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The DCR program oversees the clearing of futures, options on futures, and swaps by derivatives clearing organizations (DCOs) and other market participants that may pose risk to the clearing process including futures commission merchants, swap dealers, major swap participants and large traders.  The DCR staff  prepare proposed regulations, orders, guidelines, and other regulatory work products on issues pertaining to DCOs; review DCO applications and rule submissions and make recommendations to the Commission; make determinations and recommendations to the Commission to which types of swaps should be cleared; make determinations and recommendations to the Commission as to the initial eligibility or continuing qualification of a DCO to clear swaps; assess compliance by DCOs with the CEA and Commission regulations, including examining systemically important DCOs at least once a year; and conduct risk assessment and financial surveillance to identify, quantify, and monitor the risks posed by DCOs, clearing members, and market participants and its financial impact.

Clearing and Risk Request
($ in thousands)

	FY 2011 Actual			FY 2012 Base		FY 2013 Request
	Budget	Positions	FTE	Budget	FTE	Budget	FTE
Clearing and Risk	$11,296	54	50	$12,705	56	$24,220	103

Clearing and Risk Request by Mission Activity
($ in thousands)

Mission Activity	FY 2012 Base		FY 2013 Request		Change
	Budget	FTE	Budget	FTE	Budget	FTE
Clearing and Risk	$12,705	56	$24,220	103	$11,515	47
Review of Products and Rules of Operation					$2,940	12
Data  Acquisition, Analytics, and Surveillance					$2,450	10
Examinations					$5,880	24
Economic and Legal Analysis					$245	1

Mandatory clearing determination. DFA imposes a new requirement on the CFTC to review, evaluate, and make a determination concerning a swap as to whether the swap should be cleared — i.e., a mandatory clearing determination — as well as evaluate the continuing qualification of the DCO to clear such a swap. As noted above, data from the Bank for International Settlements indicates that the total notional amount of over-the-counter derivatives outstanding as of the end of December 2010 is $415 trillion for interest rates; $29 trillion for credit default swaps and $2 trillion for commodities.  The Commission will deploy seven current FTE to this high-priority activity that will require the review of data relating to pricing, outstanding notional exposures, and trading liquidity. In addition, DCR requests an additional eight FTE to support this effort.

Registration of derivatives clearing organizations, rules review, applications for portfolio margining. CFTC will be required to review, evaluate and make recommendations to the Commission in response to applications for registration as DCOs and in response to rule submissions submitted by them.  As noted earlier, the Commission is anticipating an increase in the number of DCOs, from 17 to 18 for the beginning of FY 2013.  Further, the Dodd-Frank Act amended the CEA to permit, pursuant to an exemption, rule or regulation, futures and options on futures to be held in a portfolio margining account that is carried as securities account and approved by the Securities and Exchange Commission, and added a reciprocal provision to the Securities Exchange Act of 1934.  The Commission also will be required to process portfolio margining applications in accordance with rules that will implement these statutory provisions. On average, these applications take about six months to one year to process.

Risk Surveillance of futures, options and cleared swaps. The CFTC will have to conduct risk surveillance of futures and options and cleared swaps.  It is estimated that the notional value of cleared swaps that will require surveillance is about seven times that of futures and options.  This responsibility will be discharged through the use of automated surveillance systems and applications and other risk assessment tools to assess, evaluate and report financial and market risk and risk management procedures at DCOs, clearing futures commission merchants, non-futures commission merchant clearing participants, and other market participants that may pose a risk to the clearing process, including swap dealers, major swap participants, and large traders. Current financial and risk surveillance systems will be modified to monitor volatility, variation margin, and increased financial reporting. The Commission anticipates that it will require six teams to discharge this responsibility in a comprehensive manner. Risk surveillance will approximately be divided by asset class, e.g., interest rates (eight FTE), equity index products (four FTE), foreign currencies (four FTE), broad-based index CDs (eight FTE), agricultural products (two FTE), energy products (six FTE), and metals products (two FTE).   DCR currently has 23 FTE performing this function and seeks an additional 10 FTE in FY 2013.

