[Federal Register Volume 81, Number 198 (Thursday, October 13, 2016)]
[Rules and Regulations]
[Pages 70786-70906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23891]



[[Page 70785]]

Vol. 81

Thursday,

No. 198

October 13, 2016

Part III





Securities and Exchange Commission





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17 CFR Part 240





Standards for Covered Clearing Agencies; Final Rule

  Federal Register / Vol. 81 , No. 198 / Thursday, October 13, 2016 / 
Rules and Regulations  

[[Page 70786]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-78961; File No. S7-03-14]
RIN 3235-AL48


Standards for Covered Clearing Agencies

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is adopting amendments to Rule 17Ad-22 and adding new 
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''), enacted in 
Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010 (``Dodd-Frank Act''). Among other things, the rules 
establish enhanced standards for the operation and governance of those 
clearing agencies registered with the Commission (``registered clearing 
agencies'') that meet the definition of ``covered clearing agency.''

DATES: Effective date: December 12, 2016.
    Compliance date: April 11, 2017.
    The compliance date is discussed in Part II.G below.

FOR FURTHER INFORMATION CONTACT: Jeffrey Mooney, Assistant Director; 
Stephanie Park, Senior Special Counsel; Matthew Lee, Branch Chief; 
Elizabeth Fitzgerald, Branch Chief; or DeCarlo McLaren, Attorney-
Adviser; Office of Market Infrastructure, 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 is amending Rule 17Ad-22 by 
adding new Rule 17Ad-22(e) to establish requirements for the operation 
and governance of registered clearing agencies that meet the definition 
of a ``covered clearing agency.'' A covered clearing agency includes a 
registered clearing agency that (i) has been designated as systemically 
important by the Financial Stability Oversight Council (``FSOC'') and 
for which the Commission is the supervisory agency under the Clearing 
Supervision Act (``designated clearing agency''), or (ii) provides 
central counterparty (``CCP'') services for security-based swaps or is 
involved in activities the Commission determines to have a more complex 
risk profile (``complex risk profile clearing agency''), unless the 
Commodity Futures Trading Commission (``CFTC'') is the supervisory 
agency under the Clearing Supervision Act.
    To facilitate the addition of new Rule 17Ad-22(e), the Commission 
is amending existing Rule 17Ad-22(d) to limit its application to 
clearing agencies other than covered clearing agencies and revising 
Rule 17Ad-22(a) to add 14 new definitions. The Commission is also 
adopting new Rule 17Ad-22(f) to codify the Commission's statutory 
authority under Section 807(c) of the Clearing Supervision Act and new 
Rule 17Ab2-2 to establish procedures for making determinations 
regarding covered clearing agencies in certain defined circumstances, 
described further below.
    In developing these rules, Commission staff has consulted with the 
FSOC, CFTC, and Board of Governors of the Federal Reserve System 
(``FRB''). The Commission has also considered the relevant 
international standards as required by Section 805(a)(2)(A) of the 
Clearing Supervision Act.\1\ The relevant international standards for 
designated clearing agencies and complex risk profile clearing agencies 
are the Principles for Financial Market Infrastructures (``PFMI'').\2\
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    \1\ See 12 U.S.C. 5464(a)(2)(A).
    \2\ 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. In 2014, the CPSS became the Committee on 
Payments and Market Infrastructures (``CPMI'').
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Table of Contents

I. Introduction
    A. Regulatory Framework
    1. Exchange Act
    2. Dodd-Frank Act
    3. Rule 17Ad-22
    4. Regulation SCI
    5. Relevant International Standards
    6. Recognition and Equivalence Within the EU
    B. Summary of the Commission's Proposal
    C. Comments Received
    1. Financial Stability and the Dodd-Frank Act
    2. Relationship Between Rules 17Ad-22(d) and (e)
    3. Relationship Among Rules 17Ad-22(b), (c), and (e)
    4. Risk of Duplicative or Inconsistent Regulation
    5. Flexible Versus Prescriptive Approaches to Regulation, and 
the Role of Rule Filings under Rule 19b-4
    6. Consistency With the PFMI
    7. Other Comments
II. Description of the Amendments to Rule 17AD-22 and Rule 17AB2-2
    A. Scope of Rule 17Ad-22(e)
    1. As Applied to CCPs Generally
    2. As Applied to Security-Based Swap Clearing Agencies
    3. As Applied to Dually Registered Clearing Agencies
    B. Principles-Based Approach to Rule 17Ad-22(e)
    C. Requirements for Covered Clearing Agencies Under Rule 17Ad-
22(e)
    1. Rule 17Ad-22(e)(1): Legal Risk
    2. Rule 17Ad-22(e)(2): Governance
    3. Rule 17Ad-22(e)(3): Framework for the Comprehensive 
Management of Risks
    4. Rule 17Ad-22(e)(4): Credit Risk
    5. Rule 17Ad-22(e)(5): Collateral
    6. Rule 17Ad-22(e)(6): Margin
    7. Rule 17Ad-22(e)(7): Liquidity Risk
    8. Rule 17Ad-22(e)(8): Settlement Finality
    9. Rule 17Ad-22(e)(9): Money Settlements
    10. Rule 17Ad-22(e)(10): Physical Delivery Risks
    11. Rule 17Ad-22(e)(11): CSDs
    12. Rule 17Ad-22(e)(12): Exchange-of-Value Settlement Systems
    13. Rule 17Ad-22(e)(13): Participant-Default Rules and 
Procedures
    14. Rule 17Ad-22(e)(14): Segregation and Portability
    15. Rule 17Ad-22(e)(15): General Business Risk
    16. Rule 17Ad-22(e)(16): Custody and Investment Risks
    17. Rule 17Ad-22(e)(17): Operational Risk Management
    18. Rule 17Ad-22(e)(18): Access and Participation Requirements
    19. Rule 17Ad-22(e)(19): Tiered Participation Arrangements
    20. Rule 17Ad-22(e)(20): Links
    21. Rule 17Ad-22(e)(21): Efficiency and Effectiveness
    22. Rule 17Ad-22(e)(22): Communication Procedures and Standards
    23. Rule 17Ad-22(e)(23): Disclosure of Rules, Key Procedures, 
and Market Data
    D. Rule 17Ab2-2
    1. Proposed Rule
    2. Comments Received and Commission Response
    3. Final Rule
    E. Rule 17Ad-22(f)
    F. Amendment to Rule 17Ad-22(d)
    G. Effective and Compliance Dates
III. Economic Analysis
    A. Economic Baseline
    1. Regulatory Framework for Registered Clearing Agencies
    2. Current Practices
    B. Consideration of Benefits, Costs, and the Effect on 
Competition, Efficiency, and Capital Formation
    1. General Economic Considerations
    2. Effect on Competition, Efficiency, and Capital Formation
    3. Effect of Amendments to Rule 17Ad-22 and Rule 17Ab2-2
IV. Paperwork Reduction Act
    A. Summary of Collection of Information and Use of Information
    1. Rule 17Ad-22(e)(1)
    2. Rule 17Ad-22(e)(2)
    3. Rule 17Ad-22(e)(3)
    4. Rule 17Ad-22(e)(4)
    5. Rule 17Ad-22(e)(5)
    6. Rule 17Ad-22(e)(6)
    7. Rule 17Ad-22(e)(7)

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    8. Rule 17Ad-22(e)(8)
    9. Rule 17Ad-22(e)(9)
    10. Rule 17Ad-22(e)(10)
    11. Rule 17Ad-22(e)(11)
    12. Rule 17Ad-22(e)(12)
    13. Rule 17Ad-22(e)(13)
    14. Rule 17Ad-22(e)(14)
    15. Rule 17Ad-22(e)(15)
    16. Rule 17Ad-22(e)(16)
    17. Rule 17Ad-22(e)(17)
    18. Rule 17Ad-22(e)(18)
    19. Rule 17Ad-22(e)(19)
    20. Rule 17Ad-22(e)(20)
    21. Rule 17Ad-22(e)(21)
    22. Rule 17Ad-22(e)(22)
    23. Rule 17Ad-22(e)(23)
    24. Rule 17Ab2-2
    25. Rule 17Ad-22(c)(1)
    B. Respondents
    C. Total Annual Reporting and Recordkeeping Burdens
    1. Rule 17Ad-22(e)(1)
    2. Rule 17Ad-22(e)(2)
    3. Rule 17Ad-22(e)(3)
    4. Rule 17Ad-22(e)(4)
    5. Rule 17Ad-22(e)(5)
    6. Rule 17Ad-22(e)(6)
    7. Rule 17Ad-22(e)(7)
    8. Rule 17Ad-22(e)(8)
    9. Rule 17Ad-22(e)(9)
    10. Rule 17Ad-22(e)(10)
    11. Rule 17Ad-22(e)(11)
    12. Rule 17Ad-22(e)(12)
    13. Rule 17Ad-22(e)(13)
    14. Rule 17Ad-22(e)(14)
    15. Rule 17Ad-22(e)(15)
    16. Rule 17Ad-22(e)(16)
    17. Rule 17Ad-22(e)(17)
    18. Rule 17Ad-22(e)(18)
    19. Rule 17Ad-22(e)(19)
    20. Rule 17Ad-22(e)(20)
    21. Rule 17Ad-22(e)(21)
    22. Rule 17Ad-22(e)(22)
    23. Rule 17Ad-22(e)(23)
    24. Total Burden for Rule 17Ad-22(e)
    25. Total Burden for Rule 17Ab2-2
    26. Total Burden for Rule 17Ad-22(c)(1)
    D. Collection of Information Is Mandatory
    E. Confidentiality
V. Regulatory Flexibility Act
    A. Registered Clearing Agencies
    B. Certification
VI. Statutory Authority

