not prudentially

    supervised in a jurisdiction that has domestic rules and regulations

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

    implementation of certain international banking regulations will have

    significant cost implications for that CCP and its market participants.

    In July of 2012, the BCBS,\93\ the international body that sets

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

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

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

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

    derivatives, exchange traded derivatives and securities financing

    transactions.\94\ The Basel CCP Capital Requirements create financial

    incentives for banks \95\ to clear financial derivatives with CCPs that

    are licensed in a jurisdiction where the relevant regulator has adopted

    rules or regulations that are consistent with the standards set forth

    in the PFMIs. Specifically, the Basel CCP Capital Requirements

    introduce new capital charges based on counterparty risk for banks

    conducting financial derivatives transactions through a CCP.\96\ These

    new capital charges relate to a bank's trade exposure and default fund

    exposure to a CCP.\97\

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

    \93\ The BCBS is comprised of senior representatives of bank

    supervisory authorities and central banks from around the world

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

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

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

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

    United Kingdom and the United States. See Bank for International

    Settlements, Basel III: A Global Regulatory Framework for More

    Resilient Banks and Banking Systems, December 2010 (revised June

    2011), available at http://www.bis.org/publ/bcbs189.htm.

    \94\ See Capital Requirements for Bank Exposures to Central

    Counterparties (July 2012), available at www.bis.org/publ/bcbs227.pdf. The Basel CCP Capital Requirements are one component of

    Basel III, a framework that ``is part of a comprehensive set of

    reform measures developed by the BCBS to strengthen the regulation,

    supervision and risk management of the international banking

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

    compilation of documents that form the regulatory framework of Basel

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

    \95\ ``Bank'' is defined in accordance with the Basel framework

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

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

    Regulatory Framework, Definition of Capital, paragraph 51. The term

    ``bank,'' as used herein, also includes subsidiaries and affiliates

    of the banking group or other entity. The Commission notes that a

    bank may be a client and/or a clearing member of a DCO.

    \96\ See Basel CCP Capital Requirements, Annex 4, Section II,

    6(i).

    \97\ Trade exposure is a measure of the amount of loss a bank is

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

    failure. Under the Basel CCP Capital Requirements, trade exposure is

    defined to include the current and potential future exposure of a

    bank acting as either a clearing member or a client to a CCP arising

    from OTC derivatives, exchange traded derivatives transactions or

    securities financing transactions, as well as initial margin. See

    Basel CCP Capital Requirements, Annex 4, Section I, A: General

    Terms. Current exposure, includes variation margin that is owed by

    the CCP, but not yet been received by the clearing member or client.

    Id.

    Default fund exposure is a measure of the loss a bank acting as

    a clearing member is exposed to arising from the use of its

    contributions to the CCP's mutualized default fund resources. See

    Basel CCP Capital Requirements, Annex 4, Section I, A: General

    Terms.

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

    The capital charges for trade exposure are based upon a function

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

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

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

    under the Basel CCP Capital Requirements varies significantly depending

    on whether or not the counterparty is a qualified CCP (``QCCP'').\98\ A

    QCCP is defined as an entity that (i) is licensed to operate as a CCP,

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

    (ii) is prudentially supervised in a jurisdiction where the relevant

    regulator has established and publicly indicated that it applies to the

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

    consistent with the PFMIs.\99\ If a bank transacts through a QCCP

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

    for clients \100\ or (2) a client of a clearing member that enters into

    an OTC derivatives transaction with the clearing member acting as a

    financial intermediary, then the risk weight is a flat 2% for purposes

    of calculating the counterparty risk.\101\ If

    [[Page 50267]]

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

    OTC derivative trade and the bank applies the corresponding bilateral

    risk-weight treatment, which is at least 20% if the CCP is a bank or as

    high as 100% if the CCP is a corporate institution.\102\

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

    \98\ See id. at Annex 4, Section IX, Exposures to Qualifying

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

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

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

    exposure to a non-qualifying CCP). ``A QCCP is defined as an entity

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

    appropriate regulator to operate as such, and (ii) is prudentially

    supervised in a jurisdiction where the relevant regulator has

    established and publicly indicated that it applies to the CCP on an

    ongoing basis, domestic rules and regulations that are consistent

    with the PFMIs.'' See Section I, A: General Terms of the Basel CCP

    Capital Requirements).

    \99\ Id. at Section I, A: General Terms.

    \100\ The term ``client'' as used herein refers to a customer of

    a DCO.

    \101\ Id. at Section IX: Central Counterparties, paragraphs 110

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

    following two conditions are met: (1) The offsetting transactions

    are identified by the CCP as client transactions and collateral to

    support them is held by the CCP and/or clearing member, as

    applicable, under arrangements that prevent losses to the client due

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

    member's other clients, or the joint default or insolvency of the

    clearing member and any of its other clients and (2) relevant laws,

    regulations, contractual or administrative arrangements provide that

    the offsetting transactions with the defaulted or insolvent clearing

    member are highly likely to continue to be indirectly transacted

    through the CCP, or by the CCP, should the clearing member default

    or become insolvent.

    However, in certain circumstances risk weight may increase.

    Specifically, if condition 1 is not met (i.e. where a client is not

    protected from losses in the case that the clearing member and

    another client of the clearing member jointly default or become

    jointly insolvent) but condition 2 is met, the banks trade exposure

    is risk-weighted at 4%. If neither condition 1 nor 2 is met, then

    the bank must capitalize its exposure to the CCP as a bilateral

    trade. Id. at paragraphs 115 and 116.

    \102\ See BCBS, Consultative Document: Capitalisation of Bank

    Exposures to Central Counterparties, paragraph 28 (Nov. 2011),

    available at http://www.bis.org/publ/bcbs.206.htm.

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

    With respect to default fund exposure, whenever a clearing member

    bank is required to maintain capital for exposures arising from default

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

    two methodologies for determining the capital requirement: The risk-

    sensitive approach, or the 1250% risk weight approach.\103\ The risk-

    sensitive approach considers various factors in determining the risk

    weight for a bank's default exposure to a QCCP such as (i) the size and

    quality of a QCCP's financial resources, (ii) the counterparty credit

    risk exposures of such a CCP, and (iii) the application of such

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

    one or more clearing members default.\104\ The 1250% risk weight

    approach allows a clearing member bank to apply a 1250% risk weight to

    its default fund exposures to the QCCP, subject to an overall cap of

    20% on the risk-weighted assets from all trade exposures to the

    QCCP.\105\ In other words, banks with exposures to QCCPs have a cap on

    the capital charges related to their default fund exposure. In

    contrast, a clearing member bank with exposures to a non-qualified CCP

    must apply a risk weight of 1250% with no cap for default fund

    exposures.\106\

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    \103\ See Basel CCP Capital Requirements, Annex 4, Section IX,

    paragraphs 121-125.

    \104\ Id. at paragraph 122. The Commission notes that the 1250%

    risk weight represents the reciprocal of the 8% capital ratio (which

    is the percentage of a bank's capital to its risk-weighted assets).

    \105\ Id. at paragraph 125.

    \106\ Id. at paragraph 127.

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

    Thus, the Basel CCP Capital Requirements provide incentives for

    banks, including their subsidiaries and affiliates, to clear

    derivatives through CCPs that are QCCPs by setting (1) lower capital

    charges for OTC derivatives transacted through a QCCP and (2)

    significantly higher capital charges for OTC derivatives transacted

    through non-qualifying CCPs. The increased capital charges for

    transactions through non-qualifying CCPs may have significant business

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

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

    charges may transfer their OTC derivatives business away from such DCOs

    to a QCCP in order to benefit from the preferential capital charges

    provided by Basel CCP Capital Requirements. Alternatively, banks may

    reduce or discontinue their OTC business altogether. Banks may also

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

    that result from the higher capital charges to their customers.

    Accordingly, customers using such banks as intermediaries may transfer

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

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

    members and customers.

    G. Proposed Rulemaking Applicable to SIDCOs and Subpart C DCOs

    As described in detail in section II below, this proposed

    rulemaking would create a new category of DCO, a Subpart C DCO. A

    Subpart C DCO would include any registered DCO that elects to become

    subject to the provisions in Subpart C of part 39 of the Commission's

    regulations (``Subpart C''). Further, this rulemaking would revise

    Subpart C so that Subpart C would apply to SIDCOs and Subpart C DCOs,

    and would include new or revised standards for governance, financial

    resources, system safeguards, default rules and procedures for

    uncovered losses or shortfalls, risk management, disclosure,

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

    would address any remaining gaps between the Commission's regulations

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

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

    regulations that are consistent with the PFMIs. As such, because SIDCOs

    and Subpart C DCOs would have the requirements of Subpart A, Subpart B,

    and Subpart C applied to them on a continuing basis, SIDCOs and Subpart

    C DCOs would be QCCPs for purposes of the Basel CCP Capital

    Requirements.\107\ The Commission requests comment on all aspects of

    the rules proposed herein, as well as comment on the specific

    provisions and issues highlighted in section II, below.

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

    \107\ See discussion of QCCP status supra Section I.F.

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

    II. Discussion of Revised and Proposed Rules

    A. Regulation 39.2 (Definitions)

    The Commission proposes to amend regulation 39.2 by amending one

    definition and adding six definitions. First, the Commission proposes a

    technical amendment to the definition of ``systemically important

    derivatives clearing organization.'' The definition now describes a

    SIDCO as a registered DCO ``which has been designated by the [Council]

    to be systemically important . . . .'' The proposed definition would

    describe a SIDCO as a registered DCO ``which is currently designated .

    . . '' This revision is necessary to allow for the possibility that a

    systemic importance designation may be rescinded.\108\

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    \108\ See 76 FR at 44775 (finalizing 12 CFR 1320.13(b), which

    states that ``[t]he Council shall rescind a designation of systemic

    importance for a designated financial market utility if the Council

    determines that the financial market utility no longer meets the

    standards for systemic importance.'').

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

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

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

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

    financial resources requirement. The Commission proposes to define

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

    credit default swaps, credit default futures, and derivatives that

    reference either credit default swaps or credit default futures, as

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

    permitting activities to be added by Commission action, the proposed

    definition provides the Commission with flexibility to address new and

    innovative market activities. The phrase ``activity with a more complex

    risk profile'' appears in regulation 39.29 (Financial resources

    requirements), which this rulemaking proposes to revise and renumber as

    regulation 39.33. The phrase also appears in PFMI Principles 4 (Credit

    risk) and 7 (Liquidity risk).

    The Commission also proposes to add a definition for the term

    ``subpart C

    [[Page 50268]]

    derivatives clearing organization.'' As proposed, a ``subpart C

    derivatives clearing organization'' would include any registered DCO

    that is not a SIDCO and that has elected to become subject to Subpart

    C.

    In addition, the Commission proposes to add definitions for

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

    banking organization,'' and ``trust company.'' A ``depository

    institution'' would have the meaning set forth in Section 19(b)(1)(A)

    of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)). A ``U.S. branch

    and agency of a foreign banking organization'' would mean the U.S.

    branch and agency of a foreign banking organization as defined in

    Section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).

    A ``trust company'' would mean a trust company that is a member of the

    Federal Reserve System, under Section 1 of the Federal Reserve Act (12

    U.S.C. 221), but that does not meet the definition of ``depository

    institution.''

    The Commission requests comment on these definitions. In

    particular, the Commission requests comment on the potential costs and

    benefits resulting from or arising out of the proposed definition of

    ``activity with a more complex risk profile.'' The Commission requests

    that, where possible, commenters provide both quantitative data and

    detailed analysis in their comments, particularly with respect to

    estimates of costs and benefits. In addition, the Commission requests

    comment on whether there are alternative definitions that would provide

    a more effective or efficient means for achieving consistency with the

    standards set forth by the PFMIs. The Commission requests that

    commenters include a detailed description of any such alternatives, and

    estimates of the costs and benefits of such alternatives.

    B. Regulation 39.30 (Scope)

    The Commission proposes to expand regulation 39.28 (and renumber it

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

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

    address the gaps between Commission regulations and the standards set

    forth in the PFMIs.\109\ As such, a DCO that is subject to the

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

    requirements for QCCP status and benefit from the lower capital charges

    on clearing member banks and bank customers of clearing members for

    exposures resulting from derivatives cleared through QCCPs.\110\ Such a

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

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

    standards. Because of these potential benefits, the Commission proposes

    that a DCO that has not been designated to be systemically important

    should have the option to elect to become subject to Subpart C.\111\

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

    \109\ See also supra Section I.G.

    \110\ See supra Section I.F.

    \111\ As a technical matter, the Commission proposes to move

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

    SIDCO to provide notice to the Commission in advance of any proposed

    change to its rules, procedures, or operations that could materially

    affect the nature or level of risks presented by the SIDCO, in

    accordance with the requirements of regulation 40.10) to proposed

    new regulation 39.42. Because the other provisions of proposed

    regulation 39.30 would pertain exclusively to the scope of Subpart

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

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

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

    With respect to SIDCOs, the Commission is committed to maintaining

    risk management standards that enhance the safety and efficiency of a

    SIDCO, reduce systemic risks, foster transparency and support the

    stability of the broader financial system.\112\ To support financial

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

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

    pose significant risk to its participants and the financial system more

    broadly.\113\ The Commission shares the stated objectives of the PFMIs,

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

    reduce systemic risk and foster transparency and financial

    stability.\114\ The PFMIs have been adopted and implemented by numerous

    foreign jurisdictions.\115\ A global, unified set of international risk

    management standards for systemically important CCPs can help support

    the stability of the broader financial system and, for the reasons set

    forth in the discussion below, the Commission proposes that SIDCOs be

    required to comply with all of the requirements set forth in part 39 of

    the Commission's regulations, including the proposed standards set

    forth in Subpart C.

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

    \112\ See SIDCO Final Rule (Discussion of risk management

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

    \113\ See supra Section I.E.

    \114\ PFMIs ] 1.15.

    \115\ In Europe, the European Market Infrastructure Regulation

    and implementing technical standards entered into force on March 15,

    2013, and establish standards for CCPs that are consistent with the

    PFMIs. See Commission Delegated Regulation (EU) No 153/2013,

    available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:052:0041:0074:EN:PDF; and Regulation

    (EU) No 648/2012 of the European Parliament and of the Council on

    OTC Derivatives, Central Counterparties and Trade Repositories,

    preamble paragraph 90, 2012 O.J. (L 201), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:FULL:EN:PDF.

    In Asia, Singapore has adopted the PFMIs into its financial

    regulations pertaining to FMIs. See Monetary Authority of Singapore,

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

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

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

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

    Singapore%202.pdf.

    In addition, Australia and Canada have publicly indicated their

    intent to adopt the PFMIs. See Reserve Bank of Australia,

    ``Consultation on New Financial Stability Standards,'' (August

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

    91-406 ``Derivatives: OTC Central Counterparty Clearing,'' (June 20,

    2012), available at http://www.osc.gov.on.ca/documents/en/Securities-Category9/csa_20120620_91-406_counterparty-clearing.pdf.

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

    incorporates heightened risk management standards for CCPs that

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

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

    that are systemically important in multiple jurisdictions. See 17

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

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

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

    participant family to which they have the largest exposure in

    extreme but plausible conditions, provided that a security-based

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

    shall maintain sufficient financial resources to withstand, at a

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

    the largest exposure in extreme but plausible market conditions).

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

    The Commission requests comment on the proposed rules.

    Specifically, and in light of the potential impact that a SIDCO's

    failure could have on the U.S. financial system, the Commission

    requests comment on the potential costs and benefits resulting from, or

    arising out of, requiring SIDCOs to comply with Subpart C. The

    Commission requests that, where possible, commenters provide

    quantitative data and detailed analysis in their comments, particularly

    with respect to estimates of costs and benefits. In addition, the

    Commission requests comment on whether there are more effective or

    efficient means for achieving consistency with the standards set forth

    by the PFMIs. The Commission requests that commenters include a

    detailed description of any such alternatives, and estimates of the

    costs and benefits of such alternatives.

    C. Regulation 39.31 (Election To Become Subject to the Provisions of

    Subpart C)

    As discussed above,\116\ the Basel CCP Capital Requirements impose

    significantly higher capital charges on banks (including their

    subsidiaries and

    [[Page 50269]]

    affiliates) that clear derivatives through CCPs that do not qualify as

    QCCPs. Because such charges could create incentives for banks to

    migrate their business to CCPs that are QCCPs or to avoid clearing,

    U.S. DCOs that operate internationally, but that are not QCCPs, may

    face a substantial competitive disadvantage. It would appear that DCOs

    that have not been designated by the Council as systemically important

    should have the ability to be held to international standards and to

    attain QCCP status.\117\ Accordingly, the Commission is proposing

    regulation 39.31, which would provide a mechanism whereby a DCO that

    has not been designated by the Council as systemically important may

    elect to become subject to the provisions of Subpart C (i.e., may

    ``opt'' to become subject to the regulations otherwise applicable only

    to SIDCOs) and, thereby, attain QCCP status. The Commission is also

    proposing procedures for withdrawing or rescinding that election.

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

    \116\ See discussion supra Section I.F.

    \117\ A DCO that is subject to the obligations contained in

    Subpart A, Subpart B, and Subpart C would be a QCCP.

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

    The proposed amendments to Subpart C are intended to enhance the

    financial integrity and operational security of a SIDCO, which is

    critically important to safeguarding the stability of the U.S.

    financial system. Accordingly, the Commission proposes that a SIDCO

    should be subject to all of the requirements set forth in Subpart C.

    The Commission recognizes, however, that the overall balance of the

    costs and benefits of this enhanced regulatory regime, including the

    benefits accruing from QCCP status, and the costs associated with the

    implementation of Subpart C, may vary among DCOs that are not SIDCOs.

    The proposed ``opt-in'' regime allows DCOs that are not designated by

    the Council as systemically important to weigh for themselves the costs

    and benefits of attaining QCCP status.

    The authority provided by Sections 5b(c)(2)(A) and 8a(5) of the CEA

    permits the Commission to establish and enforce regulations applicable

    to specified categories of DCOs that affirmatively elect to become

    subject to such regulations. Indeed, the Commission notes that it

    applies, and maintains the authority to enforce, regulations to persons

    and entities that voluntarily register in certain capacities.\118\

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

    \118\ See, e.g., Section 5b(b) of the CEA, 7 U.S.C. 7a-1(b)

    (voluntary registration as a DCO). The Commission recognizes that

    for such entities, the benefits of voluntary registration outweigh

    the costs of complying with the CEA and Commission regulations.

    Thus, the Commission permits such entities to register with it,

    which registration necessarily entails continuing supervision by the

    Commission, compliance with the CEA and Commission regulations, and

    Commission authority to enforce the CEA and its regulations against

    such entities.

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

    Authority for proposed regulation 39.31 is also supported by

    Section 752 of the Dodd- Frank Act,\119\ which, as described above,

    directs the Commission to consult and coordinate with foreign

    regulatory authorities on effective and consistent global regulation of

    swaps and futures. Expanding the application of Subpart C to include

    DCOs that have not been designated by the Council as systemically

    important, but that nonetheless wish to become subject to regulations

    that are fully consistent with the standards set forth in the PFMIs,

    helps promote the international consistency called for in Section 752.

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

    \119\ See supra note 19.

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

    The mandate of Section 15 of the CEA further supports the adoption

    of a flexible approach, permitting some non-SIDCOs, but not all DCOs,

    to be subject to the additional regulations of Subpart C. As discussed

    below in more detail, the Commission is required by Section 15(a)(1) to

    consider the costs and benefits of any proposed regulation prior to

    promulgating it.\120\ The benefits of enhanced financial integrity and

    operational security, the benefits accruing from being held to

    international standards and from QCCP status, and the costs associated

    with the implementation of Subpart C, may vary among DCOs that have not

    been designated as systemically important. DCOs that wish to compete

    internationally may find compliance with Subpart C a necessary cost to

    operate on a global stage. Similarly, DCOs that have banks or bank

    affiliates as members may find such compliance important to their

    membership and, in turn, to their own business. Accordingly, the

    Commission proposes that, at this time, DCOs that are not designated as

    systemically important should be provided with the opportunity to

    become subject to Subpart C based upon their assessments of the

    benefits and burdens associated with meeting the regulations set out in

    this Subpart C.

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

    \120\ See infra Section IV.C (Consideration of Costs and

    Benefits); see also Section 15(a)(1) of the CEA, 7 U.S.C. 19(a)(1),

    stating that, ``Before promulgating a regulation under this Act or

    issuing an order . . . the Commission shall consider the costs and

    benefits of the action of the Commission.''

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

    The Commission emphasizes however, that, under the present

    proposal, once a non-SIDCO elects to become subject to Subpart C, that

    non-SIDCO would, as of the effective date of the election, be subject

    to examination for compliance with Subpart C and to enforcement action

    for non-compliance. This status would continue until such time, if any,

    as the election is properly vacated as set forth in proposed regulation

    39.31(e).

    1. Regulation 39.31(a): Eligibility Requirements

    Proposed regulation 39.31(a) sets forth the two categories of

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

    provisions in Subpart C. A DCO that is not a SIDCO could request such

    election using the procedures set forth in proposed regulation

    39.31(b). An entity applying for registration as a DCO pursuant to

    regulation 39.3 (``DCO Applicant'') could request the election in

    conjunction with its application for registration (``Registration

    Application'') using the procedures set forth in proposed regulation

    39.31(c).

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

    for Registered DCOs

    Proposed regulation 39.31(b) would establish the procedures by

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

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

    withdraw that election. These procedures are intended to provide the

    Commission, clearing members, and customers (and regulators of such

    clearing members and customers) with assurance that the electing DCO

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

    Subpart C and in the PFMIs.

    A DCO seeking to become subject to Subpart C would be required to

    file with the Commission a completed Subpart C Election Form, which is

    proposed to be included in part 39 of the Commission's regulations as

    Appendix B thereto. The proposed Subpart C Election Form would include

    three parts: (1) General Instructions, (2) Elections and

    Certifications, and (3) Disclosures and Exhibits. As discussed below, a

    DCO Applicant requesting an election to become subject to Subpart C

    also would be required to file a Subpart C Election Form with the

    Commission.\121\

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

    \121\ See discussion infra Section II.C.3.

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

    In the Elections and Certifications portion of the Subpart C

    Election Form, a DCO would be required to affirmatively elect to become

    subject to Subpart C and to specify the date upon which it seeks to

    make its election effective. The effective date selected by the DCO

    could be no earlier than ten business days after the date the Subpart C

    Election Form is filed with the

    [[Page 50270]]

    Commission. The DCO, through its duly authorized representative,\122\

    would be required to certify that, as of the effective date of its

    election, the DCO will be in compliance with Subpart C and will remain

    in compliance unless and until the DCO rescinds its election pursuant

    to proposed regulation 39.31(e), discussed below.\123\ The DCO also

    would be required to certify, through its duly authorized

    representative, that all information contained in the Subpart C

    Election Form is ``true, current and complete in all material

    respects.''

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

    \122\ The signatures required by the ``Elections and

    Certifications'' portion of the proposed Subpart C Election Form

    would be required to be the manual signatures of the duly authorized

    representatives of the DCO described in the instructions. If the

    Subpart C Election Form is filed by a corporation, the Elections and

    Certifications would be required to be signed in the name of the

    corporation by a principal officer duly authorized; if filed by a

    limited liability company, they would be required to be signed in

    the name of the limited liability company by a manager or member

    duly authorized to sign on the limited liability company's behalf;

    if filed by a partnership, they would be required to be signed in

    the name of the partnership by a general partner duly authorized;

    and if filed by an unincorporated organization or association which

    is not a partnership, they would be required to be signed in the

    name of such organization or association by the managing agent

    (i.e., a duly authorized person who directs or manages or who

    participates in the directing or managing of its affairs).

    \123\ See discussion infra Section II.C.5.

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

    In the Disclosures and Exhibits portion of the Subpart C Election

    Form, a DCO would be required to provide a regulatory compliance chart

    that separately sets forth for proposed Subpart C regulations 39.32

    through 39.39, citations to the relevant rules, policies and procedures

    of the DCO that address each such regulation and a summary of the

    manner in which the DCO will comply with each regulation. In addition,

    the DCO would be required to provide, in separate exhibits, any

    documents that demonstrate its compliance with proposed Subpart C

    regulations 39.32 through 39.36 and 39.39.\124\ The Commission also

    proposes requiring the DCO to complete and to publish on the DCO's Web

    site the DCO's responses to the Disclosure Framework and to provide the

    Commission with the URL to the specific page where such responses can

    found.\125\ The Disclosure Framework would be required to be completed

    in accordance with section 2.0 and Annex A thereof \126\ and would be

    expected to fully explain how the DCO complies with the standards set

    forth in the PFMIs. As noted in section 2.5 of the Disclosure

    Framework, CPSS-IOSCO are in the process of developing a set of

    criteria for the disclosure by an FMI of quantitative information to

    enable stakeholders to evaluate FMIs and to make cross-comparisons

    (``Quantitative Information Disclosure''). The Commission proposes

    requiring the DCO, in the event that such criteria are published, to

    publish its Quantitative Information Disclosure on the DCO's Web site

    and to provide the Commission, on its Subpart C Election Form, the URL

    to the specific page where the Quantitative Information Disclosure may

    be found.

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

    \124\ This approach is consistent with the Form DCO that must be

    filed by DCO Applicants. The Form DCO requires DCO Applicants to

    submit to the Commission, as individual exhibits to the Form DCO,

    documents that demonstrate compliance with the requirements

    contained in Subpart B. 17 CFR Part. 39, Appendix A.

    \125\ This proposed obligation is consistent with the obligation

    under proposed regulation 39.37 of SIDCOs and Subpart C DCOs to

    complete and publically disclose their Disclosure Framework

    responses. See discussion infra Section II.I.

    \126\ Compliance with Section 2 and Annex A of the Disclosure

    Framework, collectively, would require the SIDCO or Subpart C DCO to

    provide ``a comprehensive narrative disclosure for each applicable

    [PFMI] principle with sufficient detail and context to enable the

    reader to understand the [SIDCO's or Subpart C DCO's] approach to

    observing the principle. In addition, the SIDCO or Subpart C DCO

    would be required to provide: (1) An executive summary of the key

    points from the disclosure [responses]; (2) a summary of the major

    changes since the last update of the disclosure[responses]; (3) a

    description of the SIDCO or Subpart C DCO and the markets it serves,

    including basic data and performance statistics on its services and

    operations; (4) a description of the SIDCO's or Subpart C DCO's

    general organization and governance structure; (5) an overview of

    the SIDCO's or Subpart C DCO's legal and regulatory framework; (6)

    an explanation of the SIDCO's or Subpart C DCO's system design and

    operation; (6) a list of publicly available resources, including

    those referenced in the disclosure [responses], that may help a

    reader understand the SIDCO or Subpart C DCO and its approach to

    observing each applicable PFMI principle. The narrative disclosure

    for each principle would be required to provide sufficient detail

    and context ``to enable a variety of readers with different

    backgrounds to understand the [SIDCO's or Subpart C DCO's] approach

    to observing the principle.'' Id.

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

    Pursuant to proposed regulation 39.31(b)(2), the filing of a

    Subpart C Election Form would not create a presumption that the Subpart

    C Election Form is materially complete or that supplemental information

    would not be required. The Commission could, prior to the effective

    date, request that the DCO provide supplemental information in order to

    process the DCO's Subpart C Election Form and the DCO would be required

    to file such supplemental information with the Commission. Proposed

    regulation 39.31(b)(3) also would require the DCO to promptly amend its

    Subpart C Election Form if it discovers a material omission or error

    in, or if there is a material change in, the information provided to

    the Commission in the Subpart C Election Form or other information

    provided in connection with the Subpart C Election Form.

    Once a Subpart C Election Form is filed by a DCO, the Commission

    may permit the DCO's election to become subject to Subpart C to take

    effect as set forth in proposed regulation 39.31(b)(4) or may stay or

    deny the election under proposed regulation 39.31(b)(5). If the

    Commission stays or denies the election, it would issue written

    notification thereof to the DCO. Proposed regulation 39.31(b)(4) would

    provide that, unless the Commission stays or denies the DCO's election

    to become subject to Subpart C, such election would become effective

    upon the later of: (1)(i) The effective date specified by the DCO in

    its Subpart C Election Form or (ii) ten business days after the DCO

    files its Subpart C Election Form with the Commission or (2) or upon

    the effective date set forth in written notification from the

    Commission that it shall permit the election to take effect after a

    stay issued pursuant to proposed regulation 39.31(b)(5). The Commission

    may provide written acknowledgement of receipt of the DCO's Subpart C

    Election Form, as well as written acknowledgement that it has permitted

    the DCO's election to become subject to Subpart C to take effect and

    the effective date of that election.\127\ The Commission emphasizes

    that, consistent with the certification required to be provided by a

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

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

    held to the requirements of Subpart C and the DCO would become subject

    to potential enforcement action by the Commission for failure to comply

    with any such requirements. To the extent that compliance with Subpart

    C would require the DCO to implement new rules or rule amendments, all

    such rules or rule amendments must be approved or permitted to take

    effect prior to the effective date.

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

    \127\ The decision to approve, to deny or to stay an election to

    become subject to Subpart C may be made by, and the related written

    notices may be provided by, the Director of the Division of Clearing

    and Risk pursuant to the authority delegated to him or her under the

    proposed amendment to regulation 140.94. See infra Section II.O.

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

    Proposed regulation 39.31(b)(7) would allow a DCO that has

    submitted a Subpart C Election Form to withdraw the form at any time

    prior to the effective date specified therein by filing a notice

    thereof with the Commission. Withdrawal, however, would not be

    permitted on or after the specified effective date. A DCO that wishes

    to rescind its election to become subject to

    [[Page 50271]]

    Subpart C after the effective date would be permitted to do so using

    the procedures set forth in proposed regulation 39.31(e).\128\

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    \128\ See discussion infra Section II.C.5.

