[Federal Register Volume 75, Number 140 (Thursday, July 22, 2010)]
[Proposed Rules]
[Pages 42633-42639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-17606]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 38, 39, and 40

RIN 3038-AC91


Business Continuity and Disaster Recovery

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is proposing a rule that would establish standards for 
recovery and resumption of trading and clearing operations by 
designated contract markets (``DCMs'') and registered derivatives 
clearing organizations (``DCOs'') that the Commission determines to be 
critical financial markets or core clearing and settlement 
organizations in the event of a wide-scale disruption affecting such 
entities' trading or clearing operations. These proposed standards 
would require such entities to maintain business continuity and 
disaster recovery resources sufficient to meet a same-day recovery time 
objective for trading and clearing, and maintain geographic dispersal 
of infrastructure and personnel sufficient to enable achievement of a 
same-day recovery time objective, in the event of a wide-scale 
disruption. The proposed amendments also revise application guidance 
and acceptable practices under the Core Principles for DCMs relating to 
business continuity and disaster recovery matters that would harmonize 
acceptable practices for DCMs and DCOs.

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

ADDRESSES: Comments should be sent to David Stawick, Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581. Comments may be submitted via e-mail 
at [email protected]. ``Business Continuity and Disaster Recovery'' must be 
in the subject field of responses submitted via e-mail, and clearly 
indicated on written submissions. Comments may also be submitted at 
http://www.regulations.gov. All comments must be submitted in English, 
or if not, accompanied by an English translation.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate 
Director, Division of Clearing and Intermediary Oversight, 202-418-
5092, [email protected]; David Taylor, Special Counsel, Division of 
Market Oversight, 202-418-5488, [email protected]; Jocelyn Partridge, 
Special Counsel, Division of Clearing and Intermediary Oversight, 202-
418-5926, [email protected]; or Cody J. Alvarez, Attorney Advisor, 
Division of Market Oversight, 202-418-5404, [email protected]; 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

    While the experience of the Commission is that DCMs and DCOs 
registered with it maintain adequate business continuity and disaster 
recovery (``BC-DR'') programs, the Commission believes that additional 
regulatory steps should be taken to further improve the resiliency and 
recovery capabilities of registered entities, particularly those 
organizations which meet the financial sector's accepted definitions of 
``critical financial markets'' and ``core clearing and settlement 
organizations.'' \1\ These accepted definitions come from the 
Interagency Paper on Sound Practices to Strengthen the Resilience of 
the U.S. Financial System, commonly known as the ``White Paper,'' that 
was issued by the Board of Governors of the Federal Reserve System 
(``Fed''), the Department of the Treasury (``Treasury''), and the 
Securities and Exchange Commission (``SEC'') in 2003.\2\ Although the 
Commission did not participate in the issuance of the White Paper, the 
Commission has determined that it would be appropriate to apply 
standards analogous to those set forth in the White Paper to DCMs and 
DCOs.\3\
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    \1\ See infra note 2.
    \2\ 68 FR 17809 (April 11, 2003). The White Paper considers new 
risks present in the post-September 11 environment, addresses steps 
needed to strengthen the overall resilience of the U.S. financial 
system in the event of a wide-scale disruption, and is the principal 
source of common business continuity and disaster recovery standards 
applicable across the U.S. financial sector.
    \3\ Because there are no Derivatives Transaction Facilities 
(``DTEFs'') currently registered with the Commission, the Commission 
has chosen to refrain from similarly modifying any regulations or 
guidance applicable to DTEFs at this time.
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B. Standards Established by Regulators of Comparable Financial Entities

    The White Paper explained that critical financial markets are those 
markets that provide the means for financial institutions to adjust 
their cash and securities positions and those of their customers in 
order to manage liquidity, market, and other risks to their 
organizations, and provide support for the provision of a wide range of 
financial services to U.S. businesses and consumers. The White Paper 
defined ``critical financial markets'' as ``markets for [(1)] federal 
funds, foreign exchange, and commercial paper; [(2)] U.S. government 
and agency securities; and [(3)] corporate debt and equity 
securities.'' \4\ ``Core clearing and settlement organizations'' are 
those that (a) provide clearing and settlement services for critical 
financial markets, or (b) act as large-value payment systems operators 
and present systemic risk should they be unable to perform.\5\ This 
proposal would apply these White Paper standards to futures markets 
related to the aforementioned instruments and extend it to futures 
markets for essential physical commodities.
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    \4\ See 68 FR at 17811.
    \5\ See id. at 17811.
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    The Commission believes that some of the registered entities 
regulated by the Commission may be ``critical financial markets'' or 
``core clearing and settlement organizations.'' They provide the means 
for financial institutions to adjust their financial positions and 
those of their customers in order to manage liquidity, market, and 
other risks, and provide support for provision of a wide range of 
financial services to U.S. businesses and consumers. Their products 
include futures on U.S. government and agency securities, equity 
indexes, foreign exchange and physical commodities that comprise 
critical components of the world financial system. For these reasons, 
it might present unacceptable risks to the U.S. financial system if 
these entities were to become inoperative and unavailable for an 
extended period of time for any reason up to and including a wide-scale 
disruption. The ability of critical financial markets and core clearing 
and settlement organizations to recover and resume trading and clearing 
promptly in the event of a wide-scale

