[Federal Register Volume 78, Number 231 (Monday, December 2, 2013)]
[Rules and Regulations]
[Pages 72476-72525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27849]



[[Page 72475]]

Vol. 78

Monday,

No. 231

December 2, 2013

Part VI





Commodity Futures Trading Commission





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17 CFR Parts 39, 140, and 190





 Derivatives Clearing Organizations and International Standards; Final 
Rule

  Federal Register / Vol. 78 , No. 231 / Monday, December 2, 2013 / 
Rules and Regulations  

[[Page 72476]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 39, 140, and 190

RIN 3038-AE06


Derivatives Clearing Organizations and International Standards

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
adopting final regulations to establish additional standards for 
compliance with the derivatives clearing organization (``DCO'') core 
principles set forth in 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''). Pursuant to 
the new regulations, SIDCOs and Subpart C DCOs are 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 new 
requirements set forth herein. The new regulations include provisions 
concerning: 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 are 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 adopting certain delegation provisions 
and certain technical clarifications.

DATES:  This rule is effective December 31, 2013, except for the 
amendments to 17 CFR 39.31 and 140.94, which are effective December 13, 
2013, and the amendments to 190.09, which are effective December 2, 
2013.

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]; or Tracey Wingate, Special Counsel, DCR, at 202-
418-5319 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 Regulations for Registered DCOs
    E. PFMIs
    F. The Role of the PFMIs in International Banking Standards
    G. New Regulations Applicable to SIDCOs and Subpart C DCOs
II. Discussion of Revised and New Regulations
    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 requirements 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 
credit losses or liquidity 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
    A. Congressional Review Act
    B. Administrative Procedure Act
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 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.
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010). The text of the Dodd-
Frank Act may be accessed at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
    \2\ Section 701 of the Dodd-Frank Act.
    \3\ 7 U.S.C. 1 et seq.
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    Section 725(c) of the Dodd-Frank Act amended Section 5b(c)(2) of 
the CEA, which sets forth core principles that a DCO must comply with 
in order to register and maintain registration with the Commission. 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,\4\ adopted regulations 
establishing standards for compliance with the DCO core principles.\5\
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    \4\ 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)).
    \5\ See Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR 69334 (Nov. 8, 2011). These regulations are 
set forth in Subpart A and Subpart B of part 39 of the Commission's 
regulations (``Subpart A'' and ``Subpart B,'' respectively).
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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,'' \6\

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was enacted to mitigate systemic risk in the financial system and 
promote financial stability.\7\ Section 804 of the Dodd-Frank Act 
requires the Financial Stability Oversight Council (``Council'') to 
designate those financial market utilities (``FMUs'') \8\ that the 
Council determines are, or are likely to become, systemically 
important.\9\
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    \6\ Section 801 of the Dodd-Frank Act.
    \7\ Section 802(b) of the Dodd-Frank Act.
    \8\ 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.
    \9\ 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 \10\ and other metrics to assess, 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.'' \11\ On 
July 18, 2012, the Council designated eight FMUs as systemically 
important under Title VIII.\12\ Two of these are CFTC-registered DCOs 
\13\ for which the Commission is the Supervisory Agency.\14\
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    \10\ 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.
    \11\ 76 FR 44766.
    \12\ 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.
    \13\ While Chicago Mercantile Exchange, Inc. (``CME Clearing''), 
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 Clearing and ICE Clear 
Credit; the Securities and Exchange Commission (``SEC'') serves as 
OCC's Supervisory Agency.
    \14\ 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.\15\ 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.\16\
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    \15\ See Section 805(a)(2) of the Dodd-Frank Act. The Commission 
notes that, under section 805 of the Dodd-Frank Act, the Commission 
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.
    \16\ Section 752(a) of the Dodd-Frank Act, codified at 15 U.S.C. 
8325, provides, in relevant part, that in order to promote effective 
and consistent global regulation of swaps and security based swaps, 
the CFTC, the SEC, 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. In addition, section 752(b) 
of the Dodd-Frank Act states that 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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    In 2013, after careful consideration of the comments on the rules 
that it had proposed for SIDCOs in 2010 and 2011,\17\ and in light of 
domestic and international market and regulatory developments, the 
Commission finalized regulations for SIDCOs in a manner consistent with 
the PFMIs.\18\ Most recently, the Commission proposed the regulations 
for SIDCOs and Subpart C DCOs that are being adopted herein (the 
``Proposal'').\19\
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    \17\ See Financial Resources Requirements for Derivatives 
Clearing Organizations, 75 FR 63113, 63119 (Oct. 14, 2010) (notice 
of proposed rulemaking) and Risk Management Requirements for 
Derivatives Clearing Organizations, 76 FR 3697 (Jan. 20, 2011) 
(notice of proposed rulemaking).
    \18\ Specifically, in that final rulemaking, 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. See Enhanced Risk Management Standards for 
Systemically Important Derivatives Clearing Organizations, 78 FR 
49663 (Aug. 15, 2013) (``SIDCO Final Rule'').
    \19\ Derivatives Clearing Organizations and International 
Standards, 78 FR 50260 (Aug. 16, 2013) (notice of proposed 
rulemaking).
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D. DCO Core Principles and Regulations for Registered DCOs

    As noted in the Proposal, 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. The Proposal did, however, identify and discuss 
those core principles and related Commission regulations that were most 
relevant to the proposed regulations. Specifically, the Proposal 
discussed the following DCO 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).\20\
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    \20\ For a summary and description of these core principles and 
Commission regulations, see 78 FR 50262-50263.
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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,\21\ were the

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international standards most relevant to the risk management of 
SIDCOs.\22\ The PFMIs set out 24 principles which address the risk 
management and efficiency of a financial market infrastructure's 
(``FMI'') operations.\23\ Assessments of observance with the PFMIs 
focus also on the ``key considerations'' set forth for each of the 
principles.\24\ While Subpart A and Subpart B of part 39 of the 
Commission's regulations incorporate the vast majority of the standards 
set forth in the PFMIs,\25\ the Commission, which is a member of the 
Board of IOSCO, has an obligation under Section 805(a) of the Dodd-
Frank Act to implement regulations relating to risk management that 
conform with applicable international standards. The PFMIs are such 
standards and, with this rulemaking, the Commission intends to adopt 
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 of part 39 of the Commission's regulations. Thus, this 
rulemaking revises 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).\26\
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    \21\ 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'').
    \22\ 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 78 FR 49666.
    \23\ See id., ] 1.19.
    \24\ 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.
    \25\ Indeed, Subpart A and Subpart B were informed by the 
consultative report for the PFMIs. See generally 76 FR 69334.
    \26\ For a summary and description of these principles, see 78 
FR 50263-50266.
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F. The Role of the PFMIs in International Banking Standards

    The Commission notes that where a central counterparty (``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 Basel Committee on Banking 
Supervision (``BCBS''),\27\ 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.\28\ 
The Basel CCP Capital Requirements create financial incentives for 
banks, including their subsidiaries and affiliates,\29\ to clear 
financial derivatives with CCPs that are prudentially supervised 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.\30\ These incentives 
include (1) lower capital charges for exposures arising from 
derivatives cleared through a qualified CCP (``QCCP'') and (2) 
significantly higher capital charges for exposures arising from 
derivatives cleared through non-qualifying CCPs. 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.\31\
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    \27\ 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.
    \28\ 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.
    \29\ ``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.
    \30\ See Basel CCP Capital Requirements, Annex 4, Section II, 
6(i). See generally 78 FR 50266-50267.
    \31\ See Basel CCP Capital Requirements, Section I, A: General 
Terms.
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    The failure of a CCP to achieve QCCP status could result in 
significant costs to its bank customers. As one market participant 
noted, the ``ramifications for failure to achieve QCCP status are 
onerous for banks' CCP exposures and can result in capital charges on 
trade exposures that are 10-20 times larger than capital charges for 
QCCP trade exposures.'' \32\ 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. For instance, banks faced with such higher capital 
charges may transfer their clearing business away from such DCOs to a 
QCCP in order to benefit from the preferential capital charges provided 
by the Basel CCP Capital Requirements. Alternatively, banks may reduce 
or discontinue their clearing 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 in retaining 
members and customers.
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    \32\ CME at 5, n. 18.

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G. New Regulations Applicable to SIDCOs and Subpart C DCOs

    As described in detail in section II below, this final rulemaking 
includes a new defined term, a Subpart C DCO, to allow registered DCOs 
that are not SIDCOs to elect to become subject to the provisions in 
Subpart C of part 39 of the Commission's regulations (``Subpart C''). 
Further, this rulemaking revises Subpart C so that Subpart C applies to 
SIDCOs and Subpart C DCOs, and includes 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 address the remaining gaps between the Commission's 
regulations and the PFMI standards. Thus, Subpart C, together with the 
provisions in Subpart A and Subpart B, establish domestic rules and 
regulations that are consistent with the PFMIs. Because Subparts A, B, 
and C apply to SIDCOs and Subpart C DCOs on a continuing basis, SIDCOs 
and Subpart C DCOs should be QCCPs for purposes of the Basel CCP 
Capital Requirements.\33\
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    \33\ See QCCP definition supra Section I.F.
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    The Commission received twelve comment letters, nine of which 
commented on the Proposal.\34\ All nine of these letters were generally 
supportive of the Proposal's goals. Given the importance of obtaining 
QCCP status for a U.S.-based DCO, the Commission requested comment on 
additional measures that the Commission should take to help ensure that 
Subpart C DCOs obtain QCCP status. MGEX responded by asserting that 
steps should be taken to ``ensure that the [Commission's] proposed 
regulations will be recognized by applicable regulators as being 
consistent with the PFMIs and that all DCOs subject to those 
regulations would be considered QCCPs in all relevant jurisdictions.'' 
\35\ MGEX also requested that the Commission ``coordinate with other 
regulators'' to provide a ``uniform framework that recognizes the 
oversight provided by multiple regulatory jurisdictions so as not to 
unnecessarily burden DCOs with requirements established by multiple 
regulatory jurisdictions.\36\ As noted in the Proposal, the Commission 
believes that the Subpart C regulations in combination with the 
provisions contained in Subpart A and Subpart B would establish 
domestic rules and regulations that are consistent with the PFMIs. 
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, such entities should qualify as QCCPs for purposes of the Basel 
CCP Capital Requirements.\37\ In addition, the Commission notes that it 
actively coordinates with other domestic and international regulators 
informally, as required by applicable law (such as through the 
rulemaking consultation process under Title VIII), and through 
participation in several working groups and international organizations 
(such as IOSCO).\38\ ISDA, which expressed support for the Commission's 
goal of implementing regulations for DCOs that are consistent with the 
PFMIs by the end of 2013, suggested that the Commission issue this 
rulemaking as an interim final rule ``so that market participants will 
have an opportunity to provide additional substantive comments.'' \39\ 
The Commission declines to do so. As is the case with other 
regulations, part 39 of the Commissions regulations may be reviewed or 
revised by the Commission as necessary.
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    \34\ All comment letters are available through the Commission's 
Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391. Comments addressing the Proposal were 
received from the European Commission and the following parties: CME 
Group Inc. (``CME''); The Futures Industry Association (``FIA''); 
IntercontinentalExchange, Inc. (``ICE''); International Swaps and 
Derivatives Association Inc. (``ISDA''); LCH.Clearnet Group Limited 
(``LCH''); The Minneapolis Grain Exchange (``MGEX''); New York 
Portfolio Clearing LLC (``NYPC''); and Chris Barnard.
    \35\ MGEX at 6.
    \36\ Id. In addition, ISDA's comment letter addressed the 
Commission's examination of SIDCOs and Subpart C DCOs. Specifically, 
ISDA stated that revised Subpart C should specify whether the 
Commission will evaluate a SIDCO's or Subpart C DCO's compliance 
with Subpart C as part of its general rule enforcement review 
program, or whether SIDCOs and Subpart C DCOs will be subject to a 
more rigorous and more frequent (e.g., annual) review process. ISDA 
at 4. This comment does not pertain to any of the proposed 
regulations and is, therefore, outside the scope of the Proposal. 
However, the Commission notes that Section 807(a) of the Dodd-Frank 
Act requires the Commission to examine a SIDCO at least once 
annually.
    \37\ 78 FR 50297.
    \38\ The Commission intends to cooperate with other regulators, 
both domestically and internationally, to foster efficient and 
effective communication and consultation so that we may support each 
other in fulfilling our respective mandates with respect to SIDCOs 
and Subpart C DCOs. See PFMIs, Responsibility E.
    \39\ ISDA at 1.
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    The following section will address discuss the comments received on 
specific aspects of the Proposal in connection with explaining each of 
the amended and new regulations adopted herein.

II. Discussion of Revised and New Regulations

A. Regulation 39.2 (Definitions)

    The Commission proposed amending regulation 39.2 by revising one 
definition and adding six new defined terms. First, the Commission 
proposed a technical amendment to the definition of ``systemically 
important derivatives clearing organization.'' The definition had 
described a SIDCO as a registered DCO ``which has been designated by 
the [Council] to be systemically important . . .'' The proposed 
definition described a SIDCO as a registered DCO ``which is currently 
designated . . .''
    Second, the Commission proposed 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 proposed 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. The 
phrase ``activity with a more complex risk profile'' currently appears 
in regulation 39.29 (Financial resources requirements), which the 
Commission proposed to revise and renumber as regulation 39.33.\40\
---------------------------------------------------------------------------

    \40\ See Section II.E., infra.
---------------------------------------------------------------------------

    The Commission also proposed to add a definition for the term 
``subpart C derivatives clearing organization.'' The proposed 
definition would include any registered DCO that is not a SIDCO and 
that has elected to become subject to Subpart C.
    Finally, the Commission proposed to add definitions for 
``depository institution,'' ``U.S. branch or agency of a foreign 
banking organization,'' and ``trust company.'' These terms are used in 
the provisions concerning liquidity set forth in paragraphs (c) and (d) 
of revised regulation 39.29, which the Proposal renumbered as 
regulation 39.33.\41\ As proposed, 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 or agency of a 
foreign banking organization'' would mean the U.S. branch or 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

[[Page 72480]]

Section 1 of the Federal Reserve Act (12 U.S.C. 221), but that does not 
meet the definition of ``depository institution.''
---------------------------------------------------------------------------

    \41\ See id.
---------------------------------------------------------------------------

    The Commission received only one comment on the substance of the 
proposed definitions. Chris Barnard stated that he approved of the fact 
that the definition of ``activity with a more complex risk profile'' 
includes credit default swaps and other activities designated as such 
by the Commission under regulation 39.33(a).
    In addition, the Commission received a comment regarding the 
wording of a defined term. MGEX expressed concern regarding the title 
``Subpart C DCO.'' Specifically, MGEX stated that the title ``itself 
implies to the public that the [Subpart C] DCO is of significantly 
lesser status'' as compared to a SIDCO.\42\ MGEX requested that the 
Commission instead use the term ``Qualified Central Counterparty'' in 
its regulations and to define that term to include any DCO that is held 
to the standards set forth in Subpart C. The Commission declines to 
adopt this suggestion.
---------------------------------------------------------------------------

    \42\ MGEX at 4.
---------------------------------------------------------------------------

    SIDCOs and registered DCOs that elect to opt-in to these heightened 
standards are not identically situated in that a SIDCO is required to 
comply with the standards set forth in Subpart C because of its 
importance to the US financial markets. In other words, a Subpart C DCO 
may rescind its election whereas a SIDCO may not. In addition, there 
may be circumstances in which the Commission may want to apply a 
particular regulation only to SIDCOs. For example, regulation 39.41, 
enacted pursuant to section 807c of the Dodd-Frank Act, grants the 
Commission special enforcement authority over SIDCOs, but not Subpart C 
DCOs. Moreover, SIDCOs are required to comply with regulation 40.10, 
enacted consistent with section 806 of the Dodd-Frank Act, which, among 
other things, requires them to provide notice to the Commission not 
less than 60 days in advance of proposed changes to their rules, 
procedures, or operations that could materially affect the nature or 
level of risks presented by the systemically important derivatives 
clearing organization. This requirement is not imposed on Subpart C 
DCOs. Thus, it is necessary and appropriate for the Commission to 
retain the ability to differentiate between SIDCOs and other registered 
DCOs in its regulations.
    Moreover, as discussed below, MGEX and other commenters have noted 
that the proposed opt-in structure is important in that it allows 
registered DCOs that are not SIDCOs to be eligible for QCCP status. 
Once a Subpart C DCO successfully attains QCCP status, the Commission 
notes that, in general, its regulations do not prohibit a Subpart C DCO 
(or a SIDCO) from stating that it is a QCCP in its marketing materials. 
Indeed, the Commission expects that Subpart C DCOs would market 
themselves as QCCPs, which is why a Subpart C DCO is prohibited from 
marketing itself as a QCCP while in the process of rescinding its 
election.
    For the reasons stated above, the Commission believes that the 
proposed revised and new definitions are appropriate and, therefore, is 
adopting them as proposed.

B. Regulation 39.30 (Scope)

    The Commission proposed expanding regulation 39.28 (and renumbering 
it 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.\43\ 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.\44\ 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.
---------------------------------------------------------------------------

    \43\ See also supra Section I.G.
    \44\ See supra Section I.F.
---------------------------------------------------------------------------

    The Commission requested comment on the proposed rules.
    LCH and MGEX argued that the amended and new provisions of Subpart 
C should pertain to all registered DCOs. LCH asserted that the BCBS 
capital rules provide significant incentives for a DCO to meet the high 
standards embodied in the PFMIs or face the real risk that bank 
clearing members will cease to clear through them and therefore all 
DCOs should be required to comply with these standards.\45\ MGEX argued 
that the Commission's proposed opt-in regime grants SIDCOs an unfair 
competitive advantage over other DCOs.\46\ MGEX suggested that the 
Commission consider holding all registered DCOs to these higher 
standards and to provide an ``opt-out'' mechanism for those registered 
DCOs that are not SIDCOs that do not wish to attain QCCP status.\47\ In 
addition, LCH and MGEX requested that, if the Commission elects to 
finalize the proposed regulations with the opt-in regime, DCOs be 
permitted to petition the Commission for additional time to comply with 
all of the Subpart C regulations.\48\
---------------------------------------------------------------------------

    \45\ LCH at 3.
    \46\ MGEX at 2-3.
    \47\ MGEX at 3.
    \48\ LCH at 3-4; MGEX at 4.
---------------------------------------------------------------------------

    The Commission has decided to adopt regulation 39.30 as proposed. 
First, because of the potential benefits resulting from QCCP status, as 
described above, the Commission believes that a DCO that has not been 
designated to be systemically important should have the option to elect 
to become subject to Subpart C.\49\ However, the Commission does not 
believe that a DCO that is not a SIDCO should be required to be held to 
Subpart C if it does not elect to because of the potential costs 
associated with compliance with these standards. In addition, and as 
discussed in more detail below, those DCOs that elect to be held to 
Subpart C may choose the effective date of their election. Because a 
Subpart C DCO is not required to comply with the regulations set forth 
in Subpart C until the specified effective date, a Subpart C DCO has a 
certain amount of control over the date on which it must comply with 
the Subpart C regulations.
---------------------------------------------------------------------------

    \49\ As a technical matter, the Commission proposed 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.
---------------------------------------------------------------------------

    Further, the Commission concludes that a SIDCO should be required 
to comply with revised Subpart C in order to maintain 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.\50\ In order 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.\51\ 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.\52\ As discussed in the Proposal, the PFMIs

[[Page 72481]]

have been adopted and implemented by numerous foreign 
jurisdictions.\53\ The Commission notes that none of the commenters 
opposed holding all SIDCOs to the Subpart C regulations. The Commission 
believes that a global, unified set of international risk management 
standards for systemically important CCPs can help support the 
stability of the broader financial system. As such, for the reasons 
described above and in the Proposal, the Commission believes that 
SIDCOs should be required to comply with all of the requirements set 
forth in part 39 of the Commission's regulations, including the 
standards set forth in Subpart C, as revised herein.
---------------------------------------------------------------------------

    \50\ See SIDCO Final Rule (Discussion of risk management 
standards). See also Section 805(b) of the Dodd-Frank Act.
    \51\ See supra Section I.E.
    \52\ PFMIs ] 1.15.
    \53\ See 78 FR 50260, 50268.
---------------------------------------------------------------------------

C. Regulation 39.31 (Election to become subject to the provisions of 
Subpart C)

    As discussed above and in the Proposal,\54\ the Basel CCP Capital 
Requirements impose significantly higher capital charges on banks 
(including their subsidiaries and affiliates) that clear financial 
derivatives through CCPs that do not qualify as QCCPs (i.e., CCPs that 
are licensed and supervised in a jurisdiction where the relevant 
regulator applies to the CCP, on an ongoing basis, domestic rules and 
regulations that are not consistent with the PFMIs).\55\ Because such 
charges could create incentives for banks to migrate their business to 
CCPs that are QCCPs or to avoid clearing,\56\ U.S. DCOs that operate 
internationally, but are not QCCPs, may face a substantial competitive 
disadvantage. The Subpart C requirements, as amended herein, address 
any remaining gaps between the Commission's existing regulations and 
the PFMI standards.\57\ Accordingly, a DCO that is subject to the 
collective obligations contained in Subpart A, Subpart B and Subpart C 
should be a QCCP for purposes of the Basel CCP Capital 
Requirements.\58\
---------------------------------------------------------------------------

    \54\ See discussion of the role of the PFMIs in international 
banking standards supra Section I.F., 78 FR 50266-9.
    \55\ See Basel CCP Capital Requirements at Section I.A.: General 
Terms.
    \56\ As noted above, banks alternatively may reduce or 
discontinue their clearing business or pass through to their 
customers any higher costs of transacting through a DCO that is not 
a QCCP. See discussion of the role of the PFMIs in International 
Banking Standards supra Section I.F; 78 FR 50267, 50269.
    \57\ See discussion of the new regulations applicable to SIDCOs 
and Subpart C DCOs supra Section I.G.
    \58\ Id.
---------------------------------------------------------------------------

    Regulation 39.31, as proposed, 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, should the 
DCO individually determine that the benefits of achieving such status 
outweigh the costs associated with implementing the Subpart C 
regulations. The Commission also proposed procedures for withdrawing or 
rescinding that election.
    The Commission received five comment letters regarding proposed 
regulation 39.31.\59\ These comments generally supported the adoption 
of procedures that would provide non-SIDCO DCOs the opportunity to 
become QCCPs through adherence to an enhanced regulatory regime.\60\ 
LCH, for example, ``strongly supported'' the adoption of ``heightened 
regulatory standards that would allow both SIDCOs and non-SIDCOs to be 
QCCPs.'' \61\ The European Commission similarly stated that central 
counterparties ``that wish to operate under safer standards and compete 
on the basis of the quality of their risk-management . . . should not 
be prevented from doing so.'' \62\
---------------------------------------------------------------------------

    \59\ Comments on proposed regulation 39.31 were received from 
the European Commission, FIA, ISDA, LCH and MGEX.
    \60\ See, e.g., European Commission at 1, LCH at 2, MGEX at 1-2.
    \61\ LCH at 1. See also MGEX at 1 (``MGEX applauds the 
Commission for attempting to establish an avenue by which DCOs not 
designated as systemically important could qualify for [QCCP] 
status.'').
    \62\ European Commission at 1.
---------------------------------------------------------------------------