I. Introduction

A. Regulatory Framework

    Below is an overview of the regulatory requirements for registered 
clearing agencies that relate to the amendments to Rule 17Ad-22 and new 
Rule 17Ab2-2 as set forth under the Exchange Act, the Dodd-Frank Act, 
and Commission rules and regulations thereunder.
1. Exchange Act
    Section 17A of the Exchange Act directs the Commission to 
facilitate the establishment of (i) a national system for the prompt 
and accurate clearance and settlement of securities transactions and 
(ii) linked or coordinated facilities for clearance and settlement of 
securities transactions.\3\ In facilitating the establishment of the 
national clearance and settlement system, the Commission must 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.\4\
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    \3\ See 15 U.S.C. 78q-1(a)(2); see also 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'').
    \4\ See 15 U.S.C. 78q-1(a)(2)(A).
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    As discussed in the Standards for Covered Clearing Agencies 
proposing release (``CCA Standards proposing release''),\5\ clearing 
agencies are broadly defined in the Exchange Act and undertake a 
variety of functions.\6\ Under Section 17A and Rule 17Ab2-1,\7\ an 
entity that meets the definition of a clearing agency is required to 
register with the Commission or obtain from the Commission an exemption 
from registration prior to performing the functions of a clearing 
agency. To grant registration to a clearing agency, the Exchange Act 
requires the Commission to determine that the rules and operations of 
the applicant clearing agency meet the standards set forth in Section 
17A.\8\ Specifically, Section 17A(b)(3) provides that a clearing agency 
shall not be registered unless the Commission determines that the 
clearing agency's rules are consistent with the Exchange Act. In so 
doing, the Commission must determine that, among other things, (i) the 
clearing agency is so organized and has the capacity to be able to 
facilitate the prompt and accurate clearance and settlement of 
securities transactions and to safeguard securities or funds in its 
custody or control, (ii) the rules of the clearing agency assure a fair 
representation of its members and participants in the selection of its 
directors and administration of its affairs, (iii) the rules of the 
clearing agency provide for the equitable allocation of reasonable dues 
and fees, and (iv) the rules of the clearing agency are designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions.\9\
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    \5\ See Exchange Act Release No. 34-71699 (Mar. 12, 2014), 79 FR 
16865 (Mar. 26, 2014), corrected at 79 FR 29507, 29510-11 (May 22, 
2014); see also Exchange Act Release No. 34-68080 (Oct. 22, 2012), 
77 FR 66219, 66221-22 (Nov. 2, 2012) (discussing the same) 
(``Clearing Agency Standards adopting release'').
    \6\ See 15 U.S.C. 78c(a)(23)(A) (providing the definition of 
``clearing agency'').
    \7\ See 17 CFR 240.17Ab2-1.
    \8\ See 15 U.S.C. 78q-1(b)(3)(A) through(I) (identifying nine 
determinations that the Commission must make regarding the rules and 
structure of a clearing agency to grant registration). In 1980, the 
Commission published a statement of the views and positions of 
Commission staff regarding the requirements of Section 17A. See 
Exchange Act Release No. 16900 (June 17, 1980), 45 FR 41920 (June 
23, 1980).
    \9\ See 15 U.S.C. 78q-1(b)(3)(A), (C), (D), (F).
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    Following registration, the Commission supervises registered 
clearing agencies using various tools. One of these tools is Rule 17a-1 
under the Exchange Act, which requires every registered clearing agency 
to keep and preserve at least one copy of all documents, including all 
correspondence, memoranda, papers, books, notices, accounts, and other 
such records as shall be made or received by it in the course of its 
business as such and in the conduct of its self-regulatory activity for 
a period not less than five years and, upon request of any 
representative of the Commission, to promptly furnish to the possession 
of such representative copies of any such documents required to be 
kept.\10\ Another of these tools is the rule filing process for self-
regulatory organizations (``SROs''),\11\ set forth in Section 19(b) of 
the Exchange Act and rules and regulations thereunder. A registered 
clearing agency is required to file with the Commission any proposed 
rule or proposed change in, addition to, or deletion from the 
registered clearing agency's rules.\12\ The Commission publishes all 
proposed rule changes for comment and reviews them. Proposed rule 
changes are generally required to be approved by the Commission prior 
to going into effect; however, certain types of proposed rule changes 
take effect upon filing with the Commission.\13\ When reviewing a 
proposed rule change, the Commission considers the submissions of the 
clearing agency together with any comments received on the proposed 
rule change in making a determination of whether the proposed rule 
change is consistent with the requirements of the Exchange Act. In

