[Federal Register Volume 79, Number 99 (Thursday, May 22, 2014)]
[Proposed Rules]
[Pages 29508-29617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: R1-2014-05806]



[[Page 29507]]

Vol. 79

Thursday,

No. 99

May 22, 2014

Part II





Securities and Exchange Commission





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17 CFR Part 240





Standards for Covered Clearing Agencies; Proposed Rule; Republication

  Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / 
Proposed Rules  

[[Page 29508]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-71699; File No. S7-03-14]
RIN 3235-AL48


Standards for Covered Clearing Agencies

Republication

Editorial Note: Proposed rule document 2014-05806 was originally 
published on pages 16865 through 16975 in the issue of Wednesday, 
March 26, 2014. In that publication the footnotes contained 
erroneous entries. The corrected document is republished in its 
entirety.
AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') proposes to amend Rule 17Ad-22 and add Rule 17Ab2-2 
pursuant to Section 17A of the Securities Exchange Act of 1934 
(``Exchange Act'') and the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act''), adopted in 
Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010 (``Dodd-Frank Act''). Among other things, the proposed 
rules would establish standards for the operation and governance of 
certain types of registered clearing agencies that meet the definition 
of a ``covered clearing agency.''

DATES: Submit comments on or before May 27, 2014.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-03-14 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Kevin M. O'Neill, Deputy Secretary, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-1090. All submissions should refer to File Number S7-03-14.
    To help us process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml).
    Comments are also available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.

FOR FURTHER INFORMATION CONTACT: Katherine Martin, Senior Special 
Counsel; Stephanie Park, Special Counsel; Mark Saltzburg, Special 
Counsel; Matthew Lee, Attorney-Adviser; and Abraham Jacob, Attorney-
Adviser; Office of Clearance and Settlement, Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-7010, at (202) 551-5710.

SUPPLEMENTARY INFORMATION: The Commission proposes to amend Rule 17Ad-
22 to add new Rule 17Ad-22(e) to establish requirements for risk 
management, operations, and governance of registered clearing agencies 
that meet the definition of a ``covered clearing agency.'' Covered 
clearing agencies would include registered clearing agencies that (i) 
have been designated as systemically important by the Financial 
Stability Oversight Council (``FSOC'') and for which the Commission is 
the supervisory agency, pursuant to the Clearing Supervision Act 
(``designated clearing agencies''), (ii) provide central counterparty 
(``CCP'') services for security-based swaps or are involved in 
activities the Commission determines to have a more complex risk 
profile, where in either case the Commodity Futures Trading Commission 
(``CFTC'') is not the supervisory agency for such clearing agency as 
defined in Section 803(8) of the Clearing Supervision Act, or (iii) are 
otherwise determined to be covered clearing agencies by the Commission. 
The Commission also proposes to add new Rule 17Ad-22(f) to codify the 
Commission's statutory authority and new Rule 17Ab2-2 to establish 
procedures for making determinations regarding covered clearing 
agencies under proposed Rule 17Ad-22(e). The Commission also proposes 
to amend existing Rule 17Ad-22(d) to limit its application to clearing 
agencies other than covered clearing agencies and to revise existing 
Rule 17Ad-22(a) to add 15 new definitions. The Commission has begun, 
and intends to continue, consultation with the FSOC and the Board of 
Governors of the Federal Reserve System (``the Board'') and has 
considered the relevant international standards as required by Section 
805(a)(2)(A) of the Clearing Supervision Act.\1\
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    \1\ See Committee on Payment and Settlement Systems and 
Technical Committee of the International Organization of Securities 
Commissions (``CPSS-IOSCO''), Principles for Financial Market 
Infrastructures (Apr. 16, 2012), available at http://www.bis.org/publ/cpss101a.pdf (``PFMI Report'').
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Table of Contents

I. Current Regulatory Framework for Clearing Agencies
    A. Section 17A of the Exchange Act
    B. OTC Swaps Clearing and the Dodd-Frank Act
    1. Title VII of the Dodd-Frank Act
    2. Title VIII of the Dodd-Frank Act
    C. Rule 17Ad-22 Under the Exchange Act
    D. Relevant International Standards
II. Discussion of the Proposed Amendments To Rule 17AD-22 and 
Proposed Rule 17AB2-2
    A. Overview
    1. Scope of Proposed Rule 17Ad-22(e)
    2. Role of Written Policies and Procedures
    3. Frequency of Review Required Under Certain Policies and 
Procedures
    4. Anticipated Impact of Proposed Rule 17Ad-22(e)
    5. General Request for Comments
    B. Proposed Rule 17Ad-22(e)
    1. Proposed Rule 17Ad-22(e)(1): Legal Risk
    2. Proposed Rule 17Ad-22(e)(2): Governance
    3. Proposed Rule 17Ad-22(e)(3): Framework for the Comprehensive 
Management of Risks
    a. Policies and Procedures Requirements, Periodic Review, and 
Annual Board Approval
    b. Recovery and Orderly Wind-Down Plans
    c. Risk Management and Internal Audit
    d. Request for Comments
    4. Proposed Rules 17Ad-22(e)(4) through (7): Financial Risk 
Management
    a. Overview of Financial Risks Faced by Clearing Agencies
    b. Current Financial Risk Management Requirements for CCPs
    c. Proposed Rule 17Ad-22(e)(4): Credit Risk
    i. Prefunded Financial Resources
    ii. Combined or Separately Maintained Clearing or Guaranty Funds
    iii. Testing the Sufficiency of Financial Resources
    iv. Annual Conforming Model Validation
    d. Proposed Rule 17Ad-22(e)(5): Collateral
    e. Proposed Rule 17Ad-22(e)(6): Margin
    i. Active Management of Model Risk
    ii. Collection of Margin
    iii. Ninety-Nine Percent Confidence Level
    iv. Price Data Source
    v. Method for Measuring Credit Exposure
    vi. Backtesting and Sensitivity Analysis
    vii. Annual Conforming Model Validation
    f. Proposed Rule 17Ad-22(e)(7): Liquidity Risk

[[Page 29509]]

    i. Sufficient Liquid Resources
    ii. Qualifying Liquid Resources
    iii. Access to Account Services at a Federal Reserve Bank or 
Other Relevant Central Bank
    iv. Liquidity Providers
    v. Maintenance and Annual Testing of Liquidity Provider 
Procedures and Operational Capacity
    vi. Testing the Sufficiency of Liquid Resources
    vii. Annual Conforming Model Validation
    viii. Address Liquidity Shortfalls and Seek to Avoid Unwinding 
Settlement
    ix. Replenishment of Liquid Resources
    x. Feasibility Analysis for ``Cover Two''
    g. Request for Comments
    5. Proposed Rule 17Ad-22(e)(8): Settlement Finality
    6. Proposed Rule 17Ad-22(e)(9): Money Settlements
    7. Proposed Rule 17Ad-22(e)(10): Physical Delivery Risks
    8. Proposed Rule 17Ad-22(e)(11): Central Securities Depositories
    a. Controls to Safeguard the Rights of Securities Issuers and 
Holders and Prevent the Unauthorized Creation or Deletion of 
Securities
    b. Periodic and At Least Daily Reconciliation of Securities 
Maintained
    c. Protect Assets against Custody Risk
    d. Request for Comments
    9. Proposed Rule 17Ad-22(e)(12): Exchange-of-Value Settlement 
Systems
    10. Proposed Rule 17Ad-22(e)(13): Participant-Default Rules and 
Procedures
    a. Address Allocation of Credit Losses
    b. Describe Replenishment of Financial Resources
    c. Test Default Procedures Annually and Following Material 
Changes
    d. Request for Comments
    11. Proposed Rule 17Ad-22(e)(14): Segregation and Portability
    12. Proposed Rule 17Ad-22(e)(15): General Business Risk
    a. Determining Liquid Net Assets for Recovery and an Orderly 
Wind-Down
    b. Requirements for Liquid Net Assets
    c. Plan for Raising Additional Equity
    d. Request for Comments
    13. Proposed Rule 17Ad-22(e)(16): Custody and Investment Risks
    14. Proposed Rule 17Ad-22(e)(17): Operational Risk Management
    15. Proposed Rule 17Ad-22(e)(18): Access and Participation 
Requirements
    16. Proposed Rule 17Ad-22(e)(19): Tiered Participation 
Agreements
    17. Proposed Rule 17Ad-22(e)(20): Links
    18. Proposed Rule 17Ad-22(e)(21): Efficiency and Effectiveness
    19. Proposed Rule 17Ad-22(e)(22): Communication Procedures and 
Standards
    20. Proposed Rule 17Ad-22(e)(23): Disclosure of Rules, Key 
Procedures, and Market Data
    a. Comprehensive Public Disclosure
    b. Updates to the Comprehensive Public Disclosure
    c. Request for Comments
    C. Proposed Rule 17Ab2-2
    1. Determination that a Registered Clearing Agency is a Covered 
Clearing Agency
    2. Determination that a Covered Clearing Agency Is Systemically 
Important in Multiple Jurisdictions
    3. Determination that a Clearing Agency Has a More Complex Risk 
Profile
    4. Request for Comments
    D. Proposed Rule 17Ad-22(f)
    E. Proposed Amendment to Rule 17Ad-22(d)
III. Paperwork Reduction Act
    A. Overview and Organization
    B. Summary of Collection of Information and Proposed Use of 
Information for Proposed Rule 17Ad-22(e) and Proposed Rule 17Ab2-2
    1. Proposed Rules 17Ad-22(e)(1) through (3): General 
Organization
    a. Proposed Rule 17Ad-22(e)(1)
    b. Proposed Rule 17Ad-22(e)(2)
    c. Proposed Rule 17Ad-22(e)(3)
    2. Proposed Rules 17Ad-22(e)(4) through (7): Financial Risk 
Management
    a. Proposed Rule 17Ad-22(e)(4)
    b. Proposed Rule 17Ad-22(e)(5)
    c. Proposed Rule 17Ad-22(e)(6)
    d. Proposed Rule 17Ad-22(e)(7)
    3. Proposed Rules 17Ad-22(e)(8) through (10): Settlement
    a. Proposed Rule 17Ad-22(e)(8)
    b. Proposed Rule 17Ad-22(e)(9)
    c. Proposed Rule 17Ad-22(e)(10)
    4. Proposed Rules 17Ad-22(e)(11) through (12): CSDs and 
Exchange-of-Value Settlement Systems
    a. Proposed Rule 17Ad-22(e)(11)
    b. Proposed Rule 17Ad-22(e)(12)
    5. Proposed Rules 17Ad-22(e)(13) through (14): Default 
Management
    a. Proposed Rule 17Ad-22(e)(13)
    b. Proposed Rule 17Ad-22(e)(14)
    6. Proposed Rules 17Ad-22(e)(15) through (17): General Business 
and Operational Risk Management
    a. Proposed Rule 17Ad-22(e)(15)
    b. Proposed Rule 17Ad-22(e)(16)
    c. Proposed Rule 17Ad-22(e)(17)
    7. Proposed Rules 17Ad-22(e)(18) through (20): Access
    a. Proposed Rule 17Ad-22(e)(18)
    b. Proposed Rule 17Ad-22(e)(19)
    c. Proposed Rule 17Ad-22(e)(20)
    8. Proposed Rules 17Ad-22(e)(21) through (22): Efficiency
    a. Proposed Rule 17Ad-22(e)(21)
    b. Proposed Rule 17Ad-22(e)(22)
    9. Proposed Rule 17Ad-22(e)(23): Disclosure
    10. Proposed Rule 17Ab2-2
    C. Respondents
    D. Total Annual Reporting and Recordkeeping Burden for Proposed 
Rule 17Ad-22(e)
    1. Proposed Rules 17Ad-22(e)(1) through (3): General 
Organization
    a. Proposed Rule 17Ad-22(e)(1)
    b. Proposed Rule 17Ad-22(e)(2)
    c. Proposed Rule 17Ad-22(e)(3)
    2. Proposed Rules 17Ad-22(e)(4) through (7): Financial Risk 
Management
    a. Proposed Rule 17Ad-22(e)(4)
    b. Proposed Rule 17Ad-22(e)(5)
    c. Proposed Rule 17Ad-22(e)(6)
    d. Proposed Rule 17Ad-22(e)(7)
    3. Proposed Rules 17Ad-22(e)(8) through (10): Settlement
    a. Proposed Rule 17Ad-22(e)(8)
    b. Proposed Rule 17Ad-22(e)(9)
    c. Proposed Rule 17Ad-22(e)(10)
    4. Proposed Rules 17Ad-22(e)(11) through (12): CSDs and 
Exchange-of-Value Settlement Systems
    a. Proposed Rule 17Ad-22(e)(11)
    b. Proposed Rule 17Ad-22(e)(12)
    5. Proposed Rules 17Ad-22(e)(13) through (14): Default 
Management
    a. Proposed Rule 17Ad-22(e)(13)
    b. Proposed Rule 17Ad-22(e)(14)
    6. Proposed Rules 17Ad-22(e)(15) through (17): General Business 
and Operational Risk Management
    a. Proposed Rule 17Ad-22(e)(15)
    b. Proposed Rule 17Ad-22(e)(16)
    c. Proposed Rule 17Ad-22(e)(17)
    7. Proposed Rules 17Ad-22(e)(18) through (20): Access
    a. Proposed Rule 17Ad-22(e)(18)
    b. Proposed Rule 17Ad-22(e)(19)
    c. Proposed Rule 17Ad-22(e)(20)
    8. Proposed Rules 17Ad-22(e)(21) through (22): Efficiency
    a. Proposed Rule 17Ad-22(e)(21)
    b. Proposed Rule 17Ad-22(e)(22)
    9. Proposed Rule 17Ad-22(e)(23): Disclosure
    10. Total Burden for Proposed Rule 17Ad-22(e)
    E. Total Annual Reporting and Recordkeeping Burden for Proposed 
Rule 17Ab2-2
    F. Collection of Information is Mandatory
    G. Confidentiality
    H. Request for Comments
IV. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Overview
    2. Current Regulatory Framework for Clearing Agencies
    a. Basel III Capital Requirements
    b. Other Regulatory Efforts
    3. Current Practices
    a. General Organization
    i. Legal Risk
    ii. Governance
    iii. Framework for the Comprehensive Management of Risks
    b. Financial Risk Management
    i. Credit Risk
    ii. Collateral and Margin
    iii. Liquidity Risk
    c. Settlement
    d. CSDs and Exchange-of-Value Settlement Systems
    i. CSDs
    ii. Exchange-of-Value Settlement Systems
    e. Default Management
    i. Participant-Default Rules and Procedures
    ii. Segregation and Portability
    f. General Business and Operational Risk Management
    i. General Business Risk
    ii. Custody and Investment Risks
    iii. Operational Risk
    g. Access
    i. Access and Participation Requirements
    ii. Tiered Participation Arrangements
    iii. Links
    h. Efficiency
    i. Efficiency and Effectiveness
    ii. Communication Procedures and Standards
    i. Transparency

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    4. Determinations by the Commission
    C. Consideration of Benefits, Costs, and the Effect on 
Competition, Efficiency, and Capital Formation
    1. General Economic Considerations
    a. Systemic Risk
    b. Discretion
    c. Market Integrity
    d. Concentration
    e. Qualifying CCP Status and Externalities on Clearing Members
    2. Effect on Competition, Efficiency, and Capital Formation
    a. Competition
    b. Efficiency
    c. Capital Formation
    3. Effect of Proposed Amendments to Rule 17Ad-22 and Proposed 
Rule 17Ab2-2
    a. Proposed Rule 17Ad-22(e)
    i. Proposed Rule 17Ad-22(e)(1): Legal Risk
    ii. Proposed Rule 17Ad-22(e)(2): Governance
    iii. Proposed Rule 17Ad-22(e)(3): Comprehensive Framework for 
the Management of Risks
    iv. Proposed Rules 17Ad-22(e)(4) through (7): Financial Risk 
Management
    (1) Proposed Rule 17Ad-22(e)(4): Credit Risk
    (2) Proposed Rule 17Ad-22(e)(5): Collateral
    (3) Proposed Rule 17Ad-22(e)(6): Margin
    (4) Proposed Rule 17Ad-22(e)(7): Liquidity Risk
    (5) Testing and Validation of Risk Models
    v. Proposed Rules 17Ad-22(e)(8) through (10): Settlement and 
Physical Delivery
    vi. Proposed Rule 17Ad-22(e)(11): CSDs
    vii. Proposed Rule 17Ad-22(e)(12): Exchange-of-Value Settlement 
Systems
    viii. Proposed Rule 17Ad-22(e)(13): Participant-Default Rules 
and Procedures
    ix. Proposed Rule 17Ad-22(e)(14): Segregation and Portability
    x. Proposed Rule 17Ad-22(e)(15): General Business Risk
    xi. Proposed Rule 17Ad-22(e)(16): Custody and Investment Risks
    xii. Proposed Rule 17Ad-22(e)(17): Operational Risk Management
    xiii. Proposed Rules 17Ad-22(e)(18) through (20): Membership 
Requirements, Tiered Participation, and Linkages
    (1) Proposed Rule 17Ad-22(e)(18): Member Requirements
    (2) Proposed Rule 17Ad-22(e)(19): Tiered Participation 
Arrangements
    (3) Proposed Rule 17Ad-22(e)(20): Links
    xiv. Proposed Rule 17Ad-22(e)(21): Efficiency and Effectiveness
    xv. Proposed Rule 17Ad-22(e)(22): Communication Procedures and 
Standards
    xvi. Proposed Rule 17Ad-22(e)(23): Disclosure of Rules, Key 
Procedures, and Market Data
    b. Proposed Rule 17Ab2-2
    c. Proposed Rule 17Ad-22(f)
    d. Quantifiable Costs and Benefits
    D. Request for Comments
V. Regulatory Flexibility Act Certification
    A. Registered Clearing Agencies
    B. Certification
VI. Small Business Regulatory Enforcement Fairness Act
VII. Statutory Authority and Text of Amended Rule 17AD-22 and 
Proposed Rule 17AB2-2

I. Current Regulatory Framework for Clearing Agencies

A. Section 17A of the Exchange Act

    When Congress added Section 17A to the Exchange Act as part of the 
Securities Acts Amendments of 1975, it directed the Commission to 
facilitate the establishment of a national system for the prompt and 
accurate clearance and settlement of securities transactions.\2\ In 
Section 17A of the Exchange Act, Congress directed the Commission to 
have due regard for the public interest, the protection of investors, 
the safeguarding of securities and funds, and maintenance of fair 
competition among brokers and dealers, clearing agencies, and transfer 
agents.\3\ The Commission's ability to achieve these goals and its 
supervision of securities clearance and settlement systems is based 
upon the regulation of clearing agencies registered with the Commission 
(``registered clearing agencies''). Clearing agencies are broadly 
defined under the Exchange Act and undertake a variety of functions.\4\ 
One such function is to act as a CCP, which is an entity that 
interposes itself between the counterparties to a trade.\5\ Over the 
years, registered clearing agencies have become an essential part of 
the infrastructure of the U.S. securities markets.\6\ Registered 
clearing agencies help reduce the costs and increase the safety and 
efficiency of securities trading and are required to be structured to 
manage and reduce counterparty risk.\7\
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    \2\ See 15 U.S.C. 78q-1; Report of the Senate Committee on 
Banking, Housing & Urban Affairs, S. Rep. No. 94-75, at 4 (1975) 
(urging that ``[t]he Committee believes the banking and security 
industries must move quickly toward the establishment of a fully 
integrated national system for the prompt and accurate processing 
and settlement of securities transactions'').
    \3\ See 15 U.S.C. 78q-1(a)(2)(A).
    \4\ Section 3(a)(23)(A) of the Exchange Act defines the term 
``clearing agency'' to mean any person who acts as an intermediary 
in making payments or deliveries or both in connection with 
transactions in securities or who provides facilities for the 
comparison of data regarding the terms of settlement of securities 
transactions, to reduce the number of settlements of securities 
transactions, or for the allocation of securities settlement 
responsibilities. Such term also means any person, such as a 
securities depository, who acts as a custodian of securities in 
connection with a system for the central handling of securities 
whereby all securities of a particular class or series of any issuer 
deposited within the system are treated as fungible and may be 
transferred, loaned or pledged by bookkeeping entry without physical 
delivery of securities certificates, or otherwise permits or 
facilitates the settlement of securities transactions or the 
hypothecation or lending of securities without physical delivery of 
securities certificates. See 15 U.S.C. 78c(a)(23)(A).
    \5\ See id.; see also Exchange Act Release No. 34-68080 (Oct. 
22, 2012), 77 FR 66219, 66221-22 (Nov. 2, 2012) (``Clearing Agency 
Standards Release''). An entity that acts as a CCP for securities 
transactions is a clearing agency as defined in the Exchange Act and 
is required to register with the Commission. For further discussion 
of the economic effects of CCPs, see infra notes 19, 563, and 
accompanying text.
    \6\ See Risk Management Supervision of Designated Clearing 
Entities (July 2011), Report by the Commission, the Board & CFTC to 
the Senate Committees on Banking, Housing & Urban Affairs and 
Agriculture in fulfillment of Section 813 of Title VIII of the Dodd-
Frank Act, at 3 (stating that designated clearing entities ``play a 
vital role in the proper functioning of financial markets and are 
increasingly important given the mandated central clearing of 
certain swaps and security-based swaps that is required by the 
[Dodd-Frank] Act'') (``Risk Management Supervision Report'').
    \7\ See id. at 12 (describing the risk management practices of 
designated clearing entities and the economic and legal incentives 
for sound risk management).
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    Section 17A of the Exchange Act and Rule 17Ab2-1 require entities 
to register with the Commission prior to performing the functions of a 
clearing agency.\8\ Under the statute, the Commission is not permitted 
to grant registration unless it determines that the rules and 
operations of the clearing agency meet the standards set forth in 
Section 17A of the Exchange Act.\9\ If the Commission registers a 
clearing agency, the Commission oversees the clearing agency to 
facilitate compliance with the Exchange Act using various tools that 
include, among other things, the rule filing process for self-
regulatory organizations (``SROs'') and on-site examinations by 
Commission staff.\10\ The Commission also oversees registered clearing 
agencies through regular contact, including onsite visits, by 
Commission staff with clearing agency senior management and other 
personnel and ongoing interactions of Commission staff with the 
registered

[[Page 29511]]

clearing agencies regarding current and expected proposed rule changes 
under Section 19(b) of the Exchange Act.
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    \8\ See 15 U.S.C. 78q-1(b) and 17 CFR 240.17Ab2-1 thereunder; 
see also infra notes 20-23 and accompanying text (noting that the 
Dodd-Frank Act also added new paragraphs (g), (i), and (j) to 
Section 17A of the Exchange Act to establish requirements for any 
entity that performs the functions of a clearing agency for 
security-based swaps).
    \9\ A clearing agency can be registered with the Commission only 
if the Commission makes a determination that the clearing agency 
satisfies the requirements set forth in Section 17A(b)(3)(A) through 
(I) of the Exchange Act. See 15 U.S.C. 78q-1(b)(3)(A) through (I). 
In 1980, the Commission published a statement of the views and 
positions of the Commission staff regarding the requirements of 
Section 17A in its Announcement of Standards for the Registration of 
Clearing Agencies. See Exchange Act Release No. 34-16900 (June 17, 
1980), 45 FR 41920 (June 23, 1980).
    \10\ Under the Clearing Supervision Act, the supervisory agency 
must consult annually with the Board regarding the scope and 
methodology of on-site examinations of designated FMUs, and those 
examinations may include participation by the Board, if requested. 
See infra note 32 and accompanying text; see also 15 U.S.C. 78u(a) 
(providing the Commission with authority to initiate and conduct 
investigations to identify potential violations of the federal 
securities laws); 15 U.S.C. 78s(h) (providing the Commission with 
authority to institute civil actions seeking injunctive and other 
equitable remedies and/or administrative proceedings).
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B. OTC Swaps Clearing and the Dodd-Frank Act

    The Commission drew on its experience regulating clearing agencies 
to address recent developments in the over-the-counter (``OTC'') 
derivatives markets. In December 2008, the Commission acted to 
facilitate the central clearing of credit default swaps (``CDS'') by 
permitting certain entities that performed CCP services to clear and 
settle CDS on a temporary, conditional basis.\11\ Consequently, some 
CDS transactions were centrally cleared prior to the enactment of the 
Dodd-Frank Act.
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    \11\ The Commission authorized five entities to clear CDS. See 
Exchange Act Release Nos. 60372 (July 23, 2009), 74 FR 37748 (July 
29, 2009), 61973 (Apr. 23, 2010), 75 FR 22656 (Apr. 29, 2010) and 
63389 (Nov. 29, 2010), 75 FR 75520 (Dec. 3, 2010) (CDS clearing by 
ICE Clear Europe Limited); 60373 (July 23, 2009), 74 FR 37740 (July 
29, 2009), 61975 (Apr. 23, 2010), 75 FR 22641 (Apr. 29, 2010) and 
63390 (Nov. 29, 2010), 75 FR 75518 (Dec. 3, 2010) (CDS clearing by 
Eurex Clearing AG); 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 
2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009), 61803 
(Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010) and 63388 (Nov. 29, 
2010), 75 FR 75522 (Dec. 3, 2010) (CDS clearing by Chicago 
Mercantile Exchange, Inc.); 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 
12, 2009), 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009), 61662 
(Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010) and 63387 (Nov. 29, 
2010), 75 FR 75502 (Dec. 3, 2010) (CDS clearing by ICE Trust US 
LLC); 59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) (temporary CDS 
clearing by LIFFE A&M and LCH.Clearnet Ltd.) (collectively ``CDS 
clearing exemption orders''). LIFFE A&M and LCH.Clearnet Ltd. 
allowed their orders to lapse without seeking renewal.
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    On July 21, 2010, President Barack Obama signed the Dodd-Frank Act 
into law.\12\ The Dodd-Frank Act was enacted, among other reasons, to 
promote the financial stability of the United States by improving 
accountability and transparency in the financial system.\13\ It is 
intended, among other things, to bolster the existing regulatory 
structure and provide regulatory tools to address risks in the OTC 
derivatives markets, which have experienced dramatic growth in recent 
years and are capable of affecting significant sectors of the U.S. 
economy.\14\
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    \12\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 
(2010).
    \13\ See id.
    \14\ From their beginnings in the early 1980s, the notional 
value of these markets grew to approximately $693 trillion globally 
by June 2013. See Bank for International Settlements (``BIS''), 
Statistical Release: OTC Derivatives Statistics at End-June 2013, at 
2 (Nov. 2013), available at http://www.bis.org/publ/otc_hy1311.pdf.
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1. Title VII of the Dodd-Frank Act
    Title VII of the Dodd-Frank Act (``Title VII'') provides the 
Commission and the CFTC with enhanced authority to regulate certain OTC 
derivatives in response to the 2008 financial crisis.\15\ Title VII 
provides that the CFTC will regulate ``swaps,'' the Commission will 
regulate ``security-based swaps,'' and both the CFTC and the Commission 
will regulate ``mixed swaps.'' \16\ Title VII provides the Commission 
with new regulatory authority over security-based swaps by requiring, 
among other things, that security-based swaps generally be cleared and 
that clearing agencies for security-based swaps register with the 
Commission.
---------------------------------------------------------------------------

    \15\ See Dodd-Frank Act, 124 Stat. at 1641-1802.
    \16\ Section 712(d) of the Dodd-Frank Act provides that the 
Commission and the CFTC, in consultation with the Board, shall 
further define the terms ``swap,'' ``security-based swap,'' ``swap 
dealer,'' ``security-based swap dealer,'' ``major swap 
participant,'' ``major security-based swap participant,'' ``eligible 
contract participant,'' and ``security-based swap agreement.'' 124 
Stat. at 1644. The Commission and the CFTC jointly adopted rules to 
further define the terms ``swap dealer,'' ``security-based swap 
dealer,'' ``major swap participant,'' ``major security-based swap 
participant,'' and ``eligible contract participant,'' as well as 
rules to further define the terms ``swap,'' ``security-based swap,'' 
and ``security-based swap agreement'' and to govern the regulation 
of mixed swaps. See Exchange Act Release Nos. 34-67453 (July 18, 
2012), 77 FR 48208 (Aug. 13, 2012); 34-66868 (Apr. 27, 2012), 77 FR 
30596 (May 23, 2012).
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    The swap and security-based swap markets traditionally have been 
characterized by privately negotiated transactions entered into by two 
counterparties, in which each assumes the credit risk of the other 
counterparty.\17\ Title VII amended the Exchange Act to require that 
transactions in security-based swaps be cleared through a clearing 
agency if they are of a type that the Commission determines must be 
cleared, unless an exemption from mandatory clearing applies.\18\ When 
structured and operated appropriately, clearing agencies may improve 
the management of counterparty risk in security-based swap markets and 
may provide additional benefits, such as the multilateral netting of 
trades.\19\
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    \17\ See, e.g., Exchange Act Release No. 34-60372 (July 23, 
2009), 74 FR 37748 (July 29, 2009), at 37748 n.2 (discussing credit 
default swaps).
    \18\ See 15 U.S.C. 78c-3; see also Exchange Act Release No. 34-
67286 (June 28, 2012), 77 FR 41602 (July 13, 2012) (adopting rules 
establishing a process for submissions for review of security-based 
swaps for mandatory clearing); Exchange Act Release No. 34-63556 
(Dec. 15, 2010), 75 FR 79992 (Dec. 21, 2010) (proposing an end-user 
exception to the mandatory clearing requirement).
    \19\ See Stephen G. Cecchetti, Jacob Gyntelberg & Marc 
Hollanders, Central Counterparties for Over-the-Counter Derivatives, 
BIS Q. Rev., Sept. 2009, at 46, available at http://www.bis.org/publ/qtrpdf/r_qt0909f.pdf (stating that the structure of a CCP 
``has three clear benefits. First, it improves the management of 
counterparty risk. Second, it allows the CCP to perform multilateral 
netting of exposures as well as payments. Third, it increases 
transparency by making information on market activity and 
exposures--both prices and quantities--available to regulators and 
the public'') (emphasis omitted); see also Exchange Act Release No. 
34-60372, supra note 17, at 37749 (discussing the benefits of using 
well-regulated CCPs to clear transactions in credit default swaps). 
But see infra note 563 and accompanying text (discussing the limits 
of clearing through central counterparties).
---------------------------------------------------------------------------

    Title VII also added new provisions to the Exchange Act that 
require entities performing the functions of a clearing agency with 
respect to security-based swaps (``security-based swap clearing 
agencies'') to register with the Commission and require the Commission 
to adopt rules with respect to security-based swap clearing 
agencies.\20\ Specifically, new Section 17A(j) requires the Commission 
to adopt rules governing security-based swap clearing agencies, and new 
Section 17A(i) gives the Commission authority to promulgate rules that 
establish standards for security-based swap clearing agencies.\21\ 
Compliance with any such rules is a prerequisite to the registration of 
a clearing agency that clears security-based swaps with the Commission 
and is also a condition to maintain its continued registration.\22\ 
Section 17A(i) also provides that the Commission, in establishing 
clearing agency standards and in its oversight of clearing agencies, 
may conform such standards and such oversight to reflect evolving 
international standards.\23\ Before commencing any rulemaking 
regarding, among other things, security-based swap clearing agencies, 
Title VII provides that the Commission shall consult and coordinate, to 
the extent possible, with the CFTC and the prudential regulators for 
the purpose of assuring regulatory consistency and comparability, to 
the extent possible.\24\
---------------------------------------------------------------------------

    \20\ See 15 U.S.C. 78q-1(g); Dodd-Frank Act, Sec. 763(b), Public 
Law 111-203, 124 Stat. 1376, 1768 (2010) (adding paragraph (g) to 
Section 17A of the Exchange Act). Pursuant to Section 774 of the 
Dodd-Frank Act, the requirement in Section 17A(g) of the Exchange 
Act for security-based swap clearing agencies to be registered with 
the Commission took effect on July 16, 2011. See 124 Stat. at 1802.
    \21\ See 15 U.S.C. 78q-1(i), (j); Dodd-Frank Act, Sec. 763(b), 
124 Stat. at 1768-69 (adding paragraphs (i) and (j) to Section 17A 
of the Exchange Act).
    \22\ See supra note 9 (describing the requirements under Section 
17A(b)(3) of the Exchange Act, 15 U.S.C. 78q-1(b)(3)).
    \23\ See 15 U.S.C. 78q-1(i) (stating that, in establishing 
standards for security-based swap clearing agencies, and in the 
exercise of its oversight of such a clearing agency pursuant to this 
title, the Commission may conform such standards or oversight to 
reflect evolving United States and international standards).
    \24\ See Dodd-Frank Act, Sec. 712(a)(2), 124 Stat. at 1641-42.
---------------------------------------------------------------------------

    Title VII further provides that some of the entities that the 
Commission permitted to clear and settle CDS on a temporary, 
conditional basis prior to the

[[Page 29512]]

July 21, 2010 enactment of the Dodd-Frank Act are deemed under the 
Dodd-Frank Act to be registered clearing agencies (the ``deemed 
registered provision'').\25\ As a result, the Chicago Mercantile 
Exchange, Inc. (``CME''), ICE Clear Credit LLC (``ICE''), and ICE Clear 
Europe LLC (``ICEEU'') became clearing agencies deemed registered with 
the Commission on July 16, 2011, solely for the purpose of clearing 
security-based swaps.
---------------------------------------------------------------------------

    \25\ See 15 U.S.C. 78q-1(l). The deemed registered provision 
applies to certain depository institutions that cleared swaps as 
multilateral clearing organizations and certain derivatives clearing 
organizations (``DCOs'') that cleared swaps pursuant to an exemption 
from registration as a clearing agency before the date of enactment 
of the Dodd-Frank Act. Under the deemed registered provision, such a 
clearing agency is deemed registered for the purpose of clearing 
security-based swaps and is therefore required to comply with all 
requirements of the Exchange Act, and the rules thereunder, 
applicable to registered clearing agencies, including, for example, 
the obligation to file proposed rule changes under Section 19(b) of 
the Exchange Act. See infra note 96 (describing the requirements in 
Section 19(b) of the Exchange Act).
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2. Title VIII of the Dodd-Frank Act
    The Clearing Supervision Act, adopted in Title VIII of the Dodd-
Frank Act (``Title VIII''), provides for enhanced regulation of 
financial market utilities (``FMUs''), such as clearing agencies that 
manage or operate 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 FMU.\26\ The enhanced regulatory regime 
in Title VIII applies only to FMUs that the FSOC designates as 
systemically important (or likely to become systemically important) in 
accordance with Section 804 of the Clearing Supervision Act.\27\ On 
July 11, 2011, the FSOC published a final rule concerning its authority 
to designate FMUs as systemically important.\28\
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    \26\ The definition of ``financial market utility'' in Section 
803(6) of the Clearing Supervision Act contains a number of 
exclusions that include, but are not limited to, certain designated 
contract markets, registered futures associations, swap data 
repositories, swap execution facilities, national securities 
exchanges, national securities associations, alternative trading 
systems, security-based swap data repositories, security-based swap 
execution facilities, brokers, dealers, transfer agents, investment 
companies and futures commission merchants. See 12 U.S.C. 
5462(6)(B).
    \27\ Pursuant to Section 803(9) of the Clearing Supervision Act, 
an FMU is systemically important if the failure of or a disruption 
to the functioning of such FMU 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. See 12 U.S.C. 5462(9).
    \28\ See 76 FR 44763 (July 27, 2011). Under Section 804 of the 
Clearing Supervision Act, the FSOC has the authority, on a non-
delegable basis and by a vote of no fewer than two-thirds of the 
members then serving, including the affirmative vote of its 
chairperson, to designate those FMUs that the FSOC determines are, 
or are likely to become, systemically important. See 12 U.S.C. 5463. 
The FSOC may, using the same procedures as discussed above, rescind 
such designation if it determines that the FMU no longer meets the 
standards for systemic importance. Before making either 
determination, the FSOC is required to consult with the Board and 
the relevant supervisory agency (as determined in accordance with 
Section 803(8) of the Clearing Supervision Act). See id. Finally, 
Section 804 of the Clearing Supervision Act sets forth the 
procedures for giving entities a 30-day notice and the opportunity 
for a hearing prior to a designation or rescission of the 
designation of systemic importance. See id.
---------------------------------------------------------------------------

    Section 806(e) of the Clearing Supervision Act requires FMUs 
designated as systemically important to file 60 days advance notice of 
changes to its rules, procedures, or operations that could materially 
affect the nature or level of risk presented by the FMU (``Advance 
Notice'').\29\ In addition, Section 806(e) requires each supervisory 
agency to adopt rules, in consultation with the Board, that define and 
describe when a designated FMU is required to file an Advance Notice 
with its supervisory agency.\30\ The Commission published a final rule 
concerning the Advance Notice process for designated clearing agencies 
on June 28, 2012.\31\ In evaluating an Advance Notice filed with the 
Commission, the Commission would assess, among other things, the 
consistency of the Advance Notice with the rules proposed herein, if 
adopted.
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    \29\ See 12 U.S.C. 5465(e)(1)(A).
    \30\ Section 803(8) of the Clearing Supervision Act defines the 
term ``supervisory agency'' in reference to the primary regulatory 
authority for the FMU. For example, it provides that the Commission 
is the supervisory agency for any FMU that is a registered clearing 
agency. See 12 U.S.C. 5462(8). To the extent that an entity is both 
a clearing agency registered with the Commission and registered with 
another agency, such as a DCO registered with the CFTC, the statute 
requires the two agencies to agree on one agency to act as the 
supervisory agency, and if the agencies cannot agree on which agency 
has primary jurisdiction, the FSOC shall decide which agency is the 
supervisory agency for purposes of the Clearing Supervision Act. See 
12 U.S.C. 5462(8).
    \31\ See Exchange Act Release No. 34-67286 (June 28, 2012), 77 
FR 41602 (July 13, 2012).
---------------------------------------------------------------------------

    The Clearing Supervision Act also provides for enhanced 
coordination between the Commission, the Board, and the CFTC by 
facilitating examinations and information sharing. Under Section 807 of 
the Clearing Supervision Act, the Commission and the CFTC must consult 
annually with the Board regarding the scope and methodology of any 
examination of a designated FMU, and the Board is authorized to 
participate in any such examination.\32\ Section 809 of the Clearing 
Supervision Act authorizes the Commission, the Board, and the CFTC to 
disclose to each other copies of examination reports or similar reports 
regarding any designated FMU.\33\ It further authorizes the Commission, 
the Board, and the CFTC to promptly notify each other of material 
concerns about a designated FMU and share appropriate reports, 
information, or data relating to such concerns.\34\ Section 813 of the 
Clearing Supervision Act requires the Commission and the CFTC to 
coordinate with the Board to develop risk management supervision 
programs for designated clearing agencies.\35\
---------------------------------------------------------------------------

    \32\ See 12 U.S.C. 5466.
    \33\ See 12 U.S.C. 5468.
    \34\ See id.
    \35\ See 12 U.S.C. 5472; see also Risk Management Supervision 
Report, supra note 6.
---------------------------------------------------------------------------

    Section 805(a) of the Clearing Supervision Act \36\ also provides 
that the Commission may prescribe risk management standards governing 
the operations related to payment, clearing, and settlement activities 
(``PCS activities'') of designated FMUs for which it acts as the 
supervisory agency, in consultation with the FSOC and the Board and 
taking into consideration relevant international standards and existing 
prudential requirements.\37\
---------------------------------------------------------------------------

    \36\ 12 U.S.C. 5464(a).
    \37\ See 12 U.S.C. 5464(a)(2) (stating that these regulations 
may govern the operations related to payment, clearing, and 
settlement activities of such designated clearing entities, and the 
conduct of designated activities by such financial institutions). 
PCS activities are defined in Section 803(7) of the Clearing 
Supervision Act. See 12 U.S.C 5462(7).
---------------------------------------------------------------------------

    On July 18, 2012, the FSOC designated as systemically important the 
following registered clearing agencies: CME, The Depository Trust 
Company (``DTC''), Fixed Income Clearing Corporation (``FICC''), ICE, 
National Securities Clearing Corporation (``NSCC''), and The Options 
Clearing Corporation (``OCC'').\38\ Under the Clearing Supervision Act, 
the Commission is the supervisory agency for DTC, FICC, NSCC, and 
OCC.\39\ The

[[Page 29513]]

Commission jointly regulates DTC with the Board and OCC with the 
CFTC.\40\ The Commission also jointly regulates CME and ICE with the 
CFTC, which serves as their supervisory agency.\41\
---------------------------------------------------------------------------

    \38\ See U.S. Treasury Dep't, Financial Stability Oversight 
Council Makes First Designations in Effort to Protect Against Future 
Financial Crises (July 18, 2012), http://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx; see also 12 U.S.C. 5321 
(establishing the FSOC and designating its voting and non-voting 
members); 12 U.S.C. 5463 (describing the designation of systemic 
importance by the FSOC); supra note 28 (describing the process by 
which the FSOC would make or rescind a designation of systemic 
importance). Section 804 of the Clearing Supervision Act, 12 U.S.C. 
5463, further sets forth procedures that give entities 30 days 
advance notice and an opportunity for a hearing prior to being 
designated as systemically important. See FSOC, 2012 Annual Report, 
at app. A, available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \39\ See supra note 30 (discussing designation as the 
supervisory agency); see also FSOC, 2013 Annual Report, at 99-101, 
113 (further discussing the same), available at http://www.treasury.gov/initiatives/fsoc/Documents/FSOC%202013%20Annual%20Report.pdf.
    \40\ As a member of the U.S. Federal Reserve System and a 
limited purpose trust company under New York State banking law, DTC 
is subject to regulation by the Board.
    \41\ In addition, the Commission jointly regulates ICEEU, which 
is not currently designated as systemically important by the FSOC, 
with the CFTC and the Bank of England.
---------------------------------------------------------------------------

C. Rule 17Ad-22 Under the Exchange Act

    On October 22, 2012, the Commission adopted Rule 17Ad-22 under the 
Exchange Act.\42\ Through Rule 17Ad-22, the Commission sought to 
strengthen the substantive regulation of registered clearing agencies, 
promote the safe and reliable operation of registered clearing 
agencies, and improve efficiency, transparency, and access to 
registered clearing agencies by establishing minimum requirements with 
due consideration given to observed practices and international 
standards.\43\ At that time, the Commission noted that the 
implementation of Rule 17Ad-22 would be an important first step in 
developing the regulatory changes contemplated by Titles VII and VIII 
of the Dodd-Frank Act.\44\ Rule 17Ad-22 requires all registered 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures that are reasonably designed to meet certain 
minimum requirements for their operations and risk management practices 
on an ongoing basis.\45\ These requirements are designed to work in 
tandem with the SRO rule filing process and the requirement in Section 
17A of the Exchange Act that the Commission must make certain 
determinations regarding a clearing agency's rules and operations for 
purposes of initial and ongoing registration.\46\ Rule 17Ad-22 does not 
apply to entities that are operating pursuant to an exemption from 
registration as a clearing agency granted by the Commission,\47\ and it 
does not give particular consideration to issues relevant to clearing 
agencies designated as systemically important FMUs.
---------------------------------------------------------------------------

    \42\ See Clearing Agency Standards Release, supra note 5.
    \43\ See id. at 66225, 66263-64.
    \44\ See Clearing Agency Standards Release, supra note 5, at 
66225.
    \45\ Rules 17Ad-22(b)(1) through (4) contain several 
requirements that address risk management practices by registered 
clearing agencies that provide CCP services. Rules 17Ad-22(b)(5) 
through (7) establish certain requirements regarding access to 
registered clearing agencies that provide CCP services. Rule 17Ad-
22(c) requires that a registered clearing agency providing CCP 
services calculate and maintain a record of its financial resources 
and requires each registered clearing agency to publish annual 
audited financial statements. Rule 17Ad-22(d) sets forth certain 
minimum standards for the operations of registered clearing agencies 
providing CCP or central securities depository (``CSD'') services. 
See infra Part II.B.4.b (discussing the current requirements for 
CCPs under Rule 17Ad-22); see also Clearing Agency Standards 
Release, supra note 5 (adopting the existing standards under Rule 
17Ad-22).
    \46\ See supra note 9 (describing the requirements under Section 
17A(b)(3) of the Exchange Act, 15 U.S.C. 78q-1(b)(3)) and infra note 
96 (further describing the Commission's framework for regulation of 
SROs and the SRO rule filing process).
    \47\ See, e.g., Exchange Act Release No. 34-44188 (Apr. 17, 
2001), 66 FR 20494 (Apr. 23, 2011) (the Omgeo exemption); Exchange 
Act Release No. 34-39643 (Feb. 11, 1998), 63 FR 8232 (Feb. 18, 1998) 
(the Euroclear exemption); Exchange Act Release No 34-38328 (Feb. 
24, 1997), 62 FR 9225 (Feb. 28, 1997) (the Clearstream exemption).
---------------------------------------------------------------------------

D. Relevant International Standards

    In proposing amendments to Rule 17Ad-22, the Commission considered 
international standards, as required by Section 805(a) of the Clearing 
Supervision Act, that are relevant to its supervision of covered 
clearing agencies.\48\ CPSS-IOSCO published in April 2012 the PFMI 
Report \49\ to replace previous standards applicable to clearing 
agencies contained in two earlier reports: Recommendations for 
Securities Settlement Systems (2001) (``RSSS'') and Recommendations for 
Central Counterparties (2004) (``RCCP'') (collectively ``CPSS-IOSCO 
Recommendations'').\50\ Commission staff participated in the 
development and drafting of the PFMI Report,\51\ and the Commission 
believes that the standards set forth in the PFMI Report are generally 
consistent with the requirements applicable to clearing agencies set 
forth in the Exchange Act.\52\ Regulatory authorities around the world 
are in various stages of updating their regulatory regimes to adopt 
measures that are in line with the standards set forth in the PFMI 
Report.\53\ The rule

[[Page 29514]]

proposals set forth below are a continuation of the Commission's active 
efforts to foster the development of the national clearance and 
settlement system.
---------------------------------------------------------------------------

    \48\ See supra note 36. In addition, the Basel Committee on 
Banking Supervision (``BCBS''), the international body that sets 
standards for the regulation of banks, published in July 2012 the 
Capital Requirements for Bank Exposures to Central Counterparties 
(``Basel III capital requirements''). The Basel III capital 
requirements set forth interim rules governing the capital charges 
arising from bank exposures to CCPs related to OTC derivatives, 
exchange-traded derivatives, and securities financing transactions 
(which term, as used throughout this release, refers generally to 
repurchase agreements and securities lending). Among other things, 
the Basel III framework imposes lower capital requirements on CCPs 
that obtain ``qualifying CCP'' (``QCCP'') status and would apply 
QCCP status only to CCPs that are subject to a regulatory framework 
consistent with the standards set forth in the PFMI Report. See 
BCBS, Capital Requirements for Bank Exposures to Central 
Counterparties (July 2012), available at http://www.bis.org/publ/bcbs227.pdf (setting forth he interim requirements set forth in this 
report, currently under revision by the BCBS, in consultation with 
CPSS and IOSCO). See also BCBS, Capital Treatment of Bank Exposures 
to Central Counterparties: Consultative Document (rev. July 2013), 
available at http://www.bis.org/publ/bcbs253.pdf; BIS, Basel III: A 
Global Regulatory Framework for More Resilient Banks and Banking 
Systems (rev. June 2011), available at http://www.bis.org/publ/bcbs189.htm (``Basel III framework''). The Basel III capital 
requirements are one component of the Basel III framework.
    \49\ See supra note 1.
     The PFMI Report defines a ``financial market infrastructure'' 
(``FMI'') as a multilateral system among participating institutions, 
including the operator of the system, used for the purposes of 
clearing, settling, or recording payments, securities, derivatives, 
or other financial transactions. See id. at 7; FMIs include CCPs, 
CSDs, securities settlement systems (``SSSs''), and trade 
repositories (``TRs''). Cf. 12 U.S.C. 5462(6)(B), supra note 30 
(defining ``financial market utility'' under the Clearing 
Supervision Act).
    The PFMI Report presumes that all CSDs, SSSs, CCPs, and TRs are 
systemically important in their home jurisdiction. See PFMI Report, 
supra note 1, at 131 & n.177 (noting the ``presumption . . . that 
all CSDs, SSSs, CCPs, and TRs are systemically important because of 
their critical roles in the markets they serve,'' but also noting 
that ultimately ``national law will dictate the criteria to 
determine whether an FMI is systemically important'').
    The Commission notes that the PFMI Report's definition of 
``financial market infrastructure'' is consistent with the 
Commission's prior use of the term. See Study of Unsafe and Unsound 
Practices of Brokers and Dealers, H.R. Doc. No. 231, 92d Cong., 1st 
Sess. 13 (1971) (defining ``financial market infrastructure'' as a 
multilateral system among participating institutions, including the 
operator of the system, used for the purposes of clearing, settling, 
or recording payments, securities, derivatives, or other financial 
transactions).
    \50\ The CPSS-IOSCO Recommendations are available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD123.pdf and http://www.iosco.org/library/pubdocs/pdf/IOSCPD176.pdf.
    The Board applies these standards in its supervisory process and 
expects systemically important FMUs, as determined by the Board and 
subject to its authority, to complete a self-assessment against the 
standards set forth in the policy. See Financial Market Utilities, 
77 FR 45907 (Aug. 2, 2012) (the Board adopting Regulation HH for 
FMUs) (``Reg. HH''); Policy on Payments System Risk, 72 FR 2518 
(Jan. 12, 2007).
    The Board has proposed to amend the standards in Regulation HH 
to replace the current standards for payment systems with standards 
based those set forth in the PFMI Report. It has also proposed to 
amend its Policy on Payments System Risk. See infra note 53.
    \51\ Commission staff co-chaired the Editorial Team, a working 
group within CPSS-IOSCO that drafted both the consultative and final 
versions of the PFMI Report.
    \52\ See 15 U.S.C. 78q-1; 15 U.S.C. 78s(b).
    \53\ See CPSS-IOSCO, Implementation Monitoring of PFMIs--Level 1 
Assessment Report (Aug. 2013), available at http://www.bis.org/publ/cpss111.pdf (describing efforts by various jurisdictions to adopt 
standards for FMIs in line with the PFMI Report) (``PFMI 
Implementation Monitoring Report''); see also Reg. HH, supra note 
50; Financial Market Utilities, 79 FR 3665 (Jan. 22, 2014) (the 
Board proposing to amend Reg. HH) (``proposed Reg. HH''); Policy on 
Payment System Risk, 79 FR 2838 (Jan. 16, 2014) (the Board proposing 
to amend its Federal Reserve Policy on Payments System Risk) 
(``proposed PSR Policy''); Derivatives Clearing Organizations and 
International Standards, 78 FR 72475 (Dec. 2, 2013) (CFTC adopting 
rules for DCOs in line with international standards) (``DCO Int'l 
Standards Release''); Enhanced Risk Management Standards for 
Systemically Important Derivatives Clearing Organizations, 78 FR 
49663 (Aug. 15, 2013) (CFTC adopting rules for systemically 
important DCOs) (``SIDCO Release''); Derivatives Clearing 
Organization General Provisions and Core Principles, 76 FR 69334 
(Nov. 8, 2011) (CFTC adopting rules for DCOs); (``DCO Principles 
Release'').
    In addition, the Board and the Office of the Comptroller of the 
Currency have adopted rules implementing the material elements of 
the BCBS interim framework for capitalization of bank exposures to 
CCPs. See Regulatory Capital Rules: Regulatory Capital, 
Implementation of Basel III, Capital Adequacy, Transition 
Provisions, Prompt Corrective Action, Standardized Approach for 
Risk-weighted Assets, Market Discipline and Disclosure Requirements, 
Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital 
Rule, 76 FR 62017, 62099 (Oct. 11, 2013) (``Regulatory Capital 
Rules''). The Board also noted the ongoing international discussions 
on this topic and stated that it intends to revisit its rules once 
the Basel III capital framework is revised. See id. The Board and 
the Office of the Comptroller of the Currency's final rules define 
``QCCP'' to mean, among other things, a designated FMU under the 
Clearing Supervision Act. See 12 CFR 217.2; see also Regulatory 
Capital Rules, supra, at 62100.
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II. Discussion of the Proposed Amendments to Rule 17Ad-22 and Proposed 
Rule 17Ab2-2

    The Commission is proposing to amend Rule 17Ad-22 and add Rule 
17Ab2-2 pursuant to Section 17A of the Exchange Act and the Clearing 
Supervision Act to provide a new regulatory framework for ``covered 
clearing agencies,'' as defined below.
    Generally, Section 17A directs the Commission to facilitate the 
establishment of a national system for the prompt and accurate 
clearance and settlement of securities transactions, having due regard 
for the public interest, the protection of investors, the safeguarding 
of securities and funds, and the maintenance of fair competition among 
brokers and dealers.\54\ It further requires that a clearing agency be 
so organized and have the capacity and rules designed to, among other 
things, facilitate the prompt and accurate clearance and settlement of 
securities transactions, and to comply with the provisions of the 
Exchange Act and the rules and regulations thereunder.\55\ In 
establishing a regulatory framework for clearance and settlement, the 
Exchange Act requires that a registered clearing agency's rules not 
impose any burden on competition not necessary or appropriate in the 
furtherance of the purposes of the Exchange Act.\56\
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    \54\ See 15 U.S.C. 78q-1(a)(2)(A).
    \55\ See 15 U.S.C. 78q-1(a)(3)(A), (F).
    \56\ See 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Consistent with these statutory objectives, the Commission 
previously adopted Rule 17Ad-22(d) to establish minimum requirements 
for registered clearing agencies and indicated that it might consider 
further rulemaking at a later date.\57\ In furtherance of the 
provisions of Section 17A of the Exchange Act and the Clearing 
Supervision Act described above and as previously considered by the 
Commission, the Commission is proposing Rule 17Ad-22(e) to establish 
new requirements for covered clearing agencies, which the Commission 
preliminarily believes are appropriate given the risks that their size, 
operation, and importance pose to the U.S. securities markets, the 
risks inherent in the products they clear, and the goals of Title VII 
and the Exchange Act.\58\ In connection with its supervision of 
registered clearing agencies under Section 17A of the Exchange Act, 
including after the adoption of Rule 17Ad-22,\59\ the Commission has 
considered whether enhanced requirements for covered clearing agencies 
could contribute to the stability of U.S. securities markets, as 
described further in Part IV, and has determined to issue this proposal 
for comment.
---------------------------------------------------------------------------

    \57\ See Clearing Agency Standards Release, supra note 5, at 
66224-25.
    \58\ See id. (contemplating future Commission action on clearing 
agency standards).
    \59\ See Clearing Agency Standards Release, supra note 5, at 
66227 (stating that Rule 17Ad-22 generally codifies existing 
practices that reflect the CPSS-IOSCO Recommendations published in 
2001 and 2004).
---------------------------------------------------------------------------

    The Commission has preliminarily chosen to retain Rule 17Ad-22(d) 
and to continue to apply it to registered clearing agencies that are 
not covered clearing agencies.\60\ The Commission preliminarily 
believes that retaining Rule 17Ad-22(d) ensures that clear, 
comprehensive, and transparent standards for registered clearing 
agencies that are not covered clearing agencies will continue to exist 
and, because they are narrower in scope, would thereby provide a more 
flexible regime for new entrants seeking to establish and operate 
registered clearing agencies, consistent with the continuing 
development of the national system for clearance and settlement, than 
would otherwise be the case with a single regime under proposed Rule 
17Ad-22(e).
---------------------------------------------------------------------------

    \60\ See infra Part II.E (discussing the proposed language 
amending Rule 17Ad-22(d) to apply to registered clearing agencies 
that are not covered clearing agencies).
---------------------------------------------------------------------------

    The Commission notes that it is not proposing to alter the existing 
requirements under Rule 17Ad-22(b), which establishes risk-management 
and participant access requirements for registered clearing agencies 
that perform CCP services for security-based swaps, or Rule 17Ad-22(c), 
which requires registered clearing agencies that provide CCP services 
to maintain a record of financial resources and all registered clearing 
agencies to post on their Web sites annual audited financial 
statements.\61\ These requirements continue to be appropriate for all 
registered clearing agencies because they promote prompt and accurate 
clearance and settlement of securities and security-based swap 
transactions. Notably, Rule 17Ad-22(b) reduces the likelihood, in a 
participant default scenario, that losses from default would disrupt 
the operations of the clearing agency, and Rule 17Ad-22(c) provides an 
additional layer of information about the activities and financial 
strength of a registered clearing agency that market participants may 
find useful in assessing their use of the registered clearing agency's 
services while also assisting the Commission in its oversight of 
registered clearing agencies' compliance with Rule 17Ad-22 by providing 
a clear record of the method used by the clearing agency to, among 
other things, maintain sufficient financial resources.\62\
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    \61\ The standards in Rules 17Ad-22(b) and (c) were also adopted 
by the Commission in 2012. See 17 CFR 240.17Ad-22(b), (c); see also 
Clearing Agency Standards Release, supra note 5.
    The Commission is proposing to revise Rule 17Ad-22(a) to account 
for new proposed definitions. See proposed revision of Rule 17Ad-
22(a), infra Part VII. The existing definitions in 17 CFR 240.17Ad-
22(a) would be renumbered to account for new terms. In addition, the 
definition of ``participant family'' would be amended to include 
references to its use in proposed paragraphs (e)(4) and (e)(7). See 
proposed Rule 17Ad-22(a)(13), infra Part VII.
    \62\ See Exchange Act Release No. 34-64017 (Mar. 3, 2011), 76 FR 
14474, 14477-83 (Mar. 16, 2011); see also Clearing Agency Standards 
Release, supra note 5, at 66244.
---------------------------------------------------------------------------

A. Overview

    The Commission is proposing Rule 17Ad-22(e) to establish 
requirements for covered clearing agencies with respect to general 
organization,\63\ financial risk management,\64\ settlement,\65\ CSDs 
and exchange-of-

[[Page 29515]]

value settlement systems,\66\ default management,\67\ general business 
risk and operational risk management,\68\ access,\69\ efficiency,\70\ 
and transparency.\71\ The discussion below provides greater detail 
regarding each respective requirement in proposed Rule 17Ad-22(e). 
Several aspects of proposed Rule 17Ad-22(e) are similar to existing 
Rule 17Ad-22(d),\72\ but in general the Commission preliminarily notes 
that certain requirements under proposed Rule 17Ad-22(e) would require 
covered clearing agencies to consider and adopt policies and procedures 
more closely tailored to the risks that are posed by covered clearing 
agencies, which the Commission preliminarily identified as appropriate 
in connection with its experience in supervising registered clearing 
agencies under Section 17A of the Exchange Act, including since the 
adoption of Rule 17Ad-22.
---------------------------------------------------------------------------

    \63\ See infra Parts II.B.1-3 (discussing proposed Rules 17Ad-
22(e)(1) (legal risk), 17Ad-22(e)(2) (governance), and 17Ad-22(e)(3) 
(framework for the comprehensive management of risk)).
    \64\ See infra Part II.B.4 (discussing proposed Rules 17Ad-
22(e)(4) (credit risk), 17Ad-22(e)(5) (collateral), 17Ad-22(e)(6) 
(margin), and 17Ad-22(e)(7) (liquidity risk)).
    \65\ See infra Parts II.B.5-7 (discussing proposed Rules 17Ad-
22(e)(8) (settlement finality), 17Ad-22(e)(9) (money settlements), 
and 17Ad-22(e)(10) (physical delivery risks)).
    \66\ See infra Parts II.B.8-9 (discussing proposed Rules 17Ad-
22(e)(11) (CSDs) and 17Ad-22(e)(12) (exchange-of-value settlement 
systems)).
    \67\ See infra Parts II.B.10-11 (discussing proposed Rules 17Ad-
22(e)(13) (participant-default rules and procedures) and 17Ad-
22(e)(14) (segregation and portability)).
    \68\ See infra Parts II.B.12-14 (discussing proposed Rules 17Ad-
22(e)(15) (general business risk), 17Ad-22(e)(16) (custody and 
investment risk), and 17Ad-22(e)(17) (operational risk management)).
    \69\ See infra Parts II.B.15-17 (discussing proposed Rules 17Ad-
22(e)(18) (access and participation requirements), 17Ad-22(e)(19) 
(tiered participation arrangements), and 17Ad-22(e)(20) (links)).
    \70\ See infra Parts II.B.18-19 (discussing proposed Rules 17Ad-
22(e)(21) (efficiency and effectiveness) and 17Ad-22(e)(22) 
(communication procedures and standards)).
    \71\ See infra Part II.B.20 (discussing proposed Rule 17Ad-
22(e)(23) (disclosure of rules, key procedures, and market data)).
    \72\ See infra Part II.A.4 (discussing the anticipated impact of 
proposed Rule 17Ad-22(e) given the existing requirements for 
registered clearing agencies under Rule 17Ad-22).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the requirements of 
proposed Rule 17Ad-22(e) would help promote governance, operations, and 
risk management practices more closely tailored to the risks raised by 
registered clearing agencies that have been designated systemically 
important, are engaged in activities with a more complex risk profile, 
or are determined to be covered clearing agencies by the Commission, 
consistent with Section 17A of the Exchange Act. The Commission 
preliminarily believes these requirements would also enable consistent 
supervision of designated FMUs and would reflect the Commission's 
consideration of international standards, as contemplated by Section 
17A(i) and the Clearing Supervision Act.\73\ While the Commission has 
made its own determination to issue the proposed rules for comment, the 
Commission preliminarily believes that generally updating its rules, 
where appropriate, to take into account the standards set forth in the 
PFMI Report would contribute to the efforts of regulators around the 
world, described above,\74\ to implement consistent standards for 
FMIs.\75\ The Commission also preliminarily believes that Rule 17Ad-
22(e) would provide an additional benefit of providing support for a 
determination by foreign bank regulators that covered clearing agencies 
providing CCP services for derivatives and securities financing 
transactions meet the requirements for QCCP status under the Basel III 
framework and could therefore help reduce competitive frictions among 
CCPs in different jurisdictions.
---------------------------------------------------------------------------

    \73\ See supra Part I.B.2, in particular notes 36-37 and 
accompanying text (discussing the requirements under Section 17A(i) 
of the Exchange Act, 15 U.S.C. 78q-1(i), and Section 805(a) of the 
Clearing Supervision Act, 12 U.S.C. 5464(a)).
    \74\ See supra note 53 and accompanying text.
    \75\ See infra Part IV.C.1.e (further discussing the economic 
effects of obtaining QCCP status under the Basel III capital 
requirements); see also supra note 48.
---------------------------------------------------------------------------

    Part II.A first discusses the scope of proposed Rule 17Ad-22(e), 
the role that written policies and procedures play in framing the 
proposed rule, and the reasons for imposing certain frequency of review 
requirements throughout the proposed rules. It then discusses the 
anticipated impact of the proposed rules given the existing 
requirements applicable to registered clearing agencies under Rules 
17Ad-22(b) through (d), with which a covered clearing agency must 
already be in compliance.
    Part II.B next discusses the proposed rules under Rule 17Ad-22(e). 
Finally, Parts II.C, D, and E discuss, in turn, proposed Rule 17Ab2-2, 
proposed Rule 17Ad-22(f), and the proposed amendment to Rule 17Ad-
22(d).
1. Scope of Proposed Rule 17Ad-22(e)
    The Commission is proposing to add four terms to Rule 17Ad-22(a) to 
identify the registered clearing agencies that would be subject to 
proposed Rule 17Ad-22(e). First, the Commission is proposing to add 
Rule 17Ad-22(a)(9) to define ``financial market utility'' (``FMU'') as 
defined in Section 803(6) of the Clearing Supervision Act.\76\ Second, 
the Commission is proposing Rule 17Ad-22(a)(8) to define ``designated 
clearing agency.'' \77\ A designated clearing agency would mean a 
clearing agency registered with the Commission under Section 17A of the 
Exchange Act that has been designated as a systemically important FMU 
by the FSOC and for which the Commission is the supervisory agency as 
defined in Section 803(8) of the Clearing Supervision Act.\78\ Third, 
the Commission is proposing to add Rule 17Ad-22(a)(4) to define 
``clearing agency involved in activities with a more complex risk 
profile'' \79\ to mean a clearing agency registered with the Commission 
under Section 17A of the Exchange Act that either (i) provides central 
counterparty services for security-based swaps or (ii) has been 
determined by the Commission to be involved in activities with a more 
complex risk profile (``complex risk profile clearing agency''), either 
at the time of its initial registration or upon a subsequent 
determination by the Commission pursuant to proposed Rule 17Ab2-2.\80\ 
Fourth, the Commission is proposing to add Rule 17Ad-22(a)(7) to define 
a ``covered clearing agency'' as a designated clearing agency, a 
complex risk profile clearing agency, or any clearing agency determined 
to be a covered clearing agency by the Commission pursuant to proposed 
Rule 17Ab2-2.\81\
---------------------------------------------------------------------------

    \76\ See proposed Rule 17Ad-22(a)(9), infra Part VII; see also 
12 U.S.C. 5462(6) (defining ``financial market utility'' pursuant to 
the Clearing Supervision Act); supra note 26 (providing further 
explanation of ``financial market utility'').
    \77\ See proposed Rule 17Ad-22(a)(8), infra Part VII.
    \78\ Rule 17Ad-22 does not currently apply to entities operating 
pursuant to an exemption from clearing agency registration. The 
proposed amendments to Rule 17Ad-22 would not broaden the scope of 
Rule 17Ad-22 to an entity operating pursuant to an exemption from 
registration as a clearing agency granted by the Commission.
    \79\ See proposed Rule 17Ad-22(a)(4), infra Part VII.
    \80\ The Commission is proposing Rule 17Ab2-2 to establish a 
process for making determinations regarding clearing agencies 
involved in activities with a more complex risk profile. See infra 
Part II.C (further discussing the purpose, scope, and application of 
proposed Rule 17Ab2-2) and Part VII (proposed text of Rule 17Ab2-2).
     The Commission is also proposing Rule 17Ad-22(a)(16) to define 
``security-based swap'' to mean security-based swap as defined in 
Section 3(a)(68) of the Exchange Act, 15 U.S.C. 78c(a)(68). See 
infra Part VII.
    \81\ See proposed Rule 17ad-22(a)(7), infra Part VII.
---------------------------------------------------------------------------

    The Commission preliminarily believes there could be several 
different bases under which registered clearing agencies would be 
required to comply with proposed Rule 17Ad-22(e). For instance, because 
DTC, FICC, NSCC, and OCC are registered clearing agencies pursuant to 
Section 17A of the Exchange Act and are designated clearing agencies 
for which the Commission is the supervisory agency

[[Page 29516]]

under the Clearing Supervision Act,\82\ they would be covered clearing 
agencies under proposed Rule 17Ad-22(a)(7) and would be subject to the 
requirements for covered clearing agencies in proposed Rule 17Ad-22(e). 
In addition, because ICEEU provides CCP services for security-based 
swaps and has been deemed registered with the Commission as a security-
based swap clearing agency,\83\ it would be a complex risk profile 
clearing agency under proposed Rule 17Ad-22(a)(4) and also subject to 
the requirements for covered clearing agencies proposed in Rule 17Ad-
22(e).
---------------------------------------------------------------------------

    \82\ See supra Part I.B.2.
    \83\ See supra note 41 and accompanying text.
---------------------------------------------------------------------------

    By comparison, CME and ICE would not be subject to the proposed 
requirements for covered clearing agencies in Rule 17Ad-22(e) because 
(i) they have been designated as systemically important FMUs under 
Section 804 of the Clearing Supervision Act; \84\ (ii) they are each 
dually registered with the Commission and the CFTC as a clearing agency 
and DCO, respectively; and (iii) the CFTC is their supervisory agency 
under the Clearing Supervision Act.\85\ The Commission preliminarily 
believes that, because CME and ICE would be subject to the CFTC's 
requirements for systemically important DCOs,\86\ applying proposed 
Rule 17Ad-22(e) to them could impose duplicative requirements. Given 
the Commission's existing regulatory authority under Section 17A(l) of 
the Exchange Act,\87\ however, CME and ICE would remain subject to the 
continuing requirements for registered clearing agencies in Rules 17Ad-
22(b) through (d).
---------------------------------------------------------------------------

    \84\ See 12 U.S.C. 5463.
    \85\ See supra Part I.B.2; see also FSOC, 2013 Annual Report, 
supra note 39, at 100.
    \86\ See supra note 41 and accompanying text.
    \87\ See 15 U.S.C. 78q-1(l).
---------------------------------------------------------------------------

    Two dormant clearing agencies, the Stock Clearing Corporation of 
Philadelphia (``SCCP'') and the Boston Stock Exchange Clearing 
Corporation (``BSECC''), have not been designated systemically 
important by the FSOC and are not involved in activities with a more 
complex risk profile.\88\ Accordingly, each would also remain subject 
to the requirements in Rules 17Ad-22(b) through (d).
---------------------------------------------------------------------------

    \88\ In 2008, NASDAQ OMX Group, Inc. acquired SCCP and BSECC. 
See Exchange Act Release No. 34-58324 (Aug. 7, 2008), 73 FR 46936 
(Aug. 12, 2008) (order approving acquisition of BSECC); Exchange Act 
Release No. 34-58180 (July 17, 2008), 73 FR 42890 (July 23, 2008) 
(order approving acquisition of SCCP).
    Both SCCP and BSECC are currently registered with the Commission 
as clearing agencies but conduct no clearing or settlement 
activities. See Exchange Act Release No. 34-63629 (Jan. 3, 2011), 76 
FR 1473 (Jan. 10, 2011); Exchange Act Release No. 34-63268 (Nov. 8, 
2010), 75 FR 69730 (Nov. 15, 2010).
---------------------------------------------------------------------------

    Further, proposed Rule 17Ab2-2 would provide the Commission 
flexibility to determine that the operations or circumstances of a 
registered clearing agency, including a registered clearing agency that 
is exempt from certain requirements applicable to registered clearing 
agencies generally, warrant designation as a covered clearing 
agency.\89\ It would also provide flexibility to make determinations 
regarding newly registered clearing agencies.
---------------------------------------------------------------------------

    \89\ See infra Parts II.C and VII (discussing determinations 
under proposed Rule 17Ab2-2 and providing rule text, respectively).
---------------------------------------------------------------------------

    The Commission preliminarily believes the requirements proposed in 
Rule 17Ad-22(e) aid the regulation of covered clearing agencies by, as 
noted above, establishing requirements more closely tailored to the 
risks they pose to the U.S. securities markets. For example, designated 
clearing agencies are systemically important because of their 
significance to the U.S. financial system and the risk that the failure 
of, or a disruption to, their functioning would increase the risk of 
significant liquidity or credit problems spreading among financial 
institutions, thereby threatening the stability of the U.S. financial 
system.\90\ Similarly, the Commission preliminarily believes that 
complex risk profile clearing agencies, such as those providing CCP 
services for security-based swaps, subject the U.S. securities markets 
to a material level of systemic risk due to the nature of the products 
that they clear.\91\ The requirements proposed in Rule 17Ad-22(e) are 
intended to ensure that covered clearing agencies have robust policies 
and procedures that help promote sound governance, operations, and risk 
management.
---------------------------------------------------------------------------

    \90\ See supra note 27 and accompanying text.
    \91\ See generally Gov't Accountability Office, Systemic Risk: 
Regulatory Oversight and Recent Initiatives to Address Risk Posed by 
Credit Default Swaps (Mar. 2009), available at http://www.gao.gov/new.items/d09397t.pdf.
---------------------------------------------------------------------------

    As noted above,\92\ the Commission preliminarily believes that 
establishing separate rules for covered clearing agencies and 
registered clearing agencies that are not covered clearing agencies is 
appropriate given the Commission's goals to facilitate the development 
of a national system for the prompt and accurate clearance and 
settlement of securities consistent with Section 17A of the Exchange 
Act and to mitigate systemic risk consistent with Titles VII and VIII 
of the Dodd-Frank Act.\93\ In this regard, the Commission intends that 
Rule 17Ad-22(d) would continue to provide minimum requirements for the 
operation and governance of registered clearing agencies that also 
facilitate the entrance of new participants, as appropriate, into the 
market for clearance and settlement services.\94\ The Commission 
preliminarily believes that Rule 17Ad-22(e) would establish new 
requirements for established participants in the market for clearance 
and settlement services commensurate to the risks that their size, 
operation, and importance pose to the U.S. securities markets.\95\
---------------------------------------------------------------------------

    \92\ See supra notes 54-61 and accompanying text.
    \93\ See supra notes 2, 13-14, and accompanying text (noting the 
goals of, respectively, Section 17A of the Exchange Act and the 
Dodd-Frank Act).
    \94\ See supra note 43 and accompanying text (noting the 
Commission's intent in adopting Rule 17Ad-22 in the Clearing Agency 
Standards Release).
    \95\ See supra note 44 and accompanying text (noting further 
that the requirements adopted under Rule 17Ad-22 constituted an 
important first step to enhance the substantive regulation of 
registered clearing agencies pursuant to the Dodd-Frank Act); see 
also infra Part IV.C.1.a (addressing systemic risk in the context of 
discussing the general economic considerations undertaken by the 
Commission in proposing Rule 17Ad-22(e)).
---------------------------------------------------------------------------

    Request for Comments. The Commission generally requests comments on 
all aspects of the scope of proposed Rule 17Ad-22(e), the relationship 
between proposed Rule 17Ad-22(e) and Rule 17Ad-22(d), and on proposed 
Rules 17Ad-22(a)(4), (7), (8), and (9). In addition, the Commission 
requests comments on the following specific issues:
     Is the scope of proposed Rule 17Ad-22(e) appropriate? Why 
or why not? Is the scope sufficiently clear? Why or why not? Has the 
Commission provided sufficient guidance regarding the scope of the 
proposed rule? Are there aspects of the scope of the proposed rule for 
which the Commission should consider providing additional guidance? If 
so, please explain.
     Given that all non-dormant registered clearing agencies 
would either be covered clearing agencies subject to Commission 
supervision or be subject to CFTC regulation as designated clearing 
entities for which the CFTC is the supervisory agency, should the 
Commission replace the existing requirements under Rule 17Ad-22(d) with 
the requirements proposed under Rule 17Ad-22(e)? Why or why not?
     Is the Commission's proposed definition of ``financial 
market utility'' appropriate and sufficiently clear given the proposed 
requirements? Why or why not? Should the definition be modified? If so, 
how? Is there an

[[Page 29517]]

alternative definition the Commission should consider?
     Is the Commission's proposed definition of ``designated 
clearing agency'' appropriate and sufficiently clear given the 
requirements proposed? Why or why not? Should the definition be 
modified? If so, how? Is there an alternative definition the Commission 
should consider?
     Is the Commission's proposed definition of ``clearing 
agency involved in activities with a more complex risk profile'' 
appropriate and sufficiently clear given the requirements proposed? Why 
or why not? Should the definition be modified? If so, how? Is there an 
alternative definition the Commission should consider?
     Is the Commission's proposed definition of ``covered 
clearing agency'' appropriate and sufficiently clear given the 
requirements proposed? Why or why not? Should the definition be 
modified? If so, how? Is there an alternative definition the Commission 
should consider?
     Are the requirements in proposed Rule 17Ad-22(e) 
necessary, or do the existing provisions in Rule 17Ad-22(d) already 
sufficiently address the issues identified in this release as 
justification for increased regulation?
2. Role of Written Policies and Procedures
    Proposed Rule 17Ad-22(e) would require covered clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, fulfill the 
requirements set forth in paragraphs (e)(1) through (23) of the 
proposed rule. The Commission preliminarily believes that this approach 
would facilitate the Commission's supervision of covered clearing 
agencies, is appropriate given their role as SROs,\96\ and is 
consistent with the approach taken by the Commission elsewhere in Rule 
17Ad-22.\97\ The Commission preliminarily believes that, by requiring 
written policies and procedures and, where appropriate, their 
disclosure, proposed Rule 17Ad-22(e) should help promote the 
development of improved standards for clearing agencies by allowing 
market participants to compare certain of the operations of covered 
clearing agencies with those of other clearing entities, which choose 
to make their policies and procedures publicly available or are 
required to do so by equivalent regulatory standards.\98\
---------------------------------------------------------------------------

    \96\ Registered clearing agencies are SROs as defined in Section 
3(a)(26) of the Exchange Act, 15 U.S.C. 78c(a)(26). After a clearing 
agency has been registered with the Commission, the clearing agency, 
as an SRO, must submit most proposed rule changes to the Commission, 
for approval pursuant to Rule 19b-4 under the Exchange Act. A stated 
policy, practice, or interpretation of an SRO, such as a clearing 
agency's written policies and procedures, would generally be deemed 
to be a proposed rule change. See 17 CFR 240.19b-4.
    \97\ See Clearing Agency Standards Release, supra note 5, at 
66228-29 (describing the scope of Rule 17Ad-22 at adoption).
    \98\ Compare proposed Rule 17Ad-22(e)(23), infra Part VII 
(requiring public disclosure of, among other things, a covered 
clearing agency's rules, policies, and procedures) with proposed 
Reg. HH, supra note 53, at 3666-67, 3686-88, 3693 (the Board 
proposing disclosure requirements intended to be in line with the 
PFMI Report in Sec. 234.3(a)(23)); DCO Int'l Standards Release, 
supra note 53, at 72493-94, 72521 (CFTC adopting disclosure 
requirements intended to be in line with the PFMI Report in Sec. 
39.37).
---------------------------------------------------------------------------

    The Commission is proposing to require policies and procedures 
developed by each covered clearing agency to fulfill the requirements 
of proposed Rule 17Ad-22(e) because the Commission preliminarily 
believes that it is important to allow covered clearing agencies enough 
flexibility to use their market experience and understanding of their 
institutions to shape the rules, policies, and procedures implementing 
proposed Rule 17Ad-22(e). This proposed approach is consistent with the 
Commission's established approach for supervising SROs, and the 
Commission preliminarily believes continuing this practice under Rule 
17Ad-22(e) will allow the Commission to continue to perform its 
supervisory function through the SRO rule filing process under Section 
19(b) of the Exchange Act and Rule 19b-4,\99\ periodic inspections and 
examinations, other monitoring of the activities of registered clearing 
agencies, and other established supervisory processes. Because of the 
importance the Commission gives to both maintaining clearing agency 
flexibility and to existing oversight mechanisms, the Commission 
preliminarily believes that the proposed approach is appropriate.
---------------------------------------------------------------------------

    \99\ See supra note 96 (describing requirements for SROs under 
the Exchange Act and Rule 19b-4).
---------------------------------------------------------------------------

    The Commission anticipates that a covered clearing agency's rules, 
policies, and procedures will need to evolve over time so that it can 
adequately respond to changes in technology, legal requirements, the 
needs of its members and their customers, trading volumes, trading 
practices, linkages between financial markets, and the financial 
instruments traded in the markets that a covered clearing agency 
serves. Accordingly, the Commission preliminarily believes that covered 
clearing agencies should continually evaluate and make appropriate 
updates and improvements to their operations and risk management 
practices to facilitate prompt and accurate clearance and settlement.
3. Frequency of Review Required Under Certain Policies and Procedures
    Many of the policies and procedures requirements proposed in Rule 
17Ad-22(e) specify a frequency of review. Generally, the proposed 
regularity of review falls into three categories-- daily, monthly, or 
annually--and is based on the Commission's understanding of the current 
review practices generally at covered clearing agencies. The 
Commission's rationale for these differences is as follows:
     Daily: For those activities that the Commission 
understands to be directly related to the day-to-day operations of a 
covered clearing agency,\100\ such as activities related to the 
calculation and collection of margin, the Commission preliminarily 
believes that a covered clearing agency should undertake a daily review 
and make decisions on a daily basis;
---------------------------------------------------------------------------

    \100\ See proposed Rules 17Ad-22(e)(4)(vi)(A); 17Ad-
22(e)(6)(ii); 17Ad-22(e)(6)(vi)(A); 17Ad-22(e)(7); 17Ad-
22(e)(7)(vi)(A); and 17Ad-22(e)(11)(ii), infra Part VII.
---------------------------------------------------------------------------

     Monthly: For those activities that the Commission 
understands to coincide with and complement the review and reporting 
cycles of the governance structures related to the risk management 
function of the covered clearing agency,\101\ the Commission 
preliminarily believes that a covered clearing agency should undertake 
a monthly review; based on its supervisory experience, the Commission 
notes that well-functioning risk management committees of the board and 
similar management committees or other board or management committees 
commonly meet or receive reports and other risk management information 
from management on a monthly basis and the monthly requirement would be 
consistent with such meeting and reporting frequency;
---------------------------------------------------------------------------

    \101\ See proposed Rules 17Ad-22(e)(4)(vi)(B); 17Ad-
22(e)(4)(vi)(C); 17Ad-22(e)(6)(vi)(B); 17Ad-22(e)(6)(vi)(C); 17Ad-
22(e)(7)(vi)(B); and 17Ad-22(e)(7)(vi)(C), infra Part VII.
---------------------------------------------------------------------------

     Annually: For those activities that are less integral to 
day-to-day operations, involve issues that merit review of information 
collected over longer time periods, or require more high-level review 
and consideration by, for example, the full board of directors of a 
clearing agency,\102\ the Commission

[[Page 29518]]

preliminarily believes that a covered clearing agency should undertake 
an annual review; additionally, the Commission preliminary believes 
that an annual cycle is appropriate in certain instances because other 
major reviews such as auditing of the financial statements of 
registered clearing agencies and their disclosure are required to occur 
on an annual basis.
---------------------------------------------------------------------------

    \102\ See proposed Rules 17Ad-22(e)(3)(i); 17Ad-22(e)(4)(vii); 
17Ad-22(e)(5); 17Ad-22(e)(6)(vii); 17Ad-22(e)(7)(v); 17Ad-
22(e)(7)(vii); 17Ad-22(e)(7)(x); 17Ad-22(e)(13)(iii); and 17Ad-
22(e)(15)(iii), infra Part VII.
---------------------------------------------------------------------------

    Request for Comments. The Commission generally requests comments on 
all aspects of the frequency of review that would be required to be 
included in a covered clearing agency's policies and procedures under 
each of the requirements in proposed Rule 17Ad-22(e). In addition, the 
Commission requests comments on whether its assessment of daily, 
monthly, and annual activities at covered clearing agencies is accurate 
and appropriate given the proposed rules. The Commission also requests 
comment on what factors should be considered in determining the nature, 
timing, and extent of the required reviews and whether other 
frequencies of review might be appropriate under some or all of the 
proposed rules.
4. Anticipated Impact of Proposed Rule 17Ad-22(e)
    Based on the Commission's experience supervising registered 
clearing agencies, and given the current requirements applicable to 
registered clearing agencies under Rule 17Ad-22, the Commission 
preliminarily anticipates that the degree of changes that covered 
clearing agencies may need to make to their policies and procedures to 
satisfy the proposed requirements of Rule 17Ad-22(e) would vary among 
the particular provisions of the proposed rule and depend in part on 
the business model and operations of the clearing agency itself, as 
discussed below. The Commission preliminarily believes that, for the 
provisions in its proposal where a similar existing requirement has 
been identified, covered clearing agencies may need to make only 
limited changes to update their policies and procedures, and the table 
below provides summary information regarding the Commission's 
preliminary assessment of the impact of the proposed rules:

------------------------------------------------------------------------
           Proposed requirement                 Existing requirement
------------------------------------------------------------------------
Rule 17Ad-22(e)(1)........................  Rule 17Ad-22(d)(1).
Rule 17Ad-22(e)(2)........................  Rule 17Ad-22(d)(8).
Rule 17Ad-22(e)(3)........................  None.
Rule 17Ad-22(e)(4)........................  Rules 17Ad-22(b)(1), (b)(3),
                                             (d)(14) \103\.
Rule 17Ad-22(e)(5)........................  None.
Rule 17Ad-22(e)(6)........................  Rule 17Ad-22(b)(2), (b)(4)
                                             \104\.
Rule 17Ad-22(e)(7)........................  None.
Rule 17Ad-22(e)(8)........................  Rules 17Ad-22(d)(12).
Rule 17Ad-22(e)(9)........................  Rule 17Ad-22(d)(5).
Rule 17Ad-22(e)(10).......................  Rule 17Ad-22(d)(15).
Rule 17Ad-22(e)(11).......................  Rule 17Ad-22(d)(10).
Rule 17Ad-22(e)(12).......................  Rule 17Ad-22(d)(13).
Rule 17Ad-22(e)(13).......................  Rule 17Ad-22(d)(11).
Rule 17Ad-22(e)(14).......................  None.
Rule 17Ad-22(e)(15).......................  None.
Rule 17Ad-22(e)(16).......................  Rule 17Ad-22(d)(3).
Rule 17Ad-22(e)(17).......................  Rule 17Ad-22(d)(4).
Rule 17Ad-22(e)(18).......................  Rules 17Ad-22(b)(5) through
                                             (7), (d)(2).
Rule 17Ad-22(e)(19).......................  None.
Rule 17Ad-22(e)(20).......................  Rule 17Ad-22(d)(7).
Rule 17Ad-22(e)(21).......................  Rule 17Ad-22(d)(6).
Rule 17Ad-22(e)(22).......................  None.
Rule 17Ad-22(e)(23).......................  Rule 17Ad-22(d)(9).
------------------------------------------------------------------------

    With respect to the provisions in its proposal where no similar 
existing requirement has been identified, the Commission preliminarily 
anticipates that covered clearing agencies may need to make more 
extensive changes to their policies and procedures (or implement new 
policies and procedures), and may need to take other steps, to satisfy 
the proposed requirements of Rule 17Ad-22(e).
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    \103\ The Commission notes that requirements under Rules 17Ad-
22(b) apply only to registered clearing agencies that provide CCP 
services, the ``cover two'' requirement under Rule 17Ad-22(b)(3) 
applies only to registered clearing agencies that provide CCP 
services for security-based swaps, and requirements under Rule 17Ad-
22(d)(14) apply only to registered clearing agencies that provide 
CSD services. See infra Part II.B.4 (discussing, among other things, 
the relationship between existing requirements under Rule 17Ad-22 
and proposed Rule 17Ad-22(e)(4)); see also 17 CFR 240.17Ad-22; 
Clearing Agency Standards Release, supra note 5.
    \104\ The Commission notes that the relevant requirement in Rule 
17Ad-22(b)(4) concerns policies and procedures regarding an annual 
model validation for margin models while proposed Rule 17Ad-22(e)(6) 
would impose, in addition to requiring policies and procedures 
regarding an annual model validation for margin models, additional 
requirements that do not appear in Rule 17Ad-22(b)(4). See infra 
Part II.B.4.e (discussing the requirements under proposed Rule 17Ad-
22(e)(6)).
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    For further discussion of the anticipated impact and costs and 
benefits of proposed Rule 17Ad-22(e), see Part IV.C.
5. General Request for Comments
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(e) and on all aspects of the definitions included 
in proposed Rule 17Ad-22(a), as discussed in more detail in Part 
II.B.\105\ In addition, the Commission requests comments on the 
following issues:
---------------------------------------------------------------------------

    \105\ Part II.B also contains additional requests for comments 
on each proposed rule regarding particular issues specific to each 
proposed rule.
---------------------------------------------------------------------------

     Is each aspect of proposed Rules 17Ad-22(e)(1) through 
(23), including any terms used therein, sufficiently clear given the 
proposed requirements? Why or why not? Has the Commission provided 
sufficient guidance as to the meaning of each provision of the proposed 
rules? Are there aspects of the proposed rules for which the Commission 
should consider providing additional guidance? If so, please explain.
     Are the Commission's definitions in proposed Rule 17Ad-
22(a) accurate, appropriate, and sufficiently clear? Why or why not? 
Should the definitions be modified? If so, how? Should the Commission 
adopt alternative definitions than those proposed? Are there additional 
terms used in Rule 17Ad-22(e) that should be defined? Please explain.
     Is the Commission's use of certain terms it believes to be 
commonly understood (e.g., ``high degree of confidence'' or ``due 
diligence'') appropriate and accurate? Why or why not?
     Would the proposed rules require covered clearing agencies 
to change their current practices? If so, how? What are the expected 
costs and benefits to covered clearing agencies in connection with 
adding or revising their current practices with respect to the 
implementation of the Commission's proposed rules? \106\
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    \106\ For a complete discussion of the anticipated economic 
effect of the proposed rules, see Part IV.
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     Should the Commission consider an alternative approach 
with respect to written policies and procedures included in the 
proposed rules? Why or why not? If so, what alternative approaches 
should the Commission consider? Please explain in detail.
     Should the Commission's proposed rules be less or more 
prescriptive? Why or why not? If so, what alternative approaches should 
the Commission consider? Please explain in detail.
     Are there any other factors that the Commission should 
take into consideration with respect to the requirements of the 
proposed rules?
     Should there be a phase-in period with respect to any of 
the requirements of proposed Rule 17Ad-22(e) ? If so, what should the 
phase-in periods be? What facts and circumstances should the Commission 
consider in evaluating whether to adopt a potential phase-in period? 
Please explain in detail.
     Could the proposed rules affect the ability of covered 
clearing agencies to compete for certain types of business

[[Page 29519]]

either within the United States or internationally? If so, how? Please 
provide specific examples and data.
     Are there significant operational or legal impediments to 
implementing the proposed rules? Would the proposed rules impact the 
ability of covered clearing agencies to clear certain products? Are any 
additional rules or regulations needed to facilitate compliance with 
the proposed rules?
     Are there any requirements under existing Rule 17Ad-22 
that could be viewed as being consistent with the PFMI standards 
without being supplemented or replaced by new requirements in proposed 
Rule 17Ad-22(e)? Please explain in detail.