The Commission’s current financial and risk surveillance applications were designed to address futures and options on futures products.  Unlike futures margin setting where each DCO uses the same application to margin positions, each DCO margining swaps positions will be using a unique margin methodology and a unique way to stress test positions. Futures and swaps risk management software will be implemented to enable the CFTC to analyze margin requirements; determine price impact on portfolios; conduct margin trend analyses and back testing; and stress test swaps positions - including interest rate swaps, energy swaps and credit default swaps.

Derivatives Clearing Organizations. The DFA requires annual examinations of systemically important DCOs.  DCOs that are determined to be systemically important under Title VIII of DFA must comply with heightened risk management and prudential standards concerning payment, clearing, and settlement supervision. The mandatory annual examinations of systemically important DCOs must review the entities’ adherence to these heightened standards. Title VIII also requires ongoing consultation between the CFTC, the SEC, and the Board of Governors of the Federal Reserve System, including the scope and methodology of planning examinations of systemically important entities.  The Commission currently anticipates no more than four entities will be determined to be systemically important.

The Commission currently has 14 staff on board to conduct examinations of DCOs.  On average, an examination requires a team of eight FTE dedicated for six months.  Examinations of larger entities, particularly those determined to be systemically important, will require 12 to 16 FTE and up to a year to complete.

While the Commission ultimately will seek resources to perform annual reviews of all major DCOs, the Commission is currently seeking an increase of 24 FTE to support annual examinations of the four systemically important entities.  Including the 14 staff on-board, the Commission will be able to provide 10 FTE per review team, for a 12 month period.  As the Commission gains experience with the Dodd-Frank requirements, additional resources may be required or resources could be deployed to support reviews of other clearing organizations.

Commission-wide legal counsel. FY 2013 will be the first full year under DFA rules.  The complexity and scope of the Commission’s regulatory framework, pursuant to its new statutory mandate, will meet with the day-to-day reality of a significantly expanded and global marketplace, including fundamental changes to historically regulated entities as well as to participants in the previously unregulated swap markets. 

Interpretation and Guidance. Market participants will have requests for clarification and guidance once the new regulations are adopted and during the implementation period.  Based on experience over the years with the implementation of other new registration schemes (e.g., for commodity pool operators and commodity trading advisors, for introducing brokers, and for retail foreign exchange dealers), there are bound to be questions arising that need a response – whether informally, by way of email or telephonic inquiry, or formally, by way of a staff-issued interpretative, no-action or exemptive letter or a Commission-issued order or regulation (or amendment thereto).  Because of the tremendous consequences of not providing adequate support for new regulated entities, the Commission is requesting resources to ensure prompt, well-reasoned and accurate responses.  Also, because many of these issues will be questions of first impression, the time taken to provide responses to the issues will be longer than it is today.  The Commission also anticipates the need to be actively involved in the preparation of interpretations relating to jurisdictional issues arising under the Dodd-Frank Act amendments to the CEA.  Timeliness is key to minimizing disruption to the orderly workings of the marketplace.

Led eight Commission rulemaking teams to develop regulations mandated by the Dodd-Frank Act in the following regulatory areas: Segregation and Bankruptcy; DCO Core Principles; Governance and Possible Limits on Ownership and Control;  Systemically Important DCO Rules Authorized under Title VIII;  Portfolio Margining Procedures; Conforming Rules; Client Clearing Documentation; and Clearing Member Risk Management.

Reviewed the application for registration as a DCO of the CME Clearing Europe Limited and recommended to the Commission that registration be granted.  The Commission issued an Order granting CME Clearing Europe Limited registration as a DCO effective September 2, 2011.   Under the terms of the Order, CME Clearing Europe Limited is authorized to clear swaps on energy, agricultural, freight and metals products as specified by the Order, in addition to authorization to clear forward contracts on such products.

Reviewed the application for registration as a DCO of the New York Portfolio Clearing LLC Limited and recommended to the Commission that registration be granted.  The Commission issued an Order granting New York Portfolio Clearing LLC registration as a DCO effective January 31, 2011.   Under the terms of the Order, New York Portfolio Clearing LLC is authorized to clear U.S. dollar-dominated interest rate futures contracts traded on NYSE Liffe U.S.