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addition, Section 17A of the Exchange Act further provides the 
Commission with authority to adopt rules as necessary or appropriate in 
the public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of the Exchange Act and prohibits a 
clearing agency from engaging in any activity in contravention of such 
rules and regulations.\14\
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    \10\ See 17 CFR 240.17a-1(a) through (c); see also 15 U.S.C. 
78q(a)(1), (2).
    \11\ Upon registration, registered clearing agencies are SROs 
under Section 3(a)(26) of the Exchange Act. See 15 U.S.C. 
78c(a)(26).
    \12\ An SRO must submit proposed rule changes to the Commission 
for review and approval pursuant to Rule 19b-4 under the Exchange 
Act. A stated policy, practice, or interpretation of an SRO, such as 
its written policies and procedures, would generally be deemed to be 
a proposed rule change. See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
    \13\ See 15 U.S.C. 78s(b)(3)(A) (setting forth the types of 
proposed rule changes that take effect upon filing with the 
Commission). The Commission may temporarily suspend those rule 
changes within 60 days of filing and institute proceedings to 
determine whether to approve or disapprove the rule changes. See 15 
U.S.C. 78s(b)(3)(C).
    \14\ See 15 U.S.C. 78q-1(d).
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    In addition, Commission staff conducts examinations of registered 
clearing agencies to assess, among other things, existing and emerging 
risks, compliance with applicable statutory and regulatory 
requirements, and a clearing agency's oversight of compliance by its 
participants with its rules. Section 21(a) of the Exchange Act provides 
the Commission with authority to initiate and conduct investigations to 
determine if there have been violations of the federal securities 
laws.\15\ Section 19(h) of the Exchange Act also provides the 
Commission with authority to institute civil actions seeking injunctive 
and other equitable remedies and/or administrative proceedings arising 
out of such investigations.\16\
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    \15\ See 15 U.S.C. 78u(a).
    \16\ See 15 U.S.C. 78s(h).
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2. Dodd-Frank Act
    Title VII of the Dodd-Frank Act provides the Commission with 
authority to regulate certain over-the-counter (``OTC'') derivatives. 
Specifically, Title VII added provisions to the Exchange Act that (i) 
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 (ii) direct the 
Commission to adopt rules with respect to security-based swap clearing 
agencies.\17\
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    \17\ 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).
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    The Clearing Supervision Act, enacted in Title VIII of the Dodd-
Frank Act, provides for the enhanced regulation of certain financial 
market utilities (``FMUs'').\18\ FMUs include 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.\19\ FSOC has designated certain 
FMUs as systemically important or likely to become systemically 
important (``SIFMUs'').\20\ SIFMUs are required to file 60-days advance 
notice of changes to rules, procedures, and operations that could 
materially affect the nature or level of risk presented by the SIFMU 
(``advance notice'').\21\ The Clearing Supervision Act authorizes the 
Commission to object to changes proposed in such an advance notice, 
which would prevent the clearing agency from implementing the 
change.\22\ The Clearing Supervision Act also provides for enhanced 
coordination between the Commission and FRB by allowing for regular on-
site examinations and information sharing.\23\ The Clearing Supervision 
Act further provides that the Commission and CFTC shall coordinate with 
the FRB to jointly develop risk management supervision programs for 
SIFMUs.\24\ In addition, the Clearing Supervision Act provides that the 
Commission and CFTC may each prescribe risk management standards 
governing the operations related to payment, clearing, and settlement 
activities (``PCS activities'') of SIFMUs for which each is the 
supervisory agency, in consultation with the FSOC and FRB and taking 
into consideration relevant international standards and existing 
prudential requirements.\25\
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    \18\ The objectives and principles for the risk management 
standards prescribed under the Clearing Supervision Act shall be to 
(i) promote robust risk management; (ii) promote safety and 
soundness; (iii) reduce systemic risks; and (iv) support the 
stability of the broader financial system. Further, the Clearing 
Supervision Act states that the standards may address areas such as 
risk management policies and procedures; margin and collateral 
requirements; participant or counterparty default policies and 
procedures; the ability to complete timely clearing and settlement 
of financial transactions; capital and financial resources 
requirements for designated FMUs; and other areas that are necessary 
to achieve the objectives and principles described above. See 12 
U.S.C. 5464(b), (c).
    \19\ See 12 U.S.C. 5462(6). 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).
    \20\ See 12 U.S.C. 5463. 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). On July 18, 2012, the FSOC designated as 
systemically important the following then-registered clearing 
agencies: CME Group (``CME''), The Depository Trust Company 
(``DTC''), Fixed Income Clearing Corporation (``FICC''), ICE Clear 
Credit (``ICC''), National Securities Clearing Corporation 
(``NSCC''), and The Options Clearing Corporation (``OCC'').
    The Commission is the supervisory agency for DTC, FICC, NSCC, 
and OCC, and the CFTC is the supervisory agency for CME and ICE. The 
Commission jointly regulates ICC and OCC with the CFTC. The 
Commission also jointly regulates ICE Clear Europe (``ICEEU''), 
which has not been designated as systemically important by FSOC, 
with the CFTC and Bank of England.
    The Commission also jointly regulated CME with the CFTC until 
2015, when the Commission published an order approving CME's request 
to withdraw from registration as a clearing agency. See Exchange Act 
Release No. 34-76678 (Dec. 17, 2015), 80 FR 79983 (Dec. 23, 2015).
    \21\ See 12 U.S.C. 5465(e)(1)(A); 17 CFR 240.19b-4(n). The 
Commission published a final rule concerning the filing of advance 
notices for designated clearing agencies in 2012. See Exchange Act 
Release No. 34-67286 (June 28, 2012), 77 FR 41602 (July 13, 2012).
    \22\ See 12 U.S.C. 5465(e).
    \23\ See 12 U.S.C. 5466.
    \24\ See 12 U.S.C. 5472; see also Risk Management Supervision of 
Designated Clearing Entities (July 2011), available at https://www.federalreserve.gov/publications/other-reports/files/risk-management-supervision-report-201107.pdf (describing the joint 
supervisory framework of the Commission, CFTC, and FRB).
    \25\ See 12 U.S.C. 5464(a)(2). The Commission notes that, under 
Rule 17Ad-22(a)(6), a SIFMU for which the Commission is the 
supervisory agency is a ``designated clearing agency.'' See infra 
note 134 and accompanying text.
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3. Rule 17Ad-22
    In 2012, the Commission adopted Rule 17Ad-22 under the Exchange Act 
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.\26\ 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.\27\ In this regard, Rule 17Ad-22(b) 
established certain requirements for clearing agencies that provide CCP 
services, and Rule 17Ad-22(d) established requirements for the 
operation and governance of all registered clearing agencies.\28\
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    \26\ See CCA Standards proposing release, supra note 5, at 
29513; see also 17 CFR 240.17Ad-22; Clearing Agency Standards 
adopting release, supra note 5, at 66225-26.
    \27\ See Clearing Agency Standards adopting release, supra note 
5, at 66224-25.
    \28\ See 17 CFR 240.17Ad-22(b), (d).
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    The requirements in Rule 17Ad-22 help guide Commission 
determinations, when considering an application to register as a 
clearing agency, that the rules and operations of the applicant 
clearing agency satisfy the requirements in Section 17A of the Exchange 
Act.\29\ Today's amendments to Rule 17Ad-22 build on the existing 
framework for registered clearing agencies by establishing new 
requirements for designated clearing agencies, complex risk profile 
clearing agencies unless the

[[Page 70789]]

CFTC is the supervisory agency, and, pursuant to Rule 17Ab2-2, any 
other clearing agencies determined by the Commission to be covered 
clearing agencies.
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    \29\ See supra notes 8-9 and accompanying text.
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4. Regulation SCI
    In 2014, the Commission adopted Regulation Systems Compliance and 
Integrity (``Regulation SCI'') to strengthen the technology 
infrastructure of the U.S. securities markets.\30\ In particular, the 
Commission notes that Regulation SCI is designed to reduce the 
occurrence of systems issues, improve resiliency when systems problems 
do occur, and enhance the Commission's oversight and enforcement of 
securities market technology infrastructure. Since adoption of 
Regulation SCI, the Commission has established a monitoring and 
examination structure to oversee compliance with Regulation SCI.
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    \30\ See Exchange Act Release No. 34-73639 (Nov. 19, 2014), 79 
FR 72252 (Dec. 5, 2014) (``Regulation SCI adopting release'').
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    Regulation SCI applies to ``SCI entities,'' a term which includes 
SROs such as registered clearing agencies.\31\ It requires SCI entities 
to, among other things, maintain policies and procedures reasonably 
designed to ensure that certain systems have levels of capacity, 
integrity, resiliency, availability, and security adequate to maintain 
their operational capability and promote the maintenance of fair and 
orderly markets, and that they operate in a manner that complies with 
the Exchange Act as well as their own rules.\32\ Certain SCI systems 
that are ``critical SCI systems'' are held to heightened requirements 
under Regulation SCI,\33\ including a requirement to establish, 
maintain, and enforce written policies and procedures reasonably 
designed, among other things, to include a two-hour resumption goal 
following a wide-scale disruption,\34\ and broader dissemination 
obligations for ``major SCI events.'' \35\ The definition of critical 
SCI systems in Regulation SCI was designed to cover ``those SCI systems 
whose functions are critical to the operation of the markets, including 
those systems that represent potential single points of failure in the 
securities markets.'' \36\ Regulation SCI requires SCI entities to take 
certain corrective actions when ``SCI events'' occur. Regulation SCI 
defines SCI events to include an event in an SCI entity's SCI systems 
that disrupts, or significantly degrades, the normal operation of an 
SCI system. In the Regulation SCI adopting release, the Commission 
explained its view that for clearance and settlement systems a return 
to ``normal operations'' following a systems disruption would include 
all steps necessary to effectuate timely and accurate end of day 
settlement.\37\
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    \31\ See 17 CFR 242.1000 (providing the definition of ``SCI 
SROs'').
    \32\ See 17 CFR 242.1001.
    \33\ See 17 CFR 242.1000 (providing definitions of ``SCI 
systems'' and ``critical SCI systems'').
    \34\ See 17 CFR 242.1001(a)(2)(v).
    \35\ See 17 CFR 242.1002(c)(3).
    \36\ See Regulation SCI adopting release, supra note 30, at 
72277.
    \37\ See id. at 72285 n.395.
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5. Relevant International Standards
    When prescribing regulations that contain risk management standards 
for designated clearing agencies, Section 805(a) of the Clearing 
Supervision Act requires the Commission to consider the relevant 
international standards and existing prudential requirements.\38\ As 
previously noted, the PFMI is the relevant international standard for 
systemically important financial market infrastructures, such as 
covered clearing agencies.\39\ The PFMI sets forth twenty-four 
principles, each of which includes a headline standard and a list of 
key considerations that further explain the headline standard. 
Accompanying explanatory notes further discuss the objectives of and 
rationales for the standards, as well as provide guidance on how the 
standard can be implemented.\40\
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    \38\ See 12 U.S.C. 5464(a)(2); see also supra note 25 and 
accompanying text.
    \39\ See supra note 2 and accompanying text. The PFMI 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 PFMI, supra note 2, at 7. FMIs include CCPs, 
central securities depositories (``CSDs''), securities settlement 
systems (``SSSs''), and trade repositories (``TRs''). Cf. 12 U.S.C. 
5462(6)(B) (defining ``financial market utility'' under the Clearing 
Supervision Act). The PFMI presumes that all CSDs, SSSs, CCPs, and 
TRs are systemically important in their home jurisdiction. See PFMI, 
supra note 2, 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'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).
    \40\ See PFMI, supra note 2, at 17.
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    Commission staff co-chaired the working group within CPSS-IOSCO 
that drafted both the consultative and final versions of the PFMI,\41\ 
and the Commission believes that the requirements applicable to 
clearing agencies set forth in the Exchange Act and the rules 
thereunder, including the rules adopted today, are consistent with the 
standards set forth in the PFMI.\42\ Regulatory authorities around the 
world are in various stages of updating their regulatory regimes to 
adopt measures consistent with the PFMI.\43\ The rules set forth below 
are a continuation of the Commission's active effort to foster the 
development of the national clearance and settlement system, consistent 
with the requirements of the Exchange Act, and enhance the regulation 
and supervision of SIFMUs, consistent with the Clearing Supervision 
Act.
---------------------------------------------------------------------------