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

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

    Applicants

    Proposed regulation 39.31(c) sets forth procedures through which a

    DCO Applicant may request to become subject to the provisions of

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

    Application. These procedures are intended to provide the Commission

    with a basis to evaluate the DCO Applicant's ability to comply with the

    provisions of Subpart C, and ultimately to provide the Commission,

    potential members and customers (and regulators of such members and

    customers) with assurance that the DCO Applicant will, once DCO

    registration has been granted, be held to and will, in fact, meet the

    standards set forth in Subpart C and in the PFMIs.

    The Commission encourages DCO Applicants to make their election to

    become subject to Subpart C at the time that their Registration

    Application is filed. The Commission anticipates considerable overlap

    between the information and documentation contained in a Registration

    Application filed by a DCO Applicant and the information and

    documentation that would be required to be submitted to the Commission

    as part of a Subpart C Election Form. It would appear that simultaneous

    filings would allow Commission resources to be used more efficiently

    and effectively.

    As proposed, a DCO Applicant requesting an election to become

    subject to Subpart C would make such request by attaching a Subpart C

    Election Form to the Form DCO that the DCO Applicant files pursuant to

    regulation 39.31. The certifications, disclosures, and exhibits that

    would be required to be provided by a DCO Applicant in the Subpart C

    Election Form would be the same as those required of registered

    DCOs,\129\ except that the DCO Applicant would not specify an effective

    date for its election. Rather, the DCO Applicant would certify that, if

    the Commission permits its election to become subject to Subpart C to

    become effective, the DCO Applicant will be in compliance with the

    Subpart C regulations as of the date set forth in the Commission's

    notice thereof.

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

    \129\ The DCO Applicant would be required to: (1) Certify that

    all information contained in its Subpart C Election Form is ``true,

    correct and complete in all material respects;'' (2) provide a

    regulatory compliance chart that separately sets forth, for proposed

    Subpart C regulations 39.32 through 39.39, citations to the relevant

    rules, policies and procedures of the DCO Applicant that address

    each such regulation and a summary of the manner in which the DCO

    Applicant will comply with each regulation; (c) provide, as separate

    exhibits to the Subpart C Election Form, any documents that

    demonstrate the DCO Applicant's compliance with proposed Subpart C

    regulations 39.32 through 39.36 and 39.39; (d) complete and publish

    on the DCO Applicant's Web site, the DCO's responses to the

    Disclosure Framework and provide the Commission with the URL to

    specific Web site page where such responses can found; and (e) if

    applicable, publish on the DCO Applicant's Web site the DCO

    Applicant's Quantitative Information Disclosure and provide the

    Commission the URL to the specific page where such disclosure may be

    found.

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

    As with Subpart C Election Forms filed by registered DCOs, the

    filing of a Subpart C Election Form by a DCO Applicant would not create

    a presumption that the Subpart C Election Form is materially complete

    or that supplemental information would not be required. Under proposed

    regulation 39.31(c)(3), the Commission could, at any time during the

    Commission's review of the Subpart C Election Form, request that the

    DCO Applicant submit supplemental information in order for the

    Commission to process the DCO Applicant's Subpart C Election Form or

    its Registration Application and the DCO Applicant would be required to

    file such supplemental information. In addition, the DCO Applicant

    would be required by proposed regulation 39.31(c)(4) to promptly amend

    its Subpart C Election Form if it discovers a material omission or

    error in, or if there is a material change in, the information provided

    to the Commission in the Subpart C Election Form or other information

    provided in connection with the Subpart C Election Form.\130\

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    \130\ Proposed regulations 39.31(c)(3) and 39.31(c)(4) are

    consistent with regulations 39.3(a)(2) and 39.3(a)(3) governing DCO

    application amendments and the submission of supplemental

    information in connection with a DCO application, respectively. 17

    CFR 39.31(a)(2)-(3).

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

    Under proposed regulation 39.31(c)(2), the Commission would review

    the Subpart C Election Form as part of the Commission's review of the

    DCO Applicant's Registration Application and the Commission, based upon

    its review and analysis of the information submitted in the Subpart C

    Election Form, could permit the DCO Applicant's election to take effect

    at the time it approves the Registration Application. The Commission

    would provide the DCO Applicant written notice of its determination to

    permit the election to become subject to Subpart C to become

    effective.\131\ The Commission notes that any Registration Application

    for which there is a Subpart C Election Form pending would be evaluated

    against the standards set forth in Subpart C as well as the standards

    set forth in Subpart A and Subpart B in order for the Commission to

    approve the Registration Application. That is, the Commission would not

    approve any such Registration Application if the Commission determines

    that the DCO Applicant's election to become subject to Subpart C should

    not become effective because the DCO Applicant has not demonstrated its

    ability to comply with the requirements of Subpart C. The DCO Applicant

    would be permitted to withdraw the Subpart C Election Form as set forth

    in proposed regulation 39.31(c)(5), however, prior to the Commission's

    taking action on the Registration Application.

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

    \131\ The decision to permit a DCO to become subject to Subpart

    C may be made by, and notice thereof may be provided by, the

    Director of the Division of Clearing and Risk, as set forth in

    Commission regulation 140.94, as proposed to be amended herein. See

    discussion infra Section II.O.

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

    Proposed regulation 39.31(c)(5) would permit a DCO Applicant to

    withdraw a request to become subject to Subpart C by filing with the

    Commission a notice of the withdrawal. The DCO Applicant could withdraw

    its Subpart C Election Form without withdrawing its Form DCO.

    4. Regulation 39.31(d)--Public Information

    Proposed regulation 39.31(d) would provide that certain portions of

    the Subpart C Election Form will be considered public documents that

    may routinely be made available for public inspection. Such portions

    include: The Elections and Certifications and Disclosures in the

    Subpart C Election Form, the rules of the DCO, the regulatory

    compliance chart, and any other part of the Subpart C Election Form

    that is not covered by a request for confidential treatment subject to

    regulation 145.9. This proposal is consistent with the transparent

    treatment typically afforded materials submitted in connection with

    applications to become registered with the Commission.\132\

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

    \132\ See, e.g., 17 CFR 39.3(a)(5) (setting forth those portions

    of DCO Registration Applications that are considered public

    information).

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

    5. Regulation 39.31(e)--Rescission

    Proposed 39.31(e) would permit a Subpart C DCO to rescind its

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

    rescind the election with the Commission. The Commission proposes that

    DCOs that ``opt-in'' to Subpart C should be permitted to rescind,

    subject to certain conditions. These conditions are intended to provide

    the DCO's members and

    [[Page 50272]]

    customers, and the regulators of such members and customers, notice of,

    and time to take such actions as these entities may deem appropriate in

    light of, the DCO's decision to rescind its election. As discussed

    above, the Commission proposes that a SIDCO should be required to

    comply with the Subpart C provisions unless and until the SIDCO's

    designation as systemically important is rescinded by the Council.\133\

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

    \133\ See 12 CFR 1320.13(b) (procedure for the Council to

    rescind a designation of systemic importance for a systemically

    important financial market utility).

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

    As proposed, the rescission of a DCO's election to become subject

    to Subpart C would become effective on the date specified by the

    Subpart C DCO in its notice of intent to rescind the Subpart C

    election, except that the rescission could not become effective any

    earlier than 90 days after the date the notice of intent to rescind is

    filed with the Commission. This proposed 90-day period is necessary to

    provide banks and other entities that wish to limit their cleared

    transactions to clearing solely through a QCCP (e.g., because of the

    preferential Basel CCP Capital Requirements applicable to exposures to

    derivatives cleared through a QCCP) sufficient time to transfer their

    business to another Subpart C DCO or SIDCO. The Subpart C DCO would be

    required to comply with all of the provisions of Subpart C until such

    rescission is effective. The Commission also proposes requiring that

    the notice of intent to rescind include a certification that the

    Subpart C DCO has complied with and will comply with the notice

    requirements set forth in proposed regulation 39.31(e)(3).

    Proposed regulation 39.31(e)(3)(i) would require a Subpart C DCO

    that files a notice of intent to rescind to provide periodic notices to

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

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

    member's customers. Specifically, a Subpart C DCO would be required to

    issue the following notices to its clearing members: (1) No later than

    the filing with the Commission of the notice of its intent to rescind

    its election to be subject to Subpart C, written notice that the

    Subpart C DCO intends to file such notice and the date that the

    rescission is intended to take effect, and (2) on the effective date of

    the rescission of its election to be subject to Subpart C, written

    notice that the rescission has become effective. These notices appear

    necessary to ensure that the Subpart C DCO's clearing members and

    customers are afforded sufficient time to consider and react to the

    implications of the Subpart C DCO's rescission of its election to be

    subject to Subpart C.

    Proposed regulation 39.31(e)(3)(ii) would also require a Subpart C

    DCO to: (1) No later than the date it files a notice of its intent to

    rescind its election to be subject to Subpart C, provide notice to the

    general public of its intent to rescind such election; (2) on the

    effective date of the rescission of its election to be subject to

    Subpart C, provide written notice to the general public that the

    rescission has become effective; and (3) remove all references to its

    Subpart C DCO (and QCCP) status on its Web site and in all other

    materials that it provides to its clearing members and customers, other

    market participants, or members of the public. As discussed herein,

    because of the potential capital impact of transacting through a

    clearinghouse that is not a QCCP, these public notices would appear

    necessary to ensure that market participants are afforded sufficient

    time to consider and react to a Subpart C DCO's rescission of its

    election to be subject to Subpart C. However, the Commission proposes

    that the notices to the general public required by this subsection may

    be accomplished through publication on the Subpart C DCO's Web site.

    In addition, the employees and representatives of the Subpart C DCO

    would be prohibited by proposed regulation 39.31(e)(3)(iii) from making

    any reference to the organization as a Subpart C DCO (or QCCP) on and

    after the date that the notice of its intent to rescind its election to

    become subject to Subpart C is filed. Because the QCCP recognition that

    accompanies Subpart C DCO status provides significant benefits to those

    transacting through a Subpart C DCO, it would be inappropriate and

    misleading to permit a DCO to hold itself out as a Subpart C DCO (or

    QCCP) once it has filed a notice of intention to rescind that status,

    even though the rescission is not immediately effective.

    Proposed regulation 39.31(e)(4) provides that the rescission of a

    DCO's election to be subject to Subpart C would not affect the

    authority of the Commission concerning any activities or events

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

    Subpart C DCO. That is, the Subpart C DCO is continually obligated to,

    and would be subject to enforcement action for failure to, comply with

    the Subpart C provisions during the time that it was subject to Subpart

    C and maintained its Subpart C DCO status.

    Proposed regulation 39.31(f) would provide that a SIDCO that is

    registered with the Commission, but whose designation of systemic

    importance is rescinded by the Council, shall immediately be deemed to

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

    C provisions unless and until it elects to rescind its status as a

    Subpart C DCO.

    The Commission requests comment on all aspects of proposed

    regulation 39.31 including, without limitation, the following:

    (1) All aspects of the proposed Subpart C election eligibility

    requirements including, without limitation, the appropriateness of

    permitting DCO Applicants to request to become subject to Subpart C at

    the time of filing their Registration Applications. If DCO Applicants

    should not be permitted to request to become subject to Subpart C at

    the time of filing their Registration Applications, what would be the

    basis for such prohibition and what would be a suitable waiting period

    after registration with the Commission for making a Subpart C Election

    Form filing?

    (2) All aspects of the proposed Subpart C Election Form including,

    without limitation, the following:

    (a) The elections and certifications contained therein and the

    disclosures and exhibits required;

    (b) whether DCOs and DCO Applicants should be permitted to amend or

    supplement their Subpart C Election Form; and

    (c) possible incentives to encourage DCOs and DCO Applicants to

    file Subpart C Election Forms that are accurate and complete at the

    time of filing, in order to avoid amendments, supplements and

    withdrawals.

    (3) Whether the Commission should require the Subpart C Election

    Form certifications to be made under penalty of perjury.

    (4) All aspects of the proposed election and withdrawal procedures

    applicable to DCOs including, without limitation, the following:

    (a) The appropriateness of permitting a DCO to designate the

    effective date of its status as a Subpart C DCO that is subject to the

    provisions of Subpart C;

    (b) The appropriateness of the ten-business-day waiting period

    prior to a DCO's status as a Subpart C DCO becoming effective, any

    suggested alternative time frame, and the reasons why such alternatives

    would be preferable; and

    (c) The circumstances under which it would be appropriate for the

    Commission to provide written acknowledgement of receipt of the Subpart

    C Election Form and/or the effective date of the DCO's Subpart C

    [[Page 50273]]

    DCO status, and the form of such acknowledgment.

    (5) All aspects of the proposed election and withdrawal procedures

    applicable to DCO Applicants including, without limitation, the

    following:

    (a) The prohibition against approving a Registration Application if

    a related Subpart C Election Form is pending and the Commission has

    determined that the DCO Applicant's request to become subject to

    Subpart C should not take effect;

    (b) The circumstances under which it may be appropriate for the

    Commission to approve a Registration Application, but to stay or deny

    an election to become subject to Subpart C;

    (c) If the Commission were to approve a Registration Application,

    but deny an election to become subject to Subpart C, whether the DCO

    Applicant should be required to wait a particular amount of time (and

    if so, what amount of time would be appropriate) before being permitted

    to elect to become subject to Subpart C pursuant to proposed 39.31(b);

    (d) If an election to become subject to Subpart C could be stayed

    when a Registration Application is approved, whether the stay should be

    limited to a particular time period (and if so, what time period) after

    which the election must be permitted to take effect or be denied; and

    (e) Any incentives, including but not limited to any waiting period

    after registration for eligibility to elect to become a Subpart C DCO,

    to encourage DCO Applicants to submit their Subpart C Election Form

    with their Registration Applications.

    (6) The circumstances under which a DCO or DCO Applicant should be

    permitted to withdraw its Subpart C Election Form.

    (7) All aspects of the proposed procedures for rescinding an

    election to become subject to Subpart C including, without limitation,

    the following:

    (a) The information that must be contained with the notice of

    intent to rescind;

    (b) The benefits and burden of the mandatory 90-day waiting period

    between the filing of the notice of intent to rescind and the date the

    rescission is effective;

    (c) The timing, content and methods, and the costs and benefits, of

    providing the required notices to clearing members, the customers of

    clearing members, and the general public;

    (d) The requirement to remove and refrain from references to the

    DCO as a Subpart C DCO (and QCCP) and the timing thereof;

    (e) The burden of a Subpart C DCO's rescission on bank clearing

    members and the bank customers of such Subpart C DCO's clearing

    members, including the costs associated with unwinding and/or

    transferring positions; and

    (f) Whether any alternative or additional conditions should be

    required of a Subpart C DCO beyond the proposed 90-day waiting period

    (and if so what alternative or additional conditions would be

    appropriate). For example, is 90 days sufficient time for clearing

    members and their customers to take such action as they may deem

    appropriate in light of such rescission?

    (8) Any alternative approach to permitting a DCO or DCO Applicant

    to elect to become subject to Subpart C.

    (9) The provision that a SIDCO whose status as a designated

    financial market utility is rescinded by the Financial Stability

    Oversight Council, be immediately deemed to be a Subpart C DCO, pending

    an election by the former SIDCO to rescind Subpart C DCO status.

    (10) What additional disclosures should the Commission require or

    what other measures should the Commission take to help ensure that

    Subpart C DCOs obtain QCCP status?

    (11) The costs and potential benefits resulting from or arising out

    of, permitting a DCO to elect to become subject to the provisions of

    Subpart C, any aspect of the procedures for allowing such election

    under proposed regulation 39.31, and any aspect of any suggested

    alternative procedures.

    For each comment submitted, the Commission requests that each

    commenter please provide detailed rationale supporting the response, as

    well as quantitative data where practicable, particularly with respect

    to estimates of costs and benefits.

    D. Regulation 39.32 (Governance for Systemically Important Derivatives

    Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    The Commission proposes to add regulation 39.32 in order to

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

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

    SIDCOs and Subpart C DCOs in a manner that is consistent with PFMI

    Principle 2 (Governance).\134\

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

    \134\ In 2010 and 2011, the Commission proposed regulations

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

    Requirements for Derivatives Clearing Organizations, Designated

    Contract Markets, and Swap Execution Facilities Regarding the

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

    see also Governance Requirements for Derivatives Clearing

    Organizations, Designated Contract Markets, and Swap Execution

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

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

    a separate rulemaking and, as such, the Commission does not intend

    to address or include those regulations in this rulemaking.

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

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

    establish governance arrangements that are transparent to fulfill

    public interest requirements and to permit the consideration of the

    views of owners and participants.\135\ DCO Core Principle O also

    requires each DCO to establish and enforce appropriate fitness

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

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

    entity with direct access to the settlement or clearing activities of

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

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

    establish and enforce rules to minimize conflicts of interest in the

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

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

    or committee of the DCO includes market participants. These core

    principles are substantively similar to PFMI Principle 2, which states

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

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

    support the stability of the broader financial system, other relevant

    public interest considerations, and the objectives of relevant

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

    procedures for managing conflicts of interest among board members and

    board members and managers should be required have ``appropriate

    skills,'' ``incentives,'' and ``experience.'' \136\

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

    \135\ See supra Section I.D.6.

    \136\ PFMIs at Principle 2, K.C. 4-5.

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

    The governance requirements set forth in proposed regulation 39.32

    are designed to enhance risk management and controls by promoting

    fitness standards for directors and managers, promoting transparency of

    governance arrangements, and making sure that the interests of a

    SIDCO's or Subpart C DCO's clearing members and, where relevant,

    customers are taken into account. Because of the potential impact that

    a SIDCO's failure could have on the U.S. financial markets, the

    Commission is proposing these requirements for SIDCOs. Moreover, it

    would be beneficial to Subpart C DCOs, their members and customers, and

    the financial system generally to apply these standards to Subpart C

    DCOs.

    [[Page 50274]]

    Specifically, subsection (a) (General rules) would require a SIDCO

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

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

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

    stability of the broader financial system and other relevant public

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

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

    appropriately reflect the legitimate interests of clearing members,

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

    disclose, to an extent consistent with other statutory and regulatory

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

    the board of directors to clearing members, other relevant

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

    board of directors having a broad market impact to the public.\137\

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

    \137\ The provisions concerning transparency describe which

    information, including the identities of board members, should be

    disclosed to the public and/or the Commission.

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

    Subsection (b) (Governance arrangements) would require the rules

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

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

    and responsibilities of the board of directors and its committees,

    including the establishment of a clear and documented risk management

    framework; (3) clearly specify the roles and responsibilities of

    management; (4) establish procedures for managing conflicts of interest

    among board members; and (5) assign responsibility and accountability

    for risk decisions and for implementing rules concerning default,

    recovery, and wind-down.

    Subsection (c) (Fitness standards for the board of directors and

    management) would require that board members and managers have the

    appropriate experience, skills, incentives and integrity; risk

    management and internal control personnel have sufficient independence,

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

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

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

    The Commission requests comment on all aspects of these proposals.

    The Commission is particularly interested in the following: In light of

    the potential impact that a SIDCO's failure could have on the U.S.

    financial system, would compliance with proposed regulation 39.32

    reduce systemic risks? Would applying proposed regulation 39.32 to

    SIDCOs and to Subpart C DCOs contribute to the goals articulated in the

    Dodd-Frank Act, particularly the goals of Titles VII and VIII of the

    Dodd-Frank Act? If so, in what ways? If not, why not? What

    alternatives, if any, to proposed regulation 39.32 would be more

    effective in reducing systemic risk or accomplishing the goals

    articulated in the Dodd-Frank Act? Is proposed regulation 39.32

    consistent with the PFMIs? If not, what changes need to be made to

    achieve such consistency? What alternatives to proposed regulation

    39.32, if any, would be more effective or efficient for achieving

    consistency with the standards set forth by the PFMIs? Can proposed

    regulation 39.32 be effectively implemented and complied with? If not,

    what changes can be made to permit effective implementation and

    compliance? What are the potential benefits and costs resulting from,

    or arising out of, requiring SIDCOs to comply with regulation 39.32?

    The Commission also requests comment on the potential costs and

    benefits resulting from, or arising out of, requiring Subpart C DCOs to

    comply with regulation 39.32. In considering costs and benefits,

    commenters are requested to address the effect of the proposed

    regulation not only on a DCO, but also on the DCO's clearing members,

    the customers of clearing members, and the financial system more

    broadly. The Commission requests that, where possible, commenters

    provide quantitative data in their comments, particularly with respect

    to estimates of costs and benefits. The Commission requests that

    commenters include a detailed description of any alternatives to

    proposed regulation 39.32 and estimates of the costs and benefits of

    such alternatives.

    E. Regulation 39.33 (Financial Resources Requirements for Systemically

    Important Derivatives Clearing Organizations and Subpart C Derivatives

    Clearing Organizations)

    In 2013, the Commission finalized financial resource requirements

    for SIDCOs in a manner that parallels the financial resources standard

    in Principle 4 of the PFMIs.\138\ Regulation 39.29 requires a SIDCO

    that is systemically important in multiple jurisdictions, or that is

    involved in activities with a more complex risk profile, to meet a

    Cover Two requirement, i.e. financial resources sufficient to enable it

    to meet its financial obligations to its clearing members

    notwithstanding a default by the two clearing members creating the

    largest combined financial exposure in extreme but plausible market

    conditions. Moreover, where a clearing member controls another clearing

    member or is under common control with another clearing member,

    regulation 39.29 also requires SIDCOs to treat affiliated clearing

    members as a single clearing member for the purposes of the Cover Two

    requirement. In addition, regulation 39.29 prohibits a SIDCO from using

    assessments as a financial resource to meet this Cover Two standard.

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

    \138\ See SIDCO Final Rule.

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

    The Commission proposes to further amend regulation 39.29 to

    enhance financial resources requirements for SIDCOs and Subpart C DCOs

    and to achieve consistency with the relevant provisions of the PFMIs,

    in particular Principle 4 and Principle 7.

    The Commission first proposes to renumber existing regulation 39.29

    to 39.33 and to apply the requirements set forth therein to Subpart C

    DCOs. The Commission further proposes, for purposes of organization,

    deleting from paragraph (a)(1) the requirement that, where a clearing

    member controls another clearing member or is under common control with

    another clearing member, a SIDCO treat affiliated clearing members as a

    single clearing member (the ``Clearing Member Aggregation

    Requirement''). The Commission proposes to include such language in new

    paragraph (a)(4) to clarify that the Clearing Member Aggregation

    Requirement applies when a SIDCO or Subpart C DCO calculates its

    financial resources requirements under regulation 39.33(a) as well as

    its liquidity resources requirements under regulation 39.33(c).

    The Commission also proposes amending paragraph (a) to state that

    the Commission shall, if it deems appropriate, determine whether a

    SIDCO or Subpart C DCO is systemically important in multiple

    jurisdictions. In making this determination, the Commission would, in

    order to limit such determinations to appropriate cases, review whether

    another jurisdiction had determined the SIDCO or Subpart C DCO to be

    systemically important according to a designations process that

    considers whether the foreseeable effects of a failure or disruption of

    the derivatives clearing organization could threaten the stability of

    each relevant jurisdiction's financial system. In addition, the

    Commission proposes amending paragraph (a) to state that the Commission

    shall also determine, if it deems appropriate, whether any of the

    activities of a SIDCO

    [[Page 50275]]

    or Subpart C DCO, in addition to clearing credit default swaps, credit

    default futures, and any derivatives that reference either, has a more

    complex risk profile and may take into consideration characteristics

    such as non-linear and discrete jump-to-default price changes.\139\ In

    addition and in light of the proposed liquidity provisions discussed

    below, the Commission proposes a technical clarification to paragraph

    (a)(1) to make clear that such a SIDCO or Subpart C DCO must meet its

    ``credit exposure'' (rather than ``financial obligations'') to its

    clearing members notwithstanding a default by the two clearing members

    creating the largest ``aggregate credit'' (rather than ``combined

    financial'') exposure in extreme but plausible market conditions. The

    Commission also proposes amending paragraph (b) to clarify that the

    prohibition on including assessments as a financial resource applies to

    calculating financial resources needed to cover the default of the

    largest and, where applicable, second largest clearing member, in

    extreme but plausible circumstances.\140\

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    \139\ The Commission's proposed amendment to regulation

    140.94(a) would delegate the authority to make these determinations

    to the Director of the Division of Clearing and Risk.

    \140\ The preamble to the SIDCO Final Rule adopting release made

    clear that paragraph (b) applied to both Cover One and Cover Two,

    but the Commission has decided to add clarifying language to the

    regulation text. See generally SIDCO Final Rule.

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

    The Commission proposes adding paragraphs (c), (d), and (e) to

    address the liquidity of SIDCOs' and Subpart C DCOs' financial

    resources. These new paragraphs are intended to address the gaps

    between current part 39 requirements and standards set forth in

    Principle 7.\141\

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    \141\ As discussed above in Section I.E.6, Principle 7, K.C. 2

    requires a CCP to measure, monitor, and manage liquidity risk

    effectively. This includes the CCP maintaining sufficient liquid

    resources in all relevant currencies in order to effect same-day

    and, where applicable, intraday and multiday settlement of payment

    obligations in a wide range of potential stress scenarios, including

    the default of the participant that would create the largest

    aggregate payment obligations in extreme but plausible market

    conditions. In addition, Principle 7, K. C. 5 limits a CCP to

    counting only certain qualifying liquid resources for the purpose of

    meeting its financial resources requirement. These resources

    include: Cash in the currency of the requisite obligations, held

    either at the central bank of issue or at a creditworthy commercial

    bank; committed lines of credit; or high quality, liquid, general

    obligations of a sovereign nation. In addition, Principle 7, K. C. 4

    states that a CCP that is systemically important in multiple

    jurisdictions or that is involved in activities with a more complex

    risk profile should consider maintaining sufficient qualifying

    liquid resources to meet the default of the two participants that

    would create the largest aggregate payment obligations in such

    circumstances. Principle 7, K. C. 7 also requires a CCP to monitor

    its liquidity providers, including clearing members, by undertaking

    due diligence to confirm that they have sufficient information to

    understand and manage their liquidity risks and have the capacity to

    perform as required under their commitments to the CCP.

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

    Proposed paragraph (c)(1) would require a SIDCO or Subpart C DCO to

    maintain eligible liquidity resources that will enable the SIDCO or

    Subpart C DCO to meet its intraday, same-day, and multiday settlement

    obligations, as defined in regulation 39.14(a), with a high degree of

    confidence under a wide range of stress scenarios, including the

    default of the member creating the largest liquidity requirements under

    extreme but plausible circumstances. Maintaining resources that enable

    the DCO to meet these obligations will help prevent a SIDCO or Subpart

    C DCO from defaulting on its obligations to non-defaulting clearing

    members, which is particularly important for a SIDCO because of the

    potential impact that the failure of a SIDCO could have on the U.S.

    financial markets.

    Proposed paragraph (c)(2) would require a SIDCO or Subpart C DCO to

    maintain liquidity resources that are sufficient to satisfy the

    obligations required by new paragraph (c)(1) in all relevant currencies

    for which the SIDCO or Subpart C DCO has settlement obligations to its

    clearing members. A SIDCO should be able promptly to meet its

    obligations in each relevant currency. If a SIDCO has sufficient funds

    to meet an obligation, but the funds are not in the correct currency,

    then the SIDCO cannot meet that obligation in a timely manner, which

    could lead to a disruption of the SIDCO's services. Such disruption

    could, in turn, have a significant impact on the financial stability of

    the U.S. economy.

    Proposed paragraph (c)(3) would limit a SIDCO or Subpart C DCO to

    using only certain types of liquidity resources to satisfy the minimum

    liquidity requirement set forth in proposed paragraph (c)(1).\142\

    Among these ``qualifying liquidity resources'' are ``committed lines of

    credit,'' ``committed foreign exchange swaps,'' and ``committed

    repurchase agreements.'' ``Committed'' is intended to connote a legally

    binding contract under which a liquidity provider agrees to provide the

    relevant liquidity resource without delay or further evaluation of the

    DCO's creditworthiness, e.g., a line of credit that cannot be withdrawn

    at the election of the liquidity provider during times of financial

    stress, or in the event of the default of a member of the SIDCO or

    Subpart C DCO.\143\ The proposed list of these resources is consistent

    with those set forth in Principle 7. Also consistent with Principle 7,

    proposed paragraph (c)(1)(ii) would require a SIDCO or Subpart C DCO

    that is systemically important in multiple jurisdictions, or that is

    involved in activities with a more complex risk profile, to consider

    maintaining eligible liquidity resources that, at a minimum, will

    enable it to meet its intraday, same-day, and multiday settlement

    obligations, stress scenarios that include a default of the two

    clearing members creating the largest aggregate liquidity obligation

    for the DCO in extreme but plausible market conditions. The financial

    integrity of a SIDCOs and or Subpart C DCOs might be enhanced if it

    considers meeting this enhanced standard.

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

    \142\ In determining whether the liquidity resources that are

    eligible under paragraph (c)(3) are sufficient to meet the

    obligation specified under paragraph (c)(1) (resources that

    ``enable'' the DCO to meet its settlement obligations), it is

    important to avoid double counting. For example, one may not count

    both a committed repurchase arrangement and U.S. Treasury Bills that

    would be used to collateralize that arrangement.

    \143\ Times of financial stress, and the event of the default of

    a member of the DCO are, of course, the times when reliable

    liquidity arrangements are most needed.

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

    Under proposed paragraph (c)(3)(ii), a SIDCO or Subpart C DCO would

    be required to take appropriate steps to verify that its qualifying

    liquidity arrangements do not include material adverse change

    provisions and are enforceable, and will be highly reliable, even in

    extreme but plausible market conditions. This requirement is consistent

    with Principle 7.