B. Proposed Rule 17Ad-22(e)

1. Proposed Rule 17Ad-22(e)(1): Legal Risk
    Proposed Rule 17Ad-22(e)(1) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for a well-founded, clear, 
transparent, and enforceable legal basis for each aspect of its 
activities in all relevant jurisdictions.\107\ Rule 17Ad-22(d)(1) 
currently requires a registered clearing agency's policies and 
procedures to meet substantially the same requirement.\108\ Because the 
requirements under Rule 17Ad-22(d)(1) and proposed Rule 17Ad-22(e)(1) 
are substantially the same, the Commission anticipates that covered 
clearing agencies may need to make only limited changes to update their 
policies and procedures to comply with the proposed rule.\109\
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    \107\ See proposed Rule 17Ad-22(e)(1), infra Part VII.
    The Commission preliminarily believes that (i) the United States 
is the relevant jurisdiction for covered clearing agencies that 
perform the functions of a clearing agency in the United States for 
purposes of Rule 17Ad-22(e)(1), and (ii) that covered clearing 
agencies operating in multiple jurisdictions would be required to 
address any conflicts of laws issues that they may encounter.
    \108\ Rule 17Ad-22(d)(1) requires a registered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for a well-founded, 
transparent, and enforceable legal framework for each aspect of its 
activities in all relevant jurisdictions. See 17 CFR 240.17Ad-
22(d)(1); see also Clearing Agency Standards Release, supra note 5, 
at 66245-46.
    \109\ See supra Part II.A.4.
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    Consistent with the Exchange Act requirements discussed above,\110\ 
the Commission is proposing Rule 17Ad-22(e)(1) to require that a 
covered clearing agency have a legal basis for each aspect of its 
activities in all relevant jurisdictions. The legal framework for a 
particular clearing agency may cover a broad array of areas and issues, 
in particular including but not limited to its (i) organizational and 
governance documents, such as its charter, bylaws, and any charters for 
board and management committees; \111\ (ii) rules, policies, and 
procedures,\112\ including those regarding settlement finality, 
netting,\113\ default of a member, margin, collateral,\114\ payments, 
obligations to the participant or default fund, eligibility and 
participation requirements for members, and recovery and wind-down 
plans; (iii) contracts (notably including with service providers, 
settlement banks and liquidity providers); (vi) its use of novation or 
similar legal devices; \115\ and (vii) service restrictions that may be 
imposed on participants such as restrictions on activities or access.
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    \110\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
    \111\ The role of governance arrangements in promoting effective 
risk management has also been a focus of rules proposed by the 
Commission to mitigate conflicts of interest at certain registered 
clearing agencies. See Exchange Act Release No. 34-64017 (Mar. 3, 
2011), 76 FR 14472 (Mar. 16, 2011) (proposing Rule 17Ad-23 to 
address conflicts of interest and Rule 17Ad-26 to require standards 
for board members or board committee directors at registered 
clearing agencies); Exchange Act Release No. 34-63107 (Oct. 14, 
2010), 75 FR 65881, 65893 (Oct. 26, 2010) (proposing Regulation MC 
to mitigate conflicts of interest at security-based swap clearing 
agencies).
    \112\ See supra note 96 (describing the requirements in Section 
19(b) of the Exchange Act).
    \113\ Netting offsets obligations between or among participants 
in the netting arrangement, thereby reducing the number and value of 
payments or deliveries needed to settle a set of transactions. 
Netting can reduce potential losses in the event of a participant 
default and may reduce the probability of a default. Netting 
arrangements can differ as to both timing and the parties to the 
arrangement: (i) Certain netting arrangements net payments or other 
contractual obligations resulting from market trades (or both) on a 
continuous basis, while others close-out payments or obligations 
when an event such as insolvency occurs; and (ii) netting 
arrangement may net obligations bilaterally among two parties or 
multilaterally among multiple parties.
    \114\ Collateral arrangements may involve either a pledge or a 
title transfer. Therefore, regarding pledged assets, a covered 
clearing agency would examine the degree of legal certainty that a 
pledge has been validly created in the relevant jurisdiction and, as 
appropriate, validly perfected. Regarding transfer of title to 
assets, a covered clearing agency would examine the degree of legal 
certainty that the transfer is validly created in the relevant 
jurisdiction and will be enforced.
    \115\ Novation enables a clearing agency to act as a CCP. In 
novation, the original contract between the buyer and seller is 
discharged and two new contracts are created, one between the CCP 
and the buyer and the other between the CCP and the seller. The CCP 
thereby assumes the original parties' contractual obligations to 
each other. Legal certainty regarding novation may reinforce market 
participants' confidence regarding CCP support for or guarantee of 
the transaction.
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    In addition, the Commission is proposing to add Rule 17Ad-22(a)(20) 
to define ``transparent'' to mean, for proposed Rules 17Ad-22(e)(1), 
(2), and (10), that relevant documentation is disclosed, as 
appropriate, to the Commission and other relevant authorities, clearing 
members and customers of clearing members, the owners of the covered 
clearing agency, and the public, to the extent consistent with other 
statutory and Commission requirements.\116\ In proposing this 
definition, the Commission recognizes that certain types of 
information, such as confidential information, may not be appropriate 
for public disclosure or disclosure to certain third parties. 
Confidential information might include, for instance, policies and 
procedures with respect to the security of information technology or 
other critical systems or governance arrangements relating to the 
creation of special advisory committees by the board of directors. With 
regard to public disclosures contemplated by proposed Rule 17Ad-
22(a)(20), a covered clearing agency could comply with the proposed 
requirement by posting the relevant documentation to a covered clearing 
agency's Web site. The Commission preliminarily believes that these 
disclosures would support a participant's ability to evaluate the risks 
associated with participating in the covered clearing agency. For 
example, disclosures that facilitate market participants' understanding 
of the legal basis for a covered clearing agency's activities and its 
governance arrangements may encourage participation in the covered 
clearing agency (with respect to prospective clearing members) and may 
encourage trading in the United States that would result in clearance 
and settlement through the covered clearing agency (with respect to 
prospective investors).
---------------------------------------------------------------------------

    \116\ See proposed Rule 17Ad-22(a)(20), infra Part VII; see also 
Parts II.B.2 and 7 (discussing proposed Rules 17Ad-22(e)(2) and 
(10), respectively).
    Separately, the Commission has proposed rules to require 
policies and procedures to protect the confidentiality of trading 
information and procedures. See Exchange Act Release No. 34-64017 
(Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011) (proposing Rule 17Ad-
23).
---------------------------------------------------------------------------

    As was the case when the Commission considered Rule 17Ad-22(d)(1), 
where a clearing agency is faced with significant uncertainty regarding 
legal risk, the Commission preliminary believes this uncertainty may 
undermine a covered clearing agency's ability to provide prompt and 
accurate clearance and settlement, to safeguard securities and funds 
and to provide fair procedures, as required under Section 17A of the 
Exchange Act. For example, where a covered clearing

[[Page 29520]]

agency's procedures addressing a participant default and establishing a 
security interest in collateral lack clarity or there is significant 
uncertainty regarding enforceability, there is a risk the clearing 
agency may face claims to void, stay or reverse its actions, which 
could be made by a bankruptcy trustee or other type of receiver in an 
insolvency of a participant, undermining the clearing agency's ability 
to safeguard securities and funds. As a similar example, if covered 
clearing agency netting activities are voided or reversed on legal 
grounds, which could involve a participant's insolvency, clearing and 
settlement could be disrupted as participant accounts are rebalanced. 
Also, for example, if a covered clearing agency's plan for recovery and 
wind-down is subject to legal uncertainty, the covered clearing agency 
or governmental authorities may be delayed in or prevented from taking 
appropriate actions, resulting in disorder that may undermine the 
provision of prompt and accurate clearance and settlement.\117\
---------------------------------------------------------------------------

    \117\ Issues addressed in such wind-down plans may include 
termination, netting, and the transfer of securities positions and 
assets.
---------------------------------------------------------------------------

    Therefore, like Rule 17Ad-22(d)(1), the Commission preliminarily 
believes that proposed Rule 17Ad-22(e)(1) would support the 
effectiveness of a covered clearing agency's risk management procedures 
in two ways. First, by imposing requirements addressing legal risk, it 
would continue to promote effective risk management at covered clearing 
agencies. Second, the proposed rule would reinforce covered clearing 
agency policies and procedures regarding risks other than legal risk, 
including, among others, credit, liquidity, operational, and general 
business risk.\118\
---------------------------------------------------------------------------

    \118\ Cf. PFMI Report, supra note 1, at 21-25 (discussing 
Principle 1, legal basis).
---------------------------------------------------------------------------

    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(1) and proposed Rule 17Ad-
22(a)(20). In addition, the Commission requests comments on the 
following specific issues:
     Should the proposed rule include more specific 
requirements based on the type of business or the types of services 
offered by covered clearing agencies and/or whether the covered 
clearing agency operates in multiple jurisdictions? If so, are there 
any considerations, such as those concerning compliance with 
regulations in other jurisdictions, the Commission should take into 
account for covered clearing agencies operating in multiple 
jurisdictions?
     Should the Commission adopt more prescriptive or less 
prescriptive rules to define how covered clearing agencies would 
provide for a well-founded, clear, transparent, and enforceable legal 
basis? Why or why not? If so, what would those rules be?
     Should the Commission require a covered clearing agency to 
maintain documentation to demonstrate the legal adequacy of the 
mechanisms at the clearing agency that are in place to handle 
participant defaults? If so, what kinds of documentation should the 
Commission require?
     In proposing Rule 17Ad-22(a)(20), has the Commission taken 
the right approach with respect to requiring public disclosures? Why or 
why not? Should the Commission adopt rules that would require either 
more or less disclosure? Why or why not?
     What should be the minimum level of public disclosure 
required of a covered clearing agency? What information should a 
covered clearing agency be permitted to withhold? What form should that 
disclosure take? What content should be required? Please explain in 
detail.
2. Proposed Rule 17Ad-22(e)(2): Governance
    Proposed Rule 17Ad-22(e)(2)(i) through (iv) would require a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide for governance 
arrangements that are clear and transparent, clearly prioritize the 
safety and efficiency of the covered clearing agency, and support the 
public interest requirements in Section 17A of the Exchange Act and the 
objectives of owners and participants.\119\ The proposed rule contains 
requirements similar to those currently applicable to registered 
clearing agencies under Rule 17Ad-22(d)(8), but the proposed rule also 
requires that a covered clearing agency's policies and procedures 
provide for governance arrangements that clearly prioritize the safety 
and efficiency of the covered clearing agency.\120\
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    \119\ See proposed Rule 17Ad-22(e)(2), infra Part VII. Proposed 
Rule 17Ad-22(e)(2) would complement other requirements that may 
apply separately, including requirements in proposed Rules 17Ad-25 
and 17Ad-26, and requirements for security-based swap clearing 
agencies under Section 765 of the Dodd-Frank Act, 12 U.S.C. 8343. 
See supra note 111 (noting rules proposed by the Commission to 
address potential conflicts of interest).
    \120\ Specifically, Rule 17Ad-22(d)(8) requires a registered 
clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to have 
governance arrangements that are clear and transparent to fulfill 
the public interest requirements in Section 17A of the Exchange Act 
applicable to clearing agencies, to support the objectives of owners 
and participants, and to promote the effectiveness of the clearing 
agency's risk management procedures. See 17 CFR 240.17Ad-22(d)(8); 
see also Clearing Agency Standards Release, supra note 5, at 66251-
52.
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    Governance arrangements are critical to the sound operation of 
SROs, including covered clearing agencies.\121\ The Exchange Act 
explicitly conditions clearing agency registration on a clearing agency 
having rules that (i) assure a fair representation of shareholders or 
members and participants in the selection of its directors and 
administration of affairs, (ii) facilitate prompt and accurate 
clearance and settlement, (iii) protect investors and the public 
interest, (iv) do not permit unfair discrimination in the use of the 
clearing agency by participants and (v) provide certain fair procedures 
regarding participants and other interested parties.\122\ Accordingly, 
the proper functioning of registered clearing agencies pursuant to the 
requirements of the Exchange Act is premised on the existence of a 
well-organized and operating governance function.
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    \121\ See supra Part I.A and note 96 (describing the 
Commission's framework for regulation of SROs and the SRO rule 
filing process).
    \122\ See 15 U.S.C. 78q-1(a)(3)(F), (H).
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    Consistent with these requirements and the Exchange Act 
requirements discussed above,\123\ the Commission preliminarily 
believes that the governance requirements proposed in Rule 17Ad-
22(e)(2) are appropriate because governance arrangements are 
fundamental to the functioning of a covered clearing agency pursuant to 
Section 17A of the Exchange Act.\124\ Consistent with the Commission's 
statutory mandate under the Exchange Act, the proposed rule would 
specify that governance arrangements also be consistent with the public 
interest requirements in Section 17A of the Exchange Act as applicable 
to clearing agencies. Because a covered clearing agency's decisions can 
have widespread impact, affecting multiple market participants, 
financial institutions, markets, and jurisdictions, the Commission 
preliminarily believes it is important that each covered clearing 
agency place a high priority on the safety and efficiency of its 
operations and explicitly support the objectives of owners and 
participants. In addition, supporting the public interest is a broad

[[Page 29521]]

concept that includes, for example, contributing to the ongoing 
development of the U.S. financial system, in particular the national 
clearance and settlement system contemplated by Section 17A of the 
Exchange Act, and protecting investors and fostering fair and efficient 
markets. The Commission believes that, by supporting the public 
interest, market participants can develop common processes that help 
reduce uncertainty in the market, such as industry standards and market 
protocols related to clearance and settlement that facilitate a common 
understanding and interactions among clearing agencies and their 
members. The Commission preliminarily believes that covered clearing 
agencies, as SROs, are appropriately positioned to determine, based on 
their experience in providing clearance and settlement services and 
based on information obtained from their members and other 
stakeholders, as appropriate in the circumstances, what governance 
arrangements appropriately support the public interest requirements in 
Section 17A applicable to clearing agencies consistent with the 
expectations of such stakeholders,\125\ balancing the potentially 
competing viewpoints of the various stakeholders. The Commission also 
preliminarily believes that mechanisms through which a covered clearing 
agency could support the objectives of owners and participants could 
potentially include representation on the board of directors, user 
committees, and various public consultation processes.
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    \123\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
    \124\ See 15 U.S.C. 78q-1(a)(2)(A).
    \125\ See supra note 95 (describing requirements for SROs under 
the Exchange Act and Rule 19b-4).
---------------------------------------------------------------------------

    As with Rule 17Ad-22(d)(8), the Commission preliminarily believes 
that requiring policies and procedures for clear and transparent 
governance arrangements support accountability in the decisions, rules, 
policies, and procedures of the covered clearing agency. Such policies 
and procedures requirements for governance arrangements provide owners, 
participants, and, if applicable, general members of the public, with 
an opportunity to comment on or otherwise provide input to governance 
arrangements and, in turn, provide a covered clearing agency with the 
opportunity to balance the potentially competing viewpoints of various 
stakeholders in its decision making.\126\ Similarly, these policies and 
procedures requirements for governance arrangements may promote the 
effectiveness of a covered clearing agency's risk management procedures 
by fostering a focus on the critical role that risk management plays in 
promoting prompt and accurate clearance and settlement.\127\
---------------------------------------------------------------------------

    \126\ See id.
    \127\ See supra note 111 (discussing rules proposed by the 
Commission to mitigate conflicts of interest at clearing agencies as 
part of efforts to promote sound risk management and governance 
arrangements).
---------------------------------------------------------------------------

    In addition, proposed Rule 17Ad-22(e)(2)(iv) would require that the 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements establishing that the board of directors and 
senior management have appropriate experience and skills to discharge 
their duties and responsibilities.\128\ The Commission preliminarily 
believes that these aspects of a covered clearing agency's governance 
framework are particularly important and that establishing requirements 
in these areas would be appropriate given the risks that a covered 
clearing agency's size, operation, and importance pose to the U.S. 
securities markets.\129\
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    \128\ See proposed Rule 17Ad-22(e)(2), infra Part VII.
    \129\ For a discussion of current practices at registered 
clearing agencies regarding boards of directors and senior 
management, and the anticipated impact of the proposed requirements 
for governance, see Parts IV.B.3.a.ii and IV.C.3.a.ii, respectively.
---------------------------------------------------------------------------

    The Commission preliminarily believes that directors serving on the 
board and board committees of a clearing agency play an important role 
in creating a framework that supports prompt and accurate clearance and 
settlement because of their role in the decision-making process within 
a clearing agency. Additionally, the Commission preliminarily believes 
that a covered clearing agency's senior management has an important 
role in ensuring, under the board's direction, that the clearing 
agency's activities are consistent with the objectives, strategy, and 
risk tolerance of the clearing agency, as determined by the board. 
Accordingly, the expertise and skills of senior management and 
directors serving on the board of a covered clearing agency are likely 
to affect its effective operation. For example, a lack of expertise by 
board members may deter them from challenging decisions by management 
and lessen the potential that management would escalate appropriate 
issues to the board for the board's consideration. Similarly, board 
members and management should not have conflicts of interests that 
could undermine the decision-making process within a covered clearing 
agency or interfere with fair representation and equitable treatment of 
clearing members or other market participants by a covered clearing 
agency.
    The Commission believes that covered clearing agencies are well 
positioned to determine which individuals would have the appropriate 
experience, skills, incentives and integrity to discharge their duties 
and responsibilities that reflect the particular characteristics of 
each covered clearing agency. Accordingly, the Commission preliminarily 
believes that the proposed requirement for policies and procedures 
would provide the covered clearing agency with a process to evaluate 
the expertise and skills of board members and senior management, 
consistent with the particular circumstances of the covered clearing 
agency. Such policies and procedures may include provisions requiring 
the covered clearing agency to consider, for example, the specific 
qualifications, experience, competence, character, skills, incentives, 
integrity or other relevant attributes to support a conclusion that an 
individual nominee can appropriately serve as a board member or on 
senior management. Such policies and procedures could also include, 
among other things, requirements as to industry experience relevant to 
the services provided by the covered clearing agency, educational 
background, the absence of a criminal or disciplinary record, or other 
factors relevant to the qualifications of nominees being considered.
    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(2). In addition, the Commission 
requests comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to provide for governance arrangements that 
prioritize the safety and efficiency of the covered clearing agency? 
Why or why not?
     The Commission is not proposing at this time to require a 
covered clearing agency's policies and procedures provide for 
governance arrangements that also support the objectives of 
participants' customers, securities issuers and holders, and other 
stakeholders. Should the Commission consider such a requirement? Why or 
why not? Are existing protections under the Exchange Act, such as those 
in Section 17A(b)(3)(H) (requiring clearing agency rules to provide 
fair procedures to persons with respect to access to services offered 
by the clearing

[[Page 29522]]

agency),\130\ Section 17A(b)(5)(B) (establishing requirements for 
clearing agencies when determining whether a person may be prohibited 
or limited with respect to services offered),\131\ and Section 19(d)(2) 
(persons aggrieved by SRO actions may apply to the Commission for 
review) \132\ already satisfactory or would additional Commission 
governance requirements also be appropriate? What would be the possible 
advantages and disadvantages of expanding the scope of proposed Rule 
17Ad-22(e)(2)(iii) to require covered clearing agency policies and 
procedures to consider the interests of persons other than owners and 
participants?
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    \130\ See 15 U.S.C. 78q-1(b)(3)(H).
    \131\ See 15 U.S.C. 78q-1(b)(5)(B).
    \132\ See 15 U.S.C. 78s(d)(2).
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     Should the Commission require a covered clearing agency's 
policies and procedures to provide for governance arrangements 
establishing that the board of directors and senior management have 
appropriate experience and skills to discharge their duties and 
responsibilities? Why or why not? Has the Commission provided 
sufficient guidance on what ``experience and skills'' would require? 
Why or why not?
     Are there any other requirements that should be included 
in the rule to promote clear and transparent governance arrangements?
     The Commission is not proposing at this time to require a 
covered clearing agency's policies and procedures provide for 
governance arrangements to ensure that lines of responsibility and 
accountability at the covered clearing agency are clear and direct. 
Should the Commission consider such a requirement? Why or why not?
     The Commission is not proposing at this time to require a 
covered clearing agency's policies and procedures provide for 
governance arrangements that ensure major decisions of the board of 
directors are disclosed to the public. Should the Commission consider 
such a requirement? Why or why not?
     Should there be a phase-in period for covered clearing 
agencies to comply with proposed Rule 17Ad-22(e)(2), such as until the 
next annual meeting of shareholders of the covered clearing agency or 
other time period? Why or why not?
     Are the governance requirements in proposed Rule 17Ad-
22(e)(2) necessary to achieve the benefits discussed in Part 
IV.C.3.a.ii? Why or why not? For example, how and why would particular 
features of the proposed rules, such as expectations that directors and 
officers of covered clearing agencies have certain skills and 
experience, contribute to greater market stability and reduced risk of 
insufficient internal controls endangering broader financial stability? 
Are there existing requirements under Section 17A of the Exchange Act, 
such as the ``fair representation'' requirement in Section 
17A(b)(3)(C), rules and regulations adopted by the Commission and 
applicable to SROs, or relevant interpretations published by the 
Commission that already provide a clear and sufficient basis for the 
Commission to supervise covered clearing agencies in the manner 
contemplated by proposed Rule 17Ad-22(e)(2) without adopting the 
proposed rule? What are the possible benefits of adopting the rule as 
proposed and what possible detriments may arise that the Commission 
should consider?
     Are there disclosures that a covered clearing agency 
should be required to make with respect to its governance arrangements? 
Why or why not? If so, what should be the form and content of those 
disclosures?
     Should the Commission require that the performance of the 
board of directors and senior management--individually and as a group--
are reviewed on a regular basis? If so, how often should this review be 
conducted? Should this review be conducted independently?
     Should the board of directors of covered clearing agencies 
include individuals who are not executives, officers, or employees of 
the covered clearing agency, or an affiliate of the covered clearing 
agency? Should the board of directors of covered clearing agencies 
include an independent audit committee?
     Should the Commission be involved in and/or set 
requirements and standards with respect to board and management 
governance at covered clearing agencies? Does the Commission have the 
requisite statutory authority to adopt the rule proposals and matters 
addressed in the related questions set forth in this release as to 
governance arrangements, standards, composition, and qualifications of 
covered clearing agencies' boards and management? Is the Commission's 
oversight and establishment of corporate governance measures and 
standards at clearing agencies a proper and good use of Commission 
resources? What are the potential costs and benefits of these corporate 
governance provisions?
3. Proposed Rule 17Ad-22(e)(3): Framework for the Comprehensive 
Management of Risks
    Proposed Rule 17Ad-22(e)(3) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to maintain a sound risk management 
framework for comprehensively managing legal, credit, liquidity, 
operational, general business, investment, custody, and other risks 
that arise in or are borne by the covered clearing agency.\133\
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    \133\ See proposed Rule 17Ad-22(e)(3), infra Part VII.
---------------------------------------------------------------------------

    Existing Rules 17Ad-22(b) and (d) require registered clearing 
agencies to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to meet several requirements that 
address risk management practices by registered clearing agencies that 
provide CCP services (Rules 17Ad-22(b)(1) through (4)), certain 
requirements regarding access to registered clearing agencies that 
provide CCP services (Rules 17Ad-22(b)(5) through (7)), and certain 
minimum standards for the operations of registered clearing agencies 
providing CCP or CSD services.\134\ Consistent with these requirements 
and the Exchange Act requirements discussed above, \135\ the Commission 
preliminarily believes that proposed Rule 17Ad-22(e)(3) is appropriate 
and would require a covered clearing agency's policies and procedures 
to take a broader, more comprehensive approach to risk management, 
which the Commission believes is fundamental to a covered clearing 
agency's functioning given its size, operation, and importance in the 
U.S. securities markets. While existing rules under the Exchange Act 
already target certain aspects of risk management, the Commission 
preliminarily believes that comprehensive risk management policies and 
procedures established pursuant to proposed Rule 17Ad-22(e)(3) would 
further support the examination of risks, the assessment of their 
probability and impact, and the

[[Page 29523]]

identification of linkages to other entities that in turn pose risks to 
the covered clearing agency. The Commission also believes that 
comprehensive risk management policies and procedures would facilitate 
the development of mechanisms to better prioritize, manage, and monitor 
risks, and to measure the covered clearing agency's risk tolerance and 
capacity. In proposing Rule 17Ad-22(e)(3), the Commission is 
emphasizing a comprehensive approach to risk management that would 
require risk management policies and procedures be designed 
holistically, be consistent with each other, and work effectively 
together in order to mitigate the risk of financial losses to covered 
clearing agencies' members and participants in the markets they serve.
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    \134\ See 17 CFR 240.17Ad-22(b), (d); see also Clearing Agency 
Standards Release, supra note 5, at 66230-43, 66244-58. 
Specifically, as examples, Rule 17Ad-22(d)(4) requires a registered 
clearing agency to have policies and procedures reasonably designed 
to address certain aspects of operational risk, and Rule 17Ad-
22(d)(7) requires a registered clearing agency to have policies and 
procedures reasonably designed to address certain aspects of risks 
relating to linkages. See 17 CFR 240.17Ad-22(d)(4), (7).
    \135\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
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    In addition, policies and procedures for the comprehensive 
management of risks have the potential to play an important role in 
making sure that covered clearing agencies better fulfill the Exchange 
Act requirements that the rules of a clearing agency be designed to 
protect investors and the public interest.\136\ Similarly, these 
requirements may promote the effectiveness of a covered clearing 
agency's risk management procedures by fostering a focus on the 
critical role that risk management plays in promoting prompt and 
accurate clearance and settlement. Accordingly, the Commission 
preliminarily believes that it is important that covered clearing 
agencies have policies and procedures that enable them to identify, 
monitor, and manage the range of risks that arise in or are borne by 
all aspects of their clearance and settlement activities.
---------------------------------------------------------------------------

    \136\ See 15 U.S.C. 78q-1(a)(2).
---------------------------------------------------------------------------

    In addition, the Commission is proposing the requirements described 
below, which do not appear in existing Rules 17Ad-22(b) or (d). The 
Commission preliminarily believes these requirements would be 
appropriate for covered clearing agencies given the risks that their 
size, operation, and importance pose to the U.S. securities markets.
a. Policies and Procedures Requirements, Periodic Review, and Annual 
Board Approval
    Proposed Rule 17Ad-22(e)(3)(i) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to provide for risk management 
policies, procedures, and systems designed to identify, measure, 
monitor, and manage the range of risks that arise in or are borne by 
the covered clearing agency, and subject them to review on a specified 
periodic basis and approval by the board of directors annually.\137\
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    \137\ See id.
---------------------------------------------------------------------------

    The Commission preliminarily believes periodic review of the risk 
management policies and procedures would allow covered clearing 
agencies to assess whether the risk management policies and procedures 
should be updated to account for changing factors in the market and to 
address and codify in a uniform way the approach to new risks taken 
since the last periodic review. The Commission preliminarily believes 
that the board of directors of a covered clearing agency should be 
required to approve the risk management policies and procedures. The 
Commission preliminarily believes that, in complying with this 
requirement, a board of directors may want to subject all material 
components of the covered clearing agency's risk management policies 
and procedures to review pursuant to Rule 17Ad-22(e)(3)(i) due to the 
critical role that risk management plays in promoting prompt and 
accurate clearance and settlement.
b. Recovery and Orderly Wind-Down Plans
    Proposed Rule 17Ad-22(e)(3)(ii) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to ensure it establishes plans for 
the recovery and orderly wind-down of the covered clearing agency 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.\138\
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    \138\ See proposed Rule 17Ad-22(e)(3), infra Part VII.
---------------------------------------------------------------------------

    Securities exchanges, market participants, and investors rely upon 
the safe, sound, and efficient operations of covered clearing agencies, 
and accordingly the Commission preliminarily believes that a disorderly 
wind-down of a covered clearing agency would have systemic 
consequences.\139\ The Commission preliminarily believes that a 
recovery plan designed to deal with possible scenarios that may 
threaten or potentially prevent a covered clearing agency from being 
able to provide its critical operations and services as a going concern 
and that assesses a full range of options for recovery could mitigate 
the impact of a near failure of a covered clearing agency.
---------------------------------------------------------------------------

    \139\ See generally Clearing Agency Standards Release, supra 
note 5, at 66283 (noting, in discussing Rule 17Ad-22(d)(11), that 
having policies and procedures ``allow[s] a clearing agency to wind 
down positions in an orderly way and continue to perform its 
obligations in the event of a participant default, assuring 
continued functioning of the securities market in times of stress 
and reducing systemic risk'').
---------------------------------------------------------------------------

    Based on its supervisory experience, the Commission recognizes that 
covered clearing agencies operating in the market today each have 
relevant standards and practices relating to recovery and orderly wind-
down with differing degrees of formality. The Commission therefore 
preliminarily expects that Rule 17Ad-22(e)(3)(ii) would require covered 
clearing agencies to review such standards and practices for 
sufficiency with respect to the safe operation of the covered clearing 
agency and revise such practices in a manner consistent with the 
findings of such review consistent with the proposed rule, if adopted, 
and the requirements of the Exchange Act.
c. Risk Management and Internal Audit
    Proposed Rule 17Ad-22(e)(3)(iii) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to provide risk management and 
internal audit personnel with sufficient authority, resources, 
independence from management, and access to the board of directors. The 
Commission preliminarily believes that a covered clearing agency could 
satisfy the policies and procedures requirement for independence from 
management by, for example, providing reporting lines for risk 
management functions that are clear and separate from those for other 
operations and providing for direct reporting to the board of directors 
or a relevant committee of the board. In that regard, proposed Rule 
17Ad-22(e)(3)(iv) would require a covered clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide risk management and internal audit 
personnel with oversight by and a direct reporting line to a risk 
management committee and an audit committee of the board of directors, 
respectively. Furthermore, proposed Rule 17A-22(e)(3)(v) would require 
a covered clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide for an 
independent audit committee.
    The Commission preliminarily believes that a covered clearing 
agency should have an effective internal audit function in order to 
provide, among other things, a rigorous and independent assessment of 
the effectiveness of the clearing agency's

[[Page 29524]]

risk management and control processes, and should have an independent 
audit committee overseeing the internal audit function in order to help 
promote the integrity and efficiency of the audit process and 
strengthen internal controls. In order to satisfy the independence 
requirement for an audit committee under proposed Rule 17Ad-22(e)(2), a 
covered clearing agency could use such independence criteria as are 
established by its board of directors. The Commission further 
preliminarily believes that policies and procedures for risk management 
are important to the effective operation of a covered clearing agency.
d. Request for Comments
    The Commission generally requests comments on all aspects of 
Proposed Rule 17Ad-22(e)(3). In addition, the Commission requests 
comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to maintain a sound risk management framework 
for comprehensively managing legal, credit, liquidity, operational, 
general business, investment, custody, and other risks that arise in or 
are borne by the covered clearing agency? Why or why not?
     Should the Commission require a covered clearing agency's 
policies and procedures include plans for the recovery and orderly 
wind-down of the covered clearing agency necessitated by credit losses, 
liquidity shortfalls, losses from general business risk, or any other 
losses? Why or why not?
     How and to whom should the board of directors communicate 
the results of its review of the risk management framework, if at all?
     Are there any other requirements that should be included 
in the rule to facilitate policies and procedures that maintain a sound 
risk management framework, including the proposed requirements for 
policies and procedures regarding board review and approval of risk 
management policies and policies and procedures with respect to 
recovery and orderly wind-down plans? Why or why not? For example, 
should the Commission require a covered clearing agency's policies and 
procedures to identify, measure, monitor, and manage the material risks 
that it poses to other entities, such as other financial market 
utilities, settlement banks, liquidity providers, or service providers, 
as a result of interdependencies? Why or why not?
     The Commission is not proposing at this time to require a 
covered clearing agency's policies and procedures to, in its 
comprehensive risk management framework, provide for criteria for the 
independence of audit committee members. Should the Commission consider 
requirements that specify such criteria? Why or why not? If so, should 
those criteria be similar to the audit committee independence 
requirements for listed companies in Rule 10A-3 under the Exchange Act? 
\140\ In order to satisfy the policies and procedures requirement for 
independence of the audit committee under proposed Rule 17Ad-22(e)(3), 
should a covered clearing agency be allowed to use such independence 
criteria as are established by its board of directors?
---------------------------------------------------------------------------

    \140\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

4. Proposed Rules 17Ad-22(e)(4) through (7): Financial Risk Management
a. Overview of Financial Risks Faced by Clearing Agencies
    Covered clearing agencies face a variety of financial risks from 
their participants and service providers, including credit or 
counterparty default risk, market risk, and liquidity risk. For 
example, for clearing agencies that provide CSD services, credit risk 
arises from the potential that a participant will not pay what it owes 
for securities that it has purchased or will not deliver securities 
that it has sold. For clearing agencies that clear and settle 
derivatives contracts, credit risk arises from the potential that a 
participant will not meet its margin or settlement obligations or pay 
any other amounts owed to the covered clearing agency.\141\ Credit risk 
also arises for clearing agencies of any type from commercial banks or 
custodians that the covered clearing agency uses to effect money 
transfers among participants, to hold overnight deposits, or to 
safeguard cash or other collateral.
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    \141\ In this context, the clearing agency's credit risk is 
closely related to the participant's market risk. A participant's 
ability to meet its obligations to the clearing agency may be 
affected by the participant's exposure to fluctuations in the market 
value of the participant's open positions. In addition, fluctuations 
in the market value of the collateral posted by the participant may 
require the clearing agency to obtain additional margin from the 
participant.
---------------------------------------------------------------------------

    Clearing agencies that provide CCP services take offsetting 
positions as the substituted counterparty to a transaction and, 
therefore, do not ordinarily face market risk except in the event of a 
participant default. In such an event, market risk takes two forms. 
First, the clearing agency may need to liquidate collateral posted by 
the defaulting participant. The clearing agency is therefore exposed to 
volatility in the market price of the defaulting participant's non-cash 
collateral that could result in the clearing agency having insufficient 
financial resources to cover the losses in the defaulting participant's 
open positions. Second, a clearing agency providing CCP services is 
subject to volatility in the market price of the defaulting 
participant's open positions during the interval between the point at 
which the clearing agency takes control of those positions and the 
point at which the clearing agency is able to offset, transfer, or 
liquidate those positions. A clearing agency faces the risk that its 
exposure to a participant can change as a result of a change in prices, 
positions, or both.
    A clearing agency must be able to measure the counterparty credit 
exposures that it is expected to manage effectively. A clearing agency 
can ascertain its current credit exposure to each participant by 
marking each participant's outstanding positions to current market 
prices and (to the extent permitted by a clearing agency's rules and 
supported by law) netting any gains against any losses.
    In addition to credit risk and market risk, clearing agencies also 
face liquidity or funding risk. Currently, to complete the settlement 
process, clearing agencies generally rely on incoming payments from 
participants in net debit positions in order to make payments to 
participants in net credit positions. If a participant does not have 
sufficient funds to make an incoming payment immediately when it is due 
(even though it may be able to pay at some future time), or if a 
settlement bank is unable to make an incoming payment on behalf of a 
participant, the clearing agency faces a funding shortfall. A clearing 
agency typically holds additional financial resources to cover 
potential funding shortfalls such as margin collateral or lines of 
credit. However, if collateral cannot be liquidated within a short 
time, or if lines of credit are unavailable, liquidity risk would be 
exacerbated.
b. Current Financial Risk Management Requirements for CCPs
    Rules 17Ad-22(b)(1) through (4) concern risk management 
requirements for clearing agencies that perform CCP services 
(hereinafter ``CCPs'' in this part). Rule 17Ad-22(b)(1) requires that 
CCPs establish, implement, maintain and enforce written policies and 
procedures reasonably designed to measure their credit exposures at 
least once per day.\142\ Rule 17Ad-22(b)(2) requires that CCPs 
establish, implement, maintain and enforce written policies

[[Page 29525]]

and procedures reasonably designed to use margin requirements to limit 
their exposures to participants.\143\ This margin can also be used to 
reduce a CCP's losses in the event of a participant default. Rule 17Ad-
22(b)(3) requires that CCPs establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain 
sufficient financial resources to withstand, at a minimum, a default by 
the participant family to which a CCP has the largest exposure in 
extreme but plausible market conditions, except that CCPs clearing 
security-based swap transactions must maintain additional financial 
resources sufficient to withstand the simultaneous default by the two 
participant families to which a CCP has the largest exposures.\144\ 
Finally, Rule 17Ad-22(b)(4) requires that CCPs establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide for an annual model validation that consists of 
evaluating the performance of a clearing agency's margin models and the 
related parameters and assumptions associated with such models and that 
is performed by a qualified person who is free from influence from the 
persons responsible for development or operation of the models being 
validated.\145\
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    \142\ See 17 CFR 240.17Ad-22(b)(1).
    \143\ See 17 CFR 240.17Ad-22(b)(2).
    \144\ See 17 CFR 240.17Ad-22(b)(3).
    \145\ See 17 CFR 240.17Ad-22(b)(4).
---------------------------------------------------------------------------

c. Proposed Rule 17Ad-22(e)(4): Credit Risk
    Proposed Rule 17Ad-22(e)(4) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
exposures arising from its payment, clearing, and settlement 
processes.\146\ The Commission preliminarily believes the proposed rule 
is consistent with the requirements of the Exchange Act discussed 
above.\147\
---------------------------------------------------------------------------

    \146\ See proposed Rule 17Ad-22(e)(4), infra Part VII.
    \147\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(4)(i) would require a covered clearing to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to maintain sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence. The Commission's intention in proposing the 
term ``high degree of confidence'' is to refer to the statistical 
meaning of this term.\148\ The proposed rule would require a covered 
clearing agency to use statistical methods to develop models in order 
to estimate the financial resources required under proposed Rule 17Ad-
22(e)(4)(ii) and (iii),\149\ and to comply with the requirements of 
proposed Rule 17Ad-22(e)(4)(ii) and (iii), while recognizing that such 
an approach is necessarily imprecise to at least some degree.
---------------------------------------------------------------------------

    \148\ See, e.g., Arthur S. Goldberger, A Course in Econometrics 
122-23 (Harvard Univ. Press, 2003) (defining confidence intervals 
for parameter estimates).
    \149\ See supra Part II.B.4.a (noting that a clearing agency 
must be able to measure the counterparty credit exposures in order 
to manage risk effectively).
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(4)(ii) would require a covered clearing 
agency that provides CCP services, and that is ``systemically important 
in multiple jurisdictions'' or ``a clearing agency involved in 
activities with a more complex risk profile,'' to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to maintain additional financial resources, to the extent not 
already maintained pursuant to proposed Rule 17Ad-22(e)(4)(i), at a 
minimum level necessary to enable it to cover a wide range of 
foreseeable stress scenarios, including but not limited to the default 
of the two participant families that would potentially cause the 
largest aggregate credit exposure for the covered clearing agency in 
extreme but plausible market conditions (hereinafter the ``cover two'' 
requirement).
    Proposed Rule 17Ad-22(e)(4)(iii) would require a covered clearing 
agency that is not subject to proposed Rule 17Ad-22(e)(4)(ii) to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to maintain additional financial 
resources, to the extent not already maintained pursuant to proposed 
Rule 17Ad-22(e)(4)(i), at the minimum to enable it to cover a wide 
range of foreseeable stress scenarios, including the default of the 
participant family that would potentially cause the largest aggregate 
credit exposure for the covered clearing agency in extreme but 
plausible market conditions (hereinafter the ``cover one'' 
requirement).\150\ The Commission notes that the requirement in 
proposed Rules 17Ad-22(e)(4)(ii) and (iii) to examine exposure under 
foreseeable stress scenarios including extreme but plausible market 
conditions means the covered clearing agency may need to use models to 
determine how its estimated exposure under such conditions differs from 
its actual exposure to positions of such participants, which it would 
be required to measure under proposed Rule 17Ad-22(e)(4)(i).
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    \150\ The Commission notes that, with the exception of security-
based swap clearing agencies, all registered clearing agencies 
providing CCP services are all currently required to meet a ``cover 
one'' standard under Rule 17Ad-22(b)(3), and therefore the 
Commission anticipates that covered clearing agencies may need to 
make only limited changes to policies and procedures to satisfy the 
proposed requirement, if adopted. See infra Parts IV.B.3.b.i and 
IV.C.3.a.iv(1) (discussing current practices at registered clearing 
agencies relating to credit risk and the anticipated economic effect 
of the proposed requirement, respectively).
---------------------------------------------------------------------------

    Also, as previously discussed, the Commission is proposing Rule 
17Ad-22(a)(4) to define ``clearing agency involved in activities with a 
more complex risk profile.'' \151\ The Commission is also proposing 
Rule 17Ad-22(a)(19) to define ``systemically important in multiple 
jurisdictions'' to mean a covered clearing agency that has been 
determined by the Commission to be systemically important in more than 
one jurisdiction pursuant to Rule 17Ab2-2.\152\
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    \151\ See supra Part II.A.1 (discussing the scope of proposed 
Rule 17Ad-22(e)); supra notes 79-80 and accompanying text.
    \152\ See proposed Rule 17Ad-22(a)(19), infra Part VII; see also 
infra Parts II.C and VII (discussing the determinations process 
under proposed Rule 17Ab2-2 and providing proposed rule text).
---------------------------------------------------------------------------

    Like the ``cover two'' requirement in Rule 17Ad-22(b)(3), which 
applies to registered clearing agencies that provide CCP services for 
security-based swaps,\153\ proposed Rule 17Ad-22(e)(4)(ii) would impose 
a ``cover two'' requirement to address credit risk of certain covered 
clearing agencies: Those systemically important in multiple 
jurisdictions and those involved in activities with a more complex risk 
profile. The Commission notes that the set of complex risk profile 
clearing agencies subject to this requirement would include, as of the 
date of this proposal, only registered clearing agencies that provide 
CCP services for security-based swaps, which are already subject to the 
``cover two'' requirement in Rule 17Ad-22(b)(3). In addition, the 
Commission notes that no covered clearing agency would be systemically 
important in multiple jurisdictions unless and until the Commission 
made such a determination pursuant to

[[Page 29526]]

proposed Rule 17Ab2-2.\154\ For any covered clearing agency not 
currently subject to a ``cover two'' requirement that could be 
determined by the Commission in the future to be either systemically 
important in multiple jurisdictions or involved in activities with a 
more complex risk profile, the Commission believes that requiring such 
entities to improve their resilience to offset increased risk and to 
prepare for extreme but plausible market conditions is appropriate 
because it could decrease the likelihood that systemic events in other 
jurisdictions or extreme volatility in more complex financial 
instruments would result in interruptions to the provision of clearance 
and settlement services in the U.S. securities markets.
---------------------------------------------------------------------------

    \153\ See 17 CFR 240.17Ad-22(b)(3); see also infra Part II.A.1 
(discussing the scope of proposed Rule 17Ad-22(e)); Clearing Agency 
Standards Release, supra note 5, at 66233-36 (discussing proposed 
Rule 17Ad-22(b)(3)).
    \154\ See infra Parts II.C and VII (discussing the 
determinations process under proposed Rule 17Ab2-2 and providing 
proposed rule text).
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    In addition, the Commission is proposing the requirements described 
below. In discussing these requirements, the below sections describe 
how they differ from existing requirements in Rules 17Ad-22(b)(1) 
through (4) applicable to security-based swap clearing agencies, 
previously discussed above.\155\
---------------------------------------------------------------------------

    \155\ See supra Part II.B.4.b.
---------------------------------------------------------------------------

i. Prefunded Financial Resources
    Proposed Rule 17Ad-22(e)(4)(iv) would require a covered clearing 
agency providing CCP services that is either systemically important in 
multiple jurisdictions or a complex risk profile clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to include prefunded financial 
resources, excluding assessments for additional guaranty fund 
contributions or other resources that are not prefunded, when 
calculating the financial resources available to meet the standards 
under proposed Rules 17Ad-22(e)(4)(i) through (iii), as 
applicable.\156\ The Commission preliminarily believes that prefunding 
default obligations is appropriate because of the importance of the 
ability of a covered clearing agency to meet its default resource 
obligations to the clearance and settlement system, given the risks 
that its size, operation, and importance pose to the U.S. securities 
markets.\157\ Immediately available financial resources are necessary 
to ensure that a covered clearing agency can meet its financial 
obligations on an ongoing basis. Without prefunded financial resources, 
a covered clearing agency may be unable to meet its financial 
obligations in stressed market conditions, when clearing members may be 
unwilling or unable to contribute to the clearing agency's guaranty 
fund in the event of a member default.
---------------------------------------------------------------------------

    \156\ See proposed Rule 17Ad-22(e)(4)(iv), infra Part VII.
    \157\ See generally 12 U.S.C. 5461 (Congress finding, among 
other things, that enhancements to the regulation and supervision of 
systemically important FMUs and the conduct of systemically 
important PCS activities by financial institutions are necessary, 
under Title VIII, to provide consistency, to promote robust risk 
management and safety and soundness, to reduce systemic risks, and 
to support the stability of the broader financial system).
---------------------------------------------------------------------------

    The Commission notes that while the ability to assess participants 
for contributions under applicable covered clearing agency governing 
documents, rules, or agreements could not be included in this 
calculation, previously paid-in participant contributions into a 
covered clearing agency default fund could be counted to the extent the 
clearing agency's rules, policies, or procedures permit such resources 
to be used in a manner equivalent to other financial resources in the 
default fund. Other sources of prefunded resources, such as margin 
previously posted to the clearing agency by participants, could also be 
treated in this manner. In addition, while the ability to draw down 
under a revolving loan facility could not be counted towards prefunded 
resources because funds from such loan facility would not be in the 
covered clearing agency's immediate possession, the covered clearing 
agency could count borrowed funds already drawn down, such as under a 
term loan or other credit facility.
    Existing requirements under Rule 17Ad-22 do not include 
requirements for prefunded financial resources at registered clearing 
agencies. The proposed requirement reflects the Commission's 
recognition of the importance of a covered clearing agency meeting its 
default resource obligations, given the risks that its size, operation, 
and importance pose to the U.S. securities markets.
ii. Combined or Separately Maintained Clearing or Guaranty Funds
    Proposed Rule 17Ad-22(e)(4)(v) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to maintain the financial resources 
required under proposed Rules 17Ad-22(e)(4)(i) through (iii) in 
combined or separately maintained clearing or guaranty funds.\158\ The 
proposed rule makes clear that a covered clearing agency may choose to 
maintain a separate default fund for purposes of complying with 
proposed Rules 17Ad-22(e)(4)(i) through (iii).
---------------------------------------------------------------------------

    \158\ See proposed Rule 17Ad-22(e)(4)(v), infra Part VII.
---------------------------------------------------------------------------

    This requirement would be similar to the requirement in Rule 17Ad-
22(b)(3) requiring a security-based swap clearing agency to have 
policies and procedures reasonably designed to maintain financial 
resources generally or in separately maintained funds.\159\ The 
Commission believes that this approach facilitates the operations of 
clearing agencies. For example, clearing agencies may maintain separate 
default funds for each product or asset type cleared, in order to more 
appropriately tailor risk management requirements or contain losses 
from a default to that fund.
---------------------------------------------------------------------------

    \159\ Rule 17Ad-22(b)(3) currently also permits a security-based 
swap clearing agency to have policies and procedures reasonably 
designed to maintain financial resources generally or in separately 
maintained funds. See 17 CFR 240.17Ad-22(b)(3); see also Clearing 
Agency Standards Release, supra note 5, at 66233-236.
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iii. Testing the Sufficiency of Financial Resources
    Proposed Rule 17Ad-22(e)(4)(vi) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to test the sufficiency of its total 
financial resources available to meet the minimum financial resource 
requirements under proposed Rules 17Ad-22(e)(4)(i) through (iii), as 
applicable, by conducting a stress test of its total financial 
resources at least once each day using standard predetermined 
parameters and assumptions.\160\ Registered clearing agencies are not 
subject to requirements for testing the sufficiency of their financial 
resources under existing Rule 17Ad-22.
---------------------------------------------------------------------------

    \160\ See proposed Rule 17Ad-22(e)(4)(vi), infra Part VII.
---------------------------------------------------------------------------

    The proposed rule would also require a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to conduct a comprehensive analysis on 
at least a monthly basis of the existing stress testing scenarios, 
models, and underlying parameters and assumptions, and consider 
modifications to ensure they are appropriate for determining the 
covered clearing agency's required level of default protection in light 
of current market conditions. When the products cleared or markets 
served by a covered clearing agency display high volatility, become 
less liquid, or when the size or concentration of positions held by the 
entity's participants increases

[[Page 29527]]

significantly, the proposed rule would specifically require a covered 
clearing agency to have policies and procedures for conducting 
comprehensive analyses of stress testing scenarios, models, and 
underlying parameters and assumptions more frequently than monthly. The 
Commission preliminarily believes that what constitutes ``high 
volatility'' and ``low liquidity'' would vary across asset classes that 
a covered clearing agency might clear. Accordingly, the Commission 
preliminarily believes that a clearing agency would need flexibility to 
address changing circumstances and is therefore not proposing to 
prescribe triggers for any particular circumstance.
    The proposed rule would also require a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for the reporting of the 
results of this analysis to the appropriate decision makers at the 
covered clearing agency, including its risk management committee or 
board of directors, and to require the use of the results to evaluate 
the adequacy of and to adjust its margin methodology, model parameters, 
and any other relevant aspects of its credit risk management policies 
and procedures, in supporting compliance with the minimum financial 
resources requirements discussed above.
    The Commission is also proposing to add Rule 17Ad-22(a)(18) to 
define ``stress testing'' to mean the estimation of credit and 
liquidity exposures that would result from the realization of extreme 
but plausible price changes or changes in other valuation inputs and 
assumptions.\161\ The Commission preliminarily believes that stress 
testing is an important component of the proposed rules because stress 
testing may enable a covered clearing agency to be prepared for an 
extreme event that may not be anticipated or expected based solely on 
current market conditions or from a sample of historical data.
---------------------------------------------------------------------------

    \161\ See proposed Rule 17Ad-22(a)(18), infra Part VII.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the requirements in 
proposed Rule 17Ad-22(e)(4)(vi) are appropriate for testing the 
sufficiency of the financial resources of covered clearing agencies 
because, in certain market conditions, such as periods of high 
volatility or diminished liquidity, existing stress scenarios, models, 
or underlying parameters may no longer be valid or appropriate. Based 
on its supervisory experience, the Commission believes that certain, 
but not all, covered clearing agencies adjusted their stress testing 
scenarios following the 2008 financial crisis to incorporate larger 
debt, equity, and credit market shocks similar to those experienced 
during the crisis. Accordingly, the Commission preliminarily believes 
that specific policies and procedures contemplating actions to be taken 
by all covered clearing agencies in such circumstances are necessary to 
ensure the safe functioning of the covered clearing agencies as 
required by the Exchange Act,\162\ and that requiring periodic feedback 
and analysis on the strength of credit risk management policies and 
procedures would improve the reliability of those policies and 
procedures. The Commission also preliminarily believes that the rule 
would provide a covered clearing agency with the flexibility to use 
stress scenarios that are appropriately tailored to current market 
conditions and that can be revised over time as markets change and 
believes that such flexibility is appropriate to achieve the objectives 
of the Exchange Act.
---------------------------------------------------------------------------

    \162\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
---------------------------------------------------------------------------

iv. Annual Conforming Model Validation
    Proposed Rule 17Ad-22(e)(4)(vii) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to require a conforming model 
validation for its credit risk models to be performed not less than 
annually or more frequently as may be contemplated by the covered 
clearing agency's risk management policies and procedures.\163\ The 
Commission preliminary believes that an annual cycle is appropriate for 
the reasons described in Part II.A.3. The Commission notes that other 
important reviews such as auditing of the financial statements of 
registered clearing agencies and their disclosure are required to occur 
on an annual basis as well.\164\
---------------------------------------------------------------------------

    \163\ See proposed Rule 17Ad-22(e)(4)(vii), infra Part VII.
    \164\ See 17 CFR 240.17Ad-22(c)(2).
---------------------------------------------------------------------------

    The Commission is proposing to add Rule 17Ad-22(a)(5) to define 
``conforming model validation'' to mean an evaluation of the 
performance of each material risk management model used by a covered 
clearing agency, along with the related parameters and assumptions 
associated with such models.\165\ Such model validation would apply to 
models that would include initial margin models, liquidity risk models, 
and models used to generate clearing or guaranty fund requirements. A 
conforming model validation would also require that the model 
validation be performed by a qualified person who is free from 
influence from the persons responsible for the development or operation 
of the models or policies being validated so that credit risk models 
can be candidly assessed.\166\ Generally, the Commission considers that 
a person is free from influence when that person does not perform 
functions associated with the clearing agency's models (except as part 
of the annual model validation) and does not report to a person who 
performs these functions. The Commission generally would not expect 
that it would be necessary for policies and procedures adopted pursuant 
to this proposed requirement to require the clearing agency to separate 
organizationally model review from model development or to maintain two 
separate quantitative teams.
---------------------------------------------------------------------------

    \165\ See proposed Rule 17Ad-22(a)(5), infra Part VII.
    \166\ See Clearing Agency Standards Release, supra note 5, at 
66238.
---------------------------------------------------------------------------

    The proposed rule differs from the existing requirement for 
security-based swap clearing agencies in Rule 17Ad-22(b)(4) by defining 
in explicit terms the requirements for a conforming model validation 
and by requiring it for credit risk models.\167\ The proposed rule 
would also apply to any covered clearing agency, and not only security-
based swap clearing agencies. The Commission preliminarily believes, 
because credit risk models play an important role in limiting systemic 
risk, that it is important to create a consistent, clear, and uniformly 
applied minimum standard for model validation across all covered 
clearing agencies.\168\ The Commission also preliminarily believes that 
annual conforming model validation would provide unbiased feedback on 
the performance of such models and policies, and therefore could 
improve their reliability.
---------------------------------------------------------------------------

    \167\ Rule 17Ad-22(b)(4) requires a security-based swap clearing 
agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide for an annual 
model validation consisting of evaluating the performance of the 
clearing agency's margin models and the related parameters and 
assumptions associated with such models by a qualified person who is 
free from influence from the persons responsible for the development 
or operation of the models being validated. See 17 CFR 240.17Ad-
22(b)(4); see also Clearing Agency Standards Release, supra note 5, 
at 66236-238.
     In contrast to proposed Rules 17Ad-22(a)(5) and (e)(4)(vii), 
Rule 17Ad-22(b)(4) requires only a model validation for margin 
models and does not specify the general elements of a model 
validation.
    \168\ See generally Clearing Agency Standards Release, supra 
note 5, at 66238.

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[[Page 29528]]

d. Proposed Rule 17Ad-22(e)(5): Collateral
    Proposed Rule 17Ad-22(e)(5) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to limit the assets it accepts as 
collateral to those with low credit, liquidity, and market risks, and 
also require policies that set and enforce appropriately conservative 
haircuts and concentration limits if the covered clearing agency 
requires collateral to manage its own or its participants' credit 
exposures.\169\ The proposed rule includes requirements similar to 
those applicable to registered clearing agencies under Rule 17Ad-
22(d)(3) but would, in addition, require a covered clearing agency's 
policies and procedures to set and enforce appropriately conservative 
haircuts and concentration limits if the covered clearing agency 
requires collateral to manage its own or its participants' credit 
exposures.\170\
---------------------------------------------------------------------------

    \169\ See proposed Rule 17Ad-22(e)(5), infra Part VII.
    \170\ Registered clearing agencies are currently subject to 
requirements under Rule 17Ad-22(d)(3), which requires registered 
clearing agencies to hold assets in a manner that minimizes risk of 
loss or risk of delay in access to them and invest assets in 
instruments with minimal credit, market, and liquidity risk. See 17 
CFR 240.17Ad-22(d)(3); see also Clearing Agency Standards Release, 
supra note 5, at 66247-48; infra Part II.B.13 (discussing proposed 
Rule 17Ad-22(e)(16)).
     Similarly, the Commission preliminarily believes that 
appropriately conservative haircuts and concentration limits would 
require a covered clearing agency to value assets in a manner that 
minimizes risk of loss or risk of delay in access to them.
---------------------------------------------------------------------------

    The Commission is proposing Rule 17Ad-22(e)(5) to require policies 
and procedures with respect to specific practices to be followed by a 
covered clearing agency when managing collateral to ensure the 
safeguarding of funds, consistent with the requirements under the 
Exchange Act discussed above.\171\ In doing so, proposed Rule 17Ad-
22(e)(5) would promote confidence that covered clearing agencies are 
able to meet their settlement obligations by reducing the likelihood 
that assets securing participant obligations to the covered clearing 
agency would be unavailable or insufficient when the covered clearing 
agency needs to draw on them. Specifically, such requirements recognize 
the role played by system-wide asset price deterioration in generating 
systemic risk and the vulnerability a covered clearing agency could 
face if posted collateral were concentrated in assets that subsequently 
experience such deterioration in price.\172\ The Commission 
preliminarily believes the proposed rule is appropriate given the risks 
that its size, operation, and importance pose to the U.S. securities 
markets, thereby promoting stability in the national system for 
clearance and settlement by increasing the likelihood collateral 
holdings will function as designed when faced with stressed market 
conditions.
---------------------------------------------------------------------------

    \171\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
    \172\ See, e.g., Mark Roe, Clearinghouse Overconfidence (Aug. 
11, 2013), available at http://ssrn.com/abstract=2224305 (discussing 
the risks posed to clearing agencies by asset price deterioration).
---------------------------------------------------------------------------

    In addition, the Commission is proposing that a covered clearing 
agency establish, implement, maintain and enforce written policies and 
procedures reasonably designed to include a not-less-than-annual review 
of the sufficiency of a covered clearing agency's collateral haircuts 
and concentration limits.\173\ Rule 17Ad-22(d) does not impose a 
similar requirement on registered clearing agencies. The Commission 
preliminarily believes that the proposed approach is appropriate 
because of the importance of collateral haircuts and concentration 
limits to a covered clearing agency's risk management policies and 
procedures. Because of the role collateral plays in a default, a 
covered clearing agency needs assurance of its value in the event of 
liquidation, as well as the capacity to draw upon that collateral 
promptly. The Commission preliminarily believes, given the risks that a 
covered clearing agency's size, operation, and importance pose to the 
U.S. securities markets, that it is important to require policies and 
procedures for a not-less-than-annual review of the sufficiency of its 
collateral haircuts and concentration limits.\174\
---------------------------------------------------------------------------

    \173\ See proposed Rule 17Ad-22(e)(5), infra Part VII.
    \174\ See supra Part II.A.3 (discussing the Commission's 
rationale for imposing varying frequencies of review under certain 
policies and procedures requirements of the proposed rules).
---------------------------------------------------------------------------

e. Proposed Rule 17Ad-22(e)(6): Margin
    Generally, proposed Rule 17Ad-22(e)(6) would require a covered 
clearing agency that provides CCP services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to cover its credit exposures to its participants by 
establishing a risk-based margin system that is monitored by management 
on an ongoing basis and regularly reviewed, tested, and verified.\175\
---------------------------------------------------------------------------

    \175\ See proposed Rule 17Ad-22(e)(6), infra Part VII.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(2) currently requires registered clearing agencies 
that provide CCP services to use risk-based models and parameters to 
set margin requirements, and to review such margin requirements and the 
risk-based models and parameters at least monthly,\176\ and the 
proposed rule would impose substantially the same requirements.\177\ 
Rule 17Ad-22(b)(4) also currently requires a registered clearing agency 
that provides CCP services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to provide 
for an annual model validation consisting of evaluating the performance 
of the clearing agency's margin models and the related parameters and 
assumptions associated with such models by a qualified person who is 
free from influence from the persons responsible for the development or 
operation of the models being validated.
---------------------------------------------------------------------------

    \176\ See 17 CFR 240.17Ad-22(b)(2).
    \177\ Similar to Rule 17Ad-22(b)(2), proposed Rule 17Ad-
22(e)(6)(vi) would require a covered clearing agency to conduct on 
at least a monthly basis a conforming sensitivity analysis of its 
margin resources and its parameters and assumptions for backtesting. 
See infra Parts II.B.4.e.vi and VII.
---------------------------------------------------------------------------

    The Commission notes that proposed Rule 17Ad-22(e)(6) is different 
from these existing requirements under Rule 17Ad-22, as discussed 
below. The proposed requirements reflect more specific recognition by 
the Commission of the importance margin plays in risk management by 
covered clearing agencies. The Commission preliminarily believes that 
these requirements for a covered clearing agency to periodically verify 
and modify margin requirements in light of changing market conditions 
would be appropriate to mitigate the risks posed by a covered clearing 
agency to financial markets in periods of financial stress considering 
the risks that its size, operation, and importance pose to the U.S. 
securities markets.
i. Active Management of Model Risk
    Proposed Rule 17Ad-22(e)(6)(i) would require a covered clearing 
agency that provides CCP services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to result 
in a margin system that at a minimum considers, and produces margin 
levels commensurate with, the risks and particular attributes of each 
relevant product, portfolio, and market.\178\ The complexity and 
product risk

[[Page 29529]]

characteristics of the cleared product and underlying instrument can 
influence the margin requirements necessary to manage the credit 
exposures posed by a covered clearing agency's participants. 
Additionally, the volume of trading may also influence the margin 
requirements necessary to manage the credit exposures proposed by a 
covered clearing agency's participants. The Commission preliminarily 
believes that expressly requiring policies and procedures regarding the 
active management of a covered clearing agency's margin system to 
account for those factors and differences would help ensure the 
effectiveness of a covered clearing agency's risk management practices.
---------------------------------------------------------------------------

    \178\ See proposed Rule 17Ad-22(e)(6)(i), infra Part VII.
---------------------------------------------------------------------------

ii. Collection of Margin
    Proposed Rule 17Ad-22(e)(6)(ii) would require a covered clearing 
agency that provides CCP services to establish implement, maintain and 
enforce written policies and procedures reasonably designed to ensure 
that the margin system would mark participant positions to market and 
collect margin, including variation margin or equivalent charges if 
relevant, at least daily, and include the authority and operational 
capacity to make intraday margin calls in defined circumstances.\179\ 
The Commission preliminarily believes that marking each participant's 
outstanding positions to current market prices is an important feature 
of an effective margin system because adverse price movements can 
rapidly increase a covered clearing agency's exposures to its 
participants. Rule 17Ad-22(b)(2) requires registered clearing agencies 
that provide CCP services to calculate margin requirements daily. The 
Commission preliminarily believes that requiring a covered clearing 
agency to have the authority and operational capacity to make intraday 
margin calls in defined circumstances will benefit covered clearing 
agencies by covering settlement risk created by intraday price 
movements. By being more specific with respect to its expectations for 
collecting sufficient margin and having other liquid resources at its 
disposal, the Commission expects that a covered clearing agency will be 
better able to organize its practices accordingly, to limit its 
exposures to potential losses from defaults by clearing members in 
normal market conditions considering the risks that its size, 
operation, and importance pose to the U.S. securities markets.\180\
---------------------------------------------------------------------------

    \179\ See proposed Rule 17Ad-22(e)(6)(ii), infra Part VII.
    \180\ See Clearing Agency Standards Release, supra note 5, at 
66231.
---------------------------------------------------------------------------

iii. Ninety-Nine Percent Confidence Level
    Proposed Rule 17Ad-22(e)(6)(iii) would require a covered clearing 
agency that provides CCP services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to 
calculate margin sufficient to cover its potential future exposure to 
participants in the interval between the last margin collection and the 
close out of positions following a participant default.\181\ The 
Commission is proposing to add Rule 17Ad-22(a)(14) to define 
``potential future exposure'' to mean the maximum exposure estimated to 
occur at a future point in time with an established single-tailed 
confidence level of at least 99% with respect to the estimated 
distribution of future exposure.\182\ The Commission preliminarily 
believes that a 99% confidence level is an appropriately conservative 
setting that is also consistent with the international standard for 
bank capital requirements, which requires banks to measure market risks 
at a 99% confidence interval when determining regulatory capital 
requirements.\183\
---------------------------------------------------------------------------

    \181\ See proposed Rule 17Ad-22(e)(6)(iii), infra Part VII.
    \182\ See proposed Rule 17Ad-22(a)(14), infra Part VII.
    \183\ See Clearing Agency Standards Release, supra note 5, at 
66226 (describing the history of usage for a 99% confidence 
interval). A 99% confidence level would represent one day of actual 
trading losses that exceeded the results predicted by the model (as 
revealed by backtesting) for every 100 days that trading occurred. 
See id. Requiring a covered clearing agency to have policies and 
procedures with a higher or lower confidence level than that 
currently used by its clearing members could potentially create 
incentives or disincentives for clearing members to clear based on 
the statistical confidence level alone.
---------------------------------------------------------------------------

    The Commission preliminarily believes that, rather than establish 
specific criteria in advance, it is more appropriate to address 
liquidation periods separately with respect to each covered clearing 
agency through the Commission's supervisory process under Sections 17A 
and 19 of the Exchange Act,\184\ so that the length of the liquidation 
period can be appropriately tailored to the characteristics of the 
products cleared by the covered clearing agency as financial markets 
evolve.
---------------------------------------------------------------------------

    \184\ See supra Part I.A (discussing the regulatory framework 
under Section 17A of the Exchange Act); supra note 96 (describing 
the requirements in Section 19(b) of the Exchange Act).
---------------------------------------------------------------------------

iv. Price Data Source
    Proposed Rule 17Ad-22(e)(6)(iv) would require a covered clearing 
agency that provides CCP services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to ensure 
that it uses reliable sources of timely price data and procedures and 
sound valuation models for addressing circumstances in which pricing 
data are not readily available or reliable.\185\ The Commission 
preliminarily believes that a covered clearing agency should use 
reliable sources of timely price data because its margin system needs 
such data to operate with a high degree of accuracy and reliability, 
given the risks that the covered clearing agency's size, operation, and 
importance pose to the U.S. securities markets.\186\ Based on its 
supervisory experience, the Commission preliminarily believes that 
reliable data sources may include the following features, among other 
things: (i) Provision of data by the data source that is accurate, 
complete, and timely; (ii) capability of the data source to provide 
broad data sets to the covered clearing agency; and (iii) limited need 
for manual intervention by the clearing agency. In some situations, 
price data may not be available or reliable, such as in instances where 
third party data providers experience lapses in service or where 
limited liquidity otherwise makes price discovery difficult. 
Establishing appropriate procedures and sound valuation models is a 
useful step a covered clearing agency can take to help protect itself 
in such situations. The Commission preliminarily believes, in selecting 
price data sources, a covered clearing agency should consider the 
likelihood of the data being provided under a variety of market 
conditions and not select price data sources based on their cost alone.
---------------------------------------------------------------------------

    \185\ See proposed Rule 17Ad-22(e)(6)(iv), infra Part VII.
    \186\ Cf. PFMI Report, supra note 1, at 51 (discussing Principle 
6, margin).
---------------------------------------------------------------------------

v. Method for Measuring Credit Exposure
    Proposed Rule 17Ad-22(e)(6)(v) would require a covered clearing 
agency that provides CCP services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to ensure 
the use of an appropriate method for measuring credit exposure that 
accounts for relevant product risk factors and portfolio effects across 
products. Measuring such portfolio effects means a covered clearing 
agency may take into account certain netting procedures or

[[Page 29530]]

offsets through which credit exposure may be reduced in measuring 
credit exposure, including the use of portfolio margining procedures 
across products where applicable.\187\ The Commission preliminarily 
believes that this proposed requirement that covered clearing agencies 
contemplate both product level and portfolio level effects when 
considering and measuring their credit exposure is appropriate, given 
that the method for measuring credit exposure will determine the 
accuracy of a covered clearing agency's measurements in practice.
---------------------------------------------------------------------------

    \187\ See proposed Rule 17Ad-22(e)(6)(v), infra Part VII.
---------------------------------------------------------------------------

vi. Backtesting and Sensitivity Analysis
    Under proposed Rule 17Ad-22(e)(6)(vi), in addition to the 
requirement discussed above in relation to monitoring by management on 
an ongoing basis, a covered clearing agency that provides CCP services 
would be required to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to regularly review, test, 
and verify its risk-based margin system by conducting backtests at 
least once each day and conducting a conforming sensitivity analysis of 
its margin resources and its parameters and assumptions for backtesting 
at least monthly, and consider modifications to ensure the backtesting 
practices are appropriate for determining the adequacy of its margin 
resources.\188\ The Commission preliminarily believes that, since 
margin positions must be calculated at least daily, policies and 
procedures should also provide for daily backtesting. The Commission 
preliminarily believes that requiring, on at least a monthly basis, a 
conforming sensitivity analysis of margin resources and parameters and 
assumptions for backtesting would appropriately balance cost concerns 
with the interest of assuring that risk margin methodologies continue 
to reflect current conditions. The Commission notes that, based on its 
supervisory experience, risk management committees of the board and 
similar management committees of registered clearing agencies commonly 
meet on a monthly basis, and therefore the proposed requirement of a 
monthly sensitivity analysis would be consistent with such meeting 
frequency.
---------------------------------------------------------------------------

    \188\ See proposed Rule 17Ad-22(e)(6)(vi), infra Part VII.
---------------------------------------------------------------------------

    Backtesting is a technique used to compare the potential losses 
forecasted by a model with the actual losses that participants 
incurred, and is intended to reveal the accuracy of models. 
Misspecified or miscalibrated models may lead to errors in decision 
making. The Commission is proposing to require policies and procedures 
that provide for backtesting the margin models used by covered clearing 
agencies to help uncover and address possible errors in model design, 
misapplication of models, or errors in the inputs to, and assumptions 
underlying, margin models. The Commission is also proposing to add Rule 
17Ad-22(a)(1) to define ``backtesting'' to mean an ex-post comparison 
of actual outcomes with expected outcomes derived from the use of 
margin models.\189\ Additionally, the Commission is proposing to add 
Rule 17Ad-22(a)(17) to define ``sensitivity analysis'' to mean an 
analysis that involves analyzing the sensitivity of a model to its 
assumptions, parameters, and inputs.\190\ The Commission preliminarily 
understands that these terms and definitions are commonly accepted 
among, and employed by, market participants.\191\
---------------------------------------------------------------------------

    \189\ See proposed Rule 17Ad-22(a)(1), infra Part VII.
    \190\ See proposed Rule 17Ad-22(a)(17), infra Part VII.
    \191\ See, e.g., Alexander J. McNeil, R[uuml]diger Frey & Paul 
Embrechts, Quantitative Risk Management: Concepts, Techniques, and 
Tools, at 35 (Princeton Univ. Press, 2005) (defining ``factor-
sensitivity measures'' as a change in portfolio value given a 
predetermined change in one of the underlying risk factors).
---------------------------------------------------------------------------

    The Commission is also proposing to add Rule 17Ad-22(a)(6) to 
define ``conforming sensitivity analysis'' to mean a sensitivity 
analysis that considers the impact on the model of both moderate and 
extreme changes in a wide range of inputs, parameters, and assumptions, 
including correlations of price movements or returns if relevant, which 
reflect a variety of historical and hypothetical market conditions and 
actual and hypothetical portfolios of proprietary positions and, where 
applicable, customer positions. The Commission notes that ``sensitivity 
analysis'' is a commonly understood term among industry 
participants,\192\ and the Commission intends for the proposed 
definition to ensure that the specified minimum requirements are met in 
performing sensitivity analyses. Under the proposed definition, a 
conforming sensitivity analysis, when performed by or on behalf of a 
covered clearing agency involved in activities with a more complex risk 
profile, would consider the most volatile relevant periods, where 
practical, that have been experienced by the markets served by the 
clearing agency. Under the proposed definition, a conforming 
sensitivity analysis would also test the sensitivity of the model to 
stressed market conditions, including the market conditions that may 
ensue after the default of a member and other extreme but plausible 
conditions as defined in a covered clearing agency's risk 
policies.\193\
---------------------------------------------------------------------------

    \192\ See id.
    \193\ See proposed Rule 17Ad-22(a)(6), infra Part VII.
---------------------------------------------------------------------------

    Under proposed Rule 17Ad-22(e)(6)(vi), the policies and procedures 
for model review, testing, and verification requirements would include 
policies and procedures for conducting a conforming sensitivity 
analysis more frequently than monthly when the products cleared or 
markets served display high volatility, become less liquid, or when the 
size or concentration of positions held by participants increases or 
decreases significantly.\194\ The proposed rule would also require a 
covered clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to report the 
results of such conforming sensitivity analysis to appropriate decision 
makers at the covered clearing agency, including its risk management 
committee or board of directors, and use these results to evaluate the 
adequacy of and adjust its margin methodology, model parameters, and 
any other relevant aspects of its credit risk management policies and 
procedures. The Commission preliminary believes that the requirement to 
report to appropriate decision makers at the covered clearing agency, 
including its risk management committee or board of directors, is 
important to ensure that such risk management requirements and 
compliance therewith are addressed at the most senior levels of the 
governance framework of the covered clearing agency, commensurate with 
the importance of said requirements.
---------------------------------------------------------------------------

    \194\ See proposed Rule 17Ad-22(e)(6)(vi), infra Part VII.
---------------------------------------------------------------------------

    By proposing the requirement for conducting a conforming 
sensitivity analysis, the Commission expects that feedback generated by 
these analyses would improve the performance of risk-based margin 
systems used by covered clearing agencies and therefore better ensure 
the safe functioning of covered clearing agencies. Additionally, the 
Commission preliminarily believes that conforming sensitivity analysis 
may help a covered clearing agency discover and address shortcomings in 
its margin models that would not otherwise be revealed through 
backtesting and is accordingly appropriate given the risks

[[Page 29531]]

that its size, operation, and importance pose to the U.S. securities 
markets.\195\
---------------------------------------------------------------------------

    \195\ Cf. PFMI Report, supra note 1, at 56 (discussing Principle 
6, margin).
---------------------------------------------------------------------------

vii. Annual Conforming Model Validation
    Rule 17Ad-22(b)(4) currently requires a registered clearing agency 
that provides CCP services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to provide 
for an annual model validation consisting of evaluating the performance 
of the clearing agency's margin models and the related parameters and 
assumptions associated with such models by a qualified person who is 
free from influence from the persons responsible for the development or 
operation of the models being validated. Under proposed Rule 17Ad-
22(e)(6)(vii), a covered clearing agency that provides CCP services 
would be required to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to require not less than 
annually a conforming model validation of the covered clearing agency's 
margin system and related models.\196\ As previously discussed, the 
model validation would be required to include initial margin models, 
liquidity risk models, and models used to generate clearing or guaranty 
fund requirements. Also, for a model validation to be considered a 
conforming model validation under the proposed rule, it would have to 
be performed by a qualified person who is free from influence from the 
persons responsible for the development or operation of the models or 
policies being validated.\197\
---------------------------------------------------------------------------

    \196\ See proposed Rule 17Ad-22(e)(6)(vii), infra Part VII; see 
also supra Part II.B.4.c.iv and infra Part VII (defining 
``conforming model validation'' under proposed Rule 17Ad-22(a)(5) 
and providing the definition text, respectively).
    \197\ See supra Part II.B.4.c.iv (describing a person who is 
free from influence in the context of the policy and procedure 
requirement for an annual conforming model validation addressing 
credit risk).
---------------------------------------------------------------------------

    The Commission preliminarily believes the proposed approach of 
requiring policies and procedures that subject a covered clearing 
agency's models to review by such parties would be relevant to ensuring 
the safe operation of covered clearing agencies and will help to ensure 
that covered clearing agencies have the opportunity to benefit from the 
views of a qualified person free from influence and incorporate 
alternative risk management methodologies into their models as 
appropriate. The Commission preliminarily believes this is important 
for covered clearing agencies given the risks that a covered clearing 
agency's size, operation, and importance pose to the U.S. securities 
markets.
f. Proposed Rule 17Ad-22(e)(7): Liquidity Risk
    Proposed Rule 17Ad-22(e)(7) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively measure, monitor, and 
manage the liquidity risk that arises in or is borne by it, by meeting, 
at a minimum, the ten requirements specified below.\198\
---------------------------------------------------------------------------

    \198\ See proposed Rule 17Ad-22(e)(7), infra Part VII; see also 
infra Parts II.B.4.f.i-x.
---------------------------------------------------------------------------

    Liquidity risk describes the risk that an entity will be unable to 
meet financial obligations on time due to an inability to deliver funds 
or securities in the form required though it may possess sufficient 
financial resources in other forms. Although Rule 17Ad-22(d)(11) 
currently requires, among other things, that a registered clearing 
agency establish, implement, maintain and enforce written policies and 
procedures reasonably designed to take timely action to contain 
liquidity pressures and to continue to meet obligations in the event of 
a participant default, the Commission does not currently have 
requirements for policies and procedures of registered clearing 
agencies regarding the management of liquidity risk with the level of 
specificity proposed in Rule 17Ad-22(e)(7). Given the risks that a 
covered clearing agency's size, operation, and importance pose to the 
U.S. securities markets, the proposed requirements would require a 
covered clearing agency to maintain sufficient liquidity resources to 
ensure they are prepared to meet their payment obligations in order to 
facilitate the prompt and accurate clearance and settlement of 
securities transactions.
i. Sufficient Liquid Resources
    Proposed Rule 17Ad-22(e)(7)(i) would require that a covered 
clearing agency's policies and procedures be reasonably designed to 
ensure that it maintains sufficient liquid resources in all relevant 
currencies to effect same-day and, where appropriate, intraday and 
multiday settlement of payment obligations with a high degree of 
confidence under a wide range of potential stress scenarios that 
includes the default of the participant family that would generate the 
largest aggregate payment obligation for it in extreme but plausible 
market conditions. As noted above, maintaining sufficient liquidity 
resources helps ensure that a covered clearing agency is prepared to 
meet its payment obligations in order to facilitate the prompt and 
accurate clearance and settlement of securities transactions
ii. Qualifying Liquid Resources
    Proposed Rule 17Ad-22(e)(7)(ii) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to ensure it holds qualifying liquid 
resources sufficient to meet the minimum liquidity resource requirement 
in each relevant currency for which the covered clearing agency has 
payment obligations owed to clearing members.\199\ The Commission is 
also proposing to add Rule 17Ad-22(a)(15) to define ``qualifying liquid 
resources.'' \200\ For any covered clearing agency, in each relevant 
currency, qualifying liquid resources would include three types of 
assets:
---------------------------------------------------------------------------

    \199\ See proposed Rule 17Ad-22(e)(7)(ii), infra Part VII. In 
other words, if payment obligations were denominated in U.S. 
dollars, the minimum liquidity resource requirement would refer to a 
U.S. dollar amount.
    \200\ See proposed Rule 17Ad-22(a)(15), infra Part VII.
---------------------------------------------------------------------------

     Cash held either at the central bank of issue or at 
creditworthy commercial banks; \201\
---------------------------------------------------------------------------

    \201\ The Commission preliminarily believes that the 
creditworthiness of commercial banks should be considered by a 
covered clearing agency after considering its particular 
circumstances and those of its members and the markets which it 
services. Accordingly, in complying with the requirements of 
proposed Rule 17Ad-22(e)(7) and proposed Rule 17Ad-22(a)(15), a 
covered clearing agency's policies and procedures for determining 
whether a commercial bank is creditworthy may reflect such 
circumstances.
---------------------------------------------------------------------------

     assets that are readily available and convertible into 
cash through either:
    [cir] Prearranged funding arrangements without material adverse 
change limitations, such as committed lines of credit, foreign exchange 
swaps, and repurchase agreements, or
    [cir] other prearranged funding arrangements determined to be 
highly reliable even in extreme but plausible market conditions by the 
board of directors of the covered clearing agency following a review 
conducted for this purpose not less than annually; and
     other assets that are readily available and eligible for 
pledging to (or conducting other appropriate forms of transactions 
with) a relevant central bank, if the covered clearing agency has 
access to routine credit at such central bank.\202\
---------------------------------------------------------------------------

    \202\ See id. The Commission notes that such access to routine 
credit at a relevant central bank and the collateral required by 
such central bank to be posted to secure a loan may be determined at 
the discretion of the central bank, and accordingly the practical 
application of the definition of qualifying liquid resources would 
be subject to variation based on those decisions. The Commission 
preliminarily believes that inclusion of assets eligible for 
pledging to any central bank, as opposed to only to a Federal 
Reserve Bank, is appropriate because, in practice, a covered 
clearing agency may need access to liquid resources in currencies 
other than U.S. dollars.

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

[[Page 29532]]

    The Commission preliminarily believes that this requirement is 
appropriate, given the risks that its size, operation, and importance 
pose to the U.S. securities markets, and will help ensure that a 
covered clearing agency has sufficient liquid resources, as determined 
by stress testing, to effect settlement of payment obligations with a 
high degree of confidence under a wide range of potential stress 
scenarios.\203\ Furthermore, the Commission preliminarily believes this 
requirement is appropriate given the specific circumstances of the U.S. 
securities markets. U.S. securities markets are among the largest and 
most liquid in the world, and CCPs operating in the United States are 
also among the largest in the world.\204\ The resulting peak liquidity 
demands of CCPs are therefore proportionately large on both an 
individual and an aggregate basis, and the ability of CCPs to satisfy a 
requirement limiting qualifying liquid resources to committed 
facilities could be constrained by the capacity of traditional 
liquidity sources in the U.S. banking sector in certain circumstances. 
Therefore, the Commission is proposing to include in the definition of 
qualifying liquid resources other prearranged funding arrangements 
determined to be highly reliable even in extreme but plausible market 
conditions.
---------------------------------------------------------------------------

    \203\ Cf. PFMI Report, supra note 1, at 60 (discussing Principle 
7, liquidity risk).
    \204\ See infra notes 561-562 and accompanying text (discussing 
the volume of transactions processed by U.S. clearing agencies).
---------------------------------------------------------------------------

    For similar reasons, the Commission preliminarily believes it is 
appropriate to include in the definition of qualifying liquid resources 
assets that a central bank would permit a covered clearing agency to 
use as collateral, to the extent such covered clearing agency has 
access to routine credit at such central bank.\205\ The Commission 
preliminarily notes that, although covered clearing agencies do not 
currently have access to routine credit at Federal Reserve Banks, 
potential registrants that could be determined to be covered clearing 
agencies in the future may be operating in a jurisdiction where access 
to routine credit is provided to the potential registrant by that 
jurisdiction's central bank.\206\
---------------------------------------------------------------------------

    \205\ See ICMA Eur. Repo Council, The Interconnectivity of 
Central and Commercial Bank Money in the Clearing and Settlement of 
the European Repo Market, at 10-11 (Sept. 2011) (indicating that 
access to central bank credit is important and may cause banks to 
use either central bank settlement services or cash settlement 
banking services of a commercial bank, depending on availability of, 
and the terms of, central bank credit).
    \206\ See Peter Allsopp, Bruce Summers & John Veale, The 
Evolution of Real-Time Gross Settlement: Access, Liquidity and 
Credit, and Pricing, at 15 (World Bank, Feb. 2009) (indicating that 
CCPs in the Eurozone have access to central bank settlement account 
services and routine credit).
---------------------------------------------------------------------------

    With regard to assets convertible into cash, the Commission 
preliminarily notes that the mere ownership of assets that a covered 
clearing agency may consider readily available and also may consider 
readily convertible into cash, based on factors such as the historical 
volume of trading in a particular market for such asset, may not be 
sufficient alone to make the assets count towards qualifying liquid 
resources unless one of the above-referenced prearranged funding 
arrangements is in place under which the covered clearing agency would 
receive cash in a timely manner. The prearranged funding arrangements 
would be in place to cover any shortfall. The Commission, however, 
preliminarily considers committed funding arrangements to be reasonably 
capable of being established by covered clearing agencies in the 
relevant commercial lending markets and other funding arrangements to 
be reasonably capable of being assessed for reliability by the boards 
of directors of covered clearing agencies following consideration of 
the relevant circumstances, and therefore preliminarily believes the 
standard to be sufficiently clear to allow for it to be interpreted and 
applied in practice by covered clearing agencies. Further, the 
Commission preliminarily notes that, in complying with proposed Rule 
17Ad-22(e)(7), covered clearing agencies should consider the lower of 
the value of the assets capable of being pledged and the amount of the 
commitment (or the equivalent availability under a highly reliable 
prearranged facility) as the amount that counts towards qualifying 
liquid resources in the event there is any expected difference between 
the two.\207\ This may occur, for example, where the terms of the 
arrangement provide for over-collateralization or where the covered 
clearing agency lacks sufficient qualifying assets to make full use of 
an otherwise qualifying liquidity facility.
---------------------------------------------------------------------------

    \207\ The Commission notes that, based on the types of assets 
that may be considered qualifying liquid resources, for purposes of 
complying with proposed Rule 17Ad-22(e)(7)(ii), factors that may be 
relevant for a covered clearing agency to take into account include 
(i) the portion of its default fund that is held as cash, (ii) the 
portion of its default fund that is held as securities, (iii) the 
portion of any excess default fund contributions held as cash that 
could be used by the covered clearing agency to meet liquidity 
needs, (iv) the portion of any excess default fund contributions 
held as securities that could be used by the covered clearing agency 
to meet liquidity needs, (v) the amount at any given time of 
securities or cash delivered by members that a covered clearing 
agency may be able to use to meet liquidity needs upon the default 
of a member, and (vi) the borrowing limits under any committed 
funding arrangement.
---------------------------------------------------------------------------

    In defining the proposed requirements for qualifying liquid 
resources, the Commission preliminarily believes that it would be 
appropriate to provide covered clearing agencies with the flexibility 
to use highly reliable funding arrangements in addition to committed 
arrangements for purposes of using assets other than cash to meet the 
proposed requirements of Rule 17Ad-22(e)(7).\208\ The Commission 
preliminarily believes that limiting the funding arrangements that are 
included within the definition of qualifying liquid resources to 
committed funding arrangements may not be necessary or appropriate in 
determining liquidity requirements for a covered clearing agency 
operating in the U.S. securities markets and expanding the concept of 
qualifying liquid resources to include other highly reliable funding 
arrangements is necessary and appropriate to ensure the proper 
functioning of covered clearing agencies as required by the Exchange 
Act.
---------------------------------------------------------------------------

    \208\ Cf. PFMI Report, supra note 1, at 57 (discussing Principle 
7, liquidity risk, at Key Consideration 5).
---------------------------------------------------------------------------

    For similar reasons, the Commission preliminarily believes it is 
appropriate to include in the definition of qualifying liquid resources 
assets that a central bank would permit a covered clearing agency to 
use as collateral.\209\ The Commission notes that, although routine 
discount window borrowing at a Federal Reserve Bank is currently not 
available to covered clearing agencies, this provision will provide 
covered clearing agencies with additional flexibility in meeting the 
liquidity requirements of proposed Rule 17Ad-22(e)(7), should routine 
credit at a Federal Reserve Bank become available in the future.\210\
---------------------------------------------------------------------------

    \209\ The Commission also preliminarily notes that the term 
``central bank'' in the proposed definition of ``qualifying liquid 
resources'' is not limited to a Federal Reserve Bank, and 
accordingly covered clearing agencies based in or operating outside 
of the United States that have access to routine credit at other 
central banks would be able to take that into consideration when 
assessing the amount of their qualifying liquid resources.
    \210\ See infra Part IV.C.3.a.iv(4) (discussing the relative 
cost of central bank credit). Section 806(b) of the Clearing 
Supervision Act states that the Board may authorize a Federal 
Reserve Bank to provide to a designated FMU discount and borrowing 
privileges only in unusual and exigent circumstances, subject to 
certain conditions. See 12 U.S.C. 5465(b).