    \41\ CPMI-IOSCO has also published subsequent guidance relevant 
to implementation of the PFMI. See PFMI: Disclosure framework and 
Assessment methodology (Dec. 2012), available at http://www.bis.org/cpmi/publ/d106.pdf (``PFMI disclosure framework''); Recovery of FMIs 
(Oct. 2014), available at http://www.bis.org/cpmi/publ/d121.pdf; 
Public quantitative disclosure standards for CCPs (Feb. 2015), 
available at http://www.bis.org/cpmi/publ/d125.pdf (``PFMI 
quantitative disclosures''); Guidance on cyber resilience for FMIs 
(Nov. 2015, consultative report), available at http://www.bis.org/cpmi/publ/d138.pdf; Resilience and recovery for CCPs (July 2016, 
consultative report), available at http://www.bis.org/cpmi/publ/d149.pdf.
    \42\ See 15 U.S.C. 78q-1.
    \43\ See, e.g., CPMI-IOSCO, Implementation monitoring of PFMIs: 
Third update to the Level 1 assessment report (June 2016), available 
at http://www.bis.org/cpmi/publ/d145.pdf (describing efforts by 
various jurisdictions to adopt standards for FMIs consistent with 
the PFMI). Both the CFTC and FRB have indicated publicly that they 
have completed all measures necessary to incorporate fully the PFMI 
into their regulatory frameworks. See id. at 35.
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    In addition, the Basel Committee on Banking Supervision (``BCBS'') 
has finalized an updated capital framework that sets standards for 
capital charges arising from bank exposures to CCPs related to OTC 
derivatives, exchange-traded derivatives, and securities financing 
transactions.\44\ Among other things, the BCBS capital framework 
includes lower capital charges for exposures to a qualifying CCP 
(``QCCP'') that is subject to a regulatory framework consistent with 
the PFMI. The availability of QCCP status for certain covered clearing 
agencies with bank clearing members would have

[[Page 70790]]

implications for the capital charges applicable to those members.\45\
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    \44\ See BCBS, Capital requirements for bank exposures to 
central counterparties (Apr. 2014), available at http://www.bis.org/publ/bcbs282.pdf (``BCBS capital framework''). See generally Basel 
III: A global regulatory framework for more resilient banks and 
banking systems (rev. June 2011), available at http://www.bis.org/publ/bcbs189.pdf (describing the Basel III framework, which preceded 
the BCBS capital framework).
    \45\ See infra Part III.A.1.b (further discussing the BCBS 
capital framework). The FRB 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''). In doing so, the FRB noted the ongoing international 
discussions on the topic and stated that it intends to revisit its 
rules once the BCBS capital framework is revised. See id. The FRB 
and the Office of the Comptroller of the Currency's rules define 
``QCCP'' to mean, among other things, a SIFMU under the Clearing 
Supervision Act. See 12 CFR 217.2; see also Regulatory Capital 
Rules, supra, at 62100.
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6. Recognition and Equivalence Within the EU
    The Commission is aware of recent public attention on the 
availability of QCCP status under EU capital requirements for certain 
covered clearing agencies that operate in the United States and have 
bank clearing members affiliated with a European Union (``EU'') 
entity.\46\ Specifically, the Commission understands that availability 
of QCCP status in the EU for a U.S. CCP hinges on the European 
Securities and Markets Authority (``ESMA'') recognizing the U.S. CCP 
pursuant to the requirements of the European Markets Infrastructure 
Regulation (``EMIR''). Recognition by ESMA, in turn, is subject to the 
European Commission (``EC'') first making certain findings regarding 
the Commission's regulatory regime for CCPs.\47\ Recognition by ESMA 
would result in QCCP status for those U.S. CCPs for purposes of the 
EU's capital requirements, allowing EU-based clearing members of U.S. 
CCPs to continue to operate and provide clearing services to market 
participants based in the EU. Under the EU's capital requirements 
regulation, EU banks and their subsidiaries will incur higher capital 
charges if they clear through a U.S. CCP not afforded QCCP status in 
the EU, that is, a CCP not recognized or authorized by ESMA.\48\
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    \46\ See, e.g., Fiona Maxwell, EU members of U.S. options CCP 
face $30 billion capital hit: OCC fears approval will be held up by 
absence of SEC clearing rules, Risk.net, Nov. 30, 2015, available at 
http://www.risk.net/risk-magazine/news/2436901/eu-members-of-us-options-ccp-face-usd30bn-capital-hit (``A new wrinkle in the 
transatlantic dispute over clearing house regulation could leave 18 
European banks facing an estimated $30 billion jump in capital 
requirements, and limit access to equity options listed in the 
[United States] . . . . The potential capital hit for OCC members is 
a consequence of the Capital Requirements Regulation (CRR), which 
states that European banks--whether acting through their branch or 
subsidiary--will only be given a 2% risk weight for cleared trades 
if using a so-called qualifying CCP following expiration of the 
current extended grandfathering period. Clearing at a non-QCCP can 
translate to risk weights of more than 1250%.'').
    \47\ On March 16, 2016, the EC issued an equivalence decision 
stating that the CFTC's regulatory framework for CCPs is equivalent 
to EU requirements. See Commission Implementing Decision (EU) 2016/
377 of 15 March 2016 on the equivalence of the regulatory framework 
of the United States of America for central counterparties that are 
authorised and supervised by the CFTC to the requirements of 
Regulation (EU) No 648/2012 of the European Parliament and of the 
Council, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32016D0377.
    \48\ Regulation (EU) No 575/2013 on prudential requirements for 
credit institutions and investment firms. As noted earlier, although 
the United States affords QCCP status to SIFMUs, QCCP status in the 
EU is distinct from the U.S. banking regulators' determination that 
any FMU designated as systemically important by FSOC is a U.S. QCCP.
---------------------------------------------------------------------------

    As an initial matter, the Commission understands that, for the EC 
to make an equivalence decision, Article 25(6) of the European Markets 
Infrastructure Regulation (``EMIR'') requires the EC to determine that

the legal and supervisory arrangements of a third country ensure 
that CCPs authorised in that third country comply with legally 
binding requirements which are equivalent to the requirements laid 
down in [EMIR], that those CCPs are subject to effective supervision 
and enforcement in that third country on an ongoing basis and that 
the legal framework of that third country provides for an effective 
equivalent system for the recognition of CCPs authorised under 
third-country legal regimes.\49\

    \49\ See Article 25(6), Regulation (EU) No. 648/2012 of the 
European Parliament and of the Council of 4 July 2012 on OTC 
derivatives, central counterparties and trade repositories, 
available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32012R0648.

The Commission understands that its adoption of new Rule 17Ad-22(e) 
could be relevant to the EC's ongoing consideration of the Commission's 
regulatory regime for CCPs.\50\ Further, with respect to EMIR's 
requirement that the legal and supervisory regime of the United States 
include an ``effective equivalent system'' for the recognition of CCPs 
authorized under non-U.S. legal regimes, the Commission notes the 
following.\51\
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    \50\ See, e.g., Philip Stafford, European banks face U.S. 
capital hit unless rules converge, FT.com, Apr. 4, 2016, available 
at http://www.ft.com/cms/s/0/bbe6678a-f5c5-11e5-803c-d27c7117d132.html#axzz48oFXlFrR.
    \51\ See Article 25(6) of EMIR.
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    First, the Commission observes that, in certain specific contexts, 
it is not unfamiliar with the EMIR regime given that one registered 
clearing agency, ICEEU, is subject to EMIR and will be a covered 
clearing agency pursuant to Rule 17Ad-22(a)(5).\52\ As previously 
discussed, each registered clearing agency is an SRO subject to Section 
19(b) of the Exchange Act, which requires SROs to submit proposed rule 
changes to the Commission for public comment and Commission review and 
approval.\53\ In the course of its regulation of ICEEU as a registered 
clearing agency, the Commission has published, reviewed, and approved 
under the Exchange Act a number of proposed rule changes submitted by 
ICEEU under Rule 19b-4 that, based on the information and 
representations made by ICEEU at the time, were intended to facilitate 
ICEEU's efforts to comply with EMIR. These proposed rule changes 
covered such areas as (i) segregation and portability of customer 
positions and margin, (ii) risk modeling, (iii) back testing, (iv) 
stress testing, (v) default management, and (vi) liquidity risk 
management.\54\
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    \52\ As noted above, ICEEU is also regulated by the Bank of 
England. See supra note 20.
    \53\ See supra Part I.C.5 (further describing the obligations of 
a registered clearing agency to file proposed rule changes under 
Rule 19b-4).
    \54\ See Exchange Act Release No. 34-73075 (Sept. 11, 2014), 79 
FR 55848 (Sept. 17, 2014); Exchange Act Release No. 34-72756 (Aug. 
4, 2014), 79 FR 46479 (Aug. 8, 2014); Exchange Act Release No. 34-
72755 (Aug. 4, 2014), 79 FR 46481 (Aug. 8, 2014); Exchange Act 
Release No. 34-72754 (Aug. 4, 2014), 79 FR 46477 (Aug. 8, 2014).
---------------------------------------------------------------------------