    Also consistent with Principle 7, under proposed paragraph (c)(4),

    if a SIDCO or Subpart C DCO maintains liquid financial resources in

    addition to those required to satisfy the Cover One requirement, then

    those resources should be in the form of assets that are likely to be

    saleable with proceeds available promptly or acceptable as collateral

    for lines of credit, swaps, or repurchase agreements on an ad hoc

    basis. In addition, Principle 7 provides and proposed paragraph

    39.33(c)(4) requires that a SIDCO or Subpart C DCO should consider

    maintaining collateral with low credit, liquidity, and market risks

    that is typically accepted by a central bank of issue for any currency

    in which it may have settlement obligations, but shall not assume the

    availability of emergency central bank credit as a part of its

    liquidity plan.\144\

    [[Page 50276]]

    These provisions are designed to enhance the financial condition of

    SIDCOs and Subpart C DCOs and help reinforce stability.\145\

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

    \144\ It should be noted that the requirement of proposed

    paragraph (c)(4) that a SIDCO or Subpart C DCO consider maintaining

    certain types of collateral, like the requirement of proposed

    paragraph (c)(1)(ii), does not include a requirement as to the

    decision to be made following such consideration.

    \145\ See generally Financial Stability Oversight Council 2012

    Annual Report, Appendix A at 163 (finding that ``the contagion

    effect of a CME failure could impose material financial losses on

    CME's clearing members and other market participants (such as

    customers) and could lead to increased liquidity demands and credit

    problems across financial institutions, especially those that are

    active in the futures and options markets.'').

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

    Pursuant to proposed paragraphs (d)(1)-(2), a SIDCO or Subpart C

    DCO would be required to monitor its liquidity providers in a manner

    consistent with Principle 7. Proposed paragraph (d)(1) would define

    ``liquidity provider'' to mean any of the following: (i) A depository

    institution, a U.S. branch and agency of a foreign banking

    organization, a trust company, or a syndicate of depository

    institutions, U.S. branches and agencies of foreign banking

    organizations, or a trust companies providing a line of credit, foreign

    exchange swap facility or repurchase facility to the SIDCO or Subpart C

    DCO; and (ii) Any other counterparty relied upon by a SIDCO or Subpart

    C DCO to meet its minimum liquidity resources requirement under

    paragraph (c) of this section. Moreover, under proposed paragraph

    (d)(5), a SIDCO with access to accounts and services at a Federal

    Reserve Bank is encouraged to use those services, where practical, to

    enhance its management of liquidity risk.\146\ In addition, proposed

    paragraph (d)(4) would require a SIDCO or Subpart C DCO to regularly

    test its procedures for accessing its liquidity resources. Finally,

    pursuant to new subsection (e) and consistent with Principle 4, a SIDCO

    or Subpart C DCO would be required to document its supporting rationale

    for, and have appropriate governance arrangements relating to, the

    amount of total financial resources it maintains pursuant to regulation

    39.33(a) and the amount of total liquidity resources it maintains

    pursuant to regulation 39.33(c).\147\

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

    \146\ Under Section 806(a) of the Dodd-Frank Act, 12 U.S.C.

    5465(a), the Board may authorize a Federal Reserve Bank to establish

    and maintain an account for an FMU, which, as described above in

    Section I.B., includes a SIDCO. A SIDCO with access to accounts and

    services at a Federal Reserve Bank would be required to comply with

    related rules published by the Board of Governors of the Federal

    Reserve System. See generally Financial Market Utilities, 78 FR

    14024 (Mar. 4, 2013) (proposal by the Board of rules to govern

    accounts held by designated FMUs).

    \147\ This provision is consistent with PFMI Principle 4, K.C.

    4.

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

    The Commission requests comment on all aspects of proposed

    regulation 39.33. The Commission is particularly interested in the

    following:

    Are the proposed considerations in paragraph (a)(2) for determining

    whether a DCO is systemically important in multiple jurisdictions and

    in paragraph (a)(3) for determining whether it is engaged in activities

    with a more complex risk profile workable? Should alternative

    considerations be used?

    In proposed paragraph (d)(4), should the Commission specify the

    frequency with which a SIDCO or Subpart C DCO must test its procedures

    for accessing its liquidity resources? In proposed paragraph

    (c)(3)(i)(E)(1) and (c)(3)(ii), the Commission permits highly

    marketable collateral to be used as a liquidity resource provided that

    such collateral is held in custody and investments that are readily

    available and convertible into cash with prearranged and highly

    reliable funding arrangements, even in extreme but plausible market

    conditions. As such, the Commission proposes to permit as a liquidity

    resource obligations of the United States Treasury or high quality,

    liquid, general obligations of a sovereign nation provided that such

    obligations are readily available and convertible into cash pursuant to

    prearranged and highly reliable funding arrangements. This is

    consistent with the language of the PFMIs.\148\ Should the requirement

    be for funding arrangements that are committed? The Commission requests

    comment on whether there are any highly reliable funding arrangements

    that meet the requirements of the proposed regulations that are not

    committed funding arrangements.

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

    \148\ See PFMI Principle 7, K.C. 5.

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

    In addition, in light of the potential impact that a SIDCO's

    failure could have on the U.S. financial system, would compliance with

    proposed regulation 39.33 reduce systemic risks? Would proposed

    regulation 39.33 contribute to the goals articulated in the Dodd-Frank

    Act, particularly the goals of Titles VII and VIII of the Dodd-Frank

    Act? If so, in what ways? If not, why not? What alternatives, if any,

    to proposed regulation 39.33 would be more effective in reducing

    systemic risk or accomplishing the goals articulated in the Dodd-Frank

    Act? Is proposed regulation 39.33 consistent with the PFMIs? Are there

    more effective or efficient means for achieving consistency with the

    liquidity standards set forth in Principle 7? If not, what changes need

    to be made to achieve such consistency? What alternatives to proposed

    regulation 39.33, if any, would be more effective or efficient for

    achieving consistency with the standards set forth by the PFMIs? The

    Commission requests that commenters include a detailed description of

    any such alternatives and estimates of the costs and benefits of such

    alternatives. Should regulation 39.33 provide that only a SIDCO can be

    deemed systemically important in multiple jurisdictions? Can proposed

    regulation 39.33 be effectively implemented and complied with? If not,

    what changes can be made to permit effective implementation and

    compliance? What are the potential costs and benefits resulting from,

    or arising out of, requiring a SIDCO to comply with proposed regulation

    39.33? What are the potential costs and benefits resulting from, or

    arising out of, requiring Subpart C DCOs to comply with proposed

    regulation 39.33? In considering costs and benefits, commenters are

    requested to address the effect of the proposed regulation not only on

    a DCO, but also on the DCO's clearing members, the customers of

    clearing members, and the financial system more broadly. The Commission

    requests that, where possible, commenters provide quantitative data in

    their comments, particularly with respect to estimates of costs and

    benefits.

    F. Regulation 39.34 (System Safeguards for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    In 2013, the Commission finalized regulation 39.30, which enhanced

    system safeguards requirements for SIDCOs for business continuity and

    disaster recovery, and included a two-hour recovery time objective

    (``RTO'') for SIDCOs.\149\ As discussed in the adopting release, the

    two-hour RTO is consistent with Principle 17 of the PFMIs and increases

    the soundness and operating resiliency of the SIDCO, which in turn,

    increases the overall stability of the U.S. financial markets.\150\ The

    Commission proposes renumbering regulation 39.30 as regulation 39.34

    and amending the regulation to cover SIDCOs and Subpart C DCOs as well

    as a technical correction to paragraph (b) to make clear that

    subparagraphs (1), (2), and (3) concern each activity necessary for the

    daily processing, clearing, and settlement of existing and new

    contracts. Finally, to provide flexibility to address the practical

    burdens of obtaining the necessary physical and technological

    resources, and of organizing human resources, as appropriate to

    implement a two-hour RTO, the Commission proposes amending the

    regulation to allow the

    [[Page 50277]]

    Commission to, upon application, grant newly designated SIDCOs and

    Subpart C DCOs up to one year to comply with the provisions of

    regulation 39.34.

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

    \149\ See SIDCO Final Rule.

    \150\ Id.

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

    The Commission requests comment on all aspects of proposed

    regulation 39.34. The Commission is particularly interested in the

    following: Would applying proposed regulation 39.34 to Subpart C DCOs

    contribute to the goals articulated in the Dodd-Frank Act, particularly

    the goals of Titles VII and VIII of the Dodd-Frank Act? If so, in what

    ways? If not, why not? What alternatives, if any, to proposed

    regulation 39.34 would be more effective in reducing systemic risk or

    accomplishing the goals articulated in the Dodd-Frank Act? Is proposed

    regulation 39.34 consistent with the PFMIs? If not, what changes need

    to be made to achieve such consistency? What alternatives to proposed

    regulation 39.34, if any, would be more effective or efficient for

    achieving consistency with the standards set forth by the PFMIs? The

    Commission requests that commenters include a detailed description of

    any such alternatives and estimates of the costs and benefits of such

    alternatives. Can proposed regulation 39.34 be effectively implemented

    and complied with? If not, what changes can be made to permit effective

    implementation and compliance? What are the potential costs and

    benefits resulting from, or arising out of, requiring a SIDCO to comply

    with proposed regulation 39.34? What are the potential costs and

    benefits resulting from, or arising out of, requiring Subpart C DCOs to

    comply with proposed regulation 39.34? In considering costs and

    benefits, commenters are requested to address the effect of the

    proposed regulation not only on a DCO, but also on the DCO's clearing

    members, the customers of clearing members, and the financial system

    more broadly. The Commission requests that, where possible, commenters

    provide quantitative data in their comments, particularly with respect

    to estimates of costs and benefits.

    G. Regulation 39.35 (Default Rules and Procedures for Uncovered Credit

    Losses or Liquidity Shortfalls (Recovery) for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    The Commission is proposing regulation 39.35, which adds

    requirements pursuant to DCO Core Principle G, to address certain

    potential gaps between Commission regulations and Principles 4 and

    7.\151\ In particular, proposed regulation 39.35 is designed to protect

    SIDCOs, Subpart C DCOs, their members and customers, and the financial

    system more broadly by requiring SIDCOs and Subpart C DCOs to have

    plans and procedures to address credit losses and liquidity shortfalls

    beyond their prefunded resources, thus promoting their ability to

    promptly fulfill their obligations and continue to perform their

    critical functions.

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

    \151\ DCO Core Principle G requires a DCO to have rules and

    procedures ``designed to allow for the efficient, fair, and safe

    management of events during which [clearing] members or

    participants--(I) become insolvent; or (II) otherwise default on the

    obligations of the members or participants to the [DCO].'' Each DCO

    ``is required to (I) clearly state the default procedures on the

    [DCO]; (II) make publicly available the default rules of the [DCO];

    and (III) ensure that the [DCO] may take timely action--(aa) to

    contain losses and liquidity pressures; and (bb) to continue meeting

    each obligation of the DCO.'' See supra Section I.D.3.

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

    Regulation 39.16 currently requires a DCO to adopt procedures

    permitting it to take timely action to contain losses and liquidity

    pressures and to continue meeting its obligations in the event of a

    default on the obligations of a clearing member to the DCO.\152\

    Proposed regulation 39.35 would require SIDCOs and Subpart C DCOs to

    adopt additional procedures to address certain issues arising from

    extraordinary stress events, including the default of one or more

    clearing members. Specifically, consistent with Principle 4 of the

    PFMIs, proposed paragraph (a) would require a SIDCO or Subpart C DCO to

    adopt rules and procedures addressing the following:

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

    \152\ 17 CFR 39.16(c).

    1. How the SIDCO or Subpart C DCO would allocate losses

    exceeding the financial resources available to the SIDCO or Subpart

    C DCO;

    2. How the SIDCO or Subpart C DCO would arrange for the

    repayment of any funds the SIDCO or Subpart C DCO may borrow; and

    3. How the SIDCO or Subpart C DCO would replenish any financial

    resources it may employ during such a stress event, so that the

    SIDCO or Subpart C DCO would be able to continue to operate in a

    safe and sound manner.

    Consistent with Principle 7 of the PFMIs, proposed paragraph (b) would

    require a SIDCO or Subpart C DCO to establish rules and procedures

    enabling it to promptly meet all of its settlement obligations, on a

    same day and, where appropriate, on an intraday and multiday basis, in

    the context of the occurrence of either or both of the following

    scenarios: (i) Following an individual or combined default involving

    one or more clearing members' obligations to the SIDCO or Subpart C DCO

    or (ii) if there is an unforeseen liquidity shortfall exceeding the

    financial resources of the SIDCO or Subpart C DCO. Such rules and

    procedures should be established ex ante and may provide for the means

    of: increasing available assets (e.g. by using assessments) and/or

    reducing the size of liabilities (e.g. by engaging in variation margin

    haircuts or tear-ups); as well as obtaining liquidity from participants

    (e.g. through rules-based repurchase arrangements); employing a

    sequenced application of such tools; and replenishing any credit and

    liquidity resources that may be employed during a stress event.

    Proposed regulation 39.35 addresses significant consequences that

    could result from a clearing member's default. Specifically, a DCO

    might not have sufficient financial resources following a clearing

    member's default either to cover the default or to fulfill its

    settlement obligations. Similarly, a DCO may be unable to fulfill its

    settlement obligations due to a liquidity shortfall exceeding its

    financial resources. In order to avoid the negative effect on its

    clearing members, their customers, and on the financial system more

    broadly of a DCO's failure promptly to meet its settlement obligations,

    it would be prudent for a DCO to have a recovery plan that addresses

    these scenarios and, given their importance to the U.S. financial

    system, it is critical for SIDCOs to have such plans. In addition,

    because this plan would be specified in the DCO's rules and/or

    procedures, it would be disclosed to clearing members, their customers,

    and the broader public. Such transparency would likely help clearing

    members, their customers, and other market participants properly

    allocate capital and other resources as well as facilitate the

    development of their own recovery plans.

    The Commission requests comment on all aspects of these proposals.

    The Commission is particularly interested in the following: In light of

    the potential impact that a SIDCO's failure could have on the U.S.

    financial system, would compliance with proposed regulation 39.35

    reduce systemic risks? Would proposed regulation 39.35 contribute to

    the goals articulated in the Dodd-Frank Act, particularly the goals of

    Titles VII and VIII of the Dodd-Frank Act? If so, in what ways? If not,

    why not? What alternatives, if any, to proposed regulation 39.35 would

    be more effective in reducing systemic risk or accomplishing the goals

    articulated in the Dodd-Frank Act? Is proposed regulation 39.35

    consistent with the PFMIs? If not, what changes need to be made to

    achieve such consistency?

    [[Page 50278]]

    What alternatives to proposed regulation 39.35, if any, would be more

    effective or efficient for achieving consistency with the standards set

    forth by the PFMIs? Can proposed regulation 39.35 be effectively

    implemented and complied with? If not, what changes can be made to

    permit effective implementation and compliance? What are the potential

    benefits and costs resulting from, or arising out of, requiring SIDCOs

    to comply with regulation 39.35? The Commission also requests comment

    on the potential costs and benefits resulting from, or arising out of,

    requiring Subpart C DCOs to comply with regulation 39.35. In

    considering costs and benefits, commenters are requested to address the

    effect of the proposed regulation not only on a DCO, but also on the

    DCO's clearing members, the customers of clearing members, and the

    financial system more broadly. The Commission requests that, where

    possible, commenters provide quantitative data in their comments,

    particularly with respect to estimates of costs and benefits. The

    Commission requests that commenters include a detailed description of

    any alternatives to proposed regulation 39.35 and estimates of the

    costs and benefits of such alternatives.

    H. Regulation 39.36 (Risk Management for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    Proposed regulation 39.36 would include additional risk management

    requirements for SIDCOs and Subpart C DCOs. As noted above, regulation

    39.13 establishes the risk management requirements that a DCO would

    have to meet in order to comply with Core Principle D \153\ including,

    among other things, specific criteria for stress tests that a DCO must

    conduct.\154\ For example, regulation 39.13(h)(3)(ii) requires a

    registered DCO to, ``on a weekly basis, conduct stress tests with

    respect to each clearing member account, by house origin and by each

    customer origin, and each swap portfolio[hellip]under extreme but

    plausible market conditions.'' However, pursuant to this provision, a

    DCO has reasonable discretion in determining the methodology used to

    conduct such stress tests.

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

    \153\ DCO Core Principle D requires each DCO to possess the

    ability to manage the risks associated with discharging the

    responsibilities of the DCO through the use of appropriate tools and

    procedures. It further requires each DCO to measure its credit

    exposures to each clearing member not less than once during each

    business day and to monitor each such exposure periodically during

    the business day. Core Principle D also requires each DCO to limit

    its exposure to potential losses from defaults by clearing members,

    through margin requirements and other risk control mechanisms, to

    reduce the risk that its operations would not be disrupted and that

    non-defaulting clearing members would not be exposed to losses that

    non-defaulting clearing members cannot anticipate or control.

    Finally, Core Principle D requires that the margin that the DCO

    requires from each clearing member be sufficient to cover potential

    exposures in normal market conditions, and that each model and

    parameter used in setting such margin requirements be risk-based and

    reviewed on a regular basis.

    \154\ See supra Section I.D.2.

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

    The Commission is proposing regulation 39.36 to address certain

    differences between Commission regulations and Principles 4, 6, 7, and

    9.\155\ In particular, proposed regulation 39.36 would require a SIDCO

    or Subpart C DCO to enhance its stress testing procedures in ways that

    will make it more likely that the SIDCO or Subpart C DCO will be able

    to understand the risks posed by its members, so that it can ensure

    that the relationship between its resources and obligations enables it

    to meet its obligations promptly.

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

    \155\ See discussion of Principles 4 and 6 supra Sections I.E.4,

    I.E.5.

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

    Specifically, and consistent with Principle 4, proposed regulation

    39.36(a)(1) would require a SIDCO or Subpart C DCO to perform stress

    testing, on a daily basis, of its financial resources using

    predetermined parameters and assumptions. In addition, proposed

    regulation 39.36(a)(2) would require a SIDCO or Subpart C DCO to

    perform comprehensive analyses of stress testing scenarios and

    underlying parameters to ascertain that they are appropriate for

    determining the SIDCO's or Subpart C DCO's required level of financial

    resources in current and evolving market conditions. Proposed

    regulation 39.36(a)(3) would also require a SIDCO or Subpart C DCO to

    perform the analyses in proposed regulation 39.36(a)(2) ``at least

    monthly when products cleared or markets served display high

    volatility, become less liquid, or when the size or concentration of

    positions held by clearing members increases significantly.'' A SIDCO

    or Subpart C DCO would also be required to ``evaluate [its] stress

    testing scenarios, models, and underlying parameters more frequently

    than once a month,'' where appropriate. For purposes of the analyses in

    proposed regulation 39.36(a)(1) and proposed regulation 39.36(a)(2),

    proposed regulation 39.36(a)(4) would require a SIDCO or Subpart C DCO

    to include the following stress scenarios for both defaulting clearing

    members' positions and possible price changes in liquidation periods:

    (i) Relevant peak historic price volatilities; (ii) shifts in other

    market factors including, as appropriate, price determinants and yield

    curves; (iii) multiple defaults over various time horizons; (iv)

    simultaneous pressures in funding and asset markets; and (v) a range of

    forward-looking stress scenarios in a variety of extreme but plausible

    market conditions. Moreover, proposed regulation 39.36(a)(5) would

    require each SIDCO and Subpart C DCO to establish procedures for

    reporting stress test results to its risk management committee or board

    of directors, as appropriate, and for using the results to assess the

    adequacy of, and to adjust the SIDCO's or Subpart C DCO's total

    financial resources. Finally, proposed regulation 39.36(a)(6) would

    require each SIDCO and Subpart C DCO to use the results of its

    financial resources stress testing to help make sure it meets the

    minimum financial resources requirement set forth in proposed

    regulation 39.33(a).

    In addition, and consistent with Principle 7, the Commission is

    proposing stress testing requirements for liquidity resources that are

    analogous to the stress testing requirements for financial resources in

    proposed regulation 39.36(a), with the exception that the stress

    testing scenarios required by proposed regulation 39.36(c)(5) should

    consider the following: (i) All entities that might pose material

    liquidity risks to the DCO, including settlement banks, permitted

    depositories, liquidity providers, and other entities; (ii) intraday

    and multiday scenarios, where appropriate; (iii) inter-linkages between

    its clearing members and the multiple roles that they may play in in

    the SIDCO's or Subpart C DCO's risk management (e.g., scenarios where a

    clearing member or its affiliate is also a liquidity provider); and

    (iv) the probability of multiple failures and contagion effect among

    clearing members.

    Proposed regulation 39.36(c)(7) would require a SIDCO or Subpart C

    DCO to use the results of such stress tests to make certain that it

    meets the financial resources requirement set forth in regulation

    39.33(a), and the liquidity resources requirements set forth in

    regulation 39.33(c). In addition, each SIDCO and Subpart C DCO would be

    required to perform, on an annual basis, a full validation of its

    financial risk management model and its liquid risk management model.

    Proposed paragraphs (a), (c), (d), and (e) are important because

    stress testing scenarios, underlying risk factors that constitute such

    scenarios, and the relationship between different risk

    [[Page 50279]]

    factors are dynamic, and need to be updated due to changing market

    conditions. For example, use of relative, instead of absolute, changes

    in interest rates may be sufficient in a normal interest rate

    environment, but can lead to nonsensical estimates during low rate

    periods. In other words, changes in a particular risk factor during

    unusually volatile periods may be more extreme than any in the existing

    scenarios. In addition, it is important for SIDCOs and Subpart C DCOs

    to stress test both their financial resources and liquidity resources.

    While stress testing financial resources helps SIDCOs and Subpart C

    DCOs make sure they have the right amount, SIDCOs and Subpart C DCOs

    need access to liquid assets subject to arrangements in which they can

    promptly be convertible to cash to fulfill their obligations in a

    timely manner. As such, stress testing liquidity resources is a

    critical exercise for SIDCOs and Subpart C DCOs as such testing will

    help ensure that SIDCOs and Subpart C DCOs have enough resources to

    cover their obligations at the time and on the day that such

    obligations are due. Moreover, given the significant role SIDCOs play

    in the U.S. financial markets, it would appear that obtaining an in-

    depth understanding of potential liquidity needs through comprehensive

    stress testing under a broad range of scenarios is critical for a

    SIDCO's effective risk management.

    As noted above, Principle 6 requires a CCP's margin system to take

    into account the ``risks and particular attributes of each product,

    portfolio and market that it serves'' and be calibrated

    accordingly.\156\ In particular, Principle 6 requires a CCP to conduct

    a ``sensitivity analysis'' of its margin system at least monthly, and,

    more frequently, when appropriate. Accordingly, consistent with the

    standards set forth in Principle 6, paragraph (c) of proposed

    regulation 39.36 would require a SIDCO or Subpart C DCO to conduct a

    sensitivity analysis of its margin model at least monthly to analyze

    and monitor model performance and overall margin coverage. Moreover,

    paragraph (c) would require the sensitivity analysis to involve

    reviewing a wide range of parameter settings and assumptions that

    reflect possible market conditions in order to understand how the level

    of margin coverage might be affected by highly stressed market

    conditions. The parameters and assumptions used by a SIDCO or Subpart C

    DCO would be expected to capture a variety of historical and

    hypothetical conditions, including the most volatile periods that have

    been experienced by the markets served by the SIDCO or Subpart C DCO

    and extreme changes in the correlations between prices. In addition,

    the sensitivity analysis would be conducted on both actual and

    hypothetical positions, and would include testing of the abilities of

    the models or model components to produce accurate results using actual

    or hypothetical datasets and assessing the impact of different model

    parameter settings. The SIDCO or Subpart C DCO would also be required

    to evaluate potential losses in clearing members' proprietary positions

    and, where appropriate, customer positions. With respect to SIDCOs and

    Subpart C DCOs that are involved in activities with a more complex risk

    profile, the Commission proposes requiring such SIDCOs and Subpart C

    DCOs to take into consideration parameter settings that reflect the

    potential impact of the simultaneous default of two clearing members

    and consider the underlying credit instruments.\157\ Proposed

    regulation 39.36(d) would require a SIDCO or Subpart C DCO regularly to

    conduct an assessment of the theoretical and empirical properties of

    its margin model for all products it clears, and proposed regulation

    39.36(e) would require a SIDCO or Subpart C DCO to perform, on an

    annual basis, a full validation of its financial risk management model

    and its liquid risk management model. Moreover, under proposed

    paragraph (f), and consistent with Principle 16, custody and investment

    arrangements for a systemically important derivatives clearing

    organization's and subpart C derivatives clearing organization's own

    funds and assets would be subject to the same requirements as those

    specified in Sec. 39.15 of this chapter for funds and assets of

    clearing members. This includes establishing standards and procedures

    that are designed to protect and ensure safety as specified in Sec.

    39.15(a), custody arrangements that minimize the risk of loss or of

    delay in access by the DCO as specified in Sec. 39.15(c), and

    limitation of investments to instruments with minimal credit, market,

    and liquidity risks as specified in Sec. 39.15(e).

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

    \156\ See supra Section I.E.5.

    \157\ See supra Section II.E (discussing ``Cover Two'' in

    connection with revised regulation 39.33 (financial resources)). See

    generally PFMIs at E.N. 3.6.17.

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

    It is vitally important that all DCOs obtain an in-depth

    understanding of their exposure to credit risk. As financial

    derivatives markets expand globally and counterparty credit risk

    increases in size and complexity, a DCO's ability to assess its

    exposure to credit risk becomes even more critical. These proposed

    regulations are intended to enhance the ability of SIDCOs and Subpart C

    DCOs to manage their risk exposure. Because a SIDCO plays a significant

    role in the financial markets, accurate and dynamic risk management is

    critical not only to the SIDCO, but also to the stability of the

    broader U.S. financial system.

    Under proposed paragraph (g), and consistent with Principle 9, a

    SIDCO or Subpart C DCO would be required to monitor, manage, and limit

    its credit and liquidity risks arising from its settlement banks.\158\

    Specifically, a SIDCO or Subpart C DCO would be required to establish,

    and monitor adherence to, strict criteria for its settlement banks that

    take account of, among other things, their regulation and supervision,

    creditworthiness, capitalization, access to liquidity, and operational

    reliability. In addition, a SIDCO or Subpart C DCO would be required to

    monitor and manage the concentration of credit and liquidity exposures

    to its settlement banks. In order to mitigate both the probability of

    being exposed to a settlement bank's failure and the potential losses

    and liquidity pressures to which it would be exposed in the event of

    such a failure, each SIDCO and Subpart C DCO should, where reasonable

    and practicable, use multiple settlement banks instead of one and

    consider using different settlement banks for different functions, such

    as depositing funds, investing funds or holding liquidity

    resources.\159\

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

    \158\ See discussion of Principle 9 supra Section I.E.7.

    \159\ See PFMIs at E.N. 3.9.5, 3.9.6. These issues could be

    avoided by a SIDCO to the extent it uses Federal Reserve Bank

    accounts and services pursuant to proposed regulation 39.33(d)(5).

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

    The Commission requests comment on all aspects of proposed

    regulation 39.36. The Commission is particularly interested in the

    following: In light of the potential impact that a SIDCO's failure

    could have on the U.S. financial system, would compliance with proposed

    regulation 39.36 reduce systemic risks? Would proposed regulation 39.36

    contribute to the goals articulated in the Dodd-Frank Act, particularly

    the goals of Titles VII and VIII of the Dodd-Frank Act? If so, in what

    ways? If not, why not? What alternatives, if any, to proposed

    regulation 39.36 would be more effective in reducing systemic risk or

    accomplishing the goals articulated in the Dodd-Frank Act? Is proposed

    regulation 39.36 consistent with the PFMIs? If not, what changes need

    to be made to achieve such consistency? What alternatives to proposed

    [[Page 50280]]

    regulation 39.36, if any, would be more effective or efficient for

    achieving consistency with the standards set forth by the PFMIs? Can

    proposed regulation 39.36 be effectively implemented and complied with?

    If not, what changes can be made to permit effective implementation and

    compliance? What are the potential benefits and costs resulting from,

    or arising out of, requiring SIDCOs to comply with regulation 39.36?

    The Commission also requests comment on the potential costs and

    benefits resulting from, or arising out of, requiring Subpart C DCOs to

    comply with regulation 39.36. In considering costs and benefits,

    commenters are requested to address the effect of the proposed

    regulation not only on a DCO, but also on the DCO's clearing members,

    the customers of clearing members, and the financial system more

    broadly. The Commission requests that, where possible, commenters

    provide quantitative data in their comments, particularly with respect

    to estimates of costs and benefits. The Commission requests that

    commenters include a detailed description of any alternatives to

    proposed regulation 39.36 and estimates of the costs and benefits of

    such alternatives.

    I. Regulation 39.37 (Additional Disclosure for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    The Commission is proposing regulation 39.37 to set forth

    additional public disclosure requirements for SIDCOs and Subpart C

    DCOs.\160\ These requirements are intended to address differences

    between current requirements and PFMI Principles 14 and 23. In

    particular, proposed regulation 39.37 is designed to enable members of

    SIDCOs and Subpart C DCOs, their customers, and the general public to

    understand the risk of exposures to such DCOs, and to promote their

    ability to evaluate the quality of such DCOs, thereby enhancing

    competition and market discipline.

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

    \160\ Public disclosure requirements for all registered DCOs are

    set forth in Regulation 39.21, which implements DCO Core Principle L

    (Public Information), and requires DCOs to provide to market

    participants sufficient information to enable them to identify and

    evaluate accurately the risks and costs associated with using the

    services of the DCO.

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

    Specifically, proposed regulation 39.37 would require SIDCOs and

    Subpart C DCOs to disclose certain information to the public and to the

    Commission. First, consistent with Principle 23, a SIDCO or Subpart C

    DCO would be required to disclose its responses to the CPSS-IOSCO

    Disclosure Framework, discussed in section II.C.2, above. Further, a

    SIDCO or Subpart C DCO would be required to review and update at least

    every two years and following material changes to the SIDCO's or

    Subpart C DCO's system or its environment, its responses to the

    Disclosure Framework to ensure the continued accuracy and usefulness of

    the responses.\161\ A material change to the SIDCO's or Subpart C DCO's

    system or environment is a change that would significantly change the

    accuracy and usefulness of the SIDCO's or Subpart C DCO's existing

    responses. Proposed regulation 39.37 would also require a SIDCO or

    Subpart C DCO to disclose, publicly and to the Commission, relevant

    basic data on transaction volume and values. This requirement is

    intended to be consistent with the Quantitative Information Disclosure

    that CPSS-IOSCO are in the process of developing.\162\

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

    \161\ Available at: http://www.bis.org/publ/cpss106.pdf.