[[Page 42634]]

disruption is important to the U.S. economy.
    The White Paper calls for core clearing and settlement 
organizations to have the capacity to meet a same-day recovery time 
objective (``RTO''); that is, the capacity to recover and resume 
clearing and settlement activities within the business day on which the 
disruption occurs.\6\ Further, the White Paper recognizes that the 
ability to meet a same-day RTO during a wide-scale disruption requires 
an appropriate level of geographic diversity between primary and backup 
sites, with the latter as far away as necessary to avoid being subject 
to the same set of risks as the primary site. Backup sites should not 
rely on the same transportation, telecommunications, power, water, or 
other critical infrastructure components as the primary location. In 
addition, operation of the backup site should not be impaired by a 
wide-scale evacuation at, or the inaccessibility of staff that service, 
the primary site. Therefore, the White Paper calls for core clearing 
and settlement organizations to maintain backup facilities that are a 
significant distance away from their primary facilities, a distance 
sufficient to address the risk that a wide-scale disruption could make 
the organization's labor pool across the entire metropolitan or other 
geographic area of the primary site (including adjacent communities 
economically integrated with it) unavailable to support achievement of 
the organization's RTO.\7\
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    \6\ The White Paper also mentions, as an aspirational ``overall 
goal,'' an RTO of two hours for core clearing and settlement 
organizations.
    \7\ See generally, White Paper, 68 FR at 17813.
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    While the White Paper defines critical financial markets, it 
establishes an RTO only for core clearing and settlement organizations. 
The Policy Statement: Business Continuity Planning for Trading Markets 
issued by the Securities and Exchange Commission (``SEC Policy 
Statement'') establishes an RTO and a geographic dispersal of disaster 
recovery resources requirement for U.S. securities markets.\8\ The SEC 
Policy Statement recognizes that U.S. securities markets collectively 
constitute critical financial markets. It establishes a next-day, 
rather than same-day, RTO for securities markets because securities 
trading is ``relatively fungible across markets,'' since most 
securities are traded on more than one market.\9\ As a result, if 
trading on one securities market were incapacitated, that trading could 
be shifted to one or more of the other securities markets. By contrast, 
trading of futures is generally not fungible across markets. The 
geographic dispersal requirement for securities markets set in the SEC 
Policy Statement is the same as that set forth in the White Paper for 
core clearing and settlement organizations.
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    \8\ See 68 FR 56656 (October 1, 2003) (Release No. 34-48545; 
File No. S7-17-03).
    \9\ We understand that an exception to this general observation 
is the listing and trading of certain index option products that may 
be subject to exclusive licensing arrangements.
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 C. Applicable Provisions of the Commodity Exchange Act