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[[Page 29533]]

iii. Access to Account Services at a Federal Reserve Bank or Other 
Relevant Central Bank
    Proposed Rule 17Ad-22(e)(7)(iii) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to ensure it uses accounts and 
services at a Federal Reserve Bank, pursuant to Section 806(a) of the 
Clearing Supervision Act,\211\ or other relevant central bank, when 
available and where determined to be practical by the board of 
directors of the covered clearing agency, in order to enhance its 
management of liquidity risk.\212\ The Commission notes that the 
proposed rule would not require using Federal Reserve Bank or other 
relevant central bank account services; it would only require a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to consider and determine 
when and in what circumstances it chooses to do so, when the services 
are available and when considered to be practical. The Commission 
preliminarily believes that covered clearing agencies should be 
encouraged to actively consider using Federal Reserve Bank or other 
central bank accounts and services, as this is a valuable new tool made 
available under the Clearing Supervision Act.\213\ The Commission 
preliminarily believes, however, that it should also permit the use of 
commercial banks by covered clearing agencies holding cash as 
collateral or for other services related to clearance and settlement 
activity, even when comparable services are available from a central 
bank.
---------------------------------------------------------------------------

    \211\ See 12 U.S.C. 5465(a).
    \212\ See proposed Rule 17Ad-22(e)(7)(iii), infra Part VII.
    \213\ See Clearing Agency Standards Release, supra note 5, at 
66268-69 & n.535.
---------------------------------------------------------------------------

iv. Liquidity Providers
    Proposed Rule 17Ad-22(e)(7)(iv) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to ensure it undertakes due 
diligence to confirm that it has a reasonable basis to believe each of 
its liquidity providers, whether or not such liquidity provider is a 
clearing member, has sufficient information to understand and manage 
the liquidity provider's liquidity risks, and the capacity to perform 
as required under its commitments to provide liquidity.\214\
---------------------------------------------------------------------------

    \214\ See proposed Rule 17Ad-22(e)(7)(iv), infra Part VII.
---------------------------------------------------------------------------

    The Commission preliminarily intends for the term ``due diligence'' 
to have the same meaning as what this term is commonly understood to 
mean by market participants. Consequently, in order to comply with the 
requirements of proposed Rule 17Ad-22(e)(7) and to form a reasonable 
basis regarding a liquidity provider's understanding and management of 
liquidity risks and operational capacity, the Commission expects a 
covered clearing agency would ordinarily not rely on representations of 
the liquidity provider to this effect and instead conduct its own 
investigation into the liquidity provider's business. A covered 
clearing agency should consider implementing due diligence procedures 
that provide a sufficient basis for its belief, given its business and 
the nature of its liquidity providers. Procedures for purposes of 
forming a reasonable basis could include, for example, interviewing the 
liquidity provider's staff and reviewing both public and non-public 
documents that would allow the covered clearing agency to gather 
information about relevant factors, including but not limited to the 
strength of the liquidity provider's financial condition, its risk 
management capabilities, and its internal controls.
    The Commission preliminarily believes that proposed Rule 17Ad-
22(e)(7)(iv) is appropriate because a covered clearing agency needs to 
soundly manage its relationships with liquidity providers given the 
risks posed to the U.S. securities markets by its size, operation, and 
importance. In addition, Proposed Rule 17Ad-22(e)(7)(iv) would 
reinforce proposed Rule 17Ad-22(e)(7)(ii) and the definition of 
qualifying liquid resources in proposed Rule 17Ad-22(a)(15), which 
contemplate potential reliance on liquidity providers where a covered 
clearing agency would seek to use assets other than cash for purposes 
of complying with proposed Rule 17Ad-22(e)(7)(ii) and would need to 
transact with a liquidity provider to convert such assets into cash. 
Should a committed or prearranged funding arrangement prove to be 
unreliable at the time a covered clearing agency needs to utilize it 
because of liquidity problems at the lender itself, this failure may 
trigger a liquidity problem at the covered clearing agency, which would 
raise systemic risk concerns for the U.S. securities markets. These 
types of problems at a liquidity provider, by indirectly affecting a 
covered clearing agency, could undermine the national system for the 
prompt and accurate clearance and settlement of securities 
transactions.
v. Maintenance and Annual Testing of Liquidity Provider Procedures and 
Operational Capacity
    Proposed Rule 17Ad-22(e)(7)(v) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to ensure that the covered clearing 
agency maintains and, on at least an annual basis,\215\ tests with each 
liquidity provider, to the extent practicable, its procedures and 
operational capacity for accessing each type of relevant liquidity 
resource.\216\
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    \215\ The Commission preliminary believes that an annual cycle 
is appropriate for the reasons described in Part II.A.3.
    \216\ See proposed Rule 17Ad-22(e)(7)(v), infra Part VII.
---------------------------------------------------------------------------

    In addition, proposed Rule 17Ad-22(e)(7)(v) would reinforce 
proposed Rule 17Ad-22(e)(7)(ii) and the definition of qualifying liquid 
resources in proposed Rule 17Ad-22(a)(15), which contemplate potential 
reliance on liquidity providers where a covered clearing agency would 
seek to use assets other than cash for purposes of complying with 
proposed Rule 17Ad-22(e)(7)(ii) and would need to transact with a 
liquidity provider to convert such assets into cash. If procedures or 
operational capacity for accessing liquidity under committed or 
prearranged funding arrangements fail to function as planned and in a 
timely manner, the covered clearing agency may fail to meet its payment 
obligation, which would raise systemic risk concerns for the U.S. 
markets and could undermine the national system for the prompt and 
accurate clearance and settlement of securities transactions. Proper 
preparation for a liquidity shortfall scenario could also promote 
members' confidence in the ability of a covered clearing agency to 
perform its obligations, which can mitigate the risk of contagion 
during stressed market conditions. The Commission preliminarily 
believes this is important for covered clearing agencies given the 
risks that a covered clearing agency's size, operation, and importance 
pose to the U.S. securities markets.
    The Commission preliminarily believes that testing of access to 
liquidity resources could include efforts by a covered clearing agency 
to verify that a liquidity provider is able to provide the relevant 
liquidity resource in the manner intended under the terms of the 
funding arrangement and without

[[Page 29534]]

undue delay, such as, for example, promptly funding a draw on the 
covered clearing agency's credit facility. Testing procedures could 
include, for example, test draws funded by the liquidity provider or 
tests of electronic connectivity between the covered clearing agency 
and the liquidity provider. The Commission recognizes that testing with 
liquidity providers may not always be practicable in the absence of 
committed liquidity arrangements.
    The Commission preliminarily believes the proposed requirement that 
testing of a covered clearing agency's access to liquidity be conducted 
at least annually with each liquidity provider to be a reasonable step 
to ensure the objectives of the Exchange Act are achieved in practice. 
The Commission understands such tests are routinely performed currently 
by certain registered clearing agencies but are subject to variation 
due, in part, to the absence of a regulatory requirement and the 
incremental time and attention needed to conduct the tests. The 
Commission preliminarily anticipates the effect of the proposed rule 
will be to require the development of more uniform liquidity testing 
practices by covered clearing agencies, and has accordingly proposed to 
allow covered clearing agencies to assess the practicability of such 
testing to provide them with reasonable flexibility to design the tests 
to suit the circumstances of the covered clearing agency and its 
particular liquidity arrangements.
vi. Testing the Sufficiency of Liquid Resources
    Proposed Rule 17Ad-22(e)(7)(vi)(A) through (C) would require a 
covered clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to determine the 
amount and regularly test the sufficiency of the liquid resources held 
for purposes of meeting the minimum liquid resource requirement of 
proposed Rule 17Ad-22(e)(7)(i) by (A) conducting a stress test of its 
liquidity resources at least once each day using standard and 
predetermined parameters and assumptions; \217\ (B) conducting a 
comprehensive analysis of the existing stress testing scenarios, 
models, and underlying parameters and assumptions used in evaluating 
liquidity needs and resources, and considering modifications to ensure 
they are appropriate for determining the covered clearing agency's 
identified liquidity needs and resources in light of current and 
evolving market conditions at least once each month; \218\ and (C) 
conducting a comprehensive analysis of the existing stress testing 
scenarios, models, and underlying parameters and assumptions used in 
evaluating liquidity needs and resources more frequently when products 
cleared or markets served display high volatility or become less 
liquid, when the size or concentration of positions held by 
participants increases significantly, or in other circumstances 
described in the covered clearing agency's policies and 
procedures.\219\ Proposed Rule 17Ad-22(e)(7)(vi)(D) would also require 
a covered clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to result in 
reporting the results of the analyses performed under proposed Rule 
17Ad-22(e)(7)(vi)(B) and (C) to appropriate decision makers, including 
the risk management committee or board of directors, at the covered 
clearing agency for use in evaluating the adequacy of and adjusting its 
liquidity risk management framework.
---------------------------------------------------------------------------

    \217\ The Commission preliminary believes that a daily cycle is 
appropriate for the reasons described in Part II.A.3.
    \218\ The Commission preliminary believes that a monthly cycle 
is appropriate for the reasons described in Part II.A.3.
    \219\ See proposed Rule 17Ad-22(e)(7)(vi), infra Part VII.
---------------------------------------------------------------------------

    The Commission preliminarily believes that proposed Rules 17Ad-
22(e)(7)(vi)(A) through (D) would require a covered clearing agency to 
take reasonable steps to ensure the adequacy of liquid resources in 
practice. Given the risks that a covered clearing agency's size, 
operation, and importance pose to the U.S. securities markets, in 
addition to the potential consequences to the U.S. financial system of 
a failure of a covered clearing agency, the Commission preliminarily 
believes that requiring a covered clearing agency to devote additional 
time and attention to testing the sufficiency of its liquid resources, 
relative to a registered clearing agency generally, is appropriate. The 
Commission preliminarily believes that the requirements in proposed 
Rule 17Ad-22(e)(7)(vi) are appropriate for testing the sufficiency of 
liquid resources of covered clearing agencies because, in certain 
market conditions, such as periods of high volatility or diminished 
liquidity, existing stress scenarios, models, or underlying parameters 
may no longer be valid or appropriate. For example, covered clearing 
agencies may have adjusted their financial resources models following 
the 2008 financial crisis to account for larger debt, equity, and 
credit market shocks than would have been contemplated by those models 
prior to the crisis. Accordingly, the Commission preliminarily believes 
that specific policies and procedures specifying actions to be taken by 
covered clearing agencies to maintain sufficient liquid resources would 
contribute to the safe functioning of the covered clearing agency as 
required by the Exchange Act,\220\ and that requiring periodic feedback 
and analysis on the strength of liquidity risk management policies and 
procedures would improve the reliability of those policies and 
procedures. The Commission also preliminarily believes that covered 
clearing agencies should have the flexibility to use stress scenarios 
that are appropriately calibrated to the markets in which they operate 
and that they can be revised over time as those markets change. Proper 
preparation for a liquidity shortfall scenario could also promote a 
participant's confidence in the ability of a covered clearing agency to 
perform its obligations, which can mitigate the risk of undue 
disruption during stressed market conditions.
---------------------------------------------------------------------------

    \220\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
---------------------------------------------------------------------------

    One of the appropriate methods of preparation by a covered clearing 
agency would be, in the Commission's preliminary view, the testing of 
the sufficiency of liquidity that it might need under certain extreme 
but plausible parameters and assumptions. The Commission preliminarily 
believes that conducting stress testing of liquidity would allow a 
covered clearing agency to understand its level of resilience and 
adjust its operations accordingly to address areas of inadequacy. The 
Commission preliminarily believes that by testing under extreme but 
plausible scenarios, covered clearing agencies, and in particular those 
designated systemically important, would be better prepared in the 
event that equivalent or similar scenarios actually occurred.
vii. Annual Conforming Model Validation
    Proposed Rule 17Ad-22(e)(7)(vii) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to result in performing an annual or 
more frequent conforming model validation of its liquidity risk 
models.\221\
---------------------------------------------------------------------------

    \221\ See proposed Rules 17Ad-22(a)(5) and (e)(7)(vii), infra 
Part VII. The Commission notes that, in contrast to proposed Rules 
17Ad-22(a)(5) and (e)(7)(vii), Rule 17Ad-22(b)(4) requires only a 
model validation for margin models and does not specify the general 
elements of a model validation. See supra note 167 and accompanying 
text.
    In addition, the Commission preliminary believes that an annual 
cycle is appropriate for the reasons described in Part II.A.3.

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[[Page 29535]]

    The Commission preliminarily believes that such annual conforming 
model validation would provide feedback on the performance of such 
liquidity risk models conducted by a qualified person who is free from 
influence from the persons responsible for the development or operation 
of the liquidity risk model, as contemplated by the definition of 
``conforming model validation'' in proposed Rule 17Ad-22(a)(5), and 
incorporate alternative liquidity risk management methodologies into 
their models as appropriate. Generally, the Commission preliminarily 
considers that a person is free from influence when that person does 
not perform functions associated with the clearing agency's models 
(except as part of the annual model validation) and does not report to 
a person who performs these functions. Preliminarily, the Commission 
would not expect policies and procedures adopted pursuant to this 
proposed requirement to require the clearing agency to detach model 
review from model development or to maintain two separate quantitative 
teams. By reacting to such feedback, a covered clearing agency may 
improve the functioning of its liquidity risk model. The Commission 
notes that misspecified or miscalibrated liquidity risk models may lead 
to errors in decision making. The Commission preliminarily believes 
that the proposed rule is appropriate following consideration of the 
Exchange Act requirements discussed above \222\ and the risks that a 
covered clearing agency's size, operation, and importance pose to the 
U.S. securities markets.
---------------------------------------------------------------------------

    \222\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
---------------------------------------------------------------------------

viii. Address Liquidity Shortfalls and Seek To Avoid Unwinding 
Settlement
    Proposed Rule 17Ad-22(e)(7)(viii) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to address foreseeable liquidity 
shortfalls that would not be covered by its liquid resources and seek 
to avoid unwinding, revoking, or delaying the same-day settlement of 
payment obligations.\223\ The Commission preliminarily believes advance 
planning by a covered clearing agency with regard to liquidity 
shortfalls could further enhance the covered clearing agency's ability 
to perform its payment obligations without delay and therefore support 
the ability of the clearing agency's participants to function without 
disruption. Foreseeable liquidity shortfalls could include, for 
example, potential shortfalls that can be identified through testing a 
covered clearing agency's financial resources in a manner consistent 
with the policies and procedures requirements in proposed Rule 17Ad-
22(e)(7)(vi). The Commission recognizes that foreseeable liquidity 
shortfalls could occur even when a covered clearing agency is in 
compliance with the proposed requirements of Rule 17Ad-22(e)(7), such 
as when, for example, the covered clearing agency is unable to obtain 
liquidity pursuant to a prearranged funding arrangements that are 
uncommitted. The Commission preliminarily believes the proposed 
requirement is appropriate for covered clearing agencies given the 
risks that a covered clearing agency's size, operation, and importance 
pose to the U.S. securities markets and are consistent with the 
Exchange Act requirements discussed above.\224\
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    \223\ See proposed Rule 17Ad-22(e)(7)(viii), infra Part VII.
    \224\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
---------------------------------------------------------------------------

ix. Replenishment of Liquid Resources
    Proposed Rule 17Ad-22(e)(7)(ix) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to describe its process for 
replenishing any liquid resources that it may employ during a stress 
event.\225\ The Commission preliminarily believes a covered clearing 
agency should specifically contemplate and memorialize its expectations 
for replenishing its financial resources when they are depleted so that 
its ability to withstand repeated stress events, such as multiple 
market shocks or sequential defaults of multiple participants is 
clearly understood and reflected in its planning for such events. The 
Commission preliminarily believes that the proposed requirement is 
appropriate given the risks that a covered clearing agency's size, 
operation, and importance pose to the U.S. securities markets and is 
consistent with the Exchange Act requirements discussed above.\226\
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    \225\ See proposed Rule 17Ad-22(e)(7)(ix), infra Part VII.
    \226\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
---------------------------------------------------------------------------

x. Feasibility Analysis for ``Cover Two''
    Proposed Rule 17Ad-22(e)(7)(x) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to ensure it, at least once a year, 
evaluates the feasibility of maintaining sufficient liquid resources at 
a minimum in all relevant currencies to effect same-day and, where 
appropriate, intraday and multiday settlement of payment obligations 
with a high degree of confidence under a wide range of foreseeable 
stress scenarios that includes, but is not limited to, the default of 
the two participant families that would potentially cause the largest 
aggregate credit exposure for the covered clearing agency in extreme 
but plausible market conditions if the covered clearing agency provides 
CCP services and is either systemically important in multiple 
jurisdictions or a clearing agency involved in activities with a more 
complex risk profile.\227\
---------------------------------------------------------------------------

    \227\ See proposed Rule 17Ad-22(e)(7)(x), infra Part VII.
---------------------------------------------------------------------------

    Rule 17Ad-22 does not currently provide specific requirements 
regarding the sizing and testing of liquid resources or what types of 
financial resources would qualify as liquid. However, the financial 
crisis of 2008 demonstrated the plausibility of the default of two 
large participants in a clearing agency over a brief period.\228\ 
Accordingly, the Commission preliminarily believes that its proposed 
approach is appropriate, given the need for more stringent financial 
resource requirements for a covered clearing agency due to the risks 
that its size, operation, and importance pose to the U.S. securities 
markets, and is consistent with the Exchange Act requirements discussed 
above.\229\ The Commission also believes that such financial resources 
must be robust enough to accommodate the risks that are particular to 
each market served and accordingly believes that a covered clearing 
agency should have the flexibility to determine that different 
standards are appropriate in different markets, given the variable 
nature and

[[Page 29536]]

risks associated with the products cleared.\230\
---------------------------------------------------------------------------

    \228\ See Clearing Agency Standards Release, supra note 5, at 
66235-36 (noting that the financial crisis of 2008 demonstrated the 
plausibility of the default of two large participants in a clearing 
agency over a brief period).
    \229\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
    \230\ See generally Clearing Agency Standards Release, supra 
note 5, at 66234-36 (describing a ``cover two'' requirement for 
credit risk).
---------------------------------------------------------------------------

    The Commission also preliminarily believes that, with greater 
emphasis being placed on the role of CCPs in the financial system, the 
requirement in proposed Rule 17Ad-22(e)(7)(x) for CCPs to review and 
consider the feasibility of meeting a higher liquidity risk management 
standard is appropriate. While Rule 17Ad-22(e)(7)(x) would impose on 
certain covered clearing agencies' policies and procedures requirements 
to conduct an annual analysis of the feasibility of maintaining ``cover 
two'' for liquidity, such covered clearing agencies would not be 
mandated to adopt a ``cover two'' approach regarding liquidity risk 
management. The responsibility for such a determination would remain 
with the boards of directors of covered clearing agencies following a 
review of the information produced pursuant to proposed Rule 17Ad-
22(e)(7)(x).
    The Commission preliminarily believes that it may be appropriate 
for a covered clearing agency that provides CCP services to maintain 
liquidity coverage at levels higher than other clearing agencies due to 
the heightened need to ensure the safe operation of covered clearing 
agencies given their importance to the U.S. financial markets and the 
risks attributable to the products they clear, but also that covered 
clearing agencies not subject to a ``cover two'' requirement should 
have flexibility to evaluate the results of an annual feasibility study 
and to make their own determinations as to whether a ``cover two'' 
approach to liquidity risk management is necessary or appropriate. 
Furthermore, the Commission notes that if, following completion of a 
feasibility study as contemplated in proposed Rule 17Ad-22(e)(7)(x), a 
covered clearing agency makes a determination to move beyond ``cover 
one'' for liquidity that would be required under proposed Rule 17Ad-
22(e)(7)(i), such covered clearing agency would not be limited to 
sizing its qualifying liquid resources to cover the default of its two 
largest participant families. In such case, the covered clearing agency 
could select a level of liquid resources exceeding ``cover one'' that 
it deems most appropriate to the management of liquidity risk, which 
could be either less than, equal to, or more than ``cover two.''
    Based on its supervisory experience, the Commission also 
preliminarily believes that, in sizing its liquid resources to exceed 
``cover one,'' a covered clearing agency may take into account a 
variety of factors, including, but not limited to, (i) the business 
model of the covered clearing agency, such as a utility model (which 
may be also referred to as an ``at cost'' model) versus a for-profit 
model; (ii) diversification of its members' business models as they 
impact the members' ability to supply liquidity to the covered clearing 
agency; (iii) concentration of membership of the covered clearing 
agency, as the breadth of the membership may affect the ability to draw 
liquidity from members; (iv) levels of usage of the covered clearing 
agency's services by members, as the concentration of demand on the 
covered clearing agency's services may bear upon potential liquidity 
needs; (v) the relative concentration of members' market share in the 
cleared products; (vi) the degree of alignment of interest between 
member ownership of the covered clearing agency and the provision of 
funding to the covered clearing agency; and (vii) the nature of, and 
risks associated with, the products cleared by the covered clearing 
agency.
g. Request for Comments
    The Commission generally requests comments on all aspects of 
proposed Rules 17Ad-22(e)(4), (5), (6), and (7) and proposed Rules 
17Ad-22(a)(5), (6), (14), (15), (17), (18), and (19). In particular, 
the Commission requests comments on the following issues:
     Has the Commission provided sufficient guidance for Rule 
17Ad-22(e)(4) regarding the meaning of the requirement to cover credit 
exposures to each participant ``fully with a high degree of 
confidence''? Has the Commission provided sufficient guidance regarding 
the meaning of the requirement to maintain the financial resources 
required under proposed Rules 17Ad-22(e)(4)(i) through (iii), as 
applicable, ``in combined or separately maintained clearing or guaranty 
funds''? Has the Commission provided sufficient guidance regarding the 
use of ``high volatility'' and ``become less liquid''? Why or why not?
     Is the Commission's proposed requirement to cover credit 
exposures to each participant ``fully with a high degree of 
confidence'' in proposed Rule 17Ad-22(e)(4) appropriate? Why or why 
not?
     Should a covered clearing agency's policies and procedures 
provide for the measurement of credit exposures more frequently than 
once per day? Why or why not? If so, how frequently? What factors 
should be considered in determining the minimum frequency?
     Should the Commission require a covered clearing agency's 
policies and procedures to limit the assets it accepts as collateral to 
those with low credit, liquidity, and market risks? Why or why not? Has 
the Commission provided sufficient guidance regarding what constitutes 
``low credit, liquidity, and market risks''? Why or why not? If not, 
what additional guidance should the Commission consider providing?
     Should the Commission require a covered clearing agency's 
policies and procedures to set and enforce appropriately conservative 
haircuts and concentration limits if the covered clearing agency 
requires collateral to manage its or its participants' credit exposure? 
Why or why not? Has the Commission provided sufficient guidance on what 
would constitute ``appropriately conservative haircuts and 
concentration limits''? Why or why not? Should the Commission adopt 
different standards? If so, what should those standards be? Please 
explain in detail.
     Are there any other requirements that should be included 
in proposed Rule 17Ad-22(e)(5) to facilitate policies and procedures 
that address collateral? Why or why not? Are there any requirements 
that should be removed? Why or why not? For instance, should the 
Commission require policies and procedures that avoid concentrated 
holdings of any particular kind of asset, such as those that would 
significantly impair the covered clearing agency's ability to liquidate 
such assets quickly without significant adverse price effects? Should 
the Commission require policies and procedures that avoid concentrated 
holdings under certain conditions?
     Has the Commission provided sufficient guidance for Rule 
17Ad-22(e)(6) regarding ``margin levels commensurate with, the risks 
and particular attributes of each relevant product, portfolio, and 
market''? Has the Commission provided sufficient guidance regarding 
what a ``reliable'' source of timely price data is? Why or why not? 
Should the Commission use a different standard? If so, what should that 
standard be? Please explain in detail.
     Is the requirement in proposed Rule 17Ad-22(e)(6)(i) 
regarding policies and procedures reasonably designed to result in a 
margin system that at a minimum considers, and produces margin levels 
commensurate with, the risks and particular attributes of each relevant 
product, portfolio, and market appropriate? Why or why not?
     Is the Commission's approach in proposed Rule 17Ad-
22(e)(6)(iii),

[[Page 29537]]

requiring a covered clearing agency's policies and procedures to 
calculate margin sufficient to cover its potential future exposure to 
participants, and the definition of ``potential future exposure'' in 
proposed Rule 17Ad-22(a)(14) to mean the ``maximum exposure estimated 
to occur at a future point in time with an established single-tailed 
confidence interval of at least 99% with respect to the estimated 
distribution of future exposure'' appropriate and sufficiently clear? 
Why or why not?
     Are there any other requirements that should be included 
in proposed Rule 17Ad-22(e)(6) to facilitate policies and procedures 
that address margin? Why or why not? For instance, should the 
Commission require policies and procedures that address minimum 
liquidation periods for products cleared by covered clearing agencies? 
Why or why not?
     Has the Commission provided sufficient guidance for Rule 
17Ad-22(e)(7) regarding what constitutes the ``relevant currency'' in 
holding qualifying liquid resources? Has the Commission provided 
sufficient guidance regarding the ``due diligence'' with respect to 
liquidity providers? Has the Commission provided sufficient guidance 
regarding what constitutes ``foreseeable'' liquidity shortfalls? Why or 
why not?
     Has the Commission provided sufficient guidance regarding 
what constitutes ``regularly'' testing the sufficiency of liquid 
resources under proposed Rule 17Ad-22(e)(7)(vi)? Why or why not? How 
frequently should a covered clearing agency test the sufficiency of its 
liquid resources? Please explain.
     Does the set of minimum requirements for policies and 
procedures under proposed Rule 17Ad-22(e)(7) sufficiently address 
liquidity risks? Why or why not? Should the Commission adopt other 
requirements for addressing liquidity risk?
     Is the proposed definition of ``qualifying liquid 
resources'' under Rule 17Ad-22(a)(15) accurate, appropriate, and 
sufficiently clear given the requirements proposed? Why or why not? 
Should all types of assets be subject to prearranged funding 
arrangements? Should the proposed definition distinguish among them by 
asset, product type, or liquidity? Are there alternative definitions 
the Commission should consider?
     Is the meaning of the term ``due diligence'' under Rule 
17Ad-22(7)(iv) sufficiently clear? Why or why not?
     Is the proposed definition of ``systemically important in 
multiple jurisdictions'' under Rule 17Ad-22(a)(19) accurate, 
appropriate, and sufficiently clear given the requirements proposed? 
Why or why not? Are there alternative definitions the Commission should 
consider? How should the Commission assess another regulator or 
jurisdiction's determination that a covered clearing agency is 
systemically important in multiple jurisdictions? Please explain.\231\
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    \231\ For additional requests for comments relating to proposed 
Commission determinations under Rule 17Ab2-2, see Part II.C.4.
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     Is the Commission's proposed approach to ``cover one'' and 
``cover two'' with respect to credit risk appropriate? Should the 
Commission expand or contract the scope of covered clearing agencies 
subject to a ``cover two'' requirement beyond those systemically 
important in multiple jurisdictions or those involved in activities 
with a more complex risk profile? Why or why not? Is the ``cover two'' 
approach, in which the covered clearing agency must have policies and 
procedures requiring financial resources sufficient to cover the 
default of the two participant families that would potentially cause 
the largest aggregate credit exposure for the covered clearing agency 
in extreme but plausible market conditions, appropriate? Should the 
Commission require policies and procedures that provide for financial 
resources in excess of ``cover two''? Why or why not? If so, what would 
be the potential costs and benefits?
     Is the Commission's proposed approach to ``cover one'' and 
``cover two'' with respect to liquidity risk appropriate? Should the 
Commission require policies and procedures that would provide for 
maintaining qualifying liquid resources equal to ``cover two,'' rather 
than policies and procedures for a feasibility analysis with regard to 
``cover two''? Why or why not?
     Should the Commission include more specific requirements 
for policies and procedures regarding stress testing that take into 
account, for example, relevant peak historic price volatilities, shifts 
in other market factors such as price determinants and yield curves, 
multiple defaults over various time horizons, simultaneous pressures in 
funding and asset markets, or a spectrum of forward-looking stress 
scenarios in a variety of extreme but plausible market conditions? Why 
or why not?
     Is the requirement to require policies and procedures for 
reporting the results of a conforming sensitivity analysis to the 
appropriate decision makers at the covered clearing agency appropriate? 
Why or why not? Has the Commission sufficiently described who the 
appropriate decision makers are? Please explain.
     Do any of the proposed rules for financial risk management 
differentiate between clearing agencies based on factors that should 
not be determinative, i.e. whether a clearing agency is covered or 
uncovered, whether a clearing agency is systemically important in 
multiple jurisdictions, involved in activities with a more complex risk 
profile, or neither, and whether the clearing agency provides CCP 
services for security-based swaps or other securities? Should the 
Commission consider other factors in determining which clearing 
agencies should be subject to the proposed requirements?
5. Proposed Rule 17Ad-22(e)(8): Settlement Finality
    Proposed Rule 17Ad-22(e)(8) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to define the point at which settlement 
is final no later than the end of the day on which the payment or 
obligation is due and, where necessary or appropriate, intraday or in 
real time.\232\
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    \232\ See proposed Rule 17Ad-22(e)(8), infra Part VII.
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    Rule 17Ad-22(d)(12) currently requires registered clearing agencies 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ensure that final settlement occurs 
no later than the end of the settlement day and to require that 
intraday or real-time finality be provided where necessary to reduce 
risks.\233\ The Commission preliminarily believes that defining 
settlement finality with specific reference to the day on which the 
payment or obligation is due is appropriate because it better reflects 
the prevailing international convention and accordingly helps to ensure 
that covered clearing agencies can facilitate transactions 
globally.\234\ Because of the similarity between proposed Rule 17Ad-
22(e)(8) and Rule 17Ad-22(d)(12), the Commission anticipates that 
covered clearing agencies may need to make only limited changes to 
update

[[Page 29538]]

their policies and procedures to comply with the proposed rule.\235\
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    \233\ See 17 CFR 240.17Ad-22(d)(12); see also Clearing Agency 
Standards Release, supra note 5, at 66255-56. Rule 17Ad-22(d)(12) 
focuses on achieving settlement on the particular settlement date 
associated with the securities transaction or on an intraday or 
real-time basis (i.e., delivery versus payment) where those 
additional steps are necessary to reduce risks. See Clearing Agency 
Standards Release, supra note 5, at 66256.
    \234\ Cf. PFMI Report, supra note 1, at 64.
    \235\ See supra Part II.A.4.
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    As with Rule 17Ad-22(d)(12), the Commission preliminarily believes 
that proposed Rule 17Ad-22(e)(8) is appropriate for covered clearing 
agencies, given the risks that a covered clearing agency's size, 
operation, and importance pose to the U.S. securities markets, for the 
following reasons. First, the Commission preliminarily believes that 
defining the point at which settlement is final may assist in the 
potential wind-down of a member in the event of insolvency because it 
provides the covered clearing agency with information regarding the 
member's open positions. As an example, clearly defining the point at 
which settlement is final might include establishing a cut-off point 
after which unsettled payments, transfer instructions, or other 
obligations may not be revoked by a clearing member. Clearly defining 
the point at which settlement is final could also provide to clearing 
members the necessary guidance from the covered clearing agency to 
permit extensions for members with operating problems. For example, the 
covered clearing agency may establish rules governing the approval and 
duration of such extensions.
    Second, the Commission preliminarily believes that a covered 
clearing agency's policies and procedures should require completing 
final settlement no later than the end of the day on which the payment 
or obligation is due and that practices creating material uncertainty 
regarding when final settlement will occur or permit the back-dating or 
``as of'' dating of a transaction that settles after the end of the day 
on which the payment or obligation is due would not comply with this 
requirement. The Commission preliminarily believes that final 
settlement has the effect of reducing the buildup of exposures between 
clearing members and the clearing agency, and final settlement no later 
than the end of the day on which the payment or obligation is due 
limits these exposures to the change in price between valuation and the 
end of the day. Accordingly, deferring final settlement beyond the end 
of the day on which the payment or obligation is due would allow these 
exposures to increase in size, thereby creating the potential for 
credit and liquidity pressures for members and other market 
participants and potentially increasing systemic risk.
    Third, the Commission preliminarily believes that a covered 
clearing agency's policies and procedures, where necessary and 
appropriate, should require intraday or real-time finality in order to 
reduce risk in circumstances where uncertainty regarding finality may 
impede the clearing agency's ability to facilitate prompt and accurate 
clearance and settlement, cause the clearing agency's members to fail 
to meet their obligations, or otherwise disrupt the securities markets. 
The Commission preliminarily believes that such efforts would be 
necessary and appropriate when, for example, the risks in question are 
material or when the opportunity to require intraday or real-time 
finality is available and it would be reasonable, whether in economic 
or other terms, to do so.
    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(8). In addition, the Commission 
requests comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to define the point at which settlement is 
final no later than the end of the day on which the payment or 
obligation is due, as in the proposed rule, or no later than the end of 
the settlement date, as in existing Rule 17Ad-22(d)(12) applicable to 
registered clearing agencies? Please explain.
     What changes, if any, would be created by the proposed 
requirements for settlement finality? Does the proposed rule affect 
certain, identifiable categories of market participants differently 
than others, such as smaller entities or entities with limited 
operations in the United States? If so, how?
     Are there operational, legal, or regulatory impediments to 
intraday or real-time settlement finality? Will the proposed standard 
make it harder for covered clearing agencies to conduct certain types 
of business for which intraday or real-time finality may be difficult? 
Are any additional rules or regulations needed to encourage intraday or 
real-time finality to reduce risks?
     Are there circumstances when the requirements of intraday, 
real-time, or end-of-day settlement finality proposed by the rule are 
not feasible or are not beneficial? If so, in what circumstances?
6. Proposed Rule 17Ad-22(e)(9): Money Settlements
    Proposed Rule 17Ad-22(e)(9) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ensure it considers conducting its 
money settlements in central bank money, where available and determined 
to be practical by the board of directors of the covered clearing 
agency, and minimizes and manages credit and liquidity risk arising 
from conducting its money settlements in commercial bank money if 
central bank money is not used by the covered clearing agency.\236\ 
Rule 17Ad-22(e)(9) contains requirements similar to those applied to 
registered clearing agencies under Rule 17Ad-22(d)(5), but would 
additionally require a covered clearing agencies to have policies and 
procedures for conducting money settlement in central bank money.\237\ 
Because this is the only requirement that differs between proposed Rule 
17Ad-22(e)(9) and existing Rule 17Ad-22(d)(5), the Commission 
anticipates that covered clearing agencies may need to make only 
limited changes to update their policies and procedures.\238\
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    \236\ See proposed Rule 17Ad-22(e)(9), infra Part VII.
     The Commission notes that, in some cases, for example, the use 
of central bank money may not be practical, as direct access to all 
central bank accounts and payment services may not be available to 
certain clearing agencies or members, and, for clearing agencies 
working under different currencies, certain central bank accounts 
may not be operational at the time money settlements occur.
    \237\ In full, Rule 17Ad-22(d)(5) requires registered clearing 
agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to employ money 
settlement arrangements that eliminate or strictly limit the 
clearing agency's settlement bank risks, such as credit and 
liquidity risks from the use of banks to effect money settlements 
with its participants. See 17 CFR 240.17Ad-22(d)(5); see also 
Clearing Agency Standards Release, supra note 5, at 66249-50.
    \238\ See supra Part II.A.4 (noting the anticipated effect of 
the proposed rule) and infra Part IV.B.3.c (describing the current 
practices at registered clearing agencies regarding settlement).
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    As with Rule 17Ad-22(d)(5), the Commission is proposing Rule 17Ad-
22(e)(9) to provide assurance that funds transfers are final when 
effected.\239\ The Commission preliminarily believes that the proposed 
requirement for policies and procedures for conducting money settlement 
in central bank money would, in addition, help to further reduce the 
risk that financial obligations related to the activities of a covered 
clearing agency are not settled in a timely manner or discharged with 
finality because settlement in central bank money eliminates settlement 
risk within the jurisdiction of the central bank.\240\
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    \239\ See proposed Rule 17Ad-22(e)(9), infra Part VII.
    \240\ See ICMA Eu. Repo Council, supra note 205, at 8-9 (noting 
that central bank money ``can be regarded as completely safe in the 
jurisdiction of the central bank'' and listing a number of 
advantages attributable to central bank money).
---------------------------------------------------------------------------

    The Commission notes that there are a number of arrangements that a 
covered

[[Page 29539]]

clearing agency could employ to meet the requirements under the 
proposed rule. For example, pursuant to the Clearing Supervision Act, 
designated clearing agencies may obtain access to account services at a 
Federal Reserve Bank.\241\ The Commission preliminarily believes, 
however, that it may be appropriate for covered clearing agencies to 
use commercial banks for conducting money settlements even when 
comparable services are available from a central bank, and therefore 
the proposed rule would permit a covered clearing agency to decide for 
itself which service to use in those circumstances. If central bank 
account services are not available or used, then the covered clearing 
agency should consider establishing criteria for use of commercial 
banks to effect money settlements with its participants that address 
such commercial banks' regulation and supervision, creditworthiness, 
capitalization, access to liquidity, and operational reliability. In 
addition, a covered clearing agency also could seek to ensure that its 
legal agreements with such commercial settlement banks support such 
risk-reduction principles and commercial settlement bank criteria, 
including through provisions providing that funds transfers to the 
covered clearing agency are final when effected.
---------------------------------------------------------------------------

    \241\ See 12 U.S.C. 5465(a); see also supra Parts II.B.4.d and 
II.B.4.f.iii (discussing access to account services at a Federal 
Reserve Bank, or other relevant central bank, pursuant to proposed 
Rules 17Ad-22(e)(5) and (7), respectively).
---------------------------------------------------------------------------

    The proposed rule would also permit a covered clearing agency to 
use multiple settlement banks in order to monitor and manage 
concentration of payments among its commercial settlement banks. In 
those circumstances, policies and procedures would be required to 
consider the degree to which concentration of a covered clearing 
agency's exposure to a commercial settlement bank is affected or 
increased by multiple relationships with the settlement bank, including 
(i) where the settlement bank is also a participant in the covered 
clearing agency, or (ii) where the settlement bank provides back-up 
liquidity resources to the covered clearing agency.
    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(9). In addition, the Commission 
requests comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to conduct its money settlements in central 
bank money, where available and determined to be practical by the board 
of directors of the covered clearing agency? Why or why not? Has the 
Commission provided sufficient guidance on what would be ``practical'' 
in this context? Why or why not?
     Should the Commission require a covered clearing agency's 
policies and procedures to minimize and manage credit and liquidity 
risk arising from conducting its money settlements in commercial bank 
money if central bank money is not used by the covered clearing agency? 
Why or why not?
     Are there other requirements that the Commission should 
apply to money settlements, such as requiring policies and procedures 
with respect to the minimum number of banks that a covered clearing 
agency may use to effect money settlements with its participants in 
order to avoid reliance on a small number of such banks? Should the 
Commission require policies and procedures specifying the 
characteristics of financial institutions that may be used by clearing 
agencies for settlement purposes? Why or why not?
     Should the Commission require a covered clearing agency's 
policies and procedures to establish and monitor adherence to criteria 
based on high standards for the covered clearing agency's settlement 
banks? For example, should the Commission require that criteria to 
consider the applicable regulatory and supervisory frameworks, 
creditworthiness, capitalization, access to liquidity, and operational 
reliability? Why or why not?
     Should the Commission require a covered clearing agency's 
policies and procedures to monitor and manage the concentration of 
credit and liquidity exposures to its commercial settlement banks? Why 
or why not?
     Should rules for money settlements established by the 
Commission be uniform for all types of money settlements, or are there 
circumstances in which it would be appropriate for covered clearing 
agencies to accept a higher degree of money settlement risk, such as 
when transacting in certain product categories or with certain types of 
customers? Why or why not?
7. Proposed Rule 17Ad-22(e)(10): Physical Delivery Risks
    Proposed Rule 17Ad-22(e)(10) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to establish and maintain 
transparent written standards that state its obligations with respect 
to the delivery of physical instruments and operational practices that 
identify, monitor, and manage the risk associated with such physical 
deliveries.\242\
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    \242\ See proposed Rule 17Ad-22(e)(10), infra Part VII.
---------------------------------------------------------------------------

    The proposed requirement is similar to the requirement applicable 
to registered clearing agencies in Rule 17Ad-22(d)(15), but the 
proposed rule also requires that such standards be transparent at 
covered clearing agencies.\243\ Considering the risks that a covered 
clearing agency's size, operation, and importance pose to the U.S. 
securities markets, the Commission preliminarily believes that the 
proposed new requirement for transparent standards is appropriate. 
Physical delivery may require the involvement of multiple parties, 
including the clearing agency itself, its members, customers, 
custodians, and transfer agents, and failures to deliver physical 
instruments can threaten the integrity and smooth functioning of the 
financial system. By requiring policies and procedures to include 
transparent written standards at covered clearing agencies, the 
proposed rule helps to mitigate physical delivery risks.
---------------------------------------------------------------------------

    \243\ Registered clearing agencies are currently subject to 
existing Rule 17Ad-22(d)(15), which requires them to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to state to its participants the clearing 
agency's obligations with respect to physical deliveries and 
identify and manage the risks from these obligations. See 17 CFR 
240.17Ad-22(d)(15); see also Clearing Agency Standards Release, 
supra note 5, at 66257-58.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed requirement 
for a covered clearing agency to maintain transparent written standards 
that state its obligations with respect to physical deliveries would 
help to ensure that members and their customers have information that 
is likely to enhance their understanding of their rights and 
responsibilities with respect to using the clearance and settlement 
services of a covered clearing agency.\244\ The Commission 
preliminarily believes that such information, when available to members 
and their customers through the covered clearing agency's policies and 
procedures, would promote a shared understanding regarding physical 
delivery practices between the covered clearing agency and its members. 
The requirement for policies and procedures with transparent written 
standards may further facilitate prompt and accurate

[[Page 29540]]

clearance and settlement and mitigate physical delivery risks.
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    \244\ The Commission is proposing additional requirements 
regarding disclosures to participants and disclosure generally, 
pursuant to proposed Rules 17Ad-22(e)(1) (legal risk), (e)(2) 
(governance), and (e)(23) (disclosure of rules, key procedures, and 
market data). See infra Parts II.B.1, 2, and 20, respectively.
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    The Commission acknowledges that practices regarding physical 
delivery vary based on the types of assets that a covered clearing 
agency settles.\245\ A covered clearing agency would be required, 
however, to state clearly which asset classes it accepts for physical 
delivery and the procedures surrounding the delivery of each. The 
Commission notes that there are a number of arrangements that a covered 
clearing agency could employ pursuant to the requirements of the 
proposed rule. For example, if a covered clearing agency takes physical 
delivery of securities from its members in return for payments of cash, 
then it should inform its members of the extent of the clearing 
agency's obligations to make payment. The Commission envisions that one 
possible approach a covered clearing agency could take in fulfillment 
of the proposed requirement would be to employ policies and procedures 
that clearly state any obligations it incurs to members for losses 
incurred in the delivery process. In addition, its policies and 
procedures could clearly state rules or obligations regarding 
definitions for acceptable physical instruments, the location of 
delivery sites, rules for storage and warehouse operations, and the 
timing of delivery.
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    \245\ The proposed rule would provide covered clearing agencies 
with flexibility to achieve clear and transparent standards but 
would necessarily require an approach that provides sufficient 
notice to its participants regarding the covered clearing agency's 
obligations. See infra Parts II.B.20 and VII (discussing a covered 
clearing agency's disclosure obligations pursuant to proposed Rule 
17Ad-22(e)(23) and providing proposed rule text).
     The Commission notes that CDS employing the contractual term 
``physical delivery'' or similar language, which upon an event of 
default are settled by ``physical delivery'' of the instrument (as 
such terms are used in the agreement) to the protection seller by 
the protection buyer are not within the scope of this rule merely 
because of such contractual terminology where they are not delivered 
in paper form (but are delivered through book entry or electronic 
transfer).
---------------------------------------------------------------------------

    The proposed rule would also require a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify, monitor, and manage the 
risks that arise in connection with their obligations for physical 
deliveries.\246\ The Commission notes that this is similar to the 
requirement for a registered clearing agency's policies and procedures 
to identify and manage the risks from its obligations in Rule 17Ad-
22(d)(15).\247\ As with Rule 17Ad-22(d)(15), the Commission believes 
that requiring a clearing agency's policies and procedures to identify, 
monitor, and manage these risks facilitates its ability to deal 
preemptively with potential issues with physical delivery, in line with 
Exchange Act requirements to facilitate prompt and accurate clearance 
and settlement and the safeguarding of assets.\248\
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    \246\ See proposed Rule 17Ad-22(e)(10), infra Part VII.
    \247\ See supra note 243.
    \248\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission preliminarily notes that certain risks associated 
with physical deliveries could stem from operational limitations with 
respect to assuring receipt of and processing of physical deliveries. 
Other operational risks may relate to personnel, which can be mitigated 
by having policies and procedures designed to review and assess the 
qualifications of potential employees, including reference and 
background checks and employee training, among other things. Further 
operational risks include theft, loss, counterfeiting, and 
deterioration of or damage to assets.\249\ Insurance coverage may be 
one way to mitigate such risk of theft, loss, counterfeiting, fraud, 
and damage to assets. Other appropriate methods to identify, monitor, 
and manage risks related to delivery and storage of physical assets may 
include ensuring records of physical assets received and held 
accurately reflect holdings and that employee duties for such 
recordkeeping for and holding of physical assets are separated.
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    \249\ In addition, the Commission is proposing Rule 17Ad-
22(e)(17) to establish minimum requirements for operational risk 
management. See infra Parts IV.C.3.a.xii and VII (further discussing 
the proposed requirements and providing proposed rule text).
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    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(10). In addition, the 
Commission requests comments on the following specific issue:
     Should the Commission require a covered clearing agency's 
policies and procedures to establish and maintain transparent written 
standards that state its obligations with respect to the delivery of 
physical instruments? Why or why not? Are there physical delivery 
obligations that a covered clearing agency's policies and procedures 
should not be required to state through transparent written standards? 
If so, please explain.
8. Proposed Rule 17Ad-22(e)(11): Central Securities Depositories
    Proposed Rule 17Ad-22(e)(11) would apply only to a covered clearing 
agency providing CSD services (hereinafter a ``covered CSD'' in this 
part).\250\ Proposed Rule 17Ad-22(e)(11)(i) would require a covered CSD 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to maintain securities in an immobilized 
or dematerialized form for their transfer by book entry, ensure the 
integrity of securities issues, and minimize and manage the risks 
associated with the safekeeping and transfer of securities.\251\ While 
Rule 17Ad-22(d)(10) similarly requires registered clearing agencies 
that provide CSD services to have policies and procedures reasonably 
designed to immobilize or dematerialize securities certificates and 
transfer them by book entry to the greatest extent possible, \252\ 
proposed Rule 17Ad-22(e)(11) would also require a covered CSD to have 
policies and procedures that ensure the integrity of securities issues, 
and minimize and manage the risks associated with the safekeeping and 
transfer of securities. The Commission preliminarily believes these 
additional requirements are appropriate for covered CSDs given the 
risks that a covered CSD's size, operation, and importance pose to the 
U.S. securities markets.
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    \250\ See proposed Rule 17Ad-22(a)(3), infra Part VII (defining 
``central securities depository services''). In the United States, 
DTC is currently the only registered clearing agency that provides 
CSD services.
    This definition is currently codified at 17 CFR 240.17Ad-
22(a)(2). See supra note 61 (noting that 17 CFR 240.17Ad-22(a) is 
being revised to incorporate additional terms).
    \251\ See proposed Rule 17Ad-22(e)(11), infra Part VII.
    \252\ In full, existing Rule 17Ad-22(d)(10) requires registered 
clearing agencies that provide CSD services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to immobilize or dematerialize securities certificates and 
transfer them by book entry to the greatest extent possible. See 17 
CFR 240.17Ad-22(d)(10); see also Clearing Agency Standards Release, 
supra note 5, at 66253-54.
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    Like existing Rule 17Ad-22(d)(10), proposed Rule 17Ad-22(e)(11)(i) 
would, among other things, require a covered CSD to have policies and 
procedures to maintain securities in an immobilized or dematerialized 
form for transfer by book entry.\253\ The Commission

[[Page 29541]]

preliminarily believes this approach would continue to promote a 
reduction in securities transfer processing costs, as well as the risks 
associated with securities settlement and custody, such as destruction 
or theft, by removing the need to hold and transfer many, if not most, 
physical certificates.\254\ In addition, the Commission preliminarily 
believes the requirement would continue to promote prompt and efficient 
settlement processes through the potential for increased automation and 
may also help reduce the risk of error and delays in securities 
processing. The Commission also preliminarily believes the proposed 
rule would, like Rule 17Ad-22(d)(10), further the objectives in Section 
17A of the Exchange Act requiring the Commission to end the physical 
movement of securities certificates in connection with settlement among 
brokers and dealers.\255\ Further, the Commission preliminarily 
believes that the proposed rule, by continuing to facilitate book-entry 
transfer, may also continue to facilitate the use of exchange-of-value 
settlement systems, which help to reduce settlement risk pursuant to 
proposed Rule 17Ad-22(e)(12).\256\
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    \253\ Immobilization refers to any circumstance where an 
investor does not receive a physical certificate upon the purchase 
of shares or is required to physically deliver a certificate upon 
the sale of shares. Dematerialization is the process of eliminating 
physical certificates as a record of security ownership.
     The Commission notes that, while registered clearing agencies 
that provide CSD services are already subject to this requirement 
under Rule 17Ad-22(d)(10), the Commission is proposing Rule 17Ad-
22(e)(10) as part of a comprehensive set of rules for regulating 
covered clearing agencies. Because Rule 17Ad-22(d)(10) already 
contains this requirement, however, the Commission anticipates that 
covered clearing agencies may need to make only limited changes to 
update their policies and procedures to comply with this requirement 
under the proposed rule. See supra Part II.A.4.
    \254\ By concentrating the location of physical securities in a 
CSD, clearing agencies are able to achieve efficiencies in clearance 
and settlement by streamlining transfer. Virtually all mutual fund 
securities, government securities, options, and municipal bonds in 
the United States are dematerialized and most of the equity and 
corporate bonds in the U.S. market are either immobilized or 
dematerialized. While the U.S. markets have made great strides in 
achieving immobilization and dematerialization for institutional and 
broker-to-broker transactions, many industry representatives believe 
that the small percentage of securities held in certificated form 
imposes unnecessary risk and expense to the industry and to 
investors. See Exchange Act Release No. 34-49405 (Mar. 11, 2004), 69 
FR 12922, 12933 (Mar. 18, 2004).
    \255\ See 15 U.S.C. 78q-1(e).
    \256\ See infra Parts II.B.9 (discussing proposed Rule 17Ad-
22(e)(12) for exchange-of-value settlement systems) and IV.C.3.a.vi 
(noting that the economic effect of book-entry transfer in a 
delivery versus payment system is to allow securities to be credited 
to an account immediately upon debiting the account for the payment 
amount and that it thereby helps reduce trade failures).
---------------------------------------------------------------------------

    As with Rule 17Ad-22(d)(10), the Commission notes that the proposed 
requirement for policies and procedures to cover maintaining securities 
in an immobilized form is not intended to prohibit a covered CSD from 
holding physical securities certificates on behalf of its members for 
purposes other than to facilitate immobilization where such securities 
currently continue to exist in paper form. In this regard, the 
Commission believes it would be useful to describe three relevant 
features of the current U.S. market. First, in order for securities to 
be offered and sold publicly, the offer or sale of the securities 
generally must be registered with the Commission or subject to an 
exemption from registration.\257\ Securities sold in an exempt 
transaction may be subject to restrictions. For example, securities 
acquired from the issuer in a transaction not involving any public 
offering are restricted securities,\258\ are subject to restrictions on 
resale, often bear legends that discuss such restrictions, and often 
are in paper certificate form in current market practice. The 
restrictions on such securities may make more complex the 
immobilization or ultimate dematerialization of these paper 
certificates. For instance, registered CSDs in the United States 
currently do not provide book-entry transfer for all restricted 
securities.\259\
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    \257\ See 15 U.S.C. 77e.
    \258\ See 17 CFR 230.144(a)(3).
    \259\ See 17 CFR 230.144A; see also Exchange Act Release No. 34-
59384 (Feb. 11, 2009), 74 FR 7941 (Feb. 20, 2009); DTC, Operational 
Arrangements, Secs. I.A.2 & I.B.5 (Jan. 2012), available at http://www.dtcc.com/.
---------------------------------------------------------------------------

    Second, U.S. law generally does not provide for a federal corporate 
law or corporate charter. Instead, states currently permit corporations 
to issue stock certificates to registered owners. While the market in 
the United States has made advances in immobilizing and dematerializing 
securities, no federal statute or regulation prohibits the issuance of 
paper certificates to registered owners of a class of securities 
registered under the Exchange Act or companies that file periodic 
reports with the Commission. Accordingly, the Commission's rules do not 
prohibit, and in some respects contemplate, the issuance of securities 
certificates.\260\ As a result, some registered owners may hold 
securities in paper certificate form.
---------------------------------------------------------------------------

    \260\ In the absence of a federal or state requirement, an 
issuer could limit its issuance of certain types of securities to 
book-entry only form through its own charter, bylaws, or policies.
---------------------------------------------------------------------------

    Third, some broker-dealers in the United States no longer operate 
vaults in which to hold securities certificates registered in the names 
of their customers where such customers seek a third-party to 
physically hold their certificates. In such cases, broker-dealers 
(without an in-house vault) may utilize the vault services of the CSD 
of which they are a participant in order to be able to offer such 
custody service to their customers.
    The Commission also notes that the proposed rule is not intended to 
alter the following practices in the U.S. market. Proposed Rule 17Ad-
22(e)(11) would not prohibit a covered CSD from providing custody-only 
services for purposes not intended to promote immobilization to 
facilitate street name transfer but solely to hold these securities for 
third parties. Likewise, proposed Rule 17Ad-22(e)(11) would not 
prohibit a covered CSD from holding American depositary shares in 
custody.\261\
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    \261\ Issuers of American depositary receipts (``ADRs''), 
whether in programs sponsored or unsponsored by a foreign issuer, 
may hold the underlying shares of the foreign issuer (which may be 
in paper certificate form and are commonly referred to as American 
depositary shares) to which the ADRs relate in the ultimate custody 
of a covered CSD.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that the 
policies and procedures of a covered CSD should be required to ensure 
the integrity of securities issues and minimize and manage the risks 
associated with the safekeeping and transfer of securities, given the 
risks that a covered CSD's size, operation, and importance pose to the 
U.S. securities markets, for the following reasons. First, the 
preservation of the rights of issuers and holders of securities is 
necessary for the orderly functioning of the securities markets.\262\ 
The integrity of a securities issue can be undermined, for instance, if 
a covered CSD does not prohibit overdrafts and debit balances in 
securities accounts, which can create unauthorized issuances of 
securities that undermine the integrity of the covered CSD's services. 
Second, minimizing and managing the risks associated with the 
safekeeping and transfer of securities promotes risk management 
policies and procedures that address custody risk.\263\
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    \262\ The Commission is proposing additional requirements under 
Rule 17Ad-22(e)(11) to further address the integrity of securities 
issues. See infra Part II.B.8.a.
    \263\ The Commission is proposing additional requirements under 
Rule 17Ad-22(e)(11) to further address custody risk at covered CSDs. 
See infra Part II.B.8.c.
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    In addition, the Commission is proposing the requirements described 
below. Although Rule 17Ad-22(d)(10) does not include similar 
requirements, the Commission anticipates that, based on the current 
practices of registered CSDs in the United States, a registered CSD may 
need to make only limited changes to update its policies and procedures 
to comply with the below proposed requirements.\264\
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    \264\ See infra Parts IV.B.3.d.i (discussing the current 
practices of registered CSDs in the United States) and IV.C.3.a.vi 
(discussing the anticipated economic effect of the proposed rule).

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[[Page 29542]]

a. Controls To Safeguard the Rights of Securities Issuers and Holders 
and Prevent the Unauthorized Creation or Deletion of Securities
    Proposed Rule 17Ad-22(e)(11)(ii) would require a covered CSD to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to implement internal auditing and other 
controls to safeguard the rights of securities issuers and holders and 
prevent the unauthorized creation or deletion of securities.
    The Commission preliminarily believes that the proposed requirement 
to safeguard the rights of issuers and holders is appropriate because, 
while issuers and holders may not be participants in a covered CSD, 
they access its services through covered CSD immobilization or 
dematerialization of securities and thus a failure to safeguard 
securities by the CSD may adversely affect issuers or holders, 
including for example by creating legal problems related to 
unauthorized issuance of securities, dilution of a holder's ownership 
interest or the holder's claim on the security as beneficial owner 
where holding indirectly through a member of the CSD.
    As noted above, the preservation of the rights of securities 
issuers and holders is necessary for the orderly functioning of the 
securities markets. Accordingly, the Commission preliminarily believes 
the proposed rule is appropriate to help ensure that a covered clearing 
agency can verify that its records are accurate and provide a complete 
accounting of its securities issues.
b. Periodic and at Least Daily Reconciliation of Securities Maintained
    Proposed Rule 17Ad-22(e)(11)(ii) would require a covered CSD to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to conduct periodic and at least daily 
reconciliation of securities issues it maintains.\265\ The Commission 
preliminarily believes that the proposed requirement to reconcile on a 
daily basis securities maintained would (i) support the safeguarding of 
securities because, through such internal control procedures, accurate 
record-keeping is promoted and thereby safe, accurate, and effective 
clearing and settlement is also promoted, and (ii) further benefit 
issuers and holders, as discussed above, by potentially preventing 
unauthorized issuance of securities, dilution of a holder's positions, 
or the holder's claim on the security as beneficial owner where holding 
indirectly through a member of the CSD.
---------------------------------------------------------------------------

    \265\ See proposed Rule 17Ad-22(e)(11), infra Part VII. The 
Commission preliminary believes that daily reconciliation is 
appropriate for the reasons described in Part II.A.3.
---------------------------------------------------------------------------

    The Commission notes that CSDs in the United States currently do 
not provide registrar or transfer agent services to record name owners 
of securities. CSD services that facilitate book-entry transfer are 
limited to holding jumbo/global certificates in custody or, through 
sub-custodian relationships with the transfer agent for a particular 
issuer via the Fast Automated Securities Transfer (``FAST'') system, 
which is used to maintain jumbo/global record ownership position 
balances of the CSD's holdings in a particular issue.\266\ In both 
cases, custody or sub-custody facilitates book-entry transfer for 
ultimate beneficial owners as the CSD credits and debits the accounts 
of its members, which then maintain records of ownership and send 
account statements to their customers that are the ultimate beneficial 
owners. Since the registrar maintaining the security holder list for an 
issuer is not the CSD, the daily reconciliation requirement applicable 
to a covered CSD reconciling CSD ownership positions (that facilitate 
book-entry transfer for ultimate beneficial owners) against the record 
of such CSD ownership positions on the security holder list could not 
be done solely in-house but would require the CSD to coordinate with 
the registrar maintaining the security holder list for each issue that 
has been immobilized.\267\
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    \266\ For a description of DTC's rules relating to FAST, see 
Exchange Act Release Nos. 34-64191 (Apr. 5, 2011), 76 FR 20061 (Apr. 
11, 2011); 34-61800 (Mar. 30, 2010), 75 FR 17196 (Apr. 5, 2010); 34-
60196 (Jun. 30, 2009), 74 FR 33496 (Jul. 13, 2009); 34-46956 (Dec. 
2, 2002), 67 FR 77115 (Dec. 16, 2002); 34-31941 (Mar. 3, 1993); 34-
21401 (Oct. 16, 1984); 34-14997 (Jul. 26, 1978); and 34-13342 (Mar. 
8, 1977).
    \267\ Commonly, the entity performing the registrar and transfer 
services for an issue would be the same. Both functions are 
functions that place an entity within the definition of ``transfer 
agent'' pursuant to Section 3(a)(25) of the Exchange Act and the 
related regulatory regime for transfer agents. See 15 U.S.C. 
78c(a)(25).
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c. Protect Assets Against Custody Risk
    Proposed Rule 17Ad-22(e)(11)(iii) would require a covered CSD to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to protect assets against custody risk 
through appropriate rules and procedures consistent with relevant laws, 
rules, and regulations in jurisdictions where it operates.\268\ The 
Commission preliminarily believes the proposed requirement to address 
custody risk is appropriate because a covered CSD faces risks of 
negligence, misuse of assets, fraud, record-keeping or administrative 
failures, loss, destruction, damage, natural disaster, and theft or 
other crime regarding assets held in custody. The Commission 
preliminarily believes that the proposed rule would further support 
Section 17A(b)(3)(F) of the Exchange Act, which requires the rules of a 
clearing agency to assure the safeguarding of securities and funds that 
are in the custody or control of the clearing agency or for which it is 
responsible.\269\
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    \268\ See proposed Rule 17Ad-22(e)(11), infra Part VII. For 
example, in the United States, additional safekeeping requirements 
may apply under state law. See, e.g., N.Y. UCC Law 8-504 (requires 
securities intermediaries, including clearing corporations, to 
exercise due care in accordance with reasonable commercial standards 
to obtain and maintain the financial asset).
    \269\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Such custody risk may be related to physical delivery risk, which 
proposed Rule 17Ad-22(e)(10) would require a covered clearing agency's 
policies and procedures to identify, monitor, and manage.\270\ 
Operational risks may also be implicated, including those relating to 
personnel, which can be mitigated by having policies and procedures 
designed to review and assess the qualifications of potential 
employees, including reference and background checks and employee 
training, among other things. Additional operational risks include 
theft, loss, counterfeiting, and deterioration of or damage to 
assets.\271\ Insurance coverage may be one way to mitigate such risk of 
theft, loss, counterfeiting, fraud, and damage to assets. Other 
appropriate methods to monitor and manage custody risks may include 
ensuring records of securities held in custody accurately reflect 
holdings and that employee duties for such recordkeeping for and 
holding of securities are separated.\272\
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    \270\ See supra Part II.B.7 and infra Part VII (discussing the 
requirements under proposed Rule 17Ad-22(e)(10) and providing 
proposed rule text).
    \271\ The Commission is also proposing Rule 17Ad-22(e)(17) to 
establish minimum standards for operational risk management. See 
infra Parts II.B.14 and VII.
    \272\ The Commission is also proposing Rule 17Ad-22(e)(16) to 
establish minimum standards for custody and investment risk. See 
infra Parts II.B.13 and VII.
---------------------------------------------------------------------------

    The Commission also preliminarily notes that increased 
dematerialization would not eliminate the applicability of the 
requirement to protect assets against custody risk. When held in 
electronic custody through accounting entries, such as through 
electronic sub-custody

[[Page 29543]]

of the CSD global/jumbo record ownership position with a transfer agent 
via FAST, assets may nevertheless remain subject to operational risks 
and may be subject to variations of such risks, such as hacking or 
digital piracy, that are different from those risks faced with respect 
to paper certificates.
d. Request for Comments
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(e)(11). In addition, the Commission requests 
comments on the following specific issues:
     Should the Commission require a covered CSD's policies and 
procedures to maintain securities in an immobilized or dematerialized 
form for their transfer by book entry? Why or why not? Are there any 
circumstances under which this would be inappropriate? Please explain.
     Should the Commission require a covered CSD's policies and 
procedures to ensure the integrity of securities issues? Why or why 
not?
     Should the Commission require a covered CSD's policies and 
procedures to protect assets against custody risk through appropriate 
rules and procedures consistent with relevant laws, rules, and 
regulations in jurisdictions where it operates? Why or why not?
     Are there any other requirements that should be included 
in the proposed rule to promote sound practices at covered CSDs? For 
instance, should the Commission require a covered CSD's policies and 
procedures to include provisions to identify, measure, monitor, and 
manage its risks from other activities that it may perform? Should the 
Commission require a covered CSD's policies and procedures to employ a 
robust system that ensures segregation between the CSD's own assets and 
the securities of its participants and segregation among the securities 
of participants? Why or why not?
9. Proposed Rule 17Ad-22(e)(12): Exchange-of-Value Settlement Systems
    Proposed Rule 17Ad-22(e)(12) would apply to transactions cleared by 
a covered clearing agency that involve the settlement of two linked 
obligations.\273\ The proposed rule would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to eliminate principal risk by 
conditioning the final settlement of one obligation upon the final 
settlement of the other, regardless of whether the covered clearing 
agency settles on a gross or net basis and when finality occurs.\274\ 
The Commission preliminarily believes that the proposed rule is 
appropriate to help reduce the potential that delivery of a security is 
not appropriately matched with payment for the security, thereby 
impairing a covered clearing agency's ability to facilitate prompt and 
accurate clearance and settlement.
---------------------------------------------------------------------------

    \273\ See proposed Rule 17Ad-22(e)(12), infra Part VII.
    \274\ See id.
---------------------------------------------------------------------------

    Rule 17Ad-22(d)(13) similarly requires that a registered clearing 
agency's policies and procedures be reasonably designed to eliminate 
principal risk by linking securities transfers to funds transfers in a 
way that achieves delivery versus payment (``DVP''),\275\ though it 
does not specify that settlement should occur regardless of whether the 
clearing agency settles on a gross or net basis and when finality 
occurs. Because this is the only provision that differs between 
proposed Rule 17Ad-22(e)(12) and existing Rule 17Ad-22(d)(13), the 
Commission anticipates that covered clearing agencies may need to make 
only limited changes to update their policies and procedures.\276\
---------------------------------------------------------------------------

    \275\ See 17 CFR 240.17Ad-22(d)(13); see also Clearing Agency 
Standards Release, supra note 5, at 66256.
    \276\ See supra Part II.A.4.
---------------------------------------------------------------------------

    The Commission notes that ensuring settlement finality only when 
settlement of the corresponding obligation is final--regardless of 
whether a covered clearing agency settles on a gross or net basis--may 
require corresponding policies and procedures that address legal, 
contractual, operational, and other risks.\277\ Given the risks that 
the size, operation, and importance of covered clearing agencies pose 
to the U.S. securities markets, the Commission preliminarily believes 
that this requirement is appropriate for covered clearing agencies.
---------------------------------------------------------------------------

    \277\ See supra Parts II.B.1-3 and infra Parts II.B.14 and VII 
(discussing proposed rules establishing minimum standards for legal 
risk and governance arrangements, requiring a comprehensive risk 
management framework, requiring minimum standards for operational 
risk management, and providing proposed rule text in each case, 
respectively).
---------------------------------------------------------------------------

    Market confidence, in addition to public confidence more generally, 
hinges in large part on the dependability and promptness of the 
clearing and settlement systems underlying a given market. If CCPs are 
unable to promptly and fully give to clearing members access to funds 
due, they and other market participants may lose confidence in the 
settlement process.\278\
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    \278\ See Arthur Levitt, Chairman, U.S. Securities and Exchange 
Commission, Speeding Up Settlement: The Next Frontier, Remarks 
before the Symposium on Risk Reduction in Payments, Clearance and 
Settlement Systems (Jan. 26, 1996), available at http://www.sec.gov/news/speech/speecharchive/1996/spch071.txt.
---------------------------------------------------------------------------

    As under Rule 17Ad-22(d)(13), a covered clearing agency can link 
securities transfers to funds transfers and mitigate principal risk in 
connection with settlement through DVP settlement mechanisms. DVP is 
achieved in the settlement process when the mechanisms facilitating 
settlement ensure that delivery occurs only if payment occurs.\279\ DVP 
eliminates the risk that a party would lose some or its entire 
principal because securities were delivered without payments being 
confirmed. The Commission notes that DVP settlement mechanisms are 
prevalent among registered clearing agencies because they eliminate 
principal risk and reduce the settlement risk that arises in a 
securities transaction. A counterparty default absent a DVP settlement 
mechanism may cause substantial losses and liquidity pressures. 
Further, a settlement default could result in high replacement costs 
because the unrealized gain on an unsettled contract or the cost of 
replacing the original contract at market prices may change rapidly 
during periods of market stress.
---------------------------------------------------------------------------

    \279\ See BIS, Delivery Versus Payment in Securities Settlement 
Systems (Sept. 1992), available at http://www.bis.org/publ/cpss06.pdf. Three different DVP models can be differentiated 
according to whether the securities and/or funds transfers are 
settled on a gross (trade-by-trade) basis or on a net basis. 
Proposed Rule 17Ad-22(e)(10), supra Part II.B.7 and infra Part VII, 
would establish minimum requirements for physical deliveries.
---------------------------------------------------------------------------

    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(12). In addition, the 
Commission requests comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to, if the covered clearing agency settles 
transactions that involve the settlement of two linked obligations, 
eliminate principal risk by conditioning the final settlement of one 
obligation upon the final settlement of the other? Should the 
Commission impose this policy and procedure requirement regardless of 
whether the covered clearing agency settles on a gross or net basis, as 
proposed? Should the Commission impose this policy and procedure 
requirement regardless of when finality occurs, as proposed? Why or why 
not?
     Does the proposed rule affect certain identifiable 
categories of covered clearing agencies differently than others, such 
as clearing agencies with more

[[Page 29544]]

diversified post-trade services as compared to clearing agencies that 
specialize in fewer activities? If so, how? How should the proposed 
rule account for these differences?
     Are there operational or legal impediments to implementing 
the proposed rule? Would the proposed rule make it more difficult for 
covered clearing agencies to conduct certain types of business that may 
require a longer settlement cycle, for reasons outside of their 
control? Are any additional rules or regulations needed to support 
achievement of the proposed rule?
     Are there circumstances when ensuring that the settlement 
of an obligation is final if and only if the settlement of the 
corresponding obligation is final is not feasible or practicable? If 
so, when?
10. Proposed Rule 17Ad-22(e)(13): Participant-Default Rules and 
Procedures
    Proposed Rule 17Ad-22(e)(13) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to ensure that the covered clearing 
agency has the authority and operational capacity to take timely action 
to contain losses and liquidity demands and continue to meet its 
obligations in the event of a participant default.\280\ Because Rule 
17Ad-22(d)(11) currently requires a registered clearing agency's 
policies and procedures to meet substantially the same 
requirements,\281\ the Commission anticipates that covered clearing 
agencies may need to make only limited changes to update their policies 
and procedures to comply with the proposed rule.\282\
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    \280\ See proposed Rule 17Ad-22(e)(13), infra Part VII. The 
Commission is proposing Rule 17Ad-22(e)(13) as part of a 
comprehensive set of rules for regulating covered clearing agencies 
that is consistent with and comparable to other domestic and 
international standards for FMIs.
    \281\ Rule 17Ad-22(d)(11) requires a registered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to establish default procedures that 
ensure that the clearing agency can take timely action to contain 
losses and liquidity pressures and to continue meeting its 
obligations in the event of a participant default. See 17 CFR 
240.17Ad-22(d)(11); see also Clearing Agency Standards Release, 
supra note 5, at 66254-55.
    \282\ See supra Part II.A.4.
---------------------------------------------------------------------------

    As with Rule 17Ad-22(d)(11), the Commission believes that proposed 
Rule 17Ad-22(e)(13) is appropriate given the importance of having 
established procedures in the event a covered clearing agency faces a 
member default. The proposed rule would continue to provide certainty 
and predictability to market participants about the measures a clearing 
agency will take in the event of a participant default as default 
procedures, among other things, are meant to reduce the likelihood that 
a default by one or more participants will disrupt the clearing 
agency's operations. By establishing, implementing, maintaining and 
enforcing such policies and procedures, a covered clearing agency 
should be in a better position to continue providing its services in a 
manner that promotes prompt and accurate clearance and settlement 
during times of market stress.\283\ Accordingly, a covered clearing 
agency that has financial and operational triggers for default would 
need to ensure these are clearly defined.\284\ In addition, where 
triggers are not automatic through the application of objective 
standards or thresholds, the discretion afforded a covered clearing 
agency to declare defaults would need to be clearly defined.\285\ For 
example, a clear definition may include defining which person or group 
exercises discretionary authority in the event of default and providing 
specific examples of when the exercise of discretion is appropriate.
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    \283\ The Commission is also proposing Rule 17Ad-22(e)(23) to 
require disclosure of rules, key procedures, and market data to 
members, market participants, and in certain circumstances the 
public. See infra Parts II.B.20 and VII (discussing the proposed 
rule and providing rule text, respectively).
    \284\ An operational default may occur when a participant is not 
able to meet its obligations due to an operational problem, such as 
a failure in information technology systems. The Commission is 
proposing Rule 17Ad-22(e)(17) to establish minimum standards for 
operational risk management. See infra Parts II.B.14 and VII 
(discussing the proposed rule and providing rule text, 
respectively).
    \285\ In this regard, the Commission notes that policies and 
procedures regarding participant default must satisfy the 
requirement for legal certainty in proposed Rule 17Ad-22(e)(1). See 
supra Part II.B.1.
---------------------------------------------------------------------------

    The proposed rule would also require a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ensure that it can take timely action 
to contain losses and liquidity pressures and to continue meeting its 
obligations when due in the event of a member default.\286\ Default 
procedures are meant to reduce the likelihood that a default by a 
member, or multiple members, will disrupt the covered clearing agency's 
operations. Based on its supervisory experience, the Commission 
preliminarily believes such policies and procedures would address, 
among other things, the following: (i) Accessing credit facilities, 
(ii) managing (which may include hedging open positions and funding 
collateral positions it is not prudent to close out immediately), 
transferring (such as through allocation or auction to other members) 
and/or closing out a defaulting member's positions; and (iii) 
transferring and/or liquidating applicable collateral. By employing 
policies and procedures that are designed to permit a covered clearing 
agency to take actions to contain losses and liquidity pressures it 
faces in the event of a participant default while continuing to meet 
its obligations, a covered clearing agency should be in a better 
position to continue providing its services in a manner that promotes 
accurate clearance and settlement during times of market stress.
---------------------------------------------------------------------------

    \286\ See proposed Rule 17Ad-22(e)(13), infra Part VII. A 
clearing agency may be able to contain liquidity pressures it faces 
by taking actions to secure additional sources of liquidity or 
limiting transactions that potentially serve to drain liquidity 
resources.
---------------------------------------------------------------------------

    A covered clearing agency should also have the operational capacity 
to comply with the proposed requirements to contain losses. The 
Commission preliminarily believes that the following measures would 
help promote such operational capacity: (i) Establishing training 
programs for employees involved in default matters to ensure policies 
are well implemented; (ii) developing a communications strategy for 
communicating with stakeholders, including the Commission, concerning 
defaults; and (iii) making sure the proper tools and resources (whether 
these are personnel or other) required are available to close out, 
transfer, or hedge open positions of a defaulting member promptly even 
in the face of rapid market movements.\287\
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    \287\ See supra note 284 and accompanying text. The Commission 
has also proposed Regulation Systems Compliance and Integrity 
(``Regulation SCI'') to establish requirements for operational 
capacity. See infra note 326 and accompanying text.
---------------------------------------------------------------------------

    In addition, based on its supervisory experience, the Commission 
preliminarily believes that a covered clearing agency's default 
procedures would generally include the following: (i) The action that 
may be taken (e.g., exercising mutualization of losses); (ii) who may 
take those actions (e.g., the division of responsibilities when 
clearing agencies operate links to other clearing agencies); (iii) the 
scope of the actions that may be taken (e.g., any limits on the total 
losses that would be mutualized); (iv) potential changes to the normal 
settlement practices, should these changes be necessary in extreme 
circumstances, to ensure timely settlement; (v) the management of 
transactions at different stages of processing; (vi) the sequencing of 
actions; (vii) the roles, obligations, and

[[Page 29545]]

responsibilities of the various parties, including non-defaulting 
members; (viii) the mechanisms to address a covered clearing agency's 
obligations to non-defaulting members (e.g., the process for clearing 
trades guaranteed by the covered clearing agency to which a defaulting 
member is a party); and (ix) the mechanisms to address the defaulting 
member's obligations to its customers (e.g., the process for dealing 
with a defaulting member's accounts).
    In addition, proposed Rule 17Ad-22(e)(13) would include the 
requirements described below, for which no comparable requirements 
under Rule 17Ad-22(d) are applicable to registered clearing agencies. 
The Commission preliminarily believes the proposed requirements are 
appropriate for covered clearing agencies given the risks that a 
covered clearing agency's size, operation, and importance pose to the 
U.S. securities markets.
a. Address Allocation of Credit Losses
    Proposed Rule 17Ad-22(e)(13)(i) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to address the allocation of credit 
losses it may face if its collateral and other resources are 
insufficient to fully cover its credit exposures, including the 
repayment of any funds the covered clearing agency may borrow from 
liquidity providers.\288\
---------------------------------------------------------------------------

    \288\ See proposed Rule 17Ad-22(e)(13), infra Part VII.
---------------------------------------------------------------------------

    The Commission preliminarily believes that this requirement is 
appropriate because requiring that policies and procedures address key 
aspects of the allocation of credit losses would provide certainty and 
predictability about the measures available to a covered clearing 
agency in the event of a default. Such certainty and predictability 
would facilitate the orderly handling of member defaults and would 
enable members to understand their obligations to the covered clearing 
agency in extreme circumstances. In some instances, managing a member 
default may involve hedging open positions, funding collateral so that 
the positions can be closed out over time, or both. A covered clearing 
agency may also decide to auction or allocate open positions to its 
participants. To the extent possible, the Commission believes a covered 
clearing agency would allow non-defaulting members to continue to 
manage their positions in the ordinary course. By addressing the 
allocation of credit losses, the covered clearing agency would have 
policies and procedures intended to address the resolution of a member 
default where its collateral and other financial resources are 
insufficient to cover credit losses.
b. Describe Replenishment of Financial Resources
    Proposed Rule 17Ad-22(e)(13)(ii) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to describe its process to replenish 
any financial resources it may use following a member default or other 
event in which use of such resources is contemplated.\289\
---------------------------------------------------------------------------

    \289\ See proposed Rule 17Ad-22(e)(13), infra Part VII.
---------------------------------------------------------------------------

    The Commission preliminarily believes this requirement is 
appropriate because the absence of procedures to replenish resources 
may undermine a covered clearing agency's ability to contain losses and 
liquidity pressures. The Commission also preliminarily believes that a 
covered clearing agency's rules and procedures to draw on financial 
resources will support the proposed rule's other requirements to 
contain losses and liquidity pressures. Such procedures commonly 
specify the order of use of different types of resources, including (i) 
assets provided by the defaulting member (such as margin or other 
collateral), (ii) the guaranty fund of the covered clearing agency, 
(iii) capital calls on members, and (iv) credit facilities. In 
addition, the Commission preliminarily believes a covered clearing 
agency could satisfy the proposed requirement by having policies and 
procedures that describe (i) how resources that have been depleted as a 
result of a member default would be replenished over time and (ii) what 
burdens a non-defaulting member may bear.
c. Test Default Procedures Annually and Following Material Changes
    Proposed Rule 17Ad-22(e)(13)(iii) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to require its members and, when 
practicable, other stakeholders to participate in the testing and 
review of its default procedures, including any close out procedures. 
The proposed rule would also require policies and procedures providing 
for such testing and review to occur at least annually and following 
material changes thereto.\290\ The Commission preliminarily expects 
that covered clearing agencies would make efforts to secure the 
participation of all stakeholders in such testing and review of default 
procedures but recognizes that covered clearing agencies may have 
limited ability to require said participation by all such stakeholders, 
and therefore the proposed rule requires such participation by other 
stakeholders only when practicable.
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    \290\ See proposed Rule 17Ad-22(e)(13), infra Part VII. The 
Commission preliminary believes that an annual testing cycle is 
appropriate for the reasons described in Part II.A.3.
---------------------------------------------------------------------------

    The Commission preliminarily believes that including members and 
other stakeholders in such testing will help to ensure that procedures 
will be practical and effective in the face of an actual default. In 
addition to the relevant employees, members, and other stakeholders 
that would be involved in testing default procedures, a covered 
clearing agency may determine, as appropriate, to include members of 
its board of directors or similar governing body, and to invite linked 
clearing agencies, significant indirect participants, providers of 
credit facilities, and other service providers to participate. The 
Commission preliminarily believes requiring member and, where 
practicable, stakeholder participation in periodic testing is 
appropriate because successful default management will require 
coordination among these parties, particularly during periods of market 
stress.
d. Request for Comments
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(e)(13). In addition, the Commission requests 
comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to ensure the covered clearing agency has the 
authority and operational capacity to take timely action to contain 
losses and liquidity demands and continue to meet its obligations? 
Should the proposed rule include minimum requirements, as proposed? Why 
or why not?
     Should the Commission require a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to require its members and, when 
practicable, other stakeholders to participate in the testing and 
review of its default procedures? Why or why not? Is it appropriate for 
stakeholders other than a covered clearing agency's participants to 
participate in the testing and review of its default procedures? Why or 
why not? Should the Commission require policies and procedures that 
would require stakeholders to be included in testing unless a 
determination is made by the

[[Page 29546]]

covered clearing agency that it would be impracticable to do so?
     Should the Commission require policies and procedures 
regarding specific default procedures for covered clearing agencies, or 
should they have discretion to create their own default procedures 
consistent with the proposed rule? If the latter, how much flexibility 
should a covered clearing agency have in its policies and procedures 
regarding the time it takes to manage a default and liquidate 
positions?
11. Proposed Rule 17Ad-22(e)(14): Segregation and Portability
    Proposed Rule 17Ad-22(e)(14) would apply to a covered clearing 
agency that is either a security-based swap clearing agency or a 
complex risk profile clearing agency.\291\ The proposed rule would 
require such a covered clearing agency to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to enable the segregation and portability of positions of a 
member's customers and the collateral provided to the covered clearing 
agency with respect to those positions, and effectively protect such 
positions and related collateral from the default or insolvency of that 
member.\292\ The Commission notes that security-based swap clearing 
agencies are currently not subject to rules regarding segregation and 
portability under existing Rule 17Ad-22.
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    \291\ See proposed Rule 17Ad-22(e)(14), infra Part VII.
    \292\ See id.
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    The Commission preliminarily believes that proposed Rule 17Ad-
22(e)(14) is appropriate because it facilitates the protection of 
customer collateral and positions by requiring a covered clearing 
agency's policies and procedures to prescribe means for holding or 
accounting for them separately from the assets of the clearing agency 
member providing services to the customer.
    The Commission preliminarily believes that proposed Rule 17Ad-
22(e)(14) should apply only to security-based swap clearing agencies 
and complex risk profile clearing agencies because existing rules 
applicable to broker-dealers address customer security positions and 
funds in cash securities and listed option markets, thereby promoting 
segregation and portability and protecting customer positions and 
funds.\293\ The Commission considered certain international standards, 
which recognize that cash market CCPs operate in legal regimes that 
achieve protection of customer assets by alternate means, in proposing 
Rule 17Ad-22(e)(14).\294\ The Commission further notes that customer 
security positions and funds in cash securities and listed options 
markets are further protected under the Securities Investor Protection 
Act of 1970 (``SIPA'').\295\
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    \293\ Exchange Act Rule 15c3-3 requires broker-dealers that 
maintain custody of customer securities and cash (a ``carrying 
broker-dealer'') to take two primary steps to safeguard these 
assets. The steps are designed to protect customers by segregating 
their securities and cash from the broker-dealer's proprietary 
business activities. If the broker-dealer fails financially, the 
securities and cash should be readily available to be returned to 
customers. In addition, if the failed broker-dealer is liquidated in 
a formal proceeding under the Securities Investor Protection Act of 
1970, the securities and cash would be isolated and readily 
identifiable as ``customer property'' and, consequently, available 
to be distributed to customers ahead of other creditors.
    The first step required by Rule 15c3-3 is that a carrying broker 
must maintain physical possession or control of all fully paid and 
excess margin securities of their customers. See 17 CFR 240.15c3-3. 
Physical possession or control means the broker-dealer must hold 
these securities in one of several locations specified in Rule 15c3-
3 and free of liens or any other interest that could be exercised by 
a third party to secure an obligation of the broker-dealer. 
Permissible locations include a bank, as defined in section 3(a)(6) 
of the Exchange Act, and a clearing agency. As described herein, 
holding jumbo/global positions in the record name and custody of a 
clearing agency is a fundamental part of current U.S. market 
structure in which many holders hold indirectly through ``street 
name.''
    The second step is that a carrying broker-dealer must maintain a 
reserve of cash or qualified securities in an account at a bank that 
is at least equal in value to the net cash owed to customers, 
including cash obtained from the use of customer securities. The 
account must be titled ``Special Reserve Bank Account for the 
Exclusive Benefit of Customers.'' The amount of net cash owed to 
customers is computed pursuant to a formula set forth in Exhibit A 
to Rule 15c3-3. Under the customer reserve formula, the broker-
dealer adds up customer credit items (e.g. cash in customer 
securities accounts and cash obtained through the use of customer 
margin securities) and then subtracts from that amount customer 
debit items (e.g. margin loans). If credit items exceed debit items, 
the net amount must be on deposit in the customer reserve account in 
the form of cash and/or qualified securities. A broker-dealer cannot 
make a withdrawal from the customer reserve account until the next 
computation and then even only if the computation shows that the 
reserve requirement has decreased. The broker-dealer must make a 
deposit into the customer reserve account if the computation shows 
an increase in the reserve requirement. See 17 CFR 240.15c3-3.
    In addition, records of customer positions are subject to 
broker-dealer recordkeeping rules. Exchange Act Rules 17a-3 and 17a-
4 require records be kept for certain periods of time, such as three 
or six year periods depending upon the type of record. See 17 CFR 
240.17a-3, 17a-4.
    See also 15 U.S.C. 78c-5 (providing for segregation with respect 
to security-based swaps pursuant to Section 3E of the Exchange Act); 
Exchange Act Release No. 34-68071 (Oct. 18, 2012), 77 FR 70213, 
(Nov. 23, 2012) (proposing Rule 18a-4 under the Exchange Act for 
segregation with respect to security-based swaps). The Commission 
has also granted conditional relief under Sections 3E(b), (d), and 
(e) of the Exchange Act to, among others, clearing entities dually 
registered with the Commission and the CFTC as registered clearing 
agencies and DCOs, respectively. See Exchange Act Release No. 34-
68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012).
    \294\ International standards recognize that regimes providing 
the same degree of protection as segregation and portability of 
customer positions at a CCP include the following features, in the 
event of a participant failure: (a) The customer positions can be 
identified timely, (b) customers will be protected by an investor 
protection scheme designed to move customer accounts from the failed 
participant to another participant in a timely manner, and (c) 
customer assets can be restored. See PFMI Report, supra note 1, at 
83 (discussing Principle 14, Explanatory Note 3.14.6). The 
Commission preliminarily believes that the customer protections 
existing under the Commission's regulatory regime for broker-dealers 
include each of these three features and that limiting the 
application of proposed Rule 17Ad-22(e)(14) in the manner described 
above is appropriate.
    The Commission also notes that, separately, it has proposed Rule 
18a-4 to apply customer protection rules to security-based swap 
dealers and major security-based swap participants. The approach in 
proposed Rule 18a-4 was modeled on the customer protection scheme 
under Rule 15c3-3 for broker-dealers. See Exchange Act Release No. 
34-68071 (Oct. 18, 2012), 77 FR 70213 (Nov. 23, 2012).
    \295\ See 15 U.S.C. 78eee et seq. Pursuant to SIPA, when a 
broker-dealer that is a member of the Securities Investor Protection 
Corporation (``SIPC'') fails and customer assets are missing, SIPC 
seeks to return customer cash and securities, and supplements the 
distribution of the remaining customer assets at the broker-dealer 
with SIPC reserve funds of up to $500,000 per customer, including a 
maximum of $250,000 for cash claims.
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    In addition, in so limiting the scope of proposed Rule 17Ad-
22(e)(14), the Commission intends to avoid requiring changes to the 
existing structure of cash securities and listed options markets in the 
United States where registered clearing agencies that provide CSD or 
CCP services play a central role. Transactions in the U.S. cash 
security and listed options markets are characterized by the following 
features: (i) Customers of members generally do not have an account at 
a clearing agency; \296\ and (ii) the clearing agency is not able to 
identify which participants' customers beneficially own the street name 
positions registered in the record name of the clearing agency (or its 
nominee) and the clearing agency has no recourse to funds of customers 
of members. Therefore, in part because neither portability nor 
segregation could occur as a practical matter under the

[[Page 29547]]

current cash securities and listed options markets structure, the 
Commission preliminarily believes that Proposed Rule 17Ad-22(e)(14) 
should apply only to a covered clearing agency that is either a 
security-based swap clearing agency or a complex risk profile clearing 
agency.
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    \296\ A customer of a member also would not have an account at 
the clearing agency where holding in record name (rather than 
through street name ownership). This is the case even where such 
record name owner-customer does not receive a paper security 
certificate but holds in book-entry form through the direct 
registration system, as direct registration system accounts are 
maintained by a transfer agent and not by the clearing agency. See 
Exchange Act Release No. 34-63320 (Nov. 16, 2010), 75 FR 71473, 
71474 (Nov. 23, 2010) (discussing the ability of registered owners 
to hold their assets on the records of transfer agents in book-entry 
form through the direct registration system).
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    The Commission notes that segregation can be achieved either 
through an omnibus account structure, as is common in the U.S. 
securities markets today, or an individual account structure. An 
omnibus account structure, where all collateral belonging to all 
customers of a particular member is commingled and held in a single 
account segregated from that of the member, might not be as 
operationally intensive as an individual account structure. Omnibus 
accounts may expose a customer to ``fellow-customer risk'' (i.e. the 
risk that another customer of the same member will default) in the 
event of a loss that exceeds the amount of available collateral posted 
by the fellow customer who has defaulted and the available resources of 
the member, in which case the remaining commingled collateral of the 
member's non-defaulting customers may be exposed to the loss. Fellow-
customer risk is of particular concern because customers may have 
limited ability to monitor or to manage the risk of their fellow 
customers. To mitigate this risk, omnibus account structures can be 
designed in a manner that operationally commingles collateral related 
to customer positions while protecting customers legally on an 
individual basis.\297\ This may require a covered clearing agency to 
rely on the records of its members or maintain its own books reflecting 
customer-level interest in the customer's portion of collateral.
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    \297\ See, e.g., Protection of Cleared Swaps Customer Contracts 
and Collateral; Conforming Amendments to the Commodity Broker 
Bankruptcy Provisions, 77 FR 6336 (Feb. 7, 2012) (CFTC adopting 
rules imposing on DCOs legal segregation with operational 
commingling (``LSOC'') for cleared swaps).
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    An omnibus account structure may be more efficient when porting 
positions and collateral for a group of customers subject to a 
defaulting member (where there has been no customer default or where 
customer collateral is legally protected on an individual basis). 
Omnibus accounts may also foster portability depending on whether the 
covered clearing agency collects margin on a gross or net basis. Margin 
calculated on a gross basis to support individual customer portfolios 
may result in less efficient netting with respect to members; however, 
it may eliminate the possibility of under-margined customer positions 
when ported. As a result, a clearing agency may be able to port in bulk 
or piecemeal the positions of a customer of a member that has 
defaulted. When margin is collected on a net basis, there may be a risk 
that full portability cannot be achieved if under-margining means that 
porting will depend on the ability and willingness of customers to 
provide additional collateral where transferee members are unwilling to 
accept the porting to them of under-margined positions.
    Alternatively, an individual account structure may also provide a 
high degree of protection from the default of another customer of a 
member, as a customer's collateral is intended to be used to cover 
losses associated solely with the default of that customer. In the 
event of a member failure (whether or not due to a customer default), 
clear and reliable identification of a customer's collateral may 
promote portability of an individual customer's positions and 
collateral or, alternatively, expedite their return to the customer. 
Maintaining individual accounts, however, can be operationally and 
resource intensive for a covered clearing agency and could impact the 
overall efficiency of its clearing operations. An individual account 
structure may also impact margin collection practices at a covered 
clearing agency, as the individual account structure may be 
inconsistent with net collection of margin because it may be 
impractical for the covered clearing agency to allocate the net margin 
to individual customers rather than among omnibus accounts.
    The Commission preliminarily notes that a covered clearing agency 
subject to the proposed rule would be required to structure its 
portability arrangements in a way that makes it highly likely that the 
positions and collateral of a defaulting member's customers will be 
effectively transferred to one or more other members. The Commission 
also preliminarily notes that the following methods may assist a 
covered clearing agency in achieving portability: (i) Identifying 
positions that belong to customers; (ii) identifying and asserting 
rights to related collateral held by or through the covered clearing 
agency; (iii) identifying potential members to accept the positions and 
collateral; (iv) disclosing relevant information to such members so 
that they can evaluate the counterparty credit and market risk 
associated with the customers and positions, respectively; (v) 
transferring positions and related collateral to one or more members; 
and (vi) carrying out default management procedures in an orderly 
manner.
    Finally, where a covered clearing agency's policies and procedures 
facilitating portability permit a transfer of specific positions and 
collateral that is not performed with the consent of the member to whom 
they are transferred, the Commission preliminarily believes that a 
covered clearing agency could satisfy this requirement by having 
policies and procedures that set out the circumstances where this may 
occur. In addition, the Commission preliminarily notes that the 
portability requirement does not apply only upon default of a member; a 
covered clearing agency should have policies and procedures that 
facilitate porting in the normal course of business, such as when a 
customer ends its relationship with a member to start a new 
relationship with a different member, or as a result of other events, 
such as a merger involving the member.\298\
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    \298\ In this regard, the Commission notes that policies and 
procedures regarding segregation and portability must satisfy the 
requirement for legal certainty in proposed Rule 17Ad-22(e)(1). See 
supra Part II.B.1.
---------------------------------------------------------------------------