    \162\ See supra section II.C.2. for a discussion of the

    Quantitative Information Disclosure (referencing section 2.5 of the

    CPSS-IOSCO Disclosure Framework).

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

    Also under proposed regulation 39.37, a SIDCO or Subpart C DCO

    would be required, consistent with Principle 14, to publish its rules,

    policies, and procedures describing whether customer funds are

    protected on an individual or omnibus basis and whether customer funds

    are subject to any legal or operational constraints that may impair the

    ability of the SIDCO or Subpart C DCO to segregate or port the

    positions and related collateral of a clearing member's customers. This

    additional transparency, particularly with respect to information

    regarding the protection of customer positions and related collateral,

    is important for the safe and effective transfer of positions and

    collateral in a default, resolution or insolvency scenario.\163\ The

    Commission notes that the ability to transfer customer positions and

    associated collateral may reduce the need to liquidate positions, which

    liquidation could create substantial losses for customers and further

    disrupt the stability of the financial markets during times of market

    stress. In addition, these proposed additional disclosures will help

    regulators and market participants assess SIDCOs and Subpart C DCOs,

    particularly with respect to a SIDCO's or Subpart C DCO's compliance

    with the PFMIs. Because of a SIDCO's importance to the U.S. financial

    markets, it would appear that such public assessment will help provide

    comfort to market participants, which could prove to be a stabilizing

    force in times of severe market stress.

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

    \163\ See PFMIs at E.N. 3.14.1.

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

    The Commission requests comment on all aspects of these proposals.

    The Commission is particularly interested in the following: In light of

    the potential impact that a SIDCO's failure could have on the U.S.

    financial system, would compliance with proposed regulation 39.37

    reduce systemic risks? Would proposed regulation 39.37 contribute to

    the goals articulated in the Dodd-Frank Act, particularly the goals of

    Titles VII and VIII of the Dodd-Frank Act? If so, in what ways? If not,

    why not? What alternatives, if any, to proposed regulation 39.37 would

    be more effective in reducing systemic risk or accomplishing the goals

    articulated in the Dodd-Frank Act? Is proposed regulation 39.37

    consistent with the PFMIs? If not, what changes need to be made to

    achieve such consistency? What alternatives to proposed regulation

    39.37, if any, would be more effective or efficient for achieving

    consistency with the standards set forth by the PFMIs? Can proposed

    regulation 39.37 be effectively implemented and complied with? If not,

    what changes can be made to permit effective implementation and

    compliance? What are the potential benefits and costs resulting from,

    or arising out of, requiring SIDCOs to comply with regulation 39.37?

    The Commission also requests comment on the potential costs and

    benefits resulting from, or arising out of, requiring Subpart C DCOs to

    comply with regulation 39.37. In considering costs and benefits,

    commenters are requested to address the effect of the proposed

    regulation not only on a DCO, but also on the DCO's clearing members,

    the customers of clearing members, and the financial system more

    broadly. The Commission requests that, where possible, commenters

    provide quantitative data in their comments, particularly with respect

    to estimates of costs and benefits. The Commission requests that

    commenters include a detailed description of any alternatives to

    proposed regulation 39.37 and estimates of the costs and benefits of

    such alternatives.

    J. Regulation 39.38 (Efficiency for Systemically Important Derivatives

    Clearing Organizations and Subpart C Derivatives Cearing Organizations)

    Consistent with Principle 21, proposed regulation 39.38 would

    require a SIDCO or Subpart C DCO to design efficiently and effectively

    its clearing and settlement arrangements,

    [[Page 50281]]

    operating structure and procedures, product scope, and use of

    technology. In addition, a SIDCO or Subpart C DCO would be required to

    establish clearly defined goals and objectives that are measurable and

    achievable, including goals with regards to minimum service levels,

    risk management expectations, and business priorities. Moreover, a

    SIDCO or Subpart C DCO would be required to facilitate efficient

    payment, clearing, and settlement by accommodating internationally

    accepted communication procedures and standards. The explanatory notes

    to Principle 21 provide that an efficient CCP has the required

    resources to perform its functions \164\ and the efficiency of the CCP

    depends on the choice of clearing and settlement arrangement, operating

    structure, scope of products cleared or settled, and integration of

    technology and procedures.\165\ In addition, the explanatory notes

    state that an effective CCP reliably meets its obligations in a timely

    manner and achieves the public policy goals of safety and efficiency

    for participants and the markets it serves.\166\ Finally, consistent

    with Principle 22, proposed regulation 39.38(d) would require each

    SIDCO and Subpart C DCO to facilitate efficient payment, clearing, and

    settlement by accommodating internationally accepted communication

    procedures and standards.

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

    \164\ See PFMIs at E.N. 3.21.1.

    \165\ PFMIs at E.N. 3.21.2.

    \166\ PFMIs at E.N. 3.21.5.

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

    It would appear to be prudent for SIDCOs and Subpart C DCOs to

    comply with such international standards of efficiency and

    effectiveness. A SIDCO or Subpart C DCO that is inefficient or

    ineffective could distort financial activity and market structure,

    increasing financial and other risks to the SIDCO's or Subpart C DCO's

    participants.\167\ Although there is no DCO Core Principle specifically

    directed at efficiency and effectiveness, furthering these goals would

    improve compliance with Core Principle D (requiring, in part, that a

    DCO ensure it has the ability to manage the risks associated with

    discharging its responsibilities through the use of appropriate tools

    and procedures) and Core Principle G (requiring, in part, that a DCO

    have rules and procedures designed to allow for the efficient, fair,

    and safe management of events during which members or participants

    become insolvent or other default).

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

    \167\ PFMIs at E.N. 3.21.1.

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

    The Commission requests comment on all aspects of these proposals.

    The Commission is particularly interested in the following: In light of

    the potential impact that a SIDCO's failure could have on the U.S.

    financial system, would compliance with proposed regulation 39.38

    reduce systemic risks? Would proposed regulation 39.38 contribute to

    the goals articulated in the Dodd-Frank Act, particularly the goals of

    Titles VII and VIII of the Dodd-Frank Act? If so, in what ways? If not,

    why not? What alternatives, if any, to proposed regulation 39.38 would

    be more effective in reducing systemic risk or accomplishing the goals

    articulated in the Dodd-Frank Act? Is proposed regulation 39.38

    consistent with the PFMIs? If not, what changes need to be made to

    achieve such consistency? What alternatives to proposed regulation

    39.38, if any, would be more effective or efficient for achieving

    consistency with the standards set forth by the PFMIs? Can proposed

    regulation 39.38 be effectively implemented and complied with? If not,

    what changes can be made to permit effective implementation and

    compliance? What are the potential benefits and costs resulting from,

    or arising out of, requiring SIDCOs to comply with regulation 39.38?

    The Commission also requests comment on the potential costs and

    benefits resulting from, or arising out of, requiring Subpart C DCOs to

    comply with regulation 39.38. In considering costs and benefits,

    commenters are requested to address the effect of the proposed

    regulation not only on a DCO, but also on the DCO's clearing members,

    the customers of clearing members, and the financial system more

    broadly. The Commission requests that, where possible, commenters

    provide quantitative data in their comments, particularly with respect

    to estimates of costs and benefits. The Commission requests that

    commenters include a detailed description of any alternatives to

    proposed regulation 39.38 and estimates of the costs and benefits of

    such alternatives.

    K. Regulation 39.39 (Recovery and Wind-Down For Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    The Commission is proposing regulation 39.39 to require a SIDCO or

    Subpart C DCO to maintain viable plans for recovery and orderly wind-

    down. In particular, regulation 39.39 is designed to protect the

    members of such DCOs and their customers, as well as the financial

    system more broadly from the consequences of a disorderly failure of

    such a DCO.

    As noted above, Principle 3 requires a CCP to have a sound risk

    management framework for comprehensively managing legal, credit,

    liquidity, operational, and other risks.\168\ Under Principle 3, such a

    framework would include identifying scenarios that may prevent the CCP

    from providing critical operations and services as a going concern and

    would assess the effectiveness of a full range of options for recovery

    or orderly wind-down. Similarly, Principle 15 requires a CCP to

    identify, monitor, and manage its general business risk and hold

    sufficient liquid net assets funded by equity to cover potential

    general business losses so that the CCP can continue operations and

    services as a going concern if those losses materialize.\169\ Further,

    these liquid net assets should, at all times, be sufficient to allow

    for recovery or orderly wind-down of critical operations and

    services.\170\ Although there is no Core Principle that pertains

    directly to the establishment of a recovery and wind-down plan,

    proposed regulation 39.37 promotes concepts set forth in Core

    Principles B (Financial Resources), D (Risk Management), G (Default

    Rules and Procedures), and I (System Safeguards).\171\

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

    \168\ See supra Section I.E.3.

    \169\ See supra Section I.E.9.

    \170\ See id.

    \171\ See supra Section I.D.1-4.

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

    Accordingly, proposed regulation 39.39 requires a SIDCO or Subpart

    C DCO to develop additional plans that specifically address

    ``recovery'' and ``wind-down.'' The Commission proposes defining

    ``recovery'' as the actions of a SIDCO or Subpart C DCO, consistent

    with its rules, procedures, and other ex-ante contractual arrangements,

    to address any uncovered credit loss, liquidity shortfall, capital

    inadequacy, or business, operational or other structural weakness,

    including the replenishment of any depleted pre-funded financial

    resources and liquidity arrangements, as necessary to maintain the

    SIDCO's or Subpart C DCO's viability as a going concern so that it can

    continue to provide its critical services without requiring the

    commencement of an insolvency proceeding or the use of resolution

    powers by the Federal Deposit Insurance Corporation or any other

    relevant resolution authority. The Commission proposes defining ``wind-

    down'' as the actions of a SIDCO or Subpart C DCO to effect the

    permanent cessation or sale or transfer of one or more services. The

    Commission is also proposing to add a definition for

    [[Page 50282]]

    ``general business risk,'' which would mean any potential impairment of

    a SIDCO's or Subpart C DCO's financial position, as a business concern,

    as a consequence of a decline in its revenues or an increase in its

    expenses, such that expenses exceed revenues and result in a loss that

    the SIDCO or Subpart C DCO must charge against capital. In addition,

    the Commission proposes defining ``operational risk'' to mean the risk

    that deficiencies in information systems or internal processes, human

    errors, management failures or disruptions from external events will

    result in the reduction, deterioration, or breakdown of services

    provided by a SIDCO or Subpart C DCO. Finally, the Commission is

    proposing to define ``unencumbered liquid financial assets'' to include

    cash and highly liquid securities. These proposed definitions are

    designed to be consistent with the meaning of such terms in the PFMIs.

    The Commission requests comment as to whether these definitions are

    appropriate. Specifically, the Commission requests comment on whether

    the definition of ``recovery'' is appropriate in light of emerging

    international consensus.

    The Commission is proposing to require each SIDCO and Subpart C DCO

    to maintain viable plans for: (i) Recovery or orderly wind-down,

    necessitated by credit losses or liquidity shortfalls; and (ii)

    recovery or orderly wind-down, necessitated by general business risk,

    operational risk, or any other risk that threatens the SIDCO's or

    Subpart C DCO's viability as a going concern. The Commission also

    proposes requiring that the recovery and wind-down plans of SIDCOs and

    Subpart C DCOs meet certain standards, set forth in proposed subsection

    (c). Specifically, the Commission proposes requiring a SIDCO or Subpart

    C DCO to identify scenarios that may potentially prevent it from being

    able to provide its critical operations and services as a going concern

    and assess the effectiveness of a full range of options for recovery or

    orderly wind-down. The SIDCO's or Subpart C DCO's plans should also

    include procedures for informing the Commission, as soon as

    practicable, when the recovery plan is initiated or wind-down is

    pending, as well as procedures for providing the Commission and any

    other relevant authorities (e.g., the Federal Deposit Insurance

    Corporation) with information necessary for resolution planning.

    Proposed regulation 39.39(d) requires that the recovery and wind-

    down plans of a SIDCO or Subpart C DCO be supported by certain

    resources. Specifically, in evaluating the resources available to cover

    any uncovered credit losses or liquidity shortfalls as part of its

    recovery or wind-down plans necessitated by credit losses of liquidity

    shortfalls, a SIDCO or Subpart C DCO would be permitted to consider,

    among other things, assessments of additional resources provided for

    under its rules that it reasonably expects to collect from non-

    defaulting members. In addition, a SIDCO or Subpart C DCO would be

    required to maintain sufficient unencumbered liquid financial assets,

    funded by the equity of its owners, to implement its recovery or wind-

    down plans necessitated by general business risk, operational risk, or

    any other risk that threatens the SIDCO's or Subpart C DCO's viability

    as a going concern. Moreover, while the resources required by

    regulation 39.11(a)(2) may be sufficient to maintain a SIDCO's or

    Subpart C DCO's recovery or wind-down plans necessitated by general

    business risk, operational risk, or any other risk that threatens the

    SIDCO's or Subpart C DCO's viability as a going concern, a SIDCO or

    Subpart C DCO would be required to (i) analyze such plans, including

    the particular circumstances and risks associated with the SIDCO or

    Subpart C DCO, and (ii) maintain any additional resources that may be

    necessary to implement such plans.\172\ A SIDCO or Subpart C DCO would

    be required to comply with regulation 39.11(e)(2) in allocating

    sufficient financial resources to implement its recovery or wind-down

    plans necessitated by general business risk, operational risk, or any

    other risk that threatens the SIDCO's or Subpart C DCO's viability as a

    going concern. Moreover, such plans would need to include evidence and

    analysis to support the conclusion that the amount considered necessary

    is, in fact, sufficient to implement them.

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

    \172\ Thus, the requirements of proposed Sec. 39.39(d)(2) and

    existing Sec. 39.11(a)(2) are overlapping, rather than alternative.

    A SIDCO or Subpart C DCO whose plan pursuant to Sec. 39.39(b)(2)

    anticipates completion of wind-down in three months would

    nonetheless be held to the requirement of one year of operating

    costs specified in Sec. 39.11(a)(2).

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

    Proposed regulation 39.39(d)(3) would prohibit counting the

    resources maintained to meet the requirements of regulations

    39.11(a)(1) and 39.33 as available, in whole or in part, for uses other

    than addressing the default of one or more clearing members. Further,

    proposed regulation 39.39(d)(3) would prohibit a SIDCO or Subpart C DCO

    from counting the same resources as available to address both its

    recovery or orderly wind-down, necessitated by credit losses or

    liquidity shortfalls; and its recovery or orderly wind-down,

    necessitated by general business risk, operational risk, or any other

    risk that threatens the SIDCO's or Subpart C DCO's viability as a going

    concern. In other words, if a SIDCO or Subpart C DCO allocates

    resources, in whole or in part, to execute its recovery plans required

    by proposed regulation 39.39(b)(1), it may not allocate those same

    resources, in whole or in part, to satisfy the requirements of proposed

    regulation 39.39(b)(2).\173\ In addition, resources may be allocated

    only to the extent the use of that resource is not otherwise limited by

    the CEA, Commission regulations, the SIDCO's or Subpart C DCO's rules,

    or any contractual arrangements to which the SIDCO or Subpart C DCO is

    a party.

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

    \173\ This is consistent with the approach taken in Sec.

    39.11(b)(3).

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

    Finally, under 39.39(e), a SIDCO or Subpart C DCO would be required

    to maintain viable plans for raising additional financial resources,

    including, where appropriate, capital, in a scenario in which it is

    unable, or virtually unable, to comply with any financial resource

    requirements set forth in part 39. These plans would also have to be

    approved by the SIDCO's or Subpart C DCO's board of directors and be

    updated regularly.

    These proposed regulations are intended to address certain

    differences between existing Commission regulations and the standards

    set forth in the PFMIs. In addition, it would appear to be necessary

    for a SIDCO to maintain and regularly update a recovery and wind-down

    plan so as to reduce or attempt to control the potential impact a

    failure or disruption of the SIDCO's operations would have on the

    stability of the U.S. financial markets.

    The Commission requests comment on all aspects of these proposals.

    The Commission is particularly interested in the following: In light of

    the potential impact that a SIDCO's failure could have on the U.S.

    financial system, would compliance with proposed regulation 39.39

    reduce systemic risks? Would proposed regulation 39.39 contribute to

    the goals articulated in the Dodd-Frank Act, particularly the goals of

    Titles VII and VIII of the Dodd-Frank Act? If so, in what ways? If not,

    why not? What alternatives, if any, to proposed regulation 39.39 would

    be more effective in reducing systemic risk or accomplishing the goals

    articulated in the Dodd-Frank Act? Is proposed regulation 39.39

    consistent with the PFMIs? If not, what changes need to be

    [[Page 50283]]

    made to achieve such consistency? What alternatives to proposed

    regulation 39.39, if any, would be more effective or efficient for

    achieving consistency with the standards set forth by the PFMIs? Can

    proposed regulation 39.39 be effectively implemented and complied with?

    If not, what changes can be made to permit effective implementation and

    compliance? What are the potential benefits and costs resulting from,

    or arising out of, requiring SIDCOs to comply with regulation 39.39?

    The Commission also requests comment on the potential costs and

    benefits resulting from, or arising out of, requiring Subpart C DCOs to

    comply with regulation 39.39. In considering costs and benefits,

    commenters are requested to address the effect of the proposed

    regulation not only on a DCO, but also on the DCO's clearing members,

    the customers of clearing members, and the financial system more

    broadly. The Commission requests that, where possible, commenters

    provide quantitative data in their comments, particularly with respect

    to estimates of costs and benefits. The Commission requests that

    commenters include a detailed description of any alternatives to

    proposed regulation 39.39 and estimates of the costs and benefits of

    such alternatives.

    L. Regulation 39.40 (Consistency With the PFMIs)

    Proposed regulation 39.40 would make clear that Subpart C is

    intended to establish regulations that, together with Subpart A and

    Subpart B, are consistent with the DCO Core Principles set forth in

    Section 5b(c)(2) of the CEA and the PFMIs. Specifically, to the extent

    of any ambiguity, the Commission intends to interpret the regulations

    set forth in part 39 in a manner that is consistent with the standards

    set forth in the PFMIs. Such consistency would appear to promote

    international harmonization and is intended to allow the bank clearing

    members and bank customers of SIDCOs and Subpart C DCOs to receive the

    more favorable capital treatment under the Basel CCP Capital

    Requirements.

    The Commission requests comment on all aspects of these proposals.

    Specifically, the Commission requests comment on whether there are more

    effective or efficient means for achieving consistency with the

    standards set forth by the PFMIs. The Commission requests that

    commenters include a detailed description of any such alternatives and

    estimates of the costs and benefits of any such alternatives.

    M. Regulation 39.41 (Special Enforcement Authority for Systemically

    Important Derivatives Clearing Organizations)

    In 2013, the Commission adopted regulation 39.31, which implemented

    special enforcement authority over SIDCOs granted to the Commission

    under section 807(c) of the Dodd-Frank Act.\174\ The Commission is not

    proposing any changes to regulation 39.31 other than to renumber it as

    regulation 39.41.

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

    \174\ See SIDCO Final Rule.

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

    N. Regulation 39.42 (Advance Notice of Material Risk-Related Rule

    Changes by Systemically Important Derivatives Clearing Organizations)

    The Commission proposes moving existing paragraph (c) of regulation

    39.30 (Scope) to proposed regulation 39.42.\175\ This provision

    instructs a SIDCO to provide advance notice to the Commission of any

    proposed change to its rules, procedures, or operations that could

    materially affect the nature or level of risks presented by the SIDCO,

    in accordance with regulation 40.10.\176\ Because the other provisions

    of proposed revised regulation 39.28 (renumbered as regulation 39.30)

    pertain to the scope of Subpart C,\177\ it would be appropriate for

    paragraph (d) to be codified in a separate regulation. No substantive

    change is intended.

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

    \175\ See supra Section II.B and note 111.

    \176\ The Commission promulgated this provision as part of the

    SIDCO Final Rule.

    \177\ See supra Section II.B. (discussing proposed revised

    regulation 39.28, renumbered as regulation 39.30).

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

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

    Division of Clearing and Risk)

    The Commission proposes amending regulation 140.94 so that certain

    Commission functions contained in these proposed regulations would be

    delegated to the Director of the Division of Clearing and Risk and to

    such staff members as the Director may designate. Specifically, the

    Commission proposes to delegate all functions reserved to the

    Commission in proposed regulation 39.31 including, for example, the

    authority to request that a DCO provide information supplementing a

    Subpart C Election Form that it has filed with the Commission; to

    determine whether an election to be subject to Subpart C should be

    permitted to become effective, stayed or denied; and to provide any

    notices regarding the foregoing. The Commission also proposes to

    delegate to the Director of the Division of Clearing and Risk and to

    his or her designees the decision described in regulation 39.34(d)

    (whether to grant a SIDCO or a Subpart C DCO up to one year to comply

    with any provision of regulation 39.34).

    P. Regulation 190.09 (Member Property)

    Certain of the proposed requirements for SIDCOs and Subpart C DCOs

    necessitate certain clarifications to part 190 of the Commission's

    regulations. Specifically, proposed regulation 39.35(a) would require a

    SIDCO or Subpart C DCO to ``adopt explicit rules and procedures that

    address fully any loss arising from any individual or combined default

    relating to any clearing members' obligations to the SIDCO or Subpart C

    DCO.'' Proposed regulation 39.37(b) would require a SIDCO or Subpart C

    DCO to maintain viable plans for recovery and orderly wind-down. In

    addition, SIDCOs and Subpart C DCOs must comply with Core Principle R,

    which require all registered DCOs to ``have a well-founded,

    transparent, and enforceable legal framework for each aspect of the

    activities of the DCO.''

    The Commission notes that the risk management practices of DCOs

    vary depending, in part, on the types of assets that the DCO clears.

    For example, some DCOs ring-fence mutualized default resources related

    to certain asset classes separately from resources related to other

    such classes, in part, because of the different risk profiles

    associated with those asset classes and a desire among members to avoid

    exposure to contributions to mutualized resources for asset classes in

    which such members do not participate. In such cases, the DCOs have

    updated their financial safeguards arrangements to accommodate these

    differences.\178\

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

    \178\ For example, CME Clearing has three independent guaranty

    funds and financial safeguards: one for interest rate swap contracts

    (IRS Contracts), one for credit default swap contracts (CDS

    Contracts), and one for futures and cleared OTC products, other than

    IRS or CDS (the Base Guaranty Fund). See Rule 802.A of the CME

    Rulebook in respect of the Base Guaranty Fund, Rule 8G802.A of the

    CME Rulebook in respect of IRS Contracts, and Rule 8H802.A of the

    CME Rulebook in respect of CDS Contracts, each of which is available

    at http://www.cmegroup.com/rulebook/CME/.

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

    Recognizing the diversity of financial safeguard arrangements among

    DCOs, it would appear to be prudent to clarify certain language in part

    190 to materially aid compliance with Core Principle R and the proposed

    regulations specified above. Specifically, regulation 190.09 defines

    the scope of ``member property'' in the context of a DCO bankruptcy.

    The Commission notes that when regulation

    [[Page 50284]]

    190.09(b) was first proposed and adopted in the early 1980s, DCOs did

    not hold specific and independent guaranty funds for different product

    classes within a single legal entity. As such, the definition of

    ``member property'' in regulation 190.09(b) does not expressly address

    the treatment of independent guaranty fund deposits in the context of a

    DCO bankruptcy. Thus, to avoid interference with the rules of a DCO

    governing the operation of such funds, the Commission proposes the

    clarifications discussed below.

    Therefore, the Commission proposes amending paragraph (b) of

    regulation 190.09 to clarify that the scope of member property will be

    determined based on the by-laws and rules of the relevant DCO.

    Specifically, this amendment would clarify that the inclusion of

    guaranty fund contributions and other property as ``member property''

    in the context of a DCO bankruptcy would be subject to the by-laws or

    rules of the DCO. Thus, under proposed regulation 190.09(b), the

    Commission proposes that a DCO's distinct guaranty funds, which are

    established for separate product classes by the DCO's by-laws or rules,

    shall be treated separately from one another to the extent required by

    the DCO's by-laws or rules.

    The Commission requests comment on all aspects of this proposal.

    Specifically, the Commission requests comment on whether the amendments

    to regulation 190.09 will impose any costs on DCOs, clearing members,

    or other market participants, and whether there are more effective or

    efficient means for recognizing the diversity of financial safeguard

    arrangements among DCOs in a bankruptcy. The Commission requests that

    commenters include a detailed description of any such alternatives and

    estimates of the costs and benefits of such alternatives.

    III. Effective Date

    Revised regulation 190.09 would take effect upon publication of the

    final rulemaking in the Federal Register. Proposed regulations 39.31

    and 140.94 would take effect on December 13, 2013. All of the other

    revised and proposed regulations set forth herein would take effect on

    December 31, 2013, in accordance with the Commission's goal of

    implementing DCO regulations consistent with the PFMIs by the end of

    calendar year 2013.

    IV. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA''), 44 U.S.C. 3501 et seq.,

    provides that an agency may not conduct or sponsor, and a person is not

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

    a valid control number from the Office of Management and Budget

    (``OMB''). This rulemaking contains recordkeeping and reporting

    requirements that are collections of information within the meaning of

    the PRA. In particular, although the Commission does not anticipate

    that more than ten persons will respond initially to this collection of

    information, the term ``ten or more persons,'' which triggers PRA

    compliance, has been deemed to apply to ``[a]ny recordkeeping,

    reporting, or disclosure requirement contained in a rule of general

    applicability.'' 5 CFR. 1320.3(c)(4). The Commission will submit an

    information collection request in the form of an amendment to existing

    OMB control number 3038-0081.

    This rulemaking contains many provisions that would qualify as

    collections of information, for which the Commission has already sought

    and obtained a control number from OMB. The burden hours associated

    with those provisions are not replicated here because the Commission is

    obligated to account for PRA burden once, and the PRA encourages

    multiple applications of a single collection.\179\ Accordingly, the

    burdens associated with the collections contained in this proposed

    rulemaking, and the information collection request that will be

    submitted to OMB, have been estimated only to the extent that the

    proposed rulemaking imposes collections of information that OMB has not

    yet reviewed and approved.

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

    \179\ See 35 U.S.C. 3501(2) and (3).

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

    It should be noted that among the thirteen DCOs presently

    registered with the Commission, only two are SIDCOs. Moreover, not all

    remaining DCOs or all DCO Applicants are likely to elect to become

    Subpart C DCOs (for example, DCOs that are based outside of the U.S.

    may seek to obtain QCCP status through regulation by their home country

    regulator). Thus, the burden calculations herein are based on an

    estimate of how many DCOs are SIDCOs and how DCOs and DCO Applicants

    are likely to elect to become Subpart C DCOs. Additionally, many of the

    collections herein, in particular those related to electing Subpart C

    DCO status, are expected to be one-time events for a DCO. It is

    anticipated that three DCOs will elect to become subject to Subpart C

    in the year following the adoption of final rules, with possibly one or

    two additional elections thereafter.

    Finally, it is not possible to precisely estimate the reporting and

    recordkeeping burden for the SIDCOs and Subpart C DCOs that will be

    affected by the collections contained in this rulemaking, as the actual

    burden will be dependent on the operations and staffing of each

    particular SIDCO and Subpart C DCO and the manner in which they choose

    to implement compliance with certain requirements. Therefore, the

    burden estimates below are meant to be a composite of the burdens that

    will be absorbed across all SIDCOs and Subpart C DCOs, to the extent

    that the provisions for which information collection burdens are

    applicable.

    1. Collections Only Applicable to Subpart C DCOs

    Proposed regulations 39.31(b) and 39.31(c) would establish the

    process whereby DCO and DCO Applicants, respectively, may elect to

    become Subpart C DCOs subject to the provisions of Subpart C. The

    election involves filing the proposed Subpart C Election Form that

    would be contained in proposed appendix B to part 39 (including

    completing the certifications therein, providing proposed exhibits A

    through G, and drafting and publishing the DCO's responses to the

    Disclosure Framework, and, when applicable, the DCO's Quantitative

    Information Disclosure). Additionally, paragraphs (b)(2) and (c)(3) of

    proposed regulation 39.31 provide for Commission requests for

    supplemental information from those requesting Subpart C DCO status;

    paragraphs (b)(3) and (c)(4) require amendments to the Subpart C

    Election Form in the event that a DCO or DCO Applicant, respectively,

    discovers a material omission or error in, or if there is a material

    change in, the information provided in the Subpart C Election Form;

    paragraphs (b)(7) and (c)(5) permit a DCO or DCO Applicant,

    respectively, to submit a notice of withdrawal to the Commission in the

    event the DCO or DCO Applicant determines not to seek Subpart C DCO

    status prior to such status becoming effective; and paragraph (e)

    establishes the procedures by which a Subpart C DCO may rescind its

    Subpart C DCO status after it has been permitted to take effect. Each

    of these requirements implies recordkeeping that would be produced by a

    DCO to the Commission on an occasional basis to demonstrate compliance

    with the proposed rules.