    Further, the Commission observes that the Exchange Act and 
Commission rules require that CCPs register with the Commission in 
certain circumstances, and if registered, must comply with the relevant 
U.S. requirements, including the Commission rules applicable to 
registered clearing agencies. The Commission also observes that the 
registration and supervisory framework for clearing agencies under the 
Exchange Act provides the Commission with broad authority to provide 
exemptive relief from certain of the Commission's regulatory 
requirements under the Exchange Act. Specifically, Section 17A(b)(1) of 
the Exchange Act provides the Commission with authority to exempt a 
clearing agency or any class of clearing agencies from any provision of 
Section 17A or the rules or regulations thereunder. Such an exemption 
may be effected by rule or order, upon the Commission's own motion or 
upon application, and conditionally or unconditionally.\55\ The

[[Page 70791]]

Commission's exercise of authority to grant exemptive relief must be 
consistent with the public interest, the protection of investors, and 
the purposes of Section 17A, including the prompt and accurate 
clearance and settlement of securities transactions and the 
safeguarding of securities and funds.\56\
---------------------------------------------------------------------------

    \55\ To apply with the Commission for an exemption under Section 
17A(b)(1), the applicant must complete and file a Form CA-1. In this 
context, an applicant must attach to its Form CA-1, along with the 
other customary exhibits, an Exhibit S. The Exhibit S is a statement 
by the applicant demonstrating why the granting of an exemption 
would be consistent with the public interest, the protection of 
investors and the purposes of Section 17A of the Exchange Act, 
including the prompt and accurate clearance and settlement of 
securities transactions and the safeguarding of securities and 
funds.
    \56\ See 15 U.S.C. 78q-1(b)(1).
---------------------------------------------------------------------------

    The outcome of any exemptive request by the Commission (including, 
potentially, any exemptions from requirements under Rule 17Ad-22(e)) is 
dependent on a number of elements. For example, the Commission has used 
its authority under Section 17A(b)(1) of the Exchange Act to grant 
exemptions to certain non-U.S. clearing agencies. These exemptions have 
been tailored in each instance to the exemptive applicants' 
contemplated clearing agency activities. In certain instances, non-U.S. 
clearing agencies have received exemptive relief from the registration 
requirement under Section 17A(b)(1) to perform the functions of a 
clearing agency with respect to transactions involving U.S. government 
and agency securities for U.S. participants.\57\ Factors the Commission 
has considered when determining whether to grant an exemption have 
included the anticipated level or volume of activity that the applicant 
seeks to effect within the United States. Generally, the particular 
system of supervision and oversight in a jurisdiction may also be 
factors for the Commission to consider in evaluating any non-U.S. 
framework.
---------------------------------------------------------------------------

    \57\ See Exchange Act Release No. 34-39643 (Feb. 11, 1998), 63 
FR 8232 (Feb. 18, 1998), as modified by Exchange Act Release No. 34-
43775 (Dec. 28, 2000), 66 FR 819 (Jan. 4, 2001); Exchange Act 
Release No. 34-38328 (Feb. 24, 1997), 62 FR 9225 (Feb. 28, 1997).
    In the case of matching service providers, the Commission first 
sought comment on providing exemptive relief before considering any 
application for exemptive relief. See Exchange Act Release No. 34-
39829 (Apr. 6, 1998), 63 FR 17943 (Apr. 13, 1998) (``Even though 
matching services fall within the definition of clearing agency, the 
Commission preliminarily is of the view that an entity that limits 
its clearing agency functions to providing matching services need 
not be subject to the full panoply of clearing agency 
regulation.''). The Commission then engaged a close analysis of the 
attendant facts and circumstances of each applicant for an exemption 
from registration as a clearing agency on a case-by-case basis. See, 
e.g., Exchange Act Release No. 34-44188 (Apr. 17, 2001), 66 FR 20494 
(Apr. 23, 2001) (order granting exemption from registration as a 
clearing agency to Global Joint Venture Matching Services--US, LLC, 
now Omgeo).
---------------------------------------------------------------------------

    Other factors the Commission could consider in exercising its 
exemptive authority could include: the structure of, scope of, and 
requirements under the regulatory regime to which the applicant is 
subject in its home jurisdiction; the extent to which the presence of 
said regime is relevant to the findings the Commission must make in 
considering an exemption under Section 17A(b)(1) of the Exchange Act, 
and the nature of the non-U.S. covered clearing agency's activities. 
Such factors, depending on the attendant facts and circumstances, could 
lead the Commission to determine that the full scope of the 
requirements under Rule 17Ad-22(e) need not be applied to a non-U.S. 
clearing agency to achieve the Commission's regulatory objectives.
    The Commission also notes that where it has exercised its exemptive 
authority under Section 17A(b)(1) of the Exchange Act, the Commission 
and the relevant national competent authority (``NCA'') of the non-U.S. 
clearing agency have entered into cooperative arrangements whereby the 
Commission and the NCA have arranged to communicate and cooperate to 
fulfill their respective regulatory mandates.\58\ For the purposes of 
the discussion immediately above, such cooperation could also be useful 
in streamlining the Commission's consideration and analysis of an 
application for registration or an exemption from any provision of 
Section 17A of the Exchange Act or the rules or regulations thereunder 
by a non-U.S. clearing agency. For example, in the case of a non-U.S. 
clearing agency that is seeking to register or seeking an exemption 
with the Commission and is already subject to EMIR, the Commission 
could look to coordinate with the applicant's NCA for the purposes of 
analyzing and evaluating any materials the applicant might submit as 
part of the Form CA-1, including the documentation generated in the 
course of the NCA's EMIR authorization process for the applicant, and 
any self-assessment an applicant might produce to evidence its analysis 
of potential duplication between EMIR requirements and Commission 
requirements for registered clearing agencies. Such cooperative 
arrangements could be useful not only for the registration or exemption 
process but also ongoing coordinated or joint supervisory matters 
between the Commission and the NCA. However, as previously noted, 
additional careful analysis would need to be performed by the 
Commission on a case-by-case basis before the Commission could be 
willing to determine whether such cooperative arrangements would be 
appropriate.
---------------------------------------------------------------------------

    \58\ See, e.g., Understanding regarding an Application of 
Euroclear Bank for an Exemption under U.S. Federal Securities Laws 
(Jan. 30, 2001), available at https://www.nbb.be/doc/cp/nl/aboutcbfa/mou/pdf/mou_2001-01-30_euroclearbank.pdf; Exchange Act 
Release No. 34-37309 (June 12, 1996) (notice of filing of 
application for exemption from registration as a clearing agency by 
Cedel Bank); see also Undertaking on Consultation and Cooperation 
regarding Belgian Firms that are Members of U.S. Clearing 
Organizations (July 6, 2006), available at http://www.sec.gov/about/offices/oia/oia_bilateral/belgium.pdf.
---------------------------------------------------------------------------