    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(14). In addition, the 
Commission requests comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to enable the segregation and portability of 
positions of a participant's customers and the collateral provided to 
the covered clearing agency with respect to those positions? Why or why 
not?
     Should the Commission require a covered clearing agency's 
policies and procedures to effectively protect the positions of a 
participant's customers and related collateral from the default or 
insolvency of that participant? Why or why not?
     Does the proposed rule affect certain identifiable 
categories of covered clearing agencies differently than others in ways 
not discussed in this proposing release? If so, how? Should the 
requirements under the proposed rule apply to certain identifiable 
categories of covered clearing agencies in addition to security-based 
swap and complex risk profile clearing agencies, as proposed? Please 
explain.
12. Proposed Rule 17Ad-22(e)(15): General Business Risk
    Proposed Rule 17Ad-22(e)(15) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to identify, monitor, and manage its 
general

[[Page 29548]]

business risk and hold sufficient liquid net assets funded by equity to 
cover potential general business losses so that the covered clearing 
agency can continue operations and services as a going concern if those 
losses materialize.\299\ Registered clearing agencies are not subject 
to rules regarding general business risk under existing Rule 17Ad-22, 
but the Commission preliminarily believes the proposed rule is 
appropriate for covered clearing agencies given the risks that a 
covered clearing agency's size, operation, and importance pose to the 
U.S. securities markets.
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    \299\ See proposed Rule 17Ad-22(e)(15), infra Part VII.
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    Proposed Rule 17Ad-22(e)(15) is designed to help mitigate the 
potential impairment of a covered clearing agency's status as a going 
concern resulting from general business losses, such as a decline in 
revenues or an increase in expenses resulting in expenses that exceed 
revenues and a loss that must be charged against the covered clearing 
agency's capital.\300\ The Commission preliminarily believes that 
proposed Rule 17Ad-22(e)(15) is appropriate because it would help to 
mitigate the risk of a disruption in clearance and settlement services 
that might result from general business losses. The Commission 
preliminarily believes that such impairment could be caused by a 
variety of business factors, including poor execution of business 
strategy, negative cash flows, or unexpected and/or excessively large 
operating expenses. The Commission preliminarily believes that general 
business losses should be considered separately in the covered clearing 
agency's risk management policies and procedures to promote effective 
and efficient measuring, monitoring, and management of general business 
risk. The risk of general business losses may require a firm to take 
into account past loss events and financial projections, events 
distinct from the risks that arise from member default, credit losses, 
or liquidity shortfalls.\301\ Proposed Rule 17Ad-22(e)(15) would 
require a covered clearing agency to establish implement, maintain and 
enforce written policies and procedures reasonably designed to address 
the management of general business risk and the development of a 
business risk profile to address these concerns.\302\
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    \300\ General business risk is the risk of potential losses 
arising from the covered clearing agency's administration and 
operation as a business enterprise. Such losses are not related to 
member default under proposed Rule 17Ad-22(e)(13) nor covered by the 
financial resources required for credit and liquidity risk 
management under proposed Rules 17Ad-22(e)(4) and (7). See supra 
Parts II.B.4.c, II.B.4.f, and II.B.10 and infra Part VII (proposing 
rules for managing credit risk, liquidity risk, and participant 
default, and providing proposed rule text, respectively).
    \301\ See id.
    \302\ See proposed Rule 17Ad-22(e)(15), infra Part VII.
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    In addition, the Commission is proposing the requirements described 
below. Registered clearing agencies are not subject to similar rules 
under Rule 17Ad-22, but the Commission preliminarily believes the 
proposed requirements are appropriate for covered clearing agencies 
given the risks that a covered clearing agency's size, operation, and 
importance pose to the U.S. securities markets and are consistent with 
the Exchange Act requirements discussed above.\303\
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    \303\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
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a. Determining Liquid Net Assets for Recovery and an Orderly Wind-Down
    Proposed Rule 17Ad-22(e)(15)(i) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to determine the amount of liquid 
net assets funded by equity based upon its general business risk 
profile and the length of time required to achieve a recovery or 
orderly wind-down, as appropriate, of its critical operations and 
services if such action is taken.\304\ The Commission preliminarily 
believes that plans for orderly recovery and wind-down are critical to 
maintain functioning U.S. securities markets, particularly in times of 
market stress. Because of the reliance of securities markets, market 
participants, and investors on the safe, sound, and efficient 
operations of covered clearing agencies, the Commission believes that a 
disorderly failure of a covered clearing agency would have systemic 
consequences. Accordingly, the Commission is proposing to require 
liquid net assets funded by equity to ensure that the covered clearing 
agency can continue operations and services as a going concern in the 
event of general business losses. Equity allows a covered clearing 
agency to absorb losses on an ongoing basis and should therefore be 
permanently available for this purpose. The specific amount of liquid 
net assets funded by equity that a covered clearing agency should hold 
is discussed in more detail below.
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    \304\ See proposed Rule 17Ad-22(e)(15)(i), infra Part VII.
---------------------------------------------------------------------------

b. Requirements for Liquid Net Assets
    Proposed Rule 17Ad-22(e)(15)(ii) would require a clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for holding liquid net assets 
funded by equity equal to the greater of either six months of its 
current operating expenses or the amount determined by the board of 
directors to be sufficient to ensure a recovery or orderly wind-down of 
critical operations and services of the covered clearing agency, as 
contemplated by the plans established under proposed Rule 17Ad-
22(e)(3)(ii).\305\ A clearing agency's policies and procedures would 
require these liquid net assets to be held in addition to resources 
held to cover participant defaults or other risks covered under the 
credit risk standard in proposed Rules 17Ad-22(e)(4)(i) through (iii) 
and the liquidity risk standard in proposed Rules 17Ad-22(e)(7)(i) and 
(ii).\306\
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    \305\ See proposed Rule 17Ad-22(e)(15)(ii), infra Part VII; see 
also supra Part II.B.3.b (discussing recovery and wind-down plans 
under proposed Rule 17Ad-22(e)(3)(ii)).
    \306\ See supra Parts II.B.4.c and f and infra Part VII 
(discussing requirements under proposed Rules 17Ad-22(e)(4) and 
(e)(7), respectively, and providing proposed rule text).
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    The Commission preliminarily believes that the requirements for a 
covered clearing agency's policies and procedures regarding liquid net 
assets are necessary to ensure that a covered clearing agency's general 
business risk management is sufficiently robust to facilitate either 
its orderly recovery or wind-down. The Commission is proposing these 
requirements to ensure that a covered clearing agency's policies and 
procedures clearly define what liquid net assets are sufficient under 
Rule 17Ad-22(e)(15) and to require a covered clearing agency to 
maintain, pursuant to its policies and procedures, liquid net assets 
appropriate to cover general business risk in addition to those 
resources appropriate for managing participant default, credit losses, 
or liquidity shortfalls. Based on its supervisory experience, the 
Commission preliminarily believes that a covered clearing agency could 
satisfy this requirement by having policies and procedures that limit 
appropriate liquid net assets to cash or cash equivalents because these 
types of assets would best facilitate continued operations if a 
clearing agency experienced general business losses.\307\ Further, the

[[Page 29549]]

Commission preliminarily believes that a covered clearing agency could 
satisfy this requirement by having policies and procedures that fund 
liquid net assets by common stock, disclosed reserves, or other 
retained earnings in order to ensure that a covered clearing agency has 
a permanent source of capital from which to draw in order to continue 
as a going concern in the case of general business losses for at least 
a six month period or in accord with a determination of the board of 
directors of the covered clearing agency.\308\ Assets funded by debt or 
other less permanent sources of capital would not achieve this result 
and in some circumstances could further complicate the resolution 
process of a covered clearing agency.
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    \307\ Regarding marketable securities that may be included as 
cash equivalents within liquid net assets, the Commission has not 
proposed to require such assets to be readily available and 
convertible into cash through certain funding arrangements as it has 
proposed under Rule 17Ad-22(e)(7)(ii) (which incorporates proposed 
Rule 17Ad-22(a)(15) defining ``qualifying liquid resources''). The 
Commission preliminarily believes the amount of liquidity needed to 
cover participant defaults in the context of proposed Rule 17Ad-
22(e)(7) may be significantly greater than the amount of liquidity 
needed to cover general business losses, and it is therefore 
appropriate to permit the use of such assets in the context of 
proposed Rule 17Ad-22(e)(7)(ii), in order to provide greater 
flexibility to covered clearing agencies regarding liquidity risk 
management.
    \308\ The Commission preliminarily believes it is appropriate to 
apply the limitation that liquid net assets be funded by equity in 
proposed Rule 17Ad-22(e)(15) but has not proposed such limitation in 
Rule 17Ad-22(e)(4) (regarding financial resources required to manage 
credit risk) or Rule 17Ad-22(e)(7)(ii) (regarding qualifying liquid 
resources in relevant currencies required to manage liquidity risk) 
because equity allows a covered clearing agency to absorb losses on 
an ongoing basis so that it can continue operations as a going 
concern. Cf. PFMI Report, supra note 1, at 90 & n.137.
     In addition, the Commission preliminarily believes a covered 
clearing agency may exclude depreciation and amortization expenses 
from its calculation of current operating expenses because 
depreciation and amortization expenses are non-cash expenses and 
accordingly would not have an effect on a covered clearing agency's 
cash flow, which might affect its ability to continue operations as 
a going concern.
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    The Commission also preliminarily believes that a backward-looking 
calculation of operating expenses based on the income statement for the 
most recently ended fiscal year would not be the type of policy and 
procedure sufficient to comply with the proposed requirements regarding 
current operating expense.\309\ While reviewing past losses and past 
levels of operating expense may be a useful reference point, the 
Commission envisions that one possible approach a covered clearing 
agency could take in fulfillment of the proposed requirement would be 
to consider projected operating expense expected over some time period, 
as well as potential changes to the business environment of the covered 
clearing agency over that time period. Based on its supervisory 
experience, the Commission also believes that the following factors may 
materially affect current operating expenses, as compared to operating 
expense experienced in the past, that a covered clearing agency may 
need to take into account and therefore are likely to be important to 
the covered clearing agency's forward-looking projections: (i) 
Expectations regarding expansion of its business including as a result 
of offering new services or clearing and settling new types of 
securities, (ii) expectations regarding contraction of its business 
including due to reduction in or loss of certain types of clearing and 
settlement activity or clearing members, (iii) potential risk of any 
large one-time or non-recurring types of losses, and (iv) the degree to 
which expected future losses may be covered by insurance or an 
indemnity provided by a third-party unaffiliated with the covered 
clearing agency.
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    \309\ See id. at 90.
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    The proposed rule also requires a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for monitoring its business 
operations and reducing the likelihood of losses, which the Commission 
believes furthers the requirements of the Exchange Act discussed 
above.\310\
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    \310\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
---------------------------------------------------------------------------

    Because of the integral role that liquid net assets play in 
supporting the recovery or orderly wind-down of a covered clearing 
agency in the event of a business loss, the Commission is proposing 
requirements for a clearing agency's policies and procedures to require 
liquid net assets, funded by equity, equal to the greater of six months 
of operating expenses or an amount determined by the board of directors 
to be sufficient to facilitate an orderly recovery or wind-down of 
critical operations and services. The Commission preliminarily believes 
this is appropriate because liquid net assets allow the covered 
clearing agency to continue operations as a going concern by acting as 
a cushion while the covered clearing agency is in recovery or wind-
down.
c. Plan for Raising Additional Equity
    Proposed Rule 17Ad-22(e)(15)(iii) would further require a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide for maintaining 
a viable plan, approved by the board of directors and updated at least 
annually, for raising additional equity should its equity fall close to 
or below the amount required by the proposed rule as discussed 
above.\311\
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    \311\ See proposed Rule 17Ad-22(e)(15)(ii), infra Part VII.
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    As noted above, because of the reliance of securities markets, 
market participants, and investors on the safe, sound, and efficient 
operations of covered clearing agencies, a disorderly failure of a 
covered clearing agency would have systemic consequences. The proposed 
rule requires a covered clearing agency to maintain a viable plan to 
raise additional equity in the event that its liquid net assets funded 
by equity fall close to or below the amount required by the proposed 
rule.\312\ The Commission preliminarily believes that the proposed rule 
is necessary to facilitate ongoing management of a covered clearing 
agency's general business risk and to provide a covered clearing agency 
with a mechanism for maintaining or replenishing appropriate levels of 
equity following business losses.
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    \312\ See proposed Rule 17Ad-22(e)(15)(iii), infra Part VII.
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d. Request for Comments
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(e)(15). In addition, the Commission requests 
comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to identify, monitor, and manage the covered 
clearing agency's general business risk? Why or why not? Are there 
other requirements that the Commission should include in proposed Rule 
17Ad-22(e)(15) to address the general business risk management at 
covered clearing agencies?
     Is the proposed requirement for a covered clearing 
agency's policies and procedures to hold liquid net assets funded by 
equity equal to the greater of either (x) six months of the covered 
clearing agency's current operating expenses or (y) the amount 
determined by the board of directors to be sufficient to ensure a 
recovery or orderly wind-down of critical operations and services of 
the covered clearing agency appropriate? Why or why not? Under the 
proposed requirement for policies and procedures, is six months of 
operating expenses appropriate? Should the Commission adopt a different 
standard, such as three, nine, or twelve

[[Page 29550]]

months? Please explain in detail why using an alternative standard 
would be appropriate.
     Should the Commission require a covered clearing agency's 
policies and procedures to hold liquid net assets in addition to 
resources held to cover participant defaults or other risks covered 
under the credit risk standard in Rule 17Ad-22(b)(3)? Under the credit 
risk standard in proposed Rules 17Ad-22(e)(4)(i) through (iii), as 
applicable? Under the liquidity risk standard in proposed Rules 17Ad-
22(e)(7)(i) and (ii), as applicable? Why or why not? Has the Commission 
provided sufficient guidance regarding what constitutes ``liquid net 
assets''? Why or why not?
     Should a covered clearing agency be required to provide 
notice to the Commission at any time before its liquid net assets reach 
the minimum required amount? If so, at what amount should the 
requirement apply, e.g. at 110% of the minimum, 120% of the minimum, or 
some other amount? \313\
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    \313\ See, e.g., Commission Delegated Regulation No. 152/2013 of 
19 December 2012, 2013 O.J. (L 52), at art. 1(3) (European Union 
requiring that, if the required amount of capital held by a CCP is 
lower than 110% of the capital requirements or lower than 110% of 
[pound]7.5 million (the ``notification threshold''), the CCP shall 
immediately notify the competent authority and keep it updated at 
least weekly, until the amount of capital held by the CCP returns 
above the notification threshold).
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     Regarding securities that are cash equivalents and 
therefore liquid net assets, should the Commission establish 
requirements for policies and procedures that discount the value of 
these securities compared to their fair value?
13. Proposed Rule 17Ad-22(e)(16): Custody and Investment Risks
    Proposed Rule 17Ad-22(e)(16) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to safeguard its own and its 
participants' assets and minimize the risk of loss and delay in access 
to these assets.\314\ It also requires a clearing agency to invest its 
own and its participants' assets in instruments with minimal credit, 
market, and liquidity risks.\315\ Rule 17Ad-22(d)(3) currently requires 
similar policies and procedures of registered clearing agencies, but 
the proposed rule would further require a covered clearing agency to 
have policies and procedures designed to safeguard its own and its 
participants' assets.\316\ The Commission preliminarily believes this 
additional specificity is appropriate for covered clearing agencies 
given the risks that a covered clearing agency's size, operation, and 
importance pose to the U.S. securities markets. Because this is the 
only element of Rule 17Ad-22(e)(16) that differs from Rule 17Ad-
22(d)(3), the Commission anticipates that covered clearing agencies may 
need to make only limited changes to update their policies and 
procedures to comply with the proposed rule.\317\
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    \314\ See proposed Rule 17Ad-22(e)(16), infra Part VII.
    \315\ See id.
    \316\ Registered clearing agencies are currently subject to 
existing Rule 17Ad-22(d)(3), which requires them to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to hold assets in a manner that minimizes risk 
of loss or of delay in its access to them, and invest assets in 
instruments with minimal credit, market, and liquidity risks. See 17 
CFR 240.17Ad-22(d)(3); see also Clearing Agency Standards Release, 
supra note 5, at 66247-48.
    \317\ See supra Part II.A.4.
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    Custody risk is the risk of loss on assets held in custody in the 
event of a custodian's (or subcustodian's) insolvency, negligence, 
fraud, or poor administration. Investment risk is the risk of loss 
faced by a clearing agency when it invests its own or its participants' 
assets. In each case, the risk is the likelihood that assets securing 
participant obligations to the covered clearing agency or otherwise 
needed for the clearing agency to meet its own obligations would be 
unavailable or insufficient when the covered clearing agency needs to 
draw on them. Failure by a clearing agency to hold assets in 
instruments with minimal credit, market, and liquidity risk may limit 
the clearing agency's ability to retrieve these assets promptly. That, 
in turn, can cause the clearing agency to fail to meet its settlement 
obligations to its participants or cause the clearing agency's 
participants to fail to meet their obligations. Accordingly, as under 
Rule 17Ad-22(d)(3), the Commission believes it is appropriate to 
continue to limit such risks to ensure the proper functioning of a 
covered clearing agency pursuant to Section 17A of the Exchange 
Act.\318\ The Commission also preliminarily believes that requiring a 
covered clearing agency to have policies and procedures that safeguard 
its own and its participants' assets further supports this objective.
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    \318\ The Commission preliminarily believes, however, that it 
should not indirectly prohibit the use of commercial banks by 
covered clearing agencies holding cash as collateral or for other 
services related to clearance and settlement activity when 
comparable services are available from a central bank.
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    Under existing Rule 17Ad-22(d)(3), the members of a registered 
clearing agency typically deposit securities with the clearing agency, 
or the clearing agency holds assets that secure the participants' 
obligations to it and may invest these assets. In such circumstances, 
the clearing agency is exposed to custody and investment risk. The 
Commission is aware that, currently, clearing agencies ordinarily seek 
to minimize the risk of loss or delay in access by holding assets that 
are highly liquid (e.g., cash, U.S. Treasury securities, or securities 
issued by a U.S. government agency) and by using only supervised and 
regulated entities such as banks to act as custodians for the assets 
and to facilitate settlement. Steps are also ordinarily taken to ensure 
assets held in custody are protected against claims of a custodian's 
creditors through trust accounts or other equivalent arrangements. In 
addition, the use of individual custodians is subject to periodic 
assessment across several risk criteria and should remain within 
acceptable concentration limits.
    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(16). In addition, the 
Commission requests comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to invest its own and its participants' assets 
in instruments with minimal credit, market, and liquidity risks? Why or 
why not?
     Should the Commission require a covered clearing agency's 
policies and procedures to minimize the risk of loss and delay in 
access to its own and its participants' assets? Why or why not?
     Has the Commission provided sufficient guidance regarding 
what instruments have ``minimal credit, market, and liquidity risks''? 
Should the Commission further specify what kinds of assets would be 
appropriate under the proposed requirement, such as investments that 
are secured by, or are claims on, high-quality obligors and investments 
that allow for timely liquidation with little, if any, adverse price 
effect? Why or why not?
     Should covered clearing agencies ever be permitted to hold 
assets in instruments that do not have minimal credit, market, and 
liquidity risk? If so, why and under what circumstances? What type of 
measures should covered clearing agencies have in place to minimize the 
risk of loss from delays in accessing these assets? Should the proposed 
rule specify any such requirements? Should the Commission develop more 
specific criteria regarding how covered clearing agencies may hold or 
invest assets?

[[Page 29551]]

14. Proposed Rule 17Ad-22(e)(17): Operational Risk Management
    Proposed Rule 17Ad-22(e)(17) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to manage the covered clearing 
agency's operational risk.\319\ Operational risk involves, among other 
things, the likelihood that deficiencies in information systems or 
internal controls, human errors or misconduct, management failures, 
unauthorized intrusions into corporate or production systems, or 
disruptions from external events such as natural disasters, would 
adversely affect the functioning of a clearing agency. Proposed Rule 
17Ad-22(e)(17)(i) would require a covered clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to identify the plausible sources of operational 
risk, both internal and external, and mitigate their impact through the 
use of appropriate systems, policies, procedures, and controls.\320\ 
Proposed Rule 17Ad-22(e)(17)(ii) would require the covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to ensure that systems have a high 
degree of security, resiliency, operational reliability, and adequate, 
scalable capacity.\321\ Proposed Rule 17Ad-22(e)(17)(iii) further 
requires a covered clearing agency to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
provide for a business continuity plan that addresses events posing a 
significant risk of disrupting operations.\322\ Rule 17Ad-22(d)(4) 
currently requires a registered clearing agency to have policies and 
procedures that are substantially similar to those in proposed Rules 
17Ad-22(e)(17)(i) through (iii).\323\ Although proposed Rules 17Ad-
22(e)(17)(i) through (iii) differ from Rule 17Ad-22(d)(4) in 
contemplating both internal and external operational risks, a high 
degree of security and operational reliability for systems, and, in the 
context of business continuity plans, events posing a significant risk 
of disrupting operations, the Commission preliminarily believes that a 
covered clearing agency may need to make only limited changes to update 
its policies and procedures. The Commission preliminarily believes 
these requirements are appropriate for covered clearing agencies given 
the risks that a covered clearing agency's size, operation, and 
importance pose to the U.S. securities markets.
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    \319\ See proposed Rule 17Ad-22(e)(17), infra Part VII.
    \320\ See proposed Rule 17Ad-22(e)(17)(i), infra Part VII.
    \321\ See proposed Rule 17Ad-22(e)(17)(ii), infra Part VII. By 
requiring ``adequate, scalable capacity,'' the Commission 
preliminarily believes that a covered clearing agency should have 
operational systems that can be extended or expanded based on its 
anticipated business needs.
    \322\ See proposed Rule 17Ad-22(e)(17)(iii), infra Part VII.
    \323\ Rule 17Ad-22(d)(4) requires a registered clearing agency 
to establish policies and procedures reasonably designed to identify 
sources of operational risk and minimize them through the 
development of appropriate systems, controls, and procedures. It 
also requires registered clearing agencies to establish policies and 
procedures reasonably designed to implement systems that are 
reliable and secure, and have adequate, scalable capacity; and have 
business continuity plans that allow for timely recovery of 
operations and fulfillment of a clearing agency's obligations. See 
17 CFR 240.17Ad-22(d)(4); see also Clearing Agency Standards 
Release, supra note 5, at 66248-49.
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    As with Rule 17Ad-22(d)(4), the Commission preliminarily believes 
that the requirements in proposed Rule 17Ad-22(e)(17)(i) through (iii) 
should help covered clearing agencies and its participants continue to 
address and manage risks posed by potential operational deficiencies. 
Specifically, to help limit disruptions that may impede the proper 
functioning of a covered clearing agency, the Commission preliminarily 
believes it is imperative that covered clearing agencies review their 
operations for potential weaknesses and develop appropriate systems, 
controls, and procedures to address weaknesses the proposed rule seeks 
to mitigate.
    The Commission intends for proposed Rule 17Ad-22(e)(17) to 
supplement the existing guidance provided by the Commission in its 
Automation Review Policy (``ARP'') statements \324\ and the Interagency 
White Paper on Sound Practices to Strengthen the Resilience of the U.S. 
Financial System.\325\ The Commission also preliminarily believes that 
the proposed rules are consistent with the Commission's objectives in 
proposed Regulation SCI.\326\
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    \324\ See Automated Systems of Self-Regulatory Organizations, 
Exchange Act Release No. 34-27445 (Nov. 16, 1989), 54 FR 48703 (Nov. 
24, 1989) (``ARP I''); Automated Systems of Self-Regulatory 
Organizations (II), Exchange Act Release No. 34-29815 (May 9, 1991), 
56 FR 22489 (May 15, 1991) (``ARP II'').
    Generally, the guidance in ARP I and ARP II provides for the 
following activities by clearing agencies: (1) Performing periodic 
risk assessments of its automated data processing (``ADP'') systems 
and facilities; (2) providing for the selection of the clearing 
agency's independent auditors by non-management directors and 
authorizing such non-management directors to review the nature, 
scope, and results of all audit work performed; (3) having an 
adequately staffed and competent internal audit department; (4) 
furnishing annually to participants audited financial statements and 
an opinion from an independent public accountant as to the clearing 
agency's system of internal control--including unaudited quarterly 
financial statements also should be provided to participants upon 
request; and (5) developing and maintaining plans to assure the 
safeguarding of securities and funds, the integrity of the ADP 
system, and recovery of securities, funds, or data under a variety 
of loss or destruction scenarios.
    \325\ See Exchange Act Release No. 34-47638 (Apr. 7, 2003), 68 
FR 17809 (Apr. 11, 2003), available at http://www.sec.gov/news/studies/34-47638.htm.
    \326\ Proposed Rule 17Ad-22(e)(17) would not conflict with the 
Commission's proposed Regulation SCI, should the Commission 
determine at a later date to adopt those rules as proposed. Proposed 
Regulation SCI would, however, subject all covered clearing agencies 
to certain requirements, including requirements for operational risk 
management and business continuity planning, in addition to those 
that appear in this proposal. See Exchange Act Release No. 34-69077 
(Mar. 8, 2013), 78 FR 18083, 18091-141 (Mar. 25, 2013).
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    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rules 17Ad-22(e)(17). In addition, the 
Commission requests comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to manage its operational risks by establishing 
and maintaining a business continuity plan that addresses events posing 
a significant risk of disrupting operations? Why or why not? Has the 
Commission provided sufficient guidance on what an event ``posing a 
significant risk of disrupting operations'' would be?
     Should the Commission's proposal require a specific 
methodology to identify and mitigate operational risk? If so, what is 
the methodology and why should this methodology be imposed?
     Is the Commission's proposed approach with respect to 
ensuring that systems have a high degree of security, resiliency, and 
operational reliability appropriate and sufficiently clear? Why or why 
not?
     Are there any other requirements that should be included 
in the rule to facilitate policies and procedures for operational risk 
management? Why or why not?
     Should the Commission adopt additional policies and 
procedures requirements for business continuity planning? If so, please 
explain in detail.
15. Proposed Rule 17Ad-22(e)(18): Access and Participation Requirements
    Proposed Rule 17Ad-22(e)(18) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to establish objective, risk-based, 
and publicly

[[Page 29552]]

disclosed criteria for participation,\327\ which permit fair and open 
access by direct and, where relevant, indirect participants and other 
FMUs.\328\
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    \327\ The Commission notes that, in contrast to other 
requirements in Rule 17Ad-22(e) where ``transparent'' is used and 
permits disclosure ``where appropriate'' pursuant to Rule 17Ad-
22(a)(20), the requirement here for policies and procedures designed 
to ensure ``publicly disclosed'' criteria for participation would 
require policies and procedures requiring such disclosure.
    \328\ See proposed Rule 17Ad-22(e)(18), infra Part VII.
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    In addition to the requirements described above,\329\ Section 17A 
of the Exchange Act requires registered clearing agencies to have rules 
not designed to permit unfair discrimination in the admission of 
participants.\330\ The Commission has historically used its authority 
to help ensure fair access and participation requirements.\331\ In this 
regard, the Commission notes that Rules 17Ad-22(b)(5) through (7) 
impose requirements regarding access and participation for the policies 
and procedures of registered clearing agencies that provide CCP 
services.\332\ Similarly, Rule 17Ad-22(d)(2) requires a registered 
clearing agency to establish policies and procedures for access and 
participation that require participants to have sufficient financial 
resources and robust operational capacity to meet obligations arising 
from participation in the CCP and have procedures in place to monitor 
that participation requirements are met on an ongoing basis.\333\
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    \329\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
    \330\ See 15 U.S.C. 78q-1(b)(3)(F).
    \331\ See, e.g., 17 CFR 240.17Ad-22(b)(5) through (7), (d)(2); 
Clearing Agency Standards Release, supra note 5, at 66238-43, 66246-
47 (adopting minimum access and participation requirements for 
registered clearing agencies); Exchange Act Release No. 34-16900 
(June 17, 1980), 45 FR 41920 (June 23, 1980) (outlining staff 
guidance establishing minimum standards for participation and fair 
access necessary for registration as a clearing agency).
    \332\ See 17 CFR 240.17Ad-22(b)(5) through (7); Clearing Agency 
Standards Release, supra note 5, at 66238-43. The Commission notes 
that covered clearing agencies providing CCP services would remain 
subject to the requirements under Rule 17Ad-22(b), in addition to 
the requirements under proposed Rule 17Ad-22(e)(18).
    \333\ Rule 17Ad-22(d)(2) requires a registered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to (i) require participants to have 
sufficient financial resources and robust operational capacity to 
meet obligations arising from participation in the clearing agency; 
(ii) have procedures in place to monitor that participation 
requirements are met on an ongoing basis; (iii) have participation 
requirements that are objective and publicly disclosed, and permit 
fair and open access. See 17 CFR 240.17Ad-22(d)(2); see also 
Clearing Agency Standards Release, supra note 5, at 66246-47.
     The Commission notes that the elements of Rule 17Ad-
22(d)(2)(i), regarding policies and procedures requiring 
participants to have financial resources and robust operational 
capacity to meet obligations arising from participation are also 
reflected in other proposed rules, including Rules 17Ad-22(e)(4) and 
(17). See supra Parts II.B.4.c (requiring under proposed Rule 17Ad-
22(e)(4) policies and procedures for testing the sufficiency of 
financial resources) and II.B.14 (requiring under proposed Rule 
17Ad-22(e)(17) policies and procedures for operational risk 
management).
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    Appropriate minimum operational, legal, and capital requirements 
for membership that are maintained and enforced through the supervisory 
practices of a clearing agency help to ensure all members will be 
reasonably capable of meeting their various obligations to the clearing 
agency in stressed market conditions and upon member default. Member 
defaults challenge the safe functioning of a clearing agency by 
creating credit and liquidity risks, which impede a clearing agency's 
ability to settle securities transactions in a timely manner. Ensuring 
that clearing members meet objective levels of operational and 
financial soundness helps to counterbalance the potential for cascading 
effects on other participants and limit the potential of a systemic 
disruption in the U.S. securities markets. Fair and open access to all 
parties meeting the objective criteria for participation similarly 
helps to ensure wide participation and thereby increase beneficial risk 
mitigating effects.
    Accordingly, the Commission preliminarily believes Rule 17Ad-
22(e)(18) is appropriate because it would promote membership standards 
at covered clearing agencies that are likely to limit the potential for 
member defaults and, as a result, losses to non-defaulting members in 
the event of a member default. The proposed rule has similar 
requirements to those applied to registered clearing agencies under 
Rule 17Ad-22(d)(2) but would also explicitly require a covered clearing 
agency's policies and procedures to establish publicly disclosed 
criteria for participation, which permit fair and open access by direct 
and, where relevant, indirect participants and other FMUs, and also 
require that the criteria be risk-based, in addition to objective.\334\ 
The Commission preliminarily believes the requirement that policies and 
procedures for publicly disclosed criteria for participation that 
specify fair and open access by both direct and indirect participants 
and other FMUs is appropriate because of the size and reach of covered 
clearing agencies, which are likely to transact or link with many 
participants, both direct and indirect, as well as other FMUs. The 
Commission also preliminarily believes that the requirement for risk-
based criteria helps protect investors and facilitates prompt and 
accurate clearance and settlement by helping to ensure that covered 
clearing agencies accept participants that are less prone to default.
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    \334\ The Commission is proposing Rule 17Ad-22(e)(18) as part of 
a comprehensive set of rules for regulating covered clearing 
agencies that is consistent with and comparable to other domestic 
and international standards for FMIs. Because of the similarity 
between the existing requirement in Rule 17Ad-22(d)(2)(iii) and 
these requirements under proposed Rule 17Ad-22(e)(18), the 
Commission anticipates that covered clearing agencies may need to 
make only limited changes to update their policies and procedures to 
comply with these requirements under the proposed rule. See supra 
Part II.A.4.
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    In addition, the Commission is proposing a requirement that covered 
clearing agencies establish, implement, maintain and enforce written 
policies and procedures reasonably designed to require participants to 
have sufficient financial resources and robust operational capacity to 
meet obligations arising from participation in the clearing agency and 
to monitor compliance with participation requirements on an ongoing 
basis. Rule 17Ad-22(d)(2)(i) and (ii) also require a registered 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to have procedures in place 
to require participants to have sufficient financial resources and 
robust operational capacity to meet obligations arising from 
participation in the clearing agency and to monitor that participation 
requirements are met on an ongoing basis.\335\ Because these other 
requirements in proposed Rule 17Ad-22(e)(18) are the same as those for 
registered clearing agencies more generally under existing Rule 17Ad-
22(d)(2), the Commission anticipates that covered clearing agencies may 
need to make only limited changes to update their policies and 
procedures.\336\ As with Rule 17Ad-22(d)(2), the Commission believes 
these requirements are appropriate because they would further support 
membership standards at covered clearing agencies that are likely to 
limit the potential for member defaults and, as a result, losses to 
non-defaulting members in the event of a member default.
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    \335\ See supra note 333 and accompanying text.
    \336\ See supra Part II.A.4 (noting the anticipated effect of 
the proposed rule) and infra Part IV.B.3.c (describing the current 
practices at registered clearing agencies regarding settlement).
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    Request for Comments. The Commission generally requests comments on 
all aspects of proposed

[[Page 29553]]

Rule 17Ad-22(e)(18). In addition, the Commission requests comments on 
the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to monitor compliance with its participation 
requirements on an ongoing basis? Why or why not? Would a more specific 
monitoring requirement be appropriate? For example, should this 
requirement specify a frequency of review? Why or why not? If so, what 
would be the appropriate frequency of review? Please explain.
     Would it be appropriate for the Commission to require a 
covered clearing agency's policies and procedures to provide for 
different categories of participation? If so, please explain in detail 
what these different categories would be and why they would be 
appropriate.
16. Proposed Rule 17Ad-22(e)(19): Tiered Participation Agreements
    Proposed Rule 17Ad-22(e)(19) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to identify, monitor, and manage the 
material risks to the covered clearing agency arising from arrangements 
in which firms that are indirect participants in the covered clearing 
agency rely on the services provided by direct participants in the 
covered clearing agency to access the covered clearing agency's 
payment, clearing, or settlement facilities (hereinafter ``tiered 
participation arrangements'').\337\ The Commission preliminarily 
believes the proposed rule is appropriate due to the associated 
dependencies and risk exposures that tiered participation arrangements 
create, as discussed above. Such risks, including credit, liquidity, 
and operational risks, can undermine the operations of a covered 
clearing agency and pose risks to the operations of a clearing agency's 
participants, both direct and indirect, and to the broader securities 
markets as well.
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    \337\ See proposed Rule 17Ad-22(e)(19), infra Part VII. Because 
proposed Rule 17Ad-22(e)(19) only addresses the situation where a 
covered clearing agency relies on direct participants, the proposed 
rule does not apply to a broker-dealer that is a member of a CSD and 
maintains accounts for retail customers.
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    Registered clearing agencies are currently not subject to rules 
regarding tiered participation arrangements under existing Rule 17Ad-
22. The Commission preliminarily believes the proposed rule is 
appropriate for covered clearing agencies, given the risks that a 
covered clearing agency's size, operation, and importance pose to the 
U.S. securities markets, and is consistent with the requirements of the 
Exchange Act discussed above.\338\
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    \338\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
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    The Commission has previously noted that, in situations where 
direct access to clearing agencies is limited by reasonable 
participation standards, firms that do not meet these standards may 
still be able to access clearing agencies through correspondent 
clearing arrangements with direct participants.\339\ Such a process 
would involve the non-participant entering into a correspondent 
clearing arrangement with a participant so that the transaction may be 
submitted by the participant to the clearing agency. The dependencies 
and risk exposures, including credit, liquidity, and operational risks, 
inherent in tiered participation arrangements present risks to a 
clearing agency and its functioning, in addition to the direct 
participant. A covered clearing agency with direct participants that 
clear transactions on behalf of indirect participants with large values 
or volumes faces the risk of default by both the indirect participant 
itself and the direct participant through which those transactions are 
routed. Accordingly the Commission is proposing Rule 17Ad-22(e)(19) to 
promote the ongoing management of risks associated with such tiered 
participation arrangements.
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    \339\ See Exchange Act Release No. 34-63107 (Oct. 14, 2010), 75 
FR 65882 (Oct. 26, 2010) (proposing ownership limitations and 
governance requirements for security-based swap clearing agencies, 
security-based swap execution facilities, and national securities 
exchanges with respect to security-based swaps under Regulation MC).
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    In addition, the Commission is proposing to require that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to regularly review the 
material risks to the covered clearing agency arising from such tiered 
participation arrangements.\340\ The Commission preliminarily believes 
the proposed requirement is appropriate due to the ongoing dependencies 
and risk exposures that tiered arrangements present to the operation of 
a covered clearing agency and to the operation of a covered clearing 
agency's participants. Registered clearing agencies are currently not 
subject to a similar requirement under existing Rule 17Ad-22, and that 
the proposed rule is appropriate for covered clearing agencies, given 
the risks that a covered clearing agency's size, operation, and 
importance pose to the U.S. securities markets, and is consistent with 
the requirements of the Exchange Act discussed above.\341\
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    \340\ See proposed Rule 17Ad-22(e)(19), infra Part VII.
    \341\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
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    The operational, financial, and other interconnections between 
direct and indirect participants to tiered participation arrangements 
are subject to market forces and can therefore change over time. 
Because direct and indirect participants collectively contribute to the 
operational and financial stability of a covered clearing agency, the 
Commission preliminarily believes that the requirement to regularly 
review a covered clearing agency's tiered participation arrangements 
supports the Exchange Act requirements that clearing agencies be able 
to facilitate prompt and accurate clearance and settlement, protect 
investors and the public interest, and ensure the safeguarding of 
securities and funds in the custody or control of the clearing agency 
or for which the clearing agency is responsible.\342\
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    \342\ See 15 U.S.C 78q-1(b)(3)(A).
---------------------------------------------------------------------------

    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(19). In addition, the 
Commission requests comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to identify, monitor and manage the material 
risks to the covered clearing agency arising from arrangements in which 
firms that are indirect participants in the covered clearing agency 
rely on the services provided by direct participants to access the 
covered clearing agency's payment, clearing, or settlement facilities? 
Why or why not?
     Has the Commission provided sufficient guidance regarding 
who would be ``indirect participants'' and ``direct participants''? Why 
or why not?
17. Proposed Rule 17Ad-22(e)(20): Links
    Proposed Rule 17Ad-22(e)(20) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to identify, monitor, and manage 
risks related to any link with one or more other clearing agencies, 
FMUs, or trading markets.\343\ Rule 17Ad-22(d)(7) requires registered 
clearing agencies to have policies and

[[Page 29554]]

procedures for evaluating the potential sources of risks that can arise 
from links.\344\ For the purposes of Rule 17Ad-22(e)(20), however, the 
Commission would further define ``link'' in proposed Rule 17Ad-
22(a)(10) to mean any set of contractual and operational arrangements 
between a covered clearing agency and one or more other clearing 
agencies, FMUs, or trading venues that connect them directly or 
indirectly for the purposes of participating in settlement, cross 
margining, expanding its services to additional instruments and 
participants, or for any other purposes material to their 
business.\345\ The Commission preliminarily believes this expanded and 
more prescriptive approach to defining a link is appropriate for 
covered clearing agencies given their size, global operation, and 
importance to the U.S. securities markets.
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    \343\ See proposed Rule 17Ad-22(e)(20), infra Part VII.
    \344\ Rule 17Ad-22(d)(7) requires a registered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to evaluate the potential sources of 
risks that can arise when the clearing agency establishes links 
either cross-border or domestically to clear or settle trades, and 
ensure that the risks are managed prudently on an ongoing basis. See 
17 CFR 240.17Ad-22(d)(7); see also Clearing Agency Standards 
Release, supra note 5, at 66250-51.
    \345\ See proposed Rule 17Ad-22(a)(10), infra Part VII.
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    In addition to the requirements discussed above,\346\ Section 17A 
of the Exchange Act directs the Commission to facilitate the 
establishment of linked or coordinated facilities for clearance and 
settlement.\347\ Links between clearing agencies, FMUs, and trading 
markets develop in several circumstances for different reasons. A CCP 
may establish a link with another CCP to enable a participant in the 
first CCP to clear trades with a participant in the second CCP. 
Similarly, a CSD may establish a link with another CSD to enable its 
participants to access services provided by the other CSD. Clearing 
agencies may also generally establish links with trade repositories and 
trading markets to fulfill regulatory obligations.
---------------------------------------------------------------------------

    \346\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
    \347\ See 15 U.S.C. 78q-1(a)(2)(A)(ii); see also 15 U.S.C. 78q-
1(a)(1)(D) (Congress finding that the linking of all clearance and 
settlement facilities and the development of uniform standards and 
procedures for clearance and settlement will reduce unnecessary 
costs and increase the protection of investors and persons 
facilitating transactions by and acting on behalf of investors).
---------------------------------------------------------------------------

    Accordingly, the Commission is proposing Rule 17Ad-22(e)(20) to 
ensure that covered clearing agencies identify and assess the potential 
sources of risk arising from a link arrangement and incorporate that 
analysis into its risk management policies and procedures. In certain 
cases, the creation of a link may raise risks similar to those raised 
by tiered participation arrangements and participant requirements, 
discussed above: Namely, the interconnections between the clearing 
agency and the other entity may increase the risks to the clearing 
agency stemming from, among other things, the risks of participant 
default, credit losses, or liquidity shortfalls arising through the 
linked entity rather than the clearing agency's own operations.\348\ 
The range of implicated risks is broad; a clearing agency that operates 
links may increase its exposure to legal, operational, custody, 
settlement, credit, and liquidity risk depending on the nature and 
extent of the link involved.
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    \348\ See supra Parts II.B.15 and 16 (discussing the access and 
participation requirements in proposed Rule 17Ad-22(e)(18) and 
requirements for tiered participation arrangements in proposed Rule 
17Ad-22(e)(19)).
---------------------------------------------------------------------------

    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(20) and 17Ad-22(a)(10). In 
addition, the Commission requests comments on the following specific 
issue:
     Should the Commission require a covered clearing agency's 
policies and procedures to identify, monitor, and manage risks related 
to any link the covered clearing agency establishes with one or more 
other clearing agencies, FMUs, or trading markets? Why or why not?
     Is the definition of ``link'' in proposed Rule 17Ad-
22(a)(10) appropriate and sufficiently clear in light of the proposed 
requirements? Why or why not? Is there an alternative definition that 
the Commission should consider?
18. Proposed Rule 17Ad-22(e)(21): Efficiency and Effectiveness
    Proposed Rule 17Ad-22(e)(21) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to ensure that it is efficient and 
effective in meeting the requirements of its participants and the 
markets it serves.\349\ Rule 17Ad-22(d)(6) similarly requires 
registered clearing agencies to have policies and procedures designed 
to be cost-effective in meeting the requirements of participants while 
maintaining safe and secure operations.\350\
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    \349\ See proposed Rule 17Ad-22(e)(21), infra Part VII.
    \350\ Rule 17Ad-22(d)(6) requires a registered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to be cost-effective in meeting the 
requirements of participants while maintaining safe and secure 
operations. See 17 CFR 240.17Ad-22(d)(6); see also Clearing Agency 
Standards Release, supra note 5, at 66250.
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    Proposed Rule 17Ad-22(e)(21) would further require a covered 
clearing agency's management to regularly review the efficiency and 
effectiveness of its (i) clearing and settlement arrangements; (ii) 
operating structure, including risk management policies, procedures, 
and systems; (iii) scope of products cleared, settled, or recorded; and 
(iv) use of technology and communication procedures.\351\ The 
Commission preliminarily believes this requirement for regular review 
is appropriate for covered clearing agencies given the risks that a 
covered clearing agency's size, global operation, and importance pose 
to the U.S. securities markets.\352\
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    \351\ See proposed Rule 17Ad-22(e)(21), infra Part VII.
    \352\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
---------------------------------------------------------------------------

    For purposes of the proposed rule, efficiency refers generally to 
the efficient use of resources by a clearing agency to perform its 
functions, and effectiveness refers to its ability to meet its intended 
goals and objectives. A covered clearing agency that operates 
inefficiently or functions ineffectively may distort financial activity 
and market structure, increasing not only the risks borne by its 
members, but also the risks of indirect participants, such as the 
customers of participants or other buyers and sellers of securities. If 
a covered clearing agency is inefficient, a participant may choose not 
to trade or may choose to settle bilaterally, which could potentially 
result in greater risks to the U.S. financial system than would 
otherwise occur in the presence of a more efficiently functioning 
covered clearing agency.
    In addition to the requirements discussed above,\353\ Section 17A 
of the Exchange Act requires that registered clearing agencies have 
rules designed to promote the prompt and accurate clearance and 
settlement of securities transactions,\354\ following a finding by 
Congress that inefficient procedures for clearance and settlement 
impose unnecessary costs on investors and persons facilitating 
transactions by and acting on behalf of investors.\355\ The

[[Page 29555]]

Commission preliminarily believes that proposed Rule 17Ad-22(e)(21) is 
appropriate because a covered clearing agency must be designed and 
operated to meet the needs of its participants and the markets it 
serves, while remaining sufficiently flexible to respond to changing 
demand and new technologies.
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    \353\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
    \354\ See 15 U.S.C. 78q-1(b)(3)(F).
    \355\ See 15 U.S.C. 78q-1(a)(1)(B); see also 15 U.S.C. 78q-
1(a)(1)(C) (Congress finding that new data processing and 
communications techniques create the opportunity for more efficient, 
effective, and safe procedures for clearance and settlement).
---------------------------------------------------------------------------

    The Commission is also proposing to require that a covered clearing 
agency regularly review the items identified in Rule 17Ad-22(e)(21)(i) 
through (iv) because the Commission preliminarily believes that they 
are reflective of key aspects of a clearing agency's business necessary 
for efficient and effective operation. Moreover, because technology, 
sound practices, market forces, and the number and characteristics of 
participants may change over time, the Commission preliminarily 
believes that measures of efficiency and effectiveness must be subject 
to policies and procedures for regular review.
    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(21). In addition, the 
Commission requests comments on the following specific issues:
     Has the Commission provided sufficient guidance on what 
policies and procedures would be necessary to ensure that a covered 
clearing agency is ``efficient and effective'' in meeting the 
requirements of the proposed rule? Why or why not?
     Is the proposed requirement for a covered clearing 
agency's policies and procedures to regularly review the following 
aspects of its business and operations appropriate: Clearing and 
settlement arrangements; operating structure, including risk management 
policies, procedures, and systems; the scope of products cleared, 
settled, or recorded; and the use of technology and communication 
procedures? Why or why not? Should the Commission require that other 
aspects of a covered clearing agency's business and operations be 
subject to regular review?
19. Proposed Rule 17Ad-22(e)(22): Communication Procedures and 
Standards
    Proposed Rule 17Ad-22(e)(22) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to ensure that it uses, or at a 
minimum accommodates, relevant internationally accepted communication 
procedures and standards in order to facilitate efficient payment, 
clearing, and settlement.\356\ No comparable requirement exists for 
registered clearing agencies under Rule 17Ad-22(d). The Commission 
preliminarily believes this proposed requirement is appropriate for 
covered clearing agencies given a covered clearing agency's size and 
global operation. The Commission understands that covered clearing 
agencies currently use the relevant internationally accepted 
communication procedures and standards,\357\ so the Commission expects 
only limited changes may be necessary to satisfy the requirements of 
the proposed rule.
---------------------------------------------------------------------------

    \356\ See proposed Rule 17Ad-22(e)(22), infra Part VII.
    \357\ See generally Finacle, Messaging Standards in Financial 
Industry, (Infosys Thought Paper, 2012), available at http://www.infosys.com/finacle/solutions/thought-papers/Documents/messaging-standards-financial-industry.pdf (describing messaging 
standards such as SWIFT, FIX, and Fpml).
---------------------------------------------------------------------------

    The ability of participants to communicate with a covered clearing 
agency in a timely, reliable, and accurate manner is important to 
achieving prompt and accurate clearance and settlement. The Commission 
preliminarily believes that requiring policies and procedures in line 
with internationally accepted communication procedures and standards is 
appropriate for a covered clearing agency for two reasons. First, 
internationally accepted communication procedures and standards, 
because they are widely accepted and adopted standards, reduce the 
likelihood of errors and technical complexity in the clearance and 
settlement process, thereby reducing risks and costs, improving 
efficiency, and reducing barriers to entry. Such procedures and 
standards would include standardized protocols for exchanging messages 
and reference data for identifying financial instruments and 
counterparties.
    Second, internationally accepted communication procedures and 
standards ensure effective communication with direct and indirect 
participants, which the Commission preliminarily believes is important 
for covered clearing agencies, given the global nature of their 
businesses. Securities markets in the United States are among the 
largest and most actively traded in the world, with direct and indirect 
participants from numerous other countries that necessitate the 
development and use of internationally accepted communication 
procedures and standards. Accordingly, the Commission preliminarily 
believes that covered clearing agencies are likely to be engaged in 
transactions across borders, where standardized communications 
protocols and mechanisms are essential to ensure prompt and accurate 
clearance and settlement.
    Request for Comments. The Commission generally requests comments on 
all aspects of proposed Rule 17Ad-22(e)(22). In addition, the 
Commission requests comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to use, or at a minimum accommodate, relevant 
internationally accepted communication procedures and standards in 
order to facilitate efficient payment, clearing, and settlement? Why or 
why not?
     Is the Commission's assumption that covered clearing 
agencies are already using internationally accepted communication 
procedures correct? Why or why not?
     Has the Commission provided sufficient guidance on what 
``relevant internationally accepted communication procedures and 
standards'' would be appropriate under the proposed policies and 
procedures requirement? Why or why not?
20. Proposed Rule 17Ad-22(e)(23): Disclosure of Rules, Key Procedures, 
and Market Data
    Proposed Rule 17Ad-22(e)(23) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to maintain clear and comprehensive 
rules and procedures that provide for the specific disclosures 
enumerated in the rule, as discussed below.\358\ The proposed rule 
would require such policies and procedures to specifically require a 
covered clearing agency to (i) publicly disclose all relevant rules and 
material procedures, including key aspects of its default rules and 
procedures; (ii) provide sufficient information to enable participants 
to identify and evaluate the risks, fees, and other material costs they

[[Page 29556]]

incur by participating in the covered clearing agency; and (iii) 
publicly disclose relevant basic data on transaction volume and 
values.\359\ As with public disclosures contemplated under proposed 
Rule 17Ad-22(a)(20), a covered clearing agency could comply with the 
proposed requirement by posting the relevant documentation to its Web 
site. The Commission preliminarily believes the proposed rule is 
appropriate to promote continued transparency at covered clearing 
agencies and thereby continue to facilitate prompt and accurate 
clearance and settlement.
---------------------------------------------------------------------------

    \358\ See proposed Rule 17Ad-22(e)(23), infra Part VII; see also 
Parts II.B.20.a and b (discussing the specific disclosures 
enumerated in the proposed rule).
    The Commission is proposing Rule 17Ad-22(e)(23) as part of a 
comprehensive set of rules for regulating covered clearing agencies 
that is consistent with and comparable to other domestic and 
international standards for FMIs.
    The Commission notes that Rule 17Ad-22(c)(2) currently requires 
a registered clearing agency, within 60 days after the end of its 
fiscal year, to post on its Web site its annual audited financial 
statements. See 17 CFR 240.17Ad-22(c)(2); see also Clearing Agency 
Standards Release, supra note 5, at 66244.
    \359\ In full, Rule 17Ad-22(d)(9) requires registered clearing 
agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide market 
participants with sufficient information for them to identify and 
evaluate the risks and costs associated with using its services. See 
17 CFR 240.17Ad-22(d)(9); see also Clearing Agency Standards 
Release, supra note 5, at 66252-53.
---------------------------------------------------------------------------

    Rule 17Ad-22(d)(9) currently requires registered clearing agencies 
to have policies and procedures to facilitate disclosures similar to 
proposed Rule 17Ad-22(e)(23)(ii), but does not require policies and 
procedures similar to proposed Rules 17Ad-22(e)(23)(i) and (iii). The 
Commission preliminarily believes these additional requirements are 
appropriate for a covered clearing agency given the risks that a 
covered clearing agency's size, operation, and importance pose to the 
U.S. securities markets because these disclosures provide the relevant 
authorities with information that further facilitates supervision of 
the covered clearing agency, including information that may allow the 
relevant authorities to better assess the covered clearing agency's 
observance of risk management requirements and better identify possible 
risks posed by the covered clearing agency, and provide relevant 
stakeholders with information regarding risks associated with 
participation in a covered clearing agency.
    In addition to the Exchange Act requirements described above,\360\ 
Section 17A of the Exchange Act requires registered clearing agencies 
to have rules designed to foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions.\361\ The Commission preliminarily believes that requiring 
a covered clearing agency to have policies and procedures reasonably 
designed to disclose sufficient information so that participants can 
identify risks and costs associated with using the covered clearing 
agency would allow participants to make informed decisions about the 
use of the covered clearing agency and to take appropriate actions to 
mitigate their risks and to better understand the costs associated with 
their use of the covered clearing agency. Similarly, the Commission 
preliminarily believes that requiring a covered clearing agency to 
publicly disclose relevant basic data on transaction volume and values 
would allow regulators, market participants, and market observers to 
make informed decisions about the activities of the covered clearing 
agency and to take appropriate action, if necessary, in response.
---------------------------------------------------------------------------

    \360\ See notes 54-56 and accompanying text; see also Parts I.A 
and B (generally discussing the regulatory framework under Section 
17A of the Exchange Act, as amended by the Dodd-Frank Act).
    \361\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Pursuant to existing Commission regulations, changes to the rules 
of an SRO, including clearing agencies, are required to be available on 
the SRO's Web site and are published by the Commission.\362\ The 
Commission's proposed rule is designed to promote understanding among 
market participants of the policies and procedures of covered clearing 
agencies, and the Commission believes the proposed rule is consistent 
with existing requirements for SROs. Continued and improved 
understanding of the risks and costs associated with using a covered 
clearing agency's services should promote confidence generally in the 
covered clearing agency's ability to set and manage appropriately risks 
and costs, such as margin requirements, restrictions on or limitations 
of the covered clearing agency's obligations, and conditions used by 
the covered clearing agency to test the adequacy of its financial 
resources. The Commission preliminarily believes these requirements are 
especially important for covered clearing agencies given their size and 
importance.
---------------------------------------------------------------------------

    \362\ See 17 CFR 240.19b-4(l) (requiring an SRO to post each 
proposed rule change, and any amendments thereto, on its Web site 
within two business days of filing with the Commission); 17 CFR 
240.19b-4(i) (requiring SROs to retain for public inspection and 
copying all filings made pursuant to this section and all 
correspondence and other communications reduced to writing, 
including comment letters, to and from such SRO concerning any such 
filing).
---------------------------------------------------------------------------

    The Commission notes that these policies and procedures 
requirements are intended in part to codify disclosure practices 
currently undertaken by some registered clearing agencies on an 
elective basis.\363\
---------------------------------------------------------------------------

    \363\ See, e.g., DTC, Assessment of Compliance With 
Recommendations for Securities Settlement Systems (Dec. 2011), 
available at http://dtcc.com/legal/policy-and-compliance.aspx.
---------------------------------------------------------------------------

    Below is a discussion of the specific disclosures required under 
the proposed rule, which are not similarly required of registered 
clearing agencies under Rule 17Ad-22(d)(9). The Commission 
preliminarily believes that these additions to a covered clearing 
agency's disclosure practices are important to ensure clearing members 
and the public have access to up-to-date information about the covered 
clearing agency's activities, policies, and procedures, which would 
promote confidence in its operations and thereby contribute to the 
prompt and accurate clearance and settlement of securities 
transactions.\364\
---------------------------------------------------------------------------

    \364\ As noted above, the Commission preliminarily believes that 
the proposed requirement for a comprehensive public disclosure is 
consistent with the requirements of the Exchange Act, Rule 19b-4, 
and the current practices of some clearing agencies that would be 
covered clearing agencies. See supra notes 362-363 and accompanying 
text; see also Part IV.B.3.i (discussing the current practices of 
registered clearing agencies with respect to transparency and 
disclosure).
---------------------------------------------------------------------------

a. Comprehensive Public Disclosure
    Proposed Rule 17Ad-22(e)(23)(iv) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to maintain clear and comprehensive 
rules and procedures that provide for a comprehensive public disclosure 
of its material rules, policies, and procedures regarding governance 
arrangements and legal, financial, and operational risk management, 
accurate in all material respects at the time of publication, including 
(i) a general background of the covered clearing agency, including its 
function and the market it serves, basic data and performance 
statistics on its services and operations, such as basic volume and 
value statistics by product type, average aggregate intraday exposures 
to its participants, and statistics on the covered clearing agency's 
operational reliability, and a description of its general organization, 
legal and regulatory framework, and system design and operations; (ii) 
a standard-by-standard summary narrative for each applicable standard 
set forth in proposed Rules 17Ad-22(e)(1) through (22) with sufficient 
detail and context to enable the reader to understand its approach to 
controlling the risks and addressing the requirements in each standard; 
(iii) a summary of material changes since the last update of the 
disclosure; and (iv) an executive summary of the key points regarding 
each.\365\ The Commission is proposing to require that the 
comprehensive public disclosure

[[Page 29557]]

provide basic data and performance statistics, such as statistics on 
the covered clearing agency's operational reliability so that the 
relevant stakeholders and the general public have data regarding, for 
example, performance targets for systems and the actual performance of 
systems over specified periods and targets for recovery. The Commission 
is also proposing to require that the comprehensive public disclosure 
include a standard-by-standard summary narrative to elicit a summary 
discussion of a covered clearing agency's implementation of policies 
and procedures requirements that would need to be established, 
implemented, maintained and enforced by a covered clearing agency in 
response to proposed Rules 17Ad-22(e)(1) through (23). In addition, the 
Commission is proposing to require a summary of material changes and 
would expect that a covered clearing agency should consider its 
particular circumstances, such as, for example, changes in the scope of 
services provided by the covered clearing agency, in satisfying this 
requirement.
---------------------------------------------------------------------------

    \365\ See proposed Rule 17Ad-22(e)(23)(iv), infra Part VI.
---------------------------------------------------------------------------

    The Commission preliminarily believes that disclosure of the above 
required information will provide participants with the information 
necessary to, at a minimum, identify and evaluate the risks and costs 
associated with use of the covered clearing agency, thereby promoting 
transparency and enhancing competition and market discipline. The 
Commission preliminarily believes it would also provide other 
stakeholders, including regulators and the public, with information 
that facilitates informed oversight and decision-making regarding 
covered clearing agencies.
b. Updates to the Comprehensive Public Disclosure
    Proposed Rule 17Ad-22(e)(23)(v) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to ensure the comprehensive public 
disclosure required under proposed Rule 17Ad-22(e)(23)(iv) is updated 
not less than every two years, or more frequently following changes to 
its system or the environment in which it operates to the extent 
necessary, to ensure statements previously provided remain accurate in 
all material respects.\366\ The Commission preliminarily believes that 
ensuring statements previously provided remain accurate would require a 
covered clearing agency's comprehensive public disclosure to provide 
statements that would provide a market participant with an accurate 
representation of the risks and costs of participating in the covered 
clearing agency.
---------------------------------------------------------------------------

    \366\ See proposed Rule 17Ad-22(e)(23)(v), infra Part VI.
---------------------------------------------------------------------------

    The Commission preliminarily believes that this requirement would 
help provide participants, regulators, other stakeholders, and the 
public with disclosures that are current, accurate, and comprehensive, 
thereby promoting transparency and enhancing competition and market 
discipline. The Commission preliminarily believes it would also provide 
other stakeholders, including regulators and the public, with timely 
information that facilitates informed oversight and decision-making 
regarding covered clearing agencies, thereby promoting the clearing 
agency obligations required under Section 17A of the Exchange Act.\367\
---------------------------------------------------------------------------

    \367\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

c. Request for Comments
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(e)(23). In addition, the Commission requests 
comments on the following specific issues:
     Should the Commission require a covered clearing agency's 
policies and procedures to maintain clear and comprehensive rules and 
procedures that provide for the specific disclosures proposed under 
Rule 17Ad-22(e)(23)? Why or why not? Are there rules and procedures 
that should not be fully disclosed to participants? Please explain in 
detail what such rules and procedures would be and why they should not 
be disclosed to participants.
     In imposing certain minimum requirements for policies and 
procedures regarding the comprehensive public disclosure, has the 
Commission provided sufficient guidance regarding what elements must 
appear in the disclosure? Should different elements appear? Should the 
Commission require policies and procedures to update the comprehensive 
public disclosure every two years, as proposed? Should the Commission 
require policies and procedures to update the comprehensive public 
disclosure more frequently following changes to its system or the 
environment in which it operates to the extent necessary to ensure the 
statements provided remain accurate in all material respects? Why or 
why not?
     Are certain ways that covered clearing agencies 
communicate information to market participants more effective than 
others? For example, does including information in a covered clearing 
agency's rulebook or published interpretive materials provide adequate 
notice of the risks and costs of being a participant to persons that 
are not currently participants in the covered clearing agency? Why or 
why not?
     Should the types of information that a covered clearing 
agency discloses under the proposed rule be generally available to the 
public? Should any categories of the information required to be 
disclosed under the proposed rule be restricted to certain parties 
only, such as clearing members or the Commission itself? Why or why 
not?
     Should the Commission require covered clearing agencies to 
make public disclosures of information contained in their audited 
financial statements that would provide a discussion and analysis of 
the covered clearing agency's financial condition, in particular with 
respect to liquidity, capital resources, and results of operations, 
similar to the Management's Discussion and Analysis of Financial 
Condition and Results of Operations disclosure required under Items 
303(a)(1) through (3) of Regulation S-K?
     Should the Commission require that policies and procedures 
pursuant to proposed Rule 17Ad-22(e)(23) specify a certain form for the 
disclosures (e.g., using tagged or structured data)? Why or why not? 
What form should the proposed disclosures take? Please explain.

C. Proposed Rule 17Ab2-2

    The Commission is proposing Rule 17Ab2-2 to establish procedures 
for the Commission to make determinations affecting covered clearing 
agencies.\368\ Under the proposed rule, the Commission would make 
determinations in three cases, as discussed below. In each case, under 
proposed Rule 17Ab2-2(d), the Commission would publish notice of its 
intention to consider such determinations, together with a brief 
statement of the grounds under consideration, and provide at least a 
30-day public comment period prior to any determination.\369\ The 
Commission may provide the clearing agency subject to the proposed 
determination opportunity for hearing regarding the proposed 
determination. Under proposed Rule 17Ab2-2(e), notice of determinations 
in each case would be given by prompt publication thereof, together 
with a

[[Page 29558]]

statement of written reasons supporting the determination.\370\
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    \368\ See proposed Rule 17Ab2-2, infra Part VII.
    \369\ See proposed Rule 17Ab2-2(d), infra Part VII.
    \370\ See proposed Rule 17Ab2-2(e), infra Part VII.
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    The Commission notes that under proposed Rule 17Ad-22(e), five 
active registered clearing agencies would meet the definition of a 
covered clearing agency without action under proposed Rule 17Ab2-2 by 
the Commission.\371\ Because the two dormant registered clearing 
agencies would not meet the definition of a covered clearing agency, if 
they elected to begin providing clearance and settlement services, they 
could potentially be subject to a determination under Rule 17Ab2-
2.\372\ In addition, the Commission notes that it would consider, upon 
receiving an application for registration as a clearing agency, either 
making a determination regarding a registrant's status as a covered 
clearing agency as part of the registration process, if the Commission 
believes the clearing agency already meets the definition of a covered 
clearing agency, or after registration, if the Commission determines 
that the clearing agency does not meet the definition of a covered 
clearing agency upon registration but does so at a later date, as 
either market conditions or the characteristics of the clearing agency 
itself change, pursuant to proposed Rule 17Ab2-2.\373\
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    \371\ See supra notes 82-87 and accompanying text. As noted, the 
CFTC has been designated the supervisory agency for two registered 
clearing agencies, CME and ICE, which have been designated as 
systemically important by the FSOC pursuant to the Clearing 
Supervision Act, and accordingly they would not be covered clearing 
agencies under proposed Rules 17Ad-22(e) and 17Ab2-2.
    \372\ See supra note 88 and accompanying text.
    \373\ See supra note 9 and accompanying text (discussing the 
requirements for registration as a clearing agency pursuant to 
Section 17A of the Exchange Act).
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1. Determination That a Registered Clearing Agency Is a Covered 
Clearing Agency
    Under proposed Rule 17Ab2-2(a), the Commission may, if it deems 
appropriate, upon application by any registered clearing agency or 
member thereof, or on its own initiative, determine whether a 
registered clearing agency should be considered a covered clearing 
agency.\374\ In determining whether a registered clearing agency should 
be considered a covered clearing agency, the Commission may consider 
characteristics such as the clearing of financial instruments that are 
characterized by discrete jump-to-default price changes or that are 
highly correlated with potential participant defaults or other such 
factors as it deems appropriate in the circumstances. The Commission 
preliminarily believes it should reserve the right to make a 
determination on its own initiative in the event that it independently 
determines that a registered clearing agency meets the definition of a 
covered clearing agency, as either market conditions or the 
characteristics of the clearing agency itself change. The Commission 
preliminarily believes that the clearing of financial instruments that 
are characterized by discrete jump-to-default price changes or that are 
highly correlated with potential participant defaults are two factors 
that indicate a registered clearing agency may raise systemic risk 
concerns supporting application of the requirements under proposed Rule 
17Ad-22(e).\375\
---------------------------------------------------------------------------

    \374\ See proposed Rule 17Ab2-2(a), infra Part VII.
    \375\ See Clearing Agency Standards Release, supra note 5, at 
66234 n.162 (describing the risks that arise from financial 
instruments that are characterized by discrete jump-to-default price 
changes or that are highly correlated with potential participant 
defaults).
---------------------------------------------------------------------------

    The Commission preliminarily believes that proposed Rule 17Ab2-2(a) 
would provide the Commission with the flexibility necessary to achieve 
the goals of Section 17A of the Exchange Act,\376\ Title VII of the 
Dodd-Frank Act,\377\ and the Clearing Supervision Act,\378\ given the 
ever-changing nature of the U.S. securities markets, including the 
nature and character of participants in the market and the products 
required to be cleared and settled in practice. The Commission 
preliminarily believes that Rule 17Ab2-2(a) is necessary to ensure that 
a registered clearing agency not otherwise meeting the definition of 
either a designated clearing agency or a complex risk profile clearing 
agency can nonetheless be subject to the requirements for covered 
clearing agencies in proposed Rule 17Ad-22(e) upon a determination made 
by the Commission. The Commission preliminarily believes this is 
necessary to ensure that the Commission is appropriately able to 
respond to registered clearing agencies that raise systemic risk 
concerns supporting application of the requirements under proposed Rule 
17Ad-22(e).
---------------------------------------------------------------------------

    \376\ See supra Part I.A.
    \377\ See supra Part I.B.1.
    \378\ See supra Part I.B.2.
---------------------------------------------------------------------------

2. Determination That a Covered Clearing Agency Is Systemically 
Important in Multiple Jurisdictions
    Under proposed Rule 17Ab2-2(b), the Commission may, if it deems 
appropriate, upon application by any clearing agency or member thereof, 
or on its own initiative, determine whether a covered clearing agency 
meets the definition of ``systemically important in multiple 
jurisdictions.'' \379\ In determining whether a covered clearing agency 
is systemically important in multiple jurisdictions, the Commission may 
consider (i) whether the covered clearing agency is a designated 
clearing agency; (ii) whether the clearing agency has been determined 
to be systemically important by one or more jurisdictions other than 
the United States through a process that includes consideration of 
whether the foreseeable effects of a failure or disruption of the 
designated clearing agency could threaten the stability of each 
relevant jurisdiction's financial system; \380\ or (iii) such other 
factors as the Commission may deem appropriate in the circumstances.
---------------------------------------------------------------------------

    \379\ See proposed Rule 17Ab2-2(b), infra Part VII.
    \380\ The Commission notes that this provision of proposed Rule 
17Ab2-2(b) parallels the definition of systemic importance in 
Section 803(9) of the Clearing Supervision Act, which states that 
systemic importance means a situation where the failure of or a 
disruption to the functioning of an FMU 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. See 12 U.S.C. 5462(9).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it should propose the 
procedures set forth in Rule 17Ab2-2(b) for designating a covered 
clearing agency as systemically important in multiple jurisdictions. 
Accordingly, the Commission is proposing Rule 17Ab2-2(b) to provide 
procedures for determining when a clearing agency has become 
systemically important in multiple jurisdictions. In this regard, the 
Commission preliminarily believes that proposed Rule 17Ab2-2(b)(ii) is 
consistent with Section 804(a)(2)(D) of the Clearing Supervision 
Act.\381\ The Commission is also proposing that it may consider 
additional factors in determining whether a covered clearing agency is 
systemically important in multiple jurisdictions, in addition to 
whether the foreseeable effects of a failure or disruption of the 
designated clearing agency could threaten the stability of multiple 
jurisdictions' financial systems. Such analysis could include whether 
foreign regulatory authorities have designated the covered clearing 
agency as systemically important and whether any findings were made in 
anticipation of that designation.
---------------------------------------------------------------------------

    \381\ See 12 U.S.C. 5463(a)(2)(D) (listing, as one of the 
systemic importance criteria for the FSOC to consider, the effect 
that the failure of or a disruption to the FMU or PCS activity would 
have on critical markets, financial institutions, or the broader 
financial system).

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[[Page 29559]]

3. Determination That a Clearing Agency Has a More Complex Risk Profile
    Under proposed Rule 17Ab2-2(c), the Commission may, if it deems 
appropriate, determine whether any of the activities of a clearing 
agency providing central counterparty services, in addition to clearing 
agencies registered with the Commission for the purpose of clearing 
security-based swaps, have a more complex risk profile.\382\ In 
determining whether a clearing agency's activity has a more complex 
risk profile, the Commission may consider (i) characteristics such as 
the clearing of financial instruments that are characterized by 
discrete jump-to-default price changes or that are highly correlated 
with potential participant defaults; and (ii) such other 
characteristics as it deems appropriate in the circumstances. The 
Commission preliminarily believes that the clearing of financial 
instruments that are characterized by discrete jump-to-default price 
changes or that are highly correlated with potential participant 
defaults are two factors that indicate a registered clearing agency 
raises systemic risk concerns supporting application of the 
requirements under proposed Rule 17Ad-22(e).\383\
---------------------------------------------------------------------------

    \382\ See proposed Rule 17Ab2-2(c), infra Part VII.
    \383\ See supra note 375 and accompanying text.
---------------------------------------------------------------------------

    The Commission preliminarily believes that proposed Rule 17Ab2-2(c) 
would provide the Commission with the flexibility necessary to achieve 
the goals of Section 17A of the Exchange Act,\384\ Title VII of the 
Dodd-Frank Act,\385\ and the Clearing Supervision Act,\386\ given the 
dynamic nature of the U.S. securities markets, including the nature and 
character of participants in the market and the products required to be 
cleared and settled in practice, by permitting the Commission to 
determine that certain registered clearing agencies are complex risk 
profile clearing agencies. The Commission also preliminarily believes 
that activities involving a more complex risk profile, because they may 
involve the clearing of financial instruments that are characterized by 
discrete jump-to-default price changes or that are highly correlated 
with potential participant defaults, implicate systemic risk concerns 
supporting application of the requirements under proposed Rule 17Ad-
22(e).\387\
---------------------------------------------------------------------------

    \384\ See supra Part I.A.
    \385\ See supra Part I.B.1.
    \386\ See supra Part I.B.2.
    \387\ See supra note 375 and accompanying text.
---------------------------------------------------------------------------

4. Request for Comments
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ab2-2. In addition, the Commission requests comments on 
the following specific issues:
     Should the Commission establish procedures for making 
determinations affecting covered clearing agencies? Why or why not?
     In determining whether a clearing agency should be 
considered a covered clearing agency, should the Commission consider 
characteristics such as the clearing of financial instruments that are 
characterized by discrete jump-to-default price changes or that are 
highly correlated with potential participant defaults, as proposed? Why 
or why not? Are there particular other characteristics that the 
Commission should consider? If so, please explain the relevance of 
those characteristics in detail.
     Does the proposed rule sufficiently describe the types of 
factors that would be considered when the Commission considers a 
determination that a registered clearing agency is a covered clearing 
agency? What factors should be considered?
     Should the Commission, if it deems appropriate, determine 
whether a covered clearing agency is systemically important in multiple 
jurisdictions? Why or why not? If not, what alternative approach should 
the Commission use to assess whether a covered clearing agency is 
systemically important in multiple jurisdictions? For instance, what 
weight should the Commission give to determinations by other 
jurisdictions or regulators regarding the systemic importance in 
multiple jurisdictions of a covered clearing agency? Is it appropriate 
for the Commission to assess whether such determination was made 
through a process that includes consideration of whether the 
foreseeable effects of a failure or disruption of the designated 
clearing agency could threaten the stability of each relevant 
jurisdiction's financial system, as proposed? Please explain. Are there 
particular other factors that the Commission should consider? If so, 
please explain the relevance of those characteristics in detail.
     Does the proposed rule sufficiently describe the types of 
factors that would be considered when the Commission considers a 
determination that a covered clearing agency is systemically important 
in multiple jurisdictions? What factors should be considered?
     In determining whether any of the activities of a clearing 
agency providing CCP services have a more complex risk profile, should 
the Commission consider characteristics such as the clearing of 
financial instruments that are characterized by discrete jump-to-
default price changes or that are highly correlated with potential 
participant defaults, as proposed? Why or why not? Are there particular 
other characteristics that the Commission should consider? If so, 
please explain the relevance of those characteristics in detail.
     Does the proposed rule sufficiently describe the types of 
factors that would be considered when the Commission considers a 
determination that a clearing agency is a complex risk profile clearing 
agency? What factors should be considered?
     Does the proposed process for determinations under Rule 
17Ab2-2 conflict with the PFMI Report's use of ``systemic importance in 
multiple jurisdictions'' and ``more complex risk profile'' activities? 
If so, please explain.

D. Proposed Rule 17Ad-22(f)

    The Commission is proposing Rule 17Ad-22(f) to codify its special 
enforcement authority over designated clearing agencies for which the 
Commission acts as the supervisory agency, pursuant to the Clearing 
Supervision Act. Under Section 807(c) of the Clearing Supervision Act, 
for purposes of enforcing the provisions of the Clearing Supervision 
Act, a designated clearing agency is subject to, and the Commission has 
authority under, the provisions of subsections (b) through (n) of 
Section 8 of the Federal Deposit Insurance Act in the same manner and 
to the same extent as if a designated clearing agency were an insured 
depository institution and the Commission were the appropriate Federal 
banking agency for such insured depository institution.\388\
---------------------------------------------------------------------------

    \388\ See 12 U.S.C. 5466(c); see also 12 U.S.C. 1818 (relevant 
provisions under the Federal Deposit Insurance Act).
---------------------------------------------------------------------------

    Request for Comments. The Commission requests comment on proposed 
Rule 17Ad-22(f), including whether the proposed rule is clear and 
consistent with the requirements of the Exchange Act and the Clearing 
Supervision Act.

E. Proposed Amendment to Rule 17Ad-22(d)

    To facilitate consistency with proposed Rule 17Ad-22(e), the 
Commission is proposing to amend Rule 17Ad-22(d). Rule 17Ad-22(d) sets 
forth certain minimum requirements for the operation and governance of 
registered

[[Page 29560]]

clearing agencies.\389\ The first paragraph of Rule 17Ad-22(d) 
currently provides that a registered clearing agency shall establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to fulfill the requirements of Rule 17Ad-22(d), as 
applicable. The Commission is proposing to amend this first paragraph 
of Rule 17Ad-22(d) to state that Rule 17Ad-22(d) applies to registered 
clearing agencies other than covered clearing agencies.\390\ As a 
result, the proposed amendment would limit the applicability of Rule 
17Ad-22(d) to CME and ICE, as systemically important FMUs for which the 
CFTC is the supervisory agency under the Clearing Supervision Act,\391\ 
the two registered but dormant clearing agencies,\392\ and any clearing 
agency registered with the Commission in the future that is not one of 
the following: A designated clearing agency, a complex risk profile 
clearing agency, or a clearing agency that the Commission has otherwise 
determined to be a covered clearing agency pursuant to proposed Rule 
17Ab2-2.\393\
---------------------------------------------------------------------------

    \389\ See 17 CFR 240.17Ad-22(d); see also Clearing Agency 
Standards Release, supra note 5, at 66244-58.
    \390\ See proposed amendment to Rule 17Ad-22(d), infra Part VII.
    \391\ See supra notes 84-87 and accompanying text.
    \392\ See supra note 88 and accompanying text (discussing SCCP 
and BSECC).
    \393\ See supra Part II.A.1 (further discussing the scope of the 
proposed rules).
---------------------------------------------------------------------------

    Request for Comments. The Commission requests comment on the 
proposed amendment to Rule 17Ad-22(d), including whether the proposed 
amendment is clear and consistent with the requirements of the Exchange 
Act, the Clearing Supervision Act, and proposed Rule 17Ad-22(e) 
thereunder.

III. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \394\ imposes certain 
requirements on federal agencies in connection with the conducting or 
sponsoring of any ``collection of information.'' \395\ More 
specifically, an agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number. Additionally, 44 U.S.C. 3507(a)(1)(D) 
provides that before adopting (or revising) a collection of information 
requirement, an agency must, among other things, publish a notice in 
the Federal Register stating that the agency has submitted the proposed 
collection of information to the Office of Management and Budget 
(``OMB'') and setting forth certain required information, including (1) 
a title for the collection of information; (2) a summary of the 
collection information; (3) a brief description of the need for the 
information and the proposed use of the information; (4) a description 
of the likely respondents and proposed frequency of response to the 
collection of information; (5) an estimate of the paperwork burden that 
shall result from the collection of information; and (6) notice that 
comments may be submitted to the agency and director of OMB.\396\
---------------------------------------------------------------------------

    \394\ 44 U.S.C. 3501 et seq.
    \395\ See 44 U.S.C. 3502(3).
    \396\ See 44 U.S.C. 3507(a)(1)(D); see also 5 CFR 
1320.5(a)(1)(iv).
---------------------------------------------------------------------------

    Certain provisions of the proposed rules would impose new 
``collection of information'' requirements within the meaning of the 
PRA. Accordingly, the Commission has submitted the information to the 
OMB for review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. A 
title and control number already exists for Rule 17Ad-22 adopted in 
October 2012 (OMB Control No. 3235-0695 for ``Clearing Agency Standards 
for Operation and Governance''). Because the Commission is proposing to 
revise the collection of information under this proposed rulemaking for 
amendments to Rule 17Ad-22, the Commission will use OMB Control No. 
3235-0695 for the collections of information for proposed Rule 17Ad-
22(e).
    Additionally, proposed Rule 17Ab2-2 would contain a new collection 
of information requirement for PRA purposes. The title of the new 
collection of information under this proposed rulemaking is 
Determinations Affecting Covered Clearing Agencies (a proposed new 
collection of information).

A. Overview and Organization

    The Commission preliminarily believes information that would be 
required to be collected by virtue of written policies and procedure 
requirements contained in this proposed rulemaking reflects to a degree 
existing practices at covered clearing agencies.\397\ In certain 
instances, however, the proposed requirements would require covered 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to comply with this 
proposed rulemaking.
---------------------------------------------------------------------------

    \397\ See infra Part IV.B.3 (describing current practices at 
registered clearing agencies).
---------------------------------------------------------------------------

    With regard to proposed Rule 17Ad-22(e), given that several 
provisions of the proposed rule are intended to be consistent with Rule 
17Ad-22, the Commission preliminarily believes that covered clearing 
agencies currently in compliance with the requirements of existing Rule 
17Ad-22 may already have some written rules and procedures similar to 
those in proposed Rule 17Ad-22(e). Accordingly, when covered clearing 
agencies review and update their policies and procedures in order to 
come into compliance with proposed Rule 17Ad-22(e), the Commission 
preliminarily believes that the PRA burden would vary across the 
requirements of proposed Rule 17Ad-22(e), based on the complexities of 
the requirements under each paragraph of the proposed rule and the 
extent to which covered clearing agencies currently comply with the 
proposed requirements under their existing policies and 
procedures.\398\
---------------------------------------------------------------------------

    \398\ For a discussion of the differences between Rule 17Ad-
22(d) and proposed Rule 17Ad-22(e), see Parts II.B.1-20.
---------------------------------------------------------------------------

    The portions of proposed Rule 17Ad-22(e) for which the PRA burden 
is preliminarily expected to be higher are the provisions contemplating 
requirements not addressed in Rule 17Ad-22, as discussed in Part 
II.A.4. Because these proposed requirements may not reflect established 
practices of covered clearing agencies or reflect the normal course of 
their activities, the PRA burden for these proposed rules may entail 
both initial one-time burdens to create new written policies and 
procedures and ongoing burdens. The expected PRA burden for the 
proposed rules is discussed in detail below.\399\
---------------------------------------------------------------------------

    \399\ See infra Parts III.D.6 (estimated burdens under proposed 
Rule 17Ad-22(e)(15)) and 7 (estimated burdens under proposed Rule 
17Ad-22(e)(19)).
---------------------------------------------------------------------------

    In addition to the collection of information requirements imposed 
under proposed Rule 17Ad-22(e), proposed Rule 17Ab2-2 also would 
contain collection of information requirements for PRA purposes. 
Proposed Rule 17Ab2-2 establishes a process for making determinations 
regarding whether or not a clearing agency would be a covered clearing 
agency and whether a covered clearing agency is either involved in 
activities with a more complex risk profile or systemically important 
in multiple jurisdictions.\400\ The expected PRA burden for proposed 
Rule 17Ab2-2 is discussed below.
---------------------------------------------------------------------------

    \400\ See infra Part II.C (further discussing the purpose, 
scope, and application of proposed Rule 17Ab2-2) and Part VII 
(proposed text of Rule 17Ab2-2).