    It is estimated presently that it is likely that only three DCOs

    will elect to become Subpart C DCOs, but it has been

    [[Page 50285]]

    conservatively estimated below that, collectively, five DCOs or DCO

    Applicants may elect to become Subpart C DCOs. It is unlikely that any

    DCO or DCO Applicant will withdraw its election to become subject to

    Subpart C prior to such election becoming effective, but an estimate of

    compliance with the withdrawal procedures by one DCO has been included

    below. It is estimated presently that it is likely that none of the

    Subpart C DCOs will elect to rescind its election, but it has been

    conservatively estimated below that one Subpart C DCO may rescind its

    election. Consequently, the burden hours for the proposed collection of

    information in this rulemaking have been estimated as follows:

    Reporting--Certifications--Subpart C Election Form

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 1

    Average number of hours per report: 25

    Estimated gross annual reporting burden: 125

    Reporting--Exhibits A through G--Subpart C Election Form

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 1

    Average number of hours per report: 155

    Estimated gross annual reporting burden: 775

    Reporting--Preparing and Publishing Disclosure Framework Responses

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 1

    Average number of hours per report: 200

    Estimated gross annual reporting burden: 1,000

    Reporting--Preparing Quantitative Information Disclosures

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 1

    Average number of hours per report: 80

    Estimated gross annual reporting burden: 400

    Reporting--Requests for Supplemental Information

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 5

    Average number of hours per report: 45

    Estimated gross annual reporting burden: 1,125

    Reporting--Amendments to Subpart C Election Form

    Estimated number of reporters: 5

    Estimated number of reports per reporter: 3

    Average number of hours per report: 8

    Estimated gross annual reporting burden: 120

    Reporting--Withdrawal Notices

    Estimated number of reporters: 1

    Estimated number of reports per reporter: 1

    Average number of hours per report: 2

    Estimated gross annual reporting burden: 2

    Reporting--Rescission Notices

    Estimated number of reporters: 1

    Estimated number of reports per reporter: 75

    Average number of hours per report: 3

    Estimated gross annual reporting burden: 225

    Recordkeeping

    Estimated number of recordkeepers: 5

    Estimated number of records per recordkeeper: 82

    Average number of hours per record: 1

    Estimated gross annual recordkeeping burden: 410

    2. Collections Applicable Both to SIDCOs and Subpart C DCOs

    Proposed regulations 39.32(a) and (b) establish governance

    requirements applicable to each SIDCO and Subpart C DCO, including

    specific provisions requiring written and disclosed governance

    arrangements and the disclosure of certain decisions on particular, not

    regularly scheduled, occasions, to the Commission, the SIDCO or Subpart

    C DCO's clearing members, other relevant stakeholders and/or the

    public. Proposed regulation 39.33(d) requires a SIDCO or Subpart C DCO

    to conduct due diligence on its liquidity providers and to conduct

    periodic testing with respect to its access to liquidity resources.

    Proposed regulation 39.33(e) establishes documentation requirements

    with respect to the supporting rationale for the financial and

    liquidity resources it maintains pursuant to proposed regulations

    39.33(a) and 39.33(c), respectively.

    Proposed regulation 39.36(c)(6) requires each SIDCO and Subpart C

    DCO to report stress test results to its risk management committee or

    board of directors. Proposed regulation 39.37(a) requires each SIDCO

    and Subpart C DCO to complete and to publicly disclose its responses to

    the Disclosure Framework and, when applicable, to complete and disclose

    a Quantitative Information Disclosure. As described above and as

    accounted for in the previous portion of this PRA burden estimate,

    these tasks will be conducted by Subpart C DCOs as part of their

    election to become subject to Subpart C. SIDCOs and DCOs also are

    required to update their Disclosure Framework responses and

    Quantitative Information Disclosure every two years. Proposed

    regulations 39.37(c) and (d) require each SIDCO or Subpart C DCO to

    disclose, publicly and to the Commission, certain data on transaction

    volume and values and their rules, policies, and procedures related to

    the segregation and the portability of customers' positions and funds.

    Proposed regulation 39.38 requires each SIDCO or Subpart C DCO to

    establish a process to review the efficiency and effectiveness of its

    clearing and settlement arrangements, operating structure and

    procedures, scope of products cleared and use of technology. Finally,

    proposed regulations 39.39(b) and (c) require each SIDCO and Subpart C

    DCO to develop and maintain viable plans for the recovery or wind-down

    of the SIDCO or Subpart C DCO necessitated by certain circumstances.

    Each of these requirements implies recordkeeping that would be produced

    by the SIDCO or Subpart C DCO to the Commission on an occasional basis

    to demonstrate compliance with the proposed rules.

    It is not possible to estimate with precision how many DCOs may, in

    the future, be determined to be SIDCOs and how many may elect to become

    Subpart C DCOs, but it conservatively has been estimated below that,

    collectively, a total of seven DCOs may be determined to be SIDCOs or

    may opt to become Subpart C DCOs. Presently, there are two SIDCOs and

    is has been estimated that five DCOs will elect to become Subpart C

    DCOs. Consequently, the burden hours for the proposed collection of

    information in this rulemaking have been estimated as follows:

    Reporting--Governance Requirements--Written Governance Arrangements

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 200

    Estimated gross annual reporting burden: 1,400

    Reporting--Governance Requirements--Required Disclosures

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 6

    Average number of hours per report: 3

    Estimated gross annual reporting burden: 126

    [[Page 50286]]

    Reporting--Financial and Liquidity Resource Documentation

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 120

    Estimated gross annual reporting burden: 840

    Reporting--Stress Test Results

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 16

    Average number of hours per report: 14

    Estimated gross annual reporting burden: 1,568

    Reporting--Preparing and Publishing Disclosure Framework Responses

    (SIDCOs only)

    Estimated number of reporters: 2

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 200

    Estimated gross annual reporting burden: 400

    Reporting--Updating and Republishing Disclosure Framework Responses

    (SIDCOs and Subpart C DCOs)

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 80

    Estimated gross annual reporting burden: 560

    Reporting--Preparing and Publishing Quantitative Information

    Disclosures (SIDCOs only)

    Estimated number of reporters: 2

    Estimated number of reports per reporter: 1

    Average number of hours per report: 80

    Estimated gross annual reporting burden: 160

    Reporting--Updating and Republishing Quantitative Information

    Disclosures (SIDCOs and Subpart C DCOs)

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 35

    Estimated gross annual reporting burden: 245

    Reporting--Transaction, Segregation, Portability Disclosures

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 2

    Average number of hours per report: 35

    Estimated gross annual reporting burden: 490

    Reporting--Efficiency and Effectiveness Review

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 3

    Estimated gross annual reporting burden: 21

    Reporting--Recovery and Wind-Down Plan

    Estimated number of reporters: 7

    Estimated number of reports per recordkeeper: 1

    Average number of hours per report: 480

    Estimated gross annual reporting burden: 3,360

    Recordkeeping--Liquidity Resource Due Diligence and Testing

    Estimated number of recordkeepers: 7

    Estimated number of records per recordkeeper: 4

    Average number of hours per record: 10

    Estimated gross annual recordkeeping burden: 280

    Recordkeeping--Financial and Liquidity Resources, Excluding Due

    Diligence and Testing

    Estimated number of recordkeepers: 7

    Estimated number of records per recordkeeper: 4

    Average number of hours per record: 10

    Estimated gross annual recordkeeping burden: 280

    Recordkeeping--Generally

    Estimated number of recordkeepers: 7

    Estimated number of records per recordkeeper: 28

    Average number of hours per record: 10

    Estimated gross annual recordkeeping burden: 1960

    3. Information Collection Comments

    The Commission invites the public and other Federal agencies to

    comment on any aspect of the proposed information collection

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

    Commission will consider public comments on such proposed requirements

    in:

    Evaluating whether the proposed collections of information

    are necessary for the proper performance of the functions of the

    Commission, including whether the information will have a practical

    use;

    Evaluating the accuracy of the estimated burden of the

    proposed information collection requirements, including the degree to

    which the methodology and the assumptions that the Commission employed

    were valid;

    Enhancing the quality, utility, and clarity of the

    information proposed to be collected; and

    Minimizing the burden of the proposed information

    collection requirements on SIDCOs and Subpart C DCOs, including through

    the use of appropriate automated, electronic, mechanical, or other

    technological information collection techniques, e.g., permitting

    electronic submission of responses.

    Copies of the submission from the Commission to OMB are available

    from the CFTC Clearance Officer, 1155 21st Street NW., Washington, DC

    20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and

    individuals desiring to submit comments on the proposed information

    collection requirements should send those comments to:

    The Office of Information and Regulatory Affairs, Office

    of Management and Budget, Room 10235, New Executive Office Building,

    Washington, DC 20503, Attn: Desk Officer of the Commodity Futures

    Trading Commission;

    (202) 395-6566 (fax); or

    OIRAsubmissions@omb.eop.gov (email).

    Please provide the Commission with a copy of submitted comments so

    that all comments can be summarized and addressed in the final

    rulemaking, and please refer to the ADDRESSES section of this

    rulemaking for instructions on submitting comments to the Commission.

    OMB is required to make a decision concerning the proposed information

    collection requirements between thirty (30) and sixty (60) days after

    publication of the NPRM in the Federal Register. Therefore, a comment

    to OMB is best assured of receiving full consideration if OMB (as well

    as the Commission) receives it within thirty (30) days of publication

    of this NPRM. The time frame for commenting on the PRA does not affect

    the deadline established by the Commission on the proposed rules,

    provided in the DATES section of this rulemaking.

    B. Regulatory Flexibility Act

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

    consider whether the rules they propose will have a significant

    economic impact on a substantial number of small entities and, if so,

    provide a regulatory flexibility analysis respecting the impact.\180\

    The rules proposed by the Commission will only affect DCOs. The

    Commission has previously established certain definitions of ``small

    entities'' to be used by the Commission in evaluating the impact of its

    regulations on small entities in accordance with the

    [[Page 50287]]

    RFA.\181\ The Commission has previously determined that DCOs are not

    small entities for the purpose of the RFA.\182\ Accordingly, the

    Chairman, on behalf of the Commission, hereby certifies pursuant to 5

    U.S.C. 605(b) that the proposed rules will not have a significant

    economic impact on a substantial number of small entities.

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    \180\ 5 U.S.C. 601 et seq.

    \181\ Policy Statement and Establishment of Definitions of

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

    47 FR 18618 (Apr. 30, 1982).

    \182\ See 66 FR at 45609.

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    C. Consideration of Costs and Benefits

    1. Introduction

    Section 15(a) requires the Commission to consider the costs and

    benefits of its actions before promulgating a regulation under the CEA

    or issuing certain orders.\183\ Section 15(a) further specifies that

    the costs and benefits shall be evaluated in light of five broad areas

    of market and public concern: (1) Protection of market participants and

    the public; (2) efficiency, competitiveness, and financial integrity of

    futures markets; (3) price discovery; (4) sound risk management

    practices; and (5) other public interest considerations. The

    Commission's cost and benefit considerations in accordance with Section

    15(a) are discussed below.

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

    \183\ 7 U.S.C. 19(a).

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

    2. Background

    As discussed above, this proposed rulemaking would: Address gaps

    between part 39 of the Commission's regulations and the standards set

    forth in the PFMIs; provide a procedure for Subpart C DCOs to elect to

    become subject to the provisions of Subpart C; and make related

    technical amendments to regulation 190.09. As proposed, revised Subpart

    C, together with Subpart A and Subpart B, would establish regulations

    that are consistent with the PFMIs.\184\

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

    \184\ See supra Section I.G.

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

    3. Costs and Benefits of the Proposed Rules

    a. Costs

    The Commission does not have quantification or estimation of the

    costs associated with the proposed regulations. However, in qualitative

    terms, the Commission recognizes that the proposed regulations are

    comprehensive and, compared to the status quo, may impose important

    costs on SIDCOs and Subpart C DCOs depending, in particular, on the

    SIDCO's or Subpart C DCO's current financial and liquid resources, and

    risk management framework. In particular, these proposed regulations

    may require SIDCOs and Subpart C DCOs to undertake a comprehensive

    review and analysis of their current policies, procedures, and systems

    in order to determine where it may be necessary to design and implement

    additional or alternative policies, procedures, and systems. Such costs

    may increase operational, administrative, and compliance costs for a

    SIDCO or Subpart C DCO. The Commission requests comment on the

    potential costs of the proposed regulations on SIDCOs and Subpart C

    DCOs, including, where possible, quantitative data. In addition, the

    Commission requests comment on the competitive impact, the costs as

    well as benefits, resulting from, or arising out of, requiring SIDCOs

    to comply with the provisions set forth in Subpart C, while permitting

    other registered DCOs to elect to become subject to these requirements

    (or to forego such election).

    In addition to the costs for SIDCOs and Subpart C DCOs, the

    Commission has considered the costs the proposed regulations would

    impose upon market participants and the public. To the extent costs

    increase, the Commission notes that higher trading prices for market

    participants (i.e., increased clearing fees, guaranty fund

    contributions, and margin fees, etc.) may discourage market

    participation and result in decreased liquidity and reduced price

    discovery.

    i. Regulation 39.31 (Election To Become Subject to the Provisions of

    Subpart C)

    As discussed above, proposed regulation 39.31 would set forth the

    procedures a DCO would be required to follow to elect to become subject

    to the provisions of Subpart C.\185\ Proposed paragraph (b) would

    require a registered DCO to file a completed Subpart C Election Form

    with the Commission. The form appears in proposed Appendix B to Subpart

    C and is modeled after Form DCO, which the Commission promulgated in

    2011 as part of the DCO General Provisions and Core Principles final

    rule.\186\ Proposed paragraph (c) would require the same of a DCO that

    applies for registration with the Commission and that wants to be

    subject to the provisions of Subpart C as of the date the DCO is

    registered with the Commission. The Subpart C Election Form would

    include disclosures and exhibits wherein the DCO would be required to

    provide the following: a regulatory compliance chart; citations to the

    relevant rules, policies, and procedures of the DCO that addresses each

    Subpart C regulation; and a summary of the manner in which the DCO

    would comply with each regulation. In addition, the DCO would be

    required to provide, in separate exhibits, all documents that

    demonstrate the DCO's compliance with proposed regulations 39.32

    through 39.36 and proposed regulation 39.39. A DCO would also be

    required to complete responses to the Disclosure Framework and publish

    a copy of its responses on its Web site.

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

    \185\ See supra Section II.C (discussing proposed regulation

    39.31).

    \186\ DCO General Provisions and Core Principles, 76 FR 69334

    (Nov. 8, 2011) (final rule).

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

    The Commission notes that proposed regulation 39.31 would only

    apply to a DCO that the Council has not designated to be systemically

    important and that elects to become subject to the provisions of

    Subpart C. Proposed regulation 39.31, by providing an opt-in procedure

    and a procedure to rescind such election offers the benefit of

    permitting a DCO that is not systemically important may weigh (i) (1)

    the cost of preparing a comprehensive and complete Subpart C Election

    Form in accordance with the requirements set forth in proposed

    regulation 39.31 and (2) the costs associated with the requirements set

    forth in Subpart C against (ii) the benefit of attaining QCCP status,

    and, thus, to decide for itself whether to become subject to Subpart C.

    As discussed below, a Subpart C DCO's compliance with the

    provisions of Subpart C would cause the Subpart C DCO to incur certain

    costs. Some of these costs may then be incurred, indirectly, by the

    Subpart C DCO's clearing members and their customers. The Commission

    requests comments concerning examples of such costs. If a clearing

    member or its customer would incur greater costs by clearing through a

    Subpart C DCO rather than through a DCO that has not opted-in to

    Subpart C, then that clearing member or customer may decide not to

    clear through a Subpart C DCO. The Commission requests comment as to

    how these indirect costs may be mitigated. The Commission also requests

    comment concerning the extent to which a DCO's analysis of whether the

    costs of being a Subpart C DCO may outweigh the benefits could be

    affected by the possibility that some of the costs may be incurred

    indirectly by clearing members and their customers.

    In addition to the requests for comment set forth above, the

    Commission requests comment concerning the costs associated with the

    Subpart C Election Form, including without limitation, the election and

    [[Page 50288]]

    withdrawal procedures set forth in proposed regulation 39.31, as well

    as the requirements surrounding completion and publication of responses

    to the Disclosure Framework. The Commission also requests that each

    commenter provide quantitative data where practicable, as well as a

    detailed rationale supporting the response.

    The Commission notes that pursuant to proposed paragraph (e), a

    Subpart C DCO would be permitted, subject to a 90 day notice period, to

    rescind its election to become subject to the provisions of Subpart C.

    As a result of the rescission, the DCO would no longer be considered a

    QCCP, which would likely create important costs for bank clearing

    members and the bank customers of a DCO's clearing members due to the

    higher capital costs that they would incur as a result of clearing

    transactions through the DCO that is no longer a QCCP.\187\

    Alternatively, clearing members and their customers may choose to end

    their clearing activities and transact through another DCO that is a

    QCCP, with either choice imposing costs on those clearing members and

    their customers.

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

    \187\ See supra Section I.F (discussing the treatment for non-

    QCCP clearing members under the Basel CCP Capital Requirements).

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

    As discussed in section II.C., above, the Commission requests

    comments on the potential costs to a Subpart C DCO to comply with all

    aspects of proposed regulation 39.32, including the cost of the opting-

    in process (including but not limited to the completion of the Subpart

    C Election Form) and the process for rescinding such an opting-in

    (including the notices required) and any costs that would be imposed on

    other market participants or the financial system more broadly.

    ii. Regulation 39.32 (Governance for Systemically Important Derivatives

    Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    As discussed above, proposed regulation 39.32 establishes

    governance requirements for SIDCOs and Subpart C DCOs that are

    consistent with the PFMIs and establish rules and procedures concerning

    conflicts of interest, compensation policies, organizational structure,

    and fitness standards for directors and officers.\188\ Specifically,

    SIDCOs and Subpart C DCOs would be required to have written governance

    arrangements that are clear and transparent, that place a high priority

    on the safety and efficiency of the SIDCO or Subpart C DCOs, and that

    explicitly support the stability of the broader financial system and

    other relevant public interest considerations of clearing members,

    customers of clearing members, and other relevant stakeholders. In

    addition, these governance arrangements would be required to reflect

    the legitimate interests of clearing members, customers of clearing

    members, and other relevant stakeholders. To an extent consistent with

    other statutory and regulatory requirements on confidentiality and

    disclosure, SIDCO's and Subpart C DCOs would also be required to

    disclose major decisions of the board.\189\ Proposed regulation 39.32

    would require the rules and procedures of SIDCOs and Subpart C DCOs to:

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

    clearly specify the roles and responsibilities of the board of

    directors and its committees, including the establishment of a clear

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

    and responsibilities of management; (4) establish appropriate

    compensation policies; (5) establish procedures for managing conflicts

    of interest among board members; and (6) assign responsibility and

    accountability for risk decisions and for implementing rules concerning

    default, recovery, and wind-down. Finally, proposed regulation 39.32

    would require that the board members and managers of SIDCOs and Subpart

    C DCOs have the appropriate experience, skills, incentives and

    integrity; risk management and internal control personnel have

    sufficient independence, authority, resources and access to the board

    of directors; and that the board of directors include members who are

    not executives, officers or employees of the SIDCO or Subpart C DCO or

    of their affiliates.

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

    \188\ See supra Section II.D (discussing proposed regulation

    39.32).

    \189\ Id.

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

    To the extent these requirements affect the behavior of a DCO,

    costs could arise from additional hours a DCO's employees might need to

    spend analyzing the compliance of the DCO's rules and procedures with

    these requirements, designing and drafting new or amended rules and

    procedures where the analysis indicates that these are necessary, and

    implementing these new or amended rules and procedures. These costs are

    difficult for the Commission to assess in the abstract because the

    proposed regulation grants a DCO a certain amount of discretion in

    determining which rules and procedures should be adopted to comply with

    the proposed regulation. As discussed in section II.D., above, the

    Commission requests comments on the potential costs to a SIDCO or

    Subpart C DCO to comply with all aspects of proposed regulation 39.32,

    and any costs that would be imposed on other market participants or the

    financial system more broadly. As noted above, the Commission

    specifically requests comment on alternative means to establish

    governance requirements consistent with the PFMIs, and the costs (or

    cost savings) associated with such alternatives.

    iii. Regulation 39.33 (Financial Resources for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    (a.) Regulation 39.33(a): Cover Two

    As discussed above, proposed amended regulation 39.33(a) would

    require a Subpart C DCO to comply with the Cover Two minimum financial

    resource standard for all of its activities if the Subpart C DCO: (1)

    Is involved in activities with a more complex risk profile or (2) is

    systemically important in multiple jurisdictions. This requirement

    currently applies to all SIDCOs.\190\

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

    \190\ See supra Section II.E (discussing proposed revised

    regulation 39.33).

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

    The cost of the Cover Two requirement for a Subpart C DCO that

    meets either or both of the two criteria described above \191\ includes

    the opportunity cost \192\ of the additional financial resources needed

    to satisfy the guaranty fund requirements for the risk of loss

    resulting from the default of the clearing member creating the second

    largest credit exposure.\193\ In addition, the possibility exists that

    some market participants will port their positions from a Subpart C DCO

    that either (1) is deemed systemically important in multiple

    jurisdictions or (2) clears products of a more complex risk profile to

    another DCO for which neither (1) nor (2) applies because the value of

    the Cover Two protection to these market participants is less than the

    price at which that protection is being offered. These market

    participants will transact with SIDCOs or Subpart C DCOs that

    [[Page 50289]]

    operate under Cover One, which is a lower financial resources

    requirement, and thus, get the benefit of lower transactional fees and

    forego the enhanced protections associated with the SIDCOs or Subpart C

    DCOs. However, the potential cost to a SIDCO or a Subpart C DCO subject

    to the Cover Two requirement and to the goal of systemic risk reduction

    would likely be mitigated because: (a) Not every product offered by a

    SIDCO or Subpart C DCO would be available at other DCOs and (b) a SIDCO

    or Subpart C DCO may offer benefits not available to a DCO does not

    elect to become subject to the provisions of Subpart C, that is not

    designated as systemically important, and/or that does not clear

    products with a more complex risk profile. This would therefore reduce

    the likelihood that market participants would port their positions to

    other DCOs. As indicated in section II.E. (description of proposed

    regulation 39.33), above, the Commission requests comment on these

    costs, including quantitative data, if available.

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

    \191\ All Subpart C DCOs would bear the administrative cost of

    determining whether they meet either of the criteria.

    \192\ For Subpart C DCOs that are not deemed systemically

    important in multiple jurisdictions or that do not clear products

    with a more complex risk profile, the Cover One financial resources

    requirement would continue to apply, and therefore, these Subpart C

    DCOs would not face increased opportunity costs associated with the

    proposed regulation.

    \193\ In the event that these additional resources would need to

    be raised by the Subpart C DCO, as opposed to reallocated, this cost

    would be the funding cost for raising these additional resources.

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

    (b.) Regulation 39.33(b): Valuation of Financial Resources

    Proposed amended regulation 39.33(b) would prohibit SIDCOs and

    Subpart C DCOs from including assessments as part of their calculation

    of the financial resources available to cover the default of the

    clearing member creating the largest credit exposure and, where

    applicable, the default of the two clearing members creating the

    largest aggregate credit exposure, in extreme but plausible

    circumstances, i.e., Cover One or Cover Two.\194\ This requirement

    currently applies to all SIDCOs and would be expanded to include

    Subpart C DCOs. The costs associated with the prohibition on the use of

    assessments by a Subpart C DCO in calculating its obligations under

    regulation 39.33(a) would include the opportunity cost of the

    additional pre-funded financial resources needed to replace the value

    of such assessments, which may require an infusion of additional

    capital. In addition, as with the Cover Two requirement, market

    participant demand may shift from a SIDCO or a Subpart C DCO subject to

    the Cover Two requirement to a DCO with a lower capitalization

    requirement. As indicated in Section II.E, above, the Commission

    requests comment on these costs, including quantitative data, if

    available.

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

    \194\ See supra Section II.E (discussing proposed revised

    regulation 39.33).

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

    (c.) Regulation 39.33(c), (d) and (e): Liquidity

    Proposed regulation 39.33(c) would require a SIDCO and a Subpart C

    DCO to maintain eligible liquidity resources that will enable it to

    meet its intraday, same-day and multiday settlement obligations, in all

    relevant currencies, with a high degree of confidence under a wide

    range of stress scenarios notwithstanding a default by the clearing

    member creating the largest aggregate liquidity obligation. Eligible

    resources are limited to cash in the currency of the requisite

    obligation, held at the central bank of issue or a creditworthy

    commercial bank, certain highly marketable collateral, subject to

    certain prearranged and highly reliable funding arrangements, and

    various committed liquidity arrangements. These arrangements must be

    reliable and enforceable in extreme but plausible market conditions,

    and must not contain material adverse change clauses.

    In addition, a SIDCO or Subpart C DCO that is systemically

    important in multiple jurisdictions or that is involved in activities

    with a more complex risk profile would be required to consider

    maintaining liquidity resources that would enable it to meet the

    default of the two clearing members creating the largest aggregate

    payment obligation. If a SIDCO or Subpart C DCO maintains liquid

    financial resources in addition to those required to satisfy the

    minimum financial resources requirement set forth in regulations

    39.11(a)(1) and 39.33(a), then those resources should be in the form of

    assets that are likely to be saleable or acceptable as collateral for

    lines of credit, swaps, or repurchase agreements on an ad hoc

    basis.\195\

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

    \195\ Id.

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

    Proposed regulation 39.33(d) would impose a duty on SIDCOs and

    Subpart C DCOs to perform due diligence on their liquidity providers in

    order to determine their ability to perform reliably their commitments

    to provide liquidity. Finally, proposed regulation 39.33(e) would

    require SIDCOs and Subpart C DCOs to document their supporting

    rationale for the amount of financial resources they maintain pursuant

    to proposed regulation 39.33(a) and the amount of liquidity resources

    they maintain pursuant to proposed regulation 39.33(c).\196\

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

    \196\ Id.

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

    Proposed regulations 39.33(c)-(e) may result in additional costs

    for a SIDCO or Subpart C DCO with respect to analyzing and measuring

    intra-day, same-day, and multiday liquidity requirements in all

    relevant currencies, developing plans to meet those requirements,

    obtaining eligible liquidity resources and making eligible liquidity

    arrangements, reviewing and monitoring each liquidity provider's risks

    and reliability (including through periodic testing of access to

    liquidity), and documenting the DCO's basis for conclusions with

    respect to its financial resources and liquidity resources

    requirements. These proposed regulations also will require stress

    testing and other analysis of such resources as compared with the DCO's

    liquidity needs. Specifically, with regards to proposed regulation

    39.33(c), there may be costs involved in obtaining cash in the relevant

    currencies or arranging for qualifying liquidity commitments, such as a

    committed line of credit, to satisfy the minimum financial resources

    requirement set forth in regulation 39.11(a)(1)(i.e., Cover One).

    Obtaining these committed financial resources would involve

    administrative expenses such as the negotiation and drafting of

    committed arrangements, as well as costs arising from the payment of

    fees to liquidity providers. In addition, there may be operational

    costs involved in calculating the liquidity resources requirements at

    the Cover One level on an intraday, same-day, and multiday basis over

    the course of a default. This calculation may require undertaking a

    complex analysis of the SIDCO's or Subpart C DCO's exposures and

    processes, including various models, and, where appropriate, designing

    and implementing changes to either create or modify existing internal

    processes. While this analysis may involve costs, it would appear that

    it will improve the SIDCO's or Subpart C DCO's financial condition, as

    described below in section 2.b.iii. of the benefits section.

    Proposed regulation 39.33(d) may increase administrative costs to

    the extent that a SIDCO or a Subpart C DCO is required to review and

    monitor its liquidity provider's capacity and reliability to perform

    its liquidity obligations to the DCO. In addition, proposed regulation

    39.33(e) may impose an administrative cost to document the SIDCO or

    Subpart C DCO's rationale for the financial resources it maintains.

    As discussed in section II.E., above, the Commission requests

    comments on the potential costs to a SIDCO or a Subpart C DCO in

    complying with all aspects of proposed regulation 39.33 and any costs

    that would be imposed on other market participants or the financial

    system more broadly. As noted above, the Commission specifically

    [[Page 50290]]

    requests comment on alternative means to establish financial resources

    and liquidity requirements consistent with the PFMIs (including, e.g.,

    through alternative definitions of terms), and the costs (or cost

    savings) associated with such alternatives.

    iv. Regulation 39.34 (System Safeguards for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    As discussed above, proposed amended regulation 39.34 would require

    SIDCOs and Subpart C DCOs to comply with enhanced system safeguards

    requirements.\197\ While SIDCOs are already subject to these

    requirements, the Commission proposes expanding this regulation to

    include Subpart C DCOs. The proposed regulation could increase

    operational costs for Subpart C DCOs by requiring additional resources,

    including with respect to personnel, technology (e.g., hardware and

    software) and the purchase or rental of premises in order to achieve

    geographic dispersal of resources. In particular, the costs of moving

    from a next-day RTO, the minimum standard established by the DCO core

    principles and current regulation 39.18, to a two-hour RTO as required

    by proposed regulation 39.34, may be significant. Additionally, the

    implementation of a two-hour RTO may impose one-time costs to establish

    the enhanced resources and recurring costs to operate the additional

    resources. As discussed in section II.F. above, the Commission requests

    comments on the potential costs to a Subpart C DCO in complying with

    all aspects of proposed regulation 39.34, and any costs that would be

    imposed on other market participants or the financial system more

    broadly. As noted above, the Commission specifically requests comment

    on alternative means to establish, for Subpart C DCOs, system

    safeguards requirements consistent with the PFMIs and the costs (or

    cost savings) associated with such alternatives.

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

    \197\ See supra Section II.F (discussing proposed regulation

    39.34).

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

    v. Regulation 39.35 (Default Rules and Procedures for Uncovered Losses

    or Shortfalls (Recovery) for Systemically Important Derivatives

    Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    Proposed regulation 39.35 would require SIDCOs and Subpart C DCOs

    to adopt policies and procedures to address certain issues arising from

    extraordinary stress events, including the default of one or more

    clearing members.\198\ The costs associated with these default rules

    and procedures may include administrative costs to: review and analyze

    current policies and procedures; design and draft new or amended

    policies and procedures; and implement the new or amended policies and

    procedures. Such default rules and procedures must sufficiently (1)

    allocate uncovered credit losses and (2) enable a SIDCO or Subpart C

    DCO to promptly meet all of its obligations in the event of a default

    by one or more clearing members or an unforeseen liquidity shortfall

    exceeding the financial resources of the SIDCO or Subpart C DCO. As

    discussed in section II.G. above, the Commission requests comments on

    the potential costs to a SIDCO or a Subpart C DCO in complying with all

    aspects of proposed regulation 39.35, and any costs that would be

    imposed on other market participants or the financial system more

    broadly. As noted above, the Commission specifically requests comment

    on alternative means to establish requirements, in a manner consistent

    with the PFMIs, for adopting rules and procedures for uncovered losses

    or shortfalls, and the costs (or cost savings) associated with such

    alternatives.