    The Commodity Exchange Act (``CEA'' or ``Act'') provides for the 
protection of the ``public interest'' through a system of effective 
self-regulation of trading facilities, clearing systems and markets 
participants under Commission oversight. As specifically set forth in 
the Act, ensuring the integrity of the futures markets and the 
avoidance of systemic risk are critical functions of the 
Commission.\10\ Accordingly, the Commission believes that this proposal 
relating to BC-DR standards is essential for the proper functioning of 
the futures markets and the U.S. financial system.
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    \10\ Section 3(b), 7 U.S.C. 5(c). Congress gave the Commission 
broad authority in Section 8a(5) of the Act, 7 U.S.C. 12a(5), to 
make and promulgate rules, such as those contained in this Proposal, 
that are reasonably necessary to prevent disruptions to market 
integrity, ensure the financial integrity of futures and options 
transactions and promote the avoidance of systemic risk.
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    The BC-DR requirements currently applicable to DCMs are set forth 
in Core Principle 6, Emergency Authority (``Core Principle 6''),\11\ 
Core Principle 9, Execution of Transactions (``Core Principle 9''),\12\ 
and Part 38 of the Commission's Regulations. The BC-DR requirements 
currently applicable to DCOs are set forth in Core Principle I, System 
Safeguards (``Core Principle I'') \13\ and Part 39 of the Commission's 
Regulations. Pursuant to these provisions, DCMs and DCOs are required 
to have appropriate emergency authority, emergency procedures, backup 
facilities, and disaster recovery plans. Such entities must also ensure 
the proper functioning, adequate capacity, and security of their 
automated trading and clearing systems, and conduct adequate testing 
and review of those systems.
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    \11\ 7 U.S.C. 7(d)(6).
    \12\ 7 U.S.C. 7(d)(9).
    \13\ 7 U.S.C. 7a-1(c)(2)(I).
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    With respect to DCMs, Core Principle 6, Emergency Authority, 
requires DCMs to adopt rules providing for the exercise of emergency 
authority. The Application Guidance set forth in Appendix B to Part 38 
of the Commission's Regulations relating to Core Principle 6 notes that 
this authority should allow the DCM to ``intervene as necessary to 
maintain markets with fair and orderly trading as well as procedures 
for carrying out the intervention.'' \14\ Core Principle 9, Execution 
of Transactions, also requires DCMs to ``provide a competitive, open, 
and efficient market and mechanism for executing transactions.'' 
Consistent with Core Principle 9, DCMs are required to periodically 
test and review automated systems to ensure proper system functioning, 
adequate capacity, and security.\15\
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    \14\ See Application Guidance set forth in Appendix B to Part 38 
of the Commission's Regulations relating to Core Principle 6.
    \15\ See Application Guidance set forth in Appendix B to Part 38 
of the Commission's Regulations relating to Core Principle 9.
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    With respect to DCOs, Core Principle I, System Safeguards, requires 
DCOs to maintain ``a program of oversight and risk analysis to ensure 
that the automated systems of the [DCO] function properly and have 
adequate capacity and security.'' It also requires DCOs to ``maintain 
emergency procedures and a plan for disaster recovery, and to 
periodically test backup facilities sufficient to ensure daily 
processing, clearing, and settlement of transactions.'' \16\
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    \16\ See Section 5b(c)(2)(I) of the Act, 7 U.S.C. 7a-1(c)(2)(I).
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    In the near-decade that has passed since the Act's Core Principles 
were established by the Commodity Futures Modernization Act of 2000 
(``CFMA''),\17\ historical events have resulted in substantial and 
important changes in BC-DR standards for financial sector 
organizations. The events of September 11, 2001, the Northeast regional 
power outages of 2003, the economic events of 2008-2009, and the 
current rise in cyber threats have resulted in important lessons 
learned, and in changed thinking about how normal financial institution 
operations could be disrupted, and the preparedness principles that 
should be followed to ensure the financial sector's ability to recover 
and resume operations promptly after a disruption. In light of these 
developments, and of the vital importance of critical financial markets 
and core clearing and settlement organizations to the national economy, 
the Commission believes that the additional, new standards proposed for 
those DCMs and DCOs that the Commission may determine to be critical 
financial markets or core clearing and settlement organizations are 
essential to ensure the capacity of such entities to recover and resume 
operations promptly in the event they are affected by a wide-scale 
disruption.

[[Page 42635]]

The Commission also believes that, to better ensure the resiliency of 
futures and options trading and the ability of the industry to respond 
to current threats to its operations, the application guidance and 
acceptable practices language concerning BC-DR standards applicable to 
all DCMs should be updated and harmonized with the BC-DR standards 
applicable to DCOs. The proposed amendments to the existing BC-DR 
standards for all DCMs also seek to better explain those standards 
through the use of current terms of art with respect to BC-DR matters. 
The Commission believes the approach to BC-DR standards taken by the 
White Paper and the SEC Policy Statement, particularly with respect to 
the recovery time objective and geographic dispersal requirements 
needed to provide resiliency in the event of a wide-scale disruption, 
is appropriate for the Commission to take in adopting requirements 
applicable to registered entities that are critical financial markets 
or core clearing and settlement organizations.
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    \17\ See Public Law 106-554 (December 21, 2000).
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    The Commission believes that certain DCMs and DCOs may be critical 
financial markets or core clearing and settlement organizations. Some 
DCMs and DCOs provide the means for financial institutions to adjust 
their financial positions and those of their customers in order to 
manage liquidity, market, and other risks, and provide support for 
provision of a wide range of financial services to U.S. businesses and 
consumers. The available products include futures contracts and related 
options on U.S. government and agency securities, equity indexes, 
foreign exchange and physical commodities that comprise critical 
components of the world financial system. For these reasons, it might 
present unacceptable risks to the U.S. financial system if such DCMs or 
DCOs were to become inoperative and unavailable for an extended period 
of time for any reason up to and including a wide-scale disruption, and 
their ability to recover and resume trading and clearing promptly in 
the event of a wide-scale disruption may be critically important to the 
U.S. economy. Mitigating systemic risk through the application of 
consistent, same-day RTOs for clearing and settlement activities across 
the nation's critical financial markets in the event of a wide-scale 
disruption may be important to financial sector resiliency. Sufficient 
geographic dispersal of BC-DR resources, including both technology and 
personnel, is an essential means of ensuring that critical financial 
markets and core clearing and settlement organizations have the ability 
to recover and resume trading and clearing within a same-day RTO.