    MGX and LCH disagreed, however, with the proposed ``opt-in'' 
approach and suggested alternative means for achieving the Commission's 
objectives.\63\ As mentioned above, both LCH and MGEX suggested that 
the Commission require all currently registered DCOs to be held to the 
enhanced regulatory requirements proposed to be applicable only to 
SIDCOs and Subpart C DCOs.\64\ LCH asserted that ``it is important for 
all CCPs which clear swaps and other derivatives . . . to adhere to the 
higher standards.'' \65\ MGEX claimed that requiring DCOs that have not 
been designated by the Council as systemically important to ``opt-in'' 
to Subpart C compliance is ``unnecessarily burdensome and 
discriminatory'' in comparison to the regulatory treatment of 
SIDCOs.\66\ In support of its position, MGEX noted that SIDCOs will be 
held to the same standards as Subpart C DCOs, but will not be required 
to submit a Subpart C Election Form, or to otherwise engage in the 
Subpart C election process in order to become a QCCP.\67\ MGEX 
contended that requiring all currently registered DCOs to be held to 
the enhanced regulatory regime would negate the need for a Subpart C 
Election Form and, therefore, would treat all DCOs identically in terms 
of their registration status and requirements, which would enable DCOs 
to spend the time that they would otherwise spend on preparing a 
Subpart C Election Form on ensuring their compliance with the Subpart C 
regulations.\68\
---------------------------------------------------------------------------

    \63\ See LCH at 2-4, MGEX at 2-6.
    \64\ See LCH at 3, MGEX at 3.
    \65\ LCH at 2.
    \66\ MGEX at 2.
    \67\ Id.
    \68\ MGEX at 3-4.
---------------------------------------------------------------------------

    MGEX recognized, however, ``a number of potential issues'' with 
universal application of the Subpart C requirements.\69\ For example, 
this proposed alternative, by itself, would not provide flexibility for 
DCOs that do not wish to be held to the higher standards and could 
require the Commission to expend ``considerable resources to verify 
compliance for each currently registered DCO shortly after 
implementation'' and to engage in the processes necessary to revoke the 
Subpart C DCO status of those DCOs that fail to satisfy the proposed 
regulations.\70\ Both MGEX and LCH suggested alternatives. 
Specifically, these commenters recommended that the Commission replace 
the proposed ``opt-in'' regime with a regime under which the Subpart C 
standards would be applicable to all DCOs, but a DCO would be permitted 
to ``opt-out'' of the heightened standards, if it believed that 
attaining QCCP status was not important for its business.\71\ Both 
entities recommended that the opt-out regime be accompanied by an 
extension of the compliance deadline \72\ for all or some of the 
substantive proposed Subpart C regulations.\73\ Specifically, LCH and 
MGEX voiced concern that it would be difficult or unlikely for non-
SIDCO DCOs to satisfy the Subpart C election and implementation 
requirements necessary to achieve QCCP status prior

[[Page 72482]]

to December 31, 2013.\74\ LCH specifically stated that additional time 
is necessary to come into compliance with the regulations ``governing 
financial resources, system safeguards, risk management, and recovery 
and wind-down plans.'' \75\ Both MGEX and LCH commented on the 
particular difficulty of developing a recovery and wind down plan 
citing, respectively, the ``complexity and potential effects the 
contents of such a plan would have on the operation of a DCO'' \76\ and 
the fact that the Commission has not previously proposed any 
requirements with respect to such plans.\77\
---------------------------------------------------------------------------

    \69\ MGEX at 3.
    \70\ Id.
    \71\ See LCH at 2-4, MGEX at 3-4.
    \72\ The Commission notes that, there is no general ``compliance 
deadline'' for non-SIDCO DCOs. While a non-SIDCO that wishes to 
become a Subpart C DCO must satisfy all of the Subpart C 
requirements (except the specific obligations for which the DCO is 
permitted to apply for additional time to comply) at the time it 
elects to become subject to Subpart C, a DCO is not required to make 
that election at any particular time or at all, unless it determines 
that the cost of such compliance is usurped by the benefits it would 
receive through Subpart C status.
    \73\ LCH at 2-4, MGEX at 3-4.
    \74\ LCH at 2, MGEX at 2. The Basel III Counterparty Credit Risk 
and Exposures to Central Counterparties-Frequently Asked Questions 
(``Basel III FAQs'') state that, if a CCP's primary regulator has 
publicly stated that it is working towards implementing regulations 
consistent with the PFMIs, then such CCP may be treated as a QCCP 
until December 31, 2013. After December 31, 2013, the Basel III FAQs 
state that the CCP's primary regulator must have implemented 
regulations consistent with the PFMIs and these regulations must be 
applied to the CCP on an ongoing basis in order for such CCP to be 
eligible for QCCP status. See Basel III FAQs, Question 5.6, 
available at: http://www.bis.org/publ/bcbs237.pdf.
    \75\ See LCH at 3, 4.
    \76\ MGEX at 4.
    \77\ See LCH at 3, 4.
---------------------------------------------------------------------------

    In support of their requests for additional time to comply with the 
Subpart C requirements, LCH and MGEX cited the time needed to identify 
gaps between their current rules and procedures and the Subpart C 
regulations, to implement any necessary changes to comply with the 
Subpart C regulations, and to prepare and submit their Subpart C 
Election Forms.\78\ Both entities objected to the amount of time 
between the publication of the Proposal and the time when compliance 
will be required in order to qualify for QCCP status by the end of the 
2013.\79\
---------------------------------------------------------------------------

    \78\ See LCH at 3, MGEX at 3.
    \79\ See LCH at 4, MGEX at 2.
---------------------------------------------------------------------------

    MGEX also objected to the alleged disparate treatment afforded 
SIDCOs which ``have been able to prepare for compliance with the 
enhanced standards at least since the release of the PFMIs in April 
2012.'' \80\ In addition, LCH asserted that, as proposed, the 
Commission would be requiring Subpart C DCOs to come into compliance 
with all aspects of the PFMIS ``prior to many non-US CCPs.'' \81\ LCH 
suggested that adopting the final regulations, but permitting 
compliance at a later date, would allow the Commission to adopt the 
PFMIs prior to the end of 2013 while, at the same time, providing DCOs 
with an ``ability to achieve QCCP status by the end of 2013.'' \82\
---------------------------------------------------------------------------

    \80\ MGEX at 2.
    \81\ LCH at 4. In support of this assertion, however, LCH cites 
to just one aspect of the Subpart C requirements--the recovery and 
wind-down plans--which may not be required of certain EU CCPs in 
order to become and maintain QCCP status. Specifically, LCH asserts 
that ``CCPs in the European Union will not be required to provide 
recovery and wind-down plans to become and remain QCCPs as EMIR, 
which implements the PFMIs in Europe, does not include such a 
requirement. EU legislation implementing the recovery and wind 
resolution aspects of the PMIs is not expected to be proposed by the 
European Commission until early next year'' and ``implementation is 
unlikely before 2016 at the earliest.'' Id. LCH also notes that laws 
in some EU jurisdictions will require CCPs to have recovery plans 
prior to implementation of EU legislation. LCH at 4, n. 4. As noted 
below, the Commission will permit SIDCOs and Subpart C DCOs the 
opportunity to request that the Commission grant the SIDCO or 
Subpart C DCO an extension of the deadline with respect to recovery 
and wind-down plans for up to one year. See infra Section II.K. 
(Regulation 39.39 (Recovery and wind down for systemically important 
derivatives clearing organizations and subpart C derivatives 
clearing organizations)).
    \82\ See LCH at 2, 4. LCH claims that requiring a Subpart C DCO 
to comply with the Subpart C regulations by the end of 2013 would 
``likely result in Subpart C DCO's not being able to achieve QCCP 
status prior to that time'' and that the failure of a Subpart C DCO 
to achieve QCCP status would put the Subpart C DCO at a completive 
disadvantage to non-QCCPs that are ``grandfathered'' as QCCPs. LCH 
at 2. As noted below, the Commission believes that permitting 
Subpart C DCOs a broad-based opportunity to delay compliance with 
the Subpart C regulations, as suggested by LCH, could put a DCO at 
greater risk of failing to obtain QCCP status.
---------------------------------------------------------------------------

    The Commission continues to believe that non-SIDCO DCOs that are 
willing and able to satisfy the enhanced regulatory requirements 
contained in Subpart C, should, when they are able to do so, be 
afforded the opportunity to attain QCCP status and to reap the benefits 
that may result from that designation \83\ and that the application of 
Subpart C non-SIDCO DCOs that wish to become subject to regulations 
that are consistent with the standards set forth in the PFMIs helps 
promote the international consistency called for in Section 752 of the 
Dodd-Frank Act.\84\ Commenters addressing proposed regulation 39.31 
were unanimously supportive of this objective. Accordingly, the 
Commission has determined to adopt a regulatory framework that permits 
a DCO that has not been designated as systemically important by the 
Council to elect to become subject to the heightened standards set 
forth in Subpart C.
---------------------------------------------------------------------------

    \83\ See 78 FR 50268-50269.
    \84\ See discussion of existing standards for SIDCOs supra 
Section I.C.
---------------------------------------------------------------------------

    In response to the comments recommending that the'' Commission 
apply the regulatory requirements to all DCOs or employ an ``opt-out'' 
regime in lieu of the proposed ``opt-out'' procedures, the Commission 
notes that neither commenter advocating such alternatives provided any 
quantitative data or qualitative analyses of the costs and benefits of 
its suggested alternatives, particularly as compared to the 
Commission's Proposal. The Commission believes it would be 
inappropriate to adopt the proffered alternatives absent such analyses 
and without sufficient opportunity for the public to review and comment 
upon them.
    The Commission also is concerned that an ``opt-out'' regime would 
unfairly shift certain costs associated with the Subpart C regulations 
to those non-SIDCO DCOs that do not intend to avail themselves of the 
opportunity to become QCCPs. Specifically, regulation 39.31, as 
proposed and finalized herein, would require only those non-SIDCO DCOs 
that wish to become subject to the Subpart C regulations (and to attain 
the benefits of QCCP status) to complete and file a Subpart C Election 
Form. Non-SIDCO DCOs that do not wish to become subject to the Subpart 
C regulations (nor to obtain the benefits of QCCP status) are not 
obligated to take any further action. In contrast, an ``opt-out'' 
regime would impose an obligation to file an opt-out application on 
those DCOs that do not intend to seek the benefit of QCCP status, while 
removing the Subpart C Election Form obligation from those DCOs that 
do.
    In response to commenters' requests for additional time for Subpart 
C DCOs to comply with the new Subpart C regulations, and as discussed 
in more detail below, the Commission has determined that it would be 
appropriate to permit SIDCOs and Subpart C DCOs to request extensions 
of time to comply with the requirements for system safeguards, default 
rules and procedures for uncovered credit losses or liquidity, and 
recovery and wind-down plans contained in regulations 39.34, 39.35 and 
39.39, respectively.\85\ The Commission is declining, however, to 
permit requests from a DCO for, or to generally provide, a wholesale 
extension of time to comply with the new Subpart C regulations. Thus, a 
DCO seeking to become a Subpart C DCO will otherwise be required to be 
in compliance with the Subpart C regulations at the time it makes its

[[Page 72483]]

Subpart C election. The new Subpart C regulations finalized herein seek 
to provide DCOs that have not been designated by the Council as 
systemically important the opportunity to qualify as QCCPs. Despite 
LCH's assertion to the contrary,\86\ the Commission is concerned that a 
broad-based extension of the compliance deadline (in contrast to 
individually justified extensions with respect to particular 
requirements) would be more likely to jeopardize the ability of a 
Subpart C DCO to achieve QCCP status. As noted above, rules and 
regulations that are consistent with the PFMIs must be implemented by 
the end of 2013.\87\ Moreover, as noted above, a QCCP is defined, in 
part, as a CCP that is prudentially supervised in a jurisdiction where 
the relevant regulator applies to the CCP, on an ongoing basis, 
domestic rules and regulations that are consistent with the PFMIs.\88\
---------------------------------------------------------------------------

    \85\ See infra Section II.F. (Regulation 39.34 (System 
safeguards for systemically important derivatives clearing 
organizations and subpart C derivatives clearing organizations)), 
Section G (Regulation 39.35 (Default rules or procedures for 
uncovered credit losses or liquidity shortfalls (recovery) for 
systemically important derivatives clearing organizations and 
subpart C derivatives clearing organizations)), and Section II.K 
(Regulation 39.35 (Recovery and wind-down for systemically important 
derivatives clearing organizations and subpart C derivatives 
clearing organizations)).
    \86\ Notwithstanding its timing concerns, LCH has indicated that 
it intends to ``take advantage of the Subpart C election process. 
LCH at 3.
    \87\ See supra n 91.
    \88\ See supra Section I.F. (The Role of the PFMIs in 
International Banking Standards).
---------------------------------------------------------------------------

    The Commission further notes that a non-SIDCO DCO is obligated to 
comply with the Subpart C regulations only if--and when--the DCO 
affirmatively elects to become subject to such regulations, based upon 
its own examination of the benefits (including, but not limited to, the 
opportunity to attain QCCP status) and burdens thereof. No non-SIDCO 
DCO is obligated to elect to become a Subpart C DCO and thereby comply 
with the Subpart C regulations by December 31, 2013 or any other date 
unless it believes that it is prudent to do so in light of its 
particular business. The Commission stands ready to review the 
application of any DCO that is prepared to be held to the Subpart C 
standards, whether the DCO is prepared to do so on December 31, 2013 or 
any later date.
    The Commission also disagrees with commenters' assertions that 
potential Subpart C DCOs have only recently been advised of the nature 
of the additional regulations to which they, if they choose, will be 
subject. The final PFMIs were published in April of 2012. In the same 
month, the Commission and other domestic financial regulators issued a 
joint press release explicitly notifying the public of the publication 
of the final PFMIs.\89\ At a minimum, therefore, DCOs have been on 
notice of the specific requirements of the PFMIs since April 2012. 
Moreover, the Basel CCP Capital Requirements were published in July of 
2012, and as mentioned above, the Basel FAQs, which were published in 
December of 2012, state that during 2013, if a CCP regulator has not 
yet implemented the PFMIs but has publicly stated that it is working 
towards implementing these principles, the CCPs that are regulated by 
the CCP regulator may be treated as QCCPs.\90\ Thus, by December of 
2012, DCOs were on notice of the preferential capital treatment that 
would result from becoming subject to regulations that are consistent 
with the PFMIs by the end of 2013.
---------------------------------------------------------------------------

    \89\ Joint Press Release, Board of Governors of the Federal 
Reserve System, the Commodity Futures Trading Commission and the 
Securities and Exchange Commission, CPSS-IOSCO Issue Final Report on 
Principles for Financial Market Infrastructures'' (April 16, 2012).
    \90\ Basel III FAQs at 23. In the Final SIDCO Rule the 
Commission explicitly advised the public of its intention toward 
implementing regulations that are fully consistent with the PFMIs by 
the end of 2013. See SIDCO Final Rule at 4966 (``Moreover, the 
Commission, which is a member of the Board of IOSCO, is working 
towards implementing rules and regulations that are fully consistent 
with the PFMIs by the end of 2013'').
---------------------------------------------------------------------------

1. Regulation 39.31(a)--Eligibility Requirements
    Regulation 39.31(a), as proposed, set forth the two categories of 
entities that would be eligible to elect to become subject to the 
provisions in Subpart C. As proposed: (1) A DCO that is not a SIDCO 
could request such election using the procedures set forth in proposed 
regulation 39.31(b) and (2) 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). The Commission did not receive any 
comments specifically addressing proposed regulation 39.31(a). 
Accordingly, for the reasons cited in the Proposal,\91\ the Commission 
is adopting regulation 39.31(a) as proposed.
---------------------------------------------------------------------------

    \91\ 78 FR 50298.
---------------------------------------------------------------------------

2. Regulation 39.31(b)--Subpart C Election and Withdrawal Procedures 
for Registered DCOs
    Regulation 39.31(b), as proposed, 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 the DCO could 
withdraw that election.\92\ Comments generally addressing the Proposal 
to adopt regulations that would permit a DCO to elect to become subject 
to Subpart C (i.e., comments on the ``opt-in'' regime) are discussed 
above.\93\ In addition, the Commission received one comment referencing 
the Subpart C Election Form. MGEX asserted that the Commission should 
``waive'' the Subpart C Election Form as ``it seems overly burdensome 
and costly for a currently registered DCO to be required to complete an 
entirely new application which calls for submission of the same or 
similar information and analysis that the DCO previously provided [in 
its DCO Application]''.\94\ In support of this request, MGEX cites to a 
statement in the Proposal that the Commission ``anticipates 
considerable overlap between the information and documentation 
contained in the Registration Application files [sic] by a DCO 
Applicant and the information and documentation that would be required 
to be submitted to the Commission as part of the Subpart C Election 
Form.'' \95\ This reference is misplaced. The cited statement was made 
in the portion of the Proposal describing the proposed election and 
withdrawal procedures for new DCO applicants.\96\ The ``overlap in 
information and documentation'' to which the Commission was referring 
is the overlap between the materials that would be submitted by new 
applicants for DCO registration in their DCO applications and the 
materials that a newly registered DCO would supply as part of a Subpart 
C Election Form submitted shortly thereafter.\97\ In contrast, the 
information supplied by a currently registered DCO as part of the Form 
DCO that was filed when such DCO applied for registration is likely to 
be stale and would need to be updated.\98\ Moreover, the Subpart C 
Election Form simply calls for the electing DCO to demonstrate its 
compliance with the requirements of Subpart C, with fairly minimal 
formatting requirements. The form is intended to provide the 
Commission, clearing members, and customers (and, significantly, the 
regulators of such

[[Page 72484]]

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.\99\ Thus, the Commission continues to believe that it is 
necessary and appropriate to require DCOs electing to become subject to 
Subpart C to submit such information to the Commission.
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    \92\ 78 FR 50271, 50298-99.
    \93\ See supra Section II.C. (Regulation 39.31 (Election to 
become subject to the provisions of Subpart C)).
    \94\ MGEX at 5.
    \95\ MGEX at 5 (citing 78 FR 50271).
    \96\ 78 FR 50271.
    \97\ This distinction is even more important in the case of a 
clearing organization, such as MGEX, that was ``grandfathered in'' 
to DCO status under the Commodity Futures Modernization Act of 2000 
(Pub. L. No. 106-554, 114 Stat. 2763, sec. 112(f) (adding sec. 5a(b) 
to the CEA) and thus never filed an application for registration as 
a DCO.
    \98\ See Subpart C Election Form, Exhibit Instructions at no 2, 
(``If the [DCO] is an Applicant, in its Form DCO, the [DCO] may 
summarize such information and provide a cross reference to the 
Exhibit in this Subpart C Election Form that contains the required 
information'' (emphasis added)).
    \99\ See 78 FR 50269.
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    MGEX further asserts that the Subpart C Election Form requirement 
puts Subpart C DCOs at a risk of ``delayed regulatory approval'' not 
borne by SIDCOs, which it claims are ``grandfathered in to Subpart C . 
. . due to their SIDCO status.'' \100\ MGEX states that to ``ensure 
equal treatment'' among all DCOs, any requirements to provide 
information as part of the Subpart C election process should be imposed 
upon SIDCOs as well.\101\ The Commission notes that SIDCOs, having been 
designated as systemically important by the Council, are subject to 
annual examinations under Title VIII and are, therefore, in a different 
position than DCOs that have not been so designated, but wish to elect 
to be held to the same international standards in an effort to attain 
QCCP status. The Commission also notes that SIDCOs, as well as Subpart 
C DCOs, are required by regulation 39.37, as finalized herein, to 
complete and publically disclose their responses to the Disclosure 
Framework.\102\ As such, and since SIDCOs are required to be subject to 
the Subpart C regulations, the Commission does not feel it necessary to 
require SIDCOs to complete a Subpart C Election Form. In addition, 
because the Commission declines to require all DCOs to comply with the 
regulations in Subpart C, the Subpart C Election Form is necessary to 
provide a mechanism by which a registered DCO may elect to become 
subject to Subpart C.
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    \100\ MGEX at 5.
    \101\ Id.
    \102\ See supra Section II.I. (Regulation 39.37 (Additional 
disclosure for systemically important derivatives clearing 
organizations and subpart C derivatives clearing organizations)).
---------------------------------------------------------------------------

    In its comments on proposed regulation 39.37, MGEX also asserted 
that, while requiring the submission of a Quantitative Disclosure 
Document is ``consistent with the PFMIs,'' the Commission should delay 
implementation of this requirement until the Quantitative Disclosure 
Document is finalized in order to allow DCOs time to review and comment 
upon it or to otherwise prepare for compliance.\103\ The Commission 
confirms that, as noted in the Subpart C Election Form, as proposed and 
finalized herein, completion and publication of the Quantitative 
Information Disclosure will not be required until the criteria for such 
disclosure has been finalized and published, which has not yet 
occurred.
---------------------------------------------------------------------------

    \103\ MGEX at 8-9.
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    Finally, MGEX responded to the Commission's request for 
comment\104\ on whether or not the Commission should add a requirement 
that the certifications contained in the Subpart C Election Form be 
made under penalty of perjury. MGEX opposed the addition of this 
requirement.\105\ The Commission notes that such a requirement would be 
inconsistent with the current Form DCO, which does not include a 
similar requirement. Therefore, the Commission has decided not to add a 
perjury certification to the Subpart C Election Form.
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    \104\ 78 FR 50272.
    \105\ MGEX at 5.
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    Accordingly, after careful review and consideration of the 
comments, and for the reasons cited above and set forth in the 
Proposal,\106\ the Commission is adopting regulation 39.31(b) as 
proposed. The Commission has, however, altered the Subpart C Election 
Form in two respects.
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    \106\ 78 FR 50268-69.
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    As discussed further below,\107\ DCOs that seek to become Subpart C 
DCOs (as well as SIDCOs) will be permitted to request an extension of 
up to one year to comply with any of the provisions of regulations 
39.34, 39.35, or 39.39 pursuant to those regulations.\108\ The 
Commission has determined that, to the extent that a DCO elects to 
request any such extensions, it must do so prior to filing the Subpart 
C Election Form and the General Instructions to the Subpart C Election 
Form have been modified accordingly.\109\ The Commission also has made 
technical modifications to the certifications contained in the Subpart 
C Election Form to account for any extensions of time granted pursuant 
to regulation 39.34(d) and/or 39.39(f).
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    \107\ See infra at sections II.F. (Regulation 39.34--System 
Safeguards), II.G. (Regulation 39.35--Default Rules and Procedures), 
and II.K. (Regulation 39.39 (Recovery and Wind-Down).
    \108\ Regulation 39.34(d), as finalized herein, provides that 
the Commission may, upon request, grant a SIDCO or Subpart C DCO an 
extension of up to one year to comply with any of the provisions of 
regulation 39.34. Regulation 39.39(f), as finalized herein, 
similarly provides that a SIDCO or Subpart C DCO, upon request, may 
be granted an extension of up to one year to comply with the 
provisions of regulations 39.35 and 39.39. Any such requests made by 
a DCO seeking to become a Subpart C DCO will become part of that 
DCO's Subpart C Election Form.
    \109\ The Commission notes that it is not prescribing a 
particular time period elapse between the filing of applications for 
compliance extensions and the filing of the Subpart C Election Form.
---------------------------------------------------------------------------

    As noted in the Proposal,\110\ 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 that its 
election to become subject to Subpart C becomes effective, would be 
held to the requirements of Subpart C. As of that date, the DCO would 
be subject to examination for compliance with Subpart C and to 
potential enforcement action for non-compliance. This status would 
continue until such time, if any, that the election is properly vacated 
as set forth in regulation 39.31(e), as finalized.\111\ 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 of the 
DCO's election.
---------------------------------------------------------------------------

    \110\ 78 FR 50269-50270.
    \111\ See infra Section II.C.5. (Regulation 39.31(e)--
Rescission).
---------------------------------------------------------------------------

3. Regulation 39.31(c)--Election and Withdrawal Procedures for DCO 
Applicants
    Regulation 39.31(c), as proposed, sets forth procedures through 
which a DCO Applicant could request to become subject to the provisions 
of Subpart C at the time the DCO Applicant files its Registration 
Application. The Commission did not receive any comments specifically 
addressing proposed regulation 39.31(c).\112\ Accordingly, for the 
reasons cited in the Proposal,\113\ the Commission is adopting 
regulation 39.31(c) as proposed. In the interest of administrative 
economy, the Commission continues to encourage DCO Applicants to make 
their election to become subject to Subpart C at the time that their 
Registration Application is filed. Simultaneous filings would appear to 
allow Commission resources to be used more efficiently and effectively.
---------------------------------------------------------------------------