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

    \198\ See supra Section II.G (discussing proposed regulation

    39.35).

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

    vi. Regulation 39.36 (Risk Management for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    Proposed regulation 39.36 would impose enhanced risk management

    requirements for a SIDCO or Subpart C DCO, including, but not limited

    to, specific criteria for stress tests of financial resources, specific

    criteria for sensitivity analysis of margin models, specific criteria

    for stress tests of liquidity resources, requirements surrounding the

    monitoring and management of credit and liquidity risks arising out of

    settlement banks, and requirements surrounding the custody and

    investment of a SIDCO's or Subpart C DCO's own funds and assets.\199\

    Complying with this regulation could involve operational costs to

    perform the required testing, monitoring and analyses, which may

    include: A comprehensive analysis of existing stress testing scenarios;

    the design of new and/or alternative stress testing scenarios; and the

    design of a sensitivity analysis; the creation of a system for

    comprehensively monitoring, managing and limiting credit and liquidity

    risks arising out of settlement banks; and the implementation of

    controls surrounding the custody and investment of a SIDCO's or Subpart

    C DCO's own funds and assets. In addition, there may be costs

    associated with the modification and/or creation of processes necessary

    to support the enhanced risk management requirements in the proposed

    regulation. There would also be ongoing costs to conduct such risk

    management, analyze the results, and take action based on such results.

    In particular, to the extent that the analyses and monitoring reveal

    the need for additional financial or liquidity resources, there would

    be costs associated with obtaining such resources. In addition, there

    may be administrative and other costs associated with the management of

    a SIDCO's or Subpart C DCO's settlement bank exposures. As discussed in

    section II.H., above, the Commission requests comments on the potential

    costs to a SIDCO or a Subpart C DCO in complying with all aspects of

    proposed regulation 39.36, and any costs that would be imposed on other

    market participants or the financial system more broadly. As noted

    above, the Commission specifically requests comment on alternative

    means to establish risk management requirements consistent with the

    PFMIs, and the costs (or cost savings) associated with such

    alternatives.

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

    \199\ See supra Section II.H (discussing proposed regulation

    39.36).

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

    vii. Regulation 39.37 (Additional Disclosure for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    Proposed regulation 39.37 would set forth additional public

    disclosure requirements for a SIDCO and Subpart C DCO, including the

    disclosure of, and updates to, the DCO's responses to the Disclosure

    Framework for FMIs.\200\ Complying with this regulation may impose

    administrative costs to conduct a comprehensive analysis of the SIDCO

    or Subpart C DCO's policies, procedures and systems as well as the

    costs associated with the design, drafting and implementation of any

    new or modified policies, procedures and systems that would be

    necessary to comply with the proposed regulation. As discussed in

    section II.I. above, the Commission requests comments on the potential

    costs to a SIDCO or a Subpart C DCO in complying with all aspects of

    proposed regulation 39.37, and any costs that would be imposed on other

    market participants or the financial system

    [[Page 50291]]

    more broadly. As noted above, the Commission specifically requests

    comment on alternative means to establish disclosure requirements

    consistent with the PFMIs, and the costs (or cost savings) associated

    with such alternatives.

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

    \200\ See supra Section II.I (discussing proposed regulation

    39.37).

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

    viii. Regulation 39.38 (Efficiency for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    Proposed regulation 39.38 would require a SIDCO or a Subpart C DCO

    to comply with certain efficiency standards regarding its clearing and

    settlement arrangements, operating structure and procedures, product

    scope, and use of technology. In addition, a SIDCO or Subpart C DCO

    would be required to establish clearly defined goals and objectives

    that are measureable and achievable, including minimum service levels,

    risk management expectations, and business priorities.\201\ SIDCOs and

    Subpart C DCOs would also be required to facilitate efficient payment,

    clearing and settlement by accommodating internationally accepted

    communication procedures and standards. The costs associated with the

    proposed regulation may include the administrative costs of conducting

    a comprehensive review and analysis of the SIDCO's or Subpart C DCO's

    policies, procedures and systems, and where appropriate, the design,

    drafting and implementation of new or modified policies, procedures and

    systems to establish the goals and objectives necessary to comply with

    this regulations. There may also be administrative costs associated

    with establishing a mechanism to review the DCO's compliance with the

    proposed regulation, as well as operational costs associated with

    designing and implementing processes to accommodate internationally

    accepted communications standards. As discussed in section II.J. above,

    the Commission requests comments on the potential costs to a SIDCO or a

    Subpart C DCO in complying with all aspects of proposed regulation

    39.38, and any costs that would be imposed on other market participants

    or the financial system more broadly. As noted above, the Commission

    specifically requests comment on alternative means to establish a

    requirement for efficiency standards consistent with the PFMIs, and the

    costs (or cost savings) associated with such alternatives.

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

    \201\ See supra Section II.J (discussing proposed regulation

    39.38).

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

    ix. Regulation 39.39 (Recovery and Wind-Down for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    Proposed regulation 39.37 would require a SIDCO or Subpart C DCO to

    maintain viable plans for recovery and orderly wind-down, in cases

    necessitated by (1) credit losses or liquidity shortfalls and (2)

    general business risk, operational risk, or any other risk that

    threatens the DCO's viability as a going concern. This would require

    the DCO to identify scenarios that may prevent a SIDCO or Subpart C DCO

    from being able to provide its critical operations and services as a

    going concern and to assess the effectiveness of a full range of

    options for recovery or orderly wind-down.

    The proposed regulation would also require a SIDCO or Subpart C DCO

    to evaluate the resources available to meet the plan to cover credit

    losses and liquidity shortfalls, and to maintain sufficient

    unencumbered liquid financial assets to implement the plan to cover

    other risks. The latter point requires a SIDCO or Subpart C DCO to

    analyze whether its particular circumstances and risks require it to

    maintain liquid net assets to fund the plan that are in addition to

    those resources currently required by regulation 39.11(a)(2).

    This proposed regulation may impose costs on a SIDCO or Subpart C

    DCO to the extent it will be necessary to undertake a comprehensive

    qualitative and quantitative analysis of the credit, liquidity, general

    business, operational and other risks that may threaten the DCO's

    ability to provide its critical operations and services as a going

    concern, to design and draft plans to mitigate and address those risks,

    to analyze whether the DCO's resources allocated to recovery and/or

    wind-down are sufficient to implement those plans. This analysis may

    lead to the design of alternative and/or additional scenarios to be

    included in stress testing, the drafting of new or revised policies for

    a recovery and/or wind-down plan, and potentially the necessity of

    maintaining additional resources or procedures to obtain such resources

    in the event they are needed. Moreover, the regulation prohibits the

    double counting of available resources--that is, resources considered

    as available to meet the recovery and orderly wind-down plan for credit

    losses and liquidity shortfalls cannot be considered as available to

    meet the recovery and orderly wind-down plan for general business risk,

    operational risk, and other risks (or vice-versa). This may result in

    the need to maintain a larger quantum of total resources to meet both

    plans which, depending on the resources maintained, may involve costs

    arising from factors such as greater use of capital by the DCO, or

    greater capital charges for clearing members arising out of their

    commitments to contribute default resources.

    As discussed in section II.K. above, the Commission requests

    comments on the potential costs to a SIDCO or a Subpart C DCO in

    complying with all aspects of proposed regulation 39.39, and any costs

    that would be imposed on other market participants or the financial

    system more broadly. As noted above, the Commission specifically

    requests comment on alternative means to establish, consistent with the

    PFMIs, a requirement for the adoption of a recovery and wind-down plan,

    and the costs (or cost savings) associated with such alternatives.

    b. Benefits

    As explained in the subsections that follow, this proposed rule

    would hold SIDCOs and Subpart C DCOs to enhanced regulatory standards,

    which are designed to promote the financial strength, operational

    integrity, security, and reliability of these organizations and to

    reduce the likelihood of their disruption or failure. This would then

    increase the overall stability of the U.S. financial markets. As the

    PFMIs note, FMIs, including CCPs (i.e. DCOs), play a critical role in

    fostering financial stability.\202\ This is particularly the case with

    respect to SIDCOs. The Council has determined that the failure of or a

    disruption to the functioning of a SIDCO could create or increase the

    risk of significant liquidity or credit problems spreading among

    financial institutions or markets and thereby threaten the stability of

    the U.S. financial system.\203\

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

    \202\ PFMIs, E.N. 1.1.

    \203\ See http://www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx (describing the designations of CME and ICE Clear

    Credit to be systemically important financial market utilities) and

    see supra Section I.C.

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

    In addition, the proposed regulations would help ensure that SIDCOs

    and Subpart C DCOs are held to international standards in order to

    provide them with the opportunity to gain QCCP status. As discussed

    above, attaining QCCP status would provide clearing members that are

    banks, as well as banks that are customers of clearing members, with

    the benefit of complying with less onerous capital requirements,

    pursuant to the Basel CCP Capital Requirements, than if the SIDCO or

    [[Page 50292]]

    Subpart C DCO were not a QCCP.\204\ In turn, this may increase a SIDCO

    or Subpart C DCO's competitiveness vis-[agrave]-vis non-U.S. clearing

    organizations that demonstrate compliance with international standards

    and are QCCPs.

    i. Regulation 39.31 (Election To Become Subject to the Provisions of

    Subpart C)

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

    \204\ See supra Section I.F.

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

    The procedures set forth in proposed regulation 39.31, together

    with the proposed Subpart C Election Form, are intended to promote the

    protection of market participants and the public. These proposed

    procedures would require the Commission's staff to conduct a

    comprehensive and thorough review of a DCO that elects to become

    subject to the provisions of Subpart C. In addition, the international

    Basel CCP Capital Requirements provide incentives for banks to clear

    derivatives through CCPs that are qualified CCPs or ``QCCPs'' by

    setting lower capital charges for exposures arising from derivatives

    cleared through a QCCP and setting significantly higher capital charges

    for exposures arising from derivatives cleared through non-qualifying

    CCPs. These proposed regulations are consistent with the international

    standards set forth in the PFMIs and address the remaining divergences

    between part 39 of the Commission's regulations and the PFMIs, which

    will provide an opportunity for a Subpart C DCO to gain QCCP status.

    Without regulation 39.31, a DCO that is not designated by the

    Council as being systemically important would not have the opportunity

    to gain QCCP status, thereby potentially putting such a DCO at a

    significant competitive disadvantage compared to SIDCOs and non-U.S.

    clearing organizations. This would ultimately be to the detriment of

    such a DCO's clearing members and their customers.\205\ The Commission

    also notes that by clearing through a Subpart C DCO, a clearing member

    and its customers would be afforded the benefits of clearing through a

    DCO subject to enhanced risk management, operational, and other

    standards. The Commission requests comment concerning the extent to

    which clearing members and their customers would benefit from the

    additional standards to which a Subpart C DCO and SIDCO would be

    subject.

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

    \205\ See supra Section I.F (discussing QCCP status and the

    Basel CCP Capital Requirements); see also supra Section II.C.

    (discussing proposed regulation 39.31).

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

    Proposed regulation 39.31 would provide a benefit to a Subpart C

    DCO by allowing the Subpart C DCO to weigh for itself the costs and

    benefits of maintaining QCCP status. The notice requirements would

    provide important benefits to clearing members of the rescinding

    Subpart C DCO (and their customers), particularly those that are banks

    or bank affiliates, by providing them with advance notice to permit

    them to assess their options and take any actions they deem appropriate

    with respect to clearing at a DCO that has acted to rescind its

    election to be held to the standards of Subpart C (and thus to renounce

    status as a QCCP).

    In addition to the requests for comments detailed above, the

    Commission invites public comment on its cost-benefit considerations.

    Specifically, the Commission seeks comment, including quantitative

    data, if available, concerning the costs and benefits associated with

    having an opt-in process for DCOs that have not been designated as

    systemically important by the Council to elect to be subject to Subpart

    C, the proposed process for that election, and the costs and benefits

    that may be incurred and realized by the clearing members and customers

    of a Subpart C DCO that rescinds its election to become subject to the

    provisions of Subpart C. In addition, the Commission seeks comment on

    whether the notice requirements, the 90 day notice period and the

    requirements set forth in proposed regulation 39.31(e)(3)(iii) are

    sufficient to mitigate the costs associated with a Subpart C DCO's

    ability to rescind its election. Commenters are also invited to submit

    with their comment letters any data or other information that they may

    have quantifying or qualifying the costs and benefits of the proposed

    regulations.

    ii. Regulation 39.32 (Governance for Systemically Important Derivatives

    Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    The requirements set forth in proposed regulation 39.32 would

    appear to be beneficial to the extent that they cause a SIDCO or

    Subpart C DCO to internalize and/or more appropriately allocate certain

    costs that would otherwise be borne by clearing members, customers of

    clearing members, and other relevant stakeholders. Such requirements

    would also appear to promote market stability because the governance

    arrangements of SIDCOs and Subpart C DCOs would be required to

    explicitly support the stability of the financial system and other

    relevant public interest considerations of clearing members, customers

    of clearing members, and other relevant stakeholders,\206\ and reflect

    the legitimate interests of clearing members, customers of clearing

    members, and other relevant stakeholders. Finally, the governance

    arrangements required by proposed regulation 39.32 would promote a more

    efficient, effective, and reliable DCO risk management and operating

    structure.

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

    \206\ See supra Section II.D (discussing proposed regulation

    39.32).

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

    As discussed in section II.D. above, the Commission requests

    comments on the potential benefits to a SIDCO and a Subpart C DCO in

    complying with all aspects of proposed regulation 39.32, and any

    benefits that would be realized by other market participants (including

    members of such a DCO and their customers) or the financial system more

    broadly. As noted above, the Commission specifically requests comment

    on alternative means to address these issues, and the benefits

    associated with such alternatives.

    iii. Regulation 39.33 (Financial Resources for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    As described above, proposed regulation 39.33(a), as revised, would

    be expanded to include Subpart C DCOs and require those Subpart C DCOs

    that engage in an activity with a more complex risk profile (e.g.,

    clearing credit default swaps or credit default futures), or that are

    systemically important in multiple jurisdictions, to comply with the

    Cover Two minimum financial resources requirement.\207\ This regulation

    currently applies to SIDCOs. Proposed regulation 39.33(a) would

    increase the financial stability of Subpart C DCOs that are engaged in

    activities with a more complex risk profile or that are systemically

    important in multiple jurisdictions because it would require such

    Subpart C DCOs to comply with enhanced minimum financial resource

    requirements. Compliance with such standards, in turn, could increase

    the overall stability of the U.S. financial markets because enhancing a

    Subpart C DCO's financial resources requirements from the minimum of

    Cover One to a more stringent Cover Two standard helps to ensure the

    affected Subpart C DCO will have greater financial resources to meet

    its obligations to market participants, including in the case of

    defaults by multiple clearing members. These added financial resources

    lessen the likelihood of the

    [[Page 50293]]

    Subpart C DCO's failure which, in times of market turmoil, could

    increase the risk to the stability of the U.S. financial system.\208\

    By bolstering certain Subpart C DCO's resources, regulation 39.33(a)

    contributes to the financial integrity of the financial markets and

    reduces the likelihood of systemic risk from spreading through the

    financial markets due to the Subpart C DCO's failure or disruption. In

    addition, the approach of obtaining resources in such low-stress

    periods avoids the need to call for additional resources from clearing

    members during less stable, more volatile times, which would have pro-

    cyclical effects on the U.S. financial markets.

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

    \207\ See supra Section II.E (discussing proposed revised

    regulation 39.33).

    \208\ See supra Section I.B.

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

    As described above, proposed regulation 39.33(a)(2) would provide

    the Commission with the ability to determine that a SIDCO or a Subpart

    C DCO is systemically important in multiple jurisdictions, considering

    whether the DCO is a SIDCO and whether the DCO has been determined to

    be systemically important by one or more foreign jurisdictions pursuant

    to a designation process that considers whether the foreseeable effects

    of a failure or disruption of the SIDCO or Subpart C DCO could threaten

    the stability of each relevant jurisdiction's financial system.

    Moreover, proposed regulation 39.33(a)(3) would provide the Commission

    with the ability to expand the definition of ``activity with a more

    complex risk profile'' beyond clearing credit default swaps or credit

    default futures. These provisions give the Commission the flexibility

    to determine, under appropriate circumstances, what particular SIDCOs

    or Subpart C DCOs (or DCOs that engage in certain activities) would

    need to maintain Cover Two default resources. Such a decision would

    help to ensure that the affected SIDCO or Subpart C DCO would have

    greater financial resources to meet its obligations to market

    participants, including in the case of defaults by multiple clearing

    members. These added financial resources would decrease the likelihood

    that the SIDCO or Subpart C DCO would fail, thus contributing to the

    integrity and stability of the financial markets.

    Proposed regulation 39.33 would also prohibit a Subpart C DCO from

    using assessments to meets its default resource obligations, i.e.,

    those under regulations 39.11(a)(1) and 39.33(a). This prohibition

    currently applies to SIDCOs. Prohibiting the use of assessments by a

    Subpart C DCO in meeting its default resource requirement would appear

    to increase the financial stability of the Subpart C DCO, which in

    turn, would increase the overall stability of the U.S. financial

    markets.

    Assessment powers are more likely to be exercised during periods of

    financial market stress. If, during such a period, a clearing member

    defaults and the loss to the Subpart C DCO is sufficiently large to

    deplete (1) the collateral posted by the defaulting clearing member,

    (2) the defaulting clearing member's guaranty fund contribution, and

    (3) the remaining pre-funded default fund contributions, a Subpart C

    DCO's exercise of assessment powers over the non-defaulting clearing

    members may exacerbate a presumably already weakened financial market.

    The demand by a Subpart C DCO for more capital from its clearing

    members could force one or more additional clearing members into

    default because they cannot meet the assessment. The inability to meet

    the assessment could lead clearing members and/or their customers to

    de-leverage (i.e., sell off their positions) in falling asset markets,

    which further drives down asset prices and may result in clearing

    members and/or their customers defaulting on their obligations to each

    other and/or to the Subpart C DCO. In such extreme circumstances,

    assessments could trigger a downward spiral and lead to the

    destabilization of the financial markets. Prohibiting the use of

    assessments by a Subpart C DCO in meeting default resources

    requirements is intended to require the Subpart C DCO to retain more

    financial resources upfront, i.e., to prefund its financial resources

    requirement to cover its potential exposure.

    The increase in prefunding of financial resources by a Subpart C

    DCO may increase costs to clearing members of that Subpart C DCO (e.g.,

    requiring clearing members to post additional funds with the Subpart C

    DCO), but it also reduces the likelihood that the Subpart C DCO will

    require additional capital infusions during a time of financial stress

    when raising such additional capital is expensive relative to market

    norms. By increasing prefunded financial resources, a Subpart C DCO

    becomes less reliant on the ability of its clearing members to pay an

    assessment, more secure in its ability to meets its obligations, and

    more viable in any given situation, even in the case of multiple

    defaults of clearing members. Accordingly, proposed regulation 39.33(b)

    would increase the financial security and reliability of the Subpart C

    DCO, which will, therefore, further increase the overall stability of

    the U.S. financial markets.

    As described above, proposed regulation 39.33(c) would require a

    SIDCO or Subpart C DCO to maintain a minimum level of eligible

    liquidity resources that would permit the DCO to satisfy its intraday,

    same-day, and multi-day settlement obligations in all relevant

    currencies. Proposed regulation 39.33(d) would require a SIDCO or

    Subpart C DCO to undertake due diligence to confirm that each liquidity

    provider upon which the DCO relies has the capacity to perform its

    commitments to provide liquidity (and to regularly test its own

    procedures for accessing its liquidity resources) and would require a

    SIDCO with access to accounts and services at a Federal Reserve Bank to

    use such services where practical. Proposed regulation 39.33(e) would

    require a SIDCO or Subpart C DCO to document its supporting rationale

    for, and to have adequate governance arrangements relating to, the

    amount of total financial resources it maintains and the amount of

    total liquidity resources it maintains.

    These requirements would increase the likelihood that a SIDCO or

    Subpart C DCO would promptly meet its settlement obligations in a

    variety of market conditions. In determining the resources that would

    be necessary to meet the qualifying liquid resources requirements, a

    SIDCO or Subpart C DCO may need to undertake a complex analysis of the

    SIDCO's or Subpart C DCO's exposures and processes, including various

    models, and, where appropriate, designing and implementing changes to

    either create or modify existing internal processes and documenting the

    rationale for the amount of total financial and total liquidity

    resources the SIDCO or Subpart C DCO maintains. These efforts are

    likely to contribute to a better ex ante understanding by the SIDCO's

    or Subpart C DCO's management of the liquidity risks the DCO is likely

    to face in a stress scenario, resources that are calculated to enable

    the DCO to completely meets its settlement obligations on a prompt

    basis despite the default of a clearing member, and better assurance of

    its ability to rely on the commitments of its liquidity providers.

    The result of this analysis and these enhanced resources is likely

    to be better preparation to meet liquidity challenges promptly, and a

    greater likelihood that the DCO would efficiently and effectively meet

    its obligations promptly in a default scenario. This improved

    preparation and enhanced likelihood of the SIDCO or Subpart C DCO's

    prompt meeting of its own obligations will benefit the DCO's clearing

    members and

    [[Page 50294]]

    their customers by avoiding an inability to meet settlement obligations

    that might cause knock-on liquidity problems to such clearing members

    and their customers. The harm to clearing members and customers from a

    failure of a SIDCO or Subpart C DCO to meet its obligations promptly

    would be especially serious in a time of general financial stress. The

    assurance of the DCO meeting its settlement obligations promptly would

    also redound to the benefit of the larger financial system by

    mitigating systemic risk.

    As discussed in section II.E. above, the Commission requests

    comments on the potential benefits to a SIDCO or a Subpart C DCO in

    complying with all aspects of proposed regulation 39.33, and any

    benefits that would be realized by other market participants or the

    financial system more broadly. As noted above, the Commission

    specifically requests comment on alternative means to address these

    issues, and the benefits associated with such alternatives.

    iv. Regulation 39.34 (System Safeguards for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    As discussed above, proposed amended regulation 39.34 would require

    SIDCOs and Subpart C DCOs to comply with enhanced system safeguards

    requirements.\209\ While SIDCOs are already subject to these

    requirements, the Commission proposes expanding this regulation to

    include Subpart C DCOs. A two-hour RTO in a Subpart C DCO's BC-DR plan

    would increase the soundness and operating resiliency of the Subpart C

    DCO. The two-hour RTO ensures that even in the event of a wide-scale

    disruption, the potential negative effects upon U.S. financial markets

    would be minimized because the affected Subpart C DCO would recover

    rapidly and resume its critical market functions. This would allow

    other market participants to process their transactions, including

    those participants in locations not directly affected by the

    disruption. The two-hour RTO would increase a Subpart C DCO's

    resiliency by requiring the Subpart C DCO to have the resources and

    technology necessary to resume operations promptly. This resiliency, in

    turn, would increase the overall stability of the U.S. financial

    markets.

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

    \194\ See supra Section II.F (discussing proposed regulation

    39.34).

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

    As discussed in section II.F. above, the Commission requests

    comments on the potential benefits to a SIDCO or a Subpart C DCO in

    complying with all aspects of proposed regulation 39.34, and any

    benefits that would be realized by other market participants or the

    financial system more broadly. As noted above, the Commission

    specifically requests comment on alternative means to address these

    issues, and the benefits associated with such alternatives.

    v. Regulation 39.35 (Default Rules and Procedures for Uncovered Losses

    or Shortfalls (Recovery) for Systemically Important Derivatives

    Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    As discussed above, proposed regulation 39.35 would require SIDCOs

    and Subpart C DCOs to adopt explicit rules and procedures for: (i)

    Allocating uncovered credit losses and (ii) meeting all settlement

    obligations in a variety of market conditions.\210\ The analysis SIDCOs

    and Subpart C DCOs would need to perform to create these rules and

    procedures are likely to contribute to a better ex ante understanding

    by the SIDCO or Subpart C DCO of the scenarios that would lead to

    uncovered credit losses or liquidity shortfalls. This analysis would

    also enable the SIDCO or Subpart C DCO to more effectively and

    efficiently meet its obligations promptly, thereby avoiding harm to

    clearing members and their customers from a default. In addition,

    requiring SIDCOs and Subpart C DCOs to have clear rules and procedures

    addressing such scenarios would be beneficial for clearing members and

    their customers in that these rules and procedures would provide

    clearing members with a better understanding of the members' own

    obligations, and the extent to which the SIDCO or Subpart C DCO would

    perform its obligations to its clearing members during periods of

    market stress. This understanding would, in turn, contribute to the

    ability of clearing members and their customers to tailor their own

    contingency plans to address those circumstances. Improved preparation

    by SIDCOs, Subpart C DCOs, and their clearing members will also redound

    to the benefit of the larger financial system by mitigating systemic

    risk.

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

    \210\ See supra Section II.G (discussing proposed regulation

    39.35).

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

    As discussed in section II.G. above, the Commission requests

    comments on the potential benefits to a SIDCO or a Subpart C DCO in

    complying with all aspects of proposed regulation 39.35, and any

    benefits that would be realized by other market participants or the

    financial system more broadly. As noted above, the Commission

    specifically requests comment on alternative means to address these

    issues, and the benefits associated with such alternatives.

    vi. Regulation 39.36 (Risk Management for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    As discussed above, the enhanced risk management requirements set

    forth in proposed regulation 39.36 are designed to help SIDCOs and

    Subpart C DCOs manage their risk exposure.\211\ For example, the

    proposed provisions would require SIDCOs and Subpart C DCOs to stress

    test their financial resources, stress test their liquidity resources,

    and conduct regular sensitivity analyses of their margin methodologies.

    The analyses performed under the proposed requirements would appear to

    increase the DCO's ability to mitigate and address credit risks, and to

    create proper incentives for members with respect to the exposures they

    create to the SIDCO or Subpart C DCO by enabling the DCO to tie risk

    exposures to margin requirements. In addition, proposed regulation

    39.36 would require a SIDCO or Subpart C DCO to monitor, manage and

    limit its credit and liquidity risks arising from its settlement banks,

    as well invest its own funds and assets in instruments with minimal

    credit, market, and liquidity risks. This provision would also appear

    to increase the SIDCO's or Subpart C DCO's ability to mitigate and

    address the probability of being exposed to a settlement bank's failure

    and the potential losses and liquidity pressures to which the SIDCO or

    Subpart C DCO would be exposed in the event of such a failure. This, in

    turn, would benefit members of such DCOs and their customers, as

    discussed above. It would also appear that by enhancing the reliability

    and stability of SIDCOs and Subpart C DCOs, the overall stability of

    the U.S. financial markets will be strengthened.

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

    \211\ See supra Section II.H (discussing proposed regulation

    39.36).

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

    As discussed in section II.H. above, the Commission requests

    comments on the potential benefits to a SIDCO or a Subpart C DCO in

    complying with all aspects of proposed regulation 39.36, and any

    benefits that would be realized by members of such DCOs and their

    customers, as well as other market participants or the financial system

    more broadly. As noted above, the Commission specifically requests

    comment on alternative means to address these issues, and the benefits

    associated with such alternatives.

    [[Page 50295]]

    vii. Regulation 39.37 (Additional Disclosure for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    The disclosure requirements set forth in proposed regulation 39.37

    \212\ would be beneficial to clearing members of SIDCOs and Subpart C

    DCOs, as well as to customers of clearing members, because they would

    provide transparency and certainty concerning the processes, operations

    and exposures of these DCOs. In particular, proposed paragraph (d)

    would require a SIDCO or Subpart C DCO to publicly disclose its

    policies and procedures concerning the segregation and portability of

    customers' positions and funds. These disclosures would enable clearing

    members and their customers to better understand their respective

    exposures to the SIDCO or Subpart C DCO, to better choose a DCO that

    fits their needs, and, in turn, to create incentives for safe and

    effective operations of SIDCOs and Subpart C DCOs.

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

    \212\ See supra Section II.I (discussing proposed regulation

    39.37).

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

    As discussed in section II.I. above, the Commission requests

    comments on the potential benefits to a SIDCO or a Subpart C DCO in

    complying with all aspects of proposed regulation 39.37, and any

    benefits that would be realized by members of such DCOs and their

    customers, as well as other market participants or the financial system

    more broadly. As noted above, the Commission specifically requests

    comment on alternative means to address these issues, and the benefits

    associated with such alternatives.

    viii. Regulation 39.38 (Efficiency for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    The efficiency requirements set forth in proposed regulation 39.38

    would be beneficial to clearing members of SIDCOs and Subpart C DCOs,

    as well as to customers of clearing members, because they would require

    these DCOs to regularly endeavor to improve their clearing and

    settlement arrangements, operating structures and procedures, product

    offerings, and use of technology. In addition, SIDCOs and Subpart C

    DCOs would be required to facilitate efficient payment, clearing and

    settlement by accommodating internationally accepted communication

    procedures and standards, which could result in operational efficiency

    for market participants. As a result, members of such DCOs and their

    customers, as well as the marketplace more broadly, may be offered more

    efficient clearing services that may be easier to access at an

    operational level.