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[[Page 29561]]

B. Summary of Collection of Information and Proposed Use of Information 
for Proposed Rule 17Ad-22(e) \401\ and Proposed Rule 17Ab2-2
---------------------------------------------------------------------------

    \401\ Proposed Rule 17Ad-22(e) would require covered clearing 
agencies to establish, implement, maintain and enforce certain 
written policies and procedures that would be used, among other 
things, in connection with staff examinations.
---------------------------------------------------------------------------

1. Proposed Rules 17Ad-22(e)(1) Through (3): General Organization
a. Proposed Rule 17Ad-22(e)(1)
    Proposed Rule 17Ad-22(e)(1) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for a well-founded, clear, 
transparent and enforceable legal basis for each aspect of its 
activities in all relevant jurisdictions.\402\ The purpose of this 
collection of information is to reduce the legal risks involved in the 
clearance and settlement process and to ensure that a covered clearing 
agency's policies and procedures do not cause legal uncertainty among 
participants due to a lack of clarity, completeness, or conflicts with 
applicable laws and judicial precedent.
---------------------------------------------------------------------------

    \402\ See supra Part II.B.1 (discussing proposed Rule 17Ad-
22(e)(1)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(2)
    Proposed Rule 17Ad-22(e)(2) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for governance arrangements 
that are clear and transparent, clearly prioritize the safety and 
efficiency of the covered clearing agency, and support the public 
interest requirements of Section 17A of the Exchange Act, and the 
objectives of owners and participants. Proposed Rule 17Ad-22(e)(2) 
would also require a covered clearing agency to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide for governance arrangements reasonably designed to 
establish that the covered clearing agency's board of directors and 
senior management have appropriate experience and skills to discharge 
their duties and responsibilities.\403\
---------------------------------------------------------------------------

    \403\ See supra Part II.B.2 (discussing proposed Rule 17Ad-
22(e)(2)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

    The purpose of this collection of information is to promote boards 
of directors that are composed of qualified members and that exercise 
oversight of the covered clearing agency's management, while also 
prioritizing the safety and efficiency of the covered clearing agency 
and supporting the public interest.
c. Proposed Rule 17Ad-22(e)(3)
    Proposed Rule 17Ad-22(e)(3) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to maintain a sound risk management 
framework for comprehensively managing legal, credit, liquidity, 
operational, general business, investment, custody, and other risks 
that arise in or are borne by the covered clearing agency. Under the 
proposed rule, risk management policies, procedures, and systems must 
provide for the identifying, measuring, monitoring, and managing of 
risks that arise in or are borne by the covered clearing agency. Such 
policies and procedures must be subject to review on a specified 
periodic basis and be approved by the board of directors annually. The 
proposed rule would require a covered clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for plans for the recovery and orderly 
wind-down of the covered clearing agency in the event of credit losses, 
liquidity shortfalls, losses from general business risk, or any other 
losses. The proposed rule would also require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to establish that risk management and 
internal audit personnel have sufficient resources, authority, and 
independence from management. The proposed rule would further require a 
covered clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to establish that 
risk management and internal audit personnel have a direct reporting 
line to, and are overseen by, a risk management committee and an audit 
committee of the board of directors, respectively. The proposed rule 
would also require policies and procedures providing for an independent 
audit committee.\404\
---------------------------------------------------------------------------

    \404\ See supra Part II.B.3 (discussing proposed Rule 17Ad-
22(e)(3)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

    The purpose of this collection of information is to enhance a 
covered clearing agency's ability to identify, monitor, and manage the 
risks clearing agencies face, including by subjecting the relevant 
policies and procedures to regular review, and to facilitate an orderly 
recovery and wind-down process in the event that a covered clearing 
agency is unable to continue operating as a going concern.
2. Proposed Rules 17Ad-22(e)(4) Through (7): Financial Risk Management
a. Proposed Rule 17Ad-22(e)(4)
    Proposed Rule 17Ad-22(e)(4) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively identify, measure, 
monitor, and manage its credit exposures to each participant and those 
exposures arising from payment, clearing, and settlement processes. 
Proposed Rule 17Ad-22(e)(4)(i) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to maintain sufficient financial 
resources to cover its credit exposure to each member fully with a high 
degree of confidence. To the extent not already maintained pursuant to 
proposed Rule 17Ad-22(e)(4)(i), a covered clearing agency that provides 
CCP services would also have to establish, implement, maintain, and 
enforce written policies and procedures to meet either the ``cover 
one'' requirement under proposed Rule 17Ad-22(e)(4)(iii) or, if it is a 
complex risk profile clearing agency or systemically important in 
multiple jurisdictions, the ``cover two'' requirement under proposed 
Rule 17Ad-22(e)(4)(ii).
    Proposed Rule 17Ad-22(e)(4)(iv) would require covered clearing 
agencies to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to cover its credit exposures by 
including prefunded financial resources and excluding assessments for 
additional guaranty fund contributions or other resources that are not 
prefunded, when calculating financial resources available to meet the 
requirements under proposed Rules 17Ad-22(e)(4)(i) through (iii), as 
applicable.\405\
---------------------------------------------------------------------------

    \405\ See supra Part II.B.4.c (discussing proposed Rule 17Ad-
22(e)(4)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(4)(v) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to maintain the financial resources 
required under proposed Rules 17Ad-22(e)(4)(i) through (iii), as 
applicable, in combined or separately maintained clearing or guaranty 
funds, and to test the sufficiency of its total financial resources by 
conducting a stress test of total financial resources once each day

[[Page 29562]]

using standard predetermined parameters and assumptions.
    Proposed Rule 17Ad-22(e)(4)(vi) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to test the sufficiency of its total 
financial resources available to meet the minimum financial resource 
requirements under proposed Rules 17Ad-22(e)(4)(i) through (iii), as 
applicable, by conducting stress tests and other comprehensive 
analyses. Specifically, those would include conducting a stress test of 
its total financial resources once each day using standard 
predetermined parameters and assumptions. It would also include 
conducting a comprehensive analysis on at least a monthly basis of the 
existing stress testing scenarios, models, and underlying parameters 
and assumptions, and considering modifications to ensure that they are 
appropriate for determining the covered clearing agency's required 
level of default protection in light of current market conditions. It 
would also include conducting a comprehensive analysis of stress 
testing scenarios, models, and underlying parameters and assumptions 
more frequently than monthly when the products cleared or markets 
served display high volatility, become less liquid, or when the size or 
concentration of positions held by its participants increases 
significantly. It would also include reporting the results of this 
analysis to appropriate decision makers, including its risk management 
committee or board of directors, and to use these results to evaluate 
the adequacy of and adjust its margin methodology, model parameters, 
models used to generate clearing or guaranty fund requirements, and any 
other relevant aspects of its credit risk management policies and 
procedures, in supporting compliance with the minimum financial 
resources requirements discussed above.
    Finally, proposed Rule 17Ad-22(e)(4)(vii) would require a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to require the covered 
clearing agency to perform a conforming model validation for its credit 
risk models at least annually, or more frequently if dictated by the 
covered clearing agency's risk management policies and procedures 
established under proposed Rule 17Ad-22(e)(3).\406\
---------------------------------------------------------------------------

    \406\ See id.
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(5)
    Rule 17Ad-22(e)(5) would require a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to limit the assets it accepts as 
collateral to those with low credit, liquidity, and market risks. It 
also would require policies that set and enforce appropriately 
conservative haircuts and concentration limits if the covered clearing 
agency requires collateral to manage its or its participants' credit 
exposure and would require a covered clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to require a not-less-than-annual review of the 
sufficiency of its collateral haircut and concentration limits.\407\
---------------------------------------------------------------------------

    \407\ See supra Part II.B.4.d (discussing proposed Rule 17Ad-
22(e)(5)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

c. Proposed Rule 17Ad-22(e)(6)
    Proposed Rule 17Ad-22(e)(6) would require a covered clearing agency 
that provides CCP services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to cover 
its credit exposures to its participants by establishing a risk-based 
margin system. The proposed rule would require such margin system to 
consider, and produce margin levels commensurate with, the risks and 
particular attributes of each relevant product, portfolio, and market. 
Furthermore, under the proposed rule the margin system would mark 
participant positions to market and collect margin, including variation 
margin or equivalent charges if relevant, at least daily, and include 
the authority and operational capacity to make intraday margin calls in 
defined circumstances. The proposed rule also requires policies and 
procedures with respect to the following: The calculation of margin 
sufficient to cover a covered clearing agency's potential future 
exposure to participants in the interval between the last margin 
collection and close out of positions following a participant default; 
the use of reliable sources of timely price data and procedures and 
sound valuation models for addressing circumstances in which pricing 
data are not readily available or reliable; and the use of an 
appropriate method for measuring credit exposure that accounts for 
relevant product risk factors and portfolio effects across 
products.\408\
---------------------------------------------------------------------------

    \408\ See supra Part II.B.4.e (discussing proposed Rule 17Ad-
22(e)(6)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

    In addition to requiring policies and procedures with respect to a 
risk-based margin system, proposed Rule 17Ad-22(e)(6) would require a 
covered clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to regularly 
review, test, and verify risk-based margin systems by conducting 
backtests at least once each day and, at least monthly, a conforming 
sensitivity analysis of its margin resources and its parameters and 
assumptions for backtesting, and consider modifications to ensure the 
backtesting practices are appropriate for determining the adequacy of 
its margin resources. Such review, testing, and verification would 
include conducting a conforming sensitivity analysis more frequently 
than monthly when the products cleared or markets served display high 
volatility, become less liquid, or when the size or concentration of 
positions held by participants increase or decrease significantly. The 
proposed rule would also require a covered clearing agency providing 
CCP services to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to report the results of 
such conforming sensitivity analysis to appropriate decision makers, 
including its risk management committee or board of directors, and use 
these results to evaluate the adequacy of and adjust its margin 
methodology, model parameters, and any other relevant aspects of its 
credit risk management policies and procedures. Finally, under such 
policies and procedures, a not less than annual conforming model 
validation would be required for the covered clearing agency's margin 
system and related models.\409\
---------------------------------------------------------------------------

    \409\ See id.
---------------------------------------------------------------------------

d. Proposed Rule 17Ad-22(e)(7)
    Proposed Rule 17Ad-22(e)(7) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively measure, monitor, and 
manage the liquidity risk that arises in or is borne by the covered 
clearing agency, including measuring, monitoring, and managing its 
settlement and funding flows on an ongoing and timely basis and its use 
of intraday liquidity. Under the proposed rule, a covered clearing 
agency would be required to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain 
sufficient liquid resources in all relevant currencies to effect same-
day and,

[[Page 29563]]

where appropriate, intraday and multiday settlement of payment 
obligations with a high degree of confidence under a wide range of 
potential stress scenarios that includes the default of the participant 
family that would generate the largest aggregate payment obligation for 
it in extreme but plausible market conditions. Under such policies and 
procedures, use of access to accounts and services at a Federal Reserve 
Bank, pursuant to Section 806 of the Clearing Supervision Act,\410\ or 
other relevant central bank, when available and where determined to be 
practical by the board of directors of the covered clearing agency, 
would be required.\411\
---------------------------------------------------------------------------

    \410\ 12 U.S.C. 5465(a).
    \411\ See supra Part II.B.4.f (discussing proposed Rule 17Ad-
22(e)(7)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

    For the purposes of meeting such liquid resource requirements, a 
covered clearing agency would be required to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to require the holding of qualifying liquid resources in each 
relevant currency for which clearing activities are performed, limited 
to (i) cash at the central bank of issue or at creditworthy commercial 
banks; (ii) assets that are readily available and convertible into cash 
through prearranged funding arrangements without material adverse 
change provisions, such as committed lines of credit, committed foreign 
exchange swaps, committed repurchase agreements, and other prearranged 
funding arrangements determined to be highly reliable even in extreme 
but plausible market conditions by the board of directors, following an 
annual review conducted for this purpose; and (iii) other assets that 
are readily available and eligible for pledging to (or conducting other 
appropriate forms of transactions with) a relevant central bank, 
provided that the covered clearing agency had access to routine credit 
at the central bank.
    With respect to a covered clearing agency's sources of liquidity, 
the proposed rule would require a covered clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to undertake due diligence to confirm that it has a 
reasonable basis to believe each of its liquidity providers, whether or 
not such liquidity provider is a clearing member, has sufficient 
information to understand and manage the liquidity provider's liquidity 
risks, and the capacity to perform as required under its commitments to 
provide liquidity. Furthermore, under such policies and procedures, on 
at least an annual basis, a covered clearing agency would be required 
to maintain and test with each liquidity provider to the extent 
practicable the covered clearing agency's procedures and operational 
capacity for accessing each type of liquidity resource by conducting 
stress testing of its liquidity resources using standard and 
predetermined parameters and assumptions at least once each day. 
Additionally, a covered clearing agency would be required to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to determine the amount and regularly test the 
sufficiency of the liquid resources held for purposes of meeting the 
minimum liquid resource requirement by (i) conducting a stress test of 
its liquidity resources using standard and predetermined parameters and 
assumptions at least once each day; and (ii) conducting a comprehensive 
analysis of the existing stress testing scenarios, models, and 
underlying parameters and assumptions used in evaluating liquidity 
needs and resources, and considering modifications to ensure they are 
appropriate in light of current and evolving market conditions at least 
once a month and more frequently when products cleared or markets 
served display high volatility, become less liquid, or when the size or 
concentration of positions held by participants increase 
significantly.\412\
---------------------------------------------------------------------------

    \412\ See id.
---------------------------------------------------------------------------

    Under such policies and procedures required by the proposed rule, 
stress test results must be reported to appropriate decision makers, 
including the risk management committee or board of directors, at the 
covered clearing agency for use in evaluating the adequacy of and 
adjusting its liquidity risk management policies and procedures. A 
covered clearing agency would also be required to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to perform an annual conforming model validation of its 
liquidity risk models and would be required to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to address foreseeable liquidity shortfalls that would not be 
covered by its liquid resources and to seek to avoid unwinding, 
revoking, or delaying the same-day settlement of payment obligations. 
Additionally, a covered clearing agency would be required to establish, 
implement, maintain and enforce written policies and procedures that 
describe the covered clearing agency's process to replenish any liquid 
resources that may be employed during a stress event.\413\
---------------------------------------------------------------------------

    \413\ See id.
---------------------------------------------------------------------------

    Finally, a covered clearing agency would be required to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to require the covered clearing agency to undertake 
an analysis at least once a year that evaluates the feasibility of 
maintaining sufficient liquid resources at a minimum in all relevant 
currencies to effect same-day and, where appropriate, intraday and 
multiday settlement of payment obligations with a high degree of 
confidence under a wide range of foreseeable stress scenarios that 
includes, but is not limited to, the default of the two participant 
families that would potentially cause the largest aggregate credit 
exposure for the covered clearing agency in extreme but plausible 
market conditions if the covered clearing agency provides central 
counterparty services and is either systemically important in multiple 
jurisdictions or a clearing agency involved in activities with a more 
complex risk profile.
    The purpose of this information collection is to enable a covered 
clearing agency to be able to effectively identify and limit exposures 
to participants, to maintain sufficient collateral or margin, and to 
satisfy all of its settlement obligations in the event of a participant 
default.
3. Proposed Rules 17Ad-22(e)(8) Through (10): Settlement
a. Proposed Rule 17Ad-22(e)(8)
    Proposed Rule 17Ad-22(e)(8) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to define the point at which settlement 
is final no later than the end of the day on which the payment or 
obligation is due and, where necessary or appropriate, either intraday 
or in real time.\414\
---------------------------------------------------------------------------

    \414\ See supra Part II.B.5 (discussing proposed Rule 17Ad-
22(e)(8)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(9)
    Proposed Rule 17Ad-22(e)(9) would require covered clearing agencies 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to have the covered clearing agency 
conduct its money settlements in central bank money, where available 
and determined to be

[[Page 29564]]

practical by the board of directors of the covered clearing agency, and 
minimize and manage credit and liquidity risk arising from the clearing 
agency's money settlements in commercial bank money where central bank 
money is not used.\415\
---------------------------------------------------------------------------

    \415\ See supra Part II.B.6 (discussing proposed Rule 17Ad-
22(e)(9)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

c. Proposed Rule 17Ad-22(e)(10)
    Proposed Rule 17Ad-22(e)(10) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
reasonably designed to set forth transparent written standards 
regarding a clearing agency's obligations with respect to the delivery 
of physical instruments, as well as operational practices that 
identify, monitor, and manage the risk associated with such physical 
deliveries.\416\
---------------------------------------------------------------------------

    \416\ See supra Part II.B.7 (discussing proposed Rule 17Ad-
22(e)(10)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

    The purpose of this information collection is to promote consistent 
standards of timing and reliability in the settlement process, promote 
reliability in a covered clearing agency's settlement operations, and 
to provide a covered clearing agency's participants with information 
necessary to evaluate the risks and costs associated with participation 
in the covered clearing agency.
4. Proposed Rules 17Ad-22(e)(11) Through (12): CSDs and Exchange-of-
Value Settlement Systems
    The purpose of this collection of information is to reduce 
securities transfer processing costs and risks associated with 
securities settlement and custody, increase the speed and efficiency of 
the settlement process, and eliminate risk in transactions with linked 
obligations.
a. Proposed Rule 17Ad-22(e)(11)
    Proposed Rule 17Ad-22(e)(11) would require a covered CSD to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to implement internal auditing and other 
controls to safeguard the rights of securities issuers and holders and 
prevent the unauthorized creation or deletion of securities. A covered 
CSD would also be required to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to conduct 
periodic and at least daily reconciliation of securities issues that 
the CSD maintains. Additionally, the proposed rule would require a 
covered CSD to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to maintain securities in 
an immobilized or dematerialized form, ensure the integrity of 
securities issues, and minimize and manage the risks associated with 
the safekeeping and transfer of securities, as well as protect assets 
against custody risk.\417\
---------------------------------------------------------------------------

    \417\ See supra Part II.B.8 (discussing proposed Rule 17Ad-
22(e)(11)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(12)
    Proposed Rule 17Ad-22(e)(12) would require a covered clearing 
agency that settles transactions involving the settlement of two linked 
obligations to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to eliminate principal risk 
by conditioning the final settlement of one obligation upon the final 
settlement of the other, irrespective of whether the covered clearing 
agency settles on a gross or net basis and when finality occurs.\418\
---------------------------------------------------------------------------

    \418\ See supra Part II.B.9 (discussing proposed Rule 17Ad-
22(e)(12)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

5. Proposed Rules 17Ad-22(e)(13) Through (14): Default Management
    The purpose of this collection of information is to facilitate the 
functioning of a covered clearing agency in the event that a 
participant fails to meet its obligations, as well as limit the extent 
to which a participant's failure can spread to other participants or 
the covered clearing agency itself, and to ensure the safe and 
effective holding and transfer of customers' positions and collateral 
in the event of a participant's default or insolvency.
a. Proposed Rule 17Ad-22(e)(13)
    Proposed Rule 17Ad-22(e)(13) would require covered clearing 
agencies providing CCP services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to ensure 
that a covered clearing agency subject to this rule has sufficient 
authority and operational capability to contain losses and liquidity 
demands in a timely fashion and continue to meet its own obligations. 
The proposed rule would also require that a covered clearing agency 
subject to the rule establish, implement, maintain and enforce written 
policies and procedures reasonably designed to address the allocation 
of credit losses it may face if its collateral or other resources are 
insufficient to fully cover its credit exposures, describe the process 
whereby the clearing agency would replenish any financial resources it 
may use following a default or other event in which the use of such 
resources is contemplated, and require participants and other 
stakeholders, to the extent applicable, to participate in the testing 
and review of its default procedures, including any close out 
procedures. Under such policies and procedures, the testing and review 
must occur at least annually and following any material changes 
thereto.\419\
---------------------------------------------------------------------------

    \419\ See supra Part II.B.10 (discussing proposed Rule 17Ad-
22(e)(13)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(14)
    Proposed Rule 17Ad-22(e)(14) would require a covered clearing 
agency that provides CCP services for security-based swaps or engages 
in activities that the Commission has determined to have a more complex 
risk profile to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to enable the segregation 
and portability of positions of a participant's customers and 
collateral and effectively protect such positions and collateral from 
the default or insolvency of that participant.\420\
---------------------------------------------------------------------------

    \420\ See supra Part II.B.11 (discussing proposed Rule 17Ad-
22(e)(14)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

6. Proposed Rules 17Ad-22(e)(15) Through (17): General Business and 
Operational Risk Management
    The purpose of this collection of information is to mitigate the 
potential impairment of a covered clearing agency as a result of a 
decline in revenues or increase in expenses, to limit disruptions that 
may impede the proper functioning of a covered clearing agency, and to 
improve the ability of a covered clearing agency to meet its settlement 
obligations.
a. Proposed Rule 17Ad-22(e)(15)
    Proposed Rule 17Ad-22(e)(15) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to identify, monitor, and manage 
general business risk and hold sufficient liquid net assets funded by 
equity to cover potential general business losses so that the covered 
clearing agency can continue operations and services as a going concern 
if losses materialize. Covered clearing agencies would also be required 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to determine the amount of liquid net 
assets funded by equity based upon the general risk profile of that 
clearing agency and the

[[Page 29565]]

length of time necessary to achieve recovery or orderly wind-down. The 
proposed rule would also require a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to hold liquid net assets funded by 
equity in an amount equal to the greater of either six months of 
current operating expenses or the amount determined by the agency's 
board of directors to be sufficient to ensure a recovery or orderly 
wind-down of critical operations and services. Under such policies and 
procedures, these resources are to be held in addition to resources 
held to cover participant default or other risks and must be of high 
quality and sufficiently liquid. Furthermore, under such policies and 
procedures, a covered clearing agency would be required to maintain a 
viable plan for raising additional equity in the event that its equity 
falls close to, or below, the required amount, and the plan would be 
required to be approved by the board of directors and updated at least 
annually.\421\
---------------------------------------------------------------------------

    \421\ See supra Part II.B.12 (discussing proposed Rule 17Ad-
22(e)(15)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(16)
    Proposed Rule 17Ad-22(e)(16) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to safeguard its own assets, as well 
as the assets of its participants, and to minimize the risk of loss and 
delay in access to such assets. A covered clearing agency would be 
required to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to invest such assets in instruments 
with minimal credit, market and liquidity risks.\422\
---------------------------------------------------------------------------

    \422\ See supra Part II.B.13 (discussing proposed Rule 17Ad-
22(e)(16)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

c. Proposed Rule 17Ad-22(e)(17)
    Proposed Rule 17Ad-22(e)(17) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to manage operational risk. A 
covered clearing agency would be required to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to identify the plausible sources of operational risk, both 
internal and external, and mitigate their impact through the use of 
appropriate systems, policies, procedures, and controls. A covered 
clearing agency would also be required to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to ensure that systems have a high degree of security, 
resiliency, operational reliability, and adequate, scalable capacity. 
The proposed rule would also require a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to establish and maintain a business 
continuity plan that addresses events posing a significant risk of 
disrupting operations.\423\
---------------------------------------------------------------------------

    \423\ See supra Part II.B.14 (discussing proposed Rule 17Ad-
22(e)(17)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

7. Proposed Rules 17Ad-22(e)(18) Through (20): Access
    The purpose of the collection of information is to enable a covered 
clearing agency to ensure that only entities with sufficient financial 
and operational capacity are direct participants in the covered 
clearing agency while ensuring that all qualified persons can access a 
covered clearing agency's services; to enable a covered clearing agency 
to monitor that participation requirements are met on an ongoing basis 
and to identify a participant experiencing financial difficulties 
before the participant fails to meet its settlement obligations; and to 
enable a covered clearing agency to identify and manage risks posed by 
non-member entities.
a. Proposed Rule 17Ad-22(e)(18)
    Proposed Rule 17Ad-22(e)(18) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to establish objective, risk-based, 
and publicly disclosed criteria for participation, which permit fair 
and open access by direct and, where relevant, indirect participants 
and other FMUs, and require participants to have sufficient financial 
resources and robust operational capacity to meet obligations arising 
from participation in the clearing agency. A covered clearing agency 
would also be required to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to monitor 
compliance with such participation requirements on an ongoing 
basis.\424\
---------------------------------------------------------------------------

    \424\ See supra Part II.B.15 (discussing proposed Rule 17Ad-
22(e)(18)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(19)
    Proposed Rule 17Ad-22(e)(19) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to identify, monitor, and manage the 
material risks to the covered clearing agency arising from arrangements 
in which firms that are indirect participants rely on services provided 
by direct participants to access the covered clearing agency's payment, 
clearing, or settlement facilities.\425\
---------------------------------------------------------------------------

    \425\ See supra Part II.B.16 (discussing proposed Rule 17Ad-
22(e)(19)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

c. Proposed Rule 17Ad-22(e)(20)
    Proposed Rule 17Ad-22(e)(20) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to identify, monitor, and manage 
risks related to any link with one or more other clearing agencies, 
FMUs, or trading markets.\426\
---------------------------------------------------------------------------

    \426\ See supra Part II.B.17 (discussing proposed Rule 17Ad-
22(e)(20)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

8. Proposed Rules 17Ad-22(e)(21) Through (22): Efficiency
    The purpose of this collection of information is to ensure that the 
services provided by a covered clearing agency do not become 
inefficient and to promote the sound operation of a covered clearing 
agency. The collection of information is also intended to ensure the 
prompt and accurate clearance and settlement of securities transactions 
by enabling participants to communicate with a clearing agency in a 
timely, reliable, and accurate manner.
a. Proposed Rule 17Ad-22(e)(21)
    Proposed Rule 17Ad-22(e)(21) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to require the covered clearing 
agency to be efficient and effective in meeting the requirements of its 
participants and the markets it serves. Additionally, the rule would 
require a covered clearing agency to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to have the 
management of a covered clearing agency regularly review the efficiency 
and effectiveness of the covered clearing agency's (i) clearing and 
settlement arrangement; (ii) operating structure, including risk 
management policies, procedures, and systems; (iii) scope of products 
cleared, settled, or recorded; and (iv) use of technology and 
communications procedures.\427\
---------------------------------------------------------------------------

    \427\ See supra Part II.B.18 (discussing proposed Rule 17Ad-
22(e)(21)) and infra Part VII (providing the proposed rule text).

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

[[Page 29566]]

b. Proposed Rule 17Ad-22(e)(22)
    Proposed Rule 17Ad-22(e)(22) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to use, or at a minimum, 
accommodate, relevant internationally accepted communication procedures 
and standards in order to facilitate efficient payment, clearing, and 
settlement.\428\
---------------------------------------------------------------------------

    \428\ See supra Part II.B.19 (discussing proposed Rule 17Ad-
22(e)(22)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

9. Proposed Rule 17Ad-22(e)(23): Disclosure
    Proposed Rule 17Ad-22(e)(23) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to maintain clear and comprehensive 
rules and procedures that provide for (i) publicly disclosing all 
relevant rules and material procedures, including key aspects of 
default rules and procedures; (ii) providing sufficient information to 
enable participants to identify and evaluate the risks, fees, and other 
material costs incurred by participating in a covered clearing agency; 
and (iii) publicly disclosing relevant basic data on transaction volume 
and values. The proposed rule would also require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to maintain clear and comprehensive 
rules and procedures that provide for a comprehensive public disclosure 
of its material rules, policies, and procedures regarding governance 
arrangements and legal, financial, and operational risk management that 
is accurate in all material respects at the time of publication and to 
update this public disclosure every two years, or more frequently 
following changes to the clearing agency's system or the environment in 
which it operates to the extent necessary to ensure that previous 
statements remain accurate in all material respects.\429\ The purpose 
of the collection of information is to ensure that participants, as 
well as prospective participants, are provided with a complete picture 
of the covered clearing agency's operations and risk mitigation 
procedures in order to be able to fully and clearly understand the 
risks and responsibilities of participation in a clearing agency.
---------------------------------------------------------------------------

    \429\ See supra Part II.B.20 (discussing proposed Rule 17Ad-
22(e)(23)) and infra Part VII (providing the proposed rule text).
---------------------------------------------------------------------------

10. Proposed Rule 17Ab2-2
    Proposed Rule 17Ab2-2 establishes a process for making 
determinations regarding whether a clearing agency is a covered 
clearing agency and whether a covered clearing agency is either 
involved in activities with a more complex risk profile or systemically 
important in multiple jurisdictions.\430\ Each of these determinations 
may be initiated by a registered clearing agency, a member of the 
clearing agency, or upon the Commission's own initiative.\431\ In each 
case, under proposed Rule 17Ab2-2(d), the Commission would publish 
notice of its intention to consider such determinations, together with 
a brief statement of the grounds under consideration, and provide at 
least a 30-day public comment period prior to any determination. Under 
proposed Rule 17Ab2-2(e), notice of determinations in each case would 
be given prompt publication by the Commission, together with a 
statement of written reasons supporting the determination.
---------------------------------------------------------------------------

    \430\ See infra Part II.C (further discussing the purpose, 
scope, and application of proposed Rule 17Ab2-2) and Part VII 
(proposed text of Rule 17Ab2-2).
    \431\ See proposed Rule 17Ab2-2(a), infra Part VII.
---------------------------------------------------------------------------

C. Respondents

    The Commission estimates that the majority of the proposed 
requirements under proposed Rule 17Ad-22(e) would apply to five 
registered clearing agencies. The proposed requirements in proposed 
Rules 17Ad-22(e)(1) through (23) would impose a PRA burden on covered 
clearing agencies. A covered clearing agency is defined under proposed 
Rule 17Ad-22(a)(7) as any designated clearing agency, clearing agency 
involved in activities with a more complex risk profile for which the 
CFTC is not the supervisory agency as defined in Section 803(8) of the 
Clearing Supervision Act, or a clearing agency determined by the 
Commission to be a covered clearing agency pursuant to proposed Rule 
17Ab2-2.\432\ A designated clearing agency is defined under proposed 
Rule 17Ad-22(a)(8) as a registered clearing agency that has been 
designated systemically important by the FSOC.\433\ The FSOC has 
designated six registered clearing agencies as systemically 
important.\434\ The Commission is the supervisory agency with respect 
to four of these designated clearing agencies, and the CFTC is the 
supervisory agency for the remaining two.\435\ Accordingly, proposed 
Rule 17Ad-22(e) would apply to the four designated clearing agencies 
for which the Commission is the supervisory agency.\436\
---------------------------------------------------------------------------

    \432\ See proposed Rule 17Ad-22(a)(7), infra Part VII; see also 
supra Part II.A.1 (describing the scope of proposed Rule 17Ad-22(e) 
and defining ``covered clearing agency'').
    \433\ See proposed Rule 17Ad-22(a)(8), infra Part VII; see also 
supra Part II.A.1 (describing the scope of proposed Rule 17Ad-22(e) 
and defining ``designated clearing agency''); supra Part I.B.2 
(describing designation as systemically important by the FSOC under 
the Clearing Supervision Act).
    \434\ See supra note 38 and accompanying text.
    \435\ See supra note 41 and accompanying text.
    \436\ See supra notes 82, 84-87, and accompanying text.
---------------------------------------------------------------------------

    In addition to the four designated clearing agencies for which the 
Commission is the supervisory agency, a fifth clearing agency would 
also be subject to the proposed rules as a complex risk profile 
clearing agency that provides CCP services for security-based swaps for 
which the CFTC is not the supervisory agency under the Clearing 
Supervision Act.\437\
---------------------------------------------------------------------------

    \437\ See supra note 83 and accompanying text.
---------------------------------------------------------------------------

    While the proposed rules would be applicable to the five registered 
clearing agencies currently captured by the definition of covered 
clearing agency, the Commission estimates that two additional entities 
may seek to register with the Commission and that one of these entities 
may seek to register in order to provide CCP services for security-
based swaps. Upon registration, these two entities may be deemed 
covered clearing agencies and would be subject to proposed Rule 17Ad-
22(e).
    The number of covered clearing agencies subject to proposed Rule 
17Ad-22(e) could increase if the FSOC designates additional clearing 
agencies as systemically important.\438\ Additionally, the Commission 
could determine additional clearing agencies to be covered clearing 
agencies under proposed Rule 17Ab2-2,\439\ subjecting them to the 
provisions of proposed Rule 17Ad-22(e). While the number of clearing 
agencies subject to proposed Rule 17Ad-22(e) could increase, the 
Commission is not able to predict whether the FSOC will exercise its 
authority in the future to designate additional clearing entities as 
systemically important FMUs or whether the Commission will determine 
additional clearing agencies to be covered clearing agencies. As a 
result, for the purposes of the PRA analysis, the Commission is 
preliminarily estimating that there would be seven respondents for a 
majority of the proposed requirements under proposed Rule

[[Page 29567]]

17Ad-22(e). With regard to proposed Rule 17Ad-22(e)(6), the number of 
respondents would be six because the proposed rule would apply to 
covered clearing agencies that provide CCP services. With regard to 
proposed Rule 17Ad-22(e)(11), the number of respondents would be one 
because the proposed rule would apply to covered clearing agencies that 
provide CSD services. With regard to proposed Rule 17Ad-22(e)(14), the 
number of respondents would be two because the proposed rule would 
apply to covered clearing agencies that provide CCP services for 
security-based swaps.
---------------------------------------------------------------------------

    \438\ See supra Part I.B.2, in particular notes 27-28, 38-41, 
and accompanying text.
    \439\ See supra Part II.C (discussing the purpose, scope, and 
application of proposed Rule 17Ab2-2) and Part VII (proposed text of 
Rule 17Ab2-2).
---------------------------------------------------------------------------

    With regard to proposed Rule 17Ab2-2, the Commission preliminarily 
estimates for purposes of the PRA analysis that two registered clearing 
agencies or their members on their behalf will apply for a Commission 
determination, or may be subject to a Commission-initiated 
determination, regarding whether the registered clearing agency is a 
covered clearing agency, whether a registered clearing agency is 
involved in activities with a more complex risk profile, or whether a 
covered clearing agency is systemically important in multiple 
jurisdictions.

D. Total Annual Reporting and Recordkeeping Burden for Proposed Rule 
17Ad-22(e)

    The Commission preliminarily believes that the potential PRA burden 
imposed by the requirements under proposed Rule 17Ad-22(e) will vary 
depending on the requirement in question because registered clearing 
agencies are subject to existing requirements under Rule 17Ad-22 that, 
in some cases, are similar to those in proposed Rule 17Ad-22(e), as 
discussed in Part II.
    First, because proposed Rules 17Ad-22(e)(1), (8) through (10), 
(12), (14),\440\ (16), and (22) \441\ contain requirements that are 
either substantially similar to those under existing Rule 17Ad-22 or 
have current practices that the Commission understands largely conform 
with the proposed rules, the Commission preliminarily believes that 
covered clearing agencies may need to make only limited changes to 
update their policies and procedures to satisfy these proposed 
requirements. In these cases, as an example, a covered clearing agency 
may need to conduct a review of the proposed rule against its existing 
policies and procedures to confirm that it satisfies the proposed 
requirements.\442\
---------------------------------------------------------------------------

    \440\ In the case of proposed Rule 17Ad-22(e)(14), the 
Commission preliminarily believes that the current practices of 
covered clearing agencies already largely conform to the proposed 
requirement, and accordingly believes that covered clearing agencies 
may need to make only limited changes to update their policies and 
procedures pursuant to the proposed rule. See infra note 508 and 
accompanying text; see also infra Parts IV.B.3.e.ii and IV.C.3.a.ix 
(discussing the current practices at registered clearing agencies 
regarding segregation and portability and the anticipated economic 
effect of the proposed rule, respectively).
    \441\ In the case of proposed Rule 17Ad-22(e)(22), the 
Commission preliminarily believes that the current practices of 
covered clearing agencies already largely conform to the proposed 
requirement, and accordingly believes that covered clearing agencies 
may need to make only limited changes to update their policies and 
procedures pursuant to the proposed rule. See supra Part II.B.19 
(discussing the requirements under the proposed rule) and infra 
Parts IV.B.3.h.ii and IV.C.3.a.xv (discussing the current practices 
at registered clearing agencies regarding communication procedures 
and standards and the anticipated economic effect of the proposed 
rule, respectively).
    \442\ In this regard, the Commission notes that its estimates 
for the initial one-time and ongoing burdens for proposed Rules 
17Ad-22(e)(8) through (10) and (12) are the same across each of the 
proposed rules because the Commission preliminarily believes that 
the burdens associated with each would primarily constitute a review 
of the covered clearing agency's policies and procedures to confirm 
that those policies and procedures satisfy the proposed requirement.
---------------------------------------------------------------------------

    Second, because proposed Rules 17Ad-22(e)(2), (3), (5), (11), (13), 
(17), (18), (20), and (21) contain provisions that are similar to those 
under existing Rule 17Ad-22 but would impose additional requirements 
that do not appear in existing Rule 17Ad-22, the Commission 
preliminarily believes that covered clearing agencies may need to make 
changes to update their policies and procedures to satisfy the proposed 
requirements. In these cases, as an example, a covered clearing agency 
may need to review and amend its existing rule book, policies, and 
procedures but may not need to develop, design, or implement new 
operations and practices to satisfy the proposed requirements.
    Third, for proposed Rules 17Ad-22(e)(4), (6), (7), (15), (19), and 
(23), for which no similar existing requirements under Rule 17Ad-22 
have been identified,\443\ the Commission preliminarily believes that 
covered clearing agencies may need to make more extensive changes to 
their policies and procedures (or implement new policies and 
procedures), and may need to take other steps to satisfy the proposed 
requirements. In these cases, the PRA burden would be greater since a 
covered clearing agency may need to, as an example, develop, design, 
and implement new operations and practices. With respect to these 
provisions, the PRA burden may be greater since these proposed 
requirements may not reflect established practices of covered clearing 
agencies or reflect the normal course of their activities, and the PRA 
burden for these proposed rules may therefore entail initial one-time 
burdens to create new written policies and procedures and ongoing 
burdens, including burdens associated with disclosure requirements.
---------------------------------------------------------------------------

    \443\ In the case of Rule 17Ad-22(e)(23), registered clearing 
agencies are subject to existing requirements for disclosure under 
existing Rule 17Ad-22, but new requirements under the proposed rule 
would impose greater burdens relative to other proposed rules that 
have similar requirements to those under existing Rule 17Ad-22. See 
supra Part II.B.20 (discussing the requirements under proposed Rule 
17Ad-22(e)(23) and their relationship to requirements under existing 
Rule 17Ad-22(d)(9)).
---------------------------------------------------------------------------

    The Commission requests comment regarding the accuracy of the 
estimates discussed below.
1. Proposed Rules 17Ad-22(e)(1) Through (3): General Organization
a. Proposed Rule 17Ad-22(e)(1)
    Proposed Rule 17Ad-22(e)(1) contains substantially the same 
requirements as Rule 17Ad-22(d)(1).\444\ As a result, a respondent 
clearing agency would already have written rules, policies, and 
procedures substantially similar to the requirements that would be 
imposed under the proposed rule. The PRA burden imposed by the proposed 
rules would therefore be minimal and would likely be limited to the 
review of current policies and procedures and updating existing 
policies and procedures where appropriate in order to ensure compliance 
with the proposed rule. Accordingly, based on the similar policies and 
procedures requirements and the corresponding burden estimates 
previously made by the Commission for Rule 17Ad-22(d)(1),\445\ the 
Commission preliminarily believes that respondent clearing agencies 
would incur an aggregate one-time burden of approximately 56 hours to 
review and update existing policies and procedures.\446\
---------------------------------------------------------------------------

    \444\ See 17 CFR 240.17Ad-22(d)(1); proposed Rule 17Ad-22(e)(1), 
infra Part VII; see also supra Part II.B.1 (discussing the 
requirements under the proposed rule).
    \445\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \446\ This figure was calculated as follows: ((Assistant General 
Counsel for 2 hours) + (Compliance Attorney for 6 hours)) = 8 hours 
x 7 respondent clearing agencies = 56 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(1) would also impose ongoing burdens on a 
respondent clearing agency. The proposed rule would require ongoing 
monitoring and compliance activities with respect to the written 
policies and procedures created in response to the

[[Page 29568]]

proposed rule.\447\ Based on the Commission's previous estimates for 
ongoing monitoring and compliance burdens with respect to existing Rule 
17Ad-22,\448\ the Commission preliminarily estimates that the ongoing 
activities required by proposed Rule 17Ad-22(e)(1) would impose an 
aggregate annual burden on respondent clearing agencies of 21 
hours.\449\
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    \447\ Where the Commission refers to anticipated burdens related 
to ``enforcement activities,'' the Commission notes that such 
policies and procedures contemplate enforcement by the respondent 
clearing agency itself. See Clearing Agency Standards Release, supra 
note 5, at 66246 (stating that ``the clearing agency must be able to 
enforce its policies and procedures that contemplate enforcement by 
the clearing agency'').
    \448\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \449\ This figure was calculated as follows: (Compliance 
Attorney for 3 hours) x 7 respondent clearing agencies = 21 hours.
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(2)
    Proposed Rule 17Ad-22(e)(2) contains some provisions that are 
similar to Rule 17Ad-22(d)(8), but also adds additional requirements 
that do not appear in existing Rule 17Ad-22.\450\ As a result, a 
respondent clearing agency is required to have some written rules, 
policies, and procedures substantially similar to the requirements that 
would be imposed under proposed Rule 17Ad-22(e)(2) and would need to 
establish and implement a limited number of new policies and 
procedures. The PRA burden imposed by the proposed rule would therefore 
be associated with reviewing current policies and procedures and 
updating those policies and procedures or establishing new policies and 
procedures, where appropriate, in order to ensure compliance with the 
proposed rule. Accordingly, based on the similar policies and 
procedures requirements and the corresponding burden estimates 
previously made by the Commission for Rule 17Ad-22(d)(8),\451\ the 
Commission preliminarily believes that respondent clearing agencies 
would incur an aggregate one-time burden of approximately 154 hours to 
review and update existing policies and procedures and to create new 
policies and procedures, as necessary.\452\
---------------------------------------------------------------------------

    \450\ See 17 CFR 240.17Ad-22(d)(8); proposed Rule 17Ad-22(e)(2), 
infra Part VII; see also supra Part II.B.2 (discussing the 
requirements under the proposed rule).
    \451\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \452\ This figure was calculated as follows: ((Assistant General 
Counsel for 24 hours) + (Compliance Attorney for 10 hours)) = 22 
hours x 7 respondent clearing agencies = 154 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(2) would also impose ongoing burdens on a 
respondent clearing agency. The proposed requirement would require 
ongoing monitoring and compliance activities with respect to the 
written policies and procedures created in response to the proposed 
rule. Based on the Commission's previous estimates for ongoing 
monitoring and compliance burdens with respect to existing Rule 17Ad-
22,\453\ the Commission preliminarily estimates that the ongoing 
activities required by proposed Rule 17Ad-22(e)(2) would impose an 
aggregate annual burden on respondent clearing agencies of 28 
hours.\454\
---------------------------------------------------------------------------

    \453\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \454\ This figure was calculated as follows: (Compliance 
Attorney for 4 hours) x 7 respondent clearing agencies = 28 hours.
---------------------------------------------------------------------------

c. Proposed Rule 17Ad-22(e)(3)
    Proposed Rule 17Ad-22(e)(3) would require a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for a sound risk management 
framework.\455\ Under Rule 17Ad-22(d), registered clearing agencies are 
required to have policies and procedures to manage certain risks faced 
by these entities,\456\ but the proposed rule would require a 
comprehensive framework for risk management that would require risk 
management policies and procedures be designed holistically, be 
consistent with each other, and work effectively together. Accordingly, 
the proposed rule may impose a PRA burden that would require respondent 
clearing agencies to update current policies and procedures in order to 
develop a more comprehensive framework that would include a periodic 
review thereof and a plan for orderly recovery and wind-down of the 
covered clearing agency. As a result, the Commission preliminarily 
estimates that respondent clearing agencies would incur an aggregate 
one-time burden of 399 hours to review and update existing policies and 
procedures and to create new policies and procedures, as 
necessary.\457\
---------------------------------------------------------------------------

    \455\ See proposed Rule 17Ad-22(e)(3), infra Part VII.
    \456\ See 17 CFR 240.17Ad-22(d); see also Part II.B.3 
(discussing the requirements under the proposed rule and their 
relationship to existing requirements under Rule 17Ad-22).
    \457\ This figure was calculated as follows: ((Assistant General 
Counsel for 25 hours) + (Compliance Attorney for 18 hours) + (Senior 
Risk Management Specialist for 7 hours) + (Computer Operations 
Manager for 7 hours)) = 57 hours x 7 respondent clearing agencies = 
399 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(3) would also impose ongoing burdens on a 
respondent clearing agency. The proposed requirement would require 
ongoing monitoring and compliance activities with respect to the 
written policies and procedures created in response to the proposed 
rule and activities related to preparing documents facilitating a 
periodic review of the risk management framework. Based on the 
Commission's previous estimates for ongoing monitoring and compliance 
burdens with respect to existing Rule 17Ad-22,\458\ the Commission 
preliminarily estimates that the ongoing activities required by 
proposed Rule 17Ad-22(e)(3) would impose an aggregate annual burden on 
respondent clearing agencies of 343 hours.\459\ The Commission notes 
that the estimated ongoing burden for Proposed Rule 17Ad-22(e)(3) is 
similar to the initial one-time burden because the proposed rule 
includes a specific requirement that policies and procedures for 
comprehensive risk management include review on a specified periodic 
basis and approval by the board of directors annually.
---------------------------------------------------------------------------

    \458\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \459\ This figure was calculated as follows: ((Compliance 
Attorney for 8 hours) + (Administrative Assistant for 3 hours) + 
(Senior Business Analyst for 5 hours) + (Risk Management Specialist 
for 33 hours)) = 49 hours x 7 respondent clearing agencies = 343 
hours.
---------------------------------------------------------------------------

2. Proposed Rules 17Ad-22(e)(4) Through (7): Financial Risk Management
a. Proposed Rule 17Ad-22(e)(4)
    The Commission preliminarily believes that the estimated PRA 
burdens for proposed Rule 17Ad-22(e)(4) would be more significant, as 
changes to existing policies and procedures would involve more than 
adjustments and may require a respondent clearing agency to make 
substantial changes to its policies and procedures.\460\ In addition, 
proposed Rule 17Ad-22(e)(4) would require one-time systems adjustments 
related to the capability to test the sufficiency of financial 
resources and to perform an annual conforming model validation. As a 
result, the Commission preliminarily estimates that respondent clearing 
agencies would incur an aggregate one-time burden of 1,400 hours.\461\
---------------------------------------------------------------------------

    \460\ See proposed Rule 17Ad-22(e)(4), infra Part VII; see also 
supra Part II.B.4.c (discussing the requirements under the proposed 
rule).
    \461\ This figure was calculated as follows: ((Assistant General 
Counsel for 60 hours) + (Compliance Attorney for 40 hours) + (Senior 
Risk Management Specialist for 30 hours) + (Computer Operations 
Manager for 45 hours) + (Chief Compliance Officer for 15 hours) + 
(Senior Programmer for 10 hours)) = 200 hours x 7 respondent 
clearing agencies = 1,400 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(4) would also impose ongoing burdens on a 
respondent clearing agency. The proposed rule would require ongoing 
monitoring and compliance activities

[[Page 29569]]

with respect to the written policies and procedures created in response 
to the proposed rule and ongoing activities with respect to testing the 
sufficiency of financial resources and model validation. Based on the 
Commission's previous estimates for ongoing monitoring and compliance 
burdens with respect to existing Rule 17Ad-22,\462\ the Commission 
preliminarily estimates that the ongoing activities required by 
proposed Rule 17Ad-22(e)(4) would impose an aggregate annual burden on 
respondent clearing agencies of 420 hours.\463\
---------------------------------------------------------------------------

    \462\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \463\ This figure was calculated as follows: ((Compliance 
Attorney for 24 hours) + (Administrative Assistant for 3 hours) + 
(Senior Business Analyst for 3 hours) + (Risk Management Specialist 
for 30 hours)) = 60 hours x 7 respondent clearing agencies = 420 
hours.
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(5)
    Respondent clearing agencies that would be subject to proposed Rule 
17Ad-22(e)(5) may already have some written policies and procedures 
designed to address the collateral risks borne by these entities.\464\ 
As a result, the Commission preliminarily believes that a respondent 
clearing agency may need to review and update existing policies and 
procedures as necessary and may need to adopt new policies and 
procedures with respect to an annual review of the sufficiency of 
collateral haircuts and concentration limits. Accordingly, based on the 
similar policies and procedures requirements in and the Commission's 
previous corresponding burden estimates for existing Rule 17Ad-
22(d)(3),\465\ the Commission preliminarily believes that respondent 
clearing agencies would incur an aggregate one-time burden of 
approximately 294 hours to review and update existing policies and 
procedures and to create new policies and procedures, as 
necessary.\466\
---------------------------------------------------------------------------

    \464\ See 17 CFR 240.17Ad-22(d)(3); proposed Rule 17Ad-22(e)(5), 
infra Part VII; see also supra Part II.B.4.d (discussing the 
requirements under the proposed rule).
    \465\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \466\ This figure was calculated as follows: ((Assistant General 
Counsel for 16 hours) + (Compliance Attorney for 12 hours) + (Senior 
Risk Management Specialist for 7 hours) + (Computer Operations 
Manager for 7 hours)) = 42 hours x 7 respondent clearing agencies = 
294 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(5) would also impose ongoing burdens on a 
respondent clearing agency. The proposed requirement would require 
ongoing monitoring and compliance activities with respect to the 
written policies and procedures created in response to the proposed 
rule and would also result in an annual review of collateral haircuts 
and concentration limits. Based on the Commission's previous estimates 
for ongoing monitoring and compliance burdens with respect to existing 
Rule 17Ad-22,\467\ the Commission preliminarily estimates that the 
ongoing activities required by proposed Rule 17Ad-22(e)(5) would impose 
an aggregate annual burden on respondent clearing agencies of 252 
hours.\468\ The Commission notes that the estimated ongoing burden for 
Proposed Rule 17Ad-22(e)(5) is similar to the initial one-time burden 
because the proposed rule includes a specific requirement that policies 
and procedures for collateral include a not-less-than-annual review of 
the sufficiency of a covered clearing agency's collateral haircuts and 
concentration limits.
---------------------------------------------------------------------------

    \467\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \468\ This figure was calculated as follows: ((Compliance 
Attorney for 6 hours) + (Risk Management Specialist for 30 hours)) = 
36 hours x 7 respondent clearing agencies = 252 hours.
---------------------------------------------------------------------------

c. Proposed Rule 17Ad-22(e)(6)
    The Commission preliminarily believes that the estimated PRA 
burdens for proposed Rule 17Ad-22(e)(6) would be more significant and 
may require a respondent clearing agency to make substantial changes to 
its policies and procedures.\469\ In addition, proposed Rule 17Ad-
22(e)(6) would require one-time systems adjustments related to the 
capability to perform daily backtesting and monthly (or more frequent 
than monthly) conforming sensitivity analyses. As a result, the 
Commission preliminarily estimates that respondent clearing agencies 
would incur an aggregate one-time burden of 1,080 hours to review and 
update existing policies and procedures.\470\
---------------------------------------------------------------------------

    \469\ See proposed Rule 17Ad-22(e)(6), infra Part VII; see also 
supra Part II.B.4.e (discussing the requirements under the proposed 
rule, including those that do not appear in existing Rule 17Ad-22).
    \470\ This figure was calculated as follows: ((Assistant General 
Counsel for 50 hours) + (Compliance Attorney for 40 hours) + (Senior 
Risk Management Specialist for 25 hours) + (Computer Operations 
Manager for 40 hours) + (Chief Compliance Officer for 15 hours) + 
(Senior Programmer for 10 hours)) = 180 hours x 6 respondent 
clearing agencies = 1,080 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(6) would also impose ongoing burdens on a 
respondent clearing agency. The proposed requirement would require 
ongoing monitoring and compliance activities with respect to the 
written policies and procedures created in response to the proposed 
rule and activities associated with the daily backtesting and monthly 
(or more frequent) sensitivity analysis requirements and annual model 
validation. Based on the Commission's previous estimates for ongoing 
monitoring and compliance burdens with respect to existing Rule 17Ad-
22,\471\ the Commission preliminarily estimates that the ongoing 
activities required by proposed Rule 17Ad-22(e)(6) would impose an 
aggregate annual burden on respondent clearing agencies of 360 
hours.\472\
---------------------------------------------------------------------------

    \471\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \472\ This figure was calculated as follows: ((Compliance 
Attorney for 24 hours) + (Administrative Assistant for 3 hours) + 
(Senior Business Analyst for 3 hours) + (Risk Management Specialist 
for 30 hours)) = 60 hours x 6 respondent clearing agencies = 360 
hours.
---------------------------------------------------------------------------

d. Proposed Rule 17Ad-22(e)(7)
    The Commission preliminarily believes that the estimated PRA 
burdens for proposed Rule 17Ad-22(e)(7) would be more significant and 
may require a respondent clearing agency to make substantial changes to 
its policies and procedures.\473\ In addition, proposed Rule 17Ad-
22(e)(7) would require one-time systems adjustments related to the 
capability to perform an annual conforming model validation, the 
testing of sufficiency of liquid resources and the testing of access to 
liquidity providers. As a result, the Commission preliminarily 
estimates that respondent clearing agencies would incur an aggregate 
one-time burden of 2,310 hours to review and update existing policies 
and procedures.\474\
---------------------------------------------------------------------------

    \473\ See proposed Rule 17Ad-22(e)(7), infra Part VII; see also 
supra Part II.B.4.f (discussing the requirements under the proposed 
rule).
    \474\ This figure was calculated as follows: ((Assistant General 
Counsel for 95 hours) + (Compliance Attorney for 85 hours) + (Senior 
Risk Management Specialist for 45 hours) + (Computer Operations 
Manager for 60 hours) + (Chief Compliance Officer for 30 hours) + 
(Senior Programmer for 15 hours)) = 330 hours x 7 respondent 
clearing agencies = 2,310 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(7) would also impose ongoing burdens on a 
respondent clearing agency. The proposed requirement would require 
ongoing monitoring and compliance activities with respect to the 
written policies and procedures created in response to the proposed 
rule as well as activities related to the testing of sufficiency of 
liquidity resources and the testing of access to liquidity providers. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\475\ the 
Commission preliminarily estimates that the ongoing activities required 
by proposed Rule 17Ad-

[[Page 29570]]

22(e)(7) would impose an aggregate annual burden on respondent clearing 
agencies of 896 hours.\476\
---------------------------------------------------------------------------

    \475\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \476\ This figure was calculated as follows: ((Compliance 
Attorney for 48 hours) + (Administrative Assistant for 5 hours) + 
(Senior Business Analyst for 5 hours) + (Risk Management Specialist 
for 60 hours) + (Senior Risk Management Specialist for 10 hours)) = 
128 hours x 7 respondent clearing agencies = 896 hours.
---------------------------------------------------------------------------

3. Proposed Rules 17Ad-22(e)(8) Through (10): Settlement
a. Proposed Rule 17Ad-22(e)(8)
    Proposed Rule 17Ad-22(e)(8) contains substantially similar 
provisions to Rule 17Ad-22(d)(12).\477\ As a result, a respondent 
clearing agency would already have written rules, policies, and 
procedures substantially similar to the requirements that would be 
imposed under the proposed rule. In this regard, the Commission 
preliminarily believes that respondent clearing agencies would incur 
the incremental burdens of reviewing and updating existing policies and 
procedures as necessary. Accordingly, based on the similar policies and 
procedures requirements and the corresponding burden estimates 
previously made by the Commission for Rule 17Ad-22(d)(12),\478\ the 
Commission preliminarily believes that respondent clearing agencies 
would incur an aggregate one-time burden of approximately 84 hours to 
review and update existing policies and procedures.\479\
---------------------------------------------------------------------------

    \477\ See 17 CFR 240.17Ad-22(d)(12); proposed Rule 17Ad-
22(e)(8), infra Part VII; see also supra Part II.B.5 (discussing the 
requirements under the proposed rule).
    \478\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \479\ This figure was calculated as follows: ((Assistant General 
Counsel for 2 hours) + (Compliance Attorney for 6 hours) + (Senior 
Business Analyst for 2 hours) + (Computer Operations Manager for 2 
hours)) = 12 hours x 7 respondent clearing agencies = 84 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(8) would also impose ongoing burdens on a 
respondent clearing agency. The proposed requirements would require 
ongoing monitoring and compliance activities with respect to the 
written policies and procedures created in response to the proposed 
rules. Based on the Commission's previous estimates for ongoing 
monitoring and compliance burdens with respect to existing Rule 17Ad-
22,\480\ the Commission preliminarily estimates that the ongoing 
activities required by proposed Rule 17Ad-22(e)(8) would impose an 
aggregate annual burden on respondent clearing agencies of 
approximately 35 hours.\481\
---------------------------------------------------------------------------

    \480\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \481\ This figure was calculated as follows: (Compliance 
Attorney for 5 hours) x 7 respondent clearing agencies = 35 hours.
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(9)
    Proposed Rule 17Ad-22(e)(9) contains substantially similar 
provisions to Rule 17Ad-22(d)(5).\482\ As a result, a respondent 
clearing agency would already have written rules, policies, and 
procedures substantially similar to the requirements that would be 
imposed under the proposed rule. In this regard, the Commission 
preliminarily believes that respondent clearing agencies would incur 
the incremental burdens of reviewing and updating existing policies and 
procedures as necessary. Accordingly, based on the similar policies and 
procedures requirements and the corresponding burden estimates 
previously made by the Commission for Rule 17Ad-22(d)(5),\483\ the 
Commission preliminarily believes that respondent clearing agencies 
would incur an aggregate one-time burden of approximately 84 hours to 
review and update existing policies and procedures.\484\
---------------------------------------------------------------------------

    \482\ See 17 CFR 240.17Ad-22(d)(5); proposed Rule 17Ad-22(e)(9), 
infra Part VII; see also supra Part II.B.6 (discussing the 
requirements under the proposed rule).
    \483\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \484\ This figure was calculated as follows: ((Assistant General 
Counsel for 2 hours) + (Compliance Attorney for 6 hours) + (Senior 
Business Analyst for 2 hours) + (Computer Operations Manager for 2 
hours)) = 12 hours x 7 respondent clearing agencies = 84 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(9) would also impose ongoing burdens on a 
respondent clearing agency. The proposed requirement would require 
ongoing monitoring and compliance activities with respect to the 
written policies and procedures created in response to the proposed 
rule. Based on the Commission's previous estimates for ongoing 
monitoring and compliance burdens with respect to existing Rule 17Ad-
22,\485\ the Commission preliminarily estimates that the ongoing 
activities required by proposed Rule 17Ad-22(e)(9) would impose an 
aggregate annual burden on respondent clearing agencies of 
approximately 35 hours.\486\
---------------------------------------------------------------------------

    \485\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \486\ This figure was calculated as follows: (Compliance 
Attorney for 5 hours) x 7 respondent clearing agencies = 35 hours.
---------------------------------------------------------------------------

c. Proposed Rule 17Ad-22(e)(10)
    Proposed Rule 17Ad-22(e)(10) contains substantially similar 
provisions to Rule 17Ad-22(d)(15).\487\ As a result, a respondent 
clearing agency would already have written rules, policies, and 
procedures substantially similar to the requirements that would be 
imposed under the proposed rule. In this regard, the Commission 
preliminarily believes that a respondent clearing agency would incur 
the incremental burdens of reviewing and updating existing policies and 
procedures as necessary. Accordingly, based on the similar policies and 
procedures requirements and the corresponding burden estimates 
previously made by the Commission for Rule 17Ad-22(d)(15),\488\ the 
Commission preliminarily believes that respondent clearing agencies 
would incur an aggregate one-time burden of approximately 84 hours to 
review and update existing policies and procedures.\489\
---------------------------------------------------------------------------

    \487\ See 17 CFR 240.17Ad-22(d)(15); proposed Rule 17Ad-
22(e)(10), infra Part VII; see also supra Part II.B.7 (discussing 
the requirements under the proposed rule).
    \488\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \489\ This figure was calculated as follows: ((Assistant General 
Counsel for 2 hours) + (Compliance Attorney for 6 hours) + (Senior 
Business Analyst for 2 hours) + (Computer Operations Manager for 2 
hours)) = 12 hours x 7 respondent clearing agencies = 84 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(10) would also impose ongoing burdens on a 
respondent clearing agency. The proposed requirement would require 
ongoing monitoring and compliance activities with respect to the 
written policies and procedures created in response to the proposed 
rule. Based on the Commission's previous estimates for ongoing 
monitoring and compliance burdens with respect to existing Rule 17Ad-
22,\490\ the Commission preliminarily estimates that the ongoing 
activities required by proposed Rule 17Ad-22(e)(10) would impose an 
aggregate annual burden on respondent clearing agencies of 
approximately 35 hours.\491\
---------------------------------------------------------------------------

    \490\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \491\ This figure was calculated as follows: (Compliance 
Attorney for 5 hours) x 7 respondent clearing agencies = 35 hours.
---------------------------------------------------------------------------

4. Proposed Rules 17Ad-22(e)(11) Through (12): CSDs and Exchange-of-
Value Settlement Systems
a. Proposed Rule 17Ad-22(e)(11)
    Proposed Rule 17Ad-22(e)(11) contains similar provisions to Rule 
17Ad-22(d)(10).\492\ As a result, a respondent clearing agency 
providing CSD services would already have written rules, policies, and 
procedures similar to the requirements that would

[[Page 29571]]

be imposed under the proposed rule but also imposes additional 
requirements that do not appear in existing Rule 17Ad-22,\493\ and 
accordingly a covered clearing agency providing CSD services may need 
to update or amend existing policies and procedures, as necessary, to 
satisfy the proposed requirements and may need to create new policies 
and procedures. Based on the similar policies and procedures 
requirements and the corresponding burden estimates previously made by 
the Commission for Rule 17Ad-22(d)(10),\494\ the Commission 
preliminarily believes that the respondent clearing agency would incur 
a one-time burden of approximately 55 hours to review and update 
existing policies and procedures and to create new policies and 
procedures, as necessary.\495\
---------------------------------------------------------------------------

    \492\ See 17 CFR 240.17Ad-22(d)(10); proposed Rule 17Ad-
22(e)(11), infra Part VII.
    \493\ See supra Part II.B.8 (discussing the requirements under 
the proposed rule and their relationship to existing requirements 
under Rule 17Ad-22(d)(10)).
    \494\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \495\ This figure was calculated as follows: ((Assistant General 
Counsel for 20 hours) + (Compliance Attorney for 10 hours) + 
(Intermediate Accountant for 15 hours) + (Senior Business Analyst 
for 5 hours) + (Computer Operations Manager for 5 hours)) = 55 hours 
x 1 respondent clearing agency = 55 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(11) would also impose ongoing burdens on 
the respondent clearing agency providing CSD services. The proposed 
requirement would require ongoing monitoring and compliance activities 
with respect to the written policies and procedures created in response 
to the proposed rule. Based on the Commission's previous estimates for 
ongoing monitoring and compliance burdens with respect to existing Rule 
17Ad-22,\496\ the Commission preliminarily estimates that the ongoing 
activities required by proposed Rules 17Ad-22(e)(11) would impose a 
total annual burden on the respondent clearing agency of approximately 
8 hours.\497\
---------------------------------------------------------------------------

    \496\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \497\ This figure was calculated as follows: (Compliance 
Attorney for 8 hours) x 1 respondent clearing agency = 8 hours.
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(12)
    Proposed Rule 17Ad-22(e)(12) contains substantially similar 
provisions to Rule 17Ad-22(d)(13).\498\ As a result, a respondent 
clearing agency would already have written rules, policies, and 
procedures substantially similar to the requirements that would be 
imposed under the proposed rule. In this regard, the Commission 
preliminarily believes that a respondent clearing agency would incur 
the incremental burdens of reviewing and updating existing policies and 
procedures as necessary. Accordingly, based on the similar policies and 
procedures requirements and the corresponding burden estimates 
previously made by the Commission for Rule 17Ad-22(d)(13),\499\ the 
Commission preliminarily believes that respondent clearing agencies 
would incur an aggregate one-time burden of approximately 84 hours to 
review and update existing policies and procedures.\500\
---------------------------------------------------------------------------

    \498\ See 17 CFR 240.17Ad-22(d)(13); proposed Rule 17Ad-
22(e)(12), infra Part VII; see also supra Part II.B.9 (discussing 
the requirements under the proposed rule).
    \499\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \500\ This figure was calculated as follows: ((Assistant General 
Counsel for 2 hours) + (Compliance Attorney for 6 hours) + (Senior 
Business Analyst for 2 hours) + (Computer Operations Manager for 2 
hours)) = 12 hours x 7 respondent clearing agencies = 84 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(12) would also impose ongoing burdens on a 
covered clearing agency. The proposed requirement would require ongoing 
monitoring and compliance activities with respect to the written 
policies and procedures created in response to the proposed rule. Based 
on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\501\ the 
Commission preliminarily estimates that the ongoing activities required 
by proposed Rule 17Ad-22(e)(12) would impose an aggregate annual burden 
on respondent clearing agencies of approximately 35 hours.\502\
---------------------------------------------------------------------------

    \501\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \502\ This figure was calculated as follows: (Compliance 
Attorney for 5 hours) x 7 respondent clearing agencies = 35 hours.
---------------------------------------------------------------------------

5. Proposed Rules 17Ad-22(e)(13) Through (14): Default Management
a. Proposed Rule 17Ad-22(e)(13)
    Proposed Rule 17Ad-22(e)(13) would require a respondent clearing 
agency to have written policies and procedures reasonably designed to 
address participant default and ensure that the clearing agency can 
contain losses and liquidity demands and continue to meet its 
obligations. Proposed Rule 17Ad-22(e)(13) contains similar provisions 
to Rule 17Ad-22(d)(11) but would also impose additional requirements 
that do not appear in existing Rule 17Ad-22.\503\ As a result, the 
Commission preliminarily believes that a respondent clearing agency 
would incur burdens of reviewing and updating existing policies and 
procedures in order to comply with the provisions of proposed Rule 
17Ad-22(e)(13) and, in some cases, may need to create new policies and 
procedures. Accordingly, based on the similar policies and procedures 
requirements and the corresponding burden estimates previously made by 
the Commission for Rule 17Ad-22(d)(11),\504\ the Commission 
preliminarily believes that respondent clearing agencies would incur an 
aggregate one-time burden of approximately 420 hours to review and 
update existing policies and procedures and to create new policies and 
procedures, as necessary.\505\
---------------------------------------------------------------------------

    \503\ See 17 CFR 240.17Ad-22(d)(11); proposed Rule 17Ad-
22(e)(13), infra Part VII; see also supra Part II.B.10 (discussing 
the requirements under the proposed rule and their relationship to 
existing Rule 17Ad-22(d)(11).
    \504\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \505\ This figure was calculated as follows: ((Assistant General 
Counsel for 20 hours) + (Compliance Attorney for 16 hours) + (Senior 
Business Analyst for 12 hours) + (Computer Operations Manager for 12 
hours)) = 60 hours x 7 respondent clearing agencies = 420 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(13) would also impose ongoing burdens on a 
respondent clearing agency. Specifically, the proposed rule would 
require annual review and testing of a clearing agency's default 
policies and procedures. Based on the Commission's previous estimates 
for ongoing monitoring and compliance burdens with respect to existing 
Rule 17Ad-22,\506\ the Commission preliminarily believes that the 
ongoing activities required by proposed Rule 17Ad-22(e)(13) would 
impose an aggregate annual burden on respondent clearing agencies of 
approximately 63 hours.\507\
---------------------------------------------------------------------------

    \506\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \507\ This figure was calculated as follows: (Compliance 
Attorney for 9 hours) x 7 respondent clearing agencies = 63 hours.
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(14)
    Registered clearing agencies that provide CCP services for 
security-based swaps generally have written policies and procedures 
regarding the segregation and portability of customer positions and 
collateral as a result of applicable regulations but not existing Rule 
17Ad-22.\508\ As a result, respondent clearing agencies providing CCP 
services for security-based swaps would incur burdens of reviewing and 
updating existing policies and

[[Page 29572]]

procedures as necessary in order to comply with the proposed rule. The 
Commission preliminarily estimates that Rule 17Ad-22(e)(14) would 
impose on respondent clearing agencies an aggregate one-time burden of 
72 hours to review and update existing policies and procedures.\509\
---------------------------------------------------------------------------

    \508\ See, e.g., 77 FR 6336 (Feb. 7, 2012) (CFTC adopting rules 
imposing LSOC on DCOs for cleared swaps); see also supra Part 
II.B.11, in particular note 297 and accompanying text. Because the 
affected clearing agencies are subject to the CFTC's segregation and 
portability requirements with respect to cleared swaps under LSOC, 
the Commission preliminarily believes the burden imposed by proposed 
Rule 17Ad-22(e)(14) would be limited.
    \509\ This figure was calculated as follows: ((Assistant General 
Counsel for 12 hours) + (Compliance Attorney for 10 hours) + 
(Computer Operations Manager for 7 hours) + (Senior Business Analyst 
for 7 hours)) = 36 hours x 2 respondent clearing agency that 
provide, or would potentially provide, CCP services with respect to 
security-based swaps = 72 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(14) would also impose ongoing burdens on a 
respondent clearing agency that provides CCP services for security-
based swaps. Based on the Commission's previous estimates for ongoing 
monitoring and compliance burdens with respect to existing Rule 17Ad-
22,\510\ the Commission preliminarily believes that the ongoing 
activities required by proposed Rule 17Ad-22(e)(14) would impose an 
aggregate annual burden on respondent clearing agencies of 
approximately 12 hours.\511\
---------------------------------------------------------------------------

    \510\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \511\ This figure was calculated as follows: (Compliance 
Attorney for 6 hours) x 2 respondent clearing agencies = 12 hours.
---------------------------------------------------------------------------

6. Proposed Rules 17Ad-22(e)(15) Through (17): General Business and 
Operational Risk Management
a. Proposed Rule 17Ad-22(e)(15)
    Respondent clearing agencies would be required to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to identify and manage general business risks borne 
by the clearing agency. Policies and procedures governing the 
identification and mitigation of general business risk are not 
currently required under existing Rule 17Ad-22 and, as a result, the 
Commission preliminarily believes that the estimated PRA burdens for 
proposed Rule 17Ad-22(e)(15) would be more significant and may require 
a respondent clearing agency to make substantial changes to its 
policies and procedures.\512\ The Commission preliminarily estimates 
that proposed Rule 17Ad-22(e)(15) would impose an aggregate one-time 
burden on respondent covered clearing agencies of 1,470 hours to review 
and update existing policies and procedures and to create new policies 
and procedures, as necessary.\513\
---------------------------------------------------------------------------

    \512\ See proposed Rule 17Ad-22(e)(15), infra Part VII; see also 
supra Part II.B.12 (discussing the requirements under the proposed 
rule).
    \513\ This figure was calculated as follows: ((Assistant General 
Counsel for 40 hours) + (Compliance Attorney for 30 hours) + 
(Computer Operations Manager for 10 hours) + (Senior Business 
Analyst for 10 hours) + (Financial Analyst for 70 hours) + (Chief 
Financial Officer for 50 hours)) = 210 hours x 7 respondent clearing 
agencies = 1,470 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(15) would also imposed ongoing burdens on 
a respondent clearing agency. Proposed Rule 17Ad-22(e)(15) would 
require a respondent clearing agency to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
maintain a viable plan, approved by its board of directors and updated 
at least annually, for raising additional equity in the event that the 
covered clearing agency's liquid net assets fall below the level 
required by the proposed rule. Based on the Commission's previous 
estimates for ongoing monitoring and compliance burdens with respect to 
existing Rule 17Ad-22,\514\ the Commission preliminarily estimates that 
the ongoing activities required by proposed Rule 17Ad-22(e)(15) would 
impose an aggregate annual burden on respondent clearing agencies of 
336 hours.\515\
---------------------------------------------------------------------------

    \514\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \515\ This figure was calculated as follows: ((Compliance 
Attorney for 42 hours) + (Administrative Assistant for 3 hours) + 
(Senior Business Analyst for 3 hours)) = 48 hours x 7 respondents 
clearing agencies = 336 hours.
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(16)
    A registered clearing agency is currently required to have written 
policies and procedures reasonably designed to address, in large part, 
the safeguarding of assets of its assets and those of its participants 
under Rule 17Ad-22(d)(3).\516\ Proposed Rule 17Ad-22(e)(16) contains 
substantially similar provisions. As a result, the Commission 
preliminarily believes that a respondent clearing agency would be 
required to conduct a review of current policies and procedures and 
update these existing policies and procedures where appropriate in 
order to ensure compliance with the proposed rule and that the PRA 
burden imposed by the proposed rule would be limited. Accordingly, 
based on the similar policies and procedures requirements and the 
corresponding burden estimates previously made by the Commission for 
Rule 17Ad-22(d)(3),\517\ the Commission preliminarily estimates that 
all respondent clearing agencies would incur an aggregate one-time 
burden of approximately 140 hours to review and update existing 
policies and procedures.\518\
---------------------------------------------------------------------------

    \516\ See 17 CFR 240.17Ad-22(d)(3); proposed Rule 17Ad-
22(e)(16), infra Part VII; see also supra Part II.B.13 (discussing 
the requirements under the proposed rule).
    \517\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \518\ This figure was calculated as follows: ((Assistant General 
Counsel for 4 hours) + (Compliance Attorney for 8 hours) + (Senior 
Business Analyst for 4 hours) + (Computer Operations Manager for 4 
hours)) = 20 hours x 7 respondent clearing agencies = 140 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(16) would also impose ongoing burdens on a 
respondent clearing agency. It would require ongoing monitoring and 
compliance activities with respect to the policies and procedures 
implemented in response to the requirements of the proposed rule. Based 
on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\519\ the 
Commission preliminarily estimates that the ongoing activities required 
by proposed Rule 17Ad-22(e)(16) would impose an aggregate annual burden 
on respondent clearing agencies of 42 hours.\520\
---------------------------------------------------------------------------

    \519\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \520\ This figure was calculated as follows: (Compliance 
Attorney for 6 hours) x 7 respondent clearing agencies = 42 hours.
---------------------------------------------------------------------------

c. Proposed Rule 17Ad-22(e)(17)
    Proposed Rule 17Ad-22(e)(17) contains similar requirements to those 
under Rule 17Ad-22(d)(4) but would also impose additional requirements 
that do not appear in existing Rule 17Ad-22.\521\ As a result, a 
respondent clearing agency is currently required to have some written 
rules, policies and procedures containing provisions similar to the 
requirements that would be imposed under the proposed rule, but it 
would also need to review and update existing policies and procedures, 
where necessary, and may need to create policies and procedures to 
address the additional requirements. Accordingly, based on the similar 
policies and procedures requirements and the corresponding burden 
estimates previously made by the Commission for Rule 17Ad-
22(d)(4),\522\ the Commission preliminarily estimates that respondent 
clearing agencies would incur an aggregate one-time burden of 196 hours 
to review and update existing policies and procedures and to create new 
policies and procedures, as necessary.\523\
---------------------------------------------------------------------------

    \521\ See 17 CFR 240.17Ad-22(d)(4); proposed Rule 17Ad-
22(e)(17), infra Part VII; see also supra Part II.B.14 (discussing 
the requirements under the proposed rule).
    \522\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \523\ This figure was calculated as follows: ((Assistant General 
Counsel for 4 hours) + (Compliance Attorney for 8 hours) + (Computer 
Operations Manager for 6 hours) + (Senior Business Analyst for 4 
hours) + (Chief Compliance Officer for 4 hours) + (Senior Programmer 
for 2 hours)) = 28 hours x 7 respondent clearing agency = 196 hours.

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

[[Page 29573]]

    Proposed Rule 17Ad-22(e)(17) would also impose ongoing burdens on a 
respondent clearing agency. Specifically, the proposed rule would 
require ongoing monitoring and compliance activities with respect to 
the written policies and procedures created in response to the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\524\ the 
Commission preliminarily estimates that the ongoing activities required 
by proposed Rule 17Ad-22(e)(17) would impose an aggregate annual burden 
on respondent clearing agencies of 112 hours.\525\
---------------------------------------------------------------------------

    \524\ See Clearing Agency Standards Release, supra note 5, at 
66260-63.
    \525\ This figure was calculated as follows: (Compliance 
Attorney for 6 hours) x 7 respondent clearing agencies = 42 hours.
---------------------------------------------------------------------------

7. Proposed Rules 17Ad-22(e)(18) Through (20): Access
a. Proposed Rule 17Ad-22(e)(18)
    Proposed Rule 17Ad-22(e)(18) contains similar requirements to those 
in existing Rules 17Ad-22(b)(5) through (7) and (d)(2).\526\ As a 
result, a respondent clearing agency is currently required to have 
written rules, policies, and procedures containing provisions similar 
to the requirements that would be imposed under the proposed rule. 
Thus, for certain portions of proposed Rule 17Ad-22(e)(18), the 
Commission preliminarily believes that a respondent clearing agency 
would need to review and update existing policies and procedures where 
necessary. Because proposed Rule 17Ad-22(e)(18) also imposes additional 
requirements that do not appear in existing Rule 17Ad-22, however,\527\ 
a respondent clearing agency may be required to create policies and 
procedures to address these additional requirements. Accordingly, based 
on the similar policies and procedures requirements and the 
corresponding burden estimates previously made by the Commission for 
Rules 17Ad-22(b)(5) through (7) and (d)(2),\528\ the Commission 
preliminarily estimates that respondent clearing agencies would incur 
an aggregate one-time burden of 308 hours to review and update existing 
policies and procedures and to create new policies and procedures, as 
necessary.\529\
---------------------------------------------------------------------------

    \526\ See 17 CFR 240.17Ad-22(b)(5) through (7) and (d)(2).
    \527\ See proposed Rule 17Ad-22(e)(18), infra Part VII; see also 
supra Part II.B.15 (discussing the requirements under the proposed 
rule).
    \528\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \529\ This figure was calculated as follows: ((Assistant General 
Counsel for 10 hours) + (Compliance Attorney for 7 hours) + Computer 
Operations Manager for 15 hours) + (Senior Business Analyst for 5 
hours) + (Chief Compliance Officer for 5 hours) + (Senior Programmer 
for 2 hours)) = 44 hours x 7 respondent clearing agencies = 308 
hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(18) would also impose ongoing burdens on a 
respondent clearing agency. Specifically, the proposed rule would 
require ongoing monitoring and compliance activities with respect to 
the written policies and procedures created in response to the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\530\ the 
Commission preliminarily estimates that the ongoing activities required 
by the proposed rule would impose an aggregate annual burden on 
respondent clearing agencies of 49 hours.\531\
---------------------------------------------------------------------------

    \530\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \531\ This figure was calculated as follows: (Compliance 
Attorney for 7 hours) x 7 respondent clearing agencies = 49 hours.
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(19)
    Respondent clearing agencies would be required to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to address material risks associated from tiered 
participation arrangements as required by proposed Rule 17Ad-22(e)(19). 
Tiered participation arrangements are not addressed in existing Rule 
17Ad-22. To the extent that a respondent clearing agency has not 
addressed tiered participation arrangements in its policies and 
procedures, the Commission preliminarily believes that the respondent 
clearing agency would need to create policies and procedures to address 
these proposed requirements. In this regard, the PRA burden for 
proposed Rule 17Ad-22(e)(19) would impose one-time initial burdens to 
create policies and procedures. The Commission preliminarily estimates 
that proposed Rule 17Ad-22(e)(19) would impose an aggregate one-time 
burden on respondent clearing agencies of 308 hours to create said 
policies and procedures.\532\
---------------------------------------------------------------------------

    \532\ This figure was calculated as follows: ((Assistant General 
Counsel for 10 hours) + (Compliance Attorney for 7 hours) + 
(Computer Operations Manager for 15 hours) + (Senior Business 
Analyst for 5 hours) + (Chief Compliance Officer for 5 hours) + 
(Senior Programmer for 2 hours)) = 44 hours x 7 respondent clearing 
agencies = 308 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(19) would also impose ongoing burdens on a 
respondent clearing agency. Specifically, the proposed rule would 
require ongoing monitoring and compliance activities with respect to 
the written policies and procedures created in response to the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\533\ the 
Commission preliminarily estimates that the ongoing activities required 
by the proposed rule would impose an annual aggregate burden on 
respondent clearing agencies of 49 hours.\534\
---------------------------------------------------------------------------

    \533\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \534\ This figure was calculated as follows: (Compliance 
Attorney for 7 hours) x 7 respondent clearing agencies = 49 hours.
---------------------------------------------------------------------------

c. Proposed Rule 17Ad-22(e)(20)
    Registered clearing agencies are currently required to have written 
policies and procedures reasonably designed to manage risks related to 
links between the clearing agency and others under Rule 17Ad-22(d)(7). 
Proposed Rule 17Ad-22(e)(20) contains similar requirements, but also 
imposes additional requirements.\535\ As a result, a respondent 
clearing agency may need to review and update existing policies and 
procedures or establish new policies and procedures, as necessary, to 
satisfy the proposed requirement. Accordingly, based on the similar 
policies and procedures requirements and the corresponding burden 
estimates previously made by the Commission for Rule 17Ad-
22(d)(7),\536\ the Commission preliminarily believes that respondent 
clearing agencies would incur an aggregate one-time burden of 
approximately 308 hours to review and update existing policies and 
procedures.\537\
---------------------------------------------------------------------------

    \535\ See 17 CFR 240.17Ad-22(d)(7); proposed Rule 17Ad-
22(e)(20), infra Part VII; see also supra Part II.B.17 (discussing 
the requirements under the proposed rule).
    \536\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \537\ This figure was calculated as follows: ((Assistant General 
Counsel for 10 hours) + (Compliance Attorney for 7 hours) + (Senior 
Business Analyst for 5 hours) + (Computer Operations Manager for 15 
hours) + (Chief Compliance Officer for 5 hours) + (Senior Programmer 
for 2 hours) = 44 hours x 7 respondent clearing agencies = 308 
hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(20) would also impose ongoing burdens on a 
respondent clearing agency. Specifically, the proposed rule would 
require ongoing monitoring and compliance activities with respect to 
the written policies and procedures created in response to the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance

[[Page 29574]]

burdens with respect to existing Rule 17Ad-22,\538\ the Commission 
preliminarily estimates that the ongoing activities required by the 
proposed rule would impose an aggregate annual burden on respondent 
clearing agencies of 49 hours.\539\
---------------------------------------------------------------------------

    \538\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \539\ This figure was calculated as follows: (Compliance 
Attorney for 7 hours) x 7 respondent clearing agencies = 49 hours.
---------------------------------------------------------------------------

8. Proposed Rules 17Ad-22(e)(21) Through (22): Efficiency
a. Proposed Rule 17Ad-22(e)(21)
    Registered clearing agencies are currently required to have written 
policies and procedures requiring the clearing agency to be cost 
effective with respect to meeting the requirements of its participants 
and the markets it serves under Rule 17Ad-22(d)(6), and proposed Rule 
17Ad-22(e)(21) contains similar requirements but also imposes new 
requirements.\540\ As a result, a respondent clearing agency would 
likely incur the burdens of reviewing and updating existing policies 
and procedures and may need to create new policies and procedures to 
satisfy the proposed rule, as necessary. Accordingly, based on the 
similar policies and procedures requirements and the corresponding 
burden estimates previously made by the Commission for Rule 17Ad-
22(d)(6),\541\ the Commission preliminarily estimates that that 
respondent clearing agencies would incur an aggregate one-time burden 
of approximately 224 hours to review and update existing policies and 
procedures.\542\
---------------------------------------------------------------------------

    \540\ See 17 CFR 240.17Ad-22(d)(6).
    \541\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \542\ This figure was calculated as follows: ((Assistant General 
Counsel for 10 hours) + (Compliance Attorney for 7 hours) + (Senior 
Business Analyst for 5 hours) + (Computer Operations Manager for 10 
hours)) = 32 hours x 7 respondent clearing agencies = 224 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(21) would also impose ongoing burdens on a 
respondent clearing agency. The proposed rule would require ongoing 
monitoring and compliance activities with respect to the written 
policies and procedures required under the proposed rule. Based on the 
Commission's previous estimates for ongoing monitoring and compliance 
burdens with respect to existing Rule 17Ad-22,\543\ the Commission 
preliminarily estimates that the ongoing activities required by 
proposed Rule 17Ad-22(e)(21) would impose an aggregate annual burden on 
respondent clearing agencies of 77 hours.\544\
---------------------------------------------------------------------------

    \543\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \544\ This figure was calculated as follows: ((Compliance 
Attorney for 5 hours) + (Administrative Assistant for 3 hours) + 
(Senior Business Analyst for 3 hours) = 11 hours x 7 respondent 
clearing agencies = 77 hours.
---------------------------------------------------------------------------

b. Proposed Rule 17Ad-22(e)(22)
    Respondent clearing agencies would be required to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to implement the requirements of proposed Rule 
17Ad-22(e)(22) with respect to the use of relevant internationally 
accepted communication procedures and standards. Although registered 
clearing agencies are not subject to an existing similar requirement 
under Rule 17Ad-22, the Commission understands that covered clearing 
agencies currently use the relevant internationally accepted 
communication procedures and standards and expects a covered clearing 
agency would need to make only limited changes to satisfy the 
requirements under the proposed rule.\545\ Accordingly, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(e)(22) would impose 
an aggregate one-time burden on respondent clearing agencies of 168 
hours to review and update existing policies and procedures.\546\
---------------------------------------------------------------------------

    \545\ See supra note 441.
    \546\ This figure was calculated as follows: ((Assistant General 
Counsel for 2 hours) + (Compliance Attorney for 6 hours) + (Computer 
Operations Manager for 7 hours) + (Senior Business Analyst for 2 
hours) + (Chief Compliance Officer for 5 hours) + (Senior Programmer 
for 2 hours)) = 24 hours x 7 respondent clearing agencies = 168 
hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(22) would also impose ongoing burdens on a 
respondent clearing agency. Specifically, the proposed rule would 
require ongoing monitoring and compliance activities with respect to 
the written policies and procedures created in response to the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\547\ the 
Commission preliminarily estimates that the ongoing activities required 
by proposed Rule 17Ad-22(e)(22) would impose an aggregate annual burden 
on respondent clearing agencies of 35 hours.\548\
---------------------------------------------------------------------------

    \547\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \548\ This figure was calculated as follows: (Compliance 
Attorney for 5 hours) x 7 respondent clearing agencies = 35 hours.
---------------------------------------------------------------------------

9. Proposed Rule 17Ad-22(e)(23): Disclosure
    Proposed Rule 17Ad-22(e)(23) contains similar requirements to Rule 
17Ad-22(d)(9) but also imposes substantial new requirements.\549\ As a 
result, although a respondent clearing agency is already required to 
have written rules, policies and procedures containing provisions 
similar to some of the requirements in the proposed rule, for some 
provisions of proposed Rule 17Ad-22(e)(23), a respondent clearing 
agency would be required to establish policies and procedures to 
address the additional requirements. Accordingly, based on the similar 
policies and procedures requirements and the corresponding burden 
estimates previously made by the Commission for Rule 17Ad-
22(d)(9),\550\ the Commission preliminarily estimates that respondent 
clearing agencies would incur an aggregate one-time burden of 966 hours 
to review and update existing policies and procedures and to create 
policies and procedures, as necessary.\551\
---------------------------------------------------------------------------

    \549\ See 17 CFR 240.17Ad-22(d)(9); proposed Rule 17Ad-
22(e)(23), infra Part VII; see also supra Part II.B.20 (discussing 
the requirements under the proposed rule).
    \550\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \551\ This figure was calculated as follows: ((Assistant General 
Counsel for 38 hours) + (Compliance Attorney for 24 hours) + 
(Computer Operations Manager for 32 hours) + (Senior Business 
Analyst for 18 hours) + (Chief Compliance Officer for 18 hours) + 
(Senior Programmer for 8 hours)) = 138 hours x 7 respondent clearing 
agencies = 966 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(23) would also impose ongoing burdens on a 
respondent clearing agency. Specifically, the proposed rule would 
require ongoing monitoring and compliance activities with respect to 
the written policies and procedures created in response to the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\552\ the 
Commission preliminarily estimates that the ongoing activities required 
by proposed Rule 17Ad-22(e)(23) would impose an aggregate annual burden 
on respondent clearing agencies of 238 hours.\553\
---------------------------------------------------------------------------

    \552\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \553\ This figure was calculated as follows: (Compliance 
Attorney for 34 hours) x 7 respondent clearing agencies = 238 hours.
---------------------------------------------------------------------------

10. Total Burden for Proposed Rule 17Ad-22(e)
    The aggregate initial burden for respondent clearing agencies under 
proposed Rule 17Ad-22(e) would be 10,664 hours. The aggregate ongoing 
burden for respondent clearing agencies under proposed Rule 17Ad-22(e) 
would be 3,460 hours.

[[Page 29575]]

E. Total Annual Reporting and Recordkeeping Burden for Proposed Rule 
17Ab2-2

    Proposed Rule 17Ab2-2 would govern Commission determinations as to 
whether a registered clearing agency is a covered clearing agency and 
whether a covered clearing agency is either involved in activities with 
a more complex risk profile or systemically important in multiple 
jurisdictions.\554\ Because such determinations may be made upon 
request of a clearing agency or its members, the respondents would have 
the burdens of preparing such requests for submission to the 
Commission. The Commission preliminarily notes that, to the extent such 
determinations are carried out by the Commission on its own initiative 
pursuant to proposed Rule 17Ab2-2, the PRA burdens on the respondents 
would be limited. Accordingly, based on the Commission's previous 
estimates for ongoing monitoring and compliance burdens with respect to 
existing Rule 17Ad-22,\555\ the Commission preliminarily believes that 
respondent clearing agencies would incur an aggregate one-time burden 
of approximately 24 hours to draft and review a determination request 
to the Commission.\556\
---------------------------------------------------------------------------

    \554\ See infra Part II.C (further discussing the purpose, 
scope, and application of proposed Rule 17Ab2-2) and Part VII 
(proposed text of Rule 17Ab2-2).
    \555\ See Clearing Agency Standards Release, supra note 5, at 
66260.
    \556\ This figure was calculated as follows: ((Assistant General 
Counsel for 2 hours) + (Staff Attorney for 4 hours) + (Outside 
Counsel for 6 hours)) = 12 hours x 2 respondent clearing agencies = 
24 hours.
---------------------------------------------------------------------------

F. Collection of Information Is Mandatory

    The collection of information relating to proposed Rules 17Ad-
22(e)(1) through (3), 17Ad-22(e)(4)(ii) through (v), 17Ad-22(e)(7)(i) 
through (ix), and 17Ad-22(e)(8) through (23) would be mandatory for all 
respondent clearing agencies. The collection of information requirement 
relating to proposed Rule 17Ad-22(e)(4)(i) and 17Ad-22(e)(7)(x) would 
be mandatory for a respondent clearing agency that provides CCP 
services and that is designated by the Commission either as 
systemically important in multiple jurisdictions or as a complex risk 
profile clearing agency. The collection of information requirement 
relating to proposed Rule 17Ad-22(e)(6) would be mandatory for a 
respondent clearing agency that provides CCP services.
    The collection of information requirement relating to proposed Rule 
17Ab2-2 is voluntary.

G. Confidentiality

    The Commission preliminarily expects that the written policies and 
procedures generated pursuant to proposed Rule 17Ad-22(e) would be 
communicated to the members, subscribers, and employees (as applicable) 
of all entities covered by the proposed rule and the public (as 
applicable). To the extent that this information is made available to 
the Commission, it would not be kept confidential. Such policies and 
procedures would be required to be preserved in accordance with, and 
for periods specified in, Exchange Act Rules 17a-1 \557\ and 17a-
4(e)(7).\558\ To the extent that the Commission receives confidential 
information pursuant to this collection of information, such 
information would be kept confidential subject to the provisions of 
applicable law.\559\
---------------------------------------------------------------------------

    \557\ 17 CFR 240.17a-1.
    \558\ 17 CFR 240.17a-4(e)(7).
    \559\ See, e.g., 5 U.S.C. 552. Exemption 4 of the Freedom of 
Information Act provides an exemption for trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of 
the Freedom of Information Act provides an exemption for matters 
that are contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions. See 5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    To the extent that the Commission receives confidential information 
pursuant to the collection of information under proposed Rule 17Ab2-2, 
the Commission preliminarily expects such information would be kept 
confidential subject to the provisions of applicable law.\560\
---------------------------------------------------------------------------

    \560\ See id.
---------------------------------------------------------------------------

H. Request for Comments

    The Commission invites comments on all of the above estimates. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission requests comment in 
order to (a) evaluate whether the collection of information is 
necessary for the proper performance of our functions, including 
whether the information will have practical utility; (b) evaluate the 
accuracy of our estimates of the burden of the collection of 
information; (c) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; (d) 
evaluate whether there are ways to minimize the burden of the 
collection of information on those who respond, including through the 
use of automated collection techniques or other forms of information 
technology; and (e) determine whether there are cost savings associated 
with the collection of information that have not been identified in 
this proposal.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Kevin M. O'Neill, Deputy 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090, with reference to File No. S7-03-14. 
Requests for materials submitted to OMB by the Commission with regard 
to this collection of information should be in writing, with reference 
to File No. S7-03-14, and be submitted to the Securities and Exchange 
Commission, Office of Investor Education and Advocacy, 100 F Street 
NE., Washington, DC 20549-0213. As OMB is required to make a decision 
concerning the collections of information between 30 and 60 days after 
publication, a comment to OMB is best assured of having its full effect 
if OMB receives it by April 25, 2014.