B. Summary of the Commission's Proposal

    The Commission is adopting Rules 17Ad-22(e) and (f) and amendments 
to Rules 17Ad-22(a) and (d) substantially as proposed. The Commission 
is adopting Rule 17Ab2-2 with several modifications in light of the 
comments received. Modifications to the proposed rules are discussed in 
Part II. Below is a brief summary of the Commission's proposal as set 
forth in the CCA Standards proposing release.
    In proposing amendments to Rule 17Ad-22, the Commission sought to 
establish an enhanced regulatory framework for registered clearing 
agencies that meet the definition of a ``covered clearing agency.'' 
Specifically, as proposed, a covered clearing agency would include (i) 
a designated clearing agency; (ii) a complex risk profile clearing 
agency unless the CFTC is the supervisory agency; \59\ and (iii) any 
other registered clearing agency that the Commission determines to be a 
covered clearing agency pursuant to the procedures set forth in 
proposed Rule 17Ab2-2. A covered clearing agency would be subject to 
the requirements in Rule 17Ad-22(e) whereas a registered clearing 
agency that is not a covered clearing agency would remain subject to 
the requirements in Rule 17Ad-22(d).\60\ As discussed in the CCA 
Standards proposing release, the Commission believed that such an 
approach would allow the Commission to maintain discretion to apply 
Rule 17Ad-22(d) to certain new clearing agencies while also

[[Page 70792]]

applying the requirements under Rule 17Ad-22(e) to those clearing 
agencies that raise systemic risk concerns due to, among other things, 
their size, systemic importance, global reach, or the risks inherent in 
the products they clear.\61\ To facilitate this approach, the 
Commission proposed to modify Rule 17Ad-22(d) so that it would only 
apply to a registered clearing agency other than a covered clearing 
agency.
---------------------------------------------------------------------------

    \59\ The Commission notes that, as defined in Rule 17Ad-22(a)(4) 
and as used in this release, ``security-based swap clearing 
agencies'' are a subset of complex risk profile clearing agencies 
that provide CCP services for security-based swaps. For a CCP other 
than a security-based swap clearing agency, the Commission may 
determine whether the activities of such CCP have a more complex 
risk profile and, therefore, whether such CCP is a covered clearing 
agency pursuant to Rule 17Ab2-2. See infra Part II.D (further 
discussing Commission determinations under Rule 17Ab2-2).
    \60\ Rule 17Ad-22(d) sets forth minimum requirements for the 
operation and governance of registered clearing agencies. Under the 
proposal, all registered clearing agencies and covered clearing 
agencies would also remain subject to the requirements in Section 
17A of the Exchange Act and the other relevant Commission rules and 
regulations thereunder, including Rules 17Ad-22(a), (b), and (c).
    \61\ See CCA Standards proposing release, supra note 5, at 
29516.
---------------------------------------------------------------------------

    Under proposed Rule 17Ad-22(e), a covered clearing agency would be 
required to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to address the following topics 
concerning its operation and governance:
     General organization (including legal basis, governance, 
and a framework for the comprehensive management of risks);
     financial risk management (including credit risk, 
collateral, margin, and liquidity risk);
     settlement (including settlement finality, money 
settlements, and physical deliveries);
     CSDs and exchange-of-value settlement systems;
     default management (including default rules and procedures 
and segregation and portability);
     business and operational risk management (including 
general business risk, custody and investment risks, and operational 
risk);
     access (including access and participation requirements, 
tiered participation arrangements, and links);
     efficiency (including efficiency and effectiveness and 
communication procedures and standards); and
     transparency.
    The Commission is adopting Rule 17Ad-22(e) substantially as 
proposed. Each of the requirements under Rule 17Ad-22(e), any 
modifications made thereto, and the comments received with respect to 
them, are discussed in Part II.C.
    In addition, the Commission proposed Rule 17Ab2-2 to provide the 
Commission with procedures to make determinations regarding the 
following:
     Whether a registered clearing agency should be considered 
a covered clearing agency;
     whether a covered clearing agency meets the definition of 
``systemically important in multiple jurisdictions;'' \62\ and
---------------------------------------------------------------------------

    \62\ See infra note (discussing the definition of ``systemically 
important in multiple jurisdictions'').
---------------------------------------------------------------------------

     whether the activities of a clearing agency providing CCP 
services have a more complex risk profile.
    The proposed rule would allow such determinations to occur either 
at the Commission's own initiative or upon request by either a clearing 
agency or one of its members. In each case, 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 the proposed rule, the Commission may also provide 
a clearing agency subject to any proposed determination opportunity for 
hearing. The Commission is adopting Rule 17Ab2-2 substantially as 
proposed. Modifications to Rule 17Ab2-2 made in response to the 
comments received are discussed in Part II.D.
    To facilitate the addition of proposed Rule 17Ad-22(e) and proposed 
Rule 17Ab2-2, the Commission proposed to add 14 new definitions to Rule 
17Ad-22(a). The Commission is adopting those definitions substantially 
as proposed, but is combining the definitions of ``sensitivity 
analysis'' and ``conforming sensitivity analysis'' into one definition 
of ``sensitivity analysis.'' \63\ Each of the definitions, any 
modifications made thereto, and the comments received with respect to 
them, are discussed in Part II.C.
---------------------------------------------------------------------------

    \63\ Each definition is discussed in Part II. For discussion of 
the new definition of ``sensitivity analysis,'' see Part II.C.6.c.
---------------------------------------------------------------------------

    Finally, the Commission also proposed Rule 17Ad-22(f) to codify the 
Commission's statutory authority under Section 807(c) of the Clearing 
Supervision Act. The Commission received no comments regarding Rule 
17Ad-22(f) and is adopting it as proposed.\64\
---------------------------------------------------------------------------

    \64\ See infra Part II.E.
---------------------------------------------------------------------------

C. Comments Received

    The Commission received seventeen comment letters in response to 
the CCA Standards proposing release.\65\ Commenters included market 
participants from across the financial industry, including registered 
clearing agencies, non-U.S. clearing agencies, non-profit groups, 
various entities participating in or representing professionals who 
provide investment or asset management services, participants in the 
derivatives markets, an association of banks representing clearing 
participants and members of certain CCPs, and members of the general 
public.
---------------------------------------------------------------------------

    \65\ See letters from Timothy W. Cameron, Asset Management 
Group--Head, and Laura Martin, Asset Management Group--Managing 
Director and Associate General Counsel, Securities Industry and 
Financial Markets Association, and David W. Blass, General Counsel, 
and Jennifer S. Choi, Associate General Counsel, Investment Company 
Institute (May 12, 2016) (``AMG-ICI''); Chris Barnard (May 26, 2014) 
(``Barnard''); Dennis M. Kelleher, President and CEO, Stephen Hall, 
Securities Specialist, Katelynn Bradley, Attorney, and Caitlin 
Kline, Derivatives Specialist, Better Markets, Inc. (May 27, 2014) 
(``Better Markets''); Kurt N. Schact, CFA, Managing Director, 
Standards and Financial Market Integrity, and Linda L. Rittenhouse, 
Director, Capital Markets, CFA Institute (May 27, 2014) (``CFA 
Institute''); Kathleen M. Cronin, Senior Managing Director, General 
Counsel, and Corporate Secretary, CME Group, Inc. (May 27, 2014) 
(``CME''); Larry E. Thompson, Managing Director and General Counsel, 
The Depository Trust and Clearing Corporation (May 27, 2014) 
(``DTCC''); Scott C. Goebel, Senior Vice President and General 
Counsel, Fidelity Investments (May 27, 2014) (``Fidelity''); Paul 
Swann, President and Managing Director, ICE Clear Europe Limited 
(May 23, 2014) (``ICEEU''); Dorothy M. Donohue, Acting General 
Counsel, Investment Company Institute (May 21, 2014) (``ICI''); 
Stephen O'Connor, Chairman, International Swaps and Derivatives 
Association, Inc. (May 22, 2014) (``ISDA''); John Joyce, Northern 
Illinois University College of Law (Apr. 1, 2014) (``Joyce''); Susan 
Milligan, Head of U.S. Public Affairs, LCH.Clearnet (May 27, 2014) 
(``LCH''); James E. Brown, Executive Vice President, General 
Counsel, and Secretary, The Options Clearing Corporation (May 27, 
2014) (``OCC''); Akshat Tewary et al., Occupy the SEC (June 10, 
2014) (``OSEC''); Sheila Bair, Chair, The Systemic Risk Council (May 
28, 2014) (``SRC''); Jarryd E. Anderson, Vice President, Regulatory 
Affairs, The Clearing House Association LLC (May 27, 2014) (``The 
Clearing House''); Tim Buckley, Managing Director and Chief 
Investment Officer, and John Hollyer, Principal and Head of Risk 
Management and Strategy Analysis, Vanguard (May 27, 2014) 
(``Vanguard''). Copies of the comment letters are available at 
http://www.sec.gov/comments/s7-03-14/s70314.shtml.
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    Commenters generally supported the Commission's proposal and the 
Commission's ongoing efforts to regulate registered clearing 
agencies,\66\ though several also raised concerns regarding certain 
aspects of the proposed rules, as discussed throughout this release. 
Below is a discussion of the comments that were not directed to the 
content of a particular proposed rule and, where appropriate, the 
Commission's response.\67\ Comments received that were directed to a 
particular proposed rule, or aspects thereof, are discussed in Part II.
---------------------------------------------------------------------------

    \66\ See Barnard at 1 (also focusing support on the proposed 
financial risk management and liquidity requirements); CFA Institute 
at 2 (expressing overall support for the proposed rules); CME at 2 
(applauding the Commission's efforts to support dually registered 
entities as they continue to focus their resources on the important 
work of maintaining effective systems of governance and enhancing 
their operational strength); DTCC at 3 (stating that it is broadly 
supportive of the proposed rules); ICEEU at 1 (expressing support 
for comprehensive regulation of clearing agencies and linking such 
comprehensive regulation to the PFMI and the rules of the 
Commission); OCC at 3 (expressing support for the Commission's 
effort to strengthen the substantive regulation of registered 
clearing agencies).
    \67\ For comments not directed to the substance of the proposal 
itself, see Part I.C.7.