Initiated examinations of seven DCOs - CME Clearing House, ICE Clear Europe Limited, ICE Clear US, LCH.Clearnet Ltd, Kansas City Board of Trade Clearing Corporation, North American Derivatives Exchange Inc, and International Derivatives Clearinghouse LLC – to evaluate their compliance with the Commodity Exchange Act and Commission regulations, including applicable Core Principles.

Prepared notice of proposed rulemaking for amendments to Commission regulations for Investment of Customer Funds (published November 3, 2010).

Contributed to the development of the interagency report on "Risk Management Supervision of Designated Clearing Entities," a report mandated under Title VIII of the Dodd-Frank Act.

Developed an "option tree" that performs analysis on complex option positions and produces a simplified output that allows risk analysts to identify each type of risk.

Complete and issue final regulations mandated by Dodd-Frank Act in the following regulatory areas:  Segregation and Bankruptcy; DCO Core Principles; Governance and Possible Limits on Ownership and Control; Systemically Important DCO Rules Authorized under Title VIII;  Portfolio Margining Procedures; Conforming Rules; Client Clearing Documentation; and Clearing Member Risk Management.
 
Complete and issue final regulations for Investment of Customer Funds and Acknowledgment Letters.

Complete and issue report of findings on examinations of DCOs commenced in FY 2011, and initiate examinations of five DCOs to evaluate their compliance with the Commodity Exchange Act and Commission regulations, including applicable Core Principles. 

Complete the review of applications for registration as a DCO from the Eurex Clearing AG to clear swaps and from the LCH.Clearnet SA to clear credit default swaps and make recommendations to the Commission as to whether registration should be granted.

Review, evaluate and make determinations concerning the mandatory clearing of swaps from product categories such as interest rate and currency products, credit and equity products, and commodity products.

Review, evaluate and make public interest determination regarding exemption pursuant to CEA §4(c)(6) for Regional Transmission Organizations operating pursuant to Federal Energy Regulatory Commission and Public Utility Commission of Texas Tariffs.

Review DCOs that clear swaps to evaluate and to make determinations concerning the acceptance of a swap for clearing on the DCO as to its eligibility or continuing qualification of the DCO to clear such a swap.

Review, evaluate and make determinations concerning portfolio margining applications, including the review and assessments of margin models, methodologies, and systems used by DCOs for purposes of calculating margin requirements and monitoring and managing risk.

Review, evaluate and make determinations concerning requests to commingle futures and swaps positions pursuant to DCO rules or Commission 4d order and concerning quarterly financial resource reports filed by each DCO.

Review, as part of the Designations Committee of the Financial Stability Oversight Council, six DCOs to determine whether they are systemically important.

Develop and implement risk assessment and evaluation application tools necessary to evaluate on an ongoing basis the risk of new cleared swap contracts, including the capacity to identify required data to be transmitted by the appropriate market participants, to identify the enhancements that will required of existing risk surveillance applications, and to identify third party software that may be appropriate for these tasks.   

Develop and issue rulemakings, orders, interpretations, and other regulatory work product related to the DCOs, clearing, and product review.

Review, evaluate and make determinations concerning the mandatory clearing of swaps from product categories such as interest rate and currency products, credit and equity products, and commodity products.

Review, evaluate and make determinations concerning portfolio margining applications, including the review and assessments of margin models, methodologies, and systems used by DCOs for purposes of calculating margin requirements and monitoring and managing risk.

Initiate examinations of four DCOs that are determined to be systemically important, i.e., designated clearing entities, to evaluate their compliance with heightened risk management, prudential standards concerning payment, clearing and settlement supervision, and advance notice of changes to their rules, procedures, or operations.

Review, evaluate and make determinations concerning requests to commingle futures and swaps positions pursuant to DCO rules or Commission 4d order; concerning quarterly financial resource reports filed by each DCO; and concerning the annual compliance report filed by each DCO.

Develop procedures for conducting firm level stress test across all registered DCOs.

 

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