IV. Economic Analysis

A. Introduction

    The purpose of the proposed amendments to Rule 17Ad-22 and of 
proposed Rule 17Ab2-2 is to establish requirements for the operation 
and governance of registered clearing agencies that meet the definition 
of a ``covered clearing agency.'' Registered clearing agencies have 
become an essential part of the infrastructure of the U.S. securities 
markets. Many securities transactions are centrally cleared and 
settled, and central clearing and settlement is becoming more prevalent 
in the security-based swap markets. For example, DTCC reported 
processing $1.6 quadrillion in transactions in 2012.\561\ For the same 
period, Intercontinental Exchange, Inc. reported $10.2 trillion in 
gross notional CDS cleared and settled.\562\ While clearing

[[Page 29576]]

agencies generally benefit the markets they serve, such entities can 
pose substantial risk to the financial system as a whole, due in part 
to the fact that clearing agencies concentrate risk. Disruption to a 
clearing agency's operations, or failure on the part of a clearing 
agency to meet its obligations, could serve as a potential source of 
contagion, resulting in significant costs not only to the clearing 
agency and its members but also the broader economy and market 
participants.\563\ As a result, proper management of the risks 
associated with central clearing and settlement is necessary to ensure 
the stability of U.S. securities markets.
---------------------------------------------------------------------------

    \561\ See DTCC, 2012 Annual Report, available at http://www.dtcc.com/about/annual-report.aspx.
    \562\ See Intercontinental Exchange, Inc., 2012 Annual Report, 
at 66, available at https://materials.proxyvote.com/Approved/45865V/20130319/AR_159922/. Intercontinental Exchange, Inc. is the parent 
company of ICE and ICEEU.
     ICE began clearing corporate single-name CDS in December 2009, 
and as of February 1, 2013, had cleared $1.9 trillion gross notional 
of single-name CDS on 153 North American corporate reference 
entities. See Exchange Act Release No. 34-61662 (Mar. 5, 2010), 75 
FR 11589, 11591 (Mar. 11, 2010) (discussing ICE's credit default 
swap clearing activities as of March 2010); ICE, Volume of ICE CDS 
Clearing, available at https://www.theice.com/clear_credit.jhtml.
    ICEEU began clearing CDS on single-name corporate reference 
entities in December 2009, and, as of February 1, 2013, had cleared 
[euro]1.6 trillion in gross notional of single-name CDS on 121 
European corporate reference entities. See Exchange Act Release No. 
61973 (Apr. 23, 2010), 75 FR 22656, 22657 (Apr. 29, 2010) 
(discussing ICEEU's credit default swap clearing activity as of 
April 2010); ICEEU, Volume of ICE CDS Clearing, available at https://www.theice.com/clear_credit.jhtml.
    \563\ See generally Darrell Duffie, Ada Li & Theo Lubke, Policy 
Perspectives on OTC Derivatives Market Infrastructure, at 9 (Fed. 
Reserve Bank N.Y. Staff Reps., Mar. 2010), available at http://www.newyorkfed.org/research/staff_reports/sr424.pdf (``If a CCP is 
successful in clearing a large quantity of derivatives trades, the 
CCP is itself a systemically important financial institution. The 
failure of a CCP could suddenly expose many major market 
participants to losses. Any such failure, moreover, is likely to 
have been triggered by the failure of one or more large clearing 
members, and therefore to occur during a period of extreme market 
fragility.''); Pirrong, The Inefficiency of Clearing Mandates, 
Policy Analysis, No. 655, at 11-14, 16-17, 24-26 (2010), available 
at http://www.cato.org/pubs/pas/PA665.pdf, at 11-14, 16-17, 24-26 
(stating, among other things, that ``CCPs are concentrated points of 
potential failure that can create their own systemic risks,'' that 
``[a]t most, creation of CCPs changes the topology of the network of 
connections among firms, but it does not eliminate these 
connections,'' that clearing may lead speculators and hedgers to 
take larger positions, that a CCP's failure to effectively price 
counterparty risks may lead to moral hazard and adverse selection 
problems, that the main effect of clearing would be to 
``redistribute losses consequent to a bankruptcy or run,'' and that 
clearinghouses have failed or come close to failing in the past, 
including in connection with the 1987 market break); Manmohan Singh, 
Making OTC Derivatives Safe--A Fresh Look, at 5-11 (IMF Working 
Paper, Mar. 2011), available at http://www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf (addressing factors that could lead central 
counterparties to be ``risk nodes'' that may threaten systemic 
disruption).
---------------------------------------------------------------------------

    The mandated central clearing and settlement of security-based 
swaps wherever possible and appropriate, a core component of Title VII, 
reinforces this need.\564\ Where a clearing agency provides CCP 
services, clearing and settlement of security-based swap contracts 
replaces bilateral counterparty exposures with exposures against the 
clearing agency providing CCP services. Consequently, a move from 
voluntary central clearing and settlement of security-based swap 
contracts to mandatory clearing of security-based swap contracts, 
holding the volume of security-based swap transactions constant, will 
increase economic exposures against CCPs that clear security-based 
swaps. Increased exposures in turn raise the possibility that these 
CCPs may serve as a transmission mechanism for systemic events.
---------------------------------------------------------------------------

    \564\ See supra Part I.B.1.
---------------------------------------------------------------------------

    Clearing agencies have several incentives to implement 
comprehensive risk management programs. First, the ongoing viability of 
a clearing agency depends on its reputation and the confidence that 
market participants have in its services. Clearing agencies therefore 
have an incentive to minimize the likelihood that a member default or 
operational outage would disrupt settlement. Second, some clearing 
agencies, including those that mutualize default risks, contribute a 
portion of their own capital as part of their contingent resources. 
Clearing agencies with such capital contributions to their contingent 
resources thus have an economic interest in sound risk management. 
Registered clearing agencies are SROs that enforce applicable rules and 
requirements under Commission oversight and are also in certain 
instances subject to CFTC oversight.\565\ Registered clearing agencies 
consequently also face a legal requirement that their rules be designed 
to protect the public interest in the process of clearing securities or 
derivatives.\566\
---------------------------------------------------------------------------

    \565\ See supra Part I.A and note 96 (describing the 
Commission's framework for regulation of SROs and the SRO rule 
filing process); see also supra note 53 (describing regulations 
adopted by the CFTC for DCOs).
    \566\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Nevertheless, clearing agencies' incentives for sound risk 
management may be tempered by pressures to reduce costs and maximize 
profits that are distinct from the public interest goals set forth in 
governing statutes, such as financial stability, and may result in 
clearing agencies choosing tradeoffs between the costs and benefits of 
risk management that are not socially efficient. Because the current 
market for clearing services is characterized by high barriers to entry 
and limited competition, \567\ the market power exercised by clearing 
agencies in the markets they serve may blunt incentives to invest in 
risk management systems.\568\ Further, even if clearing agencies do 
internalize costs that they impose on their clearing members, they may 
fail to internalize the consequences of their risk management decisions 
on other financial entities that are connected to them through 
relationships with clearing members.\569\ Such a failure represents a 
financial network externality imposed by clearing agencies on the 
broader financial markets and suggests that financial stability, as a 
public good, may be under-produced in equilibrium.
---------------------------------------------------------------------------

    \567\ See Clearing Agency Standards Release, supra note 5, at 
66263.
    \568\ See infra Part IV.C.2.a.
    \569\ See Daron Acemoglu, Asuman Ozdaglar & Alireza Tahbaz-
Salehi, Systemic Risk and Stability in Financial Networks (NBER 
Working Paper No. 18727, Jan. 2013), available at http://www.nber.org/papers/w18727.
---------------------------------------------------------------------------

    As discussed in more detail below, the proposed amendments to Rule 
17Ad-22 represent a strengthening of the Commission's regulation of 
registered clearing agencies. The Commission preliminarily believes 
that the more specific requirements imposed by the proposed amendments 
will further mitigate potential moral hazard associated with risk 
management at covered clearing agencies. For instance, in the absence 
of policies and procedures that require periodic stress-testing and 
validation of credit and liquidity risk models, clearing agencies could 
potentially choose to recalibrate models in periods of low volatility 
and avoid recalibration in periods of high volatility, causing them to 
underestimate the risks they face.
    The Commission also preliminarily believes that the additional 
specificity of proposed Rule 17Ad-22(e), along with proposed testing 
requirements, would be more effective at mitigating these particular 
manifestations of incentive misalignments than existing Rule 17Ad-22. 
The Commission preliminarily believes, as a result, that a general 
benefit of the proposed amendments would be reductions in the 
likelihood of CCP failure that result from improved safeguards. This 
general benefit would be realized to the extent that clearing agencies 
do not already conform to new requirements under the proposed 
amendments. Despite the potential incentive problems noted above and 
perhaps in anticipation of regulatory efforts, some registered clearing 
agencies have taken steps to update their policies and procedures in 
accordance with the standards contained in the proposed rules. The 
Commission notes that in some instances the proposed rules establish as 
a minimum regulatory requirement

[[Page 29577]]

certain current practices at some registered clearing agencies. In 
these cases, the Commission preliminarily believes that imposing the 
proposed requirements on covered clearing agencies will have the effect 
of imposing consistent, higher minimum risk management standards across 
covered clearing agencies.
    In analyzing the economic consequences and effects of the rules 
proposed in this release, the Commission has been guided by the 
objectives of Section 17A of the Exchange Act to have due regard for 
the public interest, the protection of investors, the safeguarding of 
securities and funds, the maintenance of fair competition, and to 
otherwise further the purposes of the Exchange Act through the 
registration and regulation of clearing agencies.\570\ It has also been 
guided by the objectives of the Dodd-Frank Act to mitigate risks to the 
U.S. financial system, promote counterparty protection, increase market 
transparency for OTC derivatives, and facilitate financial 
stability.\571\ The Commission has also taken into account the 
importance of maintaining a well-functioning security-based swap market 
and the objectives of the Clearing Supervision Act to establish an 
enhanced supervisory and risk control system for systemically important 
clearing agencies and other FMUs.\572\ In addition, as directed by the 
Clearing Supervision Act, the Commission makes this proposal after 
giving careful consideration to the standards set forth in the PFMI 
Report as the relevant international standard. Proposing rules that 
maintain consistency with the standards set forth in the PFMI Report 
may reduce the likelihood that market participants, including members 
of covered clearing agencies, would restructure in an effort to operate 
in less-regulated markets.
---------------------------------------------------------------------------

    \570\ See supra note 2 and accompanying text (noting the 
requirements of Section 17A of the Exchange Act).
    \571\ See supra note 13 and accompanying text (noting the 
purpose of the Dodd-Frank Act to, among other things, promote 
financial stability); supra note 14 and accompanying text (noting 
the purpose of the Dodd-Frank Act to, among other things, create a 
regulatory framework for the OTC derivatives markets).
    \572\ See supra Part I.B.2 (describing the regulatory framework 
for FMUs set forth in the Clearing Supervision Act).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed amendments 
to Rule 17Ad-22 and proposed Rule 17Ab2-2 are consistent with the goals 
of Section 17A of the Exchange Act, to promote the prompt and accurate 
clearing and settlement of transactions in securities, of the Clearing 
Supervision Act, to enhance the supervision and oversight of clearing 
entities, and of Title VII, to create a robust regulatory structure for 
security-based swaps. In proposing these rules, the Commission is also 
mindful of the benefits that would accrue through maintaining 
consistency with regulations adopted by the Board and the CFTC.
    The Commission is sensitive to the economic consequences and 
effects of the proposed rules, including their benefits and costs. In 
proposing these rules, the Commission has been mindful of the economic 
consequences of the decisions it makes regarding the scope of applying 
the proposed rules to covered clearing agencies. Moreover, the 
Commission acknowledges that, since many of the proposed rules require 
a covered clearing agency to adopt new policies and procedures, the 
economic effects and consequences of the proposed rules include those 
flowing from the substantive results of those new policies and 
procedures. Under Section 3(f) of the Exchange Act, whenever the 
Commission engages in rulemaking under the Exchange Act and is required 
to consider or determine whether an action is necessary or appropriate 
in the public interest, it must consider, in addition to the protection 
of investors, whether the action will promote efficiency, competition, 
and capital formation.\573\ Further, as noted above, Section 17A of the 
Exchange Act directs the Commission to have due regard for the public 
interest, the protection of investors, the safeguarding of securities 
and funds, and maintenance of fair competition among brokers and 
dealers, clearing agencies, and transfer agents when using its 
authority to facilitate the establishment of a national system for 
clearance and settlement transactions in securities.\574\ In addition, 
Section 23(a)(2) of the Exchange Act requires the Commission, when 
making rules under the Exchange Act, to consider the impact such rules 
would have on competition.\575\ Section 23(a)(2) also prohibits the 
Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.\576\
---------------------------------------------------------------------------

    \573\ See 15 U.S.C. 78c(f).
    \574\ See supra note 2 and accompanying text (noting the 
requirements of Section 17A).
    \575\ See 15 U.S.C. 78w(a)(2).
    \576\ See id.
---------------------------------------------------------------------------

    The Commission has attempted, where possible, to quantify the 
benefits and costs anticipated to flow from the proposed rules. In some 
cases, as indicated below, data to quantify the benefits and costs 
associated with the proposed rules are unavailable. For example, 
implementing policies and procedures that require stress testing of 
financial resources available to a covered clearing agency at least 
once each day may require additional investment in infrastructure, but 
the particular infrastructure requirements will depend on existing 
systems and a covered clearing agency's choice of modeling techniques. 
In other cases, quantification depends heavily on factors outside the 
control of the Commission, particularly with regard to the number of 
potential new entrants affected by the proposed rules that in the 
future may be designated systemically important by the FSOC.
    Overall, the Commission preliminarily believes that the proposed 
rules represent improvements in risk management, be it systemic, legal, 
credit, liquidity, general business, custody, investment, or 
operational risk, in keeping with the requirements of Section 17A of 
the Exchange Act and the Dodd-Frank Act. The Commission preliminarily 
believes that the proposed rules will result in an increase in 
financial stability insofar as they result in minimum standards at 
covered clearing agencies that are higher than those standards implied 
by current practices at covered clearing agencies. In particular cases, 
such as new requirements related to management of liquidity risk and 
general business risk, stability may arise as a result of higher risk 
management standards at covered clearing agencies that effectively 
lower the probability that either covered clearing agencies or their 
members default. As explained in Part IV.C.2, reduced default 
probabilities for covered clearing agencies may, in turn, improve 
efficiency and capital formation.
    Request for Comments. The Commission requests comment on all 
aspects of the economic analysis of the proposed rules, including their 
benefits and costs, as well as any effect these proposed rules may have 
on competition, efficiency, and capital formation. Acknowledging the 
data limitations noted above, the Commission encourages commenters to 
provide data and analysis to help further quantify or estimate the 
potential benefits and costs of the proposed rules.

B. Economic Baseline

1. Overview
    To assess the economic effects of the proposed rules, including 
possible

[[Page 29578]]

effects on efficiency, competition, and capital formation, the 
Commission is using a baseline composed of (1) the current regulatory 
framework under which registered clearing agencies operate,\577\ and 
(2) the current practices of registered clearing agencies as they 
relate to the rules being proposed today.
---------------------------------------------------------------------------

    \577\ A brief summary of the regulatory framework appears in 
Part IV.B.2. For a more detailed summary of the current regulatory 
framework, see Part I.
---------------------------------------------------------------------------

    More specifically, the baseline includes existing legal 
requirements applicable to registered clearing agencies providing CCP 
or CSD services as they exist at the time of this proposal, including 
applicable rules adopted by the Commission. Rule 17Ad-22 established a 
regulatory framework for registered clearing agencies, including 
security-based swap clearing agencies deemed registered pursuant to the 
Dodd-Frank Act.\578\ Section 17A of the Exchange Act generally 
regulates the national system for clearance and settlement, while 
Section 19 of the Exchange Act describes the registration, 
responsibilities, and oversight of SROs. Further, clearing agencies are 
subject to new requirements related to security-based swaps under the 
Dodd-Frank Act.
---------------------------------------------------------------------------

    \578\ See Clearing Agency Standards Release, supra note 5; see 
also supra note 25 and accompanying text (discussing the deemed 
registered provision).
---------------------------------------------------------------------------

    In terms of current practice, registered clearing agencies are 
required to operate in compliance with the requirements set forth in 
Rule 17Ad-22, though they may vary in the particular ways they meet 
these requirements. Some variation in practices across clearing 
agencies derives from the products they clear and the markets they 
serve. Additionally, the Commission understands that certain registered 
clearing agencies have already adopted practices consistent with 
several of the standards set forth in the PFMI Report. Accordingly, 
because proposed Rule 17Ad-22(e) and proposed Rule 17Ab2-2 result in 
general consistency with the standards set forth in the PFMI Report, 
the Commission preliminarily believes the resulting benefits and costs 
to covered clearing agencies would, in some cases, be incremental 
because of the relationship between existing requirements applicable to 
registered clearing agencies,\579\ the anticipation of new requirements 
consistent with the standards set forth in the PFMI Report,\580\ and 
the CPSS-IOSCO Recommendations that preceded the PFMI Report.\581\ In 
certain other cases, such as management of liquidity risk and general 
business risk, registered clearing agencies that are covered clearing 
agencies would be required to make changes to current policies and 
procedures, so the resulting costs, benefits and economic effects may 
be significant.
---------------------------------------------------------------------------

    \579\ See supra Part I.C (discussing existing requirements under 
Rule 17Ad-22).
    \580\ See supra note 49.
    \581\ See supra note 50 and accompanying text.
---------------------------------------------------------------------------

    In order to consider the broader implications of these proposed 
rules on market activity, including possible effects on efficiency, 
competition, and capital formation, the baseline also considers the 
current state of clearing and settlement services, including the number 
of registered clearing agencies, the distribution of members across 
these clearing agencies, and the volume of transactions these clearing 
agencies process. There are currently six registered clearing agencies 
that provide CCP services and one registered clearing agency that 
provides CSD services. As shown in Table 1, membership rates vary 
across these clearing agencies. Together, registered clearing agencies 
processed over $2 quadrillion in financial market transactions in 
2012.\582\
---------------------------------------------------------------------------

    \582\ See, e.g., CME Group, 2012 Annual Report, at 2, available 
at http://www.cmegroup.com/investor-relations/annual-review/2012/downloads/cme-group-2012-annual-report.pdf (indicating $806 trillion 
notional in trading volume); DTCC, 2012 Annual Report, available at 
http://www.dtcc.com/about/annual-report.aspx (indicating $1.6 
quadrillion in transactions cleared).

  Table 1--Membership Statistics for Registered Clearing Agencies \583\
------------------------------------------------------------------------
                                                                 Number
------------------------------------------------------------------------
CME Total Members............................................         72
  --Of which clear CDS.......................................         14
DTC Full Service Members.....................................        272
FICC GSD Members.............................................        107
  MBSD Members...............................................         76
ICE Clear Credit Members.....................................         28
   Clear Europe Members......................................         79
  --Clear Europe Members that clear CDS......................         18
NSCC Full Service Members....................................        175
OCC Total Members............................................        117
------------------------------------------------------------------------

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

    \583\ Membership statistics are taken from the Web sites of each 
of the listed clearing agencies and are current, for CME and ICE, as 
of October 2013; for FICC, including the Government Securities 
Division (``GSD'') and the Mortgage-Backed Securities Division 
(``MBSD''), as of September 2013; for OCC as of January 2014; and 
for DTC and NSCC as of December 6, 2013.
---------------------------------------------------------------------------

    Registered clearing agencies are currently characterized by 
specialization and limited competition. Clearing and settlement 
services exhibit high barriers to entry and economies of scale. These 
features of the existing market, and the resulting concentration of 
clearing and settlement within a handful of entities, informs our 
examination of effects of the proposed amendments and rules on 
competition, efficiency, and capital formation.\584\
---------------------------------------------------------------------------

    \584\ See infra Part IV.C.2 (discussing the effect of the 
proposed rules on competition, efficiency, and capital formation).
---------------------------------------------------------------------------

2. Current Regulatory Framework for Clearing Agencies
    The proposed amendments to Rule 17Ad-22 and proposed Rule 17Ab2-2 
fit within the Commission's broad approach to regulation of the 
national system for clearance and settlement that comprises the 
baseline for the Commission's economic analysis. Key elements of the 
current regulatory framework for registered clearing agencies are 
Section 17A of the Exchange Act,\585\ Titles VII and VIII of the Dodd-
Frank Act, and existing Rule 17Ad-22. Section 17A of the Exchange Act 
directs the Commission to facilitate the establishment of a national 
system for the prompt and accurate clearance and settlement of 
securities transactions, having due regard for the public interest, the 
protection of investors, the safeguarding of securities and funds, and 
the maintenance of fair competition among brokers and dealers, clearing 
agencies, and transfer agents.\586\
---------------------------------------------------------------------------

    \585\ See 15 U.S.C. 78q-1. For a more detailed discussion of the 
regulatory framework for registered clearing agencies under Section 
17A of the Exchange Act, see Part I.A.
    \586\ See supra note 2 and accompanying text (noting the 
requirements of Section 17A of the Exchange Act).
---------------------------------------------------------------------------

    Title VII, in response to the 2008 financial crisis, provides the 
Commission and the CFTC with authority to regulate the mandatory 
exchange trading and central clearing and settlement of swaps that 
formerly may have been OTC derivatives.\587\ Title VII amended Section 
17A of the Exchange Act by adding new paragraphs (g) through (j) 
requiring the registration of clearing agencies serving the security-
based swap market, giving the Commission authority to adopt rules 
governing security-based swap clearing agencies, and requiring 
compliance by registered clearing agencies with said rules. New Section 
17A(i) of the Exchange Act provides that the Commission may conform 
standards for and oversight of clearing agencies to reflect evolving 
international standards.
---------------------------------------------------------------------------

    \587\ See Dodd-Frank Act, 124 Stat. at 1641-1802. For a more 
detailed discussion of the regulatory framework for registered 
clearing agencies under Title VII, see Part I.B.1.
---------------------------------------------------------------------------

    The Clearing Supervision Act, adopted in Title VIII, provides for 
enhanced regulation of FMUs, such as clearing agencies, and for 
enhanced coordination between the Commission,

[[Page 29579]]

the CFTC, and the Board by facilitating examinations and information 
sharing.\588\ It also requires the Commission and the CFTC to 
coordinate with the Board to develop risk management supervision 
programs for clearing agencies designated systemically important. 
Section 805(a) of the Clearing Supervision Act further provides that 
the Commission, considering relevant international standards and 
existing prudential requirements, may prescribe regulations that 
contain risk management standards for designated clearing agencies or 
the conduct of designated activities by a financial institution.
---------------------------------------------------------------------------

    \588\ See 12 U.S.C. 5461 et seq. For a more detailed discussion 
of the regulatory framework for registered clearing agencies under 
Title VIII, see Part I.B.2.
---------------------------------------------------------------------------

    Rule 17Ad-22 under the Exchange Act, adopted in 2012, requires a 
registered clearing agency to establish, implement, maintain and 
enforce written policies and procedures that are reasonably designed to 
meet certain minimum requirements for their operations and risk 
management practices on an ongoing basis. These requirements are 
designed to work in tandem with the SRO rule filing process and the 
requirement in Section 17A that the Commission must make certain 
determinations regarding a clearing agency's rules and operations for 
purposes of initial and ongoing registration.\589\ In its economic 
analysis of the rule, the Commission noted that the economic 
characteristics of clearing agencies, including economies of scale, 
barriers to entry, and the particulars of their legal mandates, may 
limit competition and confer market power on such clearing agencies, 
which may lead to lower levels of service, higher prices, or under-
investment in risk management systems.\590\ To address these potential 
market failures, Rule 17Ad-22 was adopted to strengthen the substantive 
regulation of clearing agencies, promote the safe and reliable 
operation of clearing agencies, improve efficiency, transparency, and 
access to clearing agencies, and promote consistency with international 
standards.\591\ Part IV.B.3 discusses current practices at registered 
clearing agencies related to the requirements under Rule 17Ad-22.
---------------------------------------------------------------------------

    \589\ See Clearing Agency Standards Release, supra note 5. For a 
more detailed discussion of the regulatory framework for registered 
clearing agencies under Rule 17Ad-22, see Part I.C. For a comparison 
of the requirements under proposed Rule 17Ad-22(e) and existing 
requirements under Rule 17Ad-22, see Part II.A.4. For further 
discussion of current industry practices subject to the requirements 
in Rule 17Ad-22, see Part IV.B.3.
    \590\ See id.
    \591\ See Clearing Agency Standards Release, supra note 5, at 
66225, 66263-64.
---------------------------------------------------------------------------

a. Basel III Capital Requirements
    In addition to requirements under the Exchange Act, the Dodd-Frank 
Act, and Rule 17Ad-22, other regulatory efforts are relevant to our 
analysis of the economic effects of proposed Rule 17Ad-22(e). In July 
2012, the BCBS published the Basel III capital requirements, which set 
forth interim rules governing the capital charges arising from bank 
exposures to CCPs related to OTC derivatives, exchange-traded 
derivatives, and securities financing transactions.\592\ Once in 
effect, the Basel III capital requirements will create incentives for 
banks to clear derivatives and securities financing transactions with 
CCPs licensed in a jurisdiction where the relevant regulator has 
adopted rules or regulations consistent with the standards set forth in 
the PFMI Report. Specifically, the Basel III capital requirements 
introduce new capital charges based on counterparty risk for banks 
conducting derivatives transactions or securities financing 
transactions through a CCP.\593\
---------------------------------------------------------------------------

    \592\ See supra note 48 (discussing the Basel III capital 
requirements). For a more detailed discussion of the Basel III 
framework, see Part IV.C.1.e.
    \593\ Since the Basel III framework applies lower capital 
requirements only to bank exposures related to OTC and exchange-
traded derivatives activity and securities financing transactions, 
the Commission currently expects that, among all registered clearing 
agencies, FICC, ICEEU, and OCC would be those affected by the Basel 
III capital requirements. Each would meet the proposed definition of 
``covered clearing agency.''
---------------------------------------------------------------------------

    New capital charges under the Basel III framework relate to a 
bank's trade exposure and default fund exposure to a CCP and are a 
function of multiplying these exposures by a corresponding risk weight. 
Historically, these exposures have carried a risk weight of zero. As 
banking regulators adopt rules consistent with the Basel III capital 
requirements, however, these weights will increase. The risk weight 
assigned under the Basel III capital requirements varies depending on 
whether the counterparty is a QCCP. For example, risk weights for trade 
exposures to a CCP generally would vary between 20% and 100% depending 
on the CCP's credit quality, while trade exposures to a QCCP would 
carry only a 2% risk weight.\594\ In addition, bank exposures to CCP 
default funds would carry a risk weight of 1250%. While bank exposures 
to QCCP default funds will also carry a 1250% risk weight at low 
levels, under the Basel III framework, default fund exposures' 
contribution to a bank's risk weighed assets will be limited to at most 
18% of the bank's trade exposures to a given QCCP.
---------------------------------------------------------------------------

    \594\ The Basel III framework and rules adopted by the Board and 
the Office of the Comptroller of the Currency consistent with that 
framework apply lower risk weights of 2% or 4% to indirect exposures 
of banks to QCCPs. See Basel III capital requirements, supra note 
59, paras. 114-15; Regulatory Capital Rules, supra note 53, at 
62103.
---------------------------------------------------------------------------

    In some jurisdictions, banking regulators have already adopted 
rules that implement many requirements under the Basel III framework. 
For example, in its Capital Requirements Directive IV, which went into 
effect on July 17, 2013, the E.U. incorporated into its own legal 
framework the Basel III framework. Article 301 contains rules governing 
bank exposures to CCPs that are consistent with the Basel III 
framework. Similarly, the BCBS reports that the Basel III capital 
requirements, with the exception of capital conservation buffers and 
countercyclical buffers, are currently in force for Japanese 
banks.\595\ Canada and Switzerland also have risk-based capital rules 
in place.\596\
---------------------------------------------------------------------------

    \595\ See BCBS, Progress Report on Implementation of the Basel 
Regulatory Framework (Oct. 2013), available at http://www.bis.org/bcbs/implementation/bprl1.htm.
    \596\ See id.
---------------------------------------------------------------------------

    In the United States, on July 9, 2013, the Board and the Office of 
the Comptroller of the Currency jointly issued regulatory capital rules 
for U.S. banks consistent with the Basel III framework. Upon its 
effective date of January 1, 2014, the Regulatory Capital Rules subject 
bank exposures to CCPs and QCCPs to increased risk weights as specified 
in the Basel III framework.\597\ In addition to specifying risk 
weights, the rules define the term QCCP for banks supervised by the 
Board and the Office of the Comptroller of the Currency.\598\ According 
to these rules, QCCP status applies to any CCP that is a designated 
FMU. Further, any CCP that (i) requires full collateralization of 
contracts on a daily basis, and (ii), as demonstrated to the 
satisfaction of its supervisory regulator, is in sound financial 
condition, is subject to supervision by the Commission, and meets or 
exceeds the risk management standards established by the Commission 
under Titles VII and VIII of the Dodd-Frank Act, is a QCCP. Based on 
this definition, for banks regulated by the Board and the Office of the 
Comptroller of the Currency, all covered clearing agencies, with the 
exception of ICEEU,\599\ will be considered QCCPs for

[[Page 29580]]

purposes of calculating risk weights for trade exposures and default 
fund exposures.
---------------------------------------------------------------------------

    \597\ See Regulatory Capital Rules, supra note 53.
    \598\ See id.
    \599\ Although ICEEU would not be subject to QCCP treatment as a 
designated FMU, it would nonetheless be considered a QCCP because it 
is subject to regulation by the Commission. See Regulatory Capital 
Rules, supra note 53, at 62166 (defining ``Qualifying Central 
Counterparty'' at 1.iii(B)(2)).
---------------------------------------------------------------------------

    In Europe, under EMIR, legal persons incorporated under the law of 
an E.U. member state will only be able to use non-E.U. CCPs if those 
CCPs have been recognized under EMIR. Further, only non-E.U. CCPs 
recognized under EMIR will meet the conditions necessary to be 
considered a QCCP for E.U. purposes. Article 25 of EMIR outlines a 
recognition procedure for non-E.U. CCPs and Article 89 provides a 
timeline for recognition.\600\ FICC, NSCC, and OCC applied for 
recognition under EMIR prior to a September 15, 2013 deadline.\601\ As 
a result of applying for recognition, these covered clearing agencies 
will be permitted to continue to offer clearing services to existing 
E.U. clearing members until their applications are accepted or 
rejected.
---------------------------------------------------------------------------

    \600\ See Eur. Comm'n, Practical Implementation of the EMIR 
Framework to Non-EU Central Counterparties (CCPs) (May 13, 2013), 
available at http://ec.europa.eu/internal_market/financial-markets/docs/derivatives/130513_equivalence-procedure_en.pdf.
    \601\ These three clearing agencies agreed to have their names 
publicly disclosed and do not necessarily represent the full set of 
registered clearing agencies that applied for recognition under 
EMIR. See ESMA, List of Central Counterparties (CCPs) Established in 
Non-EEA Countries Which Have Applied for Recognition Under Article 
25 of Regulation (EU) No 648/2012 of the European Parliament and of 
the Council of 4 July 2012 on OTC Derivatives, CCPs and Trade 
Repositories (TRs) (EMIR) (Dec. 16, 2013), available at http://www.esma.europa.eu/system/files/2013-1581_list_of_applicants_tc-ccps_version_16_december_2013.pdf.
---------------------------------------------------------------------------

    Additionally, the Basel III capital requirements, as adopted by the 
Board, the Office of the Comptroller of the Currency, and banking 
regulators in other jurisdictions, impose new capital requirements 
related to unconditionally cancellable commitments and other off-
balance sheet exposures. For example, the Board and the Office of the 
Comptroller of the Currency will require banks to include 10% of the 
notional amount of unconditionally cancellable commitments in their 
calculation of total leverage exposure.\602\ The rules cap the ratio of 
tier one capital to total leverage exposure at 3% for banks subject to 
advanced approaches risk-based capital rules.\603\ To the extent that 
clearing agencies rely on financial resources from banks as part of 
their risk management activities, new constraints on off-balance sheet 
exposures could raise the cost of these activities.
---------------------------------------------------------------------------

    \602\ See Regulatory Capital Rules, supra note 53, at 62169.
    \603\ See id. at 62284. The Regulatory Capital Rules require 
compliance by banks no later than 2018.
---------------------------------------------------------------------------

b. Other Regulatory Efforts
    Efforts by the Board and the CFTC to adopt rules that are 
consistent with the standards set forth in the PFMI Report are also 
relevant to the economic analysis of the proposed rules.\604\ In 2012, 
the Board adopted Regulation HH setting forth risk management standards 
for designated FMUs, and, on January 10, 2014, the Board proposed 
amendments to Regulation HH and its PSR Policy based upon the standards 
set forth in the PFMI Report.\605\ Similarly, the CFTC has published 
final rules intended to be consistent with the standards set forth in 
the PFMI Report.\606\
---------------------------------------------------------------------------

    \604\ For a more detailed discussion of the regulatory efforts 
undertaken by the Board and the CFTC, see note 53.
    \605\ See id.
    \606\ See id.
---------------------------------------------------------------------------

    In proposing the amendments to Rule 17Ad-22 and new Rule 17Ab2-2, 
the Commission is mindful of these regulations proposed by the Board 
and adopted by the CFTC, which seek to establish standards for 
designated FMUs and establish standards for certain DCOs, 
respectively.\607\ Section 712(a)(2) of Title VII requires the 
Commission, before commencing any rulemaking regarding, among other 
things, security-based swap clearing agencies, to consult and 
coordinate to the extent possible with the CFTC and prudential 
regulators for the purposes of assuring regulatory consistency and 
comparability where possible.\608\ In addition, as directed by the 
Clearing Supervision Act, the Commission is proposing these amendments 
to Rule 17Ad-22 and Rule 17Ab2-2 after giving careful consideration to 
the PFMI Report as the relevant international standard.
---------------------------------------------------------------------------

    \607\ See id. (discussing efforts by the Board and the CFTC to 
adopt rules consistent with the standards set forth in the PFMI 
Report).
    \608\ See Dodd-Frank Act, Sec. 712(a)(2), Public Law 111-203, 
124 Stat. 1376, 1641-42 (2010).
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3. Current Practices
    Current industry practices are a critical element of the economic 
baseline for registered clearing agencies. Registered clearing agencies 
are required to operate in compliance with existing Rule 17Ad-22 and, 
the Commission understands, have begun implementing some of the 
standards set forth in the PFMI Report. Because proposed Rule 17Ad-
22(e) is consistent with those standards and furthers the objectives of 
Section 17A of the Exchange Act, the Clearing Supervision Act, and 
Title VII of the Dodd-Frank Act, the Commission preliminarily believes 
that the proposed rule represents, where it imposes higher minimum 
standards on covered clearing agencies, an additional step towards 
improved risk management.
    An overview of current practices is set forth below and includes 
discussion of covered clearing agency policies and procedures regarding 
general organization and risk management, including the management of 
legal, credit, liquidity, business, custody, investment, and 
operational risk. This discussion is based on the Commission's general 
understanding of current practices as of the date of this proposal, 
reflects the Commission's experience supervising registered clearing 
agencies, and is intended solely for the purpose of analyzing the 
economic effects of the Commission's proposal. The Commission notes 
that in each case, as SROs, registered clearing agencies are required 
to submit any proposed rule or any proposed change in, addition to, or 
deletion from the rules of the clearing agency to the Commission for 
review.\609\ The Exchange Act also requires a registered clearing 
agency to enforce its rules, subject to Commission oversight, and 
empowers the Commission to enforce the rules of a registered clearing 
agency.\610\
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    \609\ See supra Part I.A and note 95 (describing the 
Commission's framework for regulation of SROs and the SRO rule 
filing process).
    \610\ See supra Part I.A, in particular notes 8-10 (describing 
the requirements applicable to registered clearing agencies under 
the Exchange Act and the supervisory and enforcement tools available 
to the Commission to facilitate compliance with those requirements 
under the Exchange Act).
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a. General Organization
i. Legal Risk
    Legal risk is the risk that a registered clearing agency's rules, 
policies, or procedures may not be enforceable and concerns, among 
other things, its contracts, the rights of members, netting 
arrangements, discharge of obligations, and settlement finality. Cross-
border activities of a registered clearing agency may also present 
elements of legal risk.
    Rule 17Ad-22(d)(1) requires a registered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for a well-founded, 
transparent, and enforceable legal framework for each aspect of its 
activities in all relevant jurisdictions.\611\ Each registered clearing 
agency makes a large portion of these

[[Page 29581]]

policies and procedures available to members and participants. In 
addition, each also publishes their rule books and other key procedures 
publicly in order to promote the transparency of their legal 
framework.\612\
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    \611\ See 17 CFR 240.17Ad-22(d)(1); Clearing Agency Standards 
Release, supra note 5, at 66245-46.
    \612\ The rule book of each registered clearing agency, as well 
as select policies and procedures, are publically available on each 
registered clearing agency's Web site.
---------------------------------------------------------------------------

ii. Governance
    Rule 17Ad-22(d)(8) requires a registered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to have governance arrangements that are 
clear and transparent to fulfill the public interest requirements in 
Section 17A of the Exchange Act applicable to clearing agencies, to 
support the objectives of owners and participants, and to promote the 
effectiveness of the clearing agency's risk management procedures.\613\ 
Important elements of a registered clearing agency's governance 
arrangements include its ownership structure; its charter, bylaws, and 
charters for committees of its board and management committees; its 
rules, policies, and procedures; the composition and role of its board, 
including the structure and role of board committees; reporting lines 
between management and the board; and the processes that provide for 
management accountability with respect to the registered clearing 
agency's performance.
---------------------------------------------------------------------------

    \613\ See 17 CFR 240.17Ad-22(d)(8); see also Clearing Agency 
Standards Release, supra note 5, at 66251-52.
---------------------------------------------------------------------------

    Each registered clearing agency has a board that governs its 
operations and supervises senior management. Each registered clearing 
agency also has an independent audit committee of the board and has 
established a board committee or committee of members tasked with 
overseeing the clearing agency's risk management functions. The boards 
of registered clearing agencies that would be subject to proposed Rule 
17Ad-22(e) as covered clearing agencies currently include non-
management members.
iii. Framework for the Comprehensive Management of Risks
    Rules 17Ad-22(b) and (d) require registered clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to measure and mitigate credit 
exposures, identify operational risks, evaluate risks arising in 
connection with cross-border and domestic links for the purpose of 
clearing or settling trades, achieve DVP settlement, and implement risk 
controls to cover the clearing agency's credit exposures to 
participants.\614\ Rule 17Ad-22(d)(4) requires a registered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to establish business continuity 
plans setting forth procedures for the recovery of operations in the 
event of a disruption.\615\ Rule 17Ad-22(d)(11) further requires a 
registered clearing agency to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to make key 
aspects of the clearing agency's default procedures publicly available 
and establish default procedures that ensure that the clearing agency 
can take timely action to contain losses and liquidity pressures and to 
continue meeting its obligations in the event of a participant 
default.\616\
---------------------------------------------------------------------------

    \614\ See 17 CFR 240.17Ad-22(b) and (d); see also Clearing 
Agency Standards Release, supra note 5.
    \615\ See 17 CFR 240.17Ad-22(d)(4); see also Clearing Agency 
Standards Release, supra note 5, at 66248-49.
    \616\ See 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------

    In addition to meeting these requirements, the Commission 
understands that registered clearing agencies also specify actions to 
be taken when their resources are insufficient to cover losses faced by 
the registered clearing agency.\617\ These actions may include 
assessment rights on clearing members, forced allocation, and contract 
termination.
---------------------------------------------------------------------------

    \617\ See David Elliot, Central Counterparty Loss-Allocation 
Rules, at tbl. 1A (Bank of England Financial Stability Paper No. 20, 
Apr. 2013), available at http://www.bankofengland.co.uk/research/Documents/fspapers/fs_paper20.pdf (noting the loss-allocation rules 
applied at the end of a clearing agency waterfall).
---------------------------------------------------------------------------

b. Financial Risk Management
    Registered clearing agencies that provide CCP services have a 
variety of options available to mitigate the financial risks to which 
they are exposed. While the manner in which a CCP chooses to mitigate 
these financial risks depends on the precise nature of the CCP's 
obligations, a common set of procedures have been implemented by many 
CCPs to manage credit and liquidity risks. Broadly, these procedures 
enable CCPs to manage their risks by reducing the likelihood of member 
defaults, limiting potential losses and liquidity pressure in the event 
of a member default, implementing mechanisms that allocate losses 
across members, and providing adequate resources to cover losses and 
meet payment obligations as required.
    Registered clearing agencies that provide CCP services must be able 
to effectively measure their credit exposures in order to properly 
manage those exposures. A CCP faces the risk that its exposure to a 
member can change as a result of a change in prices, positions, or 
both. CCPs can ascertain current credit exposures to each member by, in 
some cases, marking each member's outstanding contracts to current 
market prices and, to the extent permitted by their rules and supported 
by law, by netting any gains against any losses. Rule 17Ad-22 includes 
certain requirements related to financial risk management by CCPs, 
including requirements to measure credit exposures to members and to 
use margin requirements to limit these exposures. These requirements 
are general in nature and provide registered clearing agencies 
flexibility to measure credit risk and set margin. Within the bounds of 
Rule 17Ad-22, CCPs may employ models and choose parameters that they 
conclude are appropriate to the markets they serve.
    The current practices of registered clearing agencies that provide 
CCP services generally include the following procedures: (1) Measuring 
credit exposures at least once a day; (2) setting margin coverage at a 
99% confidence level over some set period; (3) using risk-based models; 
(4) establishing a fund that mutualizes losses of defaults by one or 
more participants that exceed margin coverage; (5) maintaining 
sufficient financial resources to withstand the default of at least the 
largest participant family,\618\ and (6), in

[[Page 29582]]

the case of security-based swap transactions, maintaining enough 
financial resources to be able to withstand the default of their two 
largest participant families.\619\
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    \618\ See, e.g., IMF, Publication of Financial Sector Assessment 
Program Documentation--Detailed Assessment of Observance of the 
National Securities Clearing Corporation's Observance of the CPSS-
IOSCO Recommendations for Central Counterparties, at 10 (May 2010), 
available at http://www.imf.org/external/pubs/ft/scr/2010/cr10129.pdf (assessing NSCC's observance of Recommendation 5 from 
the RCCP that a CCP should maintain sufficient financial resources 
to withstand, at a minimum, the default of a participant to which it 
has the largest exposure in extreme but plausible market conditions; 
also noting that NSCC began evaluating itself against this standard 
in 2009 and has backtesting results to support that it maintained 
sufficient liquidity to cover the failure of the largest affiliated 
family 99.98% of the time during the period from January through 
April 2009); IMF, Publication of Financial Sector Assessment Program 
Documentation--Detailed Assessment of Observance of the Fixed Income 
Clearing Corporation--Government Securities Division's Observance of 
the CPSS-IOSCO Recommendations for Central Counterparties, at 9-10 
(2010), available at http://www.imf.org/external/pubs/ft/scr/2010/cr10130.pdf (finding that FICC's Government Securities Division 
observed the requirement to maintain enough financial resources to 
meet the default of its largest participant in extreme but plausible 
market conditions).
    \619\ See, e.g., CFTC-SEC Staff Roundtable on Clearing of Credit 
Default Swaps, at 123 (Oct. 2010), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission7_102210-transcrip.pdf (Stan Ivanov of ICE stating, ``[A]t ICE we look 
at two simultaneous defaults of the two biggest losers upon extreme 
conditions. . . .''); see also ICE, CDS Client Clearing Overview, at 
8 (Aug. 2013), available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Client_Clearing_Overview.pdf 
(noting that the guaranty fund covers the simultaneous default of 
the two largest clearing members); CME Rulebook, Ch. 8H, Rule 8H07, 
available at http://www.cmegroup.com/rulebook/CME/I/8H/8H.pdf.
---------------------------------------------------------------------------

i. Credit Risk
    Rule 17Ad-22(b)(1) requires a registered clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to measure their 
credit exposures at least once per day.\620\ Several CCPs have policies 
and procedures designed to require measuring credit exposures multiple 
times per day.
---------------------------------------------------------------------------

    \620\ See 17 CFR 240.17Ad-22(b)(1).
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(3) requires a registered clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain 
sufficient financial resources to withstand, at a minimum, a default by 
the participant family to which it has the largest exposure in extreme 
but plausible market conditions.\621\ It further requires CCPs for 
security-based swaps to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain 
additional financial resources sufficient to withstand, at a minimum, a 
default by the two participant families to which it has the largest 
exposures in extreme but plausible market conditions, in its capacity 
as a CCP for security-based swaps.\622\ Accordingly, the Commission 
notes that Rule 17Ad-22(b)(3) imposes a ``cover two'' requirement on 
CCPs for security-based swaps in order to protect such CCPs from the 
extreme jump-to-default risk and nonlinear payoffs associated with the 
nature of the financial products they clear and the participants in the 
markets they serve. Meanwhile, CCPs that clear products other than 
security-based swaps are subject to a ``cover one'' requirement.\623\ 
Rule 17Ad-22(b)(3) also states that such policies and procedures may 
provide that additional financial resources be maintained by the CCP in 
combined or separately maintained funds.\624\
---------------------------------------------------------------------------

    \621\ See 17 CFR 240.17Ad-22(b)(2).
    \622\ See id.
    \623\ See supra Part II.B.4.c and infra Part IV.C.3.a.iv(1) 
(discussing the related ``cover one'' and ``cover two'' requirements 
in proposed Rule 17Ad-22(e)(4)).
    \624\ See id.
---------------------------------------------------------------------------

    Under existing rules, CCPs collect contributions from their members 
for the purpose of establishing guaranty or clearing funds to mutualize 
losses under extreme but plausible market conditions. Currently, the 
guaranty funds or clearing funds consist of liquid assets and their 
sizes vary depending on a number of factors, including the products the 
CCP clears and the characteristics of CCP members. In particular, the 
guaranty funds for CCPs that clear security-based swaps are relatively 
larger, as measured by the size of the fund as a percentage of the 
total and largest exposures, than the guaranty or clearing funds 
maintained by CCPs for other financial instruments. CCPs generally take 
the liquidity of collateral into account when determining member 
obligations. Applying haircuts to assets posted as margin, among other 
things, mitigates the liquidity risk associated with selling margin 
assets in the event of a participant default.
ii. Collateral and Margin
    Rule 17Ad-22(b)(2) requires a registered clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to use margin 
requirements to limit their exposures to participants.\625\ This margin 
can also be used to reduce a CCP's losses in the event of a participant 
default.
---------------------------------------------------------------------------

    \625\ See 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------

    Registered clearing agencies that provide CCP services take 
positions as substituted counterparties once their trade guarantee goes 
into effect. Therefore, if a counterparty whose obligations the 
registered clearing agency has guaranteed defaults, the covered 
clearing agency may face market risk, which can take one of two forms. 
First, a covered clearing agency is subject to the risk of movement in 
the market prices of the defaulting member's open positions. Where a 
seller defaults and fails to deliver a security, the covered clearing 
agency may need to step into the market to buy the security in order to 
complete settlement and deliver the security to the buyer. Similarly, 
where a buyer defaults, the covered clearing agency may need to meet 
payment obligations to the seller. Thus, in the interval between when a 
member defaults and when the covered clearing agency must meet its 
obligations as a substituted counterparty in order to complete 
settlement, market price movements expose the covered clearing agency 
to market risk. Second, the covered clearing agency may need to 
liquidate non-cash margin collateral posted by the defaulting member. 
The covered clearing agency is therefore exposed to the risk that 
erosion in market prices of the collateral posted by the defaulting 
member could result in the covered clearing agency having insufficient 
financial resources to cover the losses in the defaulting member's open 
positions.
    To manage their exposure to market risk resulting from fulfilling a 
defaulting member's obligations, registered clearing agencies compute 
margin requirements using inputs such as portfolio size, volatility, 
and sensitivity to various risk factors that are likely to influence 
security prices. Moreover, since the size of price movements is, in 
part, a function of time, registered clearing agencies may limit their 
exposure to market risk by marking participant positions to market 
daily and, in some cases, more frequently. CCPs also use similar 
factors to determine haircuts applied to assets posted by members in 
satisfaction of margin requirements. To manage market risk associated 
with collateral liquidation, CCPs consider the current prices of assets 
posted as collateral and price volatility, asset liquidity, and the 
correlation of collateral assets and a member's portfolio of open 
positions. Further, because CCPs need to value their margin assets in 
times of financial stress, their rulebooks may include features such as 
market-maker domination charges that increase clearing fund obligations 
regarding open positions of members in securities in which the member 
serves as a dominant market maker. The reasoning behind this charge is 
that, should a member default, liquidity in products in which the 
member makes markets may fall, leaving these positions more difficult 
to liquidate for non-defaulting participants.
    Rule 17Ab-22(b)(2) also requires a registered clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide for 
risk-based models and parameters to set margin requirements.\626\ The 
generally recognized standard for such models and parameters is, under 
normal market conditions, price movements that

[[Page 29583]]

produce changes in exposures that are expected to breach margin 
requirements or other risk controls only 1% of the time (i.e., at a 99% 
confidence interval) over a designated time horizon.\627\ Currently, 
CCPs use margin models to ensure coverage at a single-tailed 99% 
confidence interval. Losses beyond this level are typically covered by 
the CCP's guaranty fund. This standard comports with existing 
international standards for bank capital requirements, which require 
banks to measure market risks at a 99% confidence interval when 
determining regulatory capital requirements.\628\
---------------------------------------------------------------------------

    \626\ See id.
    \627\ See 17 CFR 240.17Ad-22(a)(4). The Commission notes that 
because it is proposing to add new definitions to Rule 17Ad-22(a), 
``normal market conditions'' would appear in Rule 17Ad-22(a)(12) in 
the event the proposed rules are adopted. The Commission is not 
proposing to alter the definition of ``normal market conditions.''
    \628\ See BCBS, International Convergence of Capital Measurement 
and Capital Standards: A Revised Framework (June 2004), available at 
http://www.bis.org/publ/bcbs107.pdf; see also Darryll Hendricks & 
Beverly Hirtle, New Capital Rule Signals Supervisory Shift 
(Secondary Mortgage Mkts, Sept. 1998), available at http://www.freddiemac.com/finance/smm/july98/pdfs/hen_hirt.pdf.
    Prior to this standard, banks measured value-at-risk using a 
range of confidence intervals from 90-99%. See BCBS, An Internal 
Model-Based Approach to Market Risk Capital Requirements, at 12 
(Apr. 1995), available at http://www.bis.org/publ/bcbs17.pdf. When 
determining the minimum quantitative standards for calculating risk 
measurements, the BCBS noted then the importance of specifying ``a 
common and relatively conservative confidence level,'' choosing the 
99% confidence interval over other less conservative measures. See 
id.
    Since its adoption in 1998, the standard has become a generally 
recognized practice of banks to quantify credit risk as the worst 
expected loss that a portfolio might incur over an appropriate time 
horizon at a 99% confidence interval. See Kenji Nishiguchi, Hiroshi 
Kawai & Takanori Sazaki, Capital Allocation and Bank Management 
Based on the Quantification of Credit Risk, at 83 (FRBNY Econ. 
Policy Rev., Oct. 1998), available at http://www.newyorkfed.org/research/epr/98v04n3/9810nish.pdf; Jeff Aziz & Narat Charupat, 
Calculating Credit Exposure and Credit Loss: A Case Study, at 34 
(Sept. 1998), available at http://www.bis.org/bcbs/ca/alrequse98.pdf.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(2) also requires a registered clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to review such 
margin requirements and the related risk-based models and parameters at 
least monthly.\629\ CCPs are accordingly required to establish a model 
validation process that evaluates the adequacy of margin models, 
parameters, and assumptions. Additionally, CCPs are required to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for an annual model 
validation consisting of evaluating the performance of the CCPs' margin 
models and the related parameters and assumptions associated with such 
models by a qualified person who is free from influence from the 
persons responsible for the development or operation of the models 
being validated.\630\
---------------------------------------------------------------------------

    \629\ See 17 CFR 240.17Ad-22(b)(2).
    \630\ See 17 CFR 240.17Ad-22(b)(4).
---------------------------------------------------------------------------

iii. Liquidity Risk
    In addition to credit risk and the aforementioned market risk, 
registered clearing agencies also face liquidity or funding risk. 
Currently, to complete the settlement process, registered clearing 
agencies that employ netting rely on incoming payments from 
participants in net debit positions in order to make payments to 
participants in net credit positions. If a participant does not have 
sufficient funds or securities in the form required to fulfill a 
payment obligation immediately when due (even though it may be able to 
pay at some future time), or if a settlement bank is unable to make an 
incoming payment on behalf of a participant, a registered clearing 
agency may face a funding shortfall. Such funding shortfalls may occur 
due to a lack of financial resources necessary to meet delivery or 
payment obligations, however even registered clearing agencies that do 
hold sufficient financial resources to meet their obligations may not 
carry those in the form required for delivery or payments to 
participants.
    A registered clearing agency that provides CCP services may hold 
additional financial resources to cover potential funding shortfalls in 
the form of collateral. As noted above, CCPs may take the liquidity of 
collateral into account when determining member obligations. Applying 
haircuts to illiquid assets posted as margin mitigates the liquidity 
risk associated with selling margin assets in the event of participant 
default. Some registered CCPs also arrange for liquidity provision from 
other financial institutions using lines of credit. Additionally, some 
registered clearing agencies enter into prearranged funding agreements 
with their members pursuant to their rules. For example, members of one 
registered clearing agency are obligated to enter into repurchase 
agreements against securities that would have been delivered to a 
defaulting member.
    No rule under the Exchange Act currently requires a registered 
clearing agency through its written policies and procedures to address 
liquidity risk.
c. Settlement
    Rule 17Ad-22(d)(5) requires a registered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to employ money settlement arrangements 
that eliminate or strictly limit the clearing agency's settlement bank 
risks and require funds transfers to the clearing agency to be final 
when effected.\631\ Rule 17Ad-22(d)(12) further requires a registered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to ensure that final 
settlement occurs no later than the end of the settlement day.\632\ 
Accordingly, for example, certain registered clearing agencies provide 
for final settlement of securities transfers no later than the end of 
the day of the transaction. Rule 17Ad-22(d)(15) also requires a 
registered clearing agency to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to state to 
its participants the clearing agency's obligations with respect to 
physical deliveries and identify and manage the risks from these 
obligations.\633\
---------------------------------------------------------------------------

    \631\ See 17 CFR 240.17Ad-22(d)(5).
    \632\ See 17 CFR 240.17Ad-22(d)(12).
    \633\ See 17 CFR 240.17Ad-22(d)(15).
---------------------------------------------------------------------------

d. CSDs and Exchange-of-Value Settlement Systems
i. CSDs
    Rule 17Ad-22(d)(10) requires a registered clearing agency that 
provides CSD services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain 
securities in an immobilized or dematerialized form for transfer by 
book entry to the greatest extent possible. Currently, some securities, 
such as mutual fund securities and government securities, are issued 
primarily or solely on a dematerialized basis. Dematerialized shares do 
not exist as physical certificates but are held in book entry form in 
the name of the owner (which, where the master security holder file is 
not maintained on paper due to the use of technology, is also referred 
to as electronic custody). Other types of securities may be issued in 
the form of one or more physical security certificates, which could be 
held by the CSD to facilitate immobilization. Alternatively, securities 
may be held by the beneficial owner in record name, in the form of 
book-entry positions, where the issuer offers the ability for a 
security holder to hold through the direct registration system.

[[Page 29584]]

Whether immobilization occurs at the CSD or through direct registration 
depends on what is provided for by the issuer.
    When a trade occurs, the depository's accounting system credits one 
participant account and debits another participant account. 
Transactions between counterparties in dematerialized shares are 
recorded by the registrar responsible for maintaining the paper or 
electronic register of security holders, such as by a transfer agent, 
and reflected in customer accounts.
    Registered CSDs currently reconcile ownership positions in 
securities against CSD ownership positions on the security holders list 
daily, mitigating the risk of unauthorized creation or deletion of 
shares.
ii. Exchange-of-Value Settlement Systems
    Rule 17Ad-22(d)(13) requires a registered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to eliminate principal risk by linking 
securities transfers to funds transfers in a way that achieves delivery 
versus payment,\634\ which serves to link obligations by conditioning 
the final settlement of one upon the final settlement of the other. One 
registered clearing agency, for example, operates a Model 2 DVP system 
that provides for gross securities transfers during the day followed by 
an end-of-day net funds settlement. Under the rules governing the 
clearing agency's system, the delivering party in a DVP transaction is 
assured that it will be paid for the securities once they are credited 
to the receiving party's securities account. DVP eliminates the risk 
that a buyer would lose the purchase price of a security purchased from 
a defaulting seller or that a seller would lose the sold security 
without receiving payment for a security acquired by a defaulting 
buyer.
---------------------------------------------------------------------------

    \634\ See 17 CFR 240.17Ad-22(d)(13); see also Clearing Agency 
Standards Release, supra note 5, at 66256.
---------------------------------------------------------------------------

    For example, one registered clearing agency has rules governing its 
continuous net settlement (``CNS'') system, under which it becomes the 
counterparty for settlement purposes at the point its trade guarantee 
attaches, thereby assuming the obligation of its members that are 
receiving securities to receive and pay for those securities, and the 
obligation of members that are delivering securities to make the 
delivery. Unless the clearing agency has invoked its default rules, it 
is not obligated to make those deliveries until it receives from 
members with delivery obligations deliveries of such securities; 
rather, deliveries that come into CNS ordinarily are promptly 
redelivered to parties that are entitled to receive them through an 
allocation algorithm. Members are obligated to take and pay for 
securities allocated to them in the CNS process. These rules also 
provide mechanisms to allow receiving members a right to receive high 
priority in the allocation of deliveries, and also permit a member to 
buy-in long positions that have not been delivered to it by the close 
of business on the scheduled settlement date.
e. Default Management
i. Participant-Default Rules and Procedures
    Rule 17Ad-22(d)(11) requires a registered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to make key aspects of its default 
procedures publicly available and establish default procedures that 
ensure it can take timely action to contain losses and liquidity 
pressures and to continue meeting its obligations in the event of a 
participant default. The rules of registered clearing agencies 
typically state what constitutes a default, identify whether the board 
or a committee of the board may make that determination, and describe 
what steps the clearing agency may take to protect itself and its 
members. In this regard, registered clearing agencies typically 
attempt, among other things, to hedge and liquidate a defaulting 
member's positions. Rules of registered clearing agencies also include 
information about the allocation of losses across available financial 
resources.
ii. Segregation and Portability
    No rule under the Exchange Act currently requires a registered 
clearing agency through its written policies and procedures to enable 
the portability of positions of a member's customers and the collateral 
provided in connection therewith. Additionally, no rule under the 
Exchange Act currently requires a registered clearing agency through 
its written policies and procedures to protect the positions of a 
member's customers from the default or insolvency of the member.\635\
---------------------------------------------------------------------------

    \635\ See supra note 293 (discussing existing rules applicable 
to registered broker-dealers that address customer security 
positions and funds in cash securities and listed option markets, 
thereby promoting segregation and portability at the broker-dealer 
level).
---------------------------------------------------------------------------

f. General Business and Operational Risk Management
i. General Business Risk
    Business risk refers to the risks and potential losses arising from 
a registered clearing agency's administration and operation as a 
business enterprise that are neither related to member default nor 
separately covered by financial resources designated to mitigate credit 
or liquidity risk. While Rule 17Ad-22 sets forth requirements for 
registered clearing agencies to identify, monitor, and mitigate or 
eliminate a broad array of risks through written policies and 
procedures, no rule under the Exchange Act expressly requires a 
registered clearing agency through its written policies and procedures 
to identify, monitor, and manage general business risk or to meet a 
capital requirement. Nonetheless, registered clearing agencies 
currently have certain internal controls in place to mitigate business 
risk. Some clearing agencies, for instance, have policies and 
procedures that identify an auditor who is responsible for examining 
accounts, records, and transactions, as well as other duties prescribed 
in the audit program. Other registered clearing agencies allow members 
to collectively audit the books of the clearing agency on an annual 
basis, at their own expense.
ii. Custody and Investment Risks
    Registered clearing agencies face default risk from commercial 
banks that they use to effect money transfers among participants, to 
hold overnight deposits, and to safeguard collateral. Rule 17Ad-
22(d)(3) requires a registered clearing agency to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to (i) hold assets in a manner that minimizes risk of loss or 
delay in its access to them; and (ii) invest assets in instruments with 
minimal credit, market, and liquidity risks.\636\ Registered clearing 
agencies currently seek to minimize the risk of loss or delay in access 
by holding assets that are highly liquid (e.g., cash, U.S. Treasury 
securities, or securities issued by a U.S. government agency) and by 
engaging banks to custody the assets and facilitate settlement. 
Typically, registered clearing agencies take steps to ensure that 
assets held in custody are protected from claims from the custodian's 
creditors using trust accounts or equivalent arrangements. 
Additionally, designated clearing agencies may gain access to account

[[Page 29585]]

services at a Federal Reserve Bank, to the extent such services are not 
already available as the result of other laws and regulations.\637\
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    \636\ See 17 CFR 240.17Ad-22(d)(3).
    \637\ See supra Part II.B.4.f.iii (discussing the requirement 
under proposed Rule 17Ad-22(e)(7)(iii) for a covered clearing agency 
to have policies and procedures reasonably designed to ensure it has 
access to account services at a Federal Reserve Bank or other 
relevant central bank).
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iii. Operational Risk
    Operational risk refers to a broad category of potential losses 
arising from deficiencies in internal processes, personnel, and 
information technology. Registered clearing agencies face operational 
risk from both internal and external sources, including human error, 
system failures, security breaches, and natural or man-made disasters. 
Rule 17Ad-22(d)(4) requires a registered clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to identify sources of operational risk and to 
minimize those risks through the development of appropriate systems, 
controls and procedures.\638\ It also requires a registered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to (i) implement systems that are 
reliable and secure, and have adequate, scalable capacity; and (ii) 
have business continuity plans that allow for timely recovery of 
operations and fulfillment of a clearing agency's obligations.\639\
---------------------------------------------------------------------------

    \638\ See 17 CFR 240.17Ad-22(d)(4).
    \639\ See id.
---------------------------------------------------------------------------

    As a result, registered clearing agencies have developed and 
currently maintain plans to assure the safeguarding of securities and 
funds, the integrity of automated data processing systems, and the 
recovery of securities, funds, or data under a variety of loss or 
destruction scenarios.\640\ These plans may include turning operations 
over to a secondary site that is located a sufficient distance from the 
primary location to ensure a distinct geographic risk profile. In 
addition, registered clearing agencies generally maintain an internal 
audit department to review the adequacy of their internal controls, 
procedures, and records with respect to operational risks. Some 
registered clearing agencies also engage independent accountants to 
perform an annual study and evaluation of the internal controls 
relating to their operations.\641\
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    \640\ Many of these practices had been previously developed 
pursuant to prior Commission guidelines. See ARP I and II, supra 
note 324; see also supra note 326 (discussing related requirements 
under proposed Regulation SCI).
    \641\ See, e.g., NSCC, Assessment of Compliance with the CPSS/
IOSCO Recommendations for Central Counterparties (Nov. 2011), 
available at http://www.dtcc.com/legal/policy-and-compliance.aspx.
---------------------------------------------------------------------------

g. Access
i. Access and Participation Requirements
    Rule 17Ad-22(b)(5) requires a registered clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide the 
opportunity for a person that does not perform any dealer or security-
based swap dealer services to obtain membership on fair and reasonable 
terms at the clearing agency to clear securities for itself or on 
behalf of other persons.\642\ Rule 17Ad-22(b)(6) requires a registered 
clearing agency that provides CCP services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to have membership standards that do not require participants 
to maintain a portfolio of any minimum size or a minimum transaction 
volume.\643\ Rule 17Ad-22(b)(7) requires a registered clearing agency 
that provides CCP services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to provide 
a person that maintains net capital equal or greater than $50 million 
with the ability to obtain membership at the clearing agency, provided 
such persons are able to comply with reasonable membership standards, 
with higher net capital requirements permissible subject to Commission 
approval.\644\
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    \642\ See 17 CFR 240.17Ad-22(b)(5).
    \643\ See 17 CFR 240.17Ad-22(b)(6).
    \644\ See 17 CFR 240.17Ad-22(b)(7).
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    In addition, Rule 17Ad-22(d)(2) requires a registered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to require participants to have 
sufficient financial resources and robust operational capacity to meet 
obligations arising from participation in the clearing agency, have 
procedures in place to monitor that participation requirements are met 
on an ongoing basis, and have participation requirements that are 
objective and publicly disclosed, and permit fair and open access.\645\ 
Typically, a registered clearing agency's rulebook requires applicants 
for membership to provide certain financial and operational information 
prior to being admitted as a member and on an ongoing basis as a 
condition of continuing membership. Registered clearing agencies review 
this information to ensure that the applicant has the operational 
capability to meet the other demands of interfacing with the clearing 
agency. In particular, registered clearing agencies typically require 
that an applicant demonstrate that it has adequate personnel capable of 
handling transactions with the clearing agency and adequate physical 
facilities, books and records, and procedures to fulfill its 
anticipated commitments to, and to meet the operational requirements 
of, the clearing agency and other members with necessary promptness and 
accuracy. As a result, an applicant needs to demonstrate that it has 
adequate personnel capable of handling transactions with the clearing 
agency and adequate physical facilities, books and records, and 
procedures to conform to conditions or requirements in these areas that 
the clearing agency reasonably may deem necessary for its protection. 
Registered clearing agencies have published these requirements on their 
Web sites.
---------------------------------------------------------------------------

    \645\ See 17 CFR 240.17Ad-22(d)(2).
---------------------------------------------------------------------------

    Registered clearing agencies use an ongoing monitoring process to 
help them understand relevant changes in the financial condition of 
their members and to mitigate credit risk exposure of the clearing 
agency to its members. The risk management staff analyzes financial 
statements filed with regulators, as well as information obtained from 
other SROs and gathered from various financial publications, so that 
the clearing agency may evaluate, for instance, whether members 
maintain sufficient financial resources and robust operational capacity 
to meet their obligations as participants in the clearing agency 
pursuant to existing Rule 17Ad-22(d)(2)(i).
    Table 1 contains membership statistics for registered clearing 
agencies.\646\ Current membership generally reflects features of 
cleared markets. The decision to become a clearing member depends on 
the products being cleared, the structure of these asset markets as 
well as the current state of regulation for cleared markets. For 
example, the structure of security-based swap markets and the payoffs 
to security-based swap contracts differs markedly from that of equity 
markets and common stock, which may explain some of the differences 
between the concentrated membership of certain clearing agencies and 
the relatively broader membership of others.
---------------------------------------------------------------------------

    \646\ See supra Part IV.B.1.

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[[Page 29586]]

ii. Tiered Participation Arrangements
    Tiered participation arrangements occur when clearing members 
(direct participants) provide access to clearing services to third 
parties (indirect participants). No rule under the Exchange Act 
currently requires a registered clearing agency through its written 
policies and procedures to identify, monitor, and manage material risks 
arising from tiered participation arrangements. The Commission 
understands, however, that certain registered clearing agencies have 
policies and procedures currently in place in order to identify, 
monitor, or manage such arrangements. Specifically, such clearing 
agencies rely on information gathered from, and distributed by, direct 
participants in order to manage these tiered participation 
arrangements. For example, under some covered clearing agencies' rules, 
direct participants generally have the responsibility to indicate to 
the clearing agency whether a transaction submitted for clearing 
represents a proprietary or customer position. Such rules further 
require direct participants to calculate, and notify the clearing 
agency of the value of, each customer's collateral. Direct participants 
also communicate with indirect participants regarding the clearing 
agency's margin and other requirements.
iii. Links
    Rule 17Ad-22(d)(7) requires a registered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to evaluate the potential sources of 
risks that can arise when the clearing agency establishes links either 
cross-border or domestically to clear or settle trades, and ensure that 
the risks are managed prudently on an ongoing basis.\647\
---------------------------------------------------------------------------

    \647\ See 17 CFR 240.17Ad-22(d)(7).
---------------------------------------------------------------------------

    Each registered clearing agency is linked to other clearing 
organizations, trading platforms, and service providers. For instance, 
a link between U.S. and Canadian clearing agencies allows U.S. members 
to clear and settle valued securities transactions with participants of 
a Canadian securities depository. The link is designed to facilitate 
cross-border transactions by allowing members to use a single 
depository interface for U.S. and Canadian dollar transactions and 
eliminate the need for split inventories.\648\ Registered clearing 
agencies that provide CCP services currently establish links to allow 
members to realize collateral and other operational efficiencies.
---------------------------------------------------------------------------

    \648\ See Exchange Act Release No. 52784 (Nov. 16, 2005), 71 FR 
70902 (Nov. 23, 2005); Exchange Act Release No. 55239 (Feb. 5, 
2007), 72 FR 6797 (Feb. 13, 2007).
---------------------------------------------------------------------------

h. Efficiency
i. Efficiency and Effectiveness
    Rule 17Ad-22(d)(6) requires a registered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to require the clearing agency to be 
cost-effective in meeting the requirements of participants while 
maintaining safe and secure operations.\649\ Registered clearing 
agencies have procedures to control costs and to regularly review 
pricing levels against operating costs. These clearing agencies may use 
a formal budgeting process to control expenditures, and may review 
pricing levels against their costs of operation during the annual 
budget process. Registered clearing agencies also analyze workflows in 
order to make recommendations to improve their operating efficiency.
---------------------------------------------------------------------------

    \649\ See 17 CFR 240.17Ad-22(d)(6).
---------------------------------------------------------------------------

ii. Communication Procedures and Standards
    Although no rule under the Exchange Act expressly requires a 
registered clearing agency through its written policies and procedures 
to use or accommodate relevant internationally accepted communication 
procedures and standards, the Commission believes that registered 
clearing agencies already use these standards. Registered clearing 
agencies typically rely on electronic communication with market 
participants, including members. For example, some registered clearing 
agencies have rules in place stating that clearing members must 
retrieve instructions, notices, reports, data, and other items and 
information from the clearing agency through electronic data retrieval 
systems. Some registered clearing agencies have the ability to rely on 
signatures transmitted, recorded, or stored through electronic, 
optical, or similar means. Other clearing agencies have policies and 
procedures that provide for certain emergency meetings using telephonic 
or other electronic notice.
i. Transparency
    Transparency requirements and disclosures by registered clearing 
agencies serve to limit the size of potential information asymmetries 
between registered clearing agencies, their members, and market 
participants. Rule 17Ad-22(d)(9) requires a registered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide market participants with 
sufficient information for them to identify and evaluate risks and 
costs associated with using the clearing agency's services.\650\ 
Information regarding the operations and services of each registered 
clearing agency can be viewed publicly either on the clearing agency's 
Web site or a Web site maintained by an affiliate of the clearing 
agency. Because registered clearing agencies are SROs,\651\ changes to 
their rules are published by the Commission and are available for 
public viewing on each clearing agency's Web site.\652\
---------------------------------------------------------------------------

    \650\ See 17 CFR 240.17Ad-22(d)(9).
    \651\ See supra Part I.A and note 95 (describing the 
Commission's framework for regulation of SROs and the SRO rule 
filing process).
    \652\ See supra note 362 (discussing requirements under Rule 
19b-4(i)).
---------------------------------------------------------------------------

    Besides providing market participants with information on the risks 
and costs associated with their services, registered clearing agencies 
regularly provide information to their members to assist them in 
managing their risk exposures and potential funding obligations. Some 
of these disclosures may be common to all members--such as information 
about the composition of clearing fund assets--while other disclosures 
that concern particular positions or obligations may only be made to 
individual members.
4. Determinations by the Commission
    Currently, although Rule 17Ad-22(d) applies to registered clearing 
agencies, no mechanism exists for the Commission to make determinations 
with regard to covered clearing agencies of the type that would occur 
under proposed Rule 17Ab2-2.\653\
---------------------------------------------------------------------------

    \653\ See proposed Rule 17Ab2-2, infra Part VII.
---------------------------------------------------------------------------

C. Consideration of Benefits, Costs, and the Effect on Competition, 
Efficiency, and Capital Formation

    The discussion below sets forth the potential economic effects 
stemming from the proposed rules. The section begins by framing more 
general economic issues related to the proposed amendments to Rule 
17Ad-22 and proposed Rule 17Ab2-2. The discussion that follows 
considers the effects of the proposed rules on efficiency, competition, 
and capital formation. The section ends with a discussion of the 
benefits and costs flowing from specific provisions of the proposed 
amendments to Rule 17Ad-22 and proposed Rule 17Ab2-2.

[[Page 29587]]

1. General Economic Considerations
    The proposed amendments to Rule 17Ad-22, taken as a whole, would 
likely produce economic effects that are either conditioned on multiple 
provisions of proposed Rule 17Ad-22(e) being implemented as a set or 
are simply common to multiple provisions of the proposal. Since these 
economic effects are attributable in some way to each of the individual 
subsections of proposed Rule 17Ad-22(e), this section considers 
potential impacts of the proposed amendments, as a whole, through their 
effects on systemic risk, the discretion with which covered clearing 
agencies operate, market integrity, concentration in the market for 
clearing services and among clearing members, and QCCP status.
a. Systemic Risk
    A large portion of financial activity in the United States 
ultimately flows through one or more registered clearing agencies that 
would become covered clearing agencies under the proposed rules. These 
clearing agencies have direct links to members and indirect links to 
the customers of members. They are also linked to each other through 
common members, operational processes, and in some cases cross-
margining and cross-guaranty agreements. These linkages allow covered 
clearing agencies to provide opportunities for risk-sharing but also 
allow them to serve as potential conduits for risk transmission. 
Covered clearing agencies play an important role in fostering the 
proper functioning of financial markets. If they are not effectively 
managed, however, they may transmit financial shocks, particularly on 
days of market stress.
    The centralization of clearance and settlement activities at 
covered clearing agencies allows market participants to reduce costs, 
increase operational efficiency, and manage risks more 
effectively.\654\ While providing benefits to market participants, the 
concentration of these activities at a covered clearing agency 
implicitly exposes market participants to the risks faced by covered 
clearing agencies themselves, making risk management at covered 
clearing agencies a key element of systemic risk mitigation.
---------------------------------------------------------------------------

    \654\ Cf. PFMI Report, supra note 1, at 9.
---------------------------------------------------------------------------

b. Discretion
    The Commission recognizes that the degree of discretion permitted 
by the proposed rules partially determines their economic effect. Even 
where current practices at covered clearing agencies would not need to 
change significantly to comply with the proposed rules, covered 
clearing agencies could still potentially face costs associated with 
the limitations on discretion that will result from the proposed rules, 
including costs related to limiting a clearing agency's flexibility to 
respond to changing economic environments. For example, to the extent 
that covered clearing agencies currently in compliance with the 
proposed rules value the ability to periodically allow net liquid 
assets to drop below the minimum level specified by the proposed rules, 
they may incur additional costs because under the proposed rules they 
lose the option to do so.
    Although there may be costs to limiting the degree of discretion 
covered clearing agencies have over risk management policies and 
procedures, the Commission preliminarily believes there are also 
potential benefits. As discussed above, clearing agencies may not fully 
internalize the social costs of poor internal controls and thus, given 
additional discretion, may not craft appropriate risk management 
policies and procedures. For example, even if existing regulation 
provides clearing agencies with the incentives necessary to manage 
risks appropriately in a static sense, they may not provide clearing 
agencies with incentives to update their risk management programs in 
response to dynamic market conditions. Additionally, efforts at cost 
reduction or profit maximization could encourage clearing agencies to 
reduce the quality of risk management by, for example, choosing to 
update parameters and assumptions rapidly in periods of low volatility 
while maintaining stale parameters and assumptions in periods of high 
volatility. By reducing covered clearing agencies' discretion over 
their policies and procedures, the proposed amendments to Rule 17Ad-22 
may reduce the likelihood that risk management practices lag behind 
changing market conditions by requiring periodic analysis of model 
performance while paying particular attention to periods of high 
volatility or low liquidity.
    Subjecting covered clearing agencies to more specific requirements 
may have other benefits for cleared markets as well. Recent academic 
research has explored the ways in which regulation affects liquidity in 
financial markets when participants are ``ambiguity averse,'' where 
ambiguity is defined as uncertainty over the set of payoff 
distributions for an asset.\655\ Such investors may heavily weigh 
worst-case scenarios when they decide whether to hold the asset. The 
Commission preliminarily believes that regulation aimed at enhancing 
standards for covered clearing agencies while reducing their discretion 
may reduce the ambiguity associated with holding cleared assets in the 
presence of credit risk and settlement risk \656\ and thus may allow 
investors to rule out worst-case states of the world. In this regard, 
more specific rules may encourage participation in cleared markets by 
investors that benefit from resulting risk-sharing opportunities.\657\
---------------------------------------------------------------------------

    \655\ See e.g., Itzhak Gilboa & David Schmeidler, Maxmin 
Expected Utility with Non-Unique Prior, 18 J. Mathematical Econ. 141 
(1989) (proposing an axiomatic foundation of a decision rule based 
on maximizing expected minimum payoff of a strategy).
    \656\ Specifically, by performing key roles in the transaction 
process, clearing agencies serve to maintain higher minimum payoffs 
in poor states of the world, by, for example, immobilizing 
securities or adopting DVP systems.
    \657\ See e.g., David Easley & Maureen O'Hara, Microstructure 
and Ambiguity, 65 J. Fin. 1817 (2010) (using a theoretical model of 
trade on venues that differ in rules, the authors show how rules 
that reduce market-related ambiguity may induce a participatory 
equilibrium).
---------------------------------------------------------------------------

c. Market Integrity
    The Commission preliminarily believes that the proposed amendments 
to Rule 17Ad-22 could provide the benefit of reduced potential for 
market fragmentation that may arise from different requirements across 
regulatory regimes. These benefits would flow to markets that are also 
supervised by the Board and the CFTC, and internationally, since 
cleared markets are global in nature and linked to one another through 
common participants.
    Based on its consultation and coordination with other regulators, 
the Commission preliminarily believes its proposal is consistent and 
comparable, where possible and appropriate, with the rules and policy 
statement proposed by the Board and the rules adopted by the CFTC. The 
Board's proposed revisions to its PSR Policy incorporate only the 
headline principles contained in the PFMI Report and are consistent 
with the Commission's approach in proposed Rule 17Ad-22(e).\658\
---------------------------------------------------------------------------

    \658\ The Commission preliminarily notes that the Commission's 
proposal provides a greater level detail than the proposed PSR 
Policy and is tailored to take into account considerations 
particular to covered clearing agencies, consistent with the 
Commission's role as the supervisory agency under the Clearing 
Supervision Act. The Commission further notes that, in contrast to 
the Board's PSR Policy, proposed Rule 17Ad-22(e) would constitute an 
enforceable federal regulation if adopted. See proposed PSR Policy, 
supra note 53, at 2841 (distinguishing the legal effect of proposed 
Reg. HH from the proposed PSR Policy).
---------------------------------------------------------------------------

    With respect to the rules proposed by the Board and adopted by the 
CFTC, in

[[Page 29588]]

many instances the rules proposed by the Commission are consistent with 
these regulatory provisions, as each of the three rule sets are 
intended to be consistent with the headline principles contained in the 
PFMI Report,\659\ but the Commission's proposals differ from those 
requirements proposed by the Board and adopted by the CFTC in terms of 
the specific portions of the key considerations and explanatory text 
contained in the PFMI Report that are, or are not, referenced or 
emphasized. In some cases, the Commission is proposing more specific 
requirements than those proposed by the Board or adopted the CFTC, and, 
in others, it is proposing rules with fewer additional specific 
requirements.
---------------------------------------------------------------------------

    \659\ For example, the Commission preliminarily believes that 
proposed Rule 17Ad-22(e)(23), requiring disclosure of rules, key 
procedures, and market data, contains the same substantive 
requirements as rules proposed by the Board and adopted by the CFTC. 
See proposed Reg. HH, supra note 53, at 3686-88, 3693 (the Board 
proposing Sec. 234.3(a)(23)); DCO Int'l Standards Release, supra 
note 53, at 72493-94, 72521 (CFTC adopting Sec. 39.37).
    In this case, the Commission notes that regulators have taken 
slightly different approaches to achieving disclosure of rules, key 
procedures, and market data. The CFTC requires disclosure through 
the CPSS-IOSCO Disclosure Framework. See DCO Int'l Standards 
Release, supra note 53, at 72493-94, 72521 (CFTC adopting Sec. 
39.37(a)); see also CPSS-IOSCO, Disclosure Framework for Financial 
Market Infrastructures (Apr. 2012), available at http://www.bis.org/publ/cpss101c.pdf. The Commission and the Board have proposed to 
require disclosure through a comprehensive public disclosure set 
forth in their proposed rules. The Commission preliminarily 
believes, however, that the three disclosure regimes impose the same 
substantive requirements.
---------------------------------------------------------------------------

    The following discussion provides examples of proposed rule 
provisions that are representative of the differences between the 
Commission's proposal and the Board's proposal and the CFTC's final 
rules, where the Commission is proposing more detailed requirements 
than those proposed by the Board or adopted by the CFTC:
     In proposing Rule 17Ad-22(e)(4), the Commission would 
explicitly permit a covered clearing agency's policies and procedures 
to be reasonably designed to maintain financial resources either in 
combined or separately maintained clearing or default funds. Rules 
proposed by the Board and adopted by the CFTC do not include a 
comparable provision. The Commission preliminarily believes this 
requirement is appropriate because permitting a covered clearing agency 
to maintain a separate default fund for purposes of complying with 
proposed Rules 17Ad-22(e)(4)(ii) and (iii) increases the range of 
options available to covered clearing agencies when complying with this 
requirement and, when used appropriately, will allow a covered clearing 
agency to distribute the costs and responsibilities of clearing 
membership more equitably among clearing members.
     In proposing Rule 17Ad-22(e)(7), the Commission would 
permit a covered clearing agency's policies and procedures to include 
as qualifying liquid resources (i) assets that are readily available 
and convertible into cash through prearranged funding arrangements 
determined to be highly reliable even in extreme but plausible market 
conditions by the board of directors of the covered clearing agency, 
following a review conducted for this purpose not less than annually, 
and (ii) other assets that are readily available and eligible for 
pledging to a relevant central bank, if the covered clearing agency has 
access to routine credit at such central bank that permits said pledges 
or other transactions by the covered clearing agency. Rules proposed by 
the Board do not include a provision comparable to either of these two 
proposed requirements, and rules adopted by the CFTC do not include a 
provision including as qualifying liquid resources assets readily 
available and eligible for pledging to a central bank.\660\
---------------------------------------------------------------------------

    \660\ See proposed Reg. HH, supra note 53, at 3677-78, 3691 (the 
Board proposing Sec. 234.3(a)(7)); DCO Int'l Standards Release, 
supra note 53, at 72487-91, 72518 (CFTC adopting Sec. 39.33(c)).
---------------------------------------------------------------------------

    The Commission preliminarily believes this requirement is 
appropriate given the specific circumstances of the U.S. securities 
markets. U.S. securities markets are among the largest and most liquid 
in the world, and CCPs operating in the United States are also among 
the largest in the world. The resulting peak liquidity demands of CCPs 
are therefore proportionately large on both an individual and an 
aggregate basis, and the ability of CCPs to satisfy a requirement 
limiting qualifying liquid resources to committed facilities could be 
constrained by the capacity of traditional liquidity sources in the 
U.S. banking sector in certain circumstances. The Commission 
preliminarily believes that limiting the funding arrangements that are 
included within the definition of qualifying liquid resources to 
committed funding arrangements is not appropriate in the case of the 
U.S. securities markets and expanding the concept of qualifying liquid 
resources to include other highly reliable funding arrangements is 
necessary and appropriate to ensure the proper functioning of covered 
clearing agencies under the Exchange Act. For similar reasons, the 
Commission preliminarily believes it is appropriate to include in the 
definition of qualifying liquid resources assets that a central bank 
would permit a covered clearing agency to use as collateral, to the 
extent such covered clearing agency has access to routine credit at 
such central bank.
     In proposing Rule 17Ad-22(e)(13), the Commission would 
explicitly require a covered clearing agency's policies and procedures 
to be reasonably designed to ensure that the covered clearing agency 
has the authority and operational capacity to contain losses and 
liquidity demands in a timely manner and to continue to meet its 
obligations by, among other things, addressing the allocation of credit 
losses the covered clearing agency may face. Rules proposed by the 
Board and adopted by the CFTC do not include a comparable provision to 
address the allocation of credit losses.\661\ The Commission 
preliminarily believes this requirement is appropriate to help ensure 
that credit losses a covered clearing agency may reasonably be expected 
to experience are capable of allocation through pre-established 
practices of the covered clearing agency. The proposed rule would also 
facilitate the orderly handling of member defaults and provide 
certainty and transparency by enabling members to understand their 
obligations to the covered clearing agency in extreme circumstances ex 
ante.
---------------------------------------------------------------------------

    \661\ See 17 CFR 39.16; proposed Reg. HH, supra note 53, at 
3680-81, 3692 (the Board proposing Sec. 234.3(a)(13)); see also DCO 
Principles Release, supra note 53, at 69395-97, 69442 (CFTC adopting 
Sec. 39.16).
---------------------------------------------------------------------------

     In proposing Rule 17Ad-22(e)(18), the Commission would 
explicitly require a covered clearing agency's policies and procedures 
to be reasonably designed to require monitoring of compliance with 
access and participation requirements. Rules proposed by the Board and 
adopted by the CFTC do not include a comparable provision. The 
Commission preliminarily believes this requirement is consistent with 
Exchange Act provisions requiring registered clearing agencies to have 
rules designed to not permit unfair discrimination in the admission of 
participants because it helps ensure that a covered clearing agency 
complies with its own membership requirements.
     In proposing Rule 17Ad-22(e)(19), the Commission would 
explicitly require a covered clearing agency's policies and procedures 
to be reasonably designed to require regular review of its tiered 
participation arrangements. Rules proposed by the Board and adopted by 
the CFTC do not include a comparable provision. The

[[Page 29589]]

Commission preliminarily believes this requirement is consistent with 
Exchange Act provisions requiring registered clearing agencies to have 
rules designed to not permit unfair discrimination in the admission of 
participants because it helps ensure that a covered clearing agency 
periodically reconsiders whether in practice its membership 
requirements may result in either an inappropriately broad or narrow 
membership.
    The following discussion provides examples of proposed rule 
provisions that are representative of the differences between the 
Commission's proposal and the Board's proposal and the CFTC's final 
rules, where the Commission is proposing requirements that are more 
general than those proposed by the Board or adopted by the CFTC:
     In proposing Rule 17Ad-22(e)(2), the Commission would not 
require a covered clearing agency's policies and procedures to be 
reasonably designed to include requirements for disclosure of board 
decisions, review of the performance of the board of directors and 
individual directors, documentation and disclosure of governance 
arrangements, procedures for managing conflicts of interests involving 
board members, and oversight of the risk function. Rules adopted by the 
CFTC include such requirements.\662\ The Commission preliminarily 
believes that such requirements would in part be duplicative of 
existing Exchange Act requirements applicable to covered clearing 
agencies grounded in the broad definition of the term ``rules of a 
clearing agency'' in Section 3(a)(27) of the Exchange Act,\663\ and 
otherwise have been contemplated by the Commission's proposed 
Regulation MC.\664\ Accordingly any further requirements in this 
respect would be considered by the Commission separately.
---------------------------------------------------------------------------

    \662\ See DCO Int'l Standards Release, supra note 53, at 72480-
81, 72515 (CFTC adopting Sec. 39.30).
    \663\ See 15 U.S.C. 78c(a)(27).
    \664\ See supra note 111 (discussing rules for governance 
arrangements proposed by the Commission to, among other things, 
mitigate conflicts of interest at registered clearing agencies that 
provide CCP services for security-based swaps).
---------------------------------------------------------------------------

     In proposing Rules 17Ad-22(e)(4) and (e)(7), the 
Commission would not require a covered clearing agency's policies and 
procedures for stress testing its financial resources and liquid 
resources, respectively, to cover specific stress scenarios, as rules 
adopted by the CFTC do.\665\ The Commission preliminarily believes it 
is appropriate to provide discretion to the covered clearing agencies 
to identify the stress scenarios most appropriate for their needs given 
their status as SROs subject to the Commission's oversight, and to rely 
upon other tools available to the Commission through its supervisory 
and examination programs to ensure the responsibilities of covered 
clearing agencies in this regard are fulfilled.
---------------------------------------------------------------------------

    \665\ See DCO Int'l Standards Release, supra note 53, at 72492-
93, 72520 (CFTC adopting Sec. 39.36(c)).
---------------------------------------------------------------------------

     In proposing Rule 17Ad-22(e)(5), the Commission would not 
specifically require, as the CFTC does in its rules, a covered clearing 
agency's policies and procedures to be reasonably designed to (i) 
establish prudent valuation practices and develop haircuts that are 
tested regularly and take into account stressed market conditions 
(including to reduce the need for procyclical adjustments); (ii) avoid 
concentrated holdings of certain assets where it could significantly 
impair the ability to liquidate such assets quickly without significant 
adverse price effects; and (iii) use a collateral management system 
that is well designed and operationally flexible, such that it, among 
other things, accommodates changes in the ongoing monitoring and 
management of collateral; and (iv) allow for the timely valuation of 
collateral and execution of any collateral or margin calls.\666\ While 
the Commission preliminarily agrees that these requirements may 
facilitate prudent practices, the Commission preliminarily observes 
that consideration of these practices would fall within the general 
responsibilities of a covered clearing agency and its board of 
directors. The Commission therefore preliminarily believes that 
proposed Rule 17Ad-22(e)(5) strikes the appropriate balance in 
establishing policies and procedures requirements with respect to 
collateral management.
---------------------------------------------------------------------------

    \666\ See 17 CFR 39.11, 39.13; see also DCO Principles Release, 
supra note 53 (CFTC adopting Secs. 39.11 and 39.13).
---------------------------------------------------------------------------

     In proposing Rule 17Ad-22(e)(6), the Commission also would 
not require a covered clearing agency's policies and procedures to be 
reasonably designed to determine the appropriate historic time period 
for the margin methodology based on the characteristics of each 
product, spread, account, or portfolio or to require specifying minimum 
liquidation periods for different types of derivatives. Rules adopted 
by the CFTC include such requirements.\667\ While the Commission 
preliminarily agrees that these requirements may facilitate prudent 
practices, the Commission preliminarily observes that consideration of 
these practices would fall within the general responsibilities of a 
covered clearing agency and its board of directors. The Commission 
therefore preliminarily believes that proposed Rule 17Ad-22(e)(6) 
strikes the appropriate balance in establishing policies and procedures 
requirements with respect to risk management.
---------------------------------------------------------------------------