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[[Page 70793]]

1. Financial Stability and the Dodd-Frank Act
    One commenter supported the Commission's stated goal of 
contributing to the enhancement of the stability of the U.S. securities 
markets.\68\ Another commenter strongly supported the Commission's 
efforts to promote financial stability through the application of 
enhanced standards for covered clearing agencies, in particular those 
that act as CCPs for security-based swaps and other derivatives.\69\ A 
third commenter similarly expressed the belief that the proposed 
requirements should promote market integrity, improve the robustness of 
clearing systems, and protect the financial system against 
contagion.\70\ The Commission believes that Rule 17Ad-22(e) achieves 
these goals by supporting the objectives of (i) the Exchange Act to 
facilitate the establishment of a national system for the prompt and 
accurate clearance and settlement of securities transactions and linked 
or coordinated facilities for clearance and settlement of securities 
transactions, having 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,\71\ and (ii) the Clearing Supervision Act to promote 
robust risk management, promote safety and soundness, reduce systemic 
risks, and support the stability of the broader financial system.\72\
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    \68\ See CME at 1.
    \69\ See The Clearing House at 1.
    \70\ See Barnard at 1.
    \71\ See supra notes 3-4 and accompanying text.
    \72\ See supra note 18 and accompanying text.
---------------------------------------------------------------------------

    One commenter generally supported the mandate of Title VII of the 
Dodd-Frank Act to promote transparency and regulation in the 
derivatives markets.\73\ Another commenter noted that the Dodd-Frank 
Act has sought to shed light on the opaque markets for swaps and other 
exotic OTC derivatives, which numerous other commentators have asserted 
contributed to the recent financial crisis, by requiring such 
derivatives to be cleared through registered clearing agencies.\74\ The 
commenter stated that this shift toward transparency could be useful if 
clearing agencies are themselves robust and stable, noting that, in 
some ways, the risks associated with OTC derivatives trading have not 
gone away but simply shifted to clearing agencies. The commenter stated 
that, thus, it is vital for the Commission to not only promulgate 
strong regulations for clearing agencies but also to enforce such 
regulations in a vigorous manner. As noted above, the Commission 
believes that the focus in Rule 17Ad-22(e) on transparency, governance, 
financial risk management, and operational risk management are 
consistent with the objectives of promoting strong rules that help 
ensure covered clearing agencies are robust and stable, and that any 
risks particular to OTC derivatives trading and the risks present in 
clearing such derivatives are addressed in requirements for the covered 
clearing agency's management of financial risks.
---------------------------------------------------------------------------

    \73\ See Vanguard at 1.
    \74\ See OSEC at 3.
---------------------------------------------------------------------------

2. Relationship Between Rules 17Ad-22(d) and (e)
    One commenter generally supported the Commission's approach to the 
regulation of registered clearing agencies, which the commenter stated 
applies a more general set of standards under Rule 17Ad-22(d) for 
registered clearing agencies other than covered clearing agencies.\75\ 
The commenter stated that this framework would allow new entrants to 
more firmly establish themselves as clearing agencies, which is 
important for the deconsolidation and diffusion of risk across the 
market. The commenter noted that at present the clearance and 
settlement industry, like much of the financial sector, can be 
described as highly concentrated, and stated that it is paramount that 
the Commission set policies that promote the proliferation of viable 
new clearing agencies, given that existing clearing agencies typically 
serve as intermediaries for trillions of dollars in trading volumes. In 
the commenter's view, such concentration in the provision of clearance 
and settlement services results in risk concentration and inhibits 
price allocation for services, which, in turn, inhibits liquidity.\76\ 
The Commission is mindful of these concerns and notes, as discussed 
above, that the approach under Rules 17Ad-22(d) and (e) take into 
account various clearing agency activities and the risks they pose 
while promoting robust risk management practices and the general safety 
and soundness of registered clearing agencies. In particular, as 
discussed in Part III.B.1.d, the Commission has considered the level of 
concentration in the provision of clearing agency services.
---------------------------------------------------------------------------

    \75\ See OSEC at 1. The commenter, however, also raised concerns 
with the proposed dual framework under existing Rule 17Ad-22(d) and 
proposed Rule 17Ad-22(e) because the commenter believed the dual 
framework could facilitate regulatory arbitrage. See id. at 1-2; see 
also infra note 80 and accompanying text.
    \76\ See id.
---------------------------------------------------------------------------

    One commenter expressed the belief that some of the proposed 
requirements under Rule 17Ad-22(e) represent a clarification of 
existing requirements under Rule 17Ad-22(d) rather than enhanced 
standards related to the particular risks arising from a clearing 
agency's systemic importance.\77\ The commenter recommended that the 
Commission review and revise Rule 17Ad-22(d) to align it with the 
analogous provisions under proposed Rule 17Ad-22(e), particularly if 
the different language in the proposed rule is intended to clarify 
language in the existing rule or represents a logical outgrowth from 
it. The commenter stated that, to the extent any provision of the 
proposed rules reflects a best practice, the provision should apply to 
all registered clearing agencies.\78\
---------------------------------------------------------------------------

    \77\ See DTCC at 4 (citing proposed Rules 17Ad-22(e)(1), (8), 
(10), and (12) as examples).
    \78\ See id.
---------------------------------------------------------------------------

    The Commission does not believe that the requirements under Rule 
17Ad-22(e) represent a clarification of existing requirements in Rule 
17Ad-22(d) or a codification of best practices. As discussed above, the 
Commission proposed to maintain Rule 17Ad-22(d) to ensure that the 
Commission could efficiently and effectively regulate registered 
clearing agencies depending on the specific activity and risks that 
each type of clearing agency poses to the U.S. financial system. Thus, 
Rule 17Ad-22(d) applies requirements to registered clearing agencies 
other than covered clearing agencies, consistent with the continuing 
development of the national system for clearance and settlement. Since 
no clearing agency would be subject to both Rule 17Ad-22(d) and Rule 
17Ad-22(e), the Commission does not believe that confusion would arise 
from similarities or differences between the requirements under the two 
separate rules. With respect to best practices, Rule 17Ad-22(e) 
includes requirements for covered clearing agencies intended to address 
the activity and 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 both the Exchange Act and the Dodd-Frank Act, 
and is not an attempt to merely reflect best practices.\79\
---------------------------------------------------------------------------

    \79\ See CCA Standards proposing release, supra note 5, at 
29516.
---------------------------------------------------------------------------

    One commenter stated that the Commission must be vigilant to 
prevent companies from engaging in regulatory arbitrage by seeking 
application of Rule 17Ad-22(d) when the requirements of

[[Page 70794]]

proposed Rule 17Ad-22(e) would be more appropriate.\80\ The commenter 
explained that the Commission can expect, for instance, large entities 
to float new subsidiaries or affiliates seeking to operate under Rule 
17Ad-22(d), even though the risk profile of the subsidiary may be part 
of the greater risk exposure of the entity at-large.\81\ The Commission 
is mindful of this concern and notes that, in a separate release, the 
Commission has proposed an expanded definition of ``covered clearing 
agency'' that, if adopted, may further reduce potential opportunities 
for arbitrage.\82\
---------------------------------------------------------------------------

    \80\ See OSEC at 1-2.
    \81\ See id. at 2.
    \82\ In a separate release, the Commission is proposing to 
modify the definition of ``covered clearing agency'' to include all 
CCPs, CSDs, and SSSs. See Exchange Act Release No. 34-78963 (Sept. 
28, 2016) (``CCA Definition proposing release'').
---------------------------------------------------------------------------