II. Proposed New Regulation 40.9

    The Commission proposes amendments to Part 40 of its Regulations as 
follows: (1) The addition of new definitions in Regulation 40.1; (2) 
adoption of new Regulation 40.9 setting forth same-day RTO and 
geographic dispersal requirements for critical financial markets and 
core clearing and settlement organizations; and (3) the adoption of new 
Appendix E providing guidance regarding the Commission's determination 
of critical financial markets and core clearing and settlement 
organizations. The Commission also proposes to amend the application 
guidance provided in Appendix B to Part 38 and Appendix A to Part 39 of 
the Commission's regulations to incorporate the new Part 40 
requirements.
    Five new definitions are proposed to be added to Regulation 40.1. 
The terms defined include ``critical financial market,'' ``core 
clearing and settlement organization,'' ``relevant area,'' ``recovery 
time objective,'' and ``wide-scale disruption.''
    Proposed Regulation 40.1(j) would define ``critical financial 
market'' to mean a DCM that provides the means for financial 
institutions to adjust their financial positions and those of their 
customers in order to manage liquidity, market, and other risks to 
their organizations, and provides support for the provision of a wide 
range of financial services to businesses and consumers in the United 
States, particularly including markets whose trading impacts federal 
funds, foreign exchange, commercial paper, U.S. government and agency 
securities, corporate debt, equity securities, or physical commodities 
of broad, major importance to the national or international economy.
    Proposed Regulation 40.1(k) would define ``core clearing and 
settlement organization'' as a DCO that provides clearing and 
settlement services integral to a critical financial market (or to 
multiple DCMs that are critical financial markets on a collective 
rather than individual basis).
    Proposed Regulation 40.1(l) would define ``relevant area,'' for the 
purposes of Part 40, as the metropolitan or other geographic area 
within which a critical financial market or core clearing and 
settlement organization has physical infrastructure or personnel 
necessary for it to, as appropriate, (a) conduct electronic trading, 
(b) disseminate market data and provide price reporting, (c) conduct 
electronic surveillance and maintain access to audit trail information, 
or (d) conduct activities necessary to the clearance and settlement of 
existing and new contracts, including communities economically 
integrated with, adjacent to, or within normal commuting distance of 
that metropolitan or other geographic area.
    Proposed Regulation 40.1(m) would define ``recovery time 
objective'' as the time period within which an entity should be able to 
achieve recovery and resumption of, as appropriate, (a) electronic 
trading, (b) market data dissemination and price reporting, (c) access 
to audit trail information and electronic surveillance tools, or (d) 
clearing and settlement of existing and new contracts, after those 
capabilities become temporarily inoperable for any reason up to or 
including a wide-scale disruption.
    Proposed Regulation 40.1(n) would define ``wide-scale disruption'' 
to mean an event that causes a severe disruption or destruction of 
transportation, telecommunications, power, water, or other critical 
infrastructure components in a relevant area, or an event that results 
in the evacuation or unavailability of the population in a relevant 
area.
    Proposed Regulation 40.9(a) would require any registered entity 
that the Commission determines is a critical financial market or core 
clearing and settlement organization to maintain a disaster recovery 
plan and BC-DR resources, including infrastructure and personnel, 
sufficient to enable it to achieve a same-day RTO in the event of a 
wide-scale disruption affecting the relevant area of any of its normal-
use trading or clearing operations.
    Proposed Regulation 40.9(b) would provide that a same-day RTO is 
one calling for recovery and resumption of trading and clearing within 
the business day on which the disruption occurs.\18\
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    \18\ The same-day RTO is not intended to mandate the specific 
response of a particular entity to a particular disaster. Rather, 
the objective is intended to establish the recovery goal that the 
BC-DR plans of certain registrants must be designed to meet and, in 
turn, the resources that such registrants are expected to allocate 
to ensure that they are capable of achieving the objective. The 
Commission recognizes that a wide-scale disruption could occur near 
the close of a business day, and would interpret this requirement in 
a practical manner in such an event.
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    Proposed Regulation 40.9(c) would set forth the minimal 
requirements for geographic dispersal of infrastructure and personnel 
needed to meet a same-day RTO. It would provide that infrastructure 
sufficient to enable a critical financial market or core clearing

[[Page 42636]]