    As discussed in section II.J. above, the Commission requests

    comments on the potential benefits to a SIDCO or a Subpart C DCO in

    complying with all aspects of proposed regulation 39.38, and any

    benefits that would be realized by members of such DCOs, their

    customers, as well as other market participants or the financial system

    more broadly. As noted above, the Commission specifically requests

    comment on alternative means to address these issues, and the benefits

    associated with such alternatives.

    ix. Regulation 39.39 (Recovery and Wind-Down for Systemically Important

    Derivatives Clearing Organizations and Subpart C Derivatives Clearing

    Organizations)

    As discussed above, proposed regulation 39.39 would require a SIDCO

    and Subpart C DCO to maintain viable plans for recovery and orderly

    wind-down, in cases necessitated by (1) credit losses or liquidity

    shortfalls and (2) general business risk, operational risk, or any

    other risk that threatens the derivatives clearing organization's

    viability as a going concern. This would require the DCO to identify

    scenarios that may prevent a SIDCO or Subpart C DCO from being able to

    provide its critical operations and services as a going concern and to

    assess the effectiveness of a full range of options for recovery or

    orderly wind-down.

    The proposed regulation would also require a SIDCO or Subpart C DCO

    to evaluate the resources available to meet the plan to cover credit

    losses and liquidity shortfalls, and to maintain sufficient

    unencumbered liquid financial assets to implement the plan to cover

    other risks. The latter point requires a SIDCO or Subpart C DCO to

    analyze whether its particular circumstances and risks require it to

    maintain liquid net assets to fund the plan that are in addition to

    those resources currently required by regulation 39.11(a)(2).\213\

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

    \213\ See supra Section II.K (discussing proposed regulation

    39.39).

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

    The complex analysis and plan preparation that a SIDCO or Subpart C

    DCO would undertake to comply with the proposed regulation, including

    designing and implementing changes to existing plans, are likely to

    contribute to a better ex ante understanding by the SIDCO's or Subpart

    C DCO's management of the challenges the DCO would face in a recovery

    or wind-down scenario, and thus better preparation to meet those

    challenges. This improved preparation would help reduce the possibility

    of market disruptions and financial losses to clearing members and

    their customers. By maintaining and regularly updating recovery and

    wind-down plans, and maintaining resources and arrangements designed to

    meet the requirements of such plans, the DCO will better be able to

    mitigate the impact that a threat to, or a disruption of, a SIDCO's or

    Subpart C DCO's operations would have on customers, clearing members,

    and, more broadly, the stability of the U.S. financial markets. By

    reducing the possibility that a DCO would default in a disorganized

    fashion, the proposed regulation would also help to reduce the

    likelihood of a failure by the DCO to meet its obligations to its

    members, thereby enhancing protection for members of such a DCO and

    their customers, as well as helping to avoid the systemic effects of

    DCO failure.

    As discussed in section II.K. above, the Commission requests

    comments on the potential benefits to a SIDCO or a Subpart C DCO in

    complying with all aspects of proposed regulation 39.39, and any

    benefits that would be realized by members of such DCOs and their

    customers, as well as other market participants or the financial system

    more broadly. As noted above, the Commission specifically requests

    comment on alternative means to address these issues, and the benefits

    associated with such alternatives.

    4. Section 15(a) Factors

    i. Protection of Market Participants and the Public

    The proposed regulations create additional standards for compliance

    with the CEA, which include governance standards, enhanced financial

    resources and liquidity resource requirements, system safeguard

    requirements, special default rules and procedures for uncovered losses

    or shortfalls, enhanced risk management requirements, additional

    disclosure requirements, efficiency standards, and standards for

    recovery and wind-down procedures. They also include procedures for

    Subpart C DCOs to elect to be held to such additional standards, and

    procedures to rescind such election. These standards and procedures

    would further the protection of members of SIDCOs and Subpart C DCOs,

    customers of such members, as well as other market participants and the

    public by increasing the financial stability and operational security

    of SIDCOs and Subpart C DCOs. These proposed regulations could, more

    broadly, increase the stability of the U.S.

    [[Page 50296]]

    financial markets. A designation of systemic importance under Title

    VIII means the failure of a SIDCO or the disruption of its clearing and

    settlement activities could create or increase the risk of significant

    liquidity or credit problems spreading among financial institutions or

    markets, thereby threatening the stability of the U.S. financial

    markets. The regulations contained in this proposed rule are designed

    to help ensure that SIDCOs continue to function even in extreme

    circumstances, including multiple defaults by clearing members and

    wide-scale disruptions. While there may be increased costs associated

    with the implementation of the proposed rules, the increased costs

    associated with the implementation of the proposed rules for Subpart C

    DCOs would be borne only by those DCOs that have not been designated

    systemically important under Title VIII and that elect to become

    subject to the provisions of Subpart C. Some of those costs would

    ultimately be borne by clearing members of such Subpart C DCOs, and by

    customers of such clearing members.

    The costs of this rulemaking would be mitigated by the

    countervailing benefits of stronger resources, improved design, more

    efficient and effective processes, and enhanced planning that would

    lead to increased safety and soundness of SIDCOs and the reduction of

    systemic risk, which protect market participants and the public from

    the adverse consequences that would result from a SIDCO's failure or a

    disruption in its functioning. Similarly, the proposed regulations

    would increase the safety and soundness of Subpart C DCOs so that they

    may continue to operate even in extreme circumstances, which would, in

    turn, better protect members of such DCOs, their customers, and also

    market participants and the public, particularly during time of severe

    market stress.

    ii. Efficiency, Competitiveness, and Financial Integrity

    The regulations set forth in this proposed rulemaking would promote

    the financial strength and stability of SIDCOs and Subpart C DCOs, as

    well as, more broadly, efficiency and greater competition in the global

    markets. Proposed regulation 39.38 expressly promotes efficiency in the

    design of a SIDCO's or Subpart C DCO's settlement and clearing

    arrangements, operating structure and procedures, scope of products

    cleared, and use of technology. The proposed regulation also requires

    SIDCOs and Subpart C DCOs to accommodate internationally accepted

    communication procedures and standards to facilitate efficient payment,

    clearing, and settlement. In addition, the proposed regulations promote

    efficiency insofar as SIDCOs and Subpart C DCOs that operate with

    enhanced financial and liquidity resources, enhanced risk management

    requirements, increased system safeguards, and wind-down or recovery

    plans are more secure and are less likely to fail.

    The proposed regulations would also promote competition because

    they are consistent with the international standards set forth in the

    PFMIs and will help to ensure that SIDCOs are held to international

    standards and thus are enabled to gain QCCP status and accordingly

    avoid an important competitive disadvantage relative to similarly

    situated foreign CCPs that meet international standards and are QCCPs.

    Moreover, by allowing other DCOs to elect to become subject to the

    provisions of Subpart C and thus the opportunity to meet international

    standards and to gain QCCP status, the proposed regulations promote

    competition among registered DCOs, and between registered DCOs and

    foreign CCPs that meet international standards and are QCCPs.

    Conversely, the Commission notes that these enhanced financial

    resources and risk management standards are also associated with

    additional costs and to the extent that SIDCOs and Subpart C DCOs pass

    along the additional costs to their clearing members and, indirectly,

    those clearing members' customers, participation in the affected

    markets may decrease and have a negative impact on price discovery.

    However, it would appear that such higher transactional costs should be

    offset by the lower capital charges granted to clearing members and

    customers for exposures resulting from transactions that are cleared

    through SIDCOs and Subpart C DCOs that are also QCCPs.

    Additionally, enhanced risk management and operational standards

    would promote financial integrity by leading to SIDCOs and Subpart C

    DCOs to be more secure and less likely to fail. By increasing the

    stability and strength of the SIDCOs and Subpart C DCOs, the proposed

    regulations would help SIDCOs and Subpart C DCOs to meet their

    obligations in extreme circumstances and be able to resume operations

    even in the face of wide-scale disruption, which contributes to the

    financial integrity of the financial markets. Moreover, in requiring

    (1) more financial resources to be pre-funded by expanding the

    potential losses those resources are intended to cover and restricting

    the means for satisfying those resource requirements, and (2) requiring

    greater liquidity resources, the requirements of these proposed

    regulations seek to lessen the incidence of pro-cyclical demands for

    additional resources and, in so doing, promote both financial integrity

    and market stability. These efforts would redound to the benefit of

    clearing members and their customers, as well as the financial system

    more broadly.

    iii. Price Discovery

    The regulations in this proposed rulemaking would enhance financial

    resources, liquidity resources, risk management standards, disclosure

    standards, and recovery planning for SIDCOs and Subpart C DCOs which

    may result in increased public confidence, which, in turn, might lead

    to expanded participation in the affected markets (including markets

    with products with a more complex risk profile). The expanded

    participation in these markets (i.e., greater transactional volume) may

    have a positive impact on price discovery. Conversely, the Commission

    notes that these proposed regulations are also associated with

    additional costs and to the extent that SIDCOs and Subpart C DCOs pass

    along the additional costs to their clearing members and, indirectly,

    to their clearing members' customers, participation in the affected

    markets may decrease and have a negative impact on price discovery.

    However, it is the Commission's belief that such higher transactional

    costs should be offset by the lower capital charges granted to clearing

    members and customers with exposures resulting from transactions

    cleared through SIDCOs and Subpart C DCOs that are deemed QCCPs.

    iv. Sound Risk Management Practices

    The regulations in this proposed rulemaking contribute to the sound

    risk management practices of SIDCOs and Subpart C DCOs because the

    requirements would promote the safety and soundness of SIDCOs and

    Subpart C DCOs by: (1) Enhancing the financial resources requirements

    and liquidity resource requirements; (2) enhancing understanding of

    credit and liquidity risks and related governance arrangements; (3)

    enhancing system safeguards to facilitate the continuous operation and

    rapid recovery of activities; \214\ (4) enhancing risk management

    standards by creating new stress testing and sensitivity analysis

    [[Page 50297]]

    requirements; (5) promoting the active management of credit and

    liquidity risks arising from settlement banks; \215\ and (6) enhancing

    risk management by establishing rules and procedures addressing

    uncovered credit losses or liquidity shortfalls, and recovery and wind-

    down planning for credit risks and for business continuity and

    operational risks.\216\ In addition, by strengthening financial and

    liquidity resource requirements, enhancing risk management standards,

    and enhancing disclosure and recovery planning requirements, these

    proposed regulations would provide greater certainty for clearing

    members of such DCOs, their customers, and other market participants

    that obligations of the SIDCOs and Subpart C DCOs will be honored, and

    provide certainty and security to market participants that potential

    disruptions will be reduced and, by extension, the risk of loss of

    capital and liquidity will be reduced.

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

    \214\ As mentioned above, this proposed rulemaking would extend

    to Subpart C DCOs the system safeguards requirements currently

    applicable to SIDCOs. See supra Section II.F (discussing proposed

    revised regulation 39.34 (system safeguards)).

    \215\ See supra Section II.H (discussing proposed regulation

    39.36).

    \216\ See supra Section II.G (discussing proposed regulation

    39.35); see also supra Section II.K (discussing proposed regulation

    39.39).

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

    v. Other Public Interest Considerations

    The Commission notes the strong public interest for jurisdictions

    to either adopt the PFMIs or establish standards consistent with the

    PFMIs in order to allow CCPs licensed in the relevant jurisdiction to

    gain QCCP status. As emphasized throughout this proposed rulemaking,

    SIDCOs and Subpart C DCOs that are held to international standards and

    that gain QCCP status might hold a competitive advantage in the

    financial markets by, inter alia, helping bank clearing members and

    bank customers avoid the much higher capital charges imposed by the

    Basel CCP Capital Requirements on exposures to non-QCCPs. Moreover,

    because ``enhancements to the regulation and supervision of

    systemically important financial market utilities . . . are necessary .

    . . to support the stability of the broader financial system,'' \217\

    adopting these proposed rules would promote the public interest in a

    more stable broader financial system.

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

    \217\ See Section 802(a)(4) of the Dodd-Frank Act (Congressional

    Findings).

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

    List of Subjects in 17 CFR Part 39

    Commodity futures, Risk management, Settlement procedures, Default

    rules and procedures, System safeguards.

    For the reasons stated in the preamble, the Commission proposes to

    amend 17 CFR part 39 as follows:

    PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    0

    1. The authority citation for part 39 is amended to read as follows:

    Authority: 7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C.

    8325.

    0

    2. Revise Sec. 39.2 to read as follows:

    Sec. 39.2 Definitions.

    For the purposes of this part: Activity with a more complex risk

    profile includes:

    (1) Clearing credit default swaps, credit default futures, or

    derivatives that reference either credit default swaps or credit

    default futures and

    (2) Any other activity designated as such by the Commission

    pursuant to Sec. 39.33(a)(3).

    Back test means a test that compares a derivatives clearing

    organization's initial margin requirements with historical price

    changes to determine the extent of actual margin coverage.

    Customer means a person trading in any commodity named in the

    definition of commodity in section 1a(9) of the Act or in Sec. 1.3 of

    this chapter, or in any swap as defined in section 1a(47) of the Act or

    in Sec. 1.3 of this chapter; Provided, however, an owner or holder of

    a house account as defined in this section shall not be deemed to be a

    customer within the meaning of section 4d of the Act, the regulations

    that implement sections 4d and 4f of the Act and Sec. 1.35, and such

    an owner or holder of such a house account shall otherwise be deemed to

    be a customer within the meaning of the Act and Sec. Sec. 1.37 and

    1.46 of this chapter and all other sections of these rules,

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

    the Act.

    Customer account or customer origin means a clearing member account

    held on behalf of customers, as that term is defined in this section,

    and which is subject to section 4d(a) or section 4d(f) of the Act.

    Depository institution has the meaning set forth in section

    19(b)(1)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)).

    House account or house origin means a clearing member account which

    is not subject to section 4d(a) or 4d(f) of the Act.

    Key personnel means derivatives clearing organization personnel who

    play a significant role in the operations of the derivatives clearing

    organization, the provision of clearing and settlement services, risk

    management, or oversight of compliance with the Act and Commission

    regulations and orders. Key personnel include, but are not limited to,

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

    Chief executive officer; president; chief compliance officer; chief

    operating officer; chief risk officer; chief financial officer; chief

    technology officer; and emergency contacts or persons who are

    responsible for business continuity or disaster recovery planning or

    program execution.

    Stress test means a test that compares the impact of potential

    extreme price moves, changes in option volatility, and/or changes in

    other inputs that affect the value of a position, to the financial

    resources of a derivatives clearing organization, clearing member, or

    large trader, to determine the adequacy of the financial resources of

    such entities.

    Subpart C derivatives clearing organization means any derivatives

    clearing organization, as defined in section 1a(15) of the Act and

    Sec. 1.3(d) of this chapter, which:

    (1) Is registered as a derivatives clearing organization under

    section 5b of the Act;

    (2) Is not a systemically important derivatives clearing

    organization; and

    (3) Has become subject to the provisions of this Subpart C,

    pursuant to Sec. 39.31.

    Systemically important derivatives clearing organization means a

    financial market utility that is a derivatives clearing organization

    registered under section 5b of the Act, which is currently designated

    by the Financial Stability Oversight Council to be systemically

    important and for which the Commission acts as the Supervisory Agency

    pursuant to 12 U.S.C. 5462(8).

    U.S. branch and agency of a foreign banking organization means the

    U.S. branch and agency of a foreign banking organization as defined in

    section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).

    Trust company means a trust company that is a member of the Federal

    Reserve System, under section 1 of the Federal Reserve Act (12 U.S.C.

    221), but that does not meet the definition of depository institution.

    0

    3. In Subpart B, add and reserve Sec. Sec. 39.28 and 39.29.

    0

    4. Revise Subpart C to read as follows:

    Subpart C--Provisions Applicable to Systemically Important Derivatives

    Clearing Organizations and Derivatives Clearing Organizations That

    Elect To Be Subject to the Provisions of Subpart C

    Sec.

    39.30 Scope.

    39.31 Election to become subject to the provisions of subpart C.

    39.32 Governance for systemically important derivatives clearing

    organizations and subpart C derivatives clearing organizations.

    [[Page 50298]]

    39.33 Financial resources for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    39.34 System safeguards for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    39.35 Default rules and procedures for uncovered losses or

    shortfalls (recovery) for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    39.36 Risk management for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    39.37 Additional disclosure for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    39.38 Efficiency for systemically important derivatives clearing

    organizations and subpart C derivatives clearing organizations.

    39.39 Recovery and wind-down for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    39.40 Consistency with the Principles for Financial Market

    Infrastructures.

    39.41 Special enforcement authority for systemically important

    derivatives clearing organizations.

    39.42 Advance notice of material risk-related rule changes by

    systemically important derivatives clearing organizations.

    Appendix A to Part 39--Form DCO Derivatives Clearing Organization

    Application for Registration

    Appendix B to Part 39--Subpart C Election Form

    Subpart C--Provisions Applicable to Systemically Important

    Derivatives Clearing Organizations and Derivatives Clearing

    Organizations That Elect To Be Subject to the Provisions of Subpart

    C

    Sec. 39.30 Scope.

    (a) The provisions of this subpart C apply to each of the

    following: A subpart C derivatives clearing organization, a

    systemically important derivatives clearing organization, and any

    derivatives clearing organization, as defined under section 1a(15) of

    the Act and Sec. 1.3(d) of this chapter, seeking to become a subpart C

    derivatives clearing organization pursuant to Sec. 39.31.

    (b) A systemically important derivatives clearing organization is

    subject to the provisions of subparts A and B of this part in addition

    to the provisions of this subpart.

    (c) A subpart C derivatives clearing organization is subject to the

    provisions of subparts A and B of this part in addition to the

    provisions of this subpart except for Sec. Sec. 39.41 and 39.42 of

    this subpart.

    Sec. 39.31 Election to become subject to the provisions of subpart C.

    (a) Election eligibility. (1) A derivatives clearing organization

    that is registered with the Commission and that is not a systemically

    important derivatives clearing organization may elect to become a

    subpart C derivatives clearing organization subject to the provisions

    of this subpart, using the procedures set forth in paragraph (b) of

    this section.

    (2) An applicant for registration as a derivatives clearing

    organization pursuant to Sec. 39.3 may elect to become a subpart C

    derivatives clearing organization subject to the provisions of this

    subpart as part of its application for registration using the

    procedures set forth in paragraph (c) of this section.

    (b) Election and withdrawal procedures applicable to registered

    derivatives clearing organizations. (1) Election. A derivatives

    clearing organization that is registered with the Commission and that

    is not a systemically important derivatives clearing organization may

    request that the Commission accept its election to become a subpart C

    derivatives clearing organization by filing with the Commission a

    completed Subpart C Election Form. The Subpart C Election Form shall

    include the election and all certifications, disclosures and exhibits,

    as provided in appendix B to this part and any amendments or

    supplements thereto filed with the Commission pursuant to paragraphs

    (b)(2) and (b)(3) of this section.

    (2) Submission of supplemental information. The filing of a Subpart

    C Election Form does not create a presumption that the Subpart C

    Election Form is materially complete or that supplemental information

    will not be required. The Commission, at any time prior to the

    effective date, as provided in paragraph (b)(4) of this section, may

    request that the derivatives clearing organization submit supplemental

    information in order for the Commission to process the Subpart C

    Election Form, and the derivatives clearing organization shall file

    such supplemental information with the Commission.

    (3) Amendments. A derivatives clearing organization shall promptly

    amend its Subpart C Election Form if it discovers a material omission

    or error in, or if there is a material change in, the information

    provided to the Commission in the Subpart C Election Form or other

    information provided in connection with the Subpart C Election Form.

    (4) Effective date. A derivatives clearing organization's election

    to become a subpart C derivatives clearing organization shall become

    effective:

    (i) Upon the later of the following, provided the Commission has

    neither stayed nor denied such election as set forth in paragraph

    (b)(5) of this section.

    (A) The effective date specified by the derivatives clearing

    organization in its Subpart C Election Form; or

    (B) Ten business days after the derivatives clearing organization

    files its Subpart C Election Form with the Commission;

    (ii) Or upon the effective date set forth in written notification

    from the Commission that it shall permit the election to take effect

    after a stay issued pursuant to paragraph (b)(5) of this section.

    (5) Stay or denial of election. Prior to the effective date set

    forth in paragraph (b)(4)(i) of this section, the Commission may stay

    or deny a derivatives clearing organization's election to become a

    subpart C derivatives clearing organization by issuing a written

    notification thereof to the derivatives clearing organization.

    (6) Commission acknowledgement. The Commission may acknowledge, in

    writing, that it has received a Subpart C Election Form filed by a

    derivatives clearing organization and that it has permitted the

    derivatives clearing organization's election to become subject to the

    provisions of this subpart C to take effect, and the effective date of

    such election.

    (7) Withdrawal of election. A derivatives clearing organization

    that has filed a Subpart C Election Form may withdraw an election to

    become subject to the provisions of this subpart C at any time prior to

    the date that the election is permitted to take effect by filing with

    the Commission a notice of the withdrawal of election.

    (c) Election and withdrawal procedures applicable to applicants for

    registration as derivatives clearing organization--(1) Election. An

    applicant for registration as a derivatives clearing organization that

    requests an election to become subject to the provisions of this

    subpart C may make that request by attaching a completed Subpart C

    Election Form to the Form DCO that it files pursuant to Sec. 39.3. The

    Subpart C Election Form shall include the election and all

    certifications, disclosures and exhibits, as provided in appendix B to

    part 39, and any amendments or supplements thereto filed with the

    Commission pursuant to paragraphs (c)(3) or (c)(4) of this section.

    (2) Election review and effective date. The Commission shall review

    the applicant's Subpart C Election Form as part of the Commission's

    review of its

    [[Page 50299]]

    application for registration pursuant to Sec. 39.3(a). The Commission

    may permit the applicant's election to take effect at the time it

    approves the applicant's application for registration by providing

    written notice thereof to the applicant. The Commission shall not

    approve any application for registration filed pursuant to Sec.

    39.3(a) for which a Subpart C Election Form is pending, if the

    Commission determines that the applicant's election to become subject

    to Subpart C should not become effective because the applicant has not

    demonstrated its ability to comply with the applicable provisions of

    this subpart.

    (3) Submission of supplemental information. The filing of a Subpart

    C Election Form does not create a presumption that the Subpart C

    Election Form is materially complete or that supplemental information

    will not be required. At any time during the Commission's review of the

    Subpart C Election Form, the Commission may request that the applicant

    submit supplemental information in order for the Commission to process

    the Subpart C Election Form and the applicant shall file such

    supplemental information with the Commission.

    (4) Amendments. An applicant for registration as a derivatives

    clearing organization shall promptly amend its Subpart C Election Form

    if it discovers a material omission or error in, or if there is a

    material change in, the information provided to the Commission in the

    Subpart C Election Form or other information provided in connection

    with the Subpart C Election Form.

    (5) Withdrawal of election. An applicant for registration as a

    derivatives clearing organization may withdraw an election to become

    subject to the provisions of this subpart C by filing with the

    Commission a notice of the withdrawal of its Subpart C Election Form at

    any time prior to the date that the Commission approves its application

    for registration as a derivatives clearing organization. The applicant

    may withdraw its Subpart C Election Form without withdrawing its Form

    DCO.

    (d) Public information. The following portions of the Subpart C

    Election Form will be public: The Elections and Certifications and

    Disclosures in the Subpart C Election Form, the rules of the

    derivatives clearing organization, the regulatory compliance chart, and

    any other portion of the Subpart C Election Form not covered by a

    request for confidential treatment complying with the requirements of

    Sec. 145.9 of this chapter.

    (e) Rescission of election--(1) Notice of intent to rescind. A

    subpart C derivatives clearing organization may rescind its election to

    be subject to the provisions of this subpart C and terminate its status

    as a subpart C derivatives clearing organization by filing with the

    Commission a notice of its intent to rescind such election. The notice

    of intent to rescind the election shall include:

    (i) The effective date of the rescission; and

    (ii) A certification signed by the relevant duly authorized

    representative of the subpart C derivatives clearing organization, as

    specified in paragraph three of the General Instructions to the Subpart

    C Election Form, stating that the subpart C derivatives clearing

    organization:

    (A) Has provided the notice to its clearing members required by

    paragraph (e)(3)(i)(A) of this section;

    (B) Will provide the notice to its clearing members required by

    paragraph (e)(3)(i)(B) of this section;

    (C) Has provided the notice to the general public required by

    paragraph (e)(3)(ii)(A) of this section;

    (D) Will provide notice to the general public required by paragraph

    (e)(3)(ii)(B) of this section; and

    (E) Has removed all references to the organization as a subpart C

    derivatives clearing organization and a qualifying central counterparty

    on its Web site and in all other material that it provides to its

    clearing members and customers, other market participants or members of

    the public, as required by paragraph (e)(3)(ii)(C) of this section.

    (2) Effective date. The rescission of the election to be subject to

    the provisions of this subpart C shall become effective on the date set

    forth in the notice of intent to rescind the election filed by the

    subpart C derivatives clearing organization pursuant to Sec.

    39.31(e)(1), provided that the rescission may become effective no

    earlier than 90 days after the notice of intent to rescind the election

    is filed with the Commission. The subpart C derivatives clearing

    organization shall continue to comply with all of the provisions of

    this subpart C until such effective date.

    (3) Additional notice requirements.

    (i) A subpart C derivatives clearing organization shall provide the

    following notices, at the following times, to each of its clearing

    members and shall have rules in place requiring each of its clearing

    members to provide the following notices to each of the clearing

    member's customers:

    (A) No later than the filing of a notice of its intent to rescind

    its election to be subject to the provisions of this subpart C, written

    notice that it intends to file such notice with the Commission and the

    effective date thereof; and

    (B) On the effective date of the rescission of its election to be

    subject to the provisions of this subpart C, written notice that the

    rescission has become effective.

    (ii) A subpart C derivatives clearing organization shall:

    (A) No later than the filing of a notice of its intent to rescind

    its election to be subject to the provisions of this subpart C, provide

    notice to the general public, displayed prominently on its Web site, of

    its intent to rescind its election to be subject to the provisions of

    this subpart C;

    (B) On and after the effective date of the rescission of its

    election to be subject to the provisions of this subpart C, provide

    notice to the general public, displayed prominently on its Web site,

    that the rescission has become effective; and

    (C) Prior to the filing of a notice of its intent to rescind its

    election to become subject to the provisions of this subpart C, remove

    all references to the derivatives clearing organization's status as a

    subpart C derivatives clearing organization and a qualifying central

    counterparty on its Web site and in all other materials that it

    provides to its clearing members and customers, other market

    participants, or the general public.

    (iii) The employees and representatives of a derivatives clearing

    organization that has filed a notice of its intent to rescind its

    election to be subject to the provisions of this subpart C shall

    refrain from referring to the organization as a subpart C derivatives

    clearing organization and a qualifying central counterparty on and

    after the date that the notice of intent to rescind the election is

    filed.

    (4) Effect of rescission. The rescission of a subpart C derivatives

    clearing organization's election to be subject to the provisions of

    this subpart C shall not affect the authority of the Commission

    concerning any activities or events occurring during the time that the

    derivatives clearing organization maintained its status as a subpart C

    derivatives clearing organization.

    (f) Loss of designation as a systemically important derivatives

    clearing organization. A systemically important derivatives clearing

    organization whose designation of systemic importance is rescinded by

    the Financial Stability Oversight Council, shall immediately be deemed

    to be a subpart C derivatives clearing organization and shall continue

    to

    [[Page 50300]]

    comply with the provisions of this subpart C unless such derivatives

    clearing organization elects to rescind its status as a subpart C

    derivatives clearing organization in accordance with the requirements

    of paragraph (e) of this section.

    (g) All forms and notices required by this Sec. 39.31 shall be

    filed electronically with the Secretary of the Commission in the format

    and manner specified by the Commission.

    Sec. 39.32 Governance for systemically important derivatives clearing

    organizations and subpart C derivatives clearing organizations.

    (a) General rules. (1) Each systemically important derivatives

    clearing organization and subpart C derivatives clearing organization

    shall have governance arrangements that:

    (i) Are written;

    (ii) Are clear and transparent;

    (iii) Place a high priority on the safety and efficiency of the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization; and

    (iv) Explicitly support the stability of the broader financial

    system and other relevant public interest considerations of clearing

    members, customers of clearing members, and other relevant

    stakeholders.

    (2) The board of directors shall make certain that the systemically

    important derivatives clearing organization's or subpart C derivatives

    clearing organization's design, rules, overall strategy, and major

    decisions appropriately reflect the legitimate interests of clearing

    members, customers of clearing members, and other relevant

    stakeholders.

    (3) To an extent consistent with other statutory and regulatory

    requirements on confidentiality and disclosure:

    (i) Major decisions of the board of directors should be clearly

    disclosed to clearing members, other relevant stakeholders, and to the

    Commission; and

    (ii) Major decisions of the board of directors having a broad

    market impact should be clearly disclosed to the public;

    (b) Governance arrangements. Each systemically important

    derivatives clearing organization and subpart C derivatives clearing

    organization shall have governance arrangements that:

    (1) Are clear and documented;

    (2) To an extent consistent with other statutory and regulatory

    requirements on confidentiality and disclosure, are disclosed, as

    appropriate, to the Commission and to other relevant authorities, to

    clearing members and to customers of clearing members, to the owners of

    the systemically important derivatives clearing organization or subpart

    C derivatives clearing organization, and to the public;

    (3) Describe the structure pursuant to which the board of

    directors, committees, and management operate;

    (4) Include clear and direct lines of responsibility and

    accountability;

    (5) Clearly specify the roles and responsibilities of the board of

    directors and its committees, including the establishment of a clear

    and documented risk management framework;

    (6) Clearly specify the roles and responsibilities of management;

    (7) Describe procedures for identifying, addressing, and managing

    conflicts of interest involving members of the board of directors;

    (8) Describe procedures pursuant to which the board of directors

    oversees the chief risk officer, risk management committee, and

    material risk decisions;

    (9) Assign responsibility and accountability for risk decisions,

    including in crises and emergencies; and

    (10) Assign responsibility for implementing the:

    (i) Default rules and procedures required by Sec. Sec. 39.16 and

    39.35;

    (ii) System safeguard rules and procedures required by Sec. Sec.

    39.18 and 39.34; and

    (iii) Recovery and wind-down plans required by Sec. 39.39.