    \112\ See supra Section II.C. (Regulation 39.31 (Election to 
become Subject to Subpart C) for a discussion of comments regarding 
the proposed opt-in regime and process generally and the Subpart C 
Election Form.
    \113\ 78 FR 50271.
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4. Regulation 39.31(d)--Public Information
    Regulation 39.31(d), as proposed, 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. 
The Commission did not receive any comments with respect to proposed 
regulation 39.31(d). Accordingly, for the reasons set forth in

[[Page 72485]]

the Proposal,\114\ the Commission is adopting regulation 39.31(d) as 
proposed.
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    \114\ Id.
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5. Regulations 39.31(e)--Rescission
    Regulation 39.31(e), as proposed, 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. Such rescission 
would, however, be subject to certain conditions. 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. 
The Subpart C DCO would be required to comply with all of the 
provisions of Subpart C until such rescission is effective and the 
Commission would retain its authority concerning any activities or 
events occurring during the time that the DCO maintained its status as 
a Subpart C DCO.
    Regulation 39.31(e), as proposed, also would require a Subpart C 
DCO that files a notice of intent to rescind to (1) provide specified 
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; (2) provide specified notices to 
the general public; and (3) remove references to its Subpart C DCO (and 
QCCP) status on its Web site and in other materials that it provides to 
its clearing members and customers, other market participants, or 
members of the public. In addition, the employees and representatives 
of the Subpart C DCO would be prohibited 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 is filed.
    The Commission received two comments addressing proposed regulation 
39.31(e). ISDA recommended that the Commission modify the proposed 
regulation to require, as a condition to a Subpart C DCO's rescission 
of its Subpart C election, ``to certify that it has obtained approval 
from clearing members (e.g., by member ballot) to rescind the 
election.'' \115\ In response to ISDA's suggestion, the Commission 
believes that this is a matter of corporate governance and the DCO 
should follow its own policies and procedures with respect to internal 
decisions regarding rescission. The Commission further notes that 
existing regulation 39.3(e) does not require a DCO to certify that it 
has obtained the approval of its clearing members to vacate its DCO 
registration prior to filing with the Commission a request to do so 
\116\ and, thus, requiring the certification suggested by ISDA would be 
in tension with existing regulations. Accordingly, the Commission has 
declined to accept ISDA's recommendation.
---------------------------------------------------------------------------

    \115\ ISDA at 3-4.
    \116\ 17 CFR 39.3(e).
---------------------------------------------------------------------------

    FIA recommended that the Commission extend the time period between 
the date that a DCO files a notice of intent to rescind its election to 
be subject to Subpart C and the date that such rescission could become 
effective from 90 days to 180 days.\117\ In support of its 
recommendation, the FIA agreed with the view voiced by the Commission 
in the Proposal \118\ that a delay in the effective date of the 
rescission is necessary to provide banks and other entities that wish 
to limit their cleared transactions to clearing solely through a QCCP 
sufficient time to transfer their business to another Subpart C DCO or 
a SIDCO.\119\ The FIA expressed concern, however, that the 90 day delay 
is insufficient ``to allow a clearing member to make a determination 
whether to withdraw as a clearing member and, if it elects to do so, 
notify its customers, find one or more clearing members prepared to 
accept each customer and allow the new clearing member and each 
customer to negotiate the terms of their agreement.'' \120\ The 
Commission recognizes that the clearing members of a DCO that has filed 
a notice of intent to rescind its election to become subject to Subpart 
C may need additional time to determine and to effectuate the actions 
they may wish to take in light of such filing and believes that a 180 
day waiting period until such rescission may become effective is 
reasonable. Accordingly, the Commission has decided to lengthen the 
minimum time period between the date a notice of intent to rescind an 
election to become subject to Subpart C is filed and the date that such 
rescission may become effective to 180 days. For the reasons cited 
above and set forth in the Proposal,\121\ the Commission is adopting 
regulation 39.31(e) as proposed in all other respects.
---------------------------------------------------------------------------

    \117\ FIA at 5.
    \118\ 78 FR 50272.
    \119\ FIA at 4.
    \120\ FIA at 4-5.
    \121\ 78 FR 50271-72.
---------------------------------------------------------------------------

6. Regulations 39.31(f)--Loss of SIDCO Designation
    Regulation 39.31(f), as proposed, would provide that a SIDCO that 
is registered with the Commission, but whose designation of systemic 
importance is rescinded by the Council,\122\ would 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 did not receive any comments 
on proposed regulation 39.31(f). Accordingly, for the reasons set forth 
in the Proposal,\123\ the Commission is adopting regulation 39.31(f) as 
proposed.
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    \122\ See 12 CFR 1320.13(b) (procedure for the Council to 
rescind a designation of systemic importance for a systemically 
important financial market utility).
    \123\ 78 FR 50272.
---------------------------------------------------------------------------

7. Regulation 39.31(g)
    Regulation 39.31(g), as proposed, provides that all forms and 
notices required by regulation 39.31 shall be filed electronically with 
the Secretary of the Commission in the format and manner specified by 
the Commission. The Commission did not receive any comments on proposed 
regulation 39.31(g) and, thus, is adopting the regulation as proposed.

D. Regulation 39.32 (Governance for systemically important derivatives 
clearing organizations and subpart C derivatives clearing 
organizations)

    The Commission proposed adding 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 would be consistent with 
PFMI Principle 2 (Governance).\124\
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    \124\ 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. The Commission is not addressing those 
regulations in this rulemaking.
---------------------------------------------------------------------------

    As discussed above, DCO Core Principle O states that each DCO must 
establish governance arrangements that are transparent to fulfill 
public interest requirements and to permit the

[[Page 72486]]

consideration of the views of owners and participants.\125\ 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 to have ``appropriate 
skills,'' ``incentives,'' and ``experience.'' \126\
---------------------------------------------------------------------------

    \125\ See supra Section I.D.
    \126\ PFMIs at Principle 2, K.C. 4-5.
---------------------------------------------------------------------------

    As proposed, 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.\127\
---------------------------------------------------------------------------

    \127\ The provisions concerning transparency describe which 
information, including the identities of board members, should be 
disclosed to the public and/or the Commission.
---------------------------------------------------------------------------

    As proposed, 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.
    As proposed, 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 requested comment on proposed regulation 39.32 and 
asked that commenters include a detailed description of any 
alternatives to proposed regulation 39.32 and estimates of the costs 
and benefits of such alternatives. LCH commented that a SIDCO or 
Subpart C DCO should be permitted to petition the Commission for 
additional time to comply with new regulation 39.32 and with all other 
substantive regulations contained in this rulemaking. The Commission 
does not believe that a SIDCO or Subpart C DCO should be permitted to 
petition for additional time to comply with new regulation 39.32 for 
the reasons stated above.\128\
---------------------------------------------------------------------------

    \128\ See supra Section II.C. (Regulation 39.31 (Election to 
become subject to the provisions of Subpart C)).
---------------------------------------------------------------------------

    LCH also requested clarification as to which major decisions of the 
board of directors should be disclosed under new regulation 
39.32(a)(3). LCH stated that a board may make a resolution that is not 
determinative, for example to commence exploratory negotiations for 
making an acquisition. LCH stated that it did not believe Principle 2 
would require it to publish such a decision because Explanatory Note 
3.2.18 to Principle 2 states that an FMI need not disclose a major 
decision where doing so would endanger commercial confidentiality. The 
Commission agrees with LCH that there is a distinction between 
exploratory negotiations and a final decision. The Commission also 
agrees with the suggestion made in Explanatory Note 3.2.18 that it is 
reasonable for a DCO to focus on disclosing the ``outcome'' of 
decisions made by the board rather than decisions that are not 
determinative. It should also be noted that paragraph (a)(3) does not 
require a disclosure that would compromise ``statutory and regulatory 
requirements on confidentiality and disclosure.''
    Similarly, MGEX requested clarification as to: what qualifies as a 
``major decision'' under proposed paragraph (a)(3); which 
``information'' the Commission was referring to in footnote 137 of the 
Proposal; and whether the disclosure provision of paragraph (a) is 
intended to be a ``reiteration of existing law[s] or regulation[s].'' 
MGEX also suggested that paragraph (a) be amended to include a 
provision stating that a DCO may withhold disclosing a major decision 
of the board of directors if disclosing it would ``stifle candid board 
debate or endanger commercial confidentiality.'' The Commission agrees 
with MGEX that regulation 39.32 affords a DCO reasonable discretion in 
determining which decisions are ``major'' so as to warrant disclosure 
under paragraph (a)(3) and which decisions should not be disclosed due 
to concerns about confidentiality. Moreover, paragraph (a)(3) requires 
disclosure of ``decisions,'' rather than the debate preceding them. The 
Commission concludes that the language of proposed paragraph (a)(3) 
suffices in these regards.
    ISDA commented that regulation 39.32 should address decision-making 
by a SIDCO or Subpart C DCO during a crisis or emergency. Specifically, 
ISDA suggests that there should be a provision requiring a SIDCO or 
Subpart C DCO to obtain the views and approval of member 
representatives (e.g. through the DCO's risk committee or otherwise) 
before taking any material action in response to an emergency. The 
Commission has decided not to include this requested provision because 
the Commission has decided not to impose requirements beyond those 
required by Principle 2 as part of this rulemaking.
    Accordingly, the Commission has decided to finalize regulation 
39.32 as proposed. The governance requirements set forth in the 
proposed regulation were designed to enhance risk management and 
controls by promoting fitness standards for directors and managers, 
promoting transparency of

[[Page 72487]]

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 believes that that these requirements should be applicable 
to SIDCOs. Moreover, it would be beneficial to Subpart C DCOs, their 
members and customers, and the financial system generally, for 
regulation 39.32 to apply to Subpart C DCOs.

E. Regulation 39.33 (Financial resources requirements for systemically 
important derivatives clearing organizations and subpart C derivatives 
clearing organizations)

    In August of 2013, the Commission finalized Regulation 39.29, which 
sets forth financial resource requirements for SIDCOs in a manner that 
parallels the financial resources standard in Principle 4 of the 
PFMIs.\129\ The Commission proposed to 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.
---------------------------------------------------------------------------

    \129\ See SIDCO Final Rule 78 FR 49666.
---------------------------------------------------------------------------

    The Commission first proposed to renumber existing regulation 39.29 
to 39.33 and to apply the requirements set forth therein to Subpart C 
DCOs. The Commission further proposed, 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 proposed 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 proposed 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 proposed amending paragraph (a) to state that the Commission 
shall also determine, if it deems appropriate, whether any of the 
activities of a SIDCO or Subpart C DCO, in addition to clearing credit 
default swaps, credit default futures, or any derivatives that 
reference either, has a more complex risk profile and that in making 
this determination, the Commission may take into consideration 
characteristics such as non-linear and discrete jump-to-default price 
changes.\130\ The Commission also proposed 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.\131\
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    \130\ The Commission's amendment to regulation 140.94(a) 
delegates the authority to make these determinations to the Director 
of the Division of Clearing and Risk.
    \131\ The preamble to the SIDCO Final Rule adopting release made 
clear that paragraph (b) applied to both Cover One and Cover Two, 
but the Commission has decided to add clarifying language to the 
regulation text. See generally SIDCO Final Rule.
---------------------------------------------------------------------------

    The PFMI Explanatory Notes explain that liquidity risk arises in an 
FMI (such as a DCO) when settlement obligations are not completed when 
due as part of its settlement process. Liquidity risk can arise in a 
number of ways: between an FMI and its participants, between an FMI and 
other entities (such as the FMI's settlement banks and liquidity 
providers), or between an FMI's participants.\132\ The Commission 
proposed adding paragraphs (c), (d), and (e) to address the liquidity 
of SIDCOs' and Subpart C DCOs' financial resources. The liquidity 
resources discussed in paragraphs (c), (d), and (e) should be 
sufficient to address the different exposures to liquidity risk 
applicable to that DCO.
---------------------------------------------------------------------------

    \132\ See PFMIs, E.N. 3.7.1.
---------------------------------------------------------------------------

    Under proposed paragraph (c)(1), a SIDCO or Subpart C DCO would be 
required 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. Under proposed paragraph 
(c)(2), a SIDCO or Subpart C DCO would be required 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.
    Under proposed paragraph (c)(3), a SIDCO or Subpart C DCO would be 
limited to using only certain types of liquidity resources to satisfy 
the minimum liquidity requirement set forth in proposed paragraph 
(c)(1).\133\ 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.\134\
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    \133\ In determining whether the liquidity resources that are 
eligible under paragraph (c)(3) are sufficient in amount 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.
    \134\ Times of financial stress and the event of the default of 
a member of the DCO are, of course, the times when reliable 
liquidity arrangements are most needed.
---------------------------------------------------------------------------

    Under proposed paragraph (c)(3)(ii), a SIDCO or Subpart C DCO would 
be required to take appropriate steps to verify that its qualifying 
liquidity arrangements do not include material adverse change 
provisions and are enforceable, and will be highly reliable, even in 
extreme but plausible market conditions.
    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

[[Page 72488]]

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.\135\
---------------------------------------------------------------------------

    \135\ 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.
---------------------------------------------------------------------------

    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 or agency of a foreign banking organization, 
a trust company, or a syndicate of depository institutions, U.S. 
branches or 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. 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 proposed 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).\136\
---------------------------------------------------------------------------

    \136\ This provision is consistent with PFMI Principle 4, K.C. 
4.
---------------------------------------------------------------------------

    The Commission requested comment on all aspects of proposed 
regulation 39.33. ISDA, MGEX and the European Commission each commented 
on paragraph (a)(1). ISDA requested clarification of the term ``credit 
exposure,'' which the Proposal used to replace the term ``financial 
obligation,'' which currently appears in regulation 39.29 (renumbered 
as regulation 39.33 as part of this rulemaking). In response to this 
comment, the Commission will revert to the term financial obligation.
    MGEX requested clarification that a Subpart C DCO that is neither 
systemically important in multiple jurisdictions nor involved in 
activities with a more complex risk profile would be required to meet 
only the Cover One financial resources requirement,\137\ not the Cover 
Two requirement.\138\ The Commission notes that MGEX understood 
paragraph (a)(1) correctly, and the Commission believes that the 
language in paragraph (a)(1) is sufficiently clear.
---------------------------------------------------------------------------

    \137\ Regulation 39.11 requires 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 financial exposure to the CCP in extreme but 
plausible market conditions, otherwise known as ``Cover One.''
    \138\ The term ``Cover Two'' refers to the requirement that a 
DCO 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 
loss (which would include both proprietary and customer accounts) 
for the SIDCO in extreme but plausible market conditions.
---------------------------------------------------------------------------

    The European Commission disagreed with the Commission's decision to 
require a SIDCO or Subpart C DCO to meet the Cover Two financial 
resources requirement only if it is systemically important in multiple 
jurisdictions or is involved in activities with a more complex risk 
profile. The European Commission suggested that all SIDCOs should be 
required to comply with the Cover Two requirement for the following 
reasons. First, any DCO that serves non-US clearing members or non-US 
trading venues is systemically important.\139\ In addition, any DCO 
that is systemically important in the U.S. is systemically important 
internationally.\140\ Second, requiring certain DCOs to meet the Cover 
One requirement while requiring other DCOs to meet the Cover Two 
requirement would be ``detrimental to the object of building equal 
conditions of fair competition'' between U.S.-registered DCOs and DCOs 
registered in other jurisdictions.\141\ Third, banking regulators 
cannot deem various SIDCOs and Subpart C DCOs to all be QCCPs if some 
are required to meet the Cover One requirement while others are 
requirement to meet the Cover Two requirement.\142\ Fourth, differing 
financial resources requirements would make the European Commission's 
equivalence assessment of U.S.-registered DCOs more difficult.\143\ 
Fifth, it would be more prudent from a risk management perspective if 
the Cover Two requirement applied to all products and not only those 
``with a more complex risk profile.'' \144\
---------------------------------------------------------------------------

    \139\ European Commission at 2.
    \140\ Id.
    \141\ Id.
    \142\ Id.
    \143\ European Commission at 2-3.
    \144\ European Commission at 3.
---------------------------------------------------------------------------

    The applicability of the Cover Two requirement in paragraph (a)(1) 
is consistent with Principle 4 of the PFMIs. Further, while the 
European Commission raises important points, further work would need to 
be done to consider the costs versus the benefits of imposing a Cover 
Two financial resources requirements on all DCOs regardless of whether 
that DCO was affirmatively found to be systemically important by the 
Council (or other jurisdictions) and regardless of the types of 
products that DCO clears. Nonetheless, the Commission notes that the 
two existing SIDCOs will, in fact, be subject to a Cover Two financial 
resources requirement.\145\
---------------------------------------------------------------------------

    \145\ As discussed in the final rule on Enhanced Risk Management 
Standards for Systemically Important Derivatives Clearing 
Organizations, ICE Clear Credit clears credit default swaps (which 
is a product with a more complex risk profile) and currently meets a 
Cover Two requirement. See 78 FR 49670. Further, CME Clearing 
currently sizes its guaranty fund for interest rate swaps and its 
guaranty fund for credit default swaps to a Cover Two standard, and 
is required to meet a Cover Two standard for its base guaranty fund 
pursuant to regulation 39.29(a) by the end of 2013 because its 
clears credit default swaps. See 78 FR 49671.
---------------------------------------------------------------------------

    Chris Barnard commented that he supported the language of paragraph 
(a)(3) (determination of whether an activity has a more complex risk 
profile) and that it will appropriately result in higher financial 
resources requirements for such activities. Chris Barnard commented 
further that this should improve the robustness of a DCO's clearing 
system and help protect the financial system from contagion.\146\
---------------------------------------------------------------------------

    \146\ Chris Barnard at 2.
---------------------------------------------------------------------------

    With respect to proposed paragraph (c)(2)(satisfaction of 
settlement in all relevant currencies), LCH commented that it seeks 
confirmation that the provision is intended to pertain to ``material 
currencies only, which are indeed the ones [for which a liquidity 
shortfall would be] likely to disrupt the SIDCO's [or Subpart C DCO's] 
services and impact financial stability.'' \147\
---------------------------------------------------------------------------

    \147\ LCH at 5.
---------------------------------------------------------------------------

    There is no support for the implied assertions that a DCO could 
fail to meet its obligations in certain currencies on time without 
disrupting its services or impacting financial stability, and that a 
DCO could forgo arrangements to meet its obligations in certain 
currencies consistent with Principle 7. Any default by a DCO to meet 
its obligations on time would be likely to disrupt its services and 
impact financial stability. Thus, in this context, new paragraph (c)(2) 
covers those currencies for which the SIDCO or Subpart C DCO has 
obligations to perform settlements, as defined in Sec.  39.14(a)(1), to 
its clearing members.

[[Page 72489]]

The Commission believes that this interpretation is consistent with 
Principle 7. To be sure, where an FMI's obligations in a particular 
currency are relatively small, the depth and complexity of the 
arrangements necessary to establish high reliability is likely 
proportionately less demanding.
    In addition, with respect to proposed paragraph (c)(2), CME 
commented that it clears derivatives that settle in approximately 14 
currencies and that it would be difficult to obtain committed credit 
facilities for currencies other than G-7 currencies.\148\ For those 
other currencies, CME claimed that it would be forced to require a 
restrictive set of margin policies, including requiring a clearing 
member to post margin in the same currency as the settlement 
currency.\149\ This, CME argued, would require CME's bank affiliated 
clearing members to face increased capital charges because it may be 
difficult for cash collateral in such currencies to receive bankruptcy 
remote treatment (and, therefore, a smaller capital requirement) unless 
such cash is posted with a central bank.\150\
---------------------------------------------------------------------------

    \148\ CME at 10.
    \149\ Id.
    \150\ Id.
---------------------------------------------------------------------------

    As an initial matter, CME provided no support for the assertion 
that cash collateral would not be bankruptcy remote in the case of a 
DCO. To the contrary, section 761(10) of the Bankruptcy Code defines 
customer property to include both cash and securities, and 761(16) 
defines member property in terms of customer property. Section 766(i) 
provides that, in the case of the insolvency of a clearing 
organization, both customer and member property will be protected.\151\ 
A SIDCO or Subpart C DCO will have discretion to determine the most 
efficient means of ensuring sufficient liquidity, which may include 
requiring (or incentivizing) members to post all or a part of their 
collateral in the settlement currency.
---------------------------------------------------------------------------

    \151\ 11 USC 761(i).
---------------------------------------------------------------------------

    With respect to proposed paragraph (c)(3)(i)(E), CME commented that 
it is inconsistent with Principle 7 to require U.S. Treasury 
securities, which are held by a SIDCO or Subpart C DCO for purposes of 
meeting the minimum amount of liquidity resources required under 
proposed paragraph (c)(1), to be subject to ``committed'' funding 
arrangements.\152\ CME commented that it interprets Principle 7 to 
require only ``investments'' to be subject to ``prearranged and highly 
reliable funding arrangements'' and not ``highly marketable 
collateral,'' of which U.S. Treasury securities are an example.\153\
---------------------------------------------------------------------------

    \152\ CME at 10.
    \153\ CME at 3-4.
---------------------------------------------------------------------------

    CME stated further that the European Securities and Markets 
Authority (ESMA), the Monetary Authority of Singapore (MAS), and the 
Reserve Bank of Australia (RBA) have each taken a ``more flexible 
approach'' than proposed paragraph (c)(3)(i)(E) in interpreting the 
qualifying liquid resources provisions of Principle 7.\154\ According 
to CME, these other regulators do not, in some cases, require highly 
marketable collateral such as U.S. Treasury securities to be subject to 
committed funding facilities.\155\ In addition, CME stated that other 
regulators do not, in some cases, require highly marketable collateral 
to be subject to prearranged and highly reliable funding 
arrangements.\156\
---------------------------------------------------------------------------

    \154\ CME at 4.
    \155\ Id.
    \156\ Id.
---------------------------------------------------------------------------

    ISDA commented that it would be neither necessary nor appropriate 
to require that U.S. Treasuries, used to satisfy the minimum liquid 
resources requirement, be subject to prearranged and highly reliable 
funding arrangements.\157\ According to ISDA, such a requirement has 
the potential to exacerbate a liquidity crisis and pass on risk from 
the DCO to its liquidity providers.\158\
---------------------------------------------------------------------------

    \157\ ISDA at 4.
    \158\ Id.
---------------------------------------------------------------------------

    CME further argued that it would be unnecessary to require U.S. 
Treasury securities to be subject to committed funding arrangements 
because the U.S. Treasury market is the world's global standard for 
reliable liquidity and that same-day settlement of U.S. Treasury 
securities is reliably available in material sizes for a negligible 
yield concession of 1-2 basis points per annum.\159\ CME noted that 
banks are permitted to classify U.S. Treasury securities as ``High 
Quality Liquid Assets'' (HQLA) under the Basel III capital rules. CME 
also stated that due to their robust liquidity and eligibility to be 
pledged at the Federal Reserve Bank discount window, U.S. Treasury 
securities are extremely safe for banks to accept under uncommitted 
repurchase agreements.\160\
---------------------------------------------------------------------------

    \159\ CME at 7-8.
    \160\ CME at 8.
---------------------------------------------------------------------------