and settlement organization to meet a same-day recovery time objective 
after interruption of normal trading and clearing by a wide-scale 
disruption must be located outside the relevant area of the 
infrastructure the entity normally relies upon to (a) conduct 
electronic trading, (b) disseminate market data and provide price 
reporting, (c) conduct electronic surveillance and maintain access to 
audit trail information, or (d) conduct activities necessary to the 
clearance and settlement of existing and new contracts, and may not 
rely on the same critical transportation, telecommunications, power, 
water, or other critical infrastructure components as the 
infrastructure the entity normally relies upon for such activities. It 
would also provide that personnel sufficient to enable the critical 
financial market or core clearing and settlement organization to meet a 
same-day recovery time objective, after interruption of normal trading 
or clearing by a wide-scale disruption affecting the relevant area in 
which the personnel the entity normally relies upon to engage in such 
activities are located, must live and work outside that relevant area, 
so that they will not be made unavailable by a wide-scale evacuation or 
unavailability of personnel who live or work in that relevant area.
    Proposed Regulation 40.9(d) would require every registered entity 
that the Commission determines is a critical financial market or core 
clearing and settlement organization to conduct regular, periodic tests 
of its business continuity and disaster recovery plans and resources 
and its capacity to achieve a same-day RTO in the event of a wide-scale 
disruption.
    New Appendix E to Part 40 would provide guidance on the process the 
Commission will follow, and the factors it will consider, to determine 
that a registered entity is a critical financial market or a core 
clearing and settlement organization. Appendix E would also describe 
the notice and opportunity for comment that the Commission would 
provide in this connection.
    In connection with its proposal to adopt new Regulation 40.9, the 
Commission has also proposed conforming amendments to certain 
application guidance provisions of Commission Regulations relating to 
various Core Principles. Specifically, Appendix B to Part 38 and 
Appendix A to Part 39 are proposed to be amended to revise acceptable 
practices provisions under Core Principle 6 and Core Principle 9 in 
Part 38 and application guidance under Core Principle I in Part 39, to 
note that Proposed Regulation 40.9 would govern the obligations of 
registered entities that the Commission determines to be critical 
financial markets or core clearing and settlement organizations, with 
respect to maintenance and geographic dispersal of disaster recovery 
resources sufficient to meet a same-day RTO in the event of a wide-
scale disruption. These proposed revisions would further note that, 
therefore, Proposed Regulation 40.9 itself would establish the 
application guidance and acceptable practices for core principle 
compliance relating to those matters set forth in Regulation 40.9.
    As previously discussed, the Commission in this proposal would 
amend the acceptable practices provisions for Core Principle 9 set 
forth in Appendix B to Part 38, to harmonize the language of those 
provisions regarding BC-DR matters with the language of the parallel 
application guidance provisions for Core Principle I in Part 39. 
Moreover, the proposed revisions would also better explain the BC-DR 
standards currently applicable to DCMs. DCMs that have not been 
determined to be critical financial markets would be subject to the 
generally applicable BC-DR requirements set forth in these revisions, 
but would not be required to comply with the additional obligations 
imposed on critical markets by new Regulation 40.9. The Commission is 
aware that proposed legislation pending before Congress would amend the 
Act,\19\ including certain portions that govern DCMs and DCOs.\20\ At 
the time the Commission approved this proposed rulemaking, that 
legislation contained provisions that would create a new Core Principle 
20, System Safeguards, explicitly setting forth BC-DR requirements for 
all DCMs. In the event that this pending legislation is enacted into 
law, the proposed application guidance and acceptable practices 
provisions relating to Core Principle 9 set forth below may be 
considered by the Commission in connection with creation of application 
guidance and acceptable practices provisions relating to Core Principle 
20.
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    \19\ 1 U.S.C. 1 et seq.
    \20\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
H.R. 4173, 111th Cong. (2010).
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III. Proposed Effective Date

    The Commission requests comment on a reasonable date for the 
proposed amendments to become effective.

IV. Solicitation of Comments

    The Commission requests comments on all aspects of the proposed 
rule amendments, including the question of what RTO (e.g., the proposed 
same-day RTO or the aspirational two-hour RTO also mentioned in the 
White Paper) is appropriate. As noted above, at the time that the 
Commission approved this proposal, legislation was pending before 
Congress that would amend the CEA. The Commission specifically requests 
comment on the effect, if any, the legislation would have on this 
proposal.

V. Related Matters

 A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that Federal 
agencies, in proposing rules, consider the impact of those rules on 
small businesses.\21\ New requirements related to the proposed rule 
amendments would fall on DCMs and DCOs which the Commission may 
determine to be critical financial markets or core clearing and 
settlement organizations. The Commission has previously determined that 
DCMs and DCOs are not small entities for purposes of the RFA.\22\ 
Accordingly, the Commission does not expect the rules proposed herein 
to have a significant economic impact on any small entities. Therefore, 
the Chairman, on behalf of the Commission, hereby certifies, pursuant 
to 5 U.S.C. 605(b), that the actions proposed to be taken herein will 
not have a significant economic impact on a substantial number of small 
entities.
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    \21\ 5 U.S.C. 601 et seq.
    \22\ See 47 FR 18618 at 18619 (April 30, 1982) with respect to 
DCMs, and 66 FR 45604 at 45609 (August 29, 2001) with respect to 
DCOs.
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 B. Paperwork Reduction Act

    These proposed rule amendments will not impose any new 
recordkeeping or information collection requirements, or other 
collections of information that require approval of the Office of 
Management and Budget under the Paperwork Reduction Act.\23\ All 
recordkeeping or information collection requirements relevant to the 
subject of this proposed rulemaking, or discussed herein, already exist 
under current law. Accordingly, the Paperwork Reduction Act does not 
apply. The Commission invites public comment on the accuracy of its 
estimate that no additional recordkeeping or information collection 
requirements or changes to existing collection requirements would 
result from the amendments proposed herein.
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    \23\ 44 U.S.C. 3501 et seq.
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 C. Cost-Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its actions before issuing a