    \667\ See 17 CFR 39.13(g)(2); see also DCO Principles Release, 
supra note 53, at 69364-79, 69438 (CFTC adopting Sec. 39.13(g)(2)).
---------------------------------------------------------------------------

    These differences between the Commission's proposal and the Board's 
proposed rules and the CFTC's final rules are provided here as examples 
of the differences observed between the respective rule sets and do not 
constitute an exhaustive list. In preliminarily formulating the 
specific requirements of the proposed rules in furtherance of Section 
17A of the Exchange Act, the Commission was guided by its experience in 
supervising registered clearing agencies, including through the SRO 
rule filing process under Section 19(b) of the Exchange Act and Rule 
19b-4, periodic inspections and examinations, and other monitoring of 
the activities of registered clearing agencies.\668\ The Commission 
also took into account the particular circumstances of the U.S. 
securities markets, including but not limited to business models of and 
current practices at covered clearing agencies, characteristics of the 
products cleared, the nature of the covered clearing agencies' 
participant base, and other factors. The Commission preliminarily 
believes the differences between its proposal and the Board's proposed 
rules and the CFTC's final rules are appropriate for the reasons noted 
above. The Commission further preliminarily notes that some of the 
differences between the Commission's proposal and the CFTC's final 
rules is attributable to differences between the scope of the 
Commission's and the CFTC's regulatory authority.\669\
---------------------------------------------------------------------------

    \668\ See supra Part I.A and note 96 (describing the 
Commission's framework for regulation of SROs and the SRO rule 
filing process).
    \669\ For example, the Commission is proposing Rules 17Ad-
22(e)(11) and (12) to establish requirements for covered clearing 
agencies that provide CSD services and for exchange-of-value 
settlement systems. See supra Parts II.B.8-9 and infra Part VII 
(discussing the proposed rules and providing rule text, 
respectively). The CFTC has not proposed comparable rules because 
CSDs and securities settlement systems do not fall within the scope 
of its regulatory authority.
---------------------------------------------------------------------------

    Further, CPSS-IOSCO members are also in various stages of 
implementing the standards set forth in the PFMI Report into their own 
regulatory regimes, and the Commission preliminarily believes that 
proposing a set of requirements generally consistent with the relevant 
international standards would result in diminished likelihood that 
participants in cleared markets would restructure and operate

[[Page 29590]]

in less-regulated markets.\670\ Additionally, international standards 
such as the Basel III framework could create complications for U.S. 
clearing agencies not subject to regulations based on the standards set 
in the PFMI Report as a result of the Basel III framework's treatment 
of QCCPs. In particular, if U.S. clearing agencies do not obtain QCCP 
status from foreign banking regulators who have adopted rules 
conforming to the Basel III framework because, for instance, the 
regulatory framework is not consistent with the standards set forth in 
the PFMI Report, foreign bank members of U.S. clearing agencies may 
have incentives to move their clearing business to clearing agencies in 
jurisdictions where they might obtain lower capital requirements under 
the Basel III framework.\671\
---------------------------------------------------------------------------

    \670\ See supra note 53 (citing the Board's proposal and the 
CFTC's final rules).
    \671\ See supra note 48 and infra Part IV.C.1.e (discussing the 
Basel III capital requirements and the economic effect of QCCP 
status under the Basel III capital requirements, respectively).
---------------------------------------------------------------------------

    Failure to maintain consistency with other regulators may disrupt 
cleared markets in a number of ways. Significant differences across 
regulatory regimes may encourage participants to restructure their 
operations in order to avoid a particular regulatory regime.\672\ Such 
differences may reduce the liquidity of cleared products in certain 
markets if they result in an undersupply of clearing services. Further, 
inconsistency in regulation across jurisdictions may increase the 
likelihood that restructuring by market participants in response such 
inconsistency results in concentrating clearing activity in regimes 
with a weaker commitment to policies and procedures for sound risk 
management.
---------------------------------------------------------------------------

    \672\ See, e.g., Arnoud W.A. Boot, Silva Dez[otilde]elan, & Todd 
T. Milbourn, Regulatory Distortions in a Competitive Financial 
Services Industry, 16 J. Fin. Serv. Res. 249 (2000) (showing that, 
in a simple industrial organization model of bank lending, a change 
in the cost of capital resulting from regulation results in a 
greater loss of profits when regulated banks face competition from 
non-regulated banks than when regulations apply equally to all 
competitors); Victor Fleischer, Regulatory Arbitrage, 89 Tex. L. 
Rev. 227 (2010) (discussing how, when certain firms are able to 
choose their regulatory structure, regulatory costs are shifted onto 
those entities that cannot engage in regulatory arbitrage).
---------------------------------------------------------------------------

    In the case of clearing agency standards, there are additional 
motivations for consistency with other regulatory requirements. The 
Commission preliminarily believes that such consistency would prevent 
the application of inconsistent regulatory burdens and thereby reduce 
the likelihood that participants in cleared markets would restructure 
and operate in less-regulated markets. Additionally, such consistency 
would allow foreign bank clearing members and foreign bank customers of 
clearing members of covered clearing agencies to be subject to lower 
capital requirements under the Basel III framework.\673\
---------------------------------------------------------------------------

    \673\ See Basel III capital requirements, supra note 48.
---------------------------------------------------------------------------

d. Concentration
    The economic effects associated with the proposed rules may also be 
partially determined by the economic characteristics of clearing 
agencies. Generally, the economic characteristics of FMIs, including 
clearing agencies, include specialization, economies of scale, barriers 
to entry, and a limited number of competitors.\674\ Such 
characteristics, coupled with the particulars of an FMI's legal 
mandate, could result in market power, leading to lower levels of 
service, higher prices, and under-investment in risk management 
systems.\675\
---------------------------------------------------------------------------

    \674\ See supra note 49 (defining ``financial market 
infrastructure'').
    \675\ Cf. PFMI Report, supra note 1, at 11.
---------------------------------------------------------------------------

    The centralization of clearing activities in a relatively small 
number of clearing agencies somewhat insulated from market forces may 
result in a reduction in their incentives to innovate and to invest in 
the development of appropriate risk management practices on an ongoing 
basis, particularly when combined with the cost reduction pressures 
noted above in Part IV.A.\676\ However, the Commission notes that the 
inverse may not necessarily hold. In other words, additional 
competition in the market for clearing services may not necessarily 
result in improved risk management. For instance, aggressive price-
cutting in a ``race to the bottom'' may result in clearing agencies 
accepting lower-quality collateral, requiring lower margin and default 
fund contributions, lowering access requirements, or holding lower 
reserves, potentially undermining their risk management efforts.\677\
---------------------------------------------------------------------------

    \676\ Kenneth J. Arrow, Economic Welfare and the Allocation of 
Resources for Invention 609-626, in The Rate and Direction of 
Inventive Activity: Economic and Social Factors (NBER, 1962), 
available at http://www.nber.org/chapters/c2144.pdf.
    \677\ See CPSS, Market Structure Development in the Clearing 
Industry: Implications for Financial Stability, at sec. 5 (Nov. 
2010), available at http://www.bis.org/publ/cpss92.pdf; see also 
Siyi Zhu, Is There a `Race to the Bottom' in Central Counterparties 
Competition?--Evidence from LCH.Clearnet SA, EMCF and EuroCCP, DNB 
Occasional Studies, Vol. 9, No. 6 (2011); John Kiff et al., Credit 
Derivatives: Systemic Risks and Policy Options (IMF Working Paper 
No. 254, Nov. 2009), available at http://www.imf.org/external/pubs/ft/wp/2009/wp09254.pdf.
---------------------------------------------------------------------------

    Market power may raise particular issues with respect to the 
allocation of benefits and costs flowing from these proposed rules and 
precipitate changes in the structure of the financial networks that are 
served by covered clearing agencies. For example, as a result of 
limited competition,\678\ existing covered clearing agencies may easily 
pass the incremental costs associated with enhanced standards on to 
their members, who may share these costs with their customers, 
potentially resulting in increased transaction costs in cleared 
securities.
---------------------------------------------------------------------------

    \678\ See generally Nadia Linciano, Giovanni Siciliano & 
Gianfranco Trovatore, The Clearing and Settlement Industry: 
Structure Competition and Regulatory Issues (Italian Secs. & Exch. 
Comm'n Research Paper 58, May 2005), available at http://www.ssrn.com/abstract=777508 (concluding in part that the core 
services offered by the clearance and settlement industry tend 
toward natural monopolies because the industry can be characterized 
as a network industry, where consumers buy systems rather than 
single goods, consumption externalities exist, costs lock-in 
consumers once they choose a system, and production improves with 
economies of scale); Heiko Schmiedel, Markku Malkam[auml]ki & Juha 
Tarkka, Economies of Scale and Technological Development in 
Securities Depository and Settlement Systems, at 10 (Bank of Fin. 
Discussion Paper 26, Oct. 2002), available at http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0226.pdf. (``The overall results of this study reveal the 
existence of substantial economies of scale among depository and 
settlement institutions. On average, the centralized U.S. system is 
found to be the most cost effective settlement system and may act as 
the cost saving benchmark.'').
---------------------------------------------------------------------------

    If incremental increases in costs lead clearing agencies to charge 
higher prices for their services, then certain clearing members may 
choose to terminate membership and cease to clear transactions for 
their customers. Should this occur the result may be further 
concentration among clearing members, where each remaining member 
clears a higher volume of transactions. In this case, clearing agencies 
and the financial markets they serve would be more exposed to these 
larger clearing members. These remaining clearing members may, however, 
each internalize more of the costs their activity in cleared markets 
imposes on the financial system.
    The increased importance of a small set of clearing members, in 
turn, may result in firms not previously systemically important 
increasing in systemic importance. This is particularly true for 
clearing members that participate in multiple markets, both cleared and 
not cleared.\679\ However, adequate regulation of capital levels and 
margin amounts at surviving clearing members could mean that, though 
shocks to these members may be

[[Page 29591]]

larger, the propagation of shocks may be limited to a smaller set of 
entities and their equity holders.
---------------------------------------------------------------------------

    \679\ See, e.g., Roe, supra note 172 (arguing that counterparty 
risk concentrated within CCPs may be transferred to the broader 
financial system through links between clearing members and their 
clients).
---------------------------------------------------------------------------

e. Qualifying CCP Status and Externalities on Clearing Members
    An effect of the proposed amendments to Rule 17Ad-22 is that 
covered clearing agencies required to comply with the proposed rules 
may be more likely to qualify as QCCPs in non-U.S. jurisdictions that 
have adopted the Basel III framework's QCCP definition. Under the Basel 
III framework, a QCCP is defined as an entity operating as a CCP that 
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 standards set forth in the PFMI Report.\680\ 
Because the proposed amendments to Rule 17Ad-22 are intended to be in 
line with the standards set forth in the PFMI Report, the Commission 
preliminarily believes that foreign bank clearing members of certain 
covered clearing agencies and foreign banks clearing indirectly through 
clearing members of covered clearing agencies may benefit from covered 
clearing agencies obtaining QCCP status. In particular, bank clearing 
members and bank indirect participants of covered clearing agencies 
that could attain QCCP status would face lower capital requirements 
with respect to cleared derivatives and repurchase agreement 
transactions because, under the Basel III framework, capital 
requirements for bank exposures to QCCPs are lower than capital 
requirements for bank exposures to non-qualifying CCPs for these 
products. Although the Board and the Office of the Comptroller of the 
Currency have already adopted rules implementing the Basel III capital 
requirements that would identify all covered clearing agencies (with 
the exception of ICEEU) as QCCPs for the purposes of applying risk 
weights to assets at U.S. banks,\681\ the proposed amendments to Rule 
17Ad-22 may result in non-U.S. bank clearing members experiencing lower 
capital requirements related to exposures against covered clearing 
agencies relative to a baseline scenario in which foreign banking 
regulators do not determine that a covered clearing agency is a 
QCCP.\682\
---------------------------------------------------------------------------

    \680\ See supra note 48 (discussing the Basel III capital 
requirements).
    \681\ See infra Part IV.C.1.e.
    \682\ The Commission notes that benefits to banks that may arise 
as a result of the proposed rules may be contingent upon regulators 
in other jurisdictions taking action to recognize the QCCP status of 
covered clearing agencies.
---------------------------------------------------------------------------

    The Basel III framework affects capital requirements for bank 
exposures to central counterparties in two important ways. The first 
relates to trade exposures, defined under the Basel III capital 
requirements as the current and potential future exposure of a clearing 
member or indirect participant in a CCP arising from OTC derivatives, 
exchange-traded derivatives transactions, and securities financing 
transactions. If these exposures are held against a QCCP, they will be 
assigned a risk weight of 2%. In contrast, exposures against non-
qualifying CCPs do not receive lower capital requirements relative to 
bilateral exposures and are assigned risk weights between 20% and 100%, 
depending on counterparty credit risk. Second, the Basel III capital 
requirements impose a cap on risk weights applied to default fund 
contributions, limiting risk-weighted assets (subject to a 1250% risk 
weight) to a cap of 20% of a clearing member's trade exposures against 
a QCCP. This is in contrast to treatment of exposures against non-
qualifying CCPs, which are uncapped and subject to a 1250% risk weight. 
Because QCCP status generally impacts capital treatment, any benefits 
of attaining QCCP status will likely accrue, at least in part, to 
foreign clearing members or foreign indirect participants subject to 
the Basel III capital requirements.\683\ As a result of lower risk 
weights applied to exposures and a cap on capital requirements against 
default fund obligations, clearing members of QCCPs subject to Basel 
III capital requirements may experience an improved capital position 
relative to bank members of non-QCCPs. This may lower the costs of debt 
capital for bank members of QCCPs.\684\
---------------------------------------------------------------------------

    \683\ For a discussion of the effects of QCCP status on 
competition between bank and non-bank clearing members, see Part 
IV.C.2.a.
    \684\ See supra note 593 (noting that the Commission currently 
expects the lower capital treatment under the Basel III framework to 
affect registered clearing agencies FICC, ICEEU, and OCC, each of 
which would meet the definition of a ``covered clearing agency'' 
under the proposed rules).
---------------------------------------------------------------------------

    Non-U.S. banks that are constrained by Basel III tier one capital 
requirements would face a shock to risk-weighted assets once capital 
rules come into force.\685\ The size of the shock depends on 
regulators' determinations with regard to QCCP status. Regardless of 
the size of the shock and in order to come into compliance with capital 
rules, however, affected banks will have to raise capital or reduce 
leverage. In the absence of perfect markets, these banks may incur 
ongoing costs as a result.
---------------------------------------------------------------------------

    \685\ As discussed above, the Board and Office of Comptroller of 
the Currency have adopted rules implementing capital requirements 
under Basel III that make capital treatment for exposures to CCPs 
independent of the proposed rules for U.S. banks regulated by these 
two agencies, and therefore the Commission preliminarily believes no 
benefits would accrue to U.S. bank clearing members of FICC and OCC.
---------------------------------------------------------------------------

    In quantifying the benefits of achieving QCCP status, the 
Commission based its estimate on publicly available information with 
regard to OCC.\686\ To estimate the upper bound for the potential 
benefits accruing to bank clearing members at OCC as a result of QCCP 
status, the Commission identified a sample of 20 bank clearing members 
at OCC and, for each bank, collected information about total assets, 
risk weighted assets, net income and tier one capital ratio at the 
holding company level for 2012.\687\ The Commission then allocated 
trade exposures and default fund exposures across the sample of bank 
clearing members based on the level of risk-weighted assets.\688\ The 
Commission measured the impact on risk-weighted assets for non-U.S. 
bank clearing members under two different capital treatment regimes. 
The first regime is in the absence of QCCP status, assuming a 100% risk 
weight applied to trade exposures and 1250% risk weight applied to 
default fund exposures for non-U.S. members. In the second regime, OCC 
obtains QCCP status, and banks are allowed to apply a 2% risk

[[Page 29592]]

weight applied to trade exposures and a 1250% risk weight to default 
fund exposures up to a total exposure cap of 20% of trade 
exposures.\689\ If OCC is determined to be a QCCP, then the increase in 
risk weighted assets will be smaller in magnitude, implying a smaller 
adjustment at lower cost. The Commission preliminarily estimates that 
benefits associated with OCC obtaining QCCP status stemming from lower 
capital requirements against trade exposures to QCCPs as a result of 
the proposed rules to have an upper bound of $600 million per year, or 
approximately 0.60% of the total 2012 net income reported by bank 
clearing members at OCC.
---------------------------------------------------------------------------

    \686\ Under the Basel III framework ICCEU and FICC's repurchase 
agreement segment would also be eligible for QCCP status. However, 
FICC does not report counterparties to repo agreements, and ICEEU 
does not separately report exposures related to security-based swap 
clearing, so we are currently unable to quantify potential benefits 
related to QCCP status for these entities.
    \687\ The Commission used the set of entities it identified as 
banks on OCC's member list, available at http://www.optionsclearing.com/membership/member-information/. For U.S. 
bank holding companies, 2012 total assets, risk weighted assets, net 
income, and tier 1 capital ratios were collected from Y-9C reports 
available at the National Information Center, http://www.ffiec.gov/nicpubweb/nicweb/nichome.aspx. For non-U.S. bank holding companies, 
Commission staff obtained corresponding data from financial 
statements and supplementary financial materials posted to bank Web 
sites. Where necessary, values were converted back to U.S. dollars 
at appropriate exchange rates obtained from Thomson Reuters 
Datastream and the Federal Reserve, http://www.federalreserve.gov/releases/h10/hist/.
    \688\ For example, one bank in the sample, with 6.25% of total 
risk-weighted assets, was assigned 6.25% of the total trade and 
default fund exposures while another bank in the sample, with 3.43% 
of total risk weighted assets, was assigned 3.43% of these 
exposures. Because trade exposures of OCC members against OCC are 
nonpublic, the Commission used the balance of OCC margin deposits 
and deposits in lieu of margin held at OCC, $57.48 billion, as a 
proxy for trade exposures. OCC's 2012 clearing fund deposits were 
valued at $2.66 billion. See OCC, 2012 Annual Report, available at 
http://www.optionsclearing.com/components/docs/about/annual-reports/occ_2012_annual_report.pdf.
    \689\ The Basel III framework allows banks to compute default 
fund exposures in two ways. Method 1 involves computing capital 
requirements for each member proportional to its share of an 
aggregate capital requirement for all clearing members in a scenario 
where to average clearing members default. The Commission currently 
lacks data necessary to compute default fund exposures under this 
approach, instead we use Method 2, which caps overall exposure to a 
QCCP at 20% of trade exposures. See Basel III framework, supra note 
48, Annex 4, paras. 121-25 (outlining two methods for computing 
default fund exposures).
---------------------------------------------------------------------------

    The Commission's analysis is limited in several respects and relies 
on several assumptions. First, a limitation of our proxy for trade 
exposures and our use of OCC's clearing fund is that the account 
balances include deposits by bank clearing members, who would 
experience lower capital requirements under the Basel III framework, 
and non-bank clearing members who would not. The Commission 
preliminarily assumes, for the purposes of establishing an upper bound 
for the benefits to market participants that are associated with QCCP 
status for OCC under the proposed rules, that the balance of both OCC's 
margin account and OCC's default fund are attributable only to bank 
clearing members. Additionally, we assume an extreme case where, in the 
absence of QCCP status, trade exposures against a CCP would be assigned 
a 100% risk weight, causing the largest possible shock to risk-weighted 
assets for affected banks.
    Concluding that lower capital requirements on trade exposures to 
OCC would produce effects in the real economy also requires that 
certain conditions exist. Agency problems, taxes, or other capital 
market imperfections could result in banks targeting a particular 
capital structure. Further, capital constraints on bank clearing 
members subject to the Basel III framework should bind so that higher 
capital requirements on bank clearing members subject to the Basel III 
framework in the absence of QCCP status would cause these banks to 
exceed capital constraints if they chose to redistribute capital to 
shareholders or invest capital in projects with returns that exceed 
their cost of capital. Using publically available data, however, it is 
not currently possible to determine whether capital constraints will 
bind for bank clearing members when rules applying Basel III capital 
requirements come into force, so to estimate an upper bound for the 
effects of QCCP status on bank clearing members we assume that tier one 
capital constraints for all bank clearing members of OCC would bind in 
an environment with zero weight placed on bank exposures to CCPs.\690\
---------------------------------------------------------------------------

    \690\ The Commission notes that, at present, no bank in its 
sample of bank clearing members of OCC is bound by capital 
requirements under the Basel III framework. Bank holding company 
risk-weighted assets, adjusted total assets, and capital ratio data 
have been taken from http://www2.fdic.gov/SDI/. The Commission used 
data from 2009-2012 for its sample of bank clearing members and 
assumed no bank-specific countercyclical capital buffers for these 
banks. This suggests a minimum tier 1 capital ratio of 9.6%, 
exceeding the Basel III minimum by 1.1%. The same analysis suggests 
a minimum total capital ratio of 12.3%, exceeding the Basel III 
minimum by 1.8%.
---------------------------------------------------------------------------

    For the purposes of quantifying potential benefits from QCCP 
status, the Commission has also assumed that banks choose to adjust to 
new capital requirements by deleveraging. In particular, the Commission 
assumed that banks would respond by reducing risk-weighted assets 
equally across all risk classes until they reach the minimum tier one 
capital ratio under the Basel framework of 8.5%. We measure the ongoing 
costs to each non-U.S. bank by multiplying the implied change in total 
assets by each bank's return on assets, estimated using up to 12 years 
of annual financial statement data.\691\
---------------------------------------------------------------------------

    \691\ This data has been taken from Compustat. Due to data 
limitations, for certain banks a shorter window was used for this 
calculation. The minimum sample window was nine years.
---------------------------------------------------------------------------

    The Basel III capital requirements for exposures to CCPs yield 
additional benefits for QCCPs that the Commission is currently unable 
to quantify due to lack of data concerning client clearing arrangements 
by banks. For client exposures to clearing members, the Basel III 
capital requirements allow participants to reflect the shorter close-
out period of cleared transactions in their capitalized exposures. The 
Basel III framework's treatment of exposures to CCPs also applies to 
client exposures to CCPs through clearing members. This may increase 
the likelihood that bank clients of bank clearing members that are 
subject to the Basel III capital requirements share some of the 
benefits of QCCP status.
    Furthermore, the fact that the Basel III capital requirements apply 
to bank clearing members may have important implications for 
competition and concentration. While the proposed rules may extend 
lower capital requirements against exposures to CCPs to non-U.S. bank 
clearing members of covered clearing agencies,\692\ the benefits of 
QCCP status will still be limited to bank clearing members. However, 
the costs associated with compliance with the proposed rules may be 
borne by all clearing members, regardless of whether or not they are 
supervised as banks. A potential consequence of this allocation of 
costs and benefits may be ``crowding out'' of members of QCCPs that are 
not banks and will not experience benefits with respect to the Basel 
III framework. This may result in an unintended consequence of 
increased concentration of clearing activity among bank clearing 
members. As noted in Part IV.C.1.d, this increased concentration could 
mean that each remaining clearing member becomes more important from 
the standpoint of systemic risk transmission.
---------------------------------------------------------------------------

    \692\ See supra note 599 and accompanying text (noting that 
banks supervised by the Board and the Office of the Comptroller of 
the Currency would treat covered clearing agencies as QCCPs for the 
purposes of calculating regulatory capital ratios).
---------------------------------------------------------------------------

    In addition to benefits for bank clearing members, certain benefits 
resulting from QCCP status may also accrue to covered clearing 
agencies. If banks value lower capital requirements attributable to 
QCCP status, bank clearing members may prefer membership at QCCPs to 
membership at CCPs that are not QCCPs. A flight of clearing members 
from covered clearing agencies in the absence of QCCP status would 
result in default-related losses being mutualized across a narrower 
member base. If the flight from covered clearing agencies results in 
lower transactional volume at these clearing agencies, then economies 
of scale may be lost, resulting in higher clearing fees and higher 
transaction costs in cleared products.
2. Effect on Competition, Efficiency, and Capital Formation
    The proposed amendments to Rule 17Ad-22 and proposed Rule 17Ab2-2 
have the potential to affect competition, efficiency, and capital 
formation. As with the rest of the benefits and costs associated with 
the proposed amendments to Rule 17Ad-22, the Commission preliminarily 
believes that several of the effects described below only occur to the 
extent that covered clearing agencies do not already have operations 
and governance mechanisms

[[Page 29593]]

that conform to the requirements in proposed Rule 17Ad-22(e). 
Additionally, the Commission preliminarily believes that consistency 
with international regulatory frameworks, as embodied by the standards 
set forth in the PFMI Report, which may promote the integrity of 
cleared markets, could have substantial effects on competition, 
efficiency, and capital formation.
a. Competition
    Two important characteristics of the market for clearance and 
settlement services are high fixed costs and economies of scale. Large 
investments in risk management and information technology 
infrastructure costs, such as financial data database and network 
maintenance expenses, are components of high fixed costs for clearing 
agencies. Consequently, the clearance and settlement industry exhibits 
economies of scale in that the average total cost per transaction, 
which includes fixed costs, diminishes with the increase in transaction 
volume as high fixed costs are spread over a larger number of 
transactions.
    Furthermore, high fixed costs translate into barriers to entry that 
preclude competition. Lower competition is an important source of 
market power for clearing agencies. As a result, clearing agencies 
possess the ability to exert market power and influence the fees 
charged for clearance and settlement services in the markets they 
serve.\693\ Any costs resulting from the proposed amendments may have 
the effect of raising already high barriers to entry. As the potential 
entry of new clearing agencies becomes more remote, existing clearing 
agencies may be able to reduce service quality, restrict the supply of 
services, or increase fees above marginal cost in an effort to earn 
economic rents from participants in cleared markets.\694\
---------------------------------------------------------------------------

    \693\ See, e.g., Clearing Agency Standards Release, supra note 
5, at 66263.
    \694\ See, e.g., Clearing Agency Standards Release, supra note 
5, at 66263 n.481.
---------------------------------------------------------------------------

    Even if they could not take advantage of a marginal increase in 
market power, clearing agencies may use their market power to pass any 
increases in costs that flow from the proposed amendments to their 
members. This may be especially true in the cases of member-owned 
clearing agencies, such as DTC, FICC, NSCC, and OCC, where members lack 
the opportunity to pass costs through to outside equity holders. 
Allowing clearing members to serve on the board of directors of a 
covered clearing agency may align a covered clearing agency's 
incentives with its membership. Certain complications may also arise, 
however, when clearing members sit on boards of covered clearing 
agencies as members of the board and may choose to allocate the costs 
of enhanced risk management inefficiently across potential competitors, 
in an effort to reduce their own share of these costs.
    Members who are forced to internalize the costs of additional 
requirements under the proposed rules may seek to terminate their 
membership. Additionally, prospective clearing members may find it 
difficult to join clearing agencies, given the additional costs they 
must internalize.\695\ Remaining clearing members may gain market power 
as a result, enabling them to extract economic rents from their 
customers. Rent extraction could take the form of higher transaction 
costs in cleared markets, thereby reducing efficiency, as discussed 
below.
---------------------------------------------------------------------------

    \695\ See supra Part IV.C.1.d (discussing concentration both in 
the market for clearing services and among clearing members).
---------------------------------------------------------------------------

    The Commission also acknowledges that proposed Rule 17Ad-22(e)(19) 
may affect competition among firms that choose to become clearing 
members, and those who provide clearing services indirectly, through a 
clearing member. Monitoring and managing the risks associated with 
indirect participation in clearing may be costly. If monitoring and 
managing the risks associated with indirect participation in clearing 
proves costly for clearing agencies and if clearing agencies are able 
to pass the additional costs related to monitoring and managing risks 
to clearing members, it may cause marginal clearing members unable to 
absorb these additional costs to exit. While these exits may be 
socially efficient, since they reflect the internalization of costs 
otherwise imposed upon other participants in cleared markets through 
increased probability of clearing agency default, they may nevertheless 
result in lower competition among clearing members for market share, 
potentially providing additional market power to the clearing members 
that remain.
    The Commission preliminarily believes, however, that management of 
risks from indirect participation is important in mitigating the risks 
that clearing agencies pose to financial stability. The tiered 
participation risk exposures, including credit, liquidity, and 
operational risks inherent in indirect participation arrangements, may 
present risks to clearing agencies, their members, and to the broader 
financial markets. For instance, if the size of an indirect 
participant's positions is large relative to a clearing member's 
capacity to absorb risks, this may increase the clearing member's 
default risk. Consequently, a clearing agency with indirect 
participation arrangements may be exposed to the credit risk of an 
indirect participant through its clearing members. Similarly, a margin 
call on, or a default by, an indirect participant could constrain 
liquidity of its associated clearing members, making it more difficult 
for these members to manage their positions at the clearing agency.
    The consistency across regulatory frameworks contemplated by the 
proposed rules may also affect competition. Financial markets in 
cleared products are global, encompassing many countries and regulatory 
jurisdictions. Consistency with international regulatory frameworks may 
facilitate entry of clearing agencies into new markets. By contrast, 
conflicting or duplicative regulation across jurisdictions, or even 
within jurisdictions, may cause competitive friction that inhibits 
entry and helps clearing agencies behave like local monopolists. 
Consistency in regulation can facilitate competition among clearing 
agencies so long as regulation is not so costly as to discourage 
participation in any market. Additionally, the Commission preliminarily 
believes that proposed Rule 17Ad-22(e)(23) may facilitate competition 
among clearing agencies across jurisdictions by requiring public 
disclosures that enable market participants to compare clearing 
agencies more easily.
    The consistency across regulatory requirements contemplated by the 
proposed rules may affect competition among banks in particular. 
Clearing derivative and repurchase agreement transactions through QCCPs 
will result in lower capital requirements for banks under the Basel III 
capital requirements. Therefore, consistency with the standards set 
forth in the PFMI Report may allow banks that clear these products 
through covered clearing agencies to compete on equal terms with banks 
that clear through other clearing agencies accorded QCCP status. This 
effect potentially countervails higher barriers to entry that enhanced 
risk management standards may impose on clearing members by lowering 
the marginal cost of clearing these transactions. Furthermore, covered 
clearing agencies potentially compete with one another for volume from 
clearing members. Since clearing members receive better treatment for 
exposures against QCCPs, clearing

[[Page 29594]]

members will find it less costly to deal with QCCPs. Failure to 
establish requirements consistent with the standards set forth in the 
PFMI Report may place U.S. covered clearing agencies at a competitive 
disadvantage globally.
    The ability of covered clearing agencies to obtain QCCP status may 
also affect competition among clearing agencies. Under the Basel III 
framework, QCCP status would have practical relevance only for covered 
clearing agencies providing CCP services for derivatives, security-
based swaps, and securities financing transactions. To the extent that 
the proposed rules increase the likelihood that banking regulators that 
have implemented the Basel III framework in their jurisdiction 
recognize covered clearing agencies as QCCPs, banks that clear at 
covered clearing agencies will experience lower capital requirements. 
Since clearing agencies may compete for volume from clearing members 
that are also banks, the proposed rules may remove a competitive 
friction between covered clearing agencies and other clearing agencies 
that enjoy recognition as QCCPs by banking regulators. As a corollary, 
the proposed rules could potentially disadvantage any registered 
clearing agencies that are not covered clearing agencies.\696\ The 
Commission also preliminarily notes that the ability of registered 
clearing agencies to voluntarily apply for covered clearing agency 
status under proposed Rule 17Ab2-2(a) may potentially allow entrants to 
achieve QCCP status if the Commission determines they should receive 
covered clearing agency status and they otherwise meet the requirements 
of the Basel III framework.
---------------------------------------------------------------------------

    \696\ See supra note 593 (noting that the Commission currently 
expects the lower capital treatment under the Basel III framework to 
affect registered clearing agencies FICC, ICEEU, and OCC, each of 
which would meet the definition of a ``covered clearing agency'' 
under the proposed rules).
---------------------------------------------------------------------------

    Further competitive effects may flow from the proposal as a result 
of the determinations under proposed Rule 17Ab2-2 for clearing agencies 
engaged in activities with a more complex risk profile and clearing 
agencies that are systemically important in multiple jurisdictions. 
These entities will be responsible for maintaining additional financial 
resources sufficient to cover the default of the two participant 
families that would potentially cause the largest aggregate credit 
exposures in extreme but plausible market conditions as well as 
undertake an annual feasibility analysis for extending liquidity risk 
management from ``cover one'' to ``cover two.'' These clearing agencies 
will have to collect these resources from participants, either through 
higher margin requirements or guaranty fund contributions, or 
indirectly through third-party borrowing arrangements secured by member 
resources. Regardless of how clearing agencies obtain these additional 
resources, the requirement to do so potentially raises the costs to use 
services provided by covered clearing agencies which could, at the 
margin, shift transactional volume to clearing agencies that fall 
outside the scope determined by proposed Rule 17Ab2-2, where competing 
clearing agencies exist, or opt out of clearing altogether.
b. Efficiency
    The proposed amendments to Rule 17Ad-22 may affect efficiency in a 
number of ways, though as discussed previously, most of these effects 
will only flow to the extent that covered clearing agencies do not 
already comply with the proposed amendments. First, because the 
proposed amendments result in general consistency with the standards 
set forth in the PFMI Report and requirements proposed by the Board and 
adopted by the CFTC, consistency likely fosters efficiency by reducing 
the risk that covered clearing agencies will be faced with conflicting 
or duplicative regulation when clearing financial products across 
multiple regulatory jurisdictions.
    Consistency across regulatory regimes in multiple markets may also 
result in efficiency improvements. Fully integrated markets would allow 
clearing agencies to more easily exploit economies of scale because 
clearing agencies tend to have low marginal costs and, thus, could 
provide clearance and settlement services over a larger volume of 
transactions at a lower average cost. Differences in regulation, on the 
other hand, may result in market fragmentation, allowing clearing 
agencies to operate as local monopolists. The resulting potential for 
segmentation of clearing and settlement businesses along jurisdictional 
lines may lead to overinvestment in the provision of clearing services 
and reductions in efficiency as clearing agencies open and operate 
solely within jurisdictional boundaries. If market segmentation 
precludes covered clearing agencies from clearing transactions for 
customers located in another jurisdiction with a market too small to 
support a local clearing agency, fragmentation may result in under-
provisioning of clearing and settlement services in these areas, in 
turn reducing the efficiency with which market participants share risk.
    The proposed amendments may also affect efficiency directly if they 
mitigate covered clearing agencies' incentives to underinvest in risk 
management and recovery and wind-down procedures. CCP default and 
liquidation is likely a costly event, so to the extent that the 
proposed rules mitigate the risk of CCP default and prescribe rules for 
orderly recovery and wind-down, they will produce efficiency benefits. 
Another direct effect on efficiency may come if registered clearing 
agencies attempt to restructure their operations in ways that would 
allow them to fall outside of the scope of proposed Rule 17Ad-22(e).
    Finally, price efficiency and the efficiency of risk sharing among 
market participants may be affected by the proposed amendments. On one 
hand, the cost of a transaction includes costs related to counterparty 
default that are typically unrelated to fundamental asset payoffs. 
Academic research using credit default swap transaction data has 
revealed a statistically significant, though economically small, 
relationship between the credit risk of a counterparty and the spreads 
implicit in transaction prices.\697\ Enhanced risk management by 
clearing agencies may reduce this component of transaction costs. By 
reducing deviations of prices from fundamental value, the proposed 
amendments may increase price efficiency. If lower transaction costs or 
reduced ambiguity facilitates participation in cleared markets by 
investors who would benefit from opportunities for risk-sharing in 
these markets,\698\ then this transmission channel may result in more 
efficient allocation of risk. On the other hand, the proposed 
amendments may have adverse implications for price efficiency in 
cleared markets if they drive up transaction costs as higher costs of 
risk management enter asset prices. An increase in transaction costs 
could cause certain market participants to avoid trading altogether, 
reducing liquidity in

[[Page 29595]]

cleared products and opportunities for risk sharing among investors in 
these markets.
---------------------------------------------------------------------------

    \697\ See e.g., Navneet Arora, Priyank Gandhi & Francis 
Longstaff, Counterparty Credit Risk and the Credit Default Swap 
Market, 103 J. Fin. Econ. 280 (2012). Using transaction prices and 
quotes by 14 different CDS dealers, the authors identified how 
dealers' credit risk affects transaction prices. They observed a 
relationship between spreads and credit risk implying that a 645-
basis-point increase in a dealer's credit spread would produce a 
one-basis-point increase in transaction prices. They explain the 
magnitude of this relationship by noting that their sample included 
transactions that were mostly collateralized, which would diminish 
the sensitivity of transaction prices to counterparty credit risk.
    \698\ If investors who might benefit from risk-sharing in 
cleared markets are ambiguity-averse, then regulation that addresses 
payoffs in times of financial strain may induce their participation. 
See supra note 655 and accompanying text.
---------------------------------------------------------------------------

c. Capital Formation
    The implications for capital formation that flow from these 
proposed rules stem mainly from incremental costs that result from 
compliance with more specific standards and benefits in the form of 
more efficient risk sharing.
    In cases where current practice falls short of the proposed 
amendments, covered clearing agencies may have to invest in 
infrastructure or make other expenditures to come into compliance, 
which may divert capital from other uses. In line with our previous 
discussion of cost allocation in the market for clearing services, 
these resources may come from clearing members and their 
customers.\699\
---------------------------------------------------------------------------

    \699\ See supra Part IV.C.1 (discussing the economic effects of 
the proposed rules on the market for clearing services generally).
---------------------------------------------------------------------------

    At the same time, the Commission preliminarily believes that the 
standards contemplated under the proposed rules may foster capital 
formation. As mentioned earlier, clearing agencies that are less prone 
to failure may help reduce transaction costs in the markets they 
clear.\700\ Conceptually, the component of transaction costs that 
reflects counterparty credit risk insures one counterparty against the 
default of another.\701\ Reductions in counterparty default risk allow 
the corresponding portion of transaction costs to be allocated to more 
productive uses by market participants who otherwise would bear these 
costs.
---------------------------------------------------------------------------

    \700\ See supra Part IV.C.1.a (discussing the general economic 
effects of the proposed rules on systemic risk).
    \701\ See supra note 697.
---------------------------------------------------------------------------

    If, on balance, the proposed amendments cause transaction costs to 
decrease in cleared markets, then the expected value of trade may 
increase. Counterparties that are better able to diversify risk through 
participation in cleared markets may be more willing to invest in the 
real economy rather than choosing to engage in precautionary savings.
3. Effect of Proposed Amendments to Rule 17Ad-22 and Proposed Rule 
17Ab2-2
    The discussion below outlines the costs and benefits preliminarily 
considered by the Commission as they relate to the rules being proposed 
today. These specific costs and benefits are in addition to the more 
general costs and benefits anticipated under the Commission's proposal 
discussed in Part IV.C.1 and include, in particular, the costs and 
benefits stemming from the availability of QCCP status under the Basel 
III capital requirements. Many of the costs and benefits discussed 
below are difficult to quantify. This is particularly true where 
clearing agency practices are anticipated to evolve and adapt to 
changes in technology and other market developments. The difficulty in 
quantifying costs and benefits of the proposed rules is further 
exacerbated by the fact that in some cases the Commission lacks 
information regarding the specific practices of clearing agencies that 
could assist in quantifying certain costs. For example, as noted in 
Part IV.C.3.a.iv(4), without detailed information about the composition 
of illiquid assets held by clearing agencies and their members, the 
Commission cannot provide reasonable estimates of costs associated with 
satisfying substantive requirements under proposed Rules 17Ad-
22(e)(7)(i) and (ii). Another example, discussed in Part 
IV.C.3.a.iv(5), is testing and validation of financial risk models, 
where the Commission is only able to estimate that costs will fall 
within a range. In this case, the costs associated with substantive 
requirements under the proposed rules may depend on the types of risk 
models employed by clearing agencies, which are, in turn, dictated by 
the markets they serve. As a result, much of the discussion is 
qualitative in nature, though where possible, the costs and benefits 
have been quantified.
a. Proposed Rule 17Ad-22(e)
    The Commission recognizes that the scope of the proposed rules is 
an important determinant of their economic effect. Having considered 
the anticipated costs associated with the proposed rules, the 
Commission preliminarily believes that it is appropriate to limit the 
application of proposed Rule 17Ad-22(e) to covered clearing agencies, 
as these are the registered clearing agencies for which the benefits of 
the proposed rules are the greatest. In particular, as discussed below, 
the Commission preliminarily believes that an important benefit 
resulting from the enhanced risk management requirements in the 
proposed rules is a reduction in the risk of a failure of a covered 
clearing agency. For example, for designated clearing agencies these 
benefits may be significant due to their size, exposure to, and 
interconnectedness with market participants, and the effect their 
failure may have on markets, market participants, and the broader 
financial system. For complex risk profile clearing agencies, 
significant benefits may flow as a result of their higher baseline 
default risk.
    As an alternative, the Commission could have proposed to extend the 
scope of proposed Rule 17Ad-22(e) to cover all registered clearing 
agencies. The Commission preliminarily acknowledges, however, that 
costs of compliance with the proposed rules may represent barriers to 
entry for clearing agencies. By continuing to apply Rule 17Ad-22(d) to 
registered clearing agencies that are not covered clearing agencies, 
the Commission preliminary believes that the proposed scope Rule 17Ad-
22(e) appropriately preserves the potential for innovation in the 
establishment and operation of registered clearing agencies.\702\ 
Moreover, including CME and ICE in the set of covered clearing agencies 
would potentially subject them to requirements that would be 
duplicative of CFTC requirements.
---------------------------------------------------------------------------

    \702\ The Commission notes that under proposed Rule 17Ab2-2(a), 
a registered clearing agency that is not involved in activities with 
a more complex risk profile and is not a designated clearing agency 
may apply for covered clearing agency status, which would subject 
them to the requirements of Rule 17Ad-22(e). The Commission 
preliminarily believes that this may occur if the registered 
clearing agency believes such status may credibly signal the quality 
of the services it provides or if it is seeking to obtain QCCP 
status under the Basel III framework.
---------------------------------------------------------------------------

i. Proposed Rule 17Ad-22(e)(1): Legal Risk
    Because, as noted above, proposed Rule 17Ad-22(e)(1) would require 
substantially the same set of policies and procedures as Rule 17Ad-
22(d)(1),\703\ the Commission preliminarily believes that proposed Rule 
17Ad-22(e)(1) would likely impose limited material additional costs on 
covered clearing agencies and produce limited benefits, in line with 
the general economic considerations discussed in Part IV.C.1.
---------------------------------------------------------------------------

    \703\ See supra note 107; supra Part II.B.1 (discussing the full 
set of requirements under proposed Rule 17Ad-22(e)(1)); supra Part 
IV.B.3.a.i (discussing current practices among registered clearing 
agencies regarding legal risk); see also 17 CFR 240.17Ad-22(d)(1).
---------------------------------------------------------------------------

ii. Proposed Rule 17Ad-22(e)(2): Governance
    Each covered clearing agency has a board of directors that governs 
its operations and oversees its senior management. Proposed Rule 17Ad-
22(e)(2) would establish more detailed requirements for governance 
arrangements at covered clearing agencies relative to those imposed on

[[Page 29596]]

registered clearing agencies under Rule 17Ad-22(d)(8).\704\
---------------------------------------------------------------------------

    \704\ See supra Part II.B.2 (discussing the full set of 
requirements under proposed Rule 17Ad-22(e)(2) and its relationship 
to Rule 17Ad-22(d)(8)); see also supra note 119 (discussing how the 
proposed rule would complement other proposed requirements 
concerning governance at clearing agencies that may apply 
separately).
---------------------------------------------------------------------------

    The Commission understands that any covered clearing agency subject 
to the proposed rule has policies and procedures in place that clearly 
prioritize the risk management and efficiency of the clearing agency. 
However, the Commission preliminarily believes that covered clearing 
agencies do not already have in place policies and procedures with 
respect to other requirements under proposed Rule 17Ad-22(e)(2). Based 
on its supervisory experience, the Commission preliminarily believes 
that some covered clearing agencies may need to update their policies 
and procedures to comply with proposed Rule 17Ad-22(e)(2)(iv). These 
updates will entail certain basic compliance costs, and covered 
clearing agencies may also incur assessment costs related to analyzing 
current governance arrangements in order to determine the extent to 
determine which they do not meet the requirements of the proposed 
amendments. The estimated costs in terms of paperwork are discussed in 
Part III.D.1. If, as a result of new policies and procedures, a covered 
clearing agency is required to recruit new directors, the Commission 
preliminarily estimates a cost per director of $73,000.\705\
---------------------------------------------------------------------------

    \705\ The Commission estimated a cost per director of $68,000 in 
proposing Regulation MC. See Exchange Act Release No. 34-63107 (Oct. 
14, 2010), 75 FR 65881, 65921 & n.215 (Oct. 26, 2010). The $73,000 
estimate reflects this amount in 2013 dollars, using consumer price 
inflation data provided by the Bureau of Labor Statistics.
---------------------------------------------------------------------------

    While there are potential costs associated with compliance, the 
Commission preliminarily believes that benefits would potentially 
accrue from these requirements. Specifically, the Commission 
preliminarily believes that enhanced governance arrangements would 
further promote safety and efficiency at the clearing agency--motives 
that may not be part of a clearing agency's governance arrangements in 
the absence of regulation. Policies and procedures required under the 
proposed rules would also reinforce governance arrangements at covered 
clearing agencies by requiring board members and senior management to 
have appropriate experience and skills to discharge their duties and 
responsibilities.
    Compliance with these proposed requirements could reduce the risk 
that insufficient internal controls within a covered clearing agency 
endanger broader financial stability. While the benefits of compliance 
are difficult to quantify, the Commission preliminarily believes that 
they flow predominantly from a reduced probability of covered clearing 
agency default.
iii. Proposed Rule 17Ad-22(e)(3): Comprehensive Framework for the 
Management of Risks
    The Commission preliminarily believes that proposed Rule 17Ad-
22(e)(3) would aid covered clearing agencies in implementing a 
systematic process to examine risks and assess the probability and 
impact of those risks.\706\ Proposed Rule 17Ad-22(e)(3)(i) specifies 
that a risk management framework include policies and procedures 
reasonably designed to identify, measure, monitor, and manage the range 
of risks that arise in or are borne by the covered clearing agency. 
Critically, these policies and procedures would be subject to review on 
a specified basis and approval by the board of directors annually. A 
sound framework for comprehensive risk management under regular review 
would have the benefits of providing covered clearing agencies with a 
better awareness of the totality of risks they face in the dynamic 
markets they serve. In addition, the requirement to have policies and 
procedures that provide for an independent audit committee of the board 
and that provide internal audit and risk management functions with 
sufficient resources, authority, and independence from management, as 
well as access to risk and audit committees of the board, would 
reinforce governance arrangements directly related to risk management 
at covered clearing agencies. A holistic approach to risk management 
could help ensure that policies and procedures that covered clearing 
agencies adopt pursuant to the proposed rules work in tandem with one 
another. For example, such an approach could result in risk-based 
membership standards under proposed Rule 17Ad-22(e)(18) that are 
consistent with policies and procedures related to the allocation of 
credit losses under proposed Rule 17Ad-22(e)(13)(i). The Commission 
preliminarily believes ensuring that a covered clearing agency's risk 
management activities fit within a unified framework could mitigate the 
risk of financial losses to covered clearing agencies' members and 
participants in the markets they serve.
---------------------------------------------------------------------------

    \706\ See supra Part II.B.3 (discussing the full set of 
requirements under proposed Rule 17Ad-22(e)(3)).
---------------------------------------------------------------------------

    Additionally, the proposed rule extends requirements under Rules 
17Ad-22(d)(4) and 17Ad-22(d)(11) by requiring plans for recovery and 
wind-down.\707\ To the extent that covered clearing agencies do not 
already have such plans in place, they may incur additional incremental 
costs. Plans for recovery and wind-down benefit both clearing members 
and, more generally, participants in markets where products are 
cleared. Many of the costs and benefits of such plans depend critically 
on the specific recovery and wind-down tools that covered clearing 
agencies choose to include in their rules. The presence of such plans 
could reduce uncertainty over the allocation of financial losses to 
clearing members in the event that a covered clearing agency faces 
losses due to member default or for other reasons that exceed its 
prefunded default resources. Further, recovery and wind-down plans that 
detail the circumstances under which clearing services may be suspended 
or terminated may mitigate the risk of market disruption in periods of 
financial stress. Market participants who face the possibility that the 
assets they trade may no longer be cleared and settled by a CCP may be 
unwilling to trade such assets at times when risk sharing is most 
valuable. While the effects are difficult to quantify, the Commission 
preliminarily believes that recovery and wind-down plans may support 
liquidity in times of financial stress.
---------------------------------------------------------------------------

    \707\ See supra Part II.B.3.b (discussing the requirements for 
recovery and orderly wind-down plans under proposed Rule 17Ad-
22(e)(3)(ii)).
---------------------------------------------------------------------------

    Based on its supervisory experience, the Commission preliminarily 
believes that all covered clearing agencies have an independent audit 
committee of the board and most covered clearing agencies already have 
some rules governing recovery and wind-down of clearing operations but 
have plans that vary in their degree of formality. As a result, the 
benefits and costs associated with these requirements will likely be 
limited to incremental changes associated with covered clearing 
agencies' review of their policies and procedures for recovery and 
wind-down and to registered clearing agencies that move into the set of 
covered clearing agencies.

[[Page 29597]]

iv. Proposed Rules 17Ad-22(e)(4) Through (7): Financial Risk Management
(1) Proposed Rule 17Ad-22(e)(4): Credit Risk
    Proposed Rule 17Ad-22(e)(4) would establish requirements for credit 
risk management by covered clearing agencies.\708\ Based on its 
supervisory experience, the Commission preliminarily believes that all 
entities that would be covered clearing agencies are already in 
compliance with proposed Rules 17Ad-22(e)(4)(i) through (iv). Pursuant 
to Rule 17Ad-22(b)(3), registered clearing agencies that provide CCP 
services currently maintain additional financial resources to meet the 
``cover one'' requirement, and registered clearing agencies that would 
be complex risk profile clearing agencies under the proposed rules 
currently maintain financial resources to meet the ``cover two'' 
requirement.\709\ All covered clearing agencies exclude resources that 
are not prefunded when calculating this coverage.\710\ As a result, the 
Commission preliminarily believes little or no additional direct costs 
or benefits will result from these requirements unless registered 
clearing agencies were to become covered clearing agencies and include 
resources that are not prefunded towards their resource requirements. 
The requirement to include only prefunded resources when calculating 
the financial resources available to meet the standards under proposed 
Rules 17Ad-22(e)(4)(i) through (iii) potentially reduces the risk that 
covered clearing agencies request financial resources from their 
members in times of financial stress, when members are least able to 
provide these resources.
---------------------------------------------------------------------------

    \708\ See supra Part II.B.4.c (discussing the full set of 
requirements under proposed Rule 17Ad-22(e)(4)).
    \709\ The Commission also notes that no covered clearing agency 
would be systemically important in multiple jurisdictions unless and 
until the Commission made such a determination pursuant to proposed 
Rule 17Ab2-2. See supra Part II.C and infra Part VII (discussing the 
determinations process under proposed Rule 17Ab2-2 and providing 
proposed rule text, respectively).
    \710\ See supra Part IV.B.3.b.i (discussing current practices 
regarding credit risk management at registered clearing agencies).
---------------------------------------------------------------------------

    While requiring ``cover two'' for complex risk profile clearing 
agencies and for covered clearing agencies designated systemically 
important in multiple jurisdictions would place additional burdens on 
the affected clearing agencies, the Commission preliminarily believes 
that the requirement is appropriate because disruption to these 
entities due to member default carries relatively higher expected costs 
than for other covered clearing agencies. These relatively higher 
expected costs arise from the fact that covered clearing agencies 
designated systemically important in multiple jurisdictions are exposed 
to foreign financial markets and may serve as a conduit for the 
transmission of risk; for complex risk profile clearing agencies, high 
expected costs may arise from discrete jump-to-default price changes in 
the products they clear and higher correlations in the default risk of 
members.\711\
---------------------------------------------------------------------------

    \711\ Cf. PFMI Report, supra note 1, at 43 (discussing Principle 
4, Explanatory Note 3.4.19).
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(4)(vi) and (vii) would also impose 
additional costs by requiring additional measures to be taken with 
respect to the testing of a covered clearing agency's financial 
resources and model validation of a covered clearing agency's credit 
risk models. These requirements do not currently exist as part of the 
standards applied to registered clearing agencies.\712\ Covered 
clearing agencies may incur additional costs under expanded and more 
frequent testing of total financial resources if the formal requirement 
that results of monthly testing be reported to appropriate decision 
makers is a practice not currently used by covered clearing agencies. A 
range of costs for these new requirements is discussed in Part 
IV.C.3.a.iv(5).
---------------------------------------------------------------------------

    \712\ Rule 17Ad-22(b)(4) requires a registered clearing agency's 
policies and procedures be reasonably designed to provide for an 
annual validation of its margin models and the related parameters 
and assumptions. See 17 CFR 240.17Ad-22(b)(4).
---------------------------------------------------------------------------

    Frequent monitoring and stress testing of total financial 
resources, conforming model validations, and reporting of results of 
the monitoring and testing to appropriate personnel within the clearing 
agency could help rapidly identify any gaps in resources required to 
ensure stability, even in scenarios not anticipated on the basis of 
historical data. Moreover, the requirement to test and, when necessary, 
update the assumptions and parameters supporting models of credit risk 
will support the adjustment of covered clearing agency financial 
resources to changing financial conditions, and mitigate the risk that 
covered clearing agencies will strategically manage updates to their 
risk models in support of cost reduction or profit maximization.
(2) Proposed Rule 17Ad-22(e)(5): Collateral
    Proposed Rule 17Ad-22(e)(5) would require a covered clearing agency 
to have policies and procedures reasonably designed to limit the assets 
it accepts as collateral to those with low credit, liquidity, and 
market risks, and to set and enforce appropriately conservative 
haircuts and concentration limits. Collateral haircut and concentration 
limit models would be subject to a not-less-than-annual review of their 
sufficiency.\713\ Rule 17Ad-22(d)(3) currently requires registered 
clearing agencies to have policies and procedures reasonably designed 
to hold assets in a manner that minimizes risk of loss or risk of delay 
in access to them and invest assets in instruments with minimal credit, 
market, and liquidity risk.
---------------------------------------------------------------------------

    \713\ See supra Part II.B.4.d (discussing the full set of 
requirements under proposed Rule 17Ad-22(e)(5)).
---------------------------------------------------------------------------

    By focusing on the nature of assets and not on accounts, the 
Commission preliminarily believes the proposed rule may allow covered 
clearing agencies the ability to manage collateral more efficiently. In 
particular, under the proposed rule, a covered clearing agency would 
have the option of accepting collateral that is riskier than cash and 
holding this collateral at commercial banks, potentially increasing 
default risk exposure. On the other hand, the requirement to regularly 
review concentration limits and haircuts mitigates the risk that a 
covered clearing agency's collateral policies fail to respond to 
changing economic conditions. Based on its supervisory experience, the 
Commission understands that all registered clearing agencies that would 
meet the definition of a covered clearing agency already conform to the 
requirements under the proposed rule related to the nature of assets 
they may accept as collateral and the haircuts and concentration limits 
they apply to collateral assets, so the associated costs and benefits 
that would result from these requirements would apply only if 
registered clearing agencies not already in compliance were to become 
covered clearing agencies.
    As a result of the proposed rule, these covered clearing agencies 
and registered clearing agencies that become covered clearing agencies 
may experience additional costs as a result of the proposed annual 
review requirements for the sufficiency of collateral haircut and 
concentration limit models. Based on its supervisory experience, the 
Commission preliminarily believes that many clearing agencies that 
require collateral would need to develop policies and procedures to 
review haircuts and concentration limits annually. Enforcement of the 
proposed

[[Page 29598]]

haircut requirement would also require additional resources. A range of 
costs for these new requirements is discussed in Part IV.C.3.a.iv(5). 
Adherence to the new requirements by these entrants could extend the 
benefits of prompt loss coverage, incentive alignment, and systemic 
risk mitigation to a larger volume of cleared transactions.
(3) Proposed Rule 17Ad-22(e)(6): Margin
    Proposed Rule 17Ad-22(e)(6) would require a covered clearing agency 
that provides CCP services to have policies and procedures reasonably 
designed to require it to cover credit exposures using a risk-based 
margin system and to establish minimum standards for such a system. It 
would require these policies and procedures to cover daily collection 
of variation margin. The proposed rule also requires a set of policies 
and procedures generally designed to support a reliable margin system. 
Among these are policies and procedures to ensure the use of reliable 
price data sources and appropriate methods for measuring credit 
exposure, which could improve margin system accuracy. Finally, covered 
clearing agencies would be required to have policies and procedures 
related to the testing and verification of margin models.\714\ Proposed 
Rules 17Ad-22(a)(6) and (14) support these requirements by addressing 
the means of verification for margin models and the level of coverage 
required of a margin system against potential future exposures, 
respectively. Based on its supervisory experience, however, the 
Commission understands that all current covered clearing agencies have 
policies and procedures that conform to the requirements under proposed 
Rules 17Ad-22(e)(6)(i) through (v) and (vii), and some will have to 
update their policies and procedures to comply with proposed Rule 17Ad-
22(e)(6)(vi).
---------------------------------------------------------------------------

    \714\ See supra Part II.B.4.e (discussing the full set of 
requirements under proposed Rule 17Ad-22(e)(6)).
---------------------------------------------------------------------------

    Similar to proposed Rules 17Ad-22(e)(4) and (7), covered clearing 
agencies that do not already engage in backtesting of margin resources 
at least once each day or engage in a monthly analysis of assumptions 
and parameters, as well as registered clearing agencies that enter into 
the set of covered clearing agencies in the future, may incur 
incremental compliance costs as a result of the proposed rule. Since 
margin plays a key role in clearing agency risk management, however, 
requiring that margin be periodically verified and modified as a result 
of changing market conditions may mitigate the risks posed by covered 
clearing agencies to financial markets in periods of financial stress. 
Further, periodic review of model specification and parameters reduces 
the likelihood that covered clearing agencies opportunistically update 
margin models in times of low volatility and fail to update margin 
models in times of high volatility. A range of costs for verification 
and modification of margin models is discussed in Part IV.C.3.a.iv(5). 
Further, since risk-based initial margin requirements may cause market 
participants to internalize some of the costs borne by the CCP as a 
result of large or risky positions,\715\ ensuring that margin models 
are well-specified and correctly calibrated with respect to economic 
conditions will help ensure that they continue to align the incentives 
of clearing members with the goal of financial stability.
---------------------------------------------------------------------------

    \715\ See e.g., Philipp Haene & Andy Sturm, Optimal Central 
Counterparty Risk Management (Swiss Nat'l Bank Working Paper, June 
2009) (addressing the tradeoff between margin and default fund, 
considering collateral costs, clearing member default probability, 
and the extent to which margin requirements are associated with risk 
mitigating incentives).
---------------------------------------------------------------------------

(4) Proposed Rule 17Ad-22(e)(7): Liquidity Risk
    Proposed Rule 17Ad-22(e)(7) would require a covered clearing agency 
to have policies and procedures reasonably designed to effectively 
monitor, measure, and manage liquidity risk.\716\ Parties to securities 
and derivatives transactions rely on clearing agencies for prompt 
clearance and settlement of transactions. Market participants in 
centrally cleared and settled markets are often linked to one another 
through intermediation chains in which one party may rely on proceeds 
from sales of cleared products to meet payment obligations to another 
party. If insufficient liquidity causes a clearing agency to fail to 
meet settlement or payment obligations to its members, consequences 
could include the default of a clearing member who may be depending on 
these funds to make a payment to another market participant, with 
losses then transmitted to others that carry exposure to this market 
participant if the market participant is depending on payments from the 
clearing members to make said payments to others. Therefore, the 
benefits related to liquidity risk management generally flow from the 
reduced risk of systemic risk transmission by covered clearing agencies 
as a result of liquidity shortfalls, either in the normal course of 
operation or as a result of member default.
---------------------------------------------------------------------------

    \716\ See supra Part II.B.4.f (discussing the full set of 
requirements under proposed Rule 17Ad-22(e)(7)).
---------------------------------------------------------------------------

    Enhanced liquidity risk management may produce additional benefits. 
Clearing members would face less uncertainty over whether a covered 
clearing agency has the liquidity resources necessary to make prompt 
payments which would reduce any need to hedge the risk of nonpayment. 
Potential benefits from enhanced liquidity risk management may also 
extend beyond members of covered clearing agencies or markets for 
centrally cleared and settled securities. Clearing members are often 
members of larger financial networks, and the ability of a covered 
clearing agency to meet payment obligations to its members can directly 
affect its members' ability to meet payment obligations outside of the 
cleared market. Thus, management of liquidity risk may mitigate the 
risk of contagion between asset markets.
    Based on its supervisory experience, the Commission preliminarily 
believes that some covered clearing agencies would need to create new 
policies and procedures, or update existing policies and procedures, to 
meet requirements under the various subsections of proposed Rule 17Ad-
22(e)(7). These actions would entail compliance costs, as noted in Part 
III.B.2. Further, the Commission preliminarily believes that for some 
covered clearing agencies the proposed requirements would require them 
to establish new practices. The cost of adherence to the proposed rule 
would likely be passed on to market participants in cleared markets, as 
discussed in more detail below.
    Under proposed Rule 17Ad-22(e)(7)(i), a covered clearing agency 
would be required to have policies and procedures reasonably designed 
to require maintaining sufficient resources to achieve ``cover one'' 
for liquidity risk. This requirement mirrors the ``cover one'' 
requirement for credit risk in proposed Rule 17Ad-22(e)(4)(iii). Based 
on its supervisory experience, the Commission preliminarily believes 
that many covered clearing agencies do not currently meet a ``cover 
one'' requirement for liquidity and thus will likely incur costs to 
comply with this proposed rule. As discussed earlier, whether covered 
clearing agencies choose to gather liquidity directly from members or 
instead choose to rely on third-party arrangements, the costs of 
liquidity may be passed on to other market participants, eventually

[[Page 29599]]

increasing transaction costs.\717\ The requirement may, however, reduce 
the procyclicality of covered clearing agencies' liquidity demands, 
which may reduce costs to market participants in certain situations. 
For instance, the requirement would reduce the likelihood that a 
covered clearing agency would have to call on its members to contribute 
additional liquidity in periods of financial stress, when liquidity may 
be most costly.
---------------------------------------------------------------------------

    \717\ See supra Part IV.C.1.d (discussing the effect of the 
proposed rules on concentration in the market for clearing services 
and among clearing members).
---------------------------------------------------------------------------

    Under proposed Rule 17Ad-22(e)(7)(ii), a covered clearing agency 
would be required to have policies and procedures reasonably designed 
to ensure that it meets the minimum liquidity resource requirement in 
proposed Rule 17Ad-22(e)(7)(i) with qualifying liquid resources.\718\ 
Qualifying liquid resources would include cash held at the central bank 
or at a creditworthy commercial bank, assets that are readily converted 
into cash pursuant to committed lines of credit, committed foreign 
exchange swaps, committed repurchase agreements or other highly 
reliable prearranged funding agreements, or assets that may be pledged 
to a central bank in exchange for cash (if the covered clearing agency 
has access to routine credit at a central bank). The Commission notes 
that the proposed rules allow covered clearing agencies some measure of 
flexibility in managing qualifying liquid resources and that covered 
clearing agencies would be able to use creditworthy commercial bank 
services where appropriate.
---------------------------------------------------------------------------

    \718\ See proposed Rule 17Ad-22(a)(15), infra Part VII (defining 
``qualifying liquid resources'').
---------------------------------------------------------------------------

    Based on its supervisory experience, the Commission preliminarily 
believes that some covered clearing agencies currently do not meet the 
proposed liquidity requirements with qualifying liquid resources. As an 
alternative to the proposed rules, the Commission could have restricted 
the definition of qualifying liquid resources to assets held by covered 
clearing agencies. These covered clearing agencies and the markets they 
serve would benefit from the proposed minimum requirements for 
liquidity resources in terms of the reduced risk of liquidity 
shortfalls and associated contagion risks described above. However, 
qualifying liquid resources may be costly for covered clearing agencies 
to maintain on their own balance sheets. Such resources carry an 
opportunity cost. Assets held as cash are, by definition, not available 
for investment in less liquid assets that may be more productive uses 
of capital. This cost may ultimately be borne by clearing members who 
contribute liquid resources to covered clearing agencies to meet 
minimum requirements under proposed Rule 17Ad-22(e)(7)(ii) and their 
customers.
    The Commission notes that, under the proposed rules, covered 
clearing agencies have flexibility to meet their qualifying liquid 
resource requirements in a number of ways. In perfect capital markets, 
maintaining on-balance-sheet liquidity resources should be no more 
costly than entering into committed lines of credit or prearranged 
funding agreements backed by less-liquid assets that would allow these 
assets to be converted into cash. However, market frictions, such as 
search frictions, may enable banks to obtain liquidity at lower cost 
than other firms. In the presence of such frictions, obtaining 
liquidity using committed and uncommitted funding arrangements provided 
by banks may prove a less costly option for some covered clearing 
agencies than holding additional liquid resources on their balance 
sheets. In particular, the Commission preliminarily believes that 
requiring covered clearing agencies to enter into committed or 
uncommitted funding arrangements would decrease the costs that would be 
experienced by them in the event they sought to liquidate securities 
holdings during periods of market disruptions and increase the 
likelihood that they meet funding obligations to market participants by 
reducing the risk of delay in converting non-cash assets into cash.
    The Commission notes that committed or uncommitted funding 
arrangements would only count towards minimum requirements to the 
extent that covered clearing agencies had securities available to post 
as collateral, so use of these facilities may require covered clearing 
agencies to require their members to contribute more securities. If 
these securities are costly for clearing members to supply, then 
additional required contributions to meet minimum requirements under 
proposed Rule 17Ad-22(e)(7)(ii) may impose burdens on clearing members 
and their customers. Similarly, prearranged funding arrangements may 
entail implicit costs to clearing members. Prearranged funding 
arrangements could impose costs on clearing members if they are 
obligated to contribute securities towards a collateral pool that the 
covered clearing agency would use to back borrowing. Alternatively, 
clearing members may be obligated under a covered clearing agency's 
rules to act as counterparties to repurchase agreements. Under the 
latter scenario, clearing members would bear costs associated with 
accepting securities in lieu of cash. Additionally, the Commission 
notes certain explicit costs specifically associated with these 
arrangements outlined below.
    Counterparties to committed arrangements allowable under proposed 
Rule 17Ad-22(a)(15) charge covered clearing agencies a premium to 
provide firm liquidity commitments and additional out-of-pocket 
expenses will be incurred establishing and maintaining committed 
liquidity arrangements. The Commission preliminarily estimates that the 
total cost of committed funding arrangements will be approximately 30 
basis points per year, including upfront fees, legal fees, commitment 
fees, and collateral agent fees.\719\ Furthermore, the Commission is 
aware of other potential consequences of these arrangements. In some 
instances, they may cause entities outside of a covered clearing agency 
to bear risks ordinarily concentrated within the covered clearing 
agency, while, in others, these arrangements may result in increased 
exposure of covered clearing agencies to certain members.\720\ 
Financial intermediaries that participate in committed credit 
facilities may be those least able to provide liquidity in times of 
financial stress, so these commitments may represent a route for risk 
transmission.\721\ Finally, the Commission notes that covered clearing 
agencies may face constraints in the size of credit facilities 
available to them. Recent market statistics have estimated the total 
size of the committed credit facility market in the U.S. at $1.2 
trillion with only 12 of 1800 facilities exceeding $10 billion in 
size.\722\ Given the volume of activity at covered clearing agencies, 
it is possible that they may only be able to use committed credit 
facilities to meet a portion of their liquidity

[[Page 29600]]

requirements under proposed Rule 17Ad-22(e)(7)(ii).
---------------------------------------------------------------------------

    \719\ See Letter from Kim Taylor, President, CME Clearing, to 
Melissa Jurgens, Office of the Secretariat, CFTC, Sept. 16, 2013, at 
13 & n.48 (noting CME's assumption that the cost of committed 
liquidity or committed repurchase facilities is approximately $3 
million for every $1 billion of required committed facilities, 
including upfront fees, commitment fees, legal fees, and collateral 
agent fees).
    \720\ See id. at 11.
    \721\ See Letter from Robert C. Pickel, CEO, ISDA to Secretary, 
CFTC, Sept. 16, 2013, at 4 (discussing collateral and liquidity 
requirements); see also Craig Pirrong, Clearing and Collateral 
Mandates: A New Liquidity Trap?, 24 J. Applied Corp. Fin. 67 (2012).
    \722\ See Bloomberg, Global Syndicated Loans, 1st Half 2013 
League Tables (July 1, 2013), available at http://www.bloomberg.com/professional/files/2012/08/Global-Syndicated-Loans-2012.pdf.
---------------------------------------------------------------------------

    A covered clearing agency may alternatively use a prearranged 
funding arrangement determined to be highly reliable in extreme but 
plausible market conditions to raise liquid resources backed by non-
cash assets but that does not require firm commitments from liquidity 
providers. This strategy would avoid certain of the explicit fees 
associated with firm commitments, while incurring costs related to the 
annual review and maintenance of such arrangements. Based on its 
supervisory experience and discussions with market participants, the 
Commission preliminarily believes the cost associated with commitment 
fees to be between 5 and 15 basis points per year. Given the 30 basis 
point cost associated with committed funding arrangements, mentioned 
above, uncommitted facilities could entail costs of between 15 and 25 
basis points.\723\ Prearranged funding arrangements may ultimately 
prove less costly than holding cash and may be more widely available 
than committed arrangements, while still reducing the likelihood of 
delay faced by covered clearing agencies that attempt to market less-
liquid assets. As mentioned above in the context of committed credit 
facilities, the Commission acknowledges that financial institutions who 
offer to provide liquidity to covered clearing agencies on an 
uncommitted basis may be least able to do so in times of financial 
stress, when access to liquidity is most needed by the covered clearing 
agency. Without a commitment in place, counterparties retain the option 
to fail to provide liquidity during stressed conditions, when liquidity 
is most valuable to clearing agencies and the markets they serve. To 
the extent covered clearing agencies may establish requirements for 
clearing members to provide liquidity to ensure compliance with the 
Commission's proposed rules, the costs experienced by members 
indirectly may exceed those associated with committed credit 
facilities.
---------------------------------------------------------------------------

    \723\ Subtracting the lower bound of commitment fees (5 basis 
points) from the estimated total cost of a committed facility (30 
basis points) yields an estimate of the upper bound of the fees 
associated with an uncommitted facility (30 - 5 = 25 basis points). 
We estimate the lower bound of fees associated with an uncommitted 
facility analogously (30 - 15 = 15 basis points).
---------------------------------------------------------------------------

    Finally, covered clearing agencies that have access to routine 
credit at a central bank could meet the qualifying liquid resources 
requirement with assets that are pledgeable to a central bank. The 
Commission notes that this may represent the lowest cost option for 
covered clearing agencies, but understands that this latter provision 
would represent an advantage only if and when a covered clearing agency 
receives the benefit of access to routine central bank borrowing. The 
Commission anticipates that at such future time access to routine 
credit at a central bank would provide covered clearing agencies with 
additional flexibility with respect to resources used to comply with 
the liquidity risk management requirements of proposed Rules 17Ad-
22(e)(7)(i) and (ii).
    The total cost of maintaining qualifying liquid resources pursuant 
to proposed Rules 17Ad-22(e)(7)(i) and (ii) is composed of the cost of 
each liquidity source including assets held by covered clearing 
agencies, committed credit facilities and prearranged funding 
agreements, multiplied by the quantity of each of these liquidity 
sources held by covered clearing agencies. The Commission is unable to 
quantify the cost of cash held by clearing agencies and securities 
required to back credit facilities since such estimates would require 
detailed information about additional required contributions of 
clearing members under the proposed rules, as well as clearing members' 
best alternative to holding cash and securities.\724\ As mentioned 
above, however, the Commission has limited information about the costs 
associated with committed and uncommitted credit facilities. Based on 
this information, we are able to quantify the costs associated with 
committed credit facilities that will result from the requirement to 
maintain qualifying liquid resources. The Commission preliminarily 
estimates that the cost of compliance with the proposed rules will be 
between $133 million and $225 million per year as a result of the 
requirement to enter into prearranged funding agreements for non-cash 
assets used to meet liquidity requirements under proposed Rules 17Ad-
22(e)(7)(i) and (ii). This analysis assumes that covered clearing 
agencies will enter into such agreements at arm's length on an 
uncommitted basis. Based on staff discussions with market participants, 
the Commission understands that alternative arrangements between 
covered clearing agencies and their members may be obtained at lower 
cost, though these arrangements may come with increased wrong-way 
risk.\725\
---------------------------------------------------------------------------

    \724\ Covered clearing agencies may choose to allocate liquidity 
burdens based on a number of factors related to the markets they 
serve and their membership. See, e.g., Exchange Act Release No. 34-
70999 (Dec. 5, 2013), 78 FR 75400 (Dec. 11, 2013) (Commission order 
approving NSCC rule change to institute supplemental liquidity 
deposits to its clearing fund designed to increase liquidity 
resources to meet its liquidity needs).
    \725\ To produce this range, the Commission used a combination 
of publicly available information from SRO rule filings, comment 
letters, and 2012 annual financial statements, and non-public 
information gathered as a result of its regulatory role. For each 
covered clearing agency, the Commission assumed that the covered 
clearing agency's guaranty fund represents the sole source of 
liquidity used to satisfy its minimum liquidity requirements under 
the proposed rules. To compute the level of qualifying liquid 
resources currently held by each covered clearing agency, the 
Commission assumed that cash in the covered clearing agency's 
guaranty fund remains fixed at current levels and added to this any 
amount from credit facilities that could be backed by the value of 
securities held in the covered clearing agency's guaranty funds.
    Taking the sum of these current qualifying liquid resources over 
all covered clearing agencies and subtracting this from the sum of 
the ``cover one'' guaranty fund requirement over all covered 
clearing agencies results in the total shortfall relative to minimum 
requirements under proposed Rules 17Ad-22(e)(7)(i) and (ii). The 
Commission further assumed that covered clearing agencies would 
cover this shortfall using prearranged funding agreements backed by 
additional securities posted to guaranty funds by clearing members. 
Finally, the Commission multiplied the total prearranged funding 
amount by between 0.15% and 0.25% to arrive at a range of ongoing 
costs.
---------------------------------------------------------------------------

    U.S. Treasury securities would not fall under the proposed 
definition of qualifying liquid resources. The Commission understands 
that U.S. Treasury markets represent some of the largest and most 
liquid markets in the world, see Part IV.B.3.f.ii, and that, in 
``flights to quality'' and ``flights to liquidity'' in times of 
financial stress, U.S. Treasuries trade at a premium to other 
assets.\726\ If, as an alternative to the proposed rules, the 
Commission included U.S. government securities in the definition of 
qualifying liquid resources, the Commission preliminarily estimates the 
cost of complying with requirements under proposed Rule 17Ad-
22(e)(7)(i) and (ii) would be reduced by between $9

[[Page 29601]]

million and $225 million per year.\727\ The Commission preliminarily 
believes, however, that there are benefits to including government 
securities only if prearranged funding agreements exist. In particular, 
given the quantity of these securities financed by the largest 
individual dealers, fire-sale conditions could materialize if 
collateral is liquidated in a disorderly manner, which could prevent 
covered clearing agencies from meeting payment obligations.\728\
---------------------------------------------------------------------------

    \726\ See Alessandro Beber, Michael W. Brandt & Kenneth A. 
Kavajecz, Flight-to-Quality or Flight-to-Liquidity? Evidence from 
the Euro-Area Bond Market, 22 Rev. Fin. Stud. 925 (2009) 
(decomposing sovereign yield spreads into credit and liquidity 
components and showing that credit quality matters for bond 
valuation but that, in times of market stress, investors chase 
liquidity, not quality); Markus K. Brunnermeier & Lasse Heje 
Pedersen, Market Liquidity and Funding Liquidity, 22 Rev. Fin. Stud. 
2201 (2009) (showing, in a theoretical model, how with low wealth 
shocks, demand for illiquid assets falls off more sharply than 
demand for liquid assets); Francis A. Longstaff, The Flight-to-
Liquidity Premium in U.S. Treasury Bond Prices, 77 J. Bus 511 (2004) 
(estimating the liquidity premium associated with U.S. Treasuries 
relative to close substitutes); Dimitri Vayanos Flight to Quality, 
Flight to Liquidity, and the Pricing of Risk (NBER Working Paper No. 
10327, Feb. 2004) (showing, in a theoretical model, that during 
volatile times, assets' liquidity premia increase), available at 
http://www.nber.org/papers/w10327.pdf.
    \727\ The Commission re-estimated the level of prearranged 
funding agreements required to meet requirements under proposed 
Rules 17Ad-22(e)(7)(i) and (ii) using the data and methodology 
described in note 725, except in this case the Commission assumed 
that all non-defaulting member resources applied to funding 
obligations were a mix of cash and U.S. Treasuries for a lower 
bound, and assumed that all resources applied to funding obligations 
were a mix of cash and U.S. Treasuries for an upper bound.
    Taking the sum of these current qualifying liquid resources over 
all covered clearing agencies and subtracting this from the sum of 
cover one guaranty fund requirement over all covered clearing 
agencies results in the total shortfall relative to minimum 
requirements under proposed Rules 17Ad-22(e)(7)(i) and (ii) if U.S. 
government and agency securities were considered qualifying liquid 
resources. As above, the Commission further assumed that covered 
clearing agencies would cover this shortfall using prearranged 
funding agreements backed by additional securities posted to 
guaranty funds by clearing members and multiplied this amount by 
between 0.15% and 0.25% to arrive at a range of ongoing costs.
    \728\ Brian Begalle et al., The Risk of Fire Sales in the Tri-
Party Repo Market, at 19 & n.37 (FRBNY Staff Report No. 616, May 
2013), available at http://www.newyorkfed.org/research/staff_reports/sr616.pdf.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(7)(iii) concerns access to accounts and 
services at a central bank, when available and where practical.\729\ 
The Commission preliminarily believes that it may be beneficial for 
covered clearing agencies to use central bank account services because 
doing so would reduce exposure to commercial bank default risk. 
Moreover, for some covered clearing agencies, central bank services may 
represent the lowest-cost admissible funding arrangement under the 
proposed rule. The Commission understands, however, that central bank 
services are only currently available to a subset of covered clearing 
agencies, and the proposed rule only requires policies and procedures 
to ensure use of central bank accounts and services when practical and 
available.
---------------------------------------------------------------------------

    \729\ See proposed Rule 17Ad-22(e)(7)(iii), infra Part VII.
---------------------------------------------------------------------------

    Proposed Rules 17Ad-22(e)(7)(iv) and (v) address relations between 
covered clearing agencies and their liquidity providers. The Commission 
preliminarily believes that a key benefit of these proposed rules would 
be an increased level of assurance that liquidity providers would be 
able to supply liquidity to covered clearing agencies on demand. Such 
assurance is especially important because of the possibility that 
covered clearing agencies may rely on outside liquidity providers to 
convert non-cash assets into cash using prearranged funding 
arrangements or committed facilities, pursuant to proposed Rule 17Ad-
22(e)(7)(ii) and the definition of qualifying liquid resources in 
proposed Rule 17Ad-22(a)(15). The required policies and procedures 
would ensure the covered clearing agency undertakes due diligence to 
confirm that it has a reasonable basis to believe each of its liquidity 
providers understand the liquidity risk borne by the liquidity 
provider, and that the liquidity provider would have the capacity to 
provide liquidity under commitments to the covered clearing agency. 
Finally, covered clearing agencies would be required, under the 
proposed rule, to maintain and test the covered clearing agency's 
procedures and operational capacity for accessing liquidity under their 
agreements. The Commission preliminarily believes that, besides the 
costs associated with new or updated policies and procedures discussed 
in Part III.B.2, covered clearing agencies and liquidity providers may 
experience costs associated with the proposed rules as a result of the 
requirement to test liquidity resources, such as, for example, fees 
associated with conducting test draws on a covered clearing agency's 
credit lines. Costs associated with ongoing monitoring and compliance 
related to testing are included in the Commission's estimate of 
quantifiable costs presented in Part IV.C.3.d.
    Proposed Rules 17Ad-22(e)(7)(vi) and (vii) may impose costs on 
covered clearing agencies as a result of requirements for testing the 
sufficiency of liquidity resources and validating models used to 
measure liquidity risk. The testing and model validation requirements 
of these proposed rules are similar to requirements for testing and 
model validation for credit risk in proposed Rules 17Ad-22(e)(4)(vi) 
and (vii), and the Commission preliminarily believes that these 
proposed rules would yield similar benefits. Frequent monitoring and 
testing liquidity resources could help rapidly identify any gaps in 
resources required to meet payment obligations. Moreover, the 
requirement to test and, when necessary, update the assumptions and 
parameters supporting models of liquidity risk will support the 
adjustment of covered clearing agency liquidity resources to changing 
financial conditions and mitigate the risk that covered clearing 
agencies will strategically manage updates to their liquidity risk 
models in support of cost-reduction or profit-maximization.
    Proposed Rule 17Ad-22(e)(7)(viii) addresses liquidity shortfalls at 
a covered clearing agency, and the Commission preliminarily believes 
the proposed rule would reduce ambiguity related to settlement delays 
in the event of liquidity shocks. Among other things, by requiring 
procedures that seek to avoid delay of settlement payments, this 
proposed rule would require covered clearing agencies to address 
liquidity concerns in advance rather than relying on strategies of 
delaying accounts payable in the event of liquidity shocks. As 
discussed previously, effective liquidity risk management by covered 
clearing agencies that serves to eliminate uncertainty on the part of 
clearing members that payments by the covered clearing agency will be 
made on time may allow these clearing members to allocate their 
liquidity resources to more efficient uses than holding precautionary 
reserves.\730\ The Commission preliminarily believes the proposed rule 
may reduce some of the flexibility covered clearing agencies have in 
the absence of the proposed rule, which could impose additional burdens 
on these clearing agencies as discussed in Part IV.C.1.b.
---------------------------------------------------------------------------

    \730\ See supra Part IV.C.2.b.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(7)(ix) would require a covered clearing 
agency to have policies and procedures reasonably designed to describe 
its process for replenishing any liquid resources that it may employ 
during a stress event.\731\ The ability to replenish liquidity 
resources is critical to ensure that covered clearing agencies are able 
to continue operations after a stress event. Beyond the general 
benefits associated with liquidity risk management noted earlier, this 
proposed rule would yield particular benefits insofar as it would 
reduce uncertainty about covered clearing agency liquidity resources at 
precisely those times when information about liquidity may be most 
important to market participants.
---------------------------------------------------------------------------

    \731\ See proposed Rule 17Ad-22(e)(7)(ix), infra Part VII.
---------------------------------------------------------------------------

    Finally, proposed Rule 17Ad-22(e)(7)(x) would require a covered 
clearing agency that provides CCP services and is either systemically 
important in multiple jurisdictions or is a clearing agency involved in 
activities with a more complex risk profile to conduct a feasibility 
analysis for ``cover

[[Page 29602]]

two.'' \732\ The primary cost associated with this rule will be an 
annual analysis by the affected covered clearing agencies. Costs 
associated with a feasibility study would likely include the cost of 
staffing and consulting, which will depend on the scope of products 
cleared and the particular approach taken by each covered clearing 
agencies. The costs associated with this requirement are included in 
Part IV.C.3.d.
---------------------------------------------------------------------------

    \732\ See proposed Rule 17Ad-22(e)(7)(x), infra Part VII.
---------------------------------------------------------------------------

(5) Testing and Validation of Risk Models
    Proposed Rules 17Ad-22(e)(4) through (7) include requirements for 
covered clearing agencies to have policies and procedures reasonably 
designed to test and validate models related to financial risks. 
Covered clearing agencies may incur additional costs under expanded and 
more frequent testing of financial resources if the proposed 
requirements for testing and validation do not conform to practices 
currently used by covered clearing agencies.\733\ These costs are 
composed of two portions. The first encompasses startup costs related 
to collection and storage of data elements necessary to implement 
testing and validation, along with investments in software tools and 
human capital to support these functions. The second portion of costs 
includes the ongoing, annual costs of conducting testing and validation 
under the proposed rules.
---------------------------------------------------------------------------

    \733\ The Commission notes that while the stress testing 
provisions in proposed Rules 17Ad-22(e)(4) through (7) include new 
requirements for covered clearing agencies, Rule 17Ad-22(b)(4) 
requires registered clearing agencies that provide CCP services for 
security-based swaps to have policies and procedures for a general 
margin model validation requirement. See supra note 712.
---------------------------------------------------------------------------

    Based on its supervisory experience and discussions with industry 
participants, the Commission preliminarily believes that startup costs 
to support testing and validation of credit risk, margin, and liquidity 
risk models at covered clearing agencies could fall in the range of $5 
million to $25 million for each covered clearing agency. This range 
primarily reflects investments in information technology to process 
data already available to covered clearing agencies for stress testing 
and validation purposes. The range's width reflects differences in 
markets served by, as well as the scope of operations of, each covered 
clearing agency. Based on its supervisory experience and discussions 
with industry participants, the Commission estimates a lower bound of 
$1 million per year for ongoing costs related to testing of risk 
models.
    Should each covered clearing agency choose to hire external 
consultants for the purposes of performing model validation required 
under proposed Rules 17Ad-22(e)(4) and 17Ad-22(e)(7) through written 
policies and procedures, the Commission preliminarily estimates the 
ongoing cost associated with hiring such consultants would be 
approximately $4,388,160 in the aggregate.\734\
---------------------------------------------------------------------------

    \734\ This figure was calculated as follows: 2 Consultants for 
40 hours per week at $653 per hour = $52,240 x 12 weeks = $626,880 
per clearing agency x 7 covered clearing agencies = $4,388,160. The 
$653 per hour figure for a consultant was calculated using 
www.payscale.com, modified by Commission staff to account for an 
1800-hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits, and overhead.
     The Commission previously estimated that ongoing costs 
associated with hiring external consultants to fulfill the 
requirements of Rule 17Ad-22(b)(4) would be approximately $3.9 
million per year. See Clearing Agency Standards Release, supra note 
5, at 66261.
---------------------------------------------------------------------------

    The Commission acknowledges that it could have, as an alternative, 
proposed rules that would require testing and validation of financial 
risk models at covered clearing agencies at different frequencies. For 
example, the Commission could have required backtesting of margin 
resources less frequently than daily. Such a policy could imply less 
frequent adjustments in margin levels that may result in over- or 
under-margining. The Commission preliminarily believes that the 
frequencies of testing and validation of financial risk models that it 
has proposed are appropriate given the risks faced by covered clearing 
agencies and current market practices related to frequency of meetings 
of risk management committees and boards of directors at covered 
clearing agencies.
v. Proposed Rules 17Ad-22(e)(8) Through (10): Settlement and Physical 
Delivery
    Proposed Rules 17Ad-22(e)(8) through (10) require covered clearing 
agencies to have policies and procedures reasonably designed to address 
settlement risk. Many of the issues raised by settlement are similar to 
those raised by liquidity. Uncertainty in settlement may make it 
difficult for clearing members to fulfill their obligations to other 
market participants within their respective financial networks if they 
hold back precautionary reserves, as discussed above. Based on its 
supervisory experience, the Commission preliminarily believes that the 
benefits and costs for the majority of covered clearing agencies will 
likely be limited. Registered clearing agencies that enter into the set 
of covered clearing agencies in the future, by contrast, may bear more 
significant costs as a result of the enhanced standards.
    Settlement finality is important to market participants for a 
number of reasons. Reversal of transactions can be costly to 
participants. For example, if transactions are reversed, buyers and 
sellers of securities may be exposed to additional market risk as they 
attempt to reestablish desired positions in cleared products. 
Similarly, reversal of transactions may render participants expecting 
to receive payment from the covered clearing agency unable to fulfill 
payment obligations to their counterparties, exposing these additional 
parties to the transmitted credit risk. Finally, settlement finality 
can help facilitate default management procedures by covered clearing 
agencies since they improve transparency of members' positions. Unless 
settlement finality is established by covered clearing agencies, market 
participants may attempt to hedge reversal risk for themselves. This 
could come at the cost of efficiency if it means that, on the margin, 
participants are less likely to use cleared products as collateral in 
other financial transactions.
    In addition, settlement in central bank money, where available and 
determined to be practical by the board of directors of the covered 
clearing agency, as the proposed rules would require, greatly reduces 
settlement risk related to payment agents. Using central bank accounts 
to effect settlement rather than settlement banks removes a link from 
the intermediation chain associated with clearance and settlement. As a 
result, a covered clearing agency would be less exposed to the default 
risk of its settlement banks. In cases where settlement banks maintain 
links to other covered clearing agencies, for example as liquidity 
providers or as members, reducing exposure to settlement bank default 
risk may be particularly valuable.
    As in the case of proposed Rule 17Ad-22(e)(7)(iii), the Commission 
acknowledges there may be circumstances in which covered clearing 
agencies either do not have access to central bank account services or 
the use of such services is impractical. Accordingly, the Commission 
preliminarily believes it is appropriate to allow covered clearing 
agencies the flexibility to also use commercial bank account services 
to effect settlement, subject to a requirement that covered clearing 
agencies monitor and manage the risks associated with such 
arrangements.