    CME also argued that there would be several negative consequences 
if the Commission required a DCO to arrange for U.S. Treasury 
securities to be subject to a committed funding arrangement.\161\ 
First, CME stated that this provision would necessitate CME to limit 
the amount of U.S. Treasury securities a CME-clearing member could 
deposit to meet initial margin and guaranty fund obligations.\162\ To 
compensate, the clearing members would have to deposit additional cash. 
CME argued that this would be detrimental to bank affiliated clearing 
members because the Basel III capital rules may require banks to take 
higher capital charges for cash collateral than for other types of 
collateral, including U.S. Treasury securities because cash collateral 
is not confirmed to be bankruptcy remote.\163\ CME also stated that 
there would be difficulties establishing a committed liquidity facility 
for U.S. Treasury securities. CME asserted that the banks that are 
affiliated with CME clearing members are the best sources of such 
liquidity resources, and such banks may be prevented from participating 
in a large committed facility because of the risk that they would 
breach their single counterparty exposure limits under proposed Basel 
III capital rules. As a result, bank affiliated clearing members may 
reduce their customer clearing business, which could, in turn, increase 
costs to customers or prevent customers from taking advantage of the 
risk mitigating benefits of central clearing.\164\
---------------------------------------------------------------------------

    \161\ CME at 9-12.
    \162\ CME at 10.
    \163\ CME at 9. As noted above, this assertion is unsupported, 
and is contradicted by Subchapter IV of Chapter 7 of the Bankruptcy 
Code.
    \164\ CME at 11.
---------------------------------------------------------------------------

    Finally, CME suggested that the market for committed liquidity 
facilities may not be large enough to offer a facility that would 
enable CME to satisfy the proposed liquidity provisions of regulation 
39.33(c). CME also discussed a cost estimate for establishing committed 
facilities. This cost estimate is addressed in the cost benefit 
considerations, below.\165\
---------------------------------------------------------------------------

    \165\ CME at 12-13. See also section IV.C., infra.
---------------------------------------------------------------------------

    FIA also commented that U.S. Treasury securities should be 
considered a qualifying liquid resource under paragraph (c)(3), even if 
they are not subject to funding arrangements in accordance with 
proposed subparagraph (E)(2).\166\ FIA argued that, alternatively, 
subparagraph (E)(2) should permit a DCO to arrange for U.S. Treasury 
securities to be subject to uncommitted repurchase agreements. FIA 
supports CME's comment that U.S. Treasury securities are ``high quality 
liquid assets'' under BCBS standards and have remained highly liquid 
during times of stress.\167\
---------------------------------------------------------------------------

    \166\ FIA at 3-4.
    \167\ Id.
---------------------------------------------------------------------------

    However, in appealing to the standards established by other 
jurisdictions, CME acknowledged that

[[Page 72490]]

the EMIR Regulatory Technical Standards limit CCPs to ``count[ing] 
`highly marketable financial instruments . . . that the CCP can 
demonstrate are readily available and convertible into cash on a same 
day basis using prearranged and highly reliable funding arrangements, 
including in stressed market conditions.' '' \168\ Similarly, CME 
refers to United Kingdom requirements for a liquidity resource to be 
qualifying that include that the CCP needs to ``demonstrate its ability 
to liquidate the resource for same day cash.'' \169\ The Commission 
agrees that the obligation of a SIDCO or Subpart C DCO with respect to 
highly marketable collateral will be to demonstrate that, as stated in 
subparagraph (E)(2), those assets are, in fact, readily available and 
convertible into cash pursuant to prearranged and highly reliable 
funding arrangements, even in extreme but plausible market conditions.
---------------------------------------------------------------------------

    \168\ CME at 6, quoting European Market Infrastructure 
Regulation Regulatory Technical Standards, Article 33 (emphasis 
supplied here).
    \169\ CME at 6 (emphasis supplied).
---------------------------------------------------------------------------

    ISDA commented that proposed paragraph (c)(3)(ii), which requires a 
SIDCO or Subpart C DCO to take steps to verify that the prearranged and 
highly reliable funding arrangements for U.S. Treasury securities or 
other sovereign bonds do not include material adverse change 
provisions, is unnecessary because the PFMIs do not specifically 
require this.\170\ ISDA also noted that credit arrangements generally 
include such clauses in order to protect the financial institution 
providing the credit, to protect that institution's shareholders, and 
to prevent the spread of risk from a DCO to financial 
institutions.\171\
---------------------------------------------------------------------------

    \170\ ISDA at 4.
    \171\ Id.
---------------------------------------------------------------------------

    In light of these comments, the Commission has decided to make 
minor revisions to the language in 39.33(c)(3)(E)(1) and (E)(2) to more 
closely align with the language used in key consideration 5 to 
Principle 7.
    The purpose of the reference to the material adverse change clauses 
is to ensure that a SIDCO or Subpart C DCO not rely on a credit or 
liquidity arrangement that can be declined (i.e., would not be reliably 
enforceable) at the very point in time when the DCO would, in fact, 
need to use the arrangement. In other words, these funding arrangements 
are intended to ensure that a SIDCO or Subpart C DCO will be able to 
meet its obligations when they come due even after a default in extreme 
but plausible conditions. If a funding arrangement includes a provision 
that there be no material adverse changes as a condition to draw, then 
such funding arrangement will not in fact serve its intended purpose. 
By contrast, a representation that there have been no material adverse 
changes for some period prior to execution of a liquidity arrangement, 
where the truth of such representation is not a condition to 
enforceability of the obligation to provide liquidity, would not be a 
condition that defeats the purpose of the liquidity arrangement. The 
Commission believes this interpretation is consistent with key 
consideration 5 of Principle 7, which states in relevant part that 
``For the purpose of meeting its minimum liquid resource requirement, 
an FMI's qualifying liquid resources in each currency include . . . 
highly marketable collateral 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.''
    Accordingly, the Commission has decided to modify paragraph 
(c)(3)(ii) to replace the phrase ``material adverse change clause'' 
with ``material adverse change condition'' and to add the ``even in 
extreme but plausible market conditions'' language from key 
consideration 5 to clarify this issue and to ensure consistency with 
Principle 7 with respect to this point.
    With respect to proposed paragraph (c)(4), ISDA commented that if a 
SIDCO or Subpart C DCO maintains financial resources in an amount 
greater than the Cover One financial resources requirement, then the 
SIDCO or Subpart C DCO should be required to maintain collateral with a 
low credit risk to cover such greater amount.\172\ ISDA also commented 
that the phrase ``with proceeds available promptly'' should be deleted 
because it does not appear in the PFMIs and is not clearly 
defined.\173\ The Commission notes that the financial resources at 
issue in this paragraph are in excess of those required by Principle 7 
and regulation 39.33(a). Therefore, the Commission believes it is 
appropriate for attendant requirements to be less stringent than those 
that apply to required financial resources. In addition, the 
requirement in paragraph (c)(4) that a SIDCO or Subpart C DCO should 
consider maintaining collateral with low credit risk for any excess 
financial resources is consistent with Principle 7. Moreover, the 
Commission disagrees with ISDA and believe that the concept of ``with 
proceeds available promptly'' is covered by, and consistent with, the 
PFMIs.
---------------------------------------------------------------------------

    \172\ Id.
    \173\ ISDA at 4-5.
---------------------------------------------------------------------------

    In response to the Commission's question as to whether proposed 
paragraph (d)(4) should specify the frequency with which a SIDCO or 
Subpart C DCO must test its procedures for accessing liquidity 
resources, MGEX commented that it believes the proposed language is 
sufficient.\174\ MGEX commented that the proposed language 
appropriately affords a DCO the discretion to determine the frequency 
of testing its procedures for accessing liquidity resources.\175\ MGEX 
stated that a DCO is in the best position to determine this frequency 
and that unnecessary, redundant testing would cause a DCO to incur 
unnecessary costs.\176\
---------------------------------------------------------------------------

    \174\ MGEX at 7.
    \175\ Id.
    \176\ Id.
---------------------------------------------------------------------------

    The Commission has decided to finalize regulation 39.33 as modified 
above. New paragraphs (c), (d), and (e) are intended to address the 
gaps between current part 39 requirements and standards set forth in 
Principle 7.\177\ The Commission believes these new provisions are 
appropriate and will reduce risk for SIDCOs and Subpart C DCOs, their 
clearing members, and customers of clearing members. In particular, new 
paragraph (c)(1) 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, 
because

[[Page 72491]]

maintaining resources that enable the DCO to meet its intraday, same-
day, and multiday settlement obligations. New paragraph (c)(2) will 
require a SIDCO to meet its obligations in each relevant currency in a 
timely manner. This is important because 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.
---------------------------------------------------------------------------

    \177\ 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.
---------------------------------------------------------------------------

    New paragraph (c)(1)(ii) will 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 certain 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 proposed 
list of these resources is consistent with those set forth in Principle 
7. The financial integrity of a SIDCOs and or Subpart C DCOs might be 
enhanced if it considers meeting this enhanced standard. The provisions 
of new paragraph (c)(4) (pertaining to, among other issues, the 
liquidity of financial resources held in addition to those financial 
resources required by the Cover One standard) are designed to enhance 
the financial condition of SIDCOs and Subpart C DCOs and help reinforce 
stability.\178\
---------------------------------------------------------------------------

    \178\ 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.'').
---------------------------------------------------------------------------

F. Regulation 39.34 (System safeguards for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)

    In August of 2013, the Commission finalized regulation 39.30, which 
enhanced system safeguards requirements for SIDCOs with respect to 
business continuity and disaster recovery, and included a two-hour 
recovery time objective (``RTO'').\179\ 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.\180\ The Commission proposed renumbering regulation 39.30 as 
regulation 39.34 and amending the regulation to cover Subpart C DCOs in 
addition to SIDCOs. The Commission also made 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, the Commission 
proposed amending the regulation to allow the Commission to, upon 
request, grant newly designated SIDCOs and Subpart C DCOs up to one 
year to comply with the provisions of regulation 39.34.\181\
---------------------------------------------------------------------------

    \179\ See SIDCO Final Rule 78 FR 49672-49674.
    \180\ Id.
    \181\ In response to comments received, regulation 39.39, as 
finalized herein, will permit the Commission, upon request, to grant 
newly designated SIDCOs and Subpart C DCOs up to one year to comply 
with the provisions of regulation 39.35 and 39.39. To harmonize 
regulation 39.34 with this revision, the Commission has determined 
to make a technical correction to proposed regulation 39.34 that 
replaces the phrase ``upon application'' with the phrase ``upon 
request.''
---------------------------------------------------------------------------

    MGEX commented that it ``appreciates the additional time granted 
for complying'' with regulation 39.34.\182\ The Commission notes that 
MGEX's statement implies an automatic compliance extension, which is 
inaccurate because regulation 39.34(d) permits a SIDCO or Subpart C DCO 
to request that the Commission grant it up to one year to comply with 
regulation 39.34. In reviewing such requests, the Commission will be 
attentive to whether the DCO has a well-developed plan to comply with 
the requirement by the end of the requested extension, with reasonable 
milestones that can be monitored by the Commission. MGEX also commented 
that it would like flexibility in developing a business continuity and 
disaster recovery plan.\183\ MGEX stated that the regulation would 
require it to hire three or four new employees outside of Minneapolis, 
which would be very costly.\184\ MGEX suggested it would be less costly 
to comply with the regulation if it outsourced its business continuity 
compliance, but it does not wish to do that because employees, rather 
than contractors, are more likely to act in the best interests of 
MGEX.\185\
---------------------------------------------------------------------------

    \182\ MGEX at 7.
    \183\ Id.
    \184\ Id.
    \185\ Id.
---------------------------------------------------------------------------

    First, the Commission notes that to facilitate the two-hour RTO, 
regulation 39.34 specifically requires a SIDCO or Subpart C DCO to 
maintain personnel, who live and work outside the relevant area of the 
physical and technological resources the SIDCO or Subpart C DCO 
normally relies upon to conduct its clearing activities. This 
requirement might be met in a number of ways. As MGEX notes, one way is 
to engage outsourced personnel. An alternative would be to base 
employees at a geographically diverse location. In general, a SIDCO or 
Subpart C DCO does have flexibility in designing its business 
continuity and disaster recovery plan, although such plan must comply 
with the requirements set forth in regulation 39.34 as well as any 
other applicable Commission regulations. The Commission expects all 
SIDCOs and Subpart C DCOs to fully comply with these, and all other 
applicable, regulations, and anticipates that a registered DCO would 
carefully weigh any costs associated with compliance with Subpart C 
prior to electing to become subject to Subpart C. Second, the proposed 
amendment to allow the Commission, upon request, to grant newly 
designated SIDCOs and Subpart C DCOs up to one year to comply with the 
provisions of regulation 39.34 was intended to provide flexibility to 
address the time practically required to obtain the necessary physical 
and technological resources, and to organize human resources, as 
appropriate to implement a two-hour RTO. As such, the Commission has 
decided to finalize regulation 39.34 as proposed.

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 proposed regulation 39.35 in order to add 
requirements pursuant to DCO Core Principle G, to address certain 
potential gaps between Commission regulations and Principles 4 and 
7.\186\ 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

[[Page 72492]]

DCO.\187\ Under proposed regulation 39.35, SIDCOs and Subpart C DCOs 
would be required 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:
---------------------------------------------------------------------------

    \186\ 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. and 78 FR 
50263.
    \187\ 17 CFR 39.16(c).
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    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.
    The Commission requested comment on all aspects of these proposals. 
MGEX requested additional time to comply with regulation 39.35, along 
the lines of proposed regulation 39.34(d), which permits a SIDCO or 
Subpart C to request that the Commission grant the SIDCO or Subpart C 
DCO additional time of up to one year to comply with regulation 39.34. 
MGEX commented that it would be very difficult, if not impossible, to 
perform the analyses required to satisfy regulation 39.35 by December 
31, 2013. The Commission agrees and has decided to permit a SIDCO or 
Subpart C DCO to request up to a one year extension to comply with 
regulation 39.35.\188\
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    \188\ The Commission has delegated authority to approve such 
requests. See Section II.O. (discussion of regulation 140.94) infra.
---------------------------------------------------------------------------

    The Commission notes that regulation 39.35 was designed to protect 
SIDCOs, Subpart C DCOs, their clearing members, customers of clearing 
members, 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. As 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.
    For the reasons set forth above and in the Proposal, the Commission 
has decided to finalize regulation 39.35 substantively as proposed but 
will permit a SIDCO or Subpart C DCO to request that the Commission 
grant up to a one year extension to comply with regulation 39.35 and 
regulation 39.39, as discussed below.\189\
---------------------------------------------------------------------------

    \189\ See new paragraph (f) of regulation 39.39 and Section 
II.K., infra (discussing regulation 39.39).
---------------------------------------------------------------------------

H. Regulation 39.36 (Risk management for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)

    As proposed, regulation 39.36 would establish additional risk 
management requirements for SIDCOs and Subpart C DCOs. Current 
regulation 39.13 establishes the risk management requirements that a 
DCO must meet in order to comply with Core Principle D \190\ including, 
among other things, specific criteria for stress tests that a DCO must 
conduct.\191\
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    \190\ See 78 FR 50262-50263. 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 exposure to loss from the default of 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.
    \191\ See supra Section I.D. Moreover, such stress tests should 
enable the SIDCO or Subpart C DCO to address procyclicality initial 
margin requirements and collateral haircuts, consistent with 
Principle 6, K.C. 3 and Principle 5, K.C. 3.
---------------------------------------------------------------------------

    The Commission proposed regulation 39.36 in order to address 
certain gaps between Commission regulations and Principles 4, 6, 7, and 
9.\192\ 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.
---------------------------------------------------------------------------

    \192\ See discussion of Principles 4 and 6 supra Section I.E.1.
---------------------------------------------------------------------------

    The Commission requested comment on all aspects of proposed 
regulation 39.36.
    MGEX, the European Commission, and Chris Barnard commented on 
proposed regulation 39.36(a)(stress tests of financial resources). MGEX 
stated that the regulation should permit a SIDCO or Subpart C DCO to 
have the flexibility to use stress test parameters that can be 
justified by relevant data and to select relevant time periods to 
review when conducting stress tests.\193\ DCOs do have such 
flexibility, so long as the

[[Page 72493]]

meet the performance standards set forth in the regulation.
---------------------------------------------------------------------------

    \193\ MGEX at 8.
---------------------------------------------------------------------------

    The European Commission stated that regulation 39.36 should be more 
detailed in order to set a meaningful benchmark for all SIDCOs and 
Subpart C DCOs.\194\ For example, the European Commission suggests that 
SIDCOs and Subpart C DCOs should be required to conduct an assessment 
of the theoretical and empirical properties of the margin model and 
that such requirement, should prescribe minimum liquidation periods for 
each type of product.\195\ The European Commission noted that 
explanatory note 3.6.7 to Principle 6 states that ``close-out periods 
should be set on a product-specific basis'' because less liquid 
products may require longer close-out periods.\196\ The European 
Commission opined that there should be a minimum liquidation period of 
two-days for ``listed derivatives'' (i.e., futures and options) rather 
than the one-day minimum prescribed in current regulation 
39.13(g)(2)(ii)(A).\197\ The European Commission also stated more 
generally that its rules and this Commission's rules diverge in the 
area of initial margin requirements and that this divergence ``is a 
source of competitive distortion between the E.U.- and U.S.-listed 
derivative markets as well as a threat to global financial stability.'' 
\198\ The European Commission also stressed that this Commission's risk 
management rules should do more to ``mitigate the pro-cyclicality 
inherent to initial margin.'' \199\
---------------------------------------------------------------------------

    \194\ European Commission at 3.
    \195\ Id.
    \196\ Id.
    \197\ European Commission at 3-4.
    \198\ European Commission at 4.
    \199\ Id.
---------------------------------------------------------------------------

    Regulation 39.13(g)(2) already sets out minimum liquidation times 
for swaps, futures, and swaps on agricultural commodities, energy 
commodities, and metals. In addition, pursuant to regulation 
39.13(g)(2), a DCO is already required to use ``[s]uch longer 
liquidation time as is appropriate based on the specific 
characteristics of a particular product or portfolio'' and the 
Commission expressly reserved the right to establish, by order, shorter 
or longer liquidation times for particular products or portfolios. 
Moreover, under that regulation, all DCOs are obligated to consider the 
appropriateness of liquidation times in light of the specific 
characteristics of particular products or portfolios. Reg. 
39.36(b)(2)(i) has been amended to clarify this point with respect to 
SIDCOs and Subpart C DCOs.
    Chris Barnard suggested that DCOs should be required to stress test 
the liquidity of its financial resources in such a way that considers 
market stress, idiosyncratic stress, combinations thereof.\200\ In 
addition, Chris Barnard stated that assets used to offset projected 
funding needs should be discounted to reflect their credit risk and 
market volatility.\201\ In response, the Commission notes that 
regulation 39.36(a), as proposed, would require a SIDCO or Subpart C 
DCO to address these topics.
---------------------------------------------------------------------------

    \200\ Chris Barnard at 2.
    \201\ Id.
---------------------------------------------------------------------------

    With regard to paragraph (c)(6) (reporting stress test results to 
the risk management committee or board of directors), MGEX suggested 
that this provision should be amended to permit the reporting of high-
level summaries, redacted versions, or subsets of stress test 
results.\202\ Otherwise, MGEX stated that this provision would create 
conflicts of interest because stress test results reveal confidential 
information about MGEX clearing members, and members of the MGEX risk 
management committee or board of directors may also be MGEX clearing 
members.\203\ The Commission expects that stress-tests will be reported 
to the board of directors at a summary level. In complying with new 
paragraph (c)(6), a DCO should structure its reporting and governance 
arrangements in such a way that balances effective governance and risk 
management with confidentiality considerations.
---------------------------------------------------------------------------

    \202\ MGEX at 8.
    \203\ Id.
---------------------------------------------------------------------------

    With respect to proposed regulation 39.36(e) (annual validation of 
financial and liquidity risk management models), Chris Barnard 
commented that persons responsible for the development, implementation, 
or operation of the systems and models being tested not carry out the 
annual validation.\204\ The Commission agrees that would be a prudent 
aspect of an appropriately designed validation process.
---------------------------------------------------------------------------

    \204\ Chris Barnard at 2.
---------------------------------------------------------------------------

    The Commission has decided to finalize regulation 39.36 as amended 
with the clarification discussed above for the reasons discussed above 
and in the Proposal.

I. Regulation 39.37 (Additional disclosure for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)

    The Commission proposed regulation 39.37 to set forth additional 
public disclosure requirements for SIDCOs and Subpart C DCOs.\205\ 
These requirements were intended to address differences between current 
requirements and PFMI Principles 14 and 23. In particular, proposed 
regulation 39.37 was 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.
---------------------------------------------------------------------------

    \205\ Public disclosure requirements for all registered DCOs are 
set forth in Regulation 39.21, which implements DCO Core Principle L 
(Public Information), and requires DCOs to provide to market 
participants sufficient information to enable them to identify and 
evaluate accurately the risks and costs associated with using the 
services of the DCO.
---------------------------------------------------------------------------

    Specifically, proposed regulation 39.37 would require SIDCOs and 
Subpart C DCOs to disclose certain information to the public and to the 
Commission. First, consistent with Principle 23, a SIDCO or Subpart C 
DCO would be required to disclose its responses to the CPSS-IOSCO 
Disclosure Framework.\206\ Further, to ensure the continued accuracy 
and usefulness of a SIDCO or Subpart C DCO's responses, a SIDCO or 
Subpart C DCO would be required to review and update them (a) at least 
every two years and (b) following material changes to the SIDCO's or 
Subpart C DCO's system or its environment.\207\ 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. Under proposed regulation 
39.37(c), a SIDCO or Subpart C DCO would also be required 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.\208\
---------------------------------------------------------------------------

    \206\ See also section II.C.2, supra.
    \207\ Available at: http://www.bis.org/publ/cpss106.pdf.
    \208\ See supra section II.C.2. for a discussion of the 
Quantitative Information Disclosure (referencing section 2.5 of the 
CPSS-IOSCO Disclosure Framework).
---------------------------------------------------------------------------

    Also under proposed regulation 39.37, a SIDCO or Subpart C DCO 
would be required, consistent with Principle 14, to publish its rules, 
policies, and procedures describing whether customer funds are 
protected on an individual or omnibus basis and whether customer funds 
are subject to any legal or operational constraints that may impair the 
ability of the SIDCO or Subpart C DCO to segregate or port the

[[Page 72494]]

positions and related collateral of a clearing member's customers.
    The Commission requested comment on all aspects of these proposals. 
MGEX commented that it is premature for regulation 39.37(c) to require 
a SIDCO or Subpart C DCO to complete the CPSS-IOSCO Quantitative 
Disclosure Document because that document has not yet been made 
available for public comment.\209\ It is for this reason that MGEX also 
stated that it cannot comment on the potential costs of complying with 
regulation 39.37(c).\210\ The Commission notes that regulation 39.37(c) 
requires the disclosure of relevant basic data on transaction volume 
and values, which requirement is consistent with key consideration 5 in 
Principle 23. Further, given the Commission's goal of establishing 
regulations that are consistent with the PFMIs,\211\ to the extent that 
final international standards are established for the disclosure of 
relevant basic data on transaction volume and values, SIDCOs and 
Subpart C DCOs should look to such standards in complying with the 
requirements set forth in regulation 39.37(c). Further, the Commission 
notes that on October 15, 2013, CPSS-IOSCO published a consultative 
document on public quantitative disclosure standards for central 
counterparties.\212\ Moreover, CPSS-IOSCO states that these 
quantitative disclosures, together with the PFMI Disclosure framework 
also published by CPSS-IOSCO, would form the minimum disclosures 
expected of CCPs under Principle 23, Key Consideration 5, of the 
Principles.\213\ Thus, if and when such public quantitative disclosure 
standards are finalized, the Commission would expect SIDCOs and Subpart 
C DCOs to look to such standards in complying with the requirements set 
forth in regulation 39.37(c). Moreover, the Commission notes that MGEX 
is not obligated to comply with regulation 39.37(c) unless and until 
MGEX elects to become subject to Subpart C. As discussed above, a DCO 
that is not a SIDCO may submit a Subpart C Election Form any time on or 
after the effective date of these final rules and may, should it so 
choose, delay such submission until such time as the public 
quantitative disclosure standards for central counterparties are 
finalized.
---------------------------------------------------------------------------

    \209\ MGEX at 8-9.
    \210\ Id.
    \211\ See Section II.L. discussing Regulation 39.40 (Consistency 
with the Principles for Financial Market Infrastructures).
    \212\ CPSS-IOSCO, Consultative Report, Public Quantitative 
Disclosure Standards for Central Counterparties, October 15, 2013, 
available at http://www.bis.org/publ/cpss114.pdf.
    \213\ Id. at 1.
---------------------------------------------------------------------------

    The new 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, such 
public assessment should help provide confidence to market 
participants, which could prove to be a stabilizing force in times of 
severe market stress. For the reasons set forth herein, and in the 
Proposal, the Commission has decided to adopt regulation 39.37 as 
proposed.

