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

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

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

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

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

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

[email protected]; Tracey Wingate, Special Counsel, DCR, at 202-418-

5319 or twi[email protected]; or Kathryn L. Ballintine, Attorney-Advisor,

DCR, at 202-418-5575 or [email protected], in each case, at the

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

Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Regulatory Framework for Registered DCOs

B. Designation of DCOs as Systemically Important Under Title

VIII of the Dodd-Frank Act

C. Existing Standards for SIDCOs

D. DCO Core Principles and 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/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.

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

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

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

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

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

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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\

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\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.

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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).

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\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.

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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\

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\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.

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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\

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\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.

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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.

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\72\ Id.

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

\74\ See id.

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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\

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\75\ PFMIs at Principle 14.

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

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

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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

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\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.

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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\

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\81\ PFMIs at Principle 16.

\82\ Id.

\83\ Id.

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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\

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\84\ PFMIs, ] 2.9.

\85\ PFMIs at Principle 17.

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

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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\

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

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

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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.

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

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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\

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\90\ PFMIs at Principle 23.

\91\ See Disclosure Framework and Assessment Methodology, supra

note 41.

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

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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\

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\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.

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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\

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\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.

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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.

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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.

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

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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.'').

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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\

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\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.

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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.

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\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).

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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.

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\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.

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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\

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\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.

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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.

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\119\ See supra note 19.

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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.

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\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.''

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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\

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

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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.''

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\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.

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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.

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\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.

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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.

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\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.

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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.

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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.

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\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.

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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).

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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.

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\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.

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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\

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\132\ See, e.g., 17 CFR 39.3(a)(5) (setting forth those portions

of DCO Registration Applications that are considered public

information).

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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\

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\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).

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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\

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\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.

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As discussed above, DCO Core Principle O states that each DCO must

establish governance arrangements that are transparent to fulfill

public interest requirements and to permit the 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\

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\135\ See supra Section I.D.6.

\136\ PFMIs at Principle 2, K.C. 4-5.

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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\

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\137\ The provisions concerning transparency describe which

information, including the identities of board members, should be

disclosed to the public and/or the Commission.

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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.

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\138\ See SIDCO Final Rule.

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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.

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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.

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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.

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\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.

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Under proposed paragraph (c)(3)(ii), a SIDCO or Subpart C DCO would

be required to take appropriate steps to verify that its qualifying

liquidity arrangements do not include material adverse change

provisions and are enforceable, and will be highly reliable, even in

extreme but plausible market conditions. 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\

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\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.'').

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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\

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\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.

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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.

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\148\ See PFMI Principle 7, K.C. 5.

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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.

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\149\ See SIDCO Final Rule.

\150\ Id.

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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.

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\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.

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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:

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\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.

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\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.

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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.

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\155\ See discussion of Principles 4 and 6 supra Sections I.E.4,

I.E.5.

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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).

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\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.

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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\

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\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).

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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.

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\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.

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Specifically, proposed regulation 39.37 would require SIDCOs and

Subpart C DCOs to disclose certain information to the public and to the

Commission. First, consistent with Principle 23, a SIDCO or Subpart C

DCO would be required to disclose its responses to the CPSS-IOSCO

Disclosure Framework, 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\

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\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).

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Also under proposed regulation 39.37, a SIDCO or Subpart C DCO

would be required, consistent with Principle 14, to publish its rules,

policies, and procedures describing whether customer funds are

protected on an individual or omnibus basis and whether customer funds

are subject to any legal or operational constraints that may impair the

ability of the SIDCO or Subpart C DCO to segregate or port the

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.

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\163\ See PFMIs at E.N. 3.14.1.

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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.

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\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.

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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).

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\167\ PFMIs at E.N. 3.21.1.

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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\

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\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.

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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.

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\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).

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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.

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\173\ This is consistent with the approach taken in Sec.

39.11(b)(3).

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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.

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\174\ See SIDCO Final Rule.

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

Changes by Systemically Important Derivatives Clearing Organizations)

The Commission 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.

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\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).

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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\

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\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/.

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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.

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\179\ See 35 U.S.C. 3501(2) and (3).

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It should be noted that among the thirteen DCOs presently

registered with the Commission, only two are SIDCOs. Moreover, not all

remaining DCOs or all DCO Applicants are likely to elect to become

Subpart C DCOs (for example, DCOs that are based outside of the U.S.

may seek to obtain QCCP status through regulation by their home country

regulator). Thus, the burden calculations herein are based on an

estimate of how many DCOs are SIDCOs and how 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

[email protected] (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.

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\183\ 7 U.S.C. 19(a).

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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\

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\184\ See supra Section I.G.

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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.

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\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).

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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.

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\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.

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\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.

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\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.

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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.

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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.

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\197\ See supra Section II.F (discussing proposed regulation

39.34).

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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.

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\198\ See supra Section II.G (discussing proposed regulation

39.35).

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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.

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\199\ See supra Section II.H (discussing proposed regulation

39.36).

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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.

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\200\ See supra Section II.I (discussing proposed regulation

39.37).

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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).

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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\

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\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.

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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)

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\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.

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\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.

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\206\ See supra Section II.D (discussing proposed regulation

39.32).

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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.

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\207\ See supra Section II.E (discussing proposed revised

regulation 39.33).

\208\ See supra Section I.B.

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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.

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\194\ See supra Section II.F (discussing proposed regulation

39.34).

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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.

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\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).

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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.

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\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).

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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.

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\217\ See Section 802(a)(4) of the Dodd-Frank Act (Congressional

Findings).

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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,

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(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.

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5. Redesignate the Appendix to Part 39 as Appendix A to Part 39.

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6. Add appendix B to Part 39 to read as follows:

Appendix B to Part 39--Subpart C Election Form

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PART 140--ORGANIZATION, FUNCTIONS AND PROCEDURES OF THE COMMISSION

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7. The authority citation for part 140 continues to read as follows:

Authority: 7 U.S.C. 2 and 12a.

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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

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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.

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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]

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Last Updated: August 16, 2013