    (c) Fitness standards for board of directors and management. Each

    systemically important derivatives clearing organization and subpart C

    derivatives clearing organization shall maintain policies to make

    certain that:

    (1) The board of directors consists of suitable individuals having

    appropriate skills and incentives;

    (2) The board of directors includes individuals who are not

    executives, officers or employees of the systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization or an affiliate thereof;

    (3) The performance of the board of directors and the performance

    of individual directors are reviewed on a regular basis;

    (4) Managers have the appropriate experience, skills, and integrity

    necessary to discharge operational and risk management

    responsibilities; and

    (5) Risk management and internal control personnel have sufficient

    independence, authority, resources, and access to the board of

    directors so that the operations of the systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization are consistent with the risk management framework

    established by the board of directors.

    Sec. 39.33 Financial resources requirements for systemically

    important derivatives clearing organizations and subpart C derivatives

    clearing organizations.

    (a) General rule. (1) Notwithstanding the requirements of Sec.

    39.11(a)(1), each systemically important derivatives clearing

    organization and subpart C derivatives clearing organization that, in

    either case, is systemically important in multiple jurisdictions or is

    involved in activities with a more complex risk profile shall maintain

    financial resources sufficient to enable it to meet its credit exposure

    to its clearing members notwithstanding a default by the two clearing

    members creating the largest aggregate credit exposure for the

    derivatives clearing organization in extreme but plausible market

    conditions.

    (2) The Commission shall, if it deems appropriate, determine

    whether a systemically important derivatives clearing organization or

    subpart C derivatives clearing organization is systemically important

    in multiple jurisdictions. In determining whether a systemically

    important derivatives clearing organization or subpart C derivatives

    clearing organization is systemically important in multiple

    jurisdictions, the Commission shall consider whether the derivatives

    clearing organization:

    (i) Is a systemically important derivatives clearing organization,

    as defined by Sec. 39.2; or

    (ii) Has been determined to be systemically important by one or

    more jurisdictions other than the United States pursuant to a

    designation process that considers whether the foreseeable effects of a

    failure or disruption of the derivatives clearing organization could

    threaten the stability of each relevant jurisdiction's financial

    system.

    (3) The Commission shall, if it deems appropriate, determine

    whether any of the activities of a systemically important derivatives

    clearing organization or a subpart C derivatives clearing organization,

    in addition to clearing credit default swaps, credit default futures,

    and any derivatives that reference either credit default swaps or

    credit default futures, has a more complex risk profile. In determining

    whether an activity has a more complex risk profile, the Commission

    will consider characteristics such as discrete jump-to-default price

    changes or high correlations with potential participant defaults as

    factors supporting (though

    [[Page 50301]]

    not necessary for) a finding of a more complex risk profile.

    (4) For purposes of this section 39.33, if a clearing member

    controls another clearing member or is under common control with

    another clearing member, such affiliated clearing members shall be

    deemed to be a single clearing member.

    (b) Valuation of financial resources. Notwithstanding the

    provisions of Sec. 39.11(d)(2), assessments for additional guaranty

    fund contributions (i.e., guaranty fund contributions that are not pre-

    funded) shall not be included in calculating the financial resources

    available to meet a systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's

    obligations under paragraph (a) of this section or Sec. 39.11(a)(1).

    (c) Liquidity resources--(1) Minimum amount of liquidity resources.

    (i) Notwithstanding the provisions of Sec. 39.11(e)(1)(ii), each

    systemically important derivatives clearing organization and subpart C

    derivatives clearing organization shall maintain eligible liquidity

    resources that, at a minimum, will enable it to meet its intraday,

    same-day, and multiday obligations to perform settlements, as defined

    in Sec. 39.14(a)(1), with a high degree of confidence under a wide

    range of stress scenarios that should include, but not be limited to, a

    default by the clearing member creating the largest aggregate liquidity

    obligation for the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization in extreme

    but plausible market conditions.

    (ii) A systemically important derivatives clearing organization and

    subpart C derivatives clearing organization that is subject to Sec.

    39.33(a)(1) shall consider maintaining eligible liquidity resources

    that, at a minimum, will enable it to meet its intraday, same-day, and

    multiday obligations to perform settlements, as defined in Sec.

    39.14(a)(1), with a high degree of confidence under a wide range of

    stress scenarios that should include, but not be limited to, a default

    of the two clearing members creating the largest aggregate liquidity

    obligation for the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization in extreme

    but plausible market conditions.

    (2) Satisfaction of settlement in all relevant currencies. Each

    systemically important derivatives clearing organization and subpart C

    derivatives clearing organization shall maintain liquidity resources

    that are sufficient to satisfy the obligations required by paragraph

    (c)(1) of this section in all relevant currencies for which the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization has obligations to perform

    settlements, as defined in Sec. 39.14(a)(1), to its clearing members.

    (3) Qualifying liquidity resources. (i) Only the following

    liquidity resources are eligible for the purpose of meeting the

    requirement of paragraph (c)(1) of this section:

    (A) Cash in the currency of the requisite obligations, held either

    at the central bank of issue or at a creditworthy commercial bank;

    (B) Committed lines of credit;

    (C) Committed foreign exchange swaps;

    (D) Committed repurchase agreements; or

    (E) (1) Obligations of the United States Treasury or high quality,

    liquid, general obligations of a sovereign nation.

    (2) The assets described in paragraph (c)(3)(i)(E)(1) of this

    section must be readily available and convertible into cash pursuant to

    prearranged and highly reliable funding arrangements.

    (ii) With respect to the arrangements described in paragraph

    (c)(3)(i) of this section, the systemically important derivatives

    clearing organization or subpart C derivatives clearing organization

    must take appropriate steps to verify that such arrangements do not

    include material adverse change provisions and are enforceable, and

    will be highly reliable, in extreme but plausible market conditions.

    (4) Additional liquidity resources. If a systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization maintains financial resources in addition to those

    required to satisfy paragraph (c)(1) of this section, then those

    resources should be in the form of assets that are likely to be

    saleable with proceeds available promptly or acceptable as collateral

    for lines of credit, swaps, or repurchase agreements on an ad hoc

    basis. A systemically important derivatives clearing organization or

    subpart C derivatives clearing organization should consider maintaining

    collateral with low credit, liquidity, and market risks that is

    typically accepted by a central bank of issue for any currency in which

    it may have settlement obligations, but shall not assume the

    availability of emergency central bank credit as a part of its

    liquidity plan.

    (d) Liquidity providers. (1) For the purposes of this paragraph, a

    liquidity provider means:

    (i) A depository institution, a U.S. branch and agency of a foreign

    banking organization, a trust company, or a syndicate of depository

    institutions, U.S. branches and agencies of foreign banking

    organizations, or trust companies providing a line of credit, foreign

    exchange swap facility or repurchase facility to a systemically

    important derivatives clearing organization or subpart C derivatives

    clearing organization;

    (ii) Any other counterparty relied upon by a systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization to meet its minimum liquidity resources requirement under

    paragraph (c) of this section.

    (2) In fulfilling its obligations under paragraph (c) of this

    section, each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall undertake due

    diligence to confirm that each of its liquidity providers, whether or

    not such liquidity provider is a clearing member, has:

    (i) Sufficient information to understand and manage the liquidity

    provider's liquidity risks; and

    (ii) The capacity to perform as required under its commitments to

    provide liquidity to the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization.

    (3) Where relevant to a liquidity provider's ability reliably to

    perform its commitments with respect to a particular currency, the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization may take into account the liquidity

    provider's access to the central bank of issue of that currency.

    (4) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall regularly test

    its procedures for accessing its liquidity resources under paragraph

    (c)(3)(i) of this section, including testing its arrangements under

    paragraph (c)(3)(ii) and its relevant liquidity provider(s) under

    paragraph (d)(1) of this section.

    (5) A systemically important derivatives clearing organization with

    access to accounts and services at a Federal Reserve Bank, pursuant to

    section 806(a) of the Dodd-Frank Act, 12 U.S.C. 5465(a), shall use

    these services, where practical.

    (e) Documentation of financial resources and liquidity resources.

    Each

    [[Page 50302]]

    systemically important derivatives clearing organization and subpart C

    derivatives clearing organization shall document its supporting

    rationale for, and have appropriate governance arrangements relating

    to, the amount of total financial resources it maintains pursuant to

    paragraph (a) of this section and the amount of total liquidity

    resources it maintains pursuant to paragraph (c) of this section.

    Sec. 39.34 System safeguards for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    (a) Notwithstanding Sec. 39.18(e)(3), the business continuity and

    disaster recovery plan described in Sec. 39.18(e)(1) for each

    systemically important derivatives clearing organization and subpart C

    derivatives clearing organization shall have the objective of enabling,

    and the physical, technological, and personnel resources described in

    Sec. 39.18(e)(1) shall be sufficient to enable, the systemically

    important derivatives clearing organization or subpart C derivatives

    clearing organization to recover its operations and resume daily

    processing, clearing, and settlement no later than two hours following

    the disruption, for any disruption including a wide-scale disruption.

    (b) To facilitate its ability to achieve the recovery time

    objective specified in paragraph (a) of this section in the event of a

    wide-scale disruption, each systemically important derivatives clearing

    organization and subpart C derivatives clearing organization must

    maintain a degree of geographic dispersal of physical, technological

    and personnel resources consistent with the following for each activity

    necessary for the daily processing, clearing, and settlement of

    existing and new contracts:

    (1) Physical and technological resources (including a secondary

    site), sufficient to enable the entity to meet the recovery time

    objective after interruption of normal clearing by a wide-scale

    disruption, must be located outside the relevant area of the physical

    and technological resources the systemically important derivatives

    clearing organization or subpart C derivatives clearing organization

    normally relies upon to conduct that activity, and must not rely on the

    same critical transportation, telecommunications, power, water, or

    other critical infrastructure components the entity normally relies

    upon for such activities;

    (2) Personnel, who live and work outside that relevant area,

    sufficient to enable the entity to meet the recovery time objective

    after interruption of normal clearing by a wide-scale disruption

    affecting the relevant area in which the personnel the entity normally

    relies upon to engage in such activities are located;

    (3) The provisions of Sec. 39.18(f) shall apply to these resource

    requirements.

    (c) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization must conduct regular,

    periodic tests of its business continuity and disaster recovery plans

    and resources and its capacity to achieve the required recovery time

    objective in the event of a wide-scale disruption. The provisions of

    Sec. 39.18(j) apply to such testing.

    (d) The Commission may, upon application, grant an entity, which

    has been designated as a systemically important derivatives clearing

    organization or that has elected to become subject to subpart C, up to

    one year to comply with any provision of this section.

    Sec. 39.35 Default rules and procedures for uncovered credit losses

    or liquidity shortfalls (recovery) for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations.

    (a) Allocation of uncovered credit losses. Each systemically

    important derivatives clearing organization and subpart C derivatives

    clearing organization shall adopt explicit rules and procedures that

    address fully any loss arising from any individual or combined default

    relating to any clearing members' obligations to the systemically

    important derivatives clearing organization or subpart C derivatives

    clearing organization. Such rules and procedures shall address how the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization would:

    (1) Allocate losses exceeding the financial resources available to

    the systemically important derivatives clearing organization or subpart

    C derivatives clearing organization;

    (2) Repay any funds it may borrow; and

    (3) Replenish any financial resources it may employ during such a

    stress event, so that the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization can

    continue to operate in a safe and sound manner.

    (b) Allocation of uncovered liquidity shortfalls. (1) Each

    systemically important derivatives clearing organization and subpart C

    derivatives clearing organization shall establish rules and/or

    procedures that enable it promptly to meet all of its settlement

    obligations, on a same day and, as appropriate, intraday and multiday

    basis, in the context of the occurrence of either or both of the

    following scenarios:

    (i) An individual or combined default involving one or more

    clearing members' obligations to the systemically important derivatives

    clearing organization or subpart C derivatives clearing organization;

    or

    (ii) A liquidity shortfall exceeding the financial resources of the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization.

    (2) The rules and procedures described in paragraph (b)(1) of this

    section shall:

    (i) Enable the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization promptly to

    meet its payment obligations in all relevant currencies;

    (ii) Be designed to enable the systemically important derivatives

    clearing organization or subpart C derivatives clearing organization to

    avoid unwinding, revoking, or delaying the same-day settlement of

    payment obligations; and

    (iii) Address the systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's process

    to replenish any liquidity resources it may employ during a stress

    event so that it can continue to operate in a safe and sound manner.

    Sec. 39.36 Risk management for systemically important derivatives

    clearing organizations and subpart C derivatives clearing

    organizations.

    (a) Stress tests of financial resources. In addition to conducting

    stress tests pursuant to Sec. 39.13(h)(3), each systemically important

    derivatives clearing organization and subpart C derivatives clearing

    organization shall conduct stress tests of its financial resources in

    accordance with the following standards and practices:

    (1) Perform, on a daily basis, stress testing of its financial

    resources using predetermined parameters and assumptions;

    (2) Perform comprehensive analyses of stress testing scenarios and

    underlying parameters to ascertain their appropriateness for

    determining the systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's

    required level of financial resources in current and evolving market

    conditions;

    [[Page 50303]]

    (3) Perform the analyses required by paragraph (a)(2) of this

    section at least monthly and when products cleared or markets served

    display high volatility or become less liquid, when the size or

    concentration of positions held by clearing members increases

    significantly, or as otherwise appropriate, evaluate the stress testing

    scenarios, models, and underlying parameters more frequently than once

    a month;

    (4) For the analyses required by paragraph (a)(1) and paragraph

    (a)(2) of this section, include a range of relevant stress scenarios,

    in terms of both defaulting clearing members' positions and possible

    price changes in liquidation periods. The scenarios considered shall

    include, but are not limited to, the following:

    (i) Relevant peak historic price volatilities;

    (ii) Shifts in other market factors including, as appropriate,

    price determinants and yield curves;

    (iii) Multiple defaults over various time horizons;

    (iv) Simultaneous pressures in funding and asset markets; and

    (v) A range of forward-looking stress scenarios in a variety of

    extreme but plausible market conditions.

    (5) Establish procedures for:

    (i) Reporting stress test results to its risk management committee

    or board of directors, as applicable; and

    (ii) Using the results to assess the adequacy of, and to adjust,

    its total amount of financial resources; and

    (6) Use the results of stress tests to support compliance with the

    minimum financial resources requirement set forth in Sec. 39.33(a).

    (b) Sensitivity analysis of margin model.

    (1) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall, at least monthly

    and more frequently as appropriate, conduct a sensitivity analysis of

    its margin models to analyze and monitor model performance and overall

    margin coverage. Sensitivity analysis shall be conducted on both actual

    and hypothetical positions.

    (2) For the purposes of this paragraph (b), a sensitivity analysis

    of a margin model includes:

    (i) Reviewing a wide range of parameter settings and assumptions

    that reflect possible market conditions in order to understand how the

    level of margin coverage might be affected by highly stressed market

    conditions. The range of parameters and assumptions should capture a

    variety of historical and hypothetical conditions, including the most

    volatile periods that have been experienced by the markets served by

    the systemically important derivatives clearing organization or subpart

    C derivatives clearing organization and extreme changes in the

    correlations between prices.

    (ii) Testing of the ability of the models or model components to

    produce accurate results using actual or hypothetical datasets and

    assessing the impact of different model parameter settings.

    (iii) Evaluating potential losses in clearing members' proprietary

    positions and, where appropriate, customer positions.

    (3) A systemically important derivatives clearing organization or

    subpart C derivatives clearing organization involved in activities with

    a more complex risk profile shall take into consideration parameter

    settings that reflect the potential impact of the simultaneous default

    of clearing members and, where applicable, the underlying credit

    instruments.

    (c) Stress tests of liquidity resources. Each systemically

    important derivatives clearing organization and subpart C derivatives

    clearing organization shall conduct stress tests of its liquidity

    resources in accordance with the following standards and practices:

    (1) Perform, on a daily basis, stress testing of its liquidity

    resources using predetermined parameters and assumptions;

    (2) Perform comprehensive analyses of stress testing scenarios and

    underlying parameters to ascertain their appropriateness for

    determining the systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's

    required level of liquidity resources in current and evolving market

    conditions;

    (3) Perform the analyses required by paragraph (c)(2) of this

    section at least monthly and when products cleared or markets served

    display high volatility or become less liquid, when the size or

    concentration of positions held by clearing members increases

    significantly, or as otherwise appropriate, evaluate its stress testing

    scenarios, models, and underlying parameters more frequently than once

    a month;

    (4) For the analyses required by paragraph (c)(1) and paragraph

    (c)(2) of this section, include a range of relevant stress scenarios,

    in terms of both defaulting clearing members' positions and possible

    price changes in liquidation periods. The scenarios considered shall

    include, but are not limited to, the following:

    (i) Relevant peak historic price volatilities;

    (ii) Shifts in other market factors including, as appropriate,

    price determinants and yield curves;

    (iii) Multiple defaults over various time horizons;

    (iv) Simultaneous pressures in funding and asset markets; and

    (v) A range of forward-looking stress scenarios in a variety of

    extreme but plausible market conditions.

    (5) For the scenarios enumerated in paragraph (c)(4) of this

    section, consider the following:

    (i) All entities that might pose material liquidity risks to the

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization, including settlement banks,

    permitted depositories, liquidity providers, and other entities,

    (ii) Multiday scenarios as appropriate,

    (iii) Inter-linkages between its clearing members and the multiple

    roles that they may play in the systemically important derivatives

    clearing organization's or subpart C derivatives clearing

    organization's risk management; and

    (iv) The probability of multiple failures and contagion effect

    among clearing members.

    (6) Establish procedures for:

    (i) Reporting stress test results to its risk management committee

    or board of directors, as applicable; and

    (ii) Using the results to assess the adequacy of, and to adjust its

    total amount of liquidity resources.

    (7) Use the results of stress tests to support compliance with the

    liquidity resources requirement set forth in Sec. 39.33(c).

    (d) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall regularly conduct

    an assessment of the theoretical and empirical properties of its margin

    model for all products it clears.

    (e) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall perform, on an

    annual basis, a full validation of its financial risk management model

    and its liquid risk management model.

    (f) Custody and investment risk. Custody and investment

    arrangements of a systemically important derivatives clearing

    organization's and subpart C derivatives clearing organization's own

    funds and assets shall be subject to the same requirements as those

    specified in Sec. 39.15 of this chapter for the funds and assets of

    clearing members, and shall apply to the derivatives clearing

    [[Page 50304]]

    organization's own funds and assets to the same extent as if such funds

    and assets belonged to clearing members.

    (g) Settlement banks. Each systemically important derivatives

    clearing organization and subpart C derivatives clearing organization

    shall:

    (1) Monitor, manage, and limit its credit and liquidity risks

    arising from its settlement banks;

    (2) Establish, and monitor adherence to, strict criteria for its

    settlement banks that take account of, among other things, their

    regulation and supervision, creditworthiness, capitalization, access to

    liquidity, and operational reliability; and

    (3) Monitor and manage the concentration of credit and liquidity

    exposures to its settlement banks.

    Sec. 39.37 Additional disclosure for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations.

    In addition to the requirements of Sec. 39.21, each systemically

    important derivatives clearing organization and subpart C derivatives

    clearing organization shall:

    (a) Complete and publicly disclose its responses to the Disclosure

    Framework for Financial Market Infrastructures published by the

    Committee on Payment and Settlement Systems and the Board of the

    International Organization of Securities Commissions;

    (b) Review and update its responses disclosed as required by

    paragraph (a) of this section at least every two years and following

    material changes to the systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's system

    or the environment in which it operates. A material change to the

    systemically important derivatives clearing organization's or subpart C

    derivatives clearing organization's system or the environment in which

    it operates is a change that would significantly change the accuracy

    and usefulness of the existing responses;

    (c) Disclose, publicly and to the Commission, relevant basic data

    on transaction volume and values; and

    (d) Disclose, publicly and to the Commission, rules, policies, and

    procedures concerning segregation and portability of customers'

    positions and funds, including whether each of:

    (1) Futures customer funds, as defined in Sec. 1.3(jjjj) of this

    chapter;

    (2) Cleared Swaps Customer Collateral, as defined in Sec. 22.1 of

    this chapter; or

    (3) Foreign futures or foreign options secured amount, as defined

    in Sec. 1.3(rr) of this chapter is:

    (i) Protected on an individual or omnibus basis or

    (ii) Subject to any constraints, including any legal or operational

    constraints that may impair the ability of the systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization to segregate or transfer the positions and related

    collateral of a clearing member's customers.

    Sec. 39.38 Efficiency for systemically important derivatives clearing

    organizations and subpart C derivatives clearing organizations.

    (a) General rule. In order to meet the needs of clearing members

    and markets, each systemically important derivatives clearing

    organization and subpart C derivatives clearing organization should

    efficiently and effectively design its:

    (1) Clearing and settlement arrangements;

    (2) Operating structure and procedures;

    (3) Scope of products cleared; and

    (4) Use of technology.

    (b) Review of efficiency. Each systemically important derivatives

    clearing organization and subpart C derivatives clearing organization

    should establish a mechanism to review, on a regular basis, its

    compliance with paragraph (a) of this section.

    (c) Clear goals and objectives. Each systemically important

    derivatives clearing organization and subpart C derivatives clearing

    organization should have clearly defined goals and objectives that are

    measurable and achievable, including in the areas of minimum service

    levels, risk management expectations, and business priorities.

    (d) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall facilitate

    efficient payment, clearing and settlement by accommodating

    internationally accepted communication procedures and standards.

    Sec. 39.39 Recovery and wind-down for systemically important

    derivatives clearing organizations and subpart C derivatives clearing

    organizations.

    (a) Definitions. For purposes of this section:

    (1) General business risk means any potential impairment of a

    systemically important derivatives clearing organization's or subpart C

    derivatives clearing organization's financial position, as a business

    concern, as a consequence of a decline in its revenues or an increase

    in its expenses, such that expenses exceed revenues and result in a

    loss that the derivatives clearing organization must charge against

    capital.

    (2) Wind-down means the actions of a systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization to effect the permanent cessation or sale or transfer or

    one or more services.

    (3) Recovery means the actions of a systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization, consistent with its rules, procedures, and other ex-ante

    contractual arrangements, to address any uncovered credit loss,

    liquidity shortfall, capital inadequacy, or business, operational or

    other structural weakness, including the replenishment of any depleted

    pre-funded financial resources and liquidity arrangements, as necessary

    to maintain the systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's

    viability as a going concern.

    (4) Operational risk means the risk that deficiencies in

    information systems or internal processes, human errors, management

    failures or disruptions from external events will result in the

    reduction, deterioration, or breakdown of services provided by a

    systemically important derivatives clearing organization or subpart C

    derivatives clearing organization.

    (5) Unencumbered liquid financial assets include cash and highly

    liquid securities.

    (b) Recovery and wind-down plan. Each systemically important

    derivatives clearing organization and subpart C derivatives clearing

    organization shall maintain viable plans for:

    (1) Recovery or orderly wind-down, necessitated by uncovered credit

    losses or liquidity shortfalls; and, separately,

    (2) Recovery or orderly wind-down necessitated by general business

    risk, operational risk, or any other risk that threatens the

    derivatives clearing organization's viability as a going concern.

    (c) (1) In developing the plans specified in paragraph (b) of this

    section, the systemically important derivatives clearing organization

    or subpart C derivatives clearing organization shall identify scenarios

    that may potentially prevent it from being able to meet its

    obligations, provide its critical operations and services as a going

    concern and assess the effectiveness of a full range of options for

    recovery or orderly wind-down. The plans shall include procedures for

    informing the Commission, as soon as practicable, when the recovery

    plan is initiated or wind-down is pending,

    [[Page 50305]]

    (2) A systemically important derivatives clearing organization or

    subpart C derivatives clearing organization shall have procedures for

    providing the Commission and the Federal Deposit Insurance Corporation

    with information needed for purposes of resolution planning.

    (d) Financial resources to support the recovery and wind-down plan.

    (1) In evaluating the resources available to cover an uncovered

    credit loss or liquidity shortfall as part of its recovery plans

    pursuant to paragraph (b)(1) of this section, a systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization may consider, among other things, assessments of

    additional resources provided for under its rules that it reasonably

    expects to collect from non-defaulting clearing members.

    (2) Each systemically important derivatives clearing organization

    and subpart C derivatives clearing organization shall maintain

    sufficient unencumbered liquid financial assets, funded by the equity

    of its owners, to implement its recovery or wind-down plans pursuant to

    paragraph (b)(2) of this section. In general, the financial resources

    required by Sec. 39.11(a)(2) may be sufficient, but the systemically

    important derivatives clearing organization or subpart C derivatives

    clearing organization shall analyze its particular circumstances and

    risks and maintain any additional resources that may be necessary to

    implement the plans. In allocating sufficient financial resources to

    implement the plans, the systemically important derivatives clearing

    organization or subpart C derivatives clearing organization shall

    comply with Sec. 39.11(e)(2). The plan shall include evidence and

    analysis to support the conclusion that the amount considered necessary

    is, in fact, sufficient to implement the plans.

    (3) Resources counted in meeting the requirements of Sec. Sec.

    39.11(a)(1) and 39.33 may not be allocated, in whole or in part, to the

    recovery plans required by paragraph (b)(2) of this section. Other

    resources may be allocated, in whole or in part, to the recovery plans

    required by either paragraph (b)(1) or paragraph (b)(2) of this

    section, but not both paragraphs, and only to the extent the use of

    such resources is not otherwise limited by the Act, Commission

    regulations, the systemically important derivatives clearing

    organization's or subpart C derivatives clearing organization's rules,

    or any contractual arrangements to which the systemically important

    derivatives clearing organization or subpart C derivatives clearing

    organization is a party.

    (e) Plan for raising additional financial resources. All

    systemically important derivatives clearing organizations and subpart C

    derivatives clearing organizations shall maintain viable plans for

    raising additional financial resources, including, where appropriate,

    capital, in a scenario in which the systemically important derivatives

    clearing organization or subpart C derivatives clearing organization is

    unable, or virtually unable, to comply with any financial resources

    requirements set forth in this part. This plan shall be approved by the

    board of directors and be updated regularly.

    Sec. 39.40 Consistency with the Principles for Financial Market

    Infrastructures.

    This subpart C is intended to establish standards which, together

    with subparts A and B of this part, are consistent with section 5b(c)

    of the Act and the Principles for Financial Market Infrastructures

    published by the Committee on Payment and Settlement Systems and the

    Board of the International Organization of Securities Commissions and

    should be interpreted in that context.

    Sec. 39.41 Special enforcement authority for systemically important

    derivatives clearing organizations.

    For purposes of enforcing the provisions of Title VIII of the Dodd-

    Frank Act, a systemically important derivatives clearing organization

    shall be subject to, and the Commission has authority under the

    provisions of subsections (b) through (n) of section 8 of the Federal

    Deposit Insurance Act (12 U.S.C. 1818) in the same manner and to the

    same extent as if the systemically important derivatives clearing

    organization were an insured depository institution and the Commission

    were the appropriate Federal banking agency for such insured depository

    institution.

    Sec. 39.42 Advance notice of material risk-related rule changes by

    systemically important derivatives clearing organizations.

    A systemically important derivatives clearing organization shall

    provide notice to the Commission in advance of any proposed change to

    its rules, procedures, or operations that could materially affect the

    nature or level of risks presented by the systemically important

    derivatives clearing organization, in accordance with the requirements

    of Sec. 40.10 of this chapter.

    0

    5. Redesignate the Appendix to Part 39 as Appendix A to Part 39.

    0

    6. Add appendix B to Part 39 to read as follows:

    Appendix B to Part 39--Subpart C Election Form

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    BILLING CODE 6351-01-C

    PART 140--ORGANIZATION, FUNCTIONS AND PROCEDURES OF THE COMMISSION

    0

    7. The authority citation for part 140 continues to read as follows:

    Authority: 7 U.S.C. 2 and 12a.

    0

    8. Amend Sec. 140.94 to add new paragraphs (c)(12), (c)(13) and

    (c)(14) as follows:

    Sec. 140.94 Delegation of authority to the Director of the Division

    of Clearing and Risk.

    * * * * *

    (c) * * *

    (12) All functions reserved to the Commission in Sec. 39.31 of

    this chapter; and

    (13) The authority to approve the application described in Sec.

    39.34(d) of this chapter.

    * * * * *

    PART 190--BANKRUPTCY

    0

    9. The authority citation for part 190 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24,

    and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise

    noted.

    0

    10. In Sec. 190.09, revise paragraph (b) to read as follows:

    Sec. 190.09 Member property.

    * * * * *

    (b) Scope of member property. Member property shall include all

    money, securities and property received, acquired, or held by a

    clearing organization to margin, guarantee or secure, on behalf of a

    clearing member, the proprietary account, as defined in Sec. 1.3 of

    this chapter, any account not belonging to a foreign futures or foreign

    options customer pursuant to the proviso in Sec. 30.1(c), and any

    Cleared Swaps Proprietary Account, as defined in Sec. 22.1: Provided,

    however, that any guaranty deposit or similar payment or deposit made

    by such member and any capital stock, or membership of such member in

    the clearing organization shall also be included in member property

    after payment in full, in each case in accordance with the by-laws or

    rules of the clearing organization, of that portion of:

    (1) The net equity claim of the member based on its customer

    account; and

    (2) Any obligations due to the clearing organization which may be

    paid therefrom, including any obligations due from the clearing

    organization to the customers of other members.

    Issued in Washington, DC on August 12, 2013, by the Commission.

    Melissa D. Jurgens,

    Secretary of the Commission.

    Appendix to Notice of Proposed Rulemaking on Derivatives Clearing

    Organizations and International Standards--Commission Voting Summary

    Note: The following appendix will not appear in the Code of

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton,

    O'Malia, and Wetjen voted in the affirmative.

    [FR Doc. 2013-19845 Filed 8-15-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: August 16, 2013



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