J. Regulation 39.38 (Efficiency for systemically important derivatives 
clearing organizations and subpart C derivatives clearing 
organizations)

    Consistent with Principle 21, the Commission proposed regulation 
39.38 in order to require a SIDCO or Subpart C DCO efficiently and 
effectively to design its clearing and settlement arrangements, 
operating structure and procedures, product scope, and use of 
technology. Further, under proposed regulation 39.38, 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 observe that an 
efficient CCP has the required resources to perform its functions \214\ 
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.\215\ 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.\216\ 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.
---------------------------------------------------------------------------

    \214\ See PFMIs at E.N. 3.21.1.
    \215\ PFMIs at E.N. 3.21.2.
    \216\ PFMIs at E.N. 3.21.5.
---------------------------------------------------------------------------

    The Commission requested comment on all aspects of these proposals. 
MGEX commented that regulation 39.38(d) should permit a SIDCO or 
Subpart C DCO to make independent business decisions for establishing 
communication methods that best serve its clearing members and market 
participants.\217\ MGEX stated it is unclear as to whom or what 
organization is responsible for establishing international 
communication standards and would expect that there may be multiple 
acceptable communication methods.\218\ MGEX suggested that the 
Commission take a flexible approach in reviewing the efficiency of a 
DCO's methods of communication.\219\ The Commission notes that 
regulation 39.38(d) refers broadly to ``internationally accepted 
communication procedures and standards.'' Therefore, the Commission 
believes that there may be more than one way for a SIDCO or Subpart C 
DCO to comply with regulation 39.38(d). The Commission appreciates MGEX 
suggestion regarding flexibility, but as examinations are fact 
specific, the Commission declines to discuss what approach it would or 
would not take in a particular review in the abstract.
---------------------------------------------------------------------------

    \217\ MGEX at 9.
    \218\ Id.
    \219\ Id.
---------------------------------------------------------------------------

    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.\220\ For the reasons set forth in the foregoing 
discussion, and in the Proposal, the Commission has decided to finalize 
regulation 39.38 as proposed.
---------------------------------------------------------------------------

    \220\ PFMIs at E.N. 3.21.1.
---------------------------------------------------------------------------

K. Regulation 39.39 (Recovery and wind-down for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)

    The Commission proposed 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 was 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.

[[Page 72495]]

    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.\221\ 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.\222\ Further, 
these liquid net assets should, at all times, be sufficient to allow 
for recovery or orderly wind-down of critical operations and 
services.\223\ 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).\224\
---------------------------------------------------------------------------

    \221\ See supra Section I.E.1.
    \222\ See supra id.
    \223\ See id.
    \224\ See supra Section I.D.
---------------------------------------------------------------------------

    Accordingly, under proposed regulation 39.39, a SIDCO or Subpart C 
DCO would be required to develop additional plans that specifically 
address ``recovery'' and ``wind-down.'' The Commission proposed 
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 proposed 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 also proposed adding a definition for ``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 proposed 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. Furthermore, the Commission 
proposed defining ``unencumbered liquid financial assets'' to include 
cash and highly liquid securities. These proposed definitions were 
designed to be consistent with the meaning of such terms in the PFMIs. 
The Commission requested comment as to whether these definitions were 
appropriate. Specifically, the Commission requested comment on whether 
the definition of ``recovery'' is appropriate in light of emerging 
international consensus.
    The Commission proposed requiring 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 
proposed requiring that the recovery and wind-down plans of SIDCOs and 
Subpart C DCOs meet certain standards, set forth in proposed subsection 
(c).\225\ Under proposed regulation 39.39(d), a SIDCO or Subpart C DCO 
would be required to establish recovery and wind-down plans that are 
supported by certain resources.
---------------------------------------------------------------------------

    \225\ 78 FR 50282.
---------------------------------------------------------------------------

    The Commission requested comment on all aspects of these proposals. 
In their comment letters, LCH, MGEX, and NYPC suggested that the 
Commission provide additional time to a SIDCO or Subpart C DCO for 
developing recovery and wind-down plans in accordance with regulation 
39.39.\226\ Further, NYPC suggested that a SIDCO or Subpart C not be 
required to comply with regulation 39.39 until (1) CPSS-IOSCO and the 
Financial Stability Board finalize their reports on CCP recovery and 
resolution and (2) CCPs have been allowed a reasonable amount of time 
to implement the guidance included in such reports.\227\ Because 
reports on CCP recovery and resolution are still under consideration by 
the relevant international bodies, and further work in these areas may 
inform the Commission's views on a SIDCO's or Subpart C DCO's recovery 
or wind-down plans, the Commission has decided to permit a SIDCO or 
Subpart C DCO to request that the Commission grant the SIDCO or Subpart 
C DCO up to one year to comply with regulation 39.39 and 39.35 (Default 
rules and procedures), in a similar manner to the process by which a 
SIDCO or Subpart DCO may request that the Commission grant the SIDCO or 
Subpart C additional time for complying with regulations 39.34 (System 
safeguards).\228\
---------------------------------------------------------------------------

    \226\ LCH at 2-4, MGEX at 9, and NYPC at 2.
    \227\ NYPC at 1-2.
    \228\ See new paragraph (f) of regulation 39.39, new paragraph 
(d) of regulation 39.34, footnote 108 supra, and Section II.G. supra 
(discussing regulation 39.35).
---------------------------------------------------------------------------

    ISDA suggested that regulation 39.39 include more details about the 
required recovery and wind-down plans, such as the details provided in 
CPSS-IOSCO's Consultative Report, ``Recovery of Financial Market 
Infrastructures.'' \229\ The Commission notes that the Consultative 
Report lists suggested tools, not mandatory standards.\230\ This 
rulemaking, by contrast, is intended to address what the PFMIs require. 
Therefore, it would be inappropriate for Subpart C to reflect the 
Consultative Report.
---------------------------------------------------------------------------

    \229\ ISDA at 1-2.
    \230\ The Consultative Report notes that it ``is not intended to 
create additional standards for FMIs, or authorities, beyond those 
set out in the CPSS-IOSCO `Principles for financial market 
infrastructures'.'' Id. at 1.
---------------------------------------------------------------------------

    With respect to proposed regulation 39.39(b)(2), MGEX commented 
that the Commission should delete the phrase ``or any other risk that 
threatens the DCO's viability as a going concern.'' \231\ MGEX stated 
that Principle 15 requires a DCO to establish recovery and orderly 
wind-down plans necessitated only by general business risk or 
operational risk.\232\ MGEX commented further that this phrase is 
ambiguous.\233\ Although the phrase does not appear in Principle 15, 
the Commission notes that key consideration 3 of Principle 3 
specifically requires an FMI 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.'' Thus, 
the inclusion of the phrase ``or any other risk that threatens the 
DCO's viability as

[[Page 72496]]

a going concern'' is consistent with the PFMIs. Moreover, a SIDCO or 
Subpart C DCO should be aware of, and have plans to address, the risks 
that threaten their viability without being limited in their analysis 
to pre-defined risks.
---------------------------------------------------------------------------

    \231\ MGEX at 10.
    \232\ MGEX at 9-10.
    \233\ Id.
---------------------------------------------------------------------------

    With respect to proposed regulation 39.39(d)(2), MGEX commented 
that a SIDCO or Subpart C DCO that demonstrates adequate liquidity 
capabilities should be permitted to use an established line of credit 
for meeting potential business losses, particularly if the line of 
credit is offered on the basis that the DCO meet ``certain equity 
covenants.'' \234\ The Commission notes that, so long as the DCO has 
sufficient assets funded by the equity of its owners, arrangements such 
as this one may be effective in providing a DCO with a tool that would 
be adequate for providing the related liquidity necessary to comply 
with regulation 39.39(d)(2). A DCO would need to demonstrate that such 
an arrangement would: (i) enable the DCO to have sufficient 
unencumbered liquid financial assets to fund its recovery and wind-down 
plans and (ii) make that liquidity available to the DCO even in a 
scenario in which the DCO is facing recovery or wind-down. The 
Commission notes that regulation 39.39(d)(2) uses the phrase ``funded 
by equity . . .'' to connote financial resources that are part of the 
SIDCO's or Subpart C DCO's owners' equity/shareholder capital.\235\
---------------------------------------------------------------------------

    \234\ Id.
    \235\ As mentioned earlier in this section, the phrase ``funded 
by equity'' comes from Principle 15. See also supra Section I.E.1.
---------------------------------------------------------------------------

    For the reasons set forth above and in the Proposal, the Commission 
has decided to finalize regulation 39.39 substantively as proposed but, 
as discussed above, will permit a SIDCO or Subpart C DCO to request 
that the Commission grant the SIDCO or Subpart C DCO up to one year to 
comply with regulation 39.39.\236\ This new regulation is 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 (as part of such maintenance, 
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.
---------------------------------------------------------------------------

    \236\ See new paragraph (d) of regulation 39.39 and Section 
II.G. supra (discussing regulation 39.35).
---------------------------------------------------------------------------

L. Regulation 39.40 (Consistency with the Principles for Financial 
Market Infrastructures)

    Proposed regulation 39.40 was intended to 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.
    The Commission requested comment on all aspects of this proposal. 
ISDA commented that regulation 39.40 should state that subpart C is 
intended to be consistent with the PFMIs ``except to the extent 
inconsistent with other regulations of the Commission.'' According to 
ISDA, this would make clear that part 22, which pertains to the 
protection of Cleared Swaps Customer Collateral by DCOs and FCMs, would 
not be trumped by any future international standards, such as the CPSS-
IOSCO Consultative Report, ``Recovery of Financial Market 
Infrastructures.'' The Commission notes that regulation 39.40 requires 
consistency with both the CEA and with the PFMIs. Thus, ISDA's 
suggested language is not necessary because an international standard 
that is not consistent with the CEA would not trump a Commission 
regulation that implements or derives from the CEA.
    Consistency between part 39 and the PFMIs 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. For the reasons set forth above and in the Proposal, the 
Commission has decided to finalize regulation 39.40 as proposed.

M. Regulation 39.41 (Special enforcement authority for systemically 
important derivatives clearing organizations)

    In August of 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.\237\ In the 
Proposal, the Commission renumbered regulation 39.31 as regulation 
39.41 and did not propose any other changes. The Commission did not 
receive any comments on regulation 39.41 and thus, as part of this 
final rulemaking, the Commission is adopting regulation 39.41 as 
proposed.
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    \237\ See SIDCO Final Rule.
---------------------------------------------------------------------------

N. Regulation 39.42 (Advance notice of material risk-related rule 
changes by systemically important derivatives clearing organizations)

    The Commission proposed moving existing paragraph (c) of regulation 
39.30 (Scope) to proposed regulation 39.42.\238\ This paragraph 
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.\239\ Because the other provisions 
of proposed revised regulation 39.28 (renumbered as regulation 39.30) 
pertain to the scope of Subpart C,\240\ it would be appropriate for 
paragraph (d) to be codified in a separate regulation. The Proposal did 
not suggest any substantive amendments to this provision. The 
Commission did not receive any comments on regulation 39.41 and thus, 
as part of this final rulemaking, the Commission is moving the 
provision to regulation 39.42 as proposed.
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    \238\ See supra Section II.B. and note 111.
    \239\ The Commission promulgated this provision as part of the 
SIDCO Final Rule.
    \240\ See supra Section II.B. (discussing proposed revised 
regulation 39.28, renumbered as regulation 39.30).
---------------------------------------------------------------------------

O. Regulation 140.94 (Delegation of authority to the Director of the 
Division of Clearing and Risk)

    The Commission proposed 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 proposed 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 proposed 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).

[[Page 72497]]

    As discussed above, in response to comments from LCH, MGEX, and 
NYPC, the Commission has decided to permit a SIDCO or Subpart C DCO to 
request that the Commission grant the SIDCO or Subpart C DCO additional 
time of up to one year to comply with the requirements to establish 
default rules and procedures for uncovered losses or shortfalls 
pursuant to new regulation 39.35 and to establish recovery and wind-
down plans pursuant to new regulation 39.39.\241\ In this connection, 
just as proposed amended regulation 140.94 would delegate the 
disposition of such a request concerning compliance with regulation 
39.34 to the Director of the Division of Clearing and Risk, the 
Commission has decided to delegate the disposition of a request for 
delayed compliance with regulation 39.39 to the Director of the 
Division of Clearing and Risk.\242\ Otherwise, the Commission believes 
that the proposed amendments to regulation 140.94 provide appropriate 
delegations to the Director of the Division of Clearing and Risk. 
Therefore, the Commission has decided to finalize the other amendments 
as proposed.
---------------------------------------------------------------------------

    \241\ See Sections II.G. and II.K, supra.
    \242\ Regulation 140.94(c)(13), as finalized, replaces the term 
``applications'' with ``requests'' to comport with the language used 
in final regulations 39.34 and 39.39.
---------------------------------------------------------------------------

P. Regulation 190.09 (Member property)

    Certain of the proposed requirements for SIDCOs and Subpart C DCOs 
necessitated certain clarifications to part 190 of the Commission's 
regulations. Specifically, new regulation 39.35(a) requires 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.'' 
New regulation 39.39(b) requires 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.'' 
Recognizing the diversity of financial safeguard arrangements among 
DCOs, the Commission noted in the Proposal that 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.
    The Commission proposed 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.
    The Commission requested comment on all aspects of this proposal. 
The Commission did not receive any comments on the proposed amendments 
to regulation 190.09. The Commission believes that the proposed 
amendments to regulation 190.09(b) make appropriate clarifications, as 
described above. For the reasons set forth herein and in the Proposal, 
the Commission has decided to finalize the amendments to regulation 
190.09(b) as proposed.

III. Effective Date

A. Congressional Review Act

    This final rulemaking is a major rule for purposes of the 
Congressional Review Act (``CRA'').\243\ Generally, under the CRA, a 
major rule takes effect 60 days after the date on which the rule is 
published in the Federal Register.\244\ However, Section 808(2) of the 
CRA provides that any rule which an agency for good cause finds that 
notice and public procedure thereon are impracticable, unnecessary, or 
contrary to the public interest (and incorporates the finding and a 
brief statement of reasons therefore in the rule issued), shall take 
effect at such time as the federal agency promulgating the rule 
determines.\245\ For the regulations in this final rule, the Commission 
has determined that good cause exists to waive the CRA effective date 
requirement and make the regulations effective in less than 60 days.
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    \243\ See 5 U.S.C. 804(2) (defining a ``major rule'' for 
purposes of the Congressional Review Act).
    \244\ Id. at 801(a)(3).
    \245\ Id. at 808(2).
---------------------------------------------------------------------------

    For revised regulation 190.09, the Commission is making the 
regulation effective upon publication. In accordance with section 
808(2), the Commission finds good cause to make this provision 
effective upon publication because the regulation does not impose any 
new, substantive obligations on regulated entities and only serves to 
clarify an existing regulation in order to aid DCOs in their compliance 
with Commission regulations, including the final rules adopted herein. 
Moreover, the final regulation is being adopted as proposed, including 
the effective date. Market participants are thus familiar with the 
clarification and the timing of its implementation. Furthermore, the 
Commission received no comments on any aspect of revised regulation 
190.09. Therefore, the Commission has determined that good cause exists 
to make revised regulation 190.09 effective upon publication.
    Regarding regulation 39.31, the Commission is making this 
regulation effective as of December 13, 2013. In accordance with 
section 808(2), the Commission finds that a 60 day effective date for 
this regulation is contrary to the public interest because such delay 
will cause public harm by significantly increasing (for the reasons 
discussed below) the costs for market participants to clear OTC and 
exchange-traded derivatives with DCOs. More broadly, the increase in 
costs will have an adverse effect on competition and may lead to a 
disruption in the financial markets. Regulation 39.31 does not impose 
any requirements on regulated entities; rather it is a permissive 
provision that gives DCOs that have not been designated as systemically 
important by the Council the opportunity to opt-into and become subject 
to the provisions of an enhanced regulatory scheme that is otherwise 
only applicable to SIDCOs.\246\ Compliance with this enhanced 
regulatory scheme as well as existing Commission regulations is 
necessary for such DCOs to be subject to standards that are consistent 
with the PFMIs, and thus enable them to gain QCCP status.\247\ 
Attaining QCCP status will increase a DCO's ability to compete in the 
global financial markets by allowing such DCO to offer lower capital 
charges to banks (including their subsidiaries and affiliates) that 
clear derivative transactions with the DCO.\248\ Banks that transact 
with U.S. DCOs that do not have QCCP status will be charged 
substantially higher capital charges which they may pass along to their 
bank customers.\249\ In order to benefit from QCCP status by December 
31, 2013,\250\

[[Page 72498]]

the Commission must receive a DCO's election form, as set out in 
regulation 39.31, by December 13, 2013. This date is necessary to allow 
the Commission a review period to stay, deny or permit the election by 
December 31, 2013. For those DCOs that wish to gain QCCP status, an 
effective date beyond December 13, 2013, would delay the election 
process and cause financial harm by adversely impacting the ability of 
these DCOs to compete with CCPs that have attained QCCP status by the 
end of 2013. Therefore the Commission has determined that good cause 
exists to make regulation 39.31 effective as of December 13, 2013.
---------------------------------------------------------------------------

    \246\ See supra Sections I.B. and I.C.
    \247\ See supra Section I.F.
    \248\ Id.
    \249\ Id. See also CME at 5, n. 18 (stating that the 
``ramifications for failure to achieve QCCP status are onerous for 
banks' CCP exposures and can result in capital charges on trade 
exposures that are 10-20 times larger than capital charges for QCCP 
trade exposures.'').
    \250\  See CME at 5, n. 18 (stating that ``in order for banks to 
achieve preferential QCCP capital treatment for their exposures to 
given CCPs, the CCP's primary regulator, among other things, must 
have implemented the PFMIs by January 1, 2014.'' See also ``Basel 
III Counterparty Credit Risk and Exposures to Central 
Counterparties-Frequently Asked Questions'' (December 2012) 
available at http://www.bis.org/publ/bcbs237.pdf (stating that 
during 2013, if a CCP's primary regulator has publicly stated that 
it is working towards implementing regulations consistent with the 
PFMIs, then such CCP may be treated as a QCCP until the December 31, 
2013. After December 31, 2013, the CCP's primary regulator must have 
implemented regulations consistent with the PFMIs and these 
regulations must be applied to the CCP on an ongoing basis in order 
for such CCP to be eligible for QCCP status).
---------------------------------------------------------------------------

    The Commission is also making regulation 140.94 effective as of 
December 13, 2013. In accordance with section 804(3), the Commission 
finds that this provision is not covered by the CRA as it concerns 
agency management and procedures.\251\ Nevertheless, in accordance with 
section 808(2), the Commission finds that a 60 day effective date for 
this regulation is not necessary because regulation 140.94 imposes no 
requirements on DCOs. Rather it amends the current regulation 140.94 to 
allow certain functions set forth in regulation 39.31 to be delegated 
to Commission staff, for which there is no need to provide for a 
delayed effective date. Therefore the Commission has determined that 
good cause exists to make regulation 140.94 effective as of December 
13, 2013.
---------------------------------------------------------------------------

    \251\ See 5 U.S.C. 804(3) (defining the term ``rule'' for 
purposes of the CRA not to include any rule relating to agency 
management or personnel or any rule of agency organization, 
procedure, or practice).
---------------------------------------------------------------------------

    The remaining regulations, adopted herein,\252\ require SIDCOs to 
establish additional enhanced standards, which along with existing 
Commission regulations, will enable SIDCOs to be compliant with the 
PFMIs and thus, be able to attain QCCP status and offer the lower 
capital charges to banks, their subsidiaries and/or affiliates. For 
these regulations, the Commission is making the effective date as of 
December 31, 2013. For SIDCOs, a delay in attaining QCCP status beyond 
that date could create significant business and operational losses 
which in turn, could constrain the availability of liquidity and 
credit, thereby destabilizing the US financial markets. In accordance 
with section 808(2), the Commission finds that a 60 day effective date 
for these regulations is contrary to the public interest because such 
delay in obtaining QCCP status will cause public harm by significantly 
increasing the costs for market participants to clear OTC and exchange-
traded derivatives with SIDCOs and hindering the ability of SIDCOs to 
compete with internationally similarly situated CCPs, which would be 
contrary to public interest. Therefore the Commission has determined 
that good cause exists to make the remaining regulations effective as 
of December 31, 2013.
---------------------------------------------------------------------------

    \252\ These regulations set forth enhanced regulatory standards 
relating to governance, financial resources, system safeguards, risk 
management, special default rules and procedures for uncovered 
losses or shortfalls, additional disclosure requirements, 
efficiency, and recovery and wind-down procedures. Pursuant to Title 
VIII of the Dodd-Frank Act, the Commission prescribed these 
regulations in consultation with the Council and the Board. See 
Section 805 of the Dodd-Frank Act.
---------------------------------------------------------------------------

B. Administrative Procedure Act

    The Administrative Procedure Act (``APA'') generally requires that 
the rules promulgated by an agency not be made effective less than 30 
days after publication in the Federal Register, except for, inter alia, 
interpretative rules and statements of policy and as otherwise provided 
by the agency for good cause found.\253\ For the same reasons cited 
above, the Commission also finds that good cause exists under the APA 
to make revised regulation 190.09, regulation 39.31 and regulation 
140.94 effective on the dates set forth by the Commission.
---------------------------------------------------------------------------

    \253\ See generally 5 U.S.C. 553(d).
---------------------------------------------------------------------------

    Specifically, the Commission concludes that good cause exists to 
waive the 30 day effective date for revised regulation 190.09 because 
the regulation does not impose any new, substantive obligations on 
regulated entities and only clarifies the scope of an existing 
regulation. Thus, the Commission is of the view that this provision is 
not subject to the 30-day effective date requirement. Furthermore, 
because market participants are familiar with the regulation and no 
comments were received on the proposed change to the regulation, the 
Commission believes that a 30 day effective date is unnecessary and 
that good cause exists to make regulation 190.09 effective upon 
publication.
    The Commission also concludes that good cause exists to waive the 
30 day effective date for regulation 39.31 because a 30 day effective 
date would cause public financial harm by constraining the ability of 
certain DCOs to compete with other CCPs, particularly in global 
markets, which in turn, may substantially increase costs for market 
participants that transact in OTC and exchange traded derivatives. 
Moreover, as discussed above, regulation 39.31 does not impose any 
requirements on regulated entities or alter the status quo in any way; 
rather it is a permissive provision that gives DCOs that have not been 
designated as systemically important by the Council the opportunity to 
opt-into and become subject to the provisions of an enhanced regulatory 
scheme that is otherwise only applicable to SIDCOs. Compliance with 
this enhanced regulatory scheme as well as existing Commission 
regulations is necessary for such DCOs to be subject to standards that 
are consistent with the PFMIs, and thus enable them to gain QCCP 
status. Attaining QCCP status will increase a DCO's ability to compete 
in the global financial markets by allowing such DCO to offer lower 
capital charges to banks (including their subsidiaries and affiliates) 
that clear derivative transactions with the DCO. Banks that transact 
with U.S. DCOs that do not have QCCP status will be charged 
substantially higher capital charges which they may pass along to their 
bank customers. In order to benefit from QCCP status by December 31, 
2013, the Commission must receive a DCO's election form, as set out in 
regulation 39.31, by December 13, 2013. This date is necessary to allow 
the Commission a review period to stay, deny or permit the election by 
December 31, 2013. For those DCOs that wish to gain QCCP status by 
December 31, 2013, an effective date beyond December 13, 2013, would 
delay the election process and cause financial harm by adversely 
impacting the ability of these DCOs to compete with CCPs that have 
attained QCCP status by the end of 2013. Therefore, the Commission has 
determined that good cause exists to make regulation 39.31 effective as 
of December 13, 2013.
    Lastly, the Commission concludes that good cause exists to waive 
the 30 day effective date requirement for regulation 140.94 because the 
regulation pertains to agency management and procedures and imposes no 
duty on the Commission's regulated entities. Rather it amends the 
current regulation 140.94 to allow certain functions set forth in 
regulation 39.31 to be delegated to Commission staff, for which there 
is no need to provide for a delayed effective date. Therefore, the 
Commission has determined that good cause exists to make regulation 
140.94 effective as of December 13, 2013. The effective date for the 
remaining regulations is December 31, 2013 in accordance with the APA.