[[Page 42637]]

new regulation or order under the Act.\24\ By its terms, Section 15(a) 
does not require the Commission to quantify the costs and benefits of a 
new rule or to determine whether the benefits of the adopted rule 
outweigh its costs. Rather, section 15(a) requires the Commission to 
``consider the costs and benefits'' of a subject rule. Section 15(a) 
further specifies that the costs and benefits of proposed rules shall 
be evaluated in light of five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. In conducting its analysis, the Commission 
may, in its discretion, give greater weight to any one of the five 
enumerated areas of concern and may determine that, notwithstanding its 
costs, a particular rule is necessary or appropriate to protect the 
public interest or to effectuate any of the provisions or to accomplish 
any of the purposes of the Act.\25\
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    \24\ 7 U.S.C. 19(a).
    \25\ E.g., Fishermen's Dock Co-op., Inc. v. Brown, 75 F3d 164 
(4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336 (DC 
Cir. 1985) (agency has discretion to weigh factors in undertaking 
cost-benefit analyses).
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    As discussed above, the proposed rule amendments would require DCMs 
and DCOs that the Commission determines to be critical financial 
markets or core clearing and settlement organizations to (1) maintain 
business continuity and disaster recovery resources sufficient to meet 
a same-day RTO for trading and clearing, and (2) maintain geographic 
dispersal of infrastructure and personnel sufficient to enable 
achievement of a same-day RTO in the event of a wide-scale disruption. 
The Commission cannot fully quantify the costs that would be borne by 
such entities in complying with the proposed rule amendments, as the 
Commission has not yet determined which entities are critical financial 
markets or core clearing or settlement organizations. Moreover, the 
cost to comply with the proposed rule amendments would be likely to 
vary depending on the nature and location of infrastructure and 
personnel available to enable achievement of a same-day RTO that are 
presently maintained by each such entity.
    Notwithstanding the potential costs that could be incurred by DCMs 
or DCOs that the Commission determines to be critical financial markets 
or core clearing and settlement organizations in complying with the 
proposed rule amendments, the Commission believes the benefits of the 
proposed rule amendments are significant and important. The ability of 
critical financial markets and core clearing and settlement 
organizations to recover and resume trading and clearing promptly in 
the event of a wide-scale disruption is significant to the U.S. 
economy. Therefore, the proposed rule amendments may be crucially 
important to sound risk management practices for such markets, an area 
of concern that may deserve great weight in this connection. As such, 
they may be needed to protect market participants and ensure the 
continued efficiency, competitiveness, financial integrity, and price 
discovery function of such markets in the event of a wide-scale 
disruption. Accordingly, the Commission believes that the proposal is 
consistent with the Act and would serve to protect the public interest 
by promoting market integrity and the avoidance of systemic risk.
    After considering the costs and benefits noted above, the 
Commission has determined to issue the proposed rule amendments. The 
Commission invites public comment on its application of the cost-
benefit provision. Commenters are also invited to submit any data that 
they may have quantifying the costs and benefits of the proposed rule 
amendments with their comment letter.

VI. Text of Proposed Amendments

List of Subjects

17 CFR Part 38

    Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 39

    Commodity futures, Consumer protection, Reporting and recordkeeping 
requirements.

17 CFR Part 40

    Commodity futures, Reporting and recordkeeping requirements.
    In light of the foregoing, and pursuant to the authority in the 
Act, and in particular Sections 3, 5, 5c(a) and 8a(5) of the Act, the 
Commission hereby proposes to amend Parts 38, 39, and 40 of Title 17 of 
the Code of Federal Regulations as follows:

PART 38--DESIGNATED CONTRACT MARKETS

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

     Authority: 7 U.S.C. 2, 5, 6, 6c, 7, 7a-2 and 12a, as amended by 
Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

    2. Amend Appendix B to Part 38 by revising paragraph (b) of Core 
Principle 6; and paragraph (a)(2) and paragraph (b) of Core Principle 
9, to read as follows:

Appendix B to Part 38--Guidance on, and Acceptable Practices in, 
Compliance With Core Principles