[[Page 29603]]

vi. Proposed Rule 17Ad-22(e)(11): CSDs
    CSDs play a key role in modern financial markets. For many issuers, 
many transactions in their securities involve no transfer of physical 
certificates.
    Paperless trade generally improves transactional efficiency. Book-
entry transfer of securities may facilitate conditional settlement 
systems required by proposed Rule 17Ad-22(e)(12). For example, book-
entry transfer in a delivery versus payment system allows securities to 
be credited to an account immediately upon debiting the account for the 
payment amount. Institutions and individuals may elect to no longer 
hold and exchange certificates that represent their ownership of 
securities. An early study showed that the creation of DTC resulted in 
a 30-35% reduction in the physical movement of certificates.\735\ Among 
other benefits, to the extent that delays in exchanging paper 
certificates result in settlement failures, immobilization and 
dematerialization of shares reduces the frequency of these 
failures.\736\
---------------------------------------------------------------------------

    \735\ See Neal L. Wolkoff & Jason B. Werner, The History of 
Regulation of Clearing in the Securities and Futures Markets, and 
Its Impact on Competition, 30 Rev. Banking & Fin. L. 313, 323 
(2010).
    \736\ See Commission, Study of Unsafe and Unsound Practices of 
Brokers and Dealers, H.R. Doc. No. 231, 92nd Cong., 1st Sess. 13, at 
168 (1971) (suggesting that the delivery and transfer process for 
paper certificates were a principal cause of failures to deliver and 
receive during the ``paperwork crisis'' of the late 1960s).
---------------------------------------------------------------------------

    For markets to realize the transactional benefits of paperless 
trade, however, requires confidence that CSDs can correctly account for 
the number of securities in their custody and for the book entries that 
allocate these securities across participant accounts. In order to 
realize these benefits, the proposed rules also require covered CSDs to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ensure the integrity of securities 
issues, minimize the risks associated with transfer of securities, and 
protect assets against custody risk. Based on its supervisory 
experience, the Commission preliminarily believes that registered CSDs 
already have infrastructure in place to meet these requirements. 
However, CSDs may face incremental compliance costs in instances where 
they must modify their rules in order to implement appropriate 
controls. Compliance costs may be higher for potential new CSDs that 
are determined to be covered clearing agencies in the future.
vii. Proposed Rule 17Ad-22(e)(12): Exchange-of-Value Settlement Systems
    Clearance and settlement of transactions between two parties to a 
trade involves an exchange of one obligation for another. Regarding 
transactions in securities, these claims can be securities or payments 
for securities. A particular risk associated with transactions is 
principal risk, which is the risk that only one obligation is 
successfully transferred between counterparties. For example, in a 
purchase of common stock, a party faces principal risk if, despite 
successfully paying the counterparty for the purchase, the counterparty 
may fail to deliver the shares.
    The proposed requirements under Rule 17Ad-22(e)(12) are 
substantially the same as those in Rule 17Ad-22(d)(13).\737\ As a 
result, covered clearing agencies that have been in compliance with 
Rule 17Ad-22(d)(13) face no substantially new requirements under 
Proposed Rule 17Ad-22(e)(12). The Commission preliminary expects the 
proposed rule would likely impose limited material additional costs on 
covered clearing agencies. It would also produce benefits in line with 
the general economic considerations discussed in Part IV.C.1. The 
economic effects may differ for registered clearing agencies that enter 
into the set of covered clearing agencies in the future.
---------------------------------------------------------------------------

    \737\ See supra note 274; supra Part II.B.9 (discussing the full 
set of requirements under proposed Rule 17Ad-22(e)(13)); supra Part 
IV.B.3.d.ii (discussing current practices among registered clearing 
agencies regarding exchange-of-value settlement systems); see also 
17 CFR 240.17Ad-22(d)(13).
---------------------------------------------------------------------------

viii. Proposed Rule 17Ad-22(e)(13): Participant-Default Rules and 
Procedures
    Proposed Rule 17Ad-22(e)(13) would require covered clearing 
agencies to have policies and procedures for participant default with 
additional specificity relative to current requirements for registered 
clearing agencies under Rule 17Ad-22(d)(11). In particular, proposed 
Rule 17Ad-22(e)(13) requires policies and procedures that address the 
allocation of credit losses that exceed default resources, repayment of 
liquidity providers, replenishment of financial resources, and testing 
and review of default procedures.
    Based on its supervisory experience, the Commission preliminarily 
believes all covered clearing agencies currently test and review 
default procedures at least annually, so the costs of this requirement 
would apply only to registered clearing agencies that may enter into 
the set of covered clearing agencies in the future. Most covered 
clearing agencies, however, will be required to update their policies 
and procedures as a result of proposed Rules 17Ad-22(e)(13)(i) and 
(ii). Clearing members may experience benefits from proposed Rule 17Ad-
22(e)(13)(i), which requires covered clearing agencies to provide 
disclosure to members regarding the allocation of default losses when 
these losses exceed the level of financial resource it has available. 
As a result of this additional transparency, clearing members may 
experience an improved ability to manage their expectations of 
potential obligations against the covered clearing agency, which may 
increase the likelihood of orderly wind-downs in the event of member 
default. Crafting such allocation plans by covered clearing agencies 
may entail certain compliance costs, as previously discussed in Part 
III.D.5.a and as discussed further in Part IV.C.3.d. Further, covered 
clearing agencies may allocate default losses in a number of ways that 
may themselves have implications for participation, competition, and 
systemic risk.\738\ For example, if, as a part of a default resolution 
plan, selective tear-up is contemplated after a failed position 
auction, then clearing members who expect low loss exposure in the 
tear-up may not have adequate incentives to participate in the position 
auction, even if they are better able to absorb losses than clearing 
members who expect high exposure in the tear-up plan. This would 
increase the chances of a failed auction and the chances of a 
protracted and more disruptive wind-down. Thus, the total costs of any 
loss allocation plan may depend largely on the particular choices 
embedded in covered clearing agencies' plans.
---------------------------------------------------------------------------

    \738\ See, e.g., Elliot, supra note 617 (discussing various 
loss-allocation rules and CCP recovery and wind-down).
---------------------------------------------------------------------------

    As an alternative to the proposed rules, the Commission could have 
proposed more prescriptive requirements for default procedures at 
covered clearing agencies. The Commission preliminarily believes that 
differences in cleared assets and in the characteristics of clearing 
members supports allowing each covered clearing agency flexibility in 
choosing its own default procedures pursuant to proposed Rule 17Ad-
22(e)(13).
    In addition to loss allocation plans, proposed Rule 17Ad-22(e)(13) 
contains new provisions related to the replenishment of financial 
resources and testing and review of default procedures that do not 
appear in Rule

[[Page 29604]]

17Ad-22(d)(11). The Commission preliminarily believes that proposed 
rules related to replenishment of financial resources may reduce the 
potential for systemic risk and contagion in cleared markets, as they 
facilitate covered clearing agencies' prompt access to these resources 
in times of financial stress. The Commission also preliminarily 
believes that broad-based participation in the testing of default 
procedures could reduce disruption to cleared markets in the event of 
default. However, to the extent that testing of these procedures 
requires participation by members of covered clearing agencies, 
members' customers, and other stakeholders, these parties may bear 
costs under the proposed rules. The Commission is unable to quantify 
the economic effects of participation in these tests at this time.
ix. Proposed Rule 17Ad-22(e)(14): Segregation and Portability
    Segregation and portability of customer positions serves a number 
of useful purposes in cleared markets. In the normal course of 
business, the ability to efficiently identify and move an individual 
customer's positions and collateral between clearing members enables 
customers to easily terminate a relationship with one clearing member 
and initiate a relationship with another. This may facilitate 
competition between clearing members by ensuring customers are free to 
move their accounts from one clearing member to another based on their 
preferences, without being unduly limited by operational barriers.\739\
---------------------------------------------------------------------------

    \739\ See, e.g., Paul Klemperer, Competition When Consumers Have 
Switching Costs: An Overview with Applications to Industrial 
Organization, Macroeconomics, and International Trade, 62 Rev. Econ. 
Stud. 515 (1995) (presenting an overview of switching costs and 
their effects on competition).
---------------------------------------------------------------------------

    Segregation and portability may be especially important in the 
event of participant default. By requiring that customer collateral and 
positions remain segregated, covered clearing agencies can facilitate, 
in the event of a clearing member's insolvency, the recovery of 
customer collateral and the movement of customer positions to one or 
more other clearing members. Further, portability of customer positions 
may facilitate the orderly wind down of a defaulting member if customer 
positions may be moved to a non-defaulting member. Porting of positions 
in a default scenario may yield benefits for customers if the 
alternative is closing-out positions at one clearing member and 
reestablishing them at another clearing member. The latter strategy 
would cause customers to bear transactions costs, which might be 
especially high in times of financial stress.
    The Commission notes that, in its preliminary view, these proposed 
rules are flexible in their approach to implementing segregation and 
portability requirements. The most efficient means of implementing 
these requirements may depend on the products that a covered clearing 
agency clears as well as other business practices at a covered clearing 
agency. For example, a clearing agency's decision whether or not to 
collect margin on a gross or net basis may bear on its decision to port 
customer positions and collateral on an individual or omnibus basis, 
and while an individual account structure may provide a higher degree 
of protection from a default by another customer, it may be 
operationally and resource intensive for a covered clearing to 
implement and may reduce the efficiency of its operations.
    As a result, the costs and benefits of proposed Rule 17Ad-22(e)(14) 
will depend on specific rules implemented by covered clearing agencies 
as well as how much these rules differ from current practice. Based on 
its supervisory experience, the Commission preliminarily believes that 
the current practices at covered clearing agencies to which the 
proposed rule would apply already meets segregation requirements under 
the proposed rule, so any costs and benefits for covered clearing 
agencies would flow from implementing portability requirements, though 
it potentially raises a barrier to entry for security-based swap 
clearing agencies or clearing agencies involved in activities with a 
more complex risk profile that seek to become covered clearing 
agencies.
x. Proposed Rule 17Ad-22(e)(15): General Business Risk
    While proposed Rules 17Ad-22(e)(4) and 17Ad-22(e)(7) require that 
covered clearing agencies have policies and procedures reasonably 
designed to address credit risk and liquidity risk, proposed Rule 17Ad-
22(e)(15) requires that covered clearing agencies have policies and 
procedures reasonably designed to address general business risk. The 
Commission preliminarily believes that general business losses 
experienced by covered clearing agencies represent a distinct risk to 
cleared markets, given limited competition and specialization of 
clearing agencies. In this regard, the loss of clearing services due to 
general business losses would likely result in major market disruption. 
The proposed rule requires a covered clearing agency to have policies 
and procedures reasonably designed to mitigate the risk that business 
losses result in the disruption of clearing services. Under these 
policies and procedures covered clearing agencies would hold sufficient 
liquid resources funded by equity to cover potential general business 
losses, which at a minimum would constitute six months of operating 
expenses. The Commission preliminarily believes that the benefits of 
such policies and procedures would flow primarily from covered clearing 
agencies that would be required to increase their holdings of liquid 
net assets funded by equity, enabling them to sustain their operations 
for sufficient time and achieve orderly wind-down if such action is 
eventually necessary.
    The Commission could have proposed a higher or lower minimum level 
of resources, for example, corresponding to one quarter of operating 
expenses or one year of operating expenses. The Commission 
preliminarily believes, however, that the rules, as proposed, afford 
covered clearing agencies sufficient flexibility in determining the 
level of resources to hold while maintaining a minimum standard that 
supports continued operations in the event of general business losses. 
As another alternative, the Commission could have allowed covered 
clearing agencies additional flexibility in determine the nature of the 
financial resources held to mitigate the effects of general business 
risk or the means by which these resources are funded. The Commission 
preliminarily believes, however, that by specifying that these 
resources be liquid in nature, the proposed rule would limit any delays 
by covered clearing agencies that suffer business losses from paying 
expenses required for continued operations. Additionally, by 
specifically requiring that a covered clearing agency draw liquid net 
resources from members as equity capital, the proposed rules may also 
encourage members to more closely monitor the business operations of a 
covered clearing agency, which may reduce the likelihood of losses.
    Based on its supervisory experience Commission preliminarily 
believes that certain covered clearing agencies would be required to 
establish and maintain policies and procedures providing for specified 
levels of equity capital and higher levels of liquid net assets than 
they would in the absence of proposed Rule 17Ad-22(e)(15).\740\ Table 2 
contains summary information from five

[[Page 29605]]

registered clearing agencies and estimates, solely for purposes of 
evaluating the costs and benefits of proposed Rule 17Ad-22(e)(15), the 
amount of additional capital these entities would be required to 
establish and maintain to comply with the proposed rule. As the 
Commission has not previously had such a capital requirement, the 
estimate is based on one half of the average annual operating expenses 
for each covered clearing agency as reflected in their annual financial 
statements over the five-year period ending December 31, 2012.\741\
---------------------------------------------------------------------------

    \740\ Additional equity capital may be raised through share 
issuance or by retaining earnings.
    \741\ In the case of DTCC, to obtain an estimate of annual 
operating expense, the Commission made minor adjustments to the 
total expense by excluding expenses not related to DTCC's core 
operations, since its annual income statement does not explicitly 
show the operating expense.
---------------------------------------------------------------------------

    Table 2 identifies cash and cash equivalents as liquid assets and 
averages this over the same five-year period. A key shortcoming of 
using publicly available financial data is the difficulty in 
determining how much of a firm's cash and cash equivalents are funded 
by either equity or liabilities, or both. To this end, the Commission 
considered two different cases.\742\ In Case 1, the Commission assumed 
that cash on each clearing agency's balance sheet was funded by 
liabilities first, with the residual funded by equity. In Case 2, the 
Commission assumed that cash on each clearing agency's balance sheet 
was funded pro-rata by equity and liabilities.\743\ This procedure 
likely yields an upper bound for estimates of additional equity 
necessary to meet the minimum reserve requirements.
---------------------------------------------------------------------------

    \742\ The Commission notes that these two cases are provided as 
estimates of cash and cash equivalents funded by equity for existing 
covered clearing agencies for limited purposes of the economic 
analysis but are not methods the Commission would necessarily accept 
if used by a covered clearing agency to comply with proposed Rule 
17Ad-22(e)(15). Nor should the two cases presented be viewed as 
interpretive guidance regarding proposed Rule 17Ad-22(e)(15).
    \743\ For example, in Case 2, for DTC we arrive at a pro-rata 
allocation of cash by computing the ratio of Average Equity to the 
sum of Average Equity and Average Liabilities (282/3646 = 7.73%,) 
and applying this to Average Cash and Cash Equivalents (7.73% x 3151 
= 243.71) to arrive at a proxy of the level of liquid net assets 
funded by equity.
---------------------------------------------------------------------------

    Table 2. Hypothetical Additional Equity Necessary to Meet 
Requirements Under Proposed Rule 17Ad-22(e)(15), in Millions of 
Dollars, Based on Years 2008-2012.\744\
---------------------------------------------------------------------------

    \744\ The figures in Table 2 are based on financial data taken 
from the 2008-2012 annual reports of DTC, FICC, ICEEU, NSCC, and 
OCC. The Commission notes that these figures are presented for the 
limited purposes of conducting this economic analysis and do not 
represent methods the Commission would necessarily accept if used by 
a covered clearing agency to comply with proposed Rule 17Ad-
22(e)(15).

----------------------------------------------------------------------------------------------------------------
                                                              DTC        FICC      ICEEU       NSCC       OCC
----------------------------------------------------------------------------------------------------------------
Average Six Months Operating Expense.....................        166         62         41         94         68
Average Cash and Cash Equivalents........................      3,151      8,259        129      3,838         64
Average Liabilities......................................      3,364      8,471         84      3,833        155
Cash Funded by Equity....................................          0          0         45          5          0
Average Total Equity.....................................        282         97        192        125         15
    Average Net Income...................................         21         16        119         26          2
                                                          ------------------------------------------------------
Case 1, Additional Equity Needed.........................        166         62          0         89         68
Case 2, Additional Equity Needed.........................          0          0          0          0         63
----------------------------------------------------------------------------------------------------------------

    Absent market frictions, a change in capital structure should have 
no effect on the value of a covered clearing agency.\745\ The 
Commission acknowledges that market imperfections such as asymmetric 
information, moral hazard, and regulation may imply that covered 
clearing agencies that would need to raise additional equity capital 
incur opportunity costs for holding this additional capital rather than 
investing it in projects or distributing it back to equity holders who 
might, in turn, invest in projects.
---------------------------------------------------------------------------

    \745\ See Franco Modigliani & Merton H. Miller, The Cost of 
Capital, Corporation Finance and the Theory of Investment, 48 Am. 
Econ. Rev. 261 (1958) (showing the irrelevance of capital structure 
in perfect markets).
---------------------------------------------------------------------------

    To estimate these costs, the Commission applied the capital asset 
pricing model to observed returns for CME and ICE, two clearing 
agencies that have publicly-traded equity outstanding.\746\ This 
methodology yielded an estimate of the cost of equity for these two 
clearing agencies of approximately 10%. Applying estimated cost of 
equity to the lower bound of additional equity required under the 
proposed rule suggests an annual cost of $16 million, while applying 
this cost to the upper bound of additional equity needed suggests an 
annual cost of $50 million.\747\ These estimates are subject to a 
number of caveats. In particular, this exercise does not take into 
account the possibility that equity finance may reduce the cost of 
equity due to the resulting decrease in leverage, \748\ or that 
clearing agencies might simultaneously raise equity while reducing 
liabilities. Both of these possibilities would likely reduce the cost 
to covered clearing agencies of increased equity capital. Finally, this 
analysis presumes that covered clearing agencies will choose to comply 
with the requirements in proposed Rule 17Ad-22(e)(15)(iii) at the lower 
bound of six months' operating expenses.
---------------------------------------------------------------------------

    \746\ See Eugene F. Fama & Kenneth R. French, The Cross-Section 
of Expected Stock Returns, 47 J. Fin. 427 (1992). For CME, the 
Commission used monthly return data from January 2003 to December 
2012, and for ICE, from December 2005 to December 2012.
    The Commission calculated this data using Daily/Monthly U.S. 
Stock Files(copyright) 2012 Center for Research in Security Prices 
(CRSP), The University of Chicago Booth School of Business, and 
Thomson Reuters Datastream.
    \747\ The Commission based this estimate on the 2012 financial 
statements for DTC, CME, FICC, ICE, NSCC, and OCC. To ensure 
comparability, the Commission estimated leverage ratios for each of 
these clearing agencies by adjusting assets for clearing and 
guaranty funds and dividing by shareholders' equity. While DTC, 
NSCC, FICC, ICE, and CME all have estimated leverage ratios of 
between 1 and 2, the Commission computed a higher leverage ratio of 
5 for OCC. As a result, the Commission computed OCC's cost of 
capital by first ``unlevering'' CME's estimated beta of 1.14 using 
2012 financial statement information to arrive at an unlevered beta 
of 0.87 and levering this using OCC's 2012 financial statement 
information to arrive at a levered beta of 3.36. Finally, the 
Commission applied the current Fama-French monthly risk premium at a 
10-year horizon, annualized, and added the current 10 year risk-free 
rate to arrive at a levered cost of equity of approximately 26% for 
OCC.
    \748\ See e.g., Anat R. Admati, Peter M. DeMarzo, Martin F. 
Hellwig & Paul Pfleiderer, Fallacies, Irrelevant Facts, and Myths in 
the Discussion of Capital Regulation: Why Bank Equity is Not 
Expensive (Working Paper, Mar. 23, 2011), available at http://www.coll.mpg.de/pdf_dat/2010_42online.pdf (addressing the 
statement that ``[i]ncreased bank equity requirements increase the 
funding costs for banks because they must use more equity, which has 
a higher required return'').
---------------------------------------------------------------------------

    Clearing agencies that issue equity in order to satisfy the new 
requirements would additionally face costs related to issuance. The 
Commission preliminarily recognizes that the cost of maintaining 
additional equity resembles an insurance premium against the losses

[[Page 29606]]

associated by market disruption in the absence of clearing services.
xi. Proposed Rule 17Ad-22(e)(16): Custody and Investment Risks
    Proposed Rule 17Ad-22(e)(16) requires a covered clearing agency to 
have policies and procedures reasonably designed to safeguard both 
their own assets as well as the assets of participants, broadening the 
requirement applicable to registered clearing agencies in Rule 17Ad-
22(d)(3) to the protection of participants' assets.
    The Commission preliminarily believes that this may have benefits 
in terms of protecting against systemic risk, to the extent that 
covered clearing agencies to this point have treated their own assets 
differently by applying greater safeguards to those assets than with 
respect to assets of their members and members' clients. Protection of 
member assets is important to cleared markets because, for example, the 
assets of a member in default serve as margin and represent liquidity 
supplies that a covered clearing agency may access to cover losses. If 
covered clearing agencies can quickly access these liquidity sources, 
they may be able to limit losses to non-defaulting members.
    Participants may benefit from proposed Rule 17Ad-22(e)(16) in other 
ways. Requiring a covered clearing agency's policies and procedures to 
safeguard its assets and participant assets and to invest in assets 
with minimal credit, liquidity, and market risk may reduce uncertainty 
in the value of participant assets and participants' exposure to 
mutualized losses. This may allow participants to deploy their own 
capital more efficiently. Furthermore, easy access to their own capital 
enables members to more freely terminate their participation in covered 
clearing agencies.
    Based on its supervisory experience, the Commission preliminarily 
believes that current practices at covered clearing agencies meet the 
requirements under proposed Rule 17Ad-22(e)(16) in most cases, so the 
additional costs and benefits flowing from these requirements would be 
generally limited to registered clearing agencies that may enter the 
set of covered clearing agencies in the future.
xii. Proposed Rule 17Ad-22(e)(17): Operational Risk Management
    Because, as noted above, proposed Rule 17Ad-22(e)(17) would require 
substantially the same set of policies and procedures as Rule 17Ad-
22(d)(4),\749\ the Commission preliminarily believes that proposed Rule 
17Ad-22(e)(17) would likely impose limited material additional costs on 
covered clearing agencies and produce limited benefits, in line with 
the general economic considerations discussed in Part IV.C.1.
---------------------------------------------------------------------------

    \749\ See supra Part II.B.14 (discussing the full set of 
requirements under proposed Rule 17Ad-22(e)(17)); see also 17 CFR 
240.17Ad-22(d)(4).
---------------------------------------------------------------------------

xiii. Proposed Rules 17Ad-22(e)(18) Through (20): Membership 
Requirements, Tiered Participation, and Linkages
    As discussed earlier, covered clearing agencies play an important 
role in the markets they serve. They often enjoy a central place in 
financial networks that enables risk sharing, but may also enable them 
to serve as conduits for the transmission of risk throughout the 
financial system. Proposed Rules (18) through (20) require covered 
clearing agencies to have policies and procedures reasonably designed 
to explicitly consider and manage the risks associated with the 
particular characteristics of their network of direct members, the 
broader community of customers, and other parties that rely on the 
services provided by the covered clearing agencies or other partners 
that the covered clearing agency is connected to through relevant 
linkages. The Commission preliminarily believes that these efforts 
carry benefits insofar as they reduce the extent to which covered 
clearing agencies may impose negative externalities on financial 
markets.
    As economies of scale contribute to the business dynamics of 
clearing and settlement, there is often only one clearing agency or a 
small number of clearing agencies for a particular class of security. 
Consequently, membership in a clearing agency may influence competitive 
dynamics between members and indirect participants, such as 
intermediaries, in cleared markets. Members and indirect participants 
may compete for the same set of customers, but indirect participants 
must have relationships with members to access clearing services. 
Members, therefore, may have incentives in place to extract economic 
rents from indirect participants by imposing higher fees or restricting 
access to clearing services.
    Permitting fair and open access to clearing agencies and their 
services may promote competition among market participants and may 
result in lower costs and efficient clearing and settlement services. 
Open access to clearing agencies may reduce the likelihood that credit 
and liquidity risk become concentrated among a small number of clearing 
members, each of which retain a large number of indirect participants 
through tiered arrangements. Further, links between clearing agencies 
may facilitate risk management across multiple security classes and 
improve the efficiency of collateral arrangements.
(1) Proposed Rule 17Ad-22(e)(18): Member Requirements
    While fair and open access to clearing agencies may promote 
competition and enhance the efficiency of clearing and settlement 
services, these improvements should not come at the expense of prudent 
risk management. The soundness of clearing members contributes directly 
to the soundness of a clearing agency and mutualization of losses 
within clearing agencies expose each clearing member to the default 
risk of every other clearing member. Accordingly, it is important for 
clearing agencies to control and effectively manage the risks to which 
they are exposed by their direct and indirect participants by 
establishing risk-related requirements for participation.
    Based on its supervisory experience, the Commission preliminarily 
believes that current practices among most covered clearing agencies 
involve a mix of objective financial and business requirements 
stipulated in publicly-available rulebooks and discretion exercised by 
the covered clearing agency. As a result and based on its supervisory 
experience, the Commission preliminarily believes that some changes to 
policies and procedures at covered clearing agencies may be required 
under the proposed rule.
(2) Proposed Rule 17Ad-22(e)(19): Tiered Participation Arrangements
    The Commission preliminarily believes that proposed Rule 17Ad-
22(e)(19) may improve covered clearing agencies' ability to manage its 
exposure to market participants that are not clearing members, but 
access payment, clearing, or settlement facilities through their 
relationships with clearing members. A covered clearing agency that is 
able to effectively manage its exposure to its members but fails to 
identify, monitor, and manage its exposures to non-member firms may 
overlook dependencies that are critical to the stability of cleared 
markets. This is particularly true if indirect participants in the 
covered clearing agency are large and might potentially precipitate the 
default of one or more direct members.

[[Page 29607]]

    The data necessary to compute summary statistics that would be 
helpful in quantifying the costs and benefits of the proposed rule, 
including those that would indicate the size of indirect participants 
and the volume of transactions in which they are involved, are not 
available. Nevertheless, the Commission is sensitive to the fact that 
costs associated with the proposed rules may result in concentration of 
clearing services among fewer clearing members. Part of this process of 
consolidation may mean an increase in the volume of trading activity 
that involves indirect members, making identification of risks 
associated with indirect members even more critical. Based on its 
supervisory experience, however, the Commission preliminarily believes 
that certain covered clearing agencies already have policies and 
procedures in place that would satisfy the requirements of the proposed 
rule even in the absence of such explicit requirements under existing 
rules. Costs and benefits from the proposed rule would come from those 
other registered clearing agencies that require updates to their 
policies and procedures to come into compliance with the proposed rule.
    The Commission is sensitive to the fact that indirect participants 
play a key role in maintaining competition in markets for 
intermediation of trading in securities insofar as they offer investors 
a broader choice of intermediaries to deal with in centrally cleared 
and settled securities markets. If elements of policies and procedures 
under this rule make indirect participation marginally more costly, 
then transactions costs for investors may increase.
(3) Proposed Rule 17Ad-22(e)(20): Links
    Links between clearing agencies and their members are only one way 
that clearing agencies interface with the financial system. A clearing 
agency may also establish links with other clearing agencies and FMUs 
through a set of contractual and operational arrangements. For a 
clearing agency, the primary purpose of establishing a link would be to 
expand its clearing and settlement services to additional financial 
instruments, markets, and institutions. Established links among 
clearing agencies and FMUs may enable direct and indirect market 
participants to have access to a broader spectrum of clearing and 
settlement services.
    Sound linkages between clearing agencies that provide CCP services 
may also provide their customers with more efficient collateral 
arrangements and cross-margining benefits. Cross-margining potentially 
relaxes liquidity constraints in the financial system by reducing total 
required margin collateral. Resources that would otherwise be posted as 
margin may be allocated to more productive investment opportunities.
    A clearing agency that establishes a link or multiple links may 
also impose costs on participants in markets it clears by indirectly 
exposing them to systemic risk from linked entities. The Commission 
acknowledges that clearing agencies that form linkages may be exposed 
to additional risks, including credit and liquidity risks, as a 
consequence of these links. Links may, however, produce benefits for 
members to the extent that diversification and hedging across their 
combined portfolio reduces their margin requirements. At the same time, 
because such an agreement requires the linked clearing agencies to each 
guarantee cross-margining participants' obligations to the other 
clearing agency, cross-margining potentially exposes members of one 
clearing agency to default risk from members of the other.
    By requiring that covered clearing agencies have policies and 
procedures reasonably designed to identify, monitor, and manage risks 
related to any link, proposed Rule 17Ad-22(e)(20), like Rule 17Ad-
22(d)(7), reduces the likelihood that such links serve as channels for 
systemic risk transmission. Because proposed Rule 17Ad-22(e)(20) 
differs only marginally from Rule 17Ad-22(d)(7), the Commission 
preliminarily believes that the costs and benefits flowing from the 
proposed rule will be incremental, to the extent that the additional 
specificity in proposed Rule 17Ad-22(e)(20) causes covered clearing 
agencies to modify current practices. The Commission has aggregated 
these costs below.
xiv. Proposed Rule 17Ad-22(e)(21): Efficiency and Effectiveness
    Proposed Rule 17Ad-22(e)(21) would impose on covered clearing 
agencies requirements in addition to those currently applied to 
registered clearing agencies under Rule 17Ad-22(d)(6) by also requiring 
covered clearing agencies to have policies and procedures that ensure 
that a covered clearing agency's management review efficiency and 
effectiveness in four key areas:
     Efficiency and effectiveness in clearing and settlement 
arrangements may reduce participants' transaction costs and enhance 
liquidity by reducing the amount of collateral that customers must 
provide for transactions and the opportunity cost associated with 
providing such collateral. Where appropriate, net settlement 
arrangements can reduce collateral requirements. Similarly, clearing 
arrangements that include a broad scope of products enable clearing 
members to take advantage of netting efficiencies across positions.
     Efficient and effective operating structures, including 
risk management policies, procedures, and systems, may reduce the 
likelihood of failures that may lead to impairment of a clearing 
agency's capacity to complete settlement and interfering with its 
ability to monitor and manage credit exposures.
     An efficient scope of products that a clearing agency 
clears, settles, or records may provide its participants and customers 
with more efficient collateral arrangements and cross-margining 
benefits that ultimately reduce transaction costs and improve liquidity 
in cleared markets.
     Efficient and effective use of technology and 
communication procedures facilitates effective payment, clearing and 
settlement, and recordkeeping.
    The Commission preliminarily believes that requirements related to 
efficient operation of covered clearing agencies are appropriate given 
the market power enjoyed by these entities, as discussed in Part 
IV.C.1.d. Limited competition in the market for clearing services may 
blunt incentives for covered clearing agencies to cost effectively 
provide high quality services to market participants in the absence of 
regulation.
    Based on its supervisory experience, the Commission preliminarily 
believes that some covered clearing agencies would be required to make 
updates to their policies and procedures as a result of the proposed 
rule. As a result, the Commission expects incremental costs and 
benefits to flow from the proposed rule only to the extent that this 
additional specificity causes covered clearing agencies to modify 
current practices.
xv. Proposed Rule 17Ad-22(e)(22): Communication Procedures and 
Standards
    Based on its supervisory experience, the Commission preliminarily 
believes that some changes to policies and procedures would be 
necessary to meet requirements under proposed Rule 17Ad-22(e)(22).\750\ 
These costs are included as a part of implementation costs, as 
discussed below. However, the Commission understands that covered

[[Page 29608]]

clearing agencies already accommodate internationally accepted 
communication procedures and standards and preliminarily anticipates 
only incremental costs resulting from the proposed rule, in addition to 
the above discussed benefits. Registered clearing agencies that may 
enter into the set of covered clearing agencies in the future may need 
to conform their practices to internationally accepted communication 
procedures and standards, as well as adopt new policies and procedures 
as a result of the proposed rule, resulting in more substantial costs.
---------------------------------------------------------------------------

    \750\ See supra Parts II.B.19 and VII (discussing the 
requirements for communication procedures and standards under Rule 
17Ad-22(e)(22) and providing the rule text, respectively).
---------------------------------------------------------------------------

xvi. Proposed Rule 17Ad-22(e)(23): Disclosure of Rules, Key Procedures, 
and Market Data
    Enhanced disclosure may also improve the efficiency of transactions 
in cleared products and improve financial stability more generally by 
improving the ability of members of covered clearing agencies to manage 
risks and assess costs. Additional information would reduce the 
potential for uncertainty on the part of clearing members regarding 
their obligations to covered clearing agencies. Proposed Rule 17Ad-
22(e)(23) requires a covered clearing agency to establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to require specific disclosures. As in Rules 17Ad-22(d)(9) and 
(11), covered clearing agencies would be required under proposed Rule 
17Ad-22(e)(23) to disclose default procedures to the public and 
disclose sufficient information to participants to allow them to manage 
the risks, fees, and other material costs associated with membership.
    Under proposed Rule 17Ad-22(e)(23), a covered clearing agency must 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to update, on a biannual basis, public 
disclosures that describe the covered clearing agency's market and 
activities, along with information about the agency's legal, 
governance, risk management, and operating frameworks, including 
specifically covering material changes since the last disclosure, a 
general background on the covered clearing agency, a rule-by-rule 
summary of compliance with proposed Rules 17Ad-22(e)(1) through (22), 
and an executive summary. The proposed rule adds a new requirement, 
relative to existing requirements for registered clearing agencies 
under Rule 17Ad-22(d)(9), to update the disclosure biannually and to 
include, among other things, specific data elements, including details 
about system design and operations, transaction values and volumes, 
average intraday exposure to participants, and statistics on 
operational reliability.
    Additional transparency may have benefits for participants and 
cleared markets more generally. For example, if information about the 
systems that support a covered clearing agency is public, investors may 
be more certain that the market served by this agency is less prone to 
disruption and more accommodating of trade. Furthermore, public 
disclosure of detailed operating data may facilitate evaluation of each 
covered clearing agency's operating record by market participants. 
Further, under proposed Rule 17Ad-22(e)(23)(iv), these disclosures 
would be made about specific categories that potentially facilitate 
comparisons between covered clearing agencies. Additional availability 
of information on operations may increase the likelihood that clearing 
agencies compete to win market share from participants that value 
operational stability. This additional market discipline may provide 
additional incentives for covered clearing agencies to maintain 
reliability. Finally, updating the public disclosure every two years or 
more frequently following certain changes as required pursuant to 
proposed Rule 17Ad-22(e)(23)(v) would support the benefits of enhanced 
public disclosures by ensuring that information provided to the public 
remains up-to-date. The Commission preliminarily believes this would 
reduce the likelihood that market participants are forced to evaluate 
covered clearing agencies on the basis of stale data.
    Clearing members, in particular, may benefit from additional 
disclosure of risk management and governance arrangements. These 
details potentially have significant bearing on clearing members' risk 
management because they may remove uncertainty surrounding members' 
potential obligations to a covered clearing agency. In certain 
circumstances, additional disclosures may reveal to members that the 
expected costs of membership exceed the expected benefits of 
membership, and that exit from the clearing agency may be privately 
optimal. In addition to the costs of concentration among members 
discussed in earlier sections, the Commission also recognizes the 
potential for systemic benefits from termination. Member exit on the 
basis of more precise information may reduce the risk posed to other 
financial market participants by members who, given additional 
information, might prefer to terminate their membership, due to an 
inability to manage the risks to which a covered clearing agency 
exposes them. While exit from clearing agencies may have consequences 
for competition among clearing members, the Commission preliminarily 
believes that encouraging the participation of firms that are not able 
to bear the risks of membership is not an appropriate means of 
mitigating the effects of market power on participants in cleared 
markets.
    Based on its supervisory experience, the Commission preliminarily 
believes that some covered clearing agencies will require changes to 
policies and procedures as a result of the proposed rules. Compliance 
costs associated with changes to policies and procedures, biannual 
review and disclosure of additional data are included in implementation 
costs, below.
b. Proposed Rule 17Ab2-2
    Proposed Rule 17Ad-22(e) would subject covered clearing agencies to 
requirements that are in many instances more specific than requirements 
under Rule 17Ad-22(d) and in some cases produce new obligations to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to test, report, and disclose key 
elements of a covered clearing agency's performance, risk management, 
and operations.
    Proposed Rule 17Ab2-2 provides procedures for the Commission to 
determine on its own initiative, or upon voluntary application by a 
registered clearing agency, whether a registered clearing agency is a 
covered clearing agency and therefore is subject to proposed Rule 17Ad-
22(e). It also provides procedures for the Commission to determine 
whether a covered clearing agency is systemically important in multiple 
jurisdictions or has a complex risk profile and therefore should be 
subject to stricter risk management standards under proposed Rule 17Ad-
22(e).
    Proposed Rule 17Ab2-2(a) provides procedures for the Commission to 
determine whether a registered clearing agency that is otherwise not a 
designated clearing agency or a complex risk profile clearing agency is 
a covered clearing agency on the basis of the products it clears or 
other characteristics the Commission may deem appropriate under the 
circumstances. While the Commission preliminarily believes the current 
scope of proposed Rule 17Ad-22(e) is appropriate,\751\ proposed Rule 
17Ab2-

[[Page 29609]]

2(a) would provide the Commission with latitude in adjusting the scope 
of proposed Rule 17Ad-22(e) in response to financial innovation and 
changing economic circumstances. Proposed Rule 17Ab2-2(a) contemplates 
voluntary application of registered clearing agencies to become covered 
clearing agencies.
---------------------------------------------------------------------------

    \751\ See supra Part IV.C.3.a (discussing the appropriateness of 
the proposed scope of Rule 17Ad-22(e)).
---------------------------------------------------------------------------

    Proposed Rule 17Ab2-2(b) includes criteria the Commission may 
consider in determining whether a covered clearing agency is 
systemically important in multiple jurisdictions. Two of these criteria 
are based on input from a set of other bodies comprised of FSOC and 
regulators in other jurisdictions. As a result, it is possible that the 
flow of costs and benefits from proposed Rule 17Ad-22(e) may be 
partially determined by the decisions of other regulatory bodies.
    Proposed Rule 17Ab2-2(c), by contrast, suggests characteristics of 
the financial products that a clearing agency clears as a basis upon 
which the Commission may determine that a clearing agency's activity 
has a complex risk profile.
    The impact of proposed rules that determine the application of 
enhanced requirements could have direct costs on registered clearing 
agencies in the form of legal or consulting costs incurred as a result 
of seeking a determination from the Commission. In instances where 
these clearing agencies choose to apply to the Commission for status as 
a covered clearing agency under proposed Rule 17Ab2-2(a), the 
Commission preliminarily believes that a registered clearing agency's 
voluntary application would suggest that the applicant's private 
benefits from regulation under proposed Rule 17Ad-22(e) justify its 
costs.
    Quantifiable costs related to determinations under proposed Rule 
a17Ab2-2 are noted in Part IV.C.3.d.
    Indirect effects of the determination process may have important 
economic effects on the ultimate volume of clearing activity, beyond 
the economic effects of the proposed requirements themselves. An 
important feature of proposed Rule 17Ab2-2 is providing transparency 
for the determinations process. On one hand, transparency may allow 
clearing agencies to plan for new obligations under proposed Rule 17Ad-
22(e); on the other, transparency may allow clearing agencies to 
restructure their business to avoid falling within the scope of 
proposed Rule 17Ad-22(e).
    To the extent that proposed Rule 17Ad-22(e), if adopted as 
proposed, may increase costs relative to their peers for covered 
clearing agencies, clearing agencies whose activities have a more 
complex risk profile, and clearing agencies systemically important in 
multiple jurisdictions, clearing agencies may have incentives to 
restructure their businesses strategically to avoid these Commission 
determinations or otherwise exit any services made prohibitively 
expensive by such determinations. Such potential consequential effects 
would be among the considerations for the Commission to review in 
connection with any specific decision under proposed Rule 17Ab2-2. 
Restructuring may involve spinning off business lines into separate 
entities, limiting the scope of clearing activities to certain markets, 
or limiting the scale of clearing activities within a single 
market.\752\
---------------------------------------------------------------------------

    \752\ See Exchange Act Release No. 34-63107 (Oct. 14, 2010), 75 
FR 65881, 65919 & n.206 (Oct. 26, 2010).
---------------------------------------------------------------------------

    Any one of these responses could result in inefficiencies. As 
suggested in Part IV.C.2.b, registered clearing agencies may incur 
costs as a result of attempts to restructure. Clearing agencies that 
break up along product lines or fail to consolidate when consolidation 
is efficient may fail to take advantage of economies of scope and 
result in inefficient use of collateral.\753\ Similarly, clearing 
agencies that limit their scale may provide lower levels of clearing 
services to the markets that they serve.
---------------------------------------------------------------------------

    \753\ See, e.g., Darrell Duffie & Haoxiang Zhu, Does a Central 
Clearing Counterparty Reduce Counterparty Risk?, 1 Rev. Asset 
Pricing Stud. 74 (2011) (addressing potential inefficiencies 
resulting from fragmented clearing along product lines).
---------------------------------------------------------------------------

c. Proposed Rule 17Ad-22(f)
    Proposed Rule 17Ad-22(f) includes a provision that specifies 
Commission authority over designated clearing agencies for which it is 
the supervisory agency. Since this provision codifies existing 
statutory authority, the Commission does not anticipate any economic 
effects from this proposed rule.
d. Quantifiable Costs and Benefits
    As discussed above, the proposed amendments to Rule 17Ad-22 and 
proposed Rule 17Ab2-2 would impose certain costs on covered clearing 
agencies. As discussed in Part IV.C.3.a.ii, if a covered clearing 
agency is required to recruit new directors, the Commission 
preliminarily estimates a cost per director of $73,000.\754\ As 
discussed in Part IV.C.3.a.iv(4), the Commission preliminarily 
estimates costs associated with liquidity resources under proposed 
Rules 17Ad-22(e)(7) and (a)(15) would likely fall between $133 million 
and $225 million per year across all covered clearing agencies. As 
discussed in Part IV.C.3.a.iv(5), the Commission preliminarily believes 
that startup costs related to financial risk management systems for 
existing covered clearing agencies, related to new testing and model 
validation requirements to be between $5 million to $25 million. The 
Commission also estimates a lower bound on ongoing costs related to 
these requirements of $1 million per year. If covered clearing agencies 
were to hire external consultants for the purposes of performing model 
validation required under proposed Rules 17Ad-22(e)(4) and (7) through 
policies and procedures, the Commission preliminarily estimates the 
ongoing cost associated with hiring such consultants would be about 
$4,388,160 in the aggregate.\755\ As discussed in Part IV.C.3.a.x, the 
Commission expects quantifiable economic costs as a result of proposed 
Rule 17Ad-22(e)(15) to be between $16 million and $50 million per year 
across covered clearing agencies.
---------------------------------------------------------------------------

    \754\ See supra note 705.
    \755\ See supra Part IV.C.3.a.iv(5), in particular note 734.
---------------------------------------------------------------------------

    In addition, proposed Rules 17Ad-22(e)(3), (4), (6), (7), (15) and 
(21) all include elements of review by either a covered clearing 
agency's board or its management on an ongoing basis. The Commission 
preliminarily estimates the cost of ongoing review for these proposed 
rules at approximately $39,312 per year.\756\ The proposed rules would 
also impose certain implementation burdens and related costs on covered 
clearing agencies.\757\

[[Page 29610]]

These costs generally include assessment costs to determine compliance 
with the proposed rules and costs related to new policies and 
procedures and updates to existing policies and procedures required by 
the proposed rules. In Part III, the Commission estimated the burdens 
of these implementation requirements for covered clearing agencies.
---------------------------------------------------------------------------

    \756\ To monetize the cost of board review, the Commission used 
a recent report by Bloomberg stating that the average director works 
250 hours and earns $251,000, resulting in an estimated $1000 per 
hour for board review. As a proxy for the cost of management review, 
the Commission is estimating $457 per hour, based upon the Director 
of Compliance cost data from the SIFMA table, see infra note 778. 
The Commission estimates the total cost of review for each clearing 
agency as follows: ((Board Review for 32 hours at $1000 per hour) + 
(Management Review for 16 hours at $457 per hour)) = $39,312. The 
Commission requests comment on this estimate.
    \757\ To monetize the internal costs the Commission staff used 
data from the SIFMA publications, Management and Professional 
Earnings in the Security Industry--2012, and Office Salaries in the 
Securities Industry--2012, modified by the Commission staff to 
account for an 1800 hour work-year and multiplied by 5.35 
(professionals) or 2.93 (office) to account for bonuses, firm size, 
employee benefits and overhead. Commission staff also estimated an 
hourly rate for a Chief Financial Officer. The Web site 
www.salary.com reports that median CFO annual salaries in 2012 were 
$307,554. A Grant Thornton LLP survey estimated that in 2012 public 
company CFOs received an average annual salary of $286,500. Using an 
approximate midpoint of these two estimates of $300,000 per year, 
and dividing by an 1800-hour work year and multiplying by the 5.35 
factor which normally is used to include benefits but here is used 
as an approximation to offset the fact that New York salaries are 
typically higher than the rest of the country, the result is $892 
per hour. The Commission requests comment on this estimate.
---------------------------------------------------------------------------

    For a new entrant into the set of covered clearing agencies from 
the set of registered clearing agencies, the Commission preliminarily 
estimates the startup compliance costs associated with policies and 
procedures to be $592,215,\758\ and compliance costs associated with 
the determinations process under proposed Rule 17Ab2-2 to be 
$9,148.\759\ Based on its supervisory experience, the Commission 
preliminarily believes that in many cases registered clearing agencies 
are already in compliance with many of the requirements included in the 
proposed rules, so this cost represents an upper bound on upfront 
costs. Conditioned on its current understanding of current market 
practice at covered clearing agencies, the Commission preliminarily 
estimates that the total costs across all existing covered clearing 
agencies will be $4,032,720.\760\ The Commission preliminarily 
estimates that in the aggregate existing covered clearing agencies 
would be subject to ongoing costs associated with the proposed rule in 
the amount of approximately $801,980 per year.\761\
---------------------------------------------------------------------------

    \758\ The total initial cost for an entrant that is not a CSD 
and does engage in activities with a more complex risk profile was 
calculated as follows: ((Assistant General Counsel for 428 hours at 
$467 per hour) + (Compliance Attorney for 365 hours at $310 per 
hour) + (Administrative Assistant for 2 hours at $72 per hour) + 
(Computer Operations Department Manager for 300 hours at $361 per 
hour) + (Senior Business Analyst for 85 hours at $245 per hour) + 
(Senior Risk Management Specialist for 114 hours at $249 per hour) + 
(Chief Compliance Office for 102 hours at $441 per hour) + (Senior 
Programmer for 53 hours at $282 per hour) + (Chief Financial Officer 
for 50 hours at $892 per hour) + (Financial Analyst for 70 hours at 
$245 per hour)) = $592,215.
    \759\ The total cost associated with determinations under 
proposed Rule 17Ab2-2 was calculated as follows: ((Assistant General 
Counsel for 2 hours at $467 per hour) + (Compliance Attorney for 4 
hours at $310 per hour) + (Outside Counsel for 6 hours at $400 per 
hour)) x 2 registered clearing agencies = $9,148.
    \760\ The total initial cost was calculated as follows: 
((Assistant General Counsel for 2,906 hours at $467 per hour) + 
(Compliance Attorney for 2,475 hours at $310 per hour) + 
(Administrative Assistant for 14 hours at $72 per hour) + (Computer 
Operations Department Manager for 2,030 hours at $361 per hour) + 
(Senior Business Analyst for 565 hours at $245 per hour) + (Senior 
Risk Management Specialist for 773 hours at $249 per hour) + (Chief 
Compliance Office for 699 hours at $441 per hour) + (Senior 
Programmer for 361 hours at $282 per hour) + (Chief Financial 
Officer for 350 hours at $892 per hour) + (Financial Analyst for 490 
hours at $245 per hour) + (Intermediate Accountant for 15 hours at 
$155 per hour)) = $4,032,720.
    \761\ The total ongoing cost was calculated as follows: 
((Compliance Attorney for 1,851 hours at $310 per hour) + 
(Administrative Assistant for 137 hours at $72 per hour) + (Senior 
Business Analyst for 151 hours at $245 per hour) + (Senior Risk 
Management Specialist for 70 hours at $249 per hour) + (Risk 
Management Specialist for 1,251 hours at $131 per hour)) = $801,980.
---------------------------------------------------------------------------

    A benefit of the proposed rules that the Commission is able to 
quantify is the impact of QCCP status of OCC to non-U.S. bank clearing 
members at OCC. This benefit comes as a result of lower capital 
requirements against exposures to QCCPs relative to non-qualifying 
CCPs. In Part IV.C.1.e, the Commission provided an estimate of the 
upper bound of this benefit, $600 million per year, or 0.60% of the 
aggregate 2012 net income reported by bank clearing members at OCC. The 
Commission preliminarily believes that the actual benefits flowing from 
QCCP status would likely be higher due to benefits for foreign bank 
members of FICC and ICEEU, in addition to the benefits with respect to 
OCC discussed above.\762\
---------------------------------------------------------------------------

    \762\ See supra note 686 and accompanying text.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed rules will 
result in an increase in financial stability insofar as they result in 
minimum standards at covered clearing agencies that are higher than 
those standards implied by current practices at covered clearing 
agencies. Some of this increased stability may come as a result of 
lower activity as the proposed rules cause participants to internalize 
a greater proportion of the costs that their activity imposes on the 
financial system, reducing the costs of default, conditional on a 
default event occurring. Increased stability may also come as a result 
of higher risk management standards at covered clearing agencies that 
effectively lower the probability that either covered clearing agencies 
or their members default.
    The Commission preliminarily believes that clearance and settlement 
of securities and security-based swaps is fundamental to the stability 
of financial markets. As discussed above, clearing agencies may not 
fully consider the costs they could impose on financial market 
participants.\763\ As a result of the potential negative externalities 
associated with their activities, enhanced risk management standards 
are particularly important for those clearing agencies that pose the 
greatest risk to financial markets and the U.S. financial system.
---------------------------------------------------------------------------

    \763\ See Duffie, Li & Lubke, supra note 563 (noting that the 
failure of a CCP could suddenly expose many major market 
participants to losses); see also Cecchetti, Gyntelberg & 
Hollanders, supra note 19 (``[A] CCP concentrates counterparty and 
operational risks and the responsibilities for risk management. 
Therefore it is critical that CCPs have both effective risk control 
and adequate financial resources.''); supra note 278 and 
accompanying text (asserting that delays and breakdowns in the 
payments and clearance process and the perception that the clearing 
system might not be able to meet obligations may have contributed to 
price declines during the October 20, 1987 market crash).
---------------------------------------------------------------------------

D. Request for Comments

    The Commission generally requests comment about its preliminary 
analysis of the economic effects of the proposed rules and any 
qualitative and quantitative data that would facilitate an evaluation 
and assessment of the economic effects of this proposal. In addition, 
the Commission requests comment on the following specific issues:
     Has the Commission appropriately identified the relevant 
costs and benefits associated with each requirement under proposed Rule 
17Ad-22(e)? Why or why not?
     Are there any provisions of proposed Rule 17Ad-22(e) for 
which the costs of enhanced risk management standards appear 
inappropriate relative to the benefits of such standards, particularly 
given existing requirements under Rule 17Ad-22(d)? Please explain.
     Would particular provisions of proposed Rule 17Ad-22(e) 
improve or diminish competition between covered clearing agencies? 
Which provisions are likely to have such effects and through what 
transmission channels?
     Would the scope of proposed Rule 17Ad-22(e) have 
implications for competition between covered clearing agencies and 
registered clearing agencies that are not covered clearing agencies?
     Would particular provisions of proposed Rule 17Ad-22(e) 
improve or diminish competition between members of covered clearing 
agencies? Are there any provisions that would allow a subset of members 
to compete on better terms than other members?
     How would the effects of QCCP status will be allocated 
across members? Can market participants provide any qualitative or 
quantitative data to help the Commission evaluate the effects of QCCP 
status on clearing members and any heterogeneity in trade exposures and 
default fund exposures to covered

[[Page 29611]]

clearing agencies across bank and non-bank clearing members?
     Would bank clearing members to be constrained by the Basel 
III capital requirements? Do bank clearing members typically target 
tier one or total capital ratios as a business practice?
     In areas where existing requirements under Rule 17Ad-22(d) 
could be viewed as being consistent with the PFMI, and so could 
potentially earn QCCP status for covered clearing agencies, do the 
costs of additional requirements under proposed Rule 17Ad-22(e) appear 
appropriate relative to benefits of these requirements, aside from QCCP 
status? Please explain.
     Does the Commission's proposed definition of qualifying 
liquid resources adequately reflect the ability with which covered 
clearing agency assets may be used to meet funding obligations? Has the 
Commission adequately assessed the costs and benefits of requiring 
funding arrangements before considering non-cash resources 
``qualifying''?
     What would be the potential costs and benefits of 
requiring covered clearing agencies to hold liquid net assets in 
accordance with proposed Rule 17Ad-22(e)(15)? Can you provide 
qualitative and quantitative data to aid the Commission in evaluating 
these potential costs and benefits?
     Has the Commission adequately assessed the risks posed by 
indirect participation at covered clearing agencies? Can you provide 
qualitative and quantitative data to aid the Commission in evaluating 
the level of indirect participation in cleared markets, the 
heterogeneity of indirect participation across clearing members and the 
implications for networks of exposures in cleared markets?

V. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') requires the Commission, 
in promulgating rules, to consider the impact of those rules on small 
entities.\764\ Section 603(a) of the Administrative Procedure Act,\765\ 
as amended by the RFA, generally requires the Commission to undertake a 
regulatory flexibility analysis of all proposed rules to determine the 
impact of such rulemaking on ``small entities.'' \766\ Section 605(b) 
of the RFA states that this requirement shall not apply to any proposed 
rule which, if adopted, would not have a significant economic impact on 
a substantial number of small entities.\767\
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    \764\ See 5 U.S.C. 601 et seq.
    \765\ 5 U.S.C. 603(a).
    \766\ Section 601(b) of the RFA permits agencies to formulate 
their own definitions of ``small entities.'' See 5 U.S.C. 601(b). 
The Commission has adopted definitions for the term ``small entity'' 
for the purposes of rulemaking in accordance with the RFA. These 
definitions, as relevant to this proposed rulemaking, are set forth 
in Rule 0-10, 17 CFR 240.0-10.
    \767\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

A. Registered Clearing Agencies

    The proposed amendments to Rule 17Ad-22 and proposed Rule 17Ab2-2 
would apply to covered clearing agencies, which would include 
registered clearing agencies that are designated clearing agencies, 
complex risk profile clearing agencies, or clearing agencies that 
otherwise have been determined to be covered clearing agencies by the 
Commission. For the purposes of Commission rulemaking and as applicable 
to the proposed amendments to Rule 17Ad-22 and proposed Rule 17Ab2-2, a 
small entity includes, when used with reference to a clearing agency, a 
clearing agency that (i) compared, cleared, and settled less than $500 
million in securities transactions during the preceding fiscal year, 
(ii) had less than $200 million of funds and securities in its custody 
or control at all times during the preceding fiscal year (or at any 
time that it has been in business, if shorter), and (iii) is not 
affiliated with any person (other than a natural person) that is not a 
small business or small organization.\768\
---------------------------------------------------------------------------

    \768\ See 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

    Based on the Commission's existing information about the clearing 
agencies currently registered with the Commission,\769\ the Commission 
preliminarily believes that such entities exceed the thresholds 
defining ``small entities'' set out above. While other clearing 
agencies may emerge and seek to register as clearing agencies, the 
Commission preliminarily does not believe that any such entities would 
be ``small entities'' as defined in Exchange Act Rule 0-10.\770\ In any 
case, clearing agencies can only become subject to the new requirements 
under proposed Rule 17Ad-22(e) should they meet the definition of a 
covered clearing agency, as described above. Accordingly, the 
Commission preliminarily believes that any such registered clearing 
agencies will exceed the thresholds for ``small entities'' set forth in 
Exchange Act Rule 0-10.
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    \769\ In 2012, DTCC processed $1.6 quadrillion in financial 
transactions, subsidiary DTC settled $110.3 trillion of securities 
and held securities valued at $37.2 trillion, subsidiary NSCC 
processed an average daily value of $742.7 billion in equity 
securities, subsidiary FICC cleared $1.116 quadrillion in government 
securities, and FICC's Mortgage-Backed Securities Division cleared 
$104 trillion of transactions in agency mortgage-backed securities. 
See DTCC, 2012 Annual Report, available at http://www.dtcc.com/about/annual-report.aspx and http://www.dtcc.com/annuals/2012/br-settlement-and-asset-services.html; FSOC, 2013 Annual Report, supra 
note 39, at 99.
    In addition, OCC cleared more than 4 billion contracts and held 
margin of $78.8 billion at the end of 2012. See OCC, 2012 Annual 
Report, available at http://www.optionsclearing.com/components/docs/about/annual-reports/occ_2012_annual_report.pdf. CME Group had 
total contract volume of 2.89 billion contracts (in round turn 
trades) with a total notional value of $806 trillion. See CME Group, 
2012 Annual Report, available at http://files.shareholder.com/downloads/CME/2635449816x0x653543/02DB7C7F-ACF0-4D73-9AD7-1ACCEF68559A/CME_Group_2012_Annual_Report.pdf. ICE and ICEEU 
together cleared CDS with a total notional value of $10.24 trillion. 
See Intercontinental Exchange, Inc., 2012 Annual Report, available 
at http://files.shareholder.com/downloads/ICE/2623237906x0x649669/DFB49A9C-152C-4287-848C-7CCDDA42D61E/ICE_2012_Annual_Report_FINAL.pdf.
    \770\ See 17 CFR 240.0-10(d). The Commission based this 
determination on its review of public sources of financial 
information about registered clearing agencies and lifecycle event 
service providers for OTC derivatives.
---------------------------------------------------------------------------

B. Certification

    For the reasons described above, the Commission certifies that the 
proposed amendments to Rule 17Ad-22 and proposed Rule 17Ab2-2 would not 
have a significant economic impact on a substantial number of small 
entities for purposes of the RFA. The Commission requests comment 
regarding this certification. The Commission requests that commenters 
describe the nature of any impact on small entities, including clearing 
agencies and counterparties to security and security-based swap 
transactions, and provide empirical data to support the extent of the 
impact.

VI. Small Business Regulatory Enforcement Fairness Act

    Under the Small Business Regulatory Enforcement Fairness Act of 
1996,\771\ a rule is considered ``major'' where, if adopted, it results 
or is likely to result in (i) an annual effect on the economy of $100 
million or more (either in the form of an increase or a decrease); (ii) 
a major increase in costs or prices for consumers or individual 
industries; or (iii) significant adverse effect on competition, 
investment, or innovation. The Commission requests comment on the 
potential impact of the proposed amendments to Rule 17Ad-22 and 
proposed Rule 17Ab2-2 on the economy on an annual basis, any potential 
increase in costs or prices for consumers or individual industries, and 
any potential effect on competition, investment, or innovation. 
Commenters are requested to provide empirical data

[[Page 29612]]

and other factual support for their views to the extent possible.
---------------------------------------------------------------------------

    \771\ Public Law 104-121, 110 Stat. 857 (1996) (codified in 
various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 
601).
---------------------------------------------------------------------------

VII. Statutory Authority and Text of Amended Rule 17Ad-22 and Proposed 
Rule 17Ab2-2

    Pursuant to the Exchange Act, particularly Section 17A thereof, 15 
U.S.C. 78q-1, and Section 805 of the Clearing Supervision Act, 12 
U.S.C. 5464, the Commission proposes to amend Rule 17Ad-22 and proposes 
new Rule 17Ab2-2.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendment

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE

0
1. The general authority citation for Part 240 continues to read, and 
the sectional authority for Sec.  240.17Ad-22 is revised to read, as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78d, 78e, 78f, 78g, 78i, 78j, 
78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 78q, 78q-
1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4, 80b-11, and 7201 et. seq.; 18 U.S.C. 1350; and 12 
U.S.C. 5221(e)(3), unless otherwise noted.
* * * * *
    Section 240.17Ad-22 is also issued under 12 U.S.C. 5461 et seq.
* * * * *
0
2. Section 240.17Ab2-2 is added to read as follows:


Sec.  240.17Ab2-2  Determinations affecting covered clearing agencies.

    (a) The Commission may, if it deems appropriate, upon application 
by any clearing agency or member of a clearing agency, or on its own 
initiative, determine whether a registered clearing agency should be 
considered a covered clearing agency. In determining whether a clearing 
agency should be considered a covered clearing agency, the Commission 
may consider:
    (1) Characteristics such as the clearing of financial instruments 
that are characterized by discrete jump-to-default price changes or 
that are highly correlated with potential participant defaults; or
    (2) Such other characteristics as it deems appropriate in the 
circumstances.
    (b) The Commission may, if it deems appropriate, upon application 
by any clearing agency or member of a clearing agency, or on its own 
initiative, determine whether a covered clearing agency is systemically 
important in multiple jurisdictions. In determining whether a covered 
clearing agency is systemically important in multiple jurisdictions, 
the Commission may consider:
    (1) Whether the covered clearing agency is a designated clearing 
agency;
    (2) Whether the clearing agency has been determined to be 
systemically important by one or more jurisdictions other than the 
United States through a process that includes consideration of whether 
the foreseeable effects of a failure or disruption of the designated 
clearing agency could threaten the stability of each relevant 
jurisdiction's financial system; or
    (3) Such other factors as it may deem appropriate in the 
circumstances.
    (c) The Commission may, if it deems appropriate, determine whether 
any of the activities of a clearing agency providing central 
counterparty services, in addition to clearing agencies registered with 
the Commission for the purpose of clearing security-based swaps, have a 
more complex risk profile. In determining whether a clearing agency's 
activity has a more complex risk profile, the Commission may consider:
    (1) Characteristics such as the clearing of financial instruments 
that are characterized by discrete jump-to-default price changes or 
that are highly correlated with potential participant defaults; or
    (2) Such other characteristics as it deems appropriate in the 
circumstances, as factors supporting a finding of a more complex risk 
profile.
    (d) The Commission shall publish notice of its intention to 
consider making a determination under paragraph (a), (b), or (c) of 
this section, together with a brief statement of the grounds under 
consideration therefor, and provide at least a 30-day public comment 
period prior to any such determination, giving all interested persons 
an opportunity to submit written data, views, and arguments concerning 
such proposed determination. The Commission may provide the clearing 
agency subject to the proposed determination opportunity for hearing 
regarding the proposed determination.
    (e) Notice of determinations under paragraph (a), (b), or (c) of 
this section shall be given by prompt publication thereof, together 
with a statement of written reasons therefor.
    (f) For purposes of this rule, the terms central counterparty, 
covered clearing agency, designated clearing agency, and systemically 
important in multiple jurisdictions shall have the meanings set forth 
in Sec.  240.17Ad-22(a).
0
3. Amend Sec.  240.17Ad-22 by:
0
a. Revising paragraph (a) and the introductory text of paragraph (d); 
and
0
b. Adding paragraphs (e) and (f).
    The revisions and additions read as follows:


Sec.  240.17Ad-22  Standards for clearing agencies.

    (a) Definitions. For purposes of this section:
    (1) Backtesting means an ex-post comparison of actual outcomes with 
expected outcomes derived from the use of margin models.
    (2) Central counterparty means a clearing agency that interposes 
itself between the counterparties to securities transactions, acting 
functionally as the buyer to every seller and the seller to every 
buyer.
    (3) Central securities depository services means services of a 
clearing agency that is a securities depository as described in Section 
3(a)(23)(A) of the Exchange Act (15 U.S.C. 78c(a)(23)(A)).
    (4) Clearing agency involved in activities with a more complex risk 
profile means a clearing agency registered with the Commission under 
Section 17A of the Exchange Act (15 U.S.C. 78q-1) and that:
    (i) Provides central counterparty services for security-based 
swaps;
    (ii) Has been determined by the Commission to be involved in 
activities with a more complex risk profile at the time of its initial 
registration; or
    (iii) Is subsequently determined by the Commission to be involved 
in activities with a more complex risk profile pursuant to Sec.  
240.17Ab2-2(c).
    (5) Conforming model validation means an evaluation of the 
performance of each material risk management model used by a covered 
clearing agency (and the related parameters and assumptions associated 
with such models), including initial margin models, liquidity risk 
models, and models used to generate clearing or guaranty fund 
requirements, performed by a qualified person who is free from 
influence from the persons responsible for the development or operation 
of the models or policies being validated.
    (6) Conforming sensitivity analysis means a sensitivity analysis 
that:
    (i) Considers the impact on the model of both moderate and extreme 
changes in a wide range of inputs, parameters, and assumptions, 
including correlations of price movements or returns if relevant, which 
reflect a variety of historical and hypothetical market

[[Page 29613]]

conditions. Sensitivity analysis must use actual and hypothetical 
portfolios that reflect the characteristics of proprietary positions 
and, where applicable, customer positions;
    (ii) When performed by or on behalf of a covered clearing agency 
involved in activities with a more complex risk profile, considers the 
most volatile relevant periods, where practical, that have been 
experienced by the markets served by the clearing agency; and
    (iii) Tests the sensitivity of the model to stressed market 
conditions, including the market conditions that may ensue after the 
default of a member and other extreme but plausible conditions as 
defined in a covered clearing agency's risk policies.
    (7) Covered clearing agency means a designated clearing agency, a 
clearing agency involved in activities with a more complex risk profile 
for which the Commodity Futures Trading Commission is not the 
Supervisory Agency as defined in Section 803(8) of the Payment, 
Clearing, and Settlement Supervision Act of 2010 (12 U.S.C. 5461 et 
seq.), or any clearing agency determined to be a covered clearing 
agency by the Commission pursuant to Sec.  240.17Ab2-2.
    (8) Designated clearing agency means a clearing agency registered 
with the Commission under Section 17A of the Exchange Act (15 U.S.C. 
78q-1) that is designated systemically important by the Financial 
Stability Oversight Council pursuant to the Payment, Clearing, and 
Settlement Supervision Act of 2010 (12 U.S.C. 5461 et seq.) and for 
which the Commission is the supervisory agency as defined in Section 
803(8) of the Payment, Clearing, and Settlement Supervision Act of 2010 
(12 U.S.C. 5461 et seq.).
    (9) Financial market utility has the same meaning as defined in 
Section 803(6) of the Payment, Clearing, and Settlement Supervision Act 
of 2010 (12 U.S.C. 5462(6)).
    (10) Link means, for purposes of paragraph (e)(20) of this section, 
a set of contractual and operational arrangements between two or more 
clearing agencies, financial market utilities, or trading venues that 
connect them directly or indirectly for the purposes of participating 
in settlement, cross margining, expanding their services to additional 
instruments or participants, or for any other purposes material to 
their business.
    (11) Net capital as used in paragraph (b)(7) of this section means 
net capital as defined in Sec.  240.15c3-1 for broker-dealers or any 
similar risk adjusted capital calculation for all other prospective 
clearing members.
    (12) Normal market conditions as used in paragraphs (b)(1) and (2) 
of this section means conditions in which the expected movement of the 
price of cleared securities would produce changes in a clearing 
agency's exposures to its participants that would be expected to breach 
margin requirements or other risk control mechanisms only one percent 
of the time.
    (13) Participant family means that if a participant directly, or 
indirectly through one or more intermediaries, controls, is controlled 
by, or is under common control with, another participant then the 
affiliated participants shall be collectively deemed to be a single 
participant family for purposes of paragraphs (b)(3), (d)(14), (e)(4), 
and (e)(7) of this section.
    (14) Potential future exposure means the maximum exposure estimated 
to occur at a future point in time with an established single-tailed 
confidence level of at least 99% with respect to the estimated 
distribution of future exposure.
    (15) Qualifying liquid resources means, for any covered clearing 
agency, the following, in each relevant currency:
    (i) Cash held either at the central bank of issue or at 
creditworthy commercial banks;
    (ii) Assets that are readily available and convertible into cash 
through prearranged funding arrangements without material adverse 
change provisions, such as:
    (A) Committed arrangements, including:
    (1) Lines of credit,
    (2) Foreign exchange swaps, and
    (3) Repurchase agreements; or
    (B) Other prearranged funding arrangements determined to be highly 
reliable even in extreme but plausible market conditions by the board 
of directors of the covered clearing agency following a review 
conducted for this purpose not less than annually; and
    (iii) Other assets that are readily available and eligible for 
pledging to (or conducting other appropriate forms of transactions 
with) a relevant central bank, if the covered clearing agency has 
access to routine credit at such central bank that permits said pledges 
or other transactions by the covered clearing agency.
    (16) Security-based swap means a security-based swap as defined in 
Section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)).
    (17) Sensitivity analysis means an analysis that involves analyzing 
the sensitivity of a model to its assumptions, parameters, and inputs.
    (18) Stress testing means the estimation of credit or liquidity 
exposures that would result from the realization of extreme but 
plausible price changes or changes in other valuation inputs and 
assumptions.
    (19) Systemically important in multiple jurisdictions means, with 
respect to a covered clearing agency, a covered clearing agency that 
has been determined by the Commission to be systemically important in 
more than one jurisdiction pursuant to Sec.  240.17Ab2-2.
    (20) Transparent means, for the purposes of paragraphs (e)(1), (2), 
and (10) of this section, to the extent consistent with other statutory 
and Commission requirements on confidentiality and disclosure, that 
relevant documentation is 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 covered clearing agency, and 
to the public.
* * * * *
    (d) Each registered clearing agency that is not a covered clearing 
agency shall establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable:
* * * * *
    (e) Each covered clearing agency shall establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to, as applicable:
    (1) Provide for a well-founded, clear, transparent, and enforceable 
legal basis for each aspect of its activities in all relevant 
jurisdictions.
    (2) Provide for governance arrangements that:
    (i) Are clear and transparent;
    (ii) Clearly prioritize the safety and efficiency of the covered 
clearing agency;
    (iii) Support the public interest requirements in Section 17A of 
the Exchange Act (15 U.S.C. 78q-1) applicable to clearing agencies, and 
the objectives of owners and participants; and
    (iv) Establish that the board of directors and senior management 
have appropriate experience and skills to discharge their duties and 
responsibilities.
    (3) Maintain a sound risk management framework for comprehensively 
managing legal, credit, liquidity, operational, general business, 
investment, custody, and other risks that arise in or are borne by the 
covered clearing agency, which:
    (i) Includes risk management policies, procedures, and systems 
designed to identify, measure, monitor, and manage the range of risks 
that arise in or are borne by the covered clearing agency,

[[Page 29614]]

that are subject to review on a specified periodic basis and approved 
by the board of directors annually;
    (ii) Includes plans for the recovery and orderly wind-down of the 
covered clearing agency necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses;
    (iii) Provides risk management and internal audit personnel with 
sufficient authority, resources, independence from management, and 
access to the board of directors;
    (iv) Provides risk management and internal audit personnel with a 
direct reporting line to, and oversight by, a risk management committee 
and an audit committee of the board of directors, respectively; and
    (v) Provides for an independent audit committee.
    (4) Effectively identify, measure, monitor, and manage its credit 
exposures to participants and those arising from its payment, clearing, 
and settlement processes, including by:
    (i) Maintaining sufficient financial resources to cover its credit 
exposure to each participant fully with a high degree of confidence;
    (ii) To the extent not already maintained pursuant to paragraph 
(e)(4)(i) of this section, for a covered clearing agency providing 
central counterparty services that is either systemically important in 
multiple jurisdictions or a clearing agency involved in activities with 
a more complex risk profile, maintaining additional financial resources 
at the minimum to enable it to cover a wide range of foreseeable stress 
scenarios that include, but are not limited to, the default of the two 
participant families that would potentially cause the largest aggregate 
credit exposure for the covered clearing agency in extreme but 
plausible market conditions;
    (iii) To the extent not already maintained pursuant to paragraph 
(e)(4)(i) of this section, for a covered clearing agency not subject to 
paragraph (e)(4)(ii) of this section, maintaining additional financial 
resources at the minimum to enable it to cover a wide range of 
foreseeable stress scenarios that include, but are not limited to, the 
default of the participant family that would potentially cause the 
largest aggregate credit exposure for the covered clearing agency in 
extreme but plausible market conditions;
    (iv) Including prefunded financial resources, excluding assessments 
for additional guaranty fund contributions or other resources that are 
not prefunded, when calculating the financial resources available to 
meet the standards under paragraphs (e)(4)(i) through (iii) of this 
section, as applicable;
    (v) Maintaining the financial resources required under paragraphs 
(e)(4)(i) through (iii) of this section, as applicable, in combined or 
separately maintained clearing or guaranty funds;
    (vi) Testing the sufficiency of its total financial resources 
available to meet the minimum financial resource requirements under 
paragraphs (e)(4)(i) through (iii) of this section, as applicable, by:
    (A) Conducting a stress test of its total financial resources once 
each day using standard predetermined parameters and assumptions;
    (B) Conducting a comprehensive analysis on at least a monthly basis 
of the existing stress testing scenarios, models, and underlying 
parameters and assumptions, and considering modifications to ensure 
they are appropriate for determining the covered clearing agency's 
required level of default protection in light of current and evolving 
market conditions;
    (C) Conducting a comprehensive analysis of stress testing 
scenarios, models, and underlying parameters and assumptions more 
frequently than monthly when the products cleared or markets served 
display high volatility or become less liquid, and when the size or 
concentration of positions held by the covered clearing agency's 
participants increases significantly; and
    (D) Reporting the results of its analyses under paragraphs 
(e)(4)(iv)(B) and (C) of this section to appropriate decision makers at 
the covered clearing agency, including but not limited to, its risk 
management committee or board of directors, and using these results to 
evaluate the adequacy of and adjust its margin methodology, model 
parameters, models used to generate clearing or guaranty fund 
requirements, and any other relevant aspects of its credit risk 
management framework, in supporting compliance with the minimum 
financial resources requirements set forth in paragraphs (e)(4)(i) 
through (iii) of this section; and
    (vii) Performing a conforming model validation for its credit risk 
models to be performed not less than annually or more frequently as may 
be contemplated by the covered clearing agency's risk management 
framework established pursuant to paragraph (e)(3) of this section.
    (5) Limit the assets it accepts as collateral to those with low 
credit, liquidity, and market risks, and set and enforce appropriately 
conservative haircuts and concentration limits if the covered clearing 
agency requires collateral to manage its or its participants' credit 
exposure; and require a review of the sufficiency of its collateral 
haircuts and concentration limits to be performed not less than 
annually.
    (6) Cover, if the covered clearing agency provides central 
counterparty services, its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum:
    (i) Considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market;
    (ii) Marks participant positions to market and collects margin, 
including variation margin or equivalent charges if relevant, at least 
daily and includes the authority and operational capacity to make 
intraday margin calls in defined circumstances;
    (iii) Calculates margin sufficient to cover its potential future 
exposure to participants in the interval between the last margin 
collection and the close out of positions following a participant 
default;
    (iv) Uses reliable sources of timely price data and procedures and 
sound valuation models for addressing circumstances in which pricing 
data are not readily available or reliable;
    (v) Uses an appropriate method for measuring credit exposure that 
accounts for relevant product risk factors and portfolio effects across 
products;
    (vi) Is monitored by management on an ongoing basis and regularly 
reviewed, tested, and verified by:
    (A) Conducting backtests of its margin resources at least once each 
day using standard predetermined parameters and assumptions;
    (B) Conducting a conforming sensitivity analysis of its margin 
resources and its parameters and assumptions for backtesting on at 
least a monthly basis, and considering modifications to ensure the 
backtesting practices are appropriate for determining the adequacy of 
the covered clearing agency's margin resources;
    (C) Conducting a conforming sensitivity analysis of its margin 
resources and its parameters and assumptions for backtesting more 
frequently than monthly during periods of time when the products 
cleared or markets served display high volatility or become less 
liquid, and when the size or concentration of positions held by the 
covered clearing agency's participants increases or decreases 
significantly; and
    (D) Reporting the results of its analyses under paragraphs 
(e)(6)(vi)(B) and (C) of this section to appropriate decision makers at 
the covered clearing

[[Page 29615]]

agency, including but not limited to, its risk management committee or 
board of directors, and using these results to evaluate the adequacy of 
and adjust its margin methodology, model parameters, and any other 
relevant aspects of its credit risk management framework; and
    (vii) Requires a conforming model validation for the covered 
clearing agency's margin system and related models to be performed not 
less than annually, or more frequently as may be contemplated by the 
covered clearing agency's risk management framework established 
pursuant to paragraph (e)(3) of this section.
    (7) Effectively measure, monitor, and manage the liquidity risk 
that arises in or is borne by the covered clearing agency, including 
measuring, monitoring, and managing its settlement and funding flows on 
an ongoing and timely basis, and its use of intraday liquidity by, at a 
minimum, doing the following:
    (i) Maintaining sufficient liquid resources at the minimum in all 
relevant currencies to effect same-day and, where appropriate, intraday 
and multiday settlement of payment obligations with a high degree of 
confidence under a wide range of foreseeable stress scenarios that 
includes, but is not limited to, the default of the participant family 
that would generate the largest aggregate payment obligation for the 
covered clearing agency in extreme but plausible market conditions;
    (ii) Holding qualifying liquid resources sufficient to meet the 
minimum liquidity resource requirement under paragraph (e)(7)(i) of 
this section in each relevant currency for which the covered clearing 
agency has payment obligations owed to clearing members;
    (iii) Using the access to accounts and services at a Federal 
Reserve Bank, pursuant to Section 806(a) of the Payment, Clearing, and 
Settlement Supervision Act of 2010 (12 U.S.C. 5465(a)), or other 
relevant central bank, when available and where determined to be 
practical by the board of directors of the covered clearing agency, to 
enhance its management of liquidity risk;
    (iv) Undertaking due diligence to confirm that it has a reasonable 
basis to believe each of its liquidity providers, whether or not such 
liquidity provider is a clearing member, has:
    (A) Sufficient information to understand and manage the liquidity 
provider's liquidity risks; and
    (B) The capacity to perform as required under its commitments to 
provide liquidity to the covered clearing agency;
    (v) Maintaining and testing with each liquidity provider, to the 
extent practicable, the covered clearing agency's procedures and 
operational capacity for accessing each type of relevant liquidity 
resource under paragraph (e)(7)(i) of this section at least annually;
    (vi) Determining the amount and regularly testing the sufficiency 
of the liquid resources held for purposes of meeting the minimum liquid 
resource requirement under paragraph (e)(7)(i) of this section by, at a 
minimum:
    (A) Conducting a stress test of its liquidity resources at least 
once each day using standard and predetermined parameters and 
assumptions;
    (B) Conducting a comprehensive analysis on at least a monthly basis 
of the existing stress testing scenarios, models, and underlying 
parameters and assumptions used in evaluating liquidity needs and 
resources, and considering modifications to ensure they are appropriate 
for determining the clearing agency's identified liquidity needs and 
resources in light of current and evolving market conditions;
    (C) Conducting a comprehensive analysis of the scenarios, models, 
and underlying parameters and assumptions used in evaluating liquidity 
needs and resources more frequently than monthly when the products 
cleared or markets served display high volatility, become less liquid, 
when the size or concentration of positions held by the clearing 
agency's participants increases significantly and in other appropriate 
circumstances described in such policies and procedures; and
    (D) Reporting the results of its analyses under paragraphs 
(e)(6)(vii)(B) and (C) of this section to appropriate decision makers 
at the covered clearing agency, including but not limited to, its risk 
management committee or board of directors, and using these results to 
evaluate the adequacy of and adjust its liquidity risk management 
methodology, model parameters, and any other relevant aspects of its 
credit risk management framework;
    (vii) Performing a conforming model validation of its liquidity 
risk models not less than annually or more frequently as may be 
contemplated by the covered clearing agency's risk management framework 
established pursuant to paragraph (e)(3) of this section;
    (viii) Addressing foreseeable liquidity shortfalls that would not 
be covered by the covered clearing agency's liquid resources and seek 
to avoid unwinding, revoking, or delaying the same-day settlement of 
payment obligations;
    (ix) Describing the covered clearing agency's process to replenish 
any liquid resources that the clearing agency may employ during a 
stress event; and
    (x) Undertaking an analysis at least once a year that evaluates the 
feasibility of maintaining sufficient liquid resources at a minimum in 
all relevant currencies to effect same-day and, where appropriate, 
intraday and multiday settlement of payment obligations with a high 
degree of confidence under a wide range of foreseeable stress scenarios 
that includes, but is not limited to, the default of the two 
participant families that would potentially cause the largest aggregate 
payment obligation for the covered clearing agency in extreme but 
plausible market conditions if the covered clearing agency provides 
central counterparty services and is either systemically important in 
multiple jurisdictions or a clearing agency involved in activities with 
a more complex risk profile.
    (8) Define the point at which settlement is final no later than the 
end of the day on which the payment or obligation is due and, where 
necessary or appropriate, intraday or in real time.
    (9) Conduct its money settlements in central bank money, where 
available and determined to be practical by the board of directors of 
the covered clearing agency, and minimize and manage credit and 
liquidity risk arising from conducting its money settlements in 
commercial bank money if central bank money is not used by the covered 
clearing agency.
    (10) Establish and maintain transparent written standards that 
state its obligations with respect to the delivery of physical 
instruments, and establish and maintain operational practices that 
identify, monitor, and manage the risks associated with such physical 
deliveries.
    (11) When the covered clearing agency provides central securities 
depository services:
    (i) Maintain securities in an immobilized or dematerialized form 
for their transfer by book entry, ensure the integrity of securities 
issues, and minimize and manage the risks associated with the 
safekeeping and transfer of securities;
    (ii) Implement internal auditing and other controls to safeguard 
the rights of securities issuers and holders and prevent the 
unauthorized creation or deletion of securities, and conduct periodic 
and at least daily reconciliation of securities issues it maintains; 
and

[[Page 29616]]

    (iii) Protect assets against custody risk through appropriate rules 
and procedures consistent with relevant laws, rules, and regulations in 
jurisdictions where it operates.
    (12) Eliminate principal risk by conditioning the final settlement 
of one obligation upon the final settlement of the other, regardless of 
whether the covered clearing agency settles on a gross or net basis and 
when finality occurs if the covered clearing agency settles 
transactions that involve the settlement of two linked obligations.
    (13) Ensure the covered clearing agency has the authority and 
operational capacity to take timely action to contain losses and 
liquidity demands and continue to meet its obligations by, at a 
minimum, doing the following:
    (i) Addressing allocation of credit losses the covered clearing 
agency may face if its collateral and other resources are insufficient 
to fully cover its credit exposures, including the repayment of any 
funds the covered clearing agency may borrow from liquidity providers;
    (ii) Describing the covered clearing agency's process to replenish 
any financial resources it may use following a default or other event 
in which use of such resources is contemplated; and
    (iii) Requiring the covered clearing agency's participants and, 
when practicable, other stakeholders to participate in the testing and 
review of its default procedures, including any close-out procedures, 
at least annually and following material changes thereto.
    (14) Enable, when the covered clearing agency provides central 
counterparty services for security-based swaps or engages in activities 
that the Commission has determined to have a more complex risk profile, 
the segregation and portability of positions of a participant's 
customers and the collateral provided to the covered clearing agency 
with respect to those positions and effectively protect such positions 
and related collateral from the default or insolvency of that 
participant.
    (15) Identify, monitor, and manage the covered clearing agency's 
general business risk and hold sufficient liquid net assets funded by 
equity to cover potential general business losses so that the covered 
clearing agency can continue operations and services as a going concern 
if those losses materialize, including by:
    (i) Determining the amount of liquid net assets funded by equity 
based upon its general business risk profile and the length of time 
required to achieve a recovery or orderly wind-down, as appropriate, of 
its critical operations and services if such action is taken;
    (ii) Holding liquid net assets funded by equity equal to the 
greater of either (x) six months of the covered clearing agency's 
current operating expenses, or (y) the amount determined by the board 
of directors to be sufficient to ensure a recovery or orderly wind-down 
of critical operations and services of the covered clearing agency, as 
contemplated by the plans established under paragraph (e)(3)(ii) of 
this section, and which:
    (A) Shall be in addition to resources held to cover participant 
defaults or other risks covered under the credit risk standard in 
paragraph (b)(3) or paragraphs (e)(4)(i) through (iii) of this section, 
as applicable, and the liquidity risk standard in paragraphs (e)(7)(i) 
and (ii) of this section; and
    (B) Shall be of high quality and sufficiently liquid to allow the 
covered clearing agency to meet its current and projected operating 
expenses under a range of scenarios, including in adverse market 
conditions; and
    (iii) Maintaining a viable plan, approved by the board of directors 
and updated at least annually, for raising additional equity should its 
equity fall close to or below the amount required under paragraph 
(e)(15)(ii) of this section.
    (16) Safeguard the covered clearing agency's own and its 
participants' assets, minimize the risk of loss and delay in access to 
these assets, and invest such assets in instruments with minimal 
credit, market, and liquidity risks.
    (17) Manage the covered clearing agency's operational risks by:
    (i) Identifying the plausible sources of operational risk, both 
internal and external, and mitigating their impact through the use of 
appropriate systems, policies, procedures, and controls;
    (ii) Establishing and maintaining policies and procedures 
reasonably designed to ensure that systems have a high degree of 
security, resiliency, operational reliability, and adequate, scalable 
capacity; and
    (iii) Establishing and maintaining a business continuity plan that 
addresses events posing a significant risk of disrupting operations.
    (18) Establish objective, risk-based, and publicly disclosed 
criteria for participation, which permit fair and open access by direct 
and, where relevant, indirect participants and other financial market 
utilities, require participants to have sufficient financial resources 
and robust operational capacity to meet obligations arising from 
participation in the clearing agency, and monitor compliance with such 
participation requirements on an ongoing basis.
    (19) Identify, monitor, and manage the material risks to the 
covered clearing agency arising from arrangements in which firms that 
are indirect participants in the covered clearing agency rely on the 
services provided by direct participants to access the covered clearing 
agency's payment, clearing, or settlement facilities.
    (20) Identify, monitor, and manage risks related to any link the 
covered clearing agency establishes with one or more other clearing 
agencies, financial market utilities, or trading markets.
    (21) Be efficient and effective in meeting the requirements of its 
participants and the markets it serves, and have the covered clearing 
agency's management regularly review the efficiency and effectiveness 
of its:
    (i) Clearing and settlement arrangements;
    (ii) Operating structure, including risk management policies, 
procedures, and systems;
    (iii) Scope of products cleared, settled, or recorded; and
    (iv) Use of technology and communication procedures.
    (22) Use, or at a minimum accommodate, relevant internationally 
accepted communication procedures and standards in order to facilitate 
efficient payment, clearing, and settlement.
    (23) Maintain clear and comprehensive rules and procedures that 
provide for the following:
    (i) Publicly disclosing all relevant rules and material procedures, 
including key aspects of its default rules and procedures;
    (ii) Providing sufficient information to enable participants to 
identify and evaluate the risks, fees, and other material costs they 
incur by participating in the covered clearing agency;
    (iii) Publicly disclosing relevant basic data on transaction volume 
and values;
    (iv) Providing a comprehensive public disclosure of its material 
rules, policies, and procedures regarding governance arrangements and 
legal, financial, and operational risk management, accurate in all 
material respects at the time of publication, that includes:
    (A) Executive summary. An executive summary of the key points from 
paragraphs (e)(23)(iv)(B), (C), and (D) of this section;
    (B) Summary of material changes since the last update of the 
disclosure. A summary of the material changes since the last update of 
paragraph (e)(23)(iv)(C) or (D) of this section;

[[Page 29617]]

    (C) General background on the covered clearing agency. A 
description of:
    (1) The covered clearing agency's function and the markets it 
serves,
    (2) Basic data and performance statistics on the covered clearing 
agency's services and operations, such as basic volume and value 
statistics by product type, average aggregate intraday exposures to its 
participants, and statistics on the covered clearing agency's 
operational reliability, and
    (3) The covered clearing agency's general organization, legal and 
regulatory framework, and system design and operations; and
    (D) Standard-by-standard summary narrative. A comprehensive 
narrative disclosure for each applicable standard set forth in 
paragraphs (e)(1) through (22) of this section with sufficient detail 
and context to enable a reader to understand the covered clearing 
agency's approach to controlling the risks and addressing the 
requirements in each standard; and
    (v) Updating the public disclosure under paragraph (e)(23)(iv) of 
this section every two years, or more frequently following changes to 
its system or the environment in which it operates to the extent 
necessary to ensure statements previously provided under paragraph 
(e)(23)(iv) of this section remain accurate in all material respects.
    (f) For purposes of enforcing the Payment, Clearing, and Settlement 
Supervision Act of 2010 (12 U.S.C. 5461 et seq.), a designated clearing 
agency for which the Commission acts as supervisory agency shall be 
subject to, and the Commission shall have the authority under, the 
provisions of paragraphs (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 such designated clearing agency were an insured 
depository institution and the Commission were the appropriate Federal 
banking agency for such insured depository institution.

    By the Commission.

    Dated: March 12, 2014.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05806 Filed 3-25-14; 8:45 a.m.]

    Editorial Note: Proposed rule document 2014-05806 was originally 
published on pages 16865 through 16975 in the issue of Wednesday, 
March 26, 2014. In that publication the footnotes contained 
erroneous entries. The corrected document is republished in its 
entirety.

[FR Doc. R1-2014-05806 Filed 5-21-14; 8:45 am]
BILLING CODE 1505-01-D