[[Page 72499]]

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. 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 C.F.R. 
1320.3(c)(4). This rule amends existing OMB control number 3038-0081, 
titled ``General Regulations and Derivatives Clearing Organizations.'' 
Therefore, the Commission has submitted this notice of final rulemaking 
along with supporting documentation for OMB's review in accordance with 
44 U.S.C. 3507(d) and 5 CFR 1320.11.
    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.\254\ Accordingly, the 
burdens associated with the collections contained in this rulemaking, 
and the information collection request that has been submitted to OMB, 
have been estimated only to the extent that the rulemaking imposes 
collections of information that OMB has not yet reviewed and approved.
---------------------------------------------------------------------------

    \254\ See 35 U.S.C. 3501(2) and (3).
---------------------------------------------------------------------------

    It should be noted that among the thirteen DCOs presently 
registered with the Commission, only two are SIDCOs. Moreover, not all 
remaining DCOs or all DCO Applicants are likely to elect to become 
Subpart C DCOs (for example, DCOs that are based outside of the U.S. 
may seek to obtain QCCP status through regulation by their home country 
regulator). Thus, the burden calculations herein are based on an 
estimate of how many DCOs are SIDCOs and how many 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 these 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
    Regulations 39.31(b) and 39.31(c), as proposed and adopted, 
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 Subpart C Election Form that would be 
contained in appendix B to part 39 of the Commission's regulations. The 
Subpart C Election Form involves completing the certifications therein, 
providing 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, regulation 
39.31(b)(2) and (c)(3), as proposed and adopted, provide for Commission 
requests for supplemental information from those requesting Subpart C 
DCO status; regulation 39.31(b)(3) and (c)(4), as proposed and adopted, 
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; regulation 39.31 (b)(7) and (c)(5), as 
proposed and adopted, 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 regulation 39.31(e), as proposed and 
adopted, 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 rules. As noted above, the relevant 
final regulations were adopted as proposed and did not include any 
additional information collection requirements that would warrant a 
revision of the burden hour estimates.
    The Proposal noted that, while it was is likely that only three 
DCOs will elect to become Subpart C DCOs, it was conservatively 
estimated that, collectively, five DCOs or DCO Applicants may elect to 
become Subpart C DCOs. The Proposal also noted that, while 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, 
an estimate of compliance with the withdrawal procedures by one DCO was 
included in the burden hours for the information collection. Finally, 
the Proposal estimated that, while it is likely that none of the 
Subpart C DCOs will elect to rescind its election, the Commission 
conservatively estimated that one Subpart C DCO may rescind its 
election.
    The Commission received one comment that referenced the estimated 
burden hours of the collection of information in this rulemaking. 
Specifically, MGEX referenced the ``Commission's estimate'' of the 
``1,020 hours'' that ``would be required to complete the Subpart C 
Election Form'' and the ``1,125 hours estimated for responding to 
requests for supplemental information.'' \255\ MGEX did not, however, 
indicate that it disagreed with the burden hour assessments set forth 
in the Proposal. Accordingly, the Commission has not altered its 
calculations. The Commission did not receive any additional comments on 
its original hour burden estimates and believes that those estimates, 
as set forth below, remain appropriate for PRA purposes:
---------------------------------------------------------------------------

    \255\ MGEX at 2.

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

[[Page 72500]]

    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
    Regulations 39.32(a) and (b), as proposed and adopted, 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. Regulation 39.33(d), as proposed and adopted, 
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. Regulation 39.33(e), as proposed and 
adopted, establishes documentation requirements with respect to the 
supporting rationale for the financial and liquidity resources it 
maintains pursuant to regulations 39.33(a) and 39.33(c), respectively.
    Regulation 39.36(c)(6), as proposed and adopted, requires each 
SIDCO and Subpart C DCO to report stress test results to its risk 
management committee or board of directors. Regulation 39.37(a), as 
proposed and adopted, 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. Regulations 39.37(c) and (d), as proposed and adopted, 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.
    Regulation 39.38, as proposed and adopted, 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, regulations 39.39(b) and (c), as proposed and 
adopted, 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 was conservatively estimated in the Proposal 
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 it has been estimated that five DCOs will elect to become 
Subpart C DCOs.
    The Commission did not receive any comments on the estimated costs 
or burden hours of this collection of information and the Commission 
believes that its original estimates, as set forth below and in the 
Proposal,\256\ remain appropriate for PRA purposes:
---------------------------------------------------------------------------

    \256\ 78 FR 50285-86.

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
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

[[Page 72501]]

    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

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.\257\ 
The rules adopted herein 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 RFA.\258\ The Commission has 
previously determined that DCOs are not small entities for the purpose 
of the RFA.\259\ Accordingly, the Chairman, on behalf of the 
Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the rules 
adopted herein will not have a significant economic impact on a 
substantial number of small entities. The Chairman made the same 
certification in the proposed rulemaking, and the Commission did not 
receive any comments on the RFA.
---------------------------------------------------------------------------

    \257\ 5 U.S.C 601 et seq.
    \258\ Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618 (Apr. 30, 1982).
    \259\ See 66 FR 45609.
---------------------------------------------------------------------------

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.\260\ 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.
---------------------------------------------------------------------------

    \260\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

2. Background
    In this final rulemaking, the Commission is adopting regulations to 
(1) address gaps between part 39 of the Commission's regulations and 
the standards set forth in the PFMIs, (2) provide a mechanism for DCOs 
to elect to opt-in the SIDCO enhanced regulatory framework set out in 
the provisions of Subpart C; and (3) make related technical amendments 
to regulations 140.94 and 190.09. As finalized herein, revised Subpart 
C, together with Subpart A and Subpart B, will establish regulations 
that are consistent with the PFMIs \261\ and provide SIDCOs and Subpart 
C DCOs with the opportunity to become QCCPs for purposes of the Basel 
CCP Capital Requirements.\262\
---------------------------------------------------------------------------

    \261\ See supra Section I.G.
    \262\ See supra Section I.F. (discussion of the Basel CCP 
Capital Requirements).
---------------------------------------------------------------------------

    In promulgating the final rule, the Commission considered the 
following alternatives: (1) not to adopt any of the proposed additional 
standards for SIDCOs, (2) to adopt the proposed additional standards 
for SIDCOs only, (3) to adopt the proposed additional standards for 
SIDCOs and also for DCOs that have not been designated as systemically 
important by the Council but that seek adherence to the enhanced 
regulatory framework for purposes of gaining QCCP status, or (4) to 
adopt the proposed additional standards for all DCOs. As detailed 
above, the Commission has concluded it is necessary and appropriate to 
adopt regulations which set forth enhanced regulatory standards for 
SIDCOs and also to extend this framework to DCOs that have not been 
designated systemically important in order to provide the opportunity 
to for all DCOs to become QCCPs.
    The Commission invited public comment on all aspects of the 
proposed rulemaking, including (1) 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), (2) the potential costs and benefits to a 
SIDCO or Subpart C DCO to comply with all aspects of the proposed rule, 
(3) alternative means to establish, for Subpart C DCOs, requirements 
consistent with the PFMIs and the costs (or cost savings) and benefits 
associated with such alternatives, and (4) any costs that would be 
imposed on and any benefits that would be conferred on other market 
participants or the financial system more broadly. As discussed above 
in more detail, the Commission received comment letters which generally 
supported the proposed rule and the Commission's objective to harmonize 
U.S. regulations with the international standards set forth by the 
PFMIs.\263\ However, the Commission received only one comment that 
provided quantitative data from which the Commission could calculate 
the costs and benefits of the proposed regulations.\264\ The remainder 
of the comment letters provided qualitative comments on the 
Commission's proposed consideration of costs and benefits, generally, 
as well as specifically with regard to certain proposed regulations. 
These comments are summarized below in connection with the Commission's 
consideration of costs and benefits on the final rules being 
promulgated herein pursuant to section 15(a) of the CEA.
---------------------------------------------------------------------------

    \263\ See generally Chris Barnard, NYPC, FIA, ICE, ISDA, 
European Commission, CME, LCH and MGEX comment letters.
    \264\ See generally CME comment letter.
---------------------------------------------------------------------------

3. Costs and Benefits of the Final Rule
a. Costs
    The Commission requested quantitative data or specific cost

[[Page 72502]]

estimates associated with the proposed regulations but commenters, 
other than CME, did not provide this information. Commenters did 
address the costs and benefits of the proposed rule in qualitative 
terms, as described below.\265\
---------------------------------------------------------------------------

    \265\ See generally MGEX and LCH comment letters.
---------------------------------------------------------------------------

    As noted in the cost-benefit discussion in the Proposal,\266\ the 
Commission recognizes that the regulations in this final rulemaking are 
comprehensive and that, compared against the status quo (the DCO 
regulatory framework set forth in Subpart A and B of part 39 of the 
Commission's regulations), these regulations 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 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 are likely 
to increase operational, administrative, and compliance costs for 
SIDCOs or Subpart C DCOs.
---------------------------------------------------------------------------

    \266\ 78 FR 50287.
---------------------------------------------------------------------------

    In addition to the costs for SIDCOs and Subpart C DCOs, the 
Commission has considered the costs these regulations may 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, margin 
fees, etc.) may discourage market participation and result in decreased 
liquidity and reduced price discovery. However, the Commission has also 
considered the costs to market participants and the public if the 
regulations in this final rulemaking are not adopted. Significantly, 
without these regulations to ensure that SIDCOs operate under certain 
enhanced risk management standards, in a manner consistent with 
internationally accepted standards, the security of the U.S. financial 
markets would be at a greater risk relative to international markets. 
This could affect the attractiveness of the U.S. financial markets 
subject to the Commission's jurisdiction as compared to foreign 
competitors. Moreover, SIDCOS and DCOs that wish to opt-into the 
enhanced regulatory framework would not have the opportunity to gain 
QCCP status, thereby putting them at a significant competitive 
disadvantage in the global financial markets which, again, would be to 
the detriment of their clearing members and their customers.
i. Regulation 39.31 (Election to become subject to the provisions of 
subpart C)
    Regulation 39.31 sets forth the procedures a DCO will be required 
to follow to elect to become subject to the provisions of Subpart 
C.\267\ Specifically, paragraph (b) requires a registered DCO to file a 
completed Subpart C Election Form with the Commission. The form appears 
in 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.\268\ Paragraph (c) requires 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 includes 
disclosures and exhibits wherein the DCO is 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 will comply 
with each regulation. In addition, the DCO is required to provide, in 
separate exhibits, all documents that demonstrate the DCO's compliance 
with regulations 39.32 through 39.36 and regulation 39.39, as finalized 
herein. A DCO is also required to complete responses to the Disclosure 
Framework and publish a copy of its responses on its Web site.
---------------------------------------------------------------------------

    \267\ See supra Section II.C. (discussing regulation 39.31).
    \268\ See 76 FR 69448.
---------------------------------------------------------------------------

    The Commission notes that regulation 39.31 only applies 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. By 
providing an opt-in procedure and a procedure to rescind such election, 
regulation 39.31, as adopted, offers the benefit of permitting a DCO 
that is not systemically important to compare the benefit of attaining 
QCCP status with the costs of preparing a comprehensive and complete 
Subpart C Election Form (in accordance with the requirements set forth 
in regulation 39.31) and complying with the requirements set forth in 
Subpart C and, thus, to decide for itself whether to become subject to 
Subpart C.
    As discussed above in more detail, the Commission received 4 
comment letters addressing the costs associated with specific 
regulations in the proposed rule.\269\ All of the commenters expressed 
support for the Commission's efforts to provide DCOs with the 
opportunity to become eligible for QCCP status by adhering to an 
enhanced regulatory scheme.\270\ However, MGEX referred to the 
application process set forth in proposed regulation 39.31 as 
``burdensome'' and ``discriminatory'' towards DCOs that have not been 
designated as systemically important.\271\ In addition, MGEX suggested 
to the Commission two alternatives methods to more efficiently 
implement regulations that are consistent with the PFMIs: (1) require 
all DCOs to be subject to the enhanced regulatory requirements in 
Subpart C and grant an extended compliance schedule beyond December 31, 
2013 or (2) provide an ``opt-out'' process for those DCOs that do not 
wish to be held to the higher regulatory standards and grant compliance 
extensions for those regulations that would be difficult for DCOs to 
implement by December 31, 2013.\272\ LCH suggested that the Commission 
consider requiring the enhanced regulatory standards to apply to all 
DCOs and allow DCOs to petition the Commission for extended compliance 
with ``more complex rules.''\273\ LCH also suggested an opt-out process 
for those DCOs that believe QCCP status is not important for their 
business.\274\ As MGEX itself pointed out in its comment letter, 
requiring all DCOs to adhere to the enhanced requirements in Subpart C 
would impose considerable costs on DCOs that may not seek QCCP 
status.\275\ The Commission believes a DCO should have the flexibility 
to determine what level of regulatory standard is appropriate for its 
particular business model. Regarding the suggested alternative opt-out 
provision, as stated previously, the Commission does not have 
quantitative data on the costs associated with implementing the 
regulations in this final rule but it is aware that costs may be 
significant. Further, the Commission is aware that imposing an enhanced 
regulatory framework on all DCOs even with an opt-out provision, 
without the necessary quantitative analysis, would be inappropriate and 
could result in financial harm to certain DCOs. Moreover, without a 
detailed quantitative analysis comparing the

[[Page 72503]]

costs for each DCO that elects to opt-in (under the proposed rule) with 
the costs of each DCO that elects to opt-out of Subpart C compliance 
(under MGEX's alternative), the Commission cannot determine whether 
establishing an opt-out regime would be a more efficient means of 
implementing the PFMIs than the Commission's proposed opt-in regime. 
Hence, at this time, the Commission cannot justify the cost burden that 
would result for DCOs if every DCO were required to comply with the 
Subpart C regulations.
---------------------------------------------------------------------------

    \269\ See generally MGEX, CME, LCH and European Commission 
comment letters.
    \270\ MGEX at 1-2; CME at 1, LCH at 2, and European Commission 
at 1.
    \271\ MGEX at 2.
    \272\ Id. at 3.
    \273\ LCH at 3.
    \274\ Id.
    \275\ MGEX at 3.
---------------------------------------------------------------------------

    MGEX and LCH also both suggested that to alleviate the compressed 
timeline for compliance, the Commission should allow compliance 
extensions. Specifically, LCH requested that ``more complex rules, such 
as those governing financial resources, system safeguards, risk 
management, and recovery and wind-down plans'' be given additional time 
for compliance.\276\ Similarly, MGEX suggested ``granting compliance 
extensions for those regulations that may be particularly difficult to 
implement by the December 31, 2013 deadline.'' \277\ As highlighted by 
both MGEX and LCH, the Commission has already proposed an extended 
deadline for regulation 39.34 regarding system safeguards. The 
Commission is also extending the deadline for compliance with 
regulation 39.35 regarding default rules and procedures and regulation 
39.39 regarding recovery and wind-down by permitting a SIDCO or Subpart 
C DCO to request that the Commission grant the SIDCO or Subpart C DCO 
up to a one year extension to comply with these regulations. However, 
because the very purpose of this final rule is to align the 
Commission's regulations with the PFMIs and to provide DCOs the 
opportunity to become QCCPs, inherently a DCO must comply with all of 
the regulations. An extended compliance date for all the regulations or 
a large subset of the regulations, would call into the question whether 
the Commission has rules and regulations in place consistent with the 
PFMIs and is applying these rules to the DCO on an ongoing basis as of 
December 31, 2013. Extending the compliance date could delay the 
ability of a Subpart C DCO or SIDCO to gain QCCP status and thus, 
increase costs for the DCO's clearing member banks and the customers of 
these banks. While the Commission recognizes the concerns expressed by 
the commenters regarding the compliance deadline for purposes of 
achieving QCCP status, the Commission notes that for DCOs that are not 
SIDCOs, it is ultimately the decision of the DCO as to whether to elect 
to become a Subpart C DCO and if so, when to make such an election. 
Thus, the compliance dates proposed in this regulation are permissive 
and not mandatory for such DCOs.
---------------------------------------------------------------------------

    \276\ LCH at 3.
    \277\ MGEX at 3.
---------------------------------------------------------------------------

    The Commission requested comments regarding the costs associated 
with the actual opt-in process. However, although MGEX stated that the 
Subpart C Election Form would be overly burdensome, neither MGEX nor 
any other commenter provided comments quantifying the cost of opting-
in, the costs associated with rescinding an opt-in (including the 
notices required), or the costs associated with the completion and 
publication of responses to the Disclosure Framework.
    The Commission notes that pursuant to paragraph (e), a Subpart C 
DCO is permitted, subject to a 180 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 the 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.\278\ Alternatively, clearing 
members and their customers may choose to end their clearing activities 
and transact through another DCO that is a QCCP. Either choice would 
impose costs on those clearing members and their customers.
---------------------------------------------------------------------------

    \278\ See supra Section I.F. (discussing the treatment for non-
QCCP clearing members under the Basel CCP Capital Requirements).
---------------------------------------------------------------------------

    As the Commission has previously noted, a Subpart C DCO's 
compliance with the provisions of Subpart C will 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 requested but did not receive any comments 
concerning how these costs may be mitigated. Nor did the Commission 
receive any comments about the extent to which a DCO's analysis of the 
costs and benefits of being a Subpart C DCO could be affected by the 
possibility that some of the costs may be incurred indirectly by 
clearing members and their customers.
    In the absence of input from market participants, the Commission 
lacks critical information necessary to make a reasonable assessment or 
quantify dollar costs associated with regulation 39.31. Each DCO has 
its own internal cost structure, management system, and existing 
regulatory compliance framework. Thus, the way in which regulation 
39.31 impacts each Subpart C DCO with respect to costs likely will 
vary. Accordingly, the Commission is unable to provide a reliable 
quantification of the costs associated with regulation 39.31, because, 
among other things, such a determination would require information 
concerning the business model and strategies of individual DCOs, about 
which the Commission did not receive information during the comment 
period. The Commission has no reason to believe, however, that the 
costs associated with the regulation would be unreasonable or 
inappropriate to achieve the regulatory objective of providing an 
opportunity for DCOs to opt-in to Subpart C. In addition, the 
Commission believes that the costs the regulation imposes would not, to 
any unnecessary extent, impede a DCO from electing to be subject to 
Subpart C.
ii. Regulation 39.32 (Governance for systemically important derivatives 
clearing organizations and subpart C derivatives clearing 
organizations)
    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.\279\ Specifically, SIDCOs and Subpart C DCOs are required to 
have written governance arrangements that are clear and transparent, 
that place a high priority on the safety and efficiency of SIDCOs 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 
are 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, SIDCOs and Subpart C DCOs are also 
required to disclose major decisions of the board.\280\ Regulation 
39.32 requires 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

[[Page 72504]]

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, regulation 39.32 requires 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.
---------------------------------------------------------------------------

    \279\ See supra Section II.D. (discussing regulation 39.32).
    \280\ Id.
---------------------------------------------------------------------------

    As noted in the cost benefit section of the Proposal,\281\ 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. The Commission 
continues to believe that these categories accurately summarize the 
sources of material costs that may be incurred in complying with 
regulation 39.32.
---------------------------------------------------------------------------

    \281\ 78 FR 50287.
---------------------------------------------------------------------------

    In the Proposal, the Commission requested comment 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. The 
Commission specifically requested comment on any alternative means to 
satisfy the requirements of regulation 39.32 in a manner consistent 
with the PFMIs and for costs or cost savings associated with such 
alternatives.\282\ The Commission did not receive any comments in 
response to these requests.
---------------------------------------------------------------------------

    \282\ Id. at 50288.
---------------------------------------------------------------------------

    In the absence of input from market participants, the Commission 
lacks critical information necessary to make a reasonable assessment or 
quantify dollar costs associated with regulation 39.32. The Commission 
notes that regulation 39.32 grants a DCO a certain amount of discretion 
in determining the specifics of the rules and procedures that should be 
adopted to comply with the regulation. Moreover, each DCO has its own 
internal cost structure, management system, and existing regulatory 
compliance framework. Thus, the way in which regulation 39.32 impacts 
each DCO with respect to initial and ongoing costs likely will vary. 
For example, some DCOs may already have rules and processes that comply 
with the regulation, in whole or in part, while other DCOs may not.
    Accordingly, the Commission is unable to provide a reliable 
quantification of the costs associated with regulation 39.32, because, 
among other things, such a determination would require information 
concerning the business model and strategies of individual DCOs, about 
which the Commission did not receive information during the comment 
period. The Commission has no reason to believe, however, that the 
costs associated with the regulation would be unreasonable or 
inappropriate to achieve the regulatory objective of implementing the 
PFMI standards for SIDCOs and Subpart C DCOs. In addition, the 
Commission believes that the costs the regulation imposes would not, to 
any unnecessary extent, impede a DCO from electing to be subject to 
Subpart C.
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, regulation 39.33(a), as revised, requires 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 regulation 
currently applies to SIDCOs.\283\
---------------------------------------------------------------------------

    \283\ See supra Section II.E. (discussing 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 \284\ includes 
the opportunity cost \285\ 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 financial exposure.\286\ In addition, the possibility exists 
that some market participants will transfer 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 
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 and Subpart 
C DCOs that operate under Cover Two. 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 that operates under Cover One because 
it does not elect to become subject to the provisions of Subpart C, and 
is not designated as systemically important, and/or does not clear 
products with a more complex risk profile. This would therefore reduce 
the likelihood that market participants would transfer their positions 
to other DCOs.
---------------------------------------------------------------------------

    \284\ All Subpart C DCOs would bear the administrative cost of 
determining whether they meet either of the criteria.
    \285\ 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 
regulation.
    \286\ 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
    As discussed above, regulation 39.33(b) prohibits 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 financial exposure and, where 
applicable, the default of the two clearing members creating the 
largest aggregate financial exposure, in extreme but plausible 
circumstances, i.e., Cover One or Cover Two.\287\ This prohibition 
currently applies to 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)

[[Page 72505]]

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.
---------------------------------------------------------------------------

    \287\ See supra Section II.E. (discussing revised regulation 
39.33).
---------------------------------------------------------------------------

c.) Regulation 39.33(c), (d) and (e): Liquidity
    As discussed above, regulation 39.33(c) requires 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, including high 
quality, liquid, general obligations of a sovereign nation (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 is 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 regulation 39.11(a)(1) and proposed regulation 
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.\288\
---------------------------------------------------------------------------

    \288\ Id.
---------------------------------------------------------------------------

    Regulation 39.33(d) imposes 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, regulation 39.33(e) requires SIDCOs and 
Subpart C DCOs to document their supporting rationale for the amount of 
financial resources they maintain pursuant to regulation 39.33(a) and 
the amount of liquidity resources they maintain pursuant to regulation 
39.33(c).\289\
---------------------------------------------------------------------------

    \289\ Id.
---------------------------------------------------------------------------

    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 regulations also will require stress testing and 
other analysis of such resources as compared with the DCO's liquidity 
needs. Specifically, with regards to 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 may 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. 
Where appropriate, this calculation may also require designing and 
implementing changes to either create or modify existing internal 
processes. The Commission notes that while this analysis may involve 
costs, 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.
    CME estimated that if it had to obtain committed funding 
arrangements to comply with regulation 39.33(c), its liquidity costs 
would approximately double.\290\ This increase is based on their 
``assumption that the cost of committed liquidity or committed 
repurchase facilities is approximately $3 million for every $1 billion 
of required committed facilities'' or 30 basis points.\291\ 
Additionally, CME commented that given the global clearing mandate 
slated to take effect over the next two years, liquidity requirements 
will significantly increase, which could potentially result in CME's 
liquidity costs increasing to $120 to $160 million per year.\292\
---------------------------------------------------------------------------

    \290\ CME at 13.
    \291\ Id. Current and historic returns available on high quality 
sovereign bonds suggest that the actual costs of liquidity service 
may be less than the 30 basis points that CME estimates and 
therefore, CME's total liquidity costs would be lower than $120 to 
$160 million.
    \292\ CME at 13.
---------------------------------------------------------------------------

    Based on CME's 30 basis point estimate, their increase in liquidity 
costs would translate into a liquidity exposure from the default of a 
single participant, including affiliates, (i.e., Cover One) of $40 
billion to $53 billion. The size of this potential exposure highlights 
the systemic importance of SIDCOs, such as CME, and how critical it is 
for a SIDCO to meet all of its obligations promptly even in extreme but 
plausible conditions. Consequently, while there may be costs associated 
with obtaining prearranged, highly reliable funding, these costs must 
be weighed against the potential disruptions and damage to the U.S. 
financial system if, during extreme but plausible market conditions, a 
SIDCO does not maintain sufficient liquidity to meet its financial 
obligations to its non-defaulting members promptly.
    Moreover, as discussed above in more detail, the standard SIDCOs 
and Subpart C DCOs must meet under regulation 39.33(c) is to 
demonstrate the reliability of the requisite liquidity arrangements, 
even in extreme but plausible conditions. To the extent that a DCO is 
able to meet this burden through tools other than the use of a 
committed funding arrangement, and chooses to so, then the DCO would 
bear the cost of such an alternative arrangement, which may be lower 
than the costs of a committed funding arrangement.
    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, 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.