* * * * *
    Core Principle 6 of section 5(d) of the Act: EMERGENCY AUTHORITY 
* * *
* * * * *
    (b) Acceptable practices. Commission Regulation 40.9 governs the 
obligations of designated contract markets that the Commission has 
determined to be critical financial markets with respect to 
maintenance and geographic dispersal of disaster recovery resources 
sufficient to meet a same-day recovery time objective in the event 
of a wide-scale disruption. Therefore, Regulation 40.9 itself 
establishes the guidance and acceptable practices for core principle 
compliance in that respect.
* * * * *
Core Principle 9 of section 5(d) of the Act: EXECUTION OF 
TRANSACTIONS * * *
* * * * *
    (a) * * *
    (2) The board of trade shall:
    (i) Establish and maintain a program of risk analysis and 
oversight to identify and minimize sources of operational risk, 
through the development of appropriate controls and procedures;
    (ii) Establish and maintain a program of regular, periodic 
testing to ensure that all automated systems used by the board of 
trade function properly and have adequate security and capacity; and
    (iii) Establish and maintain emergency procedures, backup 
facilities, a disaster recovery plan, and regular, periodic testing 
to ensure timely recovery and resumption of order processing and 
trade matching, market data dissemination and price reporting, 
market and trade practice surveillance, and maintenance of a 
comprehensive and accurate audit trail.
* * * * *
    (b) Acceptable practices. (1) Testing and review of automated 
systems should be conducted by qualified, independent professionals. 
Such qualified independent professionals may be independent 
contractors or employees of the board of trade, but should not be 
persons responsible for development or operation of the systems 
being tested. Pursuant to the provisions of Commission Regulations 
Sections 1.31 and 1.35, the board of trade must keep records of all 
such tests, and make all test results available to the Commission 
upon request.
    (2) In fulfilling its obligations set forth in the Application 
Guidance above with respect to its automated systems, the board of 
trade should follow the guidelines issued by the International 
Organization of Securities Commissions (``IOSCO'') in 1990 (the 
``IOSCO Principles''), and adopted by the Commission on November 21, 
1990 (55 FR 48670), as supplemented and amended, and any similar 
guidelines issued by the Commission or its staff.

[[Page 42638]]

    (3) Commission Regulation 40.9 governs the obligations of 
registered entities that the Commission has determined to be 
critical financial markets, with respect to maintenance and 
geographic dispersal of disaster recovery resources sufficient to 
meet a same-day recovery time objective in the event of a wide-scale 
disruption. Therefore, Regulation 40.9 itself establishes the 
guidance and acceptable practices for core principle compliance in 
that respect.
* * * * *

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

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

    Authority: 7 U.S.C. 7b as added by Appendix E of Pub. L. 106-
554, 114 Stat. 2763A-365.

    4. Amend Appendix A to Part 39 by adding a new paragraph 3 after 
paragraph 2.b. of the guidance under Core Principle I, as follows:

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

* * * * *
Core Principle I: SYSTEM SAFEGUARDS * * *
* * * * *
    2. * * *
    b. * * *
    3. Commission Regulation 40.9 governs the obligations of 
derivatives clearing organizations that the Commission determines to 
be core clearing and settlement organizations, with respect to 
maintenance and geographic dispersal of disaster recovery resources 
sufficient to meet a same-day recovery time objective in the event 
of a wide-scale disruption. Therefore, Regulation 40.9 itself 
establishes the guidance for core principle compliance in that 
respect.
* * * * *

PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES

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

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as 
amended by Title XIII of the Food, Conservation and Energy Act of 
2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 2008).

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


Sec.  40.1  Definitions.

* * * * *
    (j) Critical financial market means a designated contract market 
that provides the means for financial institutions to adjust their 
financial positions and those of their customers in order to manage 
liquidity, market, and other risks to their organizations, and provides 
support for the provision of a wide range of financial services to 
businesses and consumers in the United States, particularly including 
markets whose trading impacts federal funds, foreign exchange, 
commercial paper, U.S. government and agency securities, corporate 
debt, equity securities, or physical commodities of broad, major 
importance to the national and international economy. Guidance as to 
how the Commission will determine whether a registered entity is a 
critical financial market is set forth in Appendix E to Part 40.
    (k) Core clearing and settlement organization means a derivatives 
clearing organization that provides clearing and settlement services 
integral to a critical financial market (or to multiple designated 
contract markets that are critical financial markets on a collective 
rather than individual basis). Guidance as to how the Commission will 
determine whether a derivatives clearing organization is a core 
clearing and settlement organization is set forth in Appendix E to Part 
40.
    (l) Relevant area means the metropolitan or other geographic area 
within which a critical financial market or core clearing and 
settlement organization has physical infrastructure or personnel 
necessary for it to, as appropriate, conduct electronic trading, 
disseminate market data and provide price reporting, conduct electronic 
surveillance and maintain access to audit trail information, or conduct 
activities necessary to the clearance and settlement of existing and 
new contracts; including communities economically integrated with, 
adjacent to, or within normal commuting distance of that metropolitan 
or other geographic area.
    (m) Recovery time objective means the time period within which an 
entity should be able to achieve recovery and resumption of, as 
appropriate, electronic trading, market data dissemination and price 
reporting, access to audit trail information and electronic 
surveillance tools, or clearing and settlement of existing and new 
contracts, after those capabilities become temporarily inoperable for 
any reason up to or including a wide-scale disruption.
    (n) Wide-scale disruption means an event that causes a severe 
disruption or destruction of transportation, telecommunications, power, 
water, or other critical infrastructure components in a relevant area, 
or an event that results in an evacuation or unavailability of the 
population in a relevant area.
    7. Add Sec.  40.9 to read as follows:


Sec.  40.9  Disaster recovery requirements for critical financial 
markets and core clearing and settlement organizations.