[[Page 72506]]

iv. Regulation 39.34 (System safeguards for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)
    As discussed above regulation 39.34, as revised, expands the 
enhanced system safeguards requirements already applicable to SIDCOs to 
include Subpart C DCOs.\293\ As noted in the cost benefit section of 
the Proposal,\294\ the regulation may increase operational costs for 
Subpart C DCOs by requiring additional resources, including, technology 
(e.g., hardware and software) and the purchase or rental of premises in 
order to achieve geographic dispersal of resources. Moreover, business 
continuity planning inherently requires that personnel be trained in 
their roles and responsibilities under the plan, and this training 
consumes time and related resources.
---------------------------------------------------------------------------

    \293\ See supra Section II.F. (discussing regulation 39.34).
    \294\ 78 FR 50290.
---------------------------------------------------------------------------

    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. The Commission continues to 
believe that these categories accurately summarize the sources of 
material costs that may be incurred in complying with regulation 39.34.
    In the Proposal, the Commission requested comment on the potential 
costs to a Subpart C DCO to comply 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. The Commission 
specifically requested comment on any alternative means to satisfy the 
requirements of regulation 39.34 in a manner consistent with the PFMIs 
and for costs or cost savings associated with such alternatives.\295\ 
The Commission received one comment in response. MGEX stated that it 
would require three or four additional employees to comply with the 
geographic diversity requirements of this rule, unless MGEX were to 
engage outsourced personnel.
---------------------------------------------------------------------------

    \295\ Id.
---------------------------------------------------------------------------

    The Commission notes that MGEX could, alternatively, relocate 
existing positions (rather than increase its headcount). This would 
require MGEX to incur either relocation or hiring costs, as well as 
office space for the geographically diverse employees. MGEX provided no 
estimates of the costs it might incur.
    In the absence of input from market participants, the Commission 
lacks critical information necessary to make a reasonable assessment or 
quantify dollar costs associated with regulation 39.34. The Commission 
notes that regulation 39.34 grants a DCO a significant amount of 
discretion in determining how to comply with the regulation. Moreover, 
it is possible that each DCO has its own internal cost structure, 
management system, and existing regulatory compliance framework. Thus, 
the way in which regulation 39.34 impacts each DCO with respect to 
initial and ongoing costs likely will vary. For example, some DCOs may 
already have resources in place that comply with the regulation, in 
whole or in part, while other DCOs may not.
    Accordingly, the Commission is unable to provide a reliable 
quantification of the costs associated with regulation 39.34, because, 
among other things, such a determination would require information 
concerning the business model and strategies of individual DCOs, about 
which the Commission did not receive information during the comment 
period. The Commission has no reason to believe, however, that the 
costs associated with the regulation would be unreasonable or 
inappropriate to achieve the regulatory objective of implementing the 
PFMI standards for Subpart C DCOs. In addition, the Commission believes 
that the costs the regulation imposes would not, to any unnecessary 
extent, impede a DCO from electing to be subject to Subpart C.
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, regulation 39.35 requires SIDCOs and Subpart C 
DCOs to adopt rules and procedures to address certain issues arising 
from extraordinary stress events, including the default of one or more 
clearing members.\296\ Such default rules and procedures must 
sufficiently (1) allocate uncovered credit losses and (2) enable a 
SIDCO or Subpart C DCO promptly to 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 noted in the cost benefit section of the 
Proposal,\297\ 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. The tools that a SIDCO or Subpart C DCO chooses to include 
in its default rules and procedures may involve capital costs. The 
Commission continues to believe that these categories accurately 
summarize the sources of material costs that may be incurred in 
complying with regulation 39.35.
---------------------------------------------------------------------------

    \296\ See supra Section II.G. (discussing regulation 39.35).
    \297\ 78 FR 50290.
---------------------------------------------------------------------------

    In the Proposal, the Commission requested comment on the potential 
costs to a SIDCO or Subpart C DCO to comply 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. The 
Commission specifically requested comment on any alternative means to 
satisfy the requirements of regulation 39.35 in a manner consistent 
with the PFMIs and for costs or cost savings associated with such 
alternatives.\298\ The Commission did not receive any comments in 
response to these requests.
---------------------------------------------------------------------------

    \298\ Id.
---------------------------------------------------------------------------

    In the absence of input from market participants, the Commission 
lacks critical information necessary to make a reasonable assessment or 
quantify dollar costs associated with regulation 39.35. The Commission 
notes that regulation 39.35 grants a DCO a certain amount of discretion 
in determining the specifics of the rules and procedures that should be 
adopted to comply with the regulation. Moreover, each DCO has its own 
internal cost structure, management system, and existing regulatory 
compliance framework. Thus, the way in which regulation 39.35 impacts 
each DCO with respect to initial and ongoing costs likely will vary. 
For example, some DCOs may already have rules and procedures that 
comply with the regulation, in whole or in part, while other DCOs may 
not.
    Accordingly, the Commission is unable to provide a reliable 
quantification of the costs associated with regulation 39.35, because, 
among other things, such a determination would require information 
concerning the business model and strategies of individual DCOs, about 
which the Commission did not receive information during the comment 
period. The Commission has no reason to believe, however, that the 
costs associated with

[[Page 72507]]

the regulation would be unreasonable or inappropriate to achieve the 
regulatory objective of implementing the PFMI standards for SIDCOs and 
Subpart C DCOs. In addition, the Commission believes that the costs the 
regulation imposes would not, to any unnecessary extent, impede a DCO 
from electing to be subject to Subpart C.
vi. Regulation 39.36 (Risk management for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)
    Regulation 39.36 sets forth 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.\299\ As noted in the 
Proposal,\300\ complying with this regulation may 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 will 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 exposure. The Commission 
continues to believe that these categories accurately summarize the 
sources of material costs that may be incurred in complying with 
regulation 39.36.
---------------------------------------------------------------------------

    \299\ See supra Section II.H. (discussing regulation 39.36).
    \300\ 78 FR 50290.
---------------------------------------------------------------------------

    In the Proposal, the Commission requested comment on the potential 
costs to a SIDCO or Subpart C DCO to comply 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. The 
Commission specifically requested comment on any alternative means to 
satisfy the requirements of regulation 39.36 in a manner consistent 
with the PFMIs and for costs or cost savings associated with such 
alternatives.\301\ The Commission did not receive any comments in 
response to these requests.
---------------------------------------------------------------------------

    \301\ Id.
---------------------------------------------------------------------------

    In the absence of input from market participants, the Commission 
lacks critical information necessary to make a reasonable assessment or 
quantify dollar costs associated with regulation 39.36. The Commission 
notes that regulation 39.36 grants a DCO a certain amount of discretion 
in determining the specifics of the processes that should be adopted to 
comply with the regulation. Moreover, each DCO has its own internal 
cost structure, management system, and existing regulatory compliance 
framework. Thus, the way in which regulation 39.36 impacts each DCO 
with respect to initial and ongoing costs likely will vary. For 
example, some DCOs may already have processes that comply with 
regulation 39.36, in whole or in part, while other DCOs may not.
    Accordingly, the Commission is unable to provide a reliable 
quantification of the costs associated with regulation 39.36, because, 
among other things, such a determination would require information 
concerning the operations of individual DCOs, about which the 
Commission did not receive information during the comment period. The 
Commission has no reason to believe, however, that the costs associated 
with the regulation would be unreasonable or inappropriate to achieve 
the regulatory objective of implementing the PFMI standards for SIDCOs 
and Subpart C DCOs. In addition, the Commission believes that the costs 
the regulation imposes would not, to any unnecessary extent, impede a 
DCO from electing to be subject to Subpart C.
vii. Regulation 39.37 (Additional disclosure for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)
    As discussed above, regulation 39.37 sets 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.\302\ As noted in the Proposal,\303\ 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. The Commission continues to believe that these categories 
accurately summarize the sources of material costs that may be incurred 
in complying with regulation 39.37.
---------------------------------------------------------------------------

    \302\ See supra Section II.I. (discussing regulation 39.37).
    \303\ 78 FR 50290-50291.
---------------------------------------------------------------------------

    In the Proposal, the Commission requested comment on the potential 
costs to a SIDCO or Subpart C to comply with all aspects of proposed 
regulation 39.37, and any costs that would be imposed on other market 
participants or the financial system more broadly. The Commission 
specifically requested comment on any alternative means to satisfy the 
requirements of regulation 39.37 in a manner consistent with the PFMIs 
and for costs or cost savings associated with such alternatives.\304\ 
The Commission did not receive any comments in response to these 
requests.
---------------------------------------------------------------------------

    \304\ Id.
---------------------------------------------------------------------------

    In the absence of input from market participants, the Commission 
lacks critical information necessary to make a reasonable assessment or 
quantify dollar costs associated with regulation 39.37. The Commission 
notes that regulation 39.37 grants a DCO a certain amount of discretion 
in determining the specifics of the procedures that should be adopted 
to comply with the regulation. Moreover, each DCO has its own internal 
cost structure, management system, and existing regulatory compliance 
framework. Thus, the way in which regulation 39.37 impacts each DCO 
with respect to initial and ongoing costs likely will vary. For 
example, some DCOs may already have rules and processes that comply 
with the regulation, in whole or in part, while other DCOs may not.

[[Page 72508]]

    Accordingly, the Commission is unable to provide a reliable 
quantification of the costs associated with regulation 39.37, because, 
among other things, such a determination would require information 
concerning the business model and strategies of individual DCOs, about 
which the Commission did not receive information during the comment 
period. The Commission has no reason to believe, however, that the 
costs associated with the regulation would be unreasonable or 
inappropriate to achieve the regulatory objective of implementing the 
PFMI standards for SIDCOs and Subpart C DCOs. In addition, the 
Commission believes that the costs the regulation imposes would not, to 
any unnecessary extent, impede a DCO from electing to be subject to 
Subpart C.
viii. Regulation 39.38 (Efficiency for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)
    As discussed above, regulation 39.38 requires 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 is required to establish clearly defined goals and 
objectives that are measureable and achievable, including minimum 
service levels, risk management expectations, and business 
priorities.\305\ SIDCOs and Subpart C DCOs are also required to 
facilitate efficient payment, clearing and settlement by accommodating 
internationally accepted communication procedures and standards. As 
outlined in the cost benefit section of the Proposal,\306\ the costs 
associated with the 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 regulation. There may also be 
administrative costs associated with establishing a mechanism to review 
the DCO's compliance with the regulation, as well as operational costs 
associated with designing and implementing processes to accommodate 
internationally accepted communications standards. The Commission 
continues to believe that these categories accurately summarize the 
sources of material costs that may be incurred in complying with 
regulation 39.38.
---------------------------------------------------------------------------

    \305\ See supra Section II.J. (discussing regulation 39.38).
    \306\ 78 FR 50291.
---------------------------------------------------------------------------

    In the Proposal, the Commission requested comment on the potential 
costs to a SIDCO or Subpart C DCO to comply 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. The 
Commission specifically requested comment on any alternative means to 
satisfy the requirements of regulation 39.38 in a manner consistent 
with the PFMIs and for costs or cost savings associated with such 
alternatives.\307\ The Commission did not receive any comments in 
response to those requests.
---------------------------------------------------------------------------

    \307\ Id.
---------------------------------------------------------------------------

    In the absence of input from market participants, the Commission 
lacks critical information necessary to make a reasonable assessment or 
quantify dollar costs associated with regulation 39.38. The Commission 
notes that efficiency is inherently difficult to measure.
    The Commission also notes that regulation 39.38 grants a DCO a 
certain amount of discretion in determining the specifics of the 
processes that should be adopted to comply with the regulation. 
Moreover, each DCO has its own internal cost structure and management 
system. Thus, the way in which regulation 39.38 impacts each DCO with 
respect to initial and ongoing costs likely will vary.
    Accordingly, the Commission is unable to provide a reliable 
quantification of the costs associated with regulation 39.38, because, 
among other things, such a determination would require information 
concerning the business model and strategies of individual DCOs, about 
which the Commission did not receive information during the comment 
period. The Commission has no reason to believe, however, that the 
costs associated with the regulation would be unreasonable or 
inappropriate to achieve the regulatory objective of implementing the 
PFMI standards for SIDCOs and Subpart C DCOs. In addition, the 
Commission believes that the costs the regulation imposes would not, to 
any unnecessary extent, impede a DCO from electing to be subject to 
Subpart C.
ix. Regulation 39.39 (Recovery and wind-down for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)
    As discussed above, regulation 39.39 requires 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 requires 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 regulation also requires 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).
    As noted in the Proposal,\308\ regulation 39.39 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-

[[Page 72509]]

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. The Commission continues to believe that these categories 
accurately summarize the sources of material costs that may be incurred 
in complying with regulation 39.39.
---------------------------------------------------------------------------

    \308\ 78 FR 50291.
---------------------------------------------------------------------------

    In the Proposal, the Commission requested comment on the potential 
costs to a SIDCO or Subpart C DCO to comply 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. The 
Commission specifically requested comment on any alternative means to 
satisfy the requirements of regulation 39.39 in a manner consistent 
with the PFMIs and for costs or cost savings associated with such 
alternatives.\309\ The Commission did not receive any comments in 
response to these requests.
---------------------------------------------------------------------------

    \309\ Id.
---------------------------------------------------------------------------

    In the absence of input from market participants, the Commission 
lacks critical information necessary to make a reasonable assessment or 
quantify dollar costs associated with regulation 39.39. The Commission 
notes that regulation 39.39 grants a DCO a certain amount of discretion 
in determining the specifics of the rules, procedures, and arrangements 
that should be adopted to comply with the regulation. Moreover, each 
DCO has its own internal cost structure, management system, and 
existing regulatory compliance framework. Thus, the way in which 
regulation 39.39 impacts each DCO with respect to initial and ongoing 
costs likely will vary. For example, some DCOs may already have rules, 
processes, and arrangements that comply with the regulation, in whole 
or in part, while other DCOs may not.
    Accordingly, the Commission is unable to provide a reliable 
quantification of the costs associated with regulation 39.39, because, 
among other things, such a determination would require information 
concerning the business model and strategies of individual DCOs, about 
which the Commission did not receive information during the comment 
period. The Commission has no reason to believe, however, that the 
costs associated with the regulation would be unreasonable or 
inappropriate to achieve the regulatory objective of implementing the 
PFMI standards for SIDCOs and Subpart C DCOs. In addition, the 
Commission believes that the costs the regulation imposes would not, to 
any unnecessary extent, impede a DCO from electing to be subject to 
Subpart C.
b. Benefits
    As explained in the subsections that follow, this final rule holds 
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, in turn, increases 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.\310\ 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.\311\ Thus, the final rule offers a substantial 
benefit vis-[agrave]-vis the status quo.
---------------------------------------------------------------------------

    \310\ PFMIs, E.N. 1.1.
    \311\ See http://www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx (describing the designations of CME and ICE Clear 
Credit to be systemically important financial market utilities) and 
see supra Section I.C.
---------------------------------------------------------------------------

    In addition, the regulations adopted in this final rulemaking 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. These regulations will 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 will 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 
Subpart C DCO were not a QCCP.\312\ In turn, this may increase a SIDCO 
or Subpart C DCO's competitiveness vis-[agrave]-vis non-US clearing 
organizations that demonstrate compliance with international standards 
and are QCCPs.
---------------------------------------------------------------------------

    \312\ See supra Section I.F.
---------------------------------------------------------------------------

i. Regulation 39.31 (Election To Become Subject to the Provisions of 
Subpart C)
    The procedures set forth in regulation 39.31, together with the 
Subpart C Election Form, are intended to promote the protection of 
market participants and the public. These procedures require the 
Commission's staff to conduct a review of a DCO that elects to become 
subject to the provisions of Subpart C. The Subpart C Election Form 
provides the Commission, clearing members, and customers (and, 
significantly, the 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.\313\ Without 
regulation 39.31, a DCO that is not designated by the Council as being 
systemically important will 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.\314\ The Commission also 
notes that by clearing through a Subpart C DCO, a clearing member and 
its customers will be afforded the benefits of clearing through a DCO 
subject to enhanced risk management, operational, and other standards.
---------------------------------------------------------------------------

    \313\ See 78 FR 50269.
    \314\ See supra Section I.F. (discussing QCCP status and the 
Basel CCP Capital Requirements); see also supra Section II.C. 
(discussing regulation 39.31).
---------------------------------------------------------------------------

    Regulation 39.31, as adopted herein, provides a benefit to a 
Subpart C DCO by allowing the Subpart C DCO the opportunity to weigh 
for itself the costs and benefits and to determine whether to maintain 
QCCP status. The notice requirements set forth in the regulation 
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).
ii. Regulation 39.32 (Governance for systemically important derivatives 
clearing organizations and subpart C derivatives clearing 
organizations)
    The requirements set forth in regulation 39.32 are beneficial to 
the extent that they cause a SIDCO or Subpart C DCO to internalize and/
or more appropriately allocate certain costs

[[Page 72510]]

that would otherwise be borne by clearing members, customers of 
clearing members, and other relevant stakeholders. Such requirements 
also promote market stability because the governance arrangements of 
SIDCOs and Subpart C DCOs are 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,\315\ and reflect the legitimate interests 
of clearing members, customers of clearing members, and other relevant 
stakeholders. Finally, the governance arrangements required by 
regulation 39.32 promote a more efficient, effective, and reliable DCO 
risk management and operating structure.
---------------------------------------------------------------------------

    \315\ See supra Section II.D. (discussing regulation 39.32).
---------------------------------------------------------------------------

    As noted above, the Commission did not receive any comments focused 
specifically on the cost and benefit considerations relevant to 
regulation 39.32.
iii. Regulation 39.33 (Financial resources for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)
    As described above, regulation 39.33(a), as revised, expands the 
Cover Two minimum financial resources requirement to include 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.\316\ This proposed 
regulation currently applies to SIDCOs. Regulation 39.33(a), as 
finalized herein, increases the financial stability of Subpart C DCOs 
subject to this regulation by requiring compliance with enhanced 
minimum financial resource requirements. Compliance with such 
standards, in turn, increases 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 
Subpart C DCO's failure which, in times of market turmoil, could 
increase the risk to the stability of the U.S. financial system.\317\ 
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.
---------------------------------------------------------------------------

    \316\ See supra Section II.E. (discussing revised regulation 
39.33).
    \317\ See supra Section I.B.
---------------------------------------------------------------------------

    As discussed above, regulation 39.33(a)(2) provides the Commission 
with the ability to determine whether a SIDCO or a Subpart C DCO is 
systemically important in multiple jurisdictions. In making such a 
determination, the Commission will consider 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, regulation 
39.33(a)(3) also provides 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.
    Regulation 39.33(b) prohibits 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 increases the financial 
stability of the Subpart C DCO, which in turn, will 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, regulation 39.33(b) 
increases 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, regulations 39.33(c), (d) and (e) increase the 
likelihood that a SIDCO or Subpart C DCO will promptly meet its 
settlement

[[Page 72511]]

obligations in a variety of market conditions. Liquidity arrangements 
that are highly reliable in stressed market conditions are important to 
enable the SIDCO or Subpart C DCO to promptly meet its cash obligations 
to its members. Ensuring that the SIDCO or Subpart C DCO can meet those 
obligations promptly, particularly in stressed market conditions, is an 
important firebreak to avoid loss of market confidence and cascading 
defaults.
    Specifically, regulation 39.33(c) requires 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. Regulation 39.33(d) 
requires 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). Proposed 
regulation 39.33(e) requires 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.
    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 their customers by avoiding an 
inability to meet settlement obligations that might cause cascading 
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.
iv. Regulation 39.34 (System safeguards for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)
    As discussed above, regulation 39.34, as revised, requires SIDCOs 
and Subpart C DCOs to comply with enhanced system safeguards 
requirements, including a two-hour RTO.\318\ While SIDCOs are already 
subject to these requirements, the Commission expanded this regulation 
to include Subpart C DCOs. A two-hour RTO in a Subpart C DCO's BC-DR 
plan will 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, will increase the overall stability of the U.S. financial 
markets.
---------------------------------------------------------------------------

    \318\ See supra Section II.F. (discussing regulation 39.34).
---------------------------------------------------------------------------

v. Regulation 39.35 (Default rules and procedures for uncovered losses 
or shortfalls (recovery) for systemically important derivatives 
clearing organizations and subpart C derivatives clearing 
organizations)
    Regulation 39.35, as detailed above, requires 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. \319\ The analysis SIDCOs and Subpart C 
DCOs will 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 will 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 will be beneficial for clearing members and their customers 
in that these rules and procedures will 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 
will, 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.
---------------------------------------------------------------------------

    \319\ See supra Section II.G. (discussing regulation 39.35).
---------------------------------------------------------------------------

vi. Regulation 39.36 (Risk management for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)
    As discussed above, Regulation 39.36 establishes enhanced risk 
management requirements designed to help SIDCOs and Subpart C DCOs 
manage their risk exposure.\320\ These requirements include the stress 
testing of their financial resources, the stress testing of their 
liquidity resources, and conducting regular sensitivity analyses of 
their margin methodologies. The analyses performed to comply with this 
regulation will 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, 
regulation 39.36 requires 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

[[Page 72512]]

in instruments with minimal credit, market, and liquidity risks.
---------------------------------------------------------------------------

    \320\ See supra Section II.H. (discussing regulation 39.36).
---------------------------------------------------------------------------

    Regulation 39.36, as adopted herein, increases 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, will benefit 
members of such DCOs and their customers, as discussed above. By 
enhancing the reliability and stability of SIDCOs and Subpart C DCOs, 
regulation 39.36 strengthens the overall stability of the U.S. 
financial markets.
    vii. Regulation 39.37 (Additional disclosure for systemically 
important derivatives clearing organizations and subpart C derivatives 
clearing organizations)
    The disclosure requirements set forth in regulation 39.37 \321\ 
benefit clearing members of SIDCOs and Subpart C DCOs, as well as 
customers of clearing members, because they provide transparency and 
certainty concerning the processes, operations and exposures of these 
DCOs. In particular, paragraph (d) requires 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 will 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.
---------------------------------------------------------------------------

    \321\ See supra Section II.I. (discussing regulation 39.37).
---------------------------------------------------------------------------

viii. Regulation 39.38 (Efficiency for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)
    The efficiency requirements set forth in regulation 39.38 will be 
beneficial to clearing members of SIDCOs and Subpart C DCOs, as well as 
to customers of clearing members, because they will 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, under this regulation, SIDCOs and 
Subpart C DCOs are required to facilitate efficient payment, clearing 
and settlement by accommodating internationally accepted communication 
procedures and standards, which may result in operational efficiency 
for market participants. Accordingly, 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.
ix. Regulation 39.39 (Recovery and wind-down for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations)
    Regulation 39.39, as described in detail above, requires 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 requires 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.
    Regulation 39.39 also requires 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).\322\
---------------------------------------------------------------------------

    \322\ See supra Section II.K. (discussing regulation 39.39).
---------------------------------------------------------------------------

    The complex analysis and plan preparation that a SIDCO or Subpart C 
DCO will undertake to comply with this 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 will 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, 
regulation 39.39, as adopted herein, also helps 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.
4. Section 15(a) Factors
a. Protection of Market Participants and the Public
    The regulations finalized herein 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 
will 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. Additionally, these regulations may, more 
broadly, increase the stability of the U.S. 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 final 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 these regulations, the increased costs associated 
with the implementation of the final rule 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

[[Page 72513]]

members of such Subpart C DCOs, and by customers of such clearing 
members.
    The costs of this final rulemaking will likely 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, including loss of market confidence or 
potentially cascading defaults, that would result from a SIDCO's 
failure to promptly meet its obligations to its members, or a 
disruption in its functioning. Similarly, the regulations will 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.
b. Efficiency, Competitiveness, and Financial Integrity
    The regulations set forth in this final rulemaking 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. Regulation 39.38, as finalized herein, 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 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 regulations finalized herein 
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.
    These regulations 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, these 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 (at least in the case of clearing members 
and customers that are banks or bank affiliates) be offset by the lower 
capital charges granted to bank or bank affiliated 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 
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 regulations in this 
final rulemaking will 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 
regulations seek to lessen the incidence of pro-cyclical demands for 
additional resources and, in so doing, promote both financial integrity 
and market stability. By promoting the ability of SIDCOs and Subpart C 
DCOs to promptly meet their obligations to members, including in times 
of extreme market stress, they will mitigate the potential loss of 
market confidence, and the potential for cascading defaults. These 
efforts will redound to the benefit of clearing members and their 
customers, as well as the financial system more broadly.
c. Price Discovery
    The regulations in this final rulemaking will 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 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.
d. Sound Risk Management Practices
    The regulations in this final rulemaking contribute to the sound 
risk management practices of SIDCOs and Subpart C DCOs because the 
requirements 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; \323\ (4) enhancing risk management standards 
by creating new stress testing and sensitivity analysis requirements; 
(5) promoting the active management of credit and liquidity risks 
arising from settlement banks; \324\ 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.\325\ In 
addition, by strengthening

[[Page 72514]]

financial and liquidity resource requirements, enhancing risk 
management standards, and enhancing disclosure and recovery planning 
requirements, the regulations in this final rule 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 promptly (thereby facilitating market participants own 
management of risks, including mitigating the risk that participants 
will be faced, at a time of market stress, with a failure by the SIDCO 
or Subpart C DCO to promptly meet its obligations to them), 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.
---------------------------------------------------------------------------

    \323\ As mentioned above, this rulemaking would extend to 
Subpart C DCOs the system safeguards requirements currently 
applicable to SIDCOs. See supra Section II.F. (discussing revised 
regulation 39.34 (system safeguards)).
    \324\ See supra Section II.H. (discussing regulation 39.36).
    \325\ See supra Section II.G. (discussing regulation 39.35); see 
also supra Section II.K. (discussing regulation 39.39).
---------------------------------------------------------------------------

e. 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 final 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,'' \326\ 
adopting the regulations in this final rule will promote the public 
interest in a more stable broader financial system.
---------------------------------------------------------------------------

    \326\ See Section 802(a)(4) of the Dodd-Frank Act (Congressional 
findings).
---------------------------------------------------------------------------

List of Subjects

17 CFR Part 39

    Commodity futures, Consumer protection, Default rules and 
procedures, Reporting and recordkeeping requirements, Risk management, 
Settlement procedures, System safeguards.

17 CFR Part 140

    Authority delegations (Government agencies), Conflict of interests, 
Organization and functions (Government agencies).

17 CFR Part 190

    Bankruptcy, Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR parts 39, 140, and 190 as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
1. The authority citation for part 39 is revised 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 of this 
chapter, 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 subpart C of this part, 
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 or agency of a foreign banking organization means the 
U.S. branch or 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. Revise subpart C to read as follows:

[[Page 72515]]

Subpart C--Provisions Applicable to Systemically Important 
Derivatives Clearing Organizations and Derivatives Clearing 
Organizations That Elect To Be Subject to the Provisions of This 
Subpart

Sec.
39.30 Scope.
39.31 Election to become subject to the provisions of this subpart.
39.32 Governance for systemically important derivatives clearing 
organizations and subpart C derivatives clearing organizations.
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 credit losses or 
liquidity 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


Sec.  39.30  Scope.

    (a) The provisions of this subpart 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.


Sec.  39.31  Election to become subject to the provisions of this 
subpart.

    (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 (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 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 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 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 of

[[Page 72516]]

this part, and any amendments or supplements thereto filed with the 
Commission pursuant to paragraphs (c)(3) or (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 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 this subpart 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 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 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 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 paragraph 
(e)(1) of this section, provided that the rescission may become 
effective no earlier than 180 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 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, 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, 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, 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;
    (B) On and after the effective date of the rescission of its 
election to be subject to the provisions of this subpart, 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, 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 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 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

[[Page 72517]]

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 comply with the provisions 
of this subpart 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 section 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 financial 
obligations to its clearing members notwithstanding a default by the 
two clearing members creating the largest combined loss to 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

[[Page 72518]]

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 not 
necessary for) a finding of a more complex risk profile.
    (4) For purposes of this section, 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) Highly marketable collateral, including 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, even in extreme 
but plausible market conditions.
    (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 conditions 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 or agency of a foreign 
banking organization, a trust company, or a syndicate of depository 
institutions, U.S. branches or 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.
    (e) Documentation of financial resources and liquidity resources. 
Each systemically important derivatives clearing organization and 
subpart C

[[Page 72519]]

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 request, 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;
    (3) Perform the analyses required by paragraph (a)(2) of this 
section at least

[[Page 72520]]

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 paragraphs (a)(1) and (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. The parameters and assumptions should be 
appropriate in light of the specific characteristics, considered on a 
current basis, of particular products and portfolios cleared.
    (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 paragraphs (c)(1) and (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 liquidity 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 for the funds and assets of

[[Page 72521]]

clearing members, and shall apply to the derivatives clearing 
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

[[Page 72522]]

Commission, as soon as practicable, when the recovery plan is initiated 
or wind-down is pending.
    (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 paragraphs (b)(1) or (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.
    (f) The Commission may, upon request, 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 or of Sec.  
39.35.


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.


Sec. Sec.  39.28 and 39.29  [Added and Reserved]

0
4. In subpart B, add reserved Sec. Sec.  39.28 and 39.29.

Appendix to Part 39 [Redesignated as Appendix A to Part 39]

0
5. Redesignate the Appendix to Part 39--Form DCO Derivatives Clearing 
Organization Application for Registrations as Appendix A to Part 39--
Form DCO Derivatives Clearing Organization Application for 
Registrations.
0
6. Add appendix B to part 39 to read as follows:

Appendix B to Part 39--Subpart C Election Form

COMMODITY FUTURES TRADING COMMISSION

SUBPART C ELECTION FORM

GENERAL INSTRUCTIONS

GENERAL INSTRUCTIONS: Intentional misstatements or omissions of fact 
may constitute federal criminal violations (7 U.S.C. 13 and 18 
U.S.C. 1001).

DEFINITIONS

    Unless the context requires otherwise, all terms used in this 
Subpart C Election Form have the same meaning as in the Commodity 
Exchange Act (``Act''), and in the General Rules and Regulations of 
the Commodity Futures Trading Commission (``Commission'') 
thereunder. All references to Commission regulations are found at 17 
CFR Ch. 1.
    For purposes of this Subpart C Election Form, the term 
``Applicant'' shall mean a derivatives clearing organization that is 
filing this Subpart C Election Form with a Form DCO as part of an 
application for registration as a derivatives clearing organization 
pursuant to Section 5b of the Act and 17 CFR 39.3(a).

GENERAL INSTRUCTIONS

    1. Any derivatives clearing organization requesting an election 
to become subject to subpart C of part 39 of the Commission's 
regulations must file this Subpart C Election Form. The Subpart C 
Election Form includes the election to be subject to the provisions 
of subpart C of part 39 of the Commission's regulations, certain 
required certifications, disclosures, and exhibits, and any 
supplements or amendments thereto filed pursuant to 17 CFR 39.31(b) 
or (c) (collectively, the ``Subpart C Election Form'').
    2. Any derivatives clearing organization wishing to request an 
extension of up to one year to comply with any of the provisions of 
17 CFR 39.34, 17 CFR 39.35 or 17 CFR 39.39, pursuant to 17 CFR 
39.34(d) or 17 CFR 39.39(f) must do so prior to filing this

[[Page 72523]]

Subpart C Election Form. Such requests shall become part of this 
Subpart C Election Form.
    3. Individuals' names, except the executing signature, shall be 
given in full (Last Name, First Name, Middle Name).
    4. The signatures required in this Subpart C Election Form shall 
be the manual signatures of: a duly authorized representative of the 
derivatives clearing organization as follows: If the Subpart C 
Election Form is filed by a corporation, it must be signed in the 
name of the corporation by a principal officer duly authorized; if 
filed by a limited liability company, it must 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, it must be signed in the name of the 
partnership by a general partner duly authorized; if filed by an 
unincorporated organization or association which is not a 
partnership, it must 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.
    5. All applicable items must be answered in full.
    6. Under Section 5b of the Act and the Commission's regulations 
thereunder, the Commission is authorized to solicit the information 
required to be supplied by this Subpart C Election Form from any 
Applicant seeking registration as a derivatives clearing 
organization and from any registered derivatives clearing 
organization.
    7. Disclosure of the information specified in this Subpart C 
Election Form is mandatory prior to the processing of the election 
to become a derivatives clearing organization subject to the 
provisions of subpart C of part 39 of the Commission's regulations. 
The Commission may determine that additional information is required 
in order to process such election.
    8. A Subpart C Election Form that is not prepared and executed 
in compliance with applicable requirements and instructions may be 
returned as not acceptable for filing. Acceptance of this Subpart C 
Election Form, however, shall not constitute a finding that the 
Subpart C Election Form is acceptable as filed or that the 
information is true, current or complete.
    9. Except as provided in 17 CFR 39.31(d), in cases where a 
derivatives clearing organization submits a request for confidential 
treatment with the Secretary of the Commission pursuant to the 
Freedom of Information Act and 17 CFR 145.9, information supplied in 
this Subpart C Election Form will be included routinely in the 
public files of the Commission and will be made available for 
inspection by any interested person.

APPLICATION AMENDMENTS

    17 CFR 39.31(b)(3) and (c)(4) require a derivatives clearing 
organization that has submitted a Subpart C Election Form 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. When amending a Subpart C Election Form, a 
derivatives clearing organization must re-file the Election and 
Certifications page, amended if necessary, and including all 
required executing signatures, and attach thereto revised exhibits 
or other materials marked to show changes, as applicable.

WHERE TO FILE

    This Subpart C Election Form must be filed electronically with 
the Secretary of the Commission in the format and manner specified 
by the Commission.

COMMODITY FUTURES TRADING COMMISSION

SUBPART C ELECTION FORM

ELECTION AND CERTIFICATIONS

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

Exact Name of the Derivatives Clearing Organization (as set forth in 
its charter, if an Applicant, or as set forth in its most recent order 
of registration, if registered with the Commission)

    [square] Check here and complete sections 1 and 3 below, if the 
organization is an Applicant.
    [square] Check here and complete sections 2 and 3 below, if the 
organization currently is registered with the Commission as a 
derivatives clearing organization.
    1. The derivatives clearing organization named above hereby elects 
to become subject to the provisions of subpart C of part 39 of the 
Commission's regulations in the event that the Commission approves its 
application for registration as a derivatives clearing organization.
    The derivatives clearing organization and the undersigned each 
certify that, in the event that the Commission approves the derivatives 
clearing organization's application for registration and permits its 
election to become subject to subpart C of part 39 of the Commission's 
regulations:
    a. The derivatives clearing organization will be in compliance with 
such regulations as of the date set forth in the notice thereof 
provided by the Commission pursuant to 17 CFR 39.31(c)(2), except to 
the limited extent that the Commission has granted the derivatives 
clearing organization an extension of time to comply with: (1) 
specified provisions of 17 CFR 39.34, pursuant to 17 CFR 39.34(d) and/
or (2) specified provisions of 17 CFR 39.35 and/or 17 CFR 39.39, 
pursuant to 17 CFR 39.39(f);
    b. The derivatives clearing organization will be in compliance with 
all provisions of 17 CFR 39.34, 39.35 and/or 39.39 for which the 
Commission, pursuant to 17 CFR 39.34(d) and/or 17 CFR 39.39(f), has 
granted an extension of time to comply in accordance with the terms of 
such extensions; and
    c. The derivatives clearing organization will remain in compliance 
with the provisions contained in subpart C of part 39 of the 
Commission's regulations until this election is rescinded pursuant to 
17 CFR 39.31(e).
-----------------------------------------------------------------------
Name of Derivatives Clearing Organization
-----------------------------------------------------------------------
Manual Signature of Duly Authorized Person
-----------------------------------------------------------------------
Print Name and Title of Signatory

    2. The derivatives clearing organization named above hereby elects 
to become subject to the provisions of subpart C of part 39 of the 
Commission's regulations as of:
    -------------------- (``Effective Date'') [insert date, which must 
be at least 10 business days after the date this Subpart C Election 
Form is filed with the Commission].
    The derivatives clearing organization and the undersigned each 
certify that:
    a. As of the Effective Date set forth above, the derivatives 
clearing organization shall be in compliance with subpart C of part 39 
of the Commission's regulations, except to the limited extent that the 
Commission has granted the derivatives clearing organization an 
extension of time to comply with: (1) specified provisions of 17 CFR 
39.34, pursuant to 17 CFR 39.34(d) and/or (2) specified provisions of 
17 CFR 39.35 and/or 17 CFR 39.39, pursuant to 17 CFR 39.39(f);
    b. The derivatives clearing organization will be in compliance with 
all provisions of 17 CFR 39.34, 39.35 and/or 39.39 for which the 
Commission, pursuant to 17 CFR 39.34(d) and/or 17 CFR 39.39(f), has 
granted an extension of time to comply in accordance with the terms of 
such extensions; and
    c. The derivatives clearing organization will remain in compliance 
with provisions contained in subpart C of part 39 of the Commission's 
regulations until this election is rescinded pursuant to 17 CFR 
39.31(e).
-----------------------------------------------------------------------
Name of Derivatives Clearing Organization
-----------------------------------------------------------------------
Manual Signature of Duly Authorized Person
-----------------------------------------------------------------------
Print Name and Title of Signatory

    3. The derivatives clearing organization named above has duly 
caused this Subpart C Election Form (which includes, as an integral 
part thereof, the Election and Certifications and all Disclosures and 
Exhibits) to be signed on its behalf by its duly authorized 
representative as of the ------ day of ----------, 20----. The

[[Page 72524]]

derivatives clearing organization and the undersigned each represent 
hereby that, to the best of their knowledge, all information contained 
in this Subpart C Election Form is true, current and complete in all 
material respects. It is understood that all required items including, 
without limitation, the Election and Certifications and Disclosures and 
Exhibits, are considered integral parts of this Subpart C Election 
Form.
-----------------------------------------------------------------------
Name of Derivatives Clearing Organization
-----------------------------------------------------------------------
Manual Signature of Duly Authorized Person
-----------------------------------------------------------------------
Print Name and Title of Signatory

COMMODITY FUTURES TRADING COMMISSION

PART 39, SUBPART C ELECTION FORM

DISCLOSURES AND EXHIBITS

    Each derivatives clearing organization that requests an election 
to become subject to the provisions set forth in subpart C of part 
39 of the Commission's regulations shall provide the Disclosures and 
Exhibits set forth below:

DISCLOSURES:

    The derivatives clearing organization shall:
    1. Publish on its Web site in a readily identifiable location 
the derivatives clearing organization's responses to the Disclosure 
Framework for Financial Market Infrastructures (``Disclosure 
Framework''), published by the Committee on Payment and Settlement 
Systems (``CPSS'') and the Board of International Organization of 
Securities Commissions (``IOSCO'') that are required to be completed 
pursuant to 17 CFR 39.37. The derivatives clearing organization's 
responses must be completed in accordance with section 2.0 and Annex 
A of the Disclosure Framework and must fully explain how the 
derivatives clearing organization observes the Principles for 
Financial Market Infrastructures (``PFMIs'') published by CPSS and 
IOSCO.
    Provide the URL to the specific page on the derivatives clearing 
organization's Web site where its responses to the Disclosure 
Framework may be found:
    --------------------
    2. In the event that CPSS and IOSCO publish final criteria for 
the disclosure by a Financial Market Infrastructure (``FMI'') of 
quantitative information to enable stakeholders to evaluate FMIs and 
to make cross comparisons referenced in section 2.5 of the 
Disclosure Framework (``Quantitative Information Disclosure''), 
publish such Quantitative Information Disclosure in a readily 
identifiable location on the derivatives clearing organization's Web 
site.
    If applicable, provide the URL to the specific page on the 
derivatives clearing organization's Web site where its Quantitative 
Information Disclosure may be found:

EXHIBITS:

EXHIBIT INSTRUCTIONS:

    1. The derivatives clearing organization must include a Table of 
Contents listing each Exhibit required by this Subpart C Election 
Form.
    2. If the derivatives clearing organization is an Applicant, in 
its Form DCO, the derivatives clearing organization may summarize 
such information and provide a cross-reference to the Exhibit in 
this Subpart C Election Form that contains the required information.
    The derivatives clearing organization shall provide the 
following Exhibits to this Subpart C Election Form:

EXHIBIT A--COMPLIANCE WITH SUBPART C

    Attach, as Exhibit A, a regulatory compliance chart that 
separately sets forth for Sec. Sec.  39.32-39.39 of the Commission's 
regulations, citations to the relevant rules, policies, and 
procedures of the derivatives clearing organization that address 
each such regulation and a summary of the manner in which the 
derivatives clearing organization will comply with each regulation. 
All citations and compliance summaries shall be separated by 
individual regulation and shall be clearly labeled with the 
corresponding regulation.

EXHBIT B--GOVERNANCE

    Attach, as Exhibit B, documents that demonstrate compliance with 
the governance requirements set forth in Sec.  39.32 of the 
Commission's regulations.

EXHIBIT C--FINANCIAL RESOURCES

    Attach, as Exhibit C, documents that demonstrate compliance with 
the financial resource requirements set forth in Sec.  39.33 of the 
Commission's regulations.

EXHIBIT D--SYSTEM SAFEGUARDS

    Attach, as Exhibit D, documents that demonstrate compliance with 
the system safeguard requirements set forth in Sec.  39.34 of the 
Commission's regulations.

EXHIBIT E--DEFAULT RULES AND PROCEDURES FOR UNCOVERED LOSSES OR 
SHORTFALLS

    Attach, as Exhibit E, documents that demonstrate compliance with 
the requirements for default rules and procedures for uncovered 
losses or shortfalls set forth in Sec.  39.35 of the Commission's 
regulations.

EXHIBIT F--RISK MANAGEMENT

    Attach, as Exhibit F, documents that demonstrate compliance with 
the risk management requirements set forth in Sec.  39.36 of the 
Commission's regulations.

EXHIBIT G--RECOVERY AND WIND-DOWN

    Attach, as Exhibit G, documents that demonstrate compliance with 
the recovery and wind-down requirements set forth in Sec.  39.39 of 
the Commission's regulations.

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

0
7. The authority citation for part 140 continues to read as follows:

    Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and 
16(b).

0
8. Amend Sec.  140.94 to add new paragraphs (c)(12) and (c)(13) to read 
as follows:


Sec.  140.94  Delegation of authority to the Director of the Division 
of Swap Dealer and Intermediary Oversight and 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 requests described in Sec. Sec.  
39.34(d) and 39.39(f) of this chapter.
* * * * *

PART 190--BANKRUPTCY

0
9. The authority citation for part 190 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24, 
and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise 
noted.

0
10. In Sec.  190.09, revise paragraph (b) to read as follows:


Sec.  190.09  Member property.

* * * * *
    (b) Scope of member property. Member property shall include all 
money, securities and property received, acquired, or held by a 
clearing organization to margin, guarantee or secure, on behalf of a 
clearing member, the proprietary account, as defined in Sec.  1.3 of 
this chapter, any account not belonging to a foreign futures or foreign 
options customer pursuant to the proviso in Sec.  30.1(c) of this 
chapter, and any Cleared Swaps Proprietary Account, as defined in Sec.  
22.1 of this chapter: 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.


[[Page 72525]]


    Issued in Washington, DC, on November 15, 2013, by the 
Commission.
Melissa D. Jurgens,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Derivatives Clearing Organizations and International 
Standards--Commission Voting Summary and Statement of Chairman

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton, 
O'Malia, and Wetjen voted in the affirmative; no Commissioner voted 
in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the final rule to complete the process of bringing 
clearinghouse risk management rules in line with international 
standards.
    In the fall of 2011, the Commission adopted a comprehensive set 
of rules for the risk management of clearinghouses. These final 
rules were consistent with international standards, as evidenced by 
the Principles for Financial Market Infrastructures (PFMIs) 
consultative document that had been published by the Committee on 
Payment and Settlement Systems and the International Organization of 
Securities Commissions (CPSS-IOSCO).
    In April of 2012, CPSS-IOSCO issued final principles. Based upon 
these final principles, it was appropriate to augment our rules in 
certain areas to meet those standards, particularly relating to 
systemically important clearinghouses.
    These final rules will implement the remaining items from the 
PFMIs in our clearinghouse rules. They will enable clearinghouses 
designated by the Financial Stability Oversight Council as 
systemically important (SIDCOs) to be qualifying central 
counterparties for the purposes of international bank capital 
standards. This permits banks and bank affiliates that are members 
(or customers of members) of the SIDCOs to benefit from favorable 
capital treatment for their exposures to these SIDCOs. The final 
rules also implement an opt-in mechanism to permit other 
clearinghouses to elect to be held to these additional standards, 
and thus benefit from the same capital treatment.

[FR Doc. 2013-27849 Filed 11-29-13; 8:45 am]
BILLING CODE 6351-01-P