    (a) Each designated contract market or derivatives clearing 
organization that the Commission determines is a critical financial 
market or a core clearing and settlement organization must maintain a 
disaster recovery plan and business continuity and disaster recovery 
resources, including infrastructure and personnel, sufficient to enable 
it to achieve a same-day recovery time objective in the event that its 
normal trading or clearing and settlement capabilities become 
temporarily inoperable for any reason up to and including a wide-scale 
disruption.
    (b) A same-day recovery time objective is a recovery time objective 
within the same business day on which normal trading or clearing and 
settlement capabilities become temporarily inoperable for any reason up 
to and including a wide-scale disruption.
    (c) To ensure its ability to achieve a same-day recovery time 
objective in the event of a wide-scale disruption, each designated 
contract market or derivatives clearing organization that the 
Commission determines is a critical financial market or a core clearing 
and settlement organization must maintain a degree of geographic 
dispersal of both infrastructure and personnel such that:
    (1) Infrastructure sufficient to enable the entity to meet a same-
day recovery time objective after interruption of normal trading and 
clearing by a wide-scale disruption is located outside the relevant 
area of the infrastructure the entity normally relies upon to conduct 
electronic trading, disseminate market data and provide price 
reporting, conduct electronic surveillance and maintain access to audit 
trail information, or conduct activities necessary to the clearance and 
settlement of existing and new contracts, and does not rely on the same 
critical transportation, telecommunications, power, water, or other 
critical infrastructure components the entity normally relies upon for 
such activities; and
    (2) Personnel sufficient to enable the entity to meet a same-day 
recovery time objective, after interruption of normal trading or 
clearing by a wide-scale disruption affecting the relevant area in 
which the personnel the entity normally relies upon to engage in such 
activities are located, live and work outside that relevant area.
    (d) Each registered entity that the Commission determines is a 
critical financial market or core clearing and settlement organization 
must conduct

[[Page 42639]]

regular, periodic tests of its business continuity and disaster 
recovery plans and resources and its capacity to achieve a same-day 
recovery time objective in the event of a wide-scale disruption.
* * * * *
    8. Add Appendix E to Part 40 to read as follows:

Appendix E to Part 40--Guidance on Critical Financial Market and Core 
Clearing and Settlement Organization Determination

    (a) Critical financial market determination. (1) The Commission 
may determine, in its discretion, whether a designated contract 
market is a critical financial market. In making such a 
determination, the Commission will evaluate each such entity on a 
case-by-case basis, giving consideration to whether the entity 
provides the means for financial institutions to adjust their 
financial positions and those of their customers in order to manage 
liquidity, market, and other risks to their organizations, and 
provides support for the provision of a wide range of financial 
services to businesses and consumers in the United States; or 
whether the entity conducts trading that impacts Federal funds, 
foreign exchange, commercial paper, U.S. government and agency 
securities, corporate debt, equity securities, or physical 
commodities of broad, major importance to the national and 
international economy. The Commission may also consider other 
relevant factors that it finds important.
    (2) The Commission will notify the designated contract market 
that it intends to undertake a determination with respect to whether 
it is a critical financial market. The entity may provide written 
data, views, and arguments relevant to the Commission's 
determination. Any such written data, views, and arguments shall be 
filed with the Secretary of the Commission, in the form and manner 
specified by the Commission, within 30 calendar days of receiving 
notice or within such other time specified by the Commission. After 
prompt consideration of all relevant information, the Commission 
will issue an order directly to the designated contract market 
explaining the Commission's determination of whether it is a 
critical financial market as defined by Sec.  40.1(j).
    (b) Core clearing and settlement organization determination. (1) 
The Commission may determine, in its discretion, whether a 
derivatives clearing organization is a core clearing and settlement 
organization. In making such a determination, the Commission will 
evaluate each such entity on a case-by-case basis, giving 
consideration to whether the entity provides clearing and settlement 
services integral to a critical financial market (or to multiple 
designated contract markets that are critical financial markets on a 
collective rather than individual basis). The Commission may also 
consider other relevant factors that it finds important.
    (2) The Commission will notify the derivatives clearing 
organization that it intends to undertake a determination with 
respect to whether it is a core clearing and settlement 
organization. The entity may provide written data, views, and 
arguments relevant to the Commission's determination. Any such 
written data, views, and arguments shall be filed with the Secretary 
of the Commission, in the form and manner specified by the 
Commission, within 30 calendar days of receiving notice or within 
such other time specified by the Commission. After prompt 
consideration of all relevant information, the Commission will issue 
an order directly to the derivatives clearing organization 
explaining the Commission's determination of whether it is a core 
clearing and settlement organization as defined by Sec.  40.1(k).

    Issued in Washington, DC, on July 14, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-17606 Filed 7-21-10; 8:45 am]
BILLING CODE P