    The same commenter also recommended that the Commission regularly 
evaluate registered clearing agencies subject to Rule 17Ad-22(d) to 
ensure that their activities have not risen to a level warranting 
oversight and requirements pursuant to Rule 17Ad-22(e).\83\ The 
commenter stated that the Commission should require frequent audits of 
the policies and procedures of clearing agencies operating under Rule 
17Ad-22(d) and proposed Rule 17Ad-22(e) because (i) smaller, profitable 
clearing agencies may quickly outgrow Rule 17Ad-22(d) and (ii) covered 
clearing agencies may shift their operations materially after crafting 
robust policies and procedures under Rule 17Ad-22(e). In addition, the 
commenter noted that even if policies and procedures are implemented in 
good faith, their efficacy could be questionable because standard 
measurements of credit and liquidity risk may only encourage excessive 
confidence in the risk profile of financial institutions.\84\ The same 
commenter stated that the Commission's vigorous enforcement of clearing 
rules will ultimately remain more important in achieving real-world 
risk reduction than the mere promulgation of detailed rules.\85\ The 
commenter noted that clearing agencies by definition collect various 
counterparty risks and, while the agglomeration of such risks by 
clearing agencies may have not played a significant role in the most 
recent financial crisis, the continued growth of trading operations and 
the consolidation of market power in the banking and finance sectors 
suggest that clearing agencies could serve as ``ground zero'' in the 
next crisis.\86\
---------------------------------------------------------------------------

    \83\ See OSEC at 2.
    \84\ See id.
    \85\ See id.
    \86\ See id.
---------------------------------------------------------------------------

    As to this commenter, the Commission notes that registered clearing 
agencies are subject to inspections and examinations under both the 
Exchange Act and the Clearing Supervision Act.\87\ The Commission also 
monitors registered clearing agencies to assess and evaluate the risks 
posed by each clearing agency. Rule 17Ad-22(e) provides the Commission 
with requirements against which a covered clearing agency can be, among 
other things, monitored, inspected, and examined with respect to its 
establishing, implementing, maintaining, and enforcing policies and 
procedures for managing credit and liquidity risk and its compliance 
with such policies and procedures. In addition, the Commission is 
proposing in a separate release to expand the definition of ``covered 
clearing agency'' to include all CCPs, CSDs, and SSSs. If adopted, the 
requirements applied to CCPs, CSDs, and SSSs would be uniform under 
Rule 17Ad-22(e).\88\
---------------------------------------------------------------------------

    \87\ See 12 U.S.C. 5466.
    \88\ See supra note 82.
---------------------------------------------------------------------------

3. Relationship Among Rules 17Ad-22(b), (c), and (e)
    One commenter raised concerns regarding overlap between existing 
Rules 17Ad-22(b)(1) through (4) and several of the provisions of 
proposed Rule 17Ad-22(e).\89\ The commenter expressed the belief that 
proposed Rules 17Ad-22(e)(4), (6), and (7) fully address all of the 
matters covered by existing Rules 17Ad-22(b)(1) through (4) and that 
subjecting covered clearing agencies that provide CCP services to both 
sets of requirements may create ambiguities and inconsistencies.\90\ 
The commenter urged the Commission to revise the proposal so that the 
provisions of existing Rules 17Ad-22(b)(1) through (4) are not 
applicable to covered clearing agencies that provide CCP services.\91\ 
The Commission notes that the commenter has not identified specific 
ambiguities or inconsistencies between Rules 17Ad-22(b) and (e) that 
might result from application of both rule sets. With respect to the 
potential for inconsistency, the Commission believes that while Rule 
17Ad-22(e) may overlap with some requirements in Rule 17Ad-22(b), it is 
not inconsistent with Rule 17Ad-22(b) and, as a general matter, 
includes requirements intended to supplement the more general 
requirements in Rule 17Ad-22(b). With respect to the potential for 
ambiguity, the Commission notes that Rule 17Ad-22(b) applies to a 
registered clearing agency that provides CCP services and Rule 17Ad-
22(e) applies to a registered clearing agency that is a covered 
clearing agency. To the extent that a registered clearing agency is one 
that both provides CCP services and is a covered clearing agency, then 
it is subject to the requirements in both rule sets, with the more 
general requirements in Rule 17Ad-22(b) supplemented by the 
requirements of Rule 17Ad-22(e). The Commission therefore is declining 
to limit application of Rule 17Ad-22(b) to clearing agencies that 
provide CCP services and are not covered clearing agencies.
---------------------------------------------------------------------------

    \89\ See DTCC at 4-5.
    \90\ See id. at 5.
    \91\ See id.; see also 17 CFR 240.17Ad-22(b)(1)-(4).
---------------------------------------------------------------------------

    The commenter stated in the alternative that, at a minimum, the 
Commission should clarify that the requirement in existing Rule 17Ad-
22(c)(1), which requires a registered clearing agency that provides CCP 
services to calculate and maintain a record of its financial resources 
available to cover participant defaults in accordance with existing 
Rule 17Ad-22(b)(3), should instead be determined and calculated in 
accordance with proposed Rule 17Ad-22(e)(4). The Commission believes 
that such clarification in the rule text is appropriate. The Commission 
further believes that, in light of the closely linked nature between 
the management of credit and liquidity risk, and the holistic approach 
taken in Rule 17Ad-22(e),\92\ a covered clearing agency generally 
should also calculate and maintain a record of its qualifying liquid 
resources under Rule 17Ad-22(e)(7). The Commission therefore is 
amending Rule 17Ad-22(c)(1) to include a reference to the requirements 
for financial resources and qualifying liquid resources in Rules 17Ad-
22(e)(4) and (e)(7) respectively, so that covered clearing agencies 
have reporting requirements for their financial and qualifying liquid 
resources equivalent to other registered clearing agencies.\93\ The 
Commission notes that, to the extent the computations for financial 
resources under Rules 17Ad-22(b)(3) and (e)(4) are the same, a covered 
clearing agency could indicate so in the supporting documentation 
required pursuant to Rule 17Ad-22(c)(1).
---------------------------------------------------------------------------

    \92\ See infra Part II.B (discussing the principles based 
approach to Rule 17Ad-22(e)).
    \93\ See Rule 17Ad-22(c)(1), infra Part VI.

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

[[Page 70795]]

4. Risk of Duplicative or Inconsistent Regulation
    One commenter noted that coordination among regulators in 
implementing derivatives reform is critical to the efficient 
functioning of the derivatives market by alleviating duplicative and 
potentially conflicting regulation of cross-border transactions.\94\ In 
response, the Commission notes that, as discussed above and previously 
in the CCA Standards proposing release, the Commission has consulted 
with the CFTC, FRB, and FSOC in developing these rules.\95\
---------------------------------------------------------------------------

    \94\ See ICI at 2.
    \95\ See CCA Standards proposing release, supra note 5, at 29508 
(noting that the Commission has begun, and intends to continue, 
consultation with the CFTC, FRB, and FSOC).
---------------------------------------------------------------------------

    Another commenter similarly expressed the belief that consistent 
international regimes are critical to mitigating regulatory arbitrage 
because opportunities for regulatory arbitrage would disadvantage 
smaller market participants.\96\ The commenter stated that no basis 
exists for different regulatory treatment between U.S. and non-U.S. 
markets for security-based swaps, noting that the Commission may 
conform its standards for clearing agencies to reflect evolving 
international standards, consistent with the Dodd-Frank Act and the 
Exchange Act.\97\ As noted above, the Commission has considered the 
relevant international standards in developing these rules, consistent 
with the Dodd-Frank Act and the Exchange Act, and the Commission 
believes that the scope of and requirements in Rule 17Ad-22(e) 
appropriately address the risk profile of CCPs that clear security-
based swaps.\98\
---------------------------------------------------------------------------

    \96\ See Fidelity at 7.
    \97\ See id. at 7-8.
    \98\ See supra note 1 and accompanying text; see also CCA 
Standards proposing release, supra note 5, at 29508 & n.1 (noting 
the same at the proposing stage).
---------------------------------------------------------------------------

    A third commenter supported the view that imposing requirements on 
dually registered entities would subject them to duplicative 
regimes,\99\ and the commenter stated that avoiding unnecessarily 
duplicative regulation allows for the most efficient use of both public 
and private sector resources towards the shared goal of protecting the 
financial system.\100\
---------------------------------------------------------------------------

    \99\ See CME at 2 (citing CCA Standards proposing release, supra 
note 5, at 29516).
    \100\ See CME at 2.
---------------------------------------------------------------------------

    A fourth commenter stated that the Commission should be wary of 
imposing additional requirements on top of those imposed by other 
regulators, particularly where other regulators are attempting to (or 
have) imposed the same or substantially similar standards.\101\ The 
commenter expressed the concern that, particularly for those clearing 
entities that are regulated by multiple governmental authorities in 
multiple jurisdictions, the approach taken in the proposed rules may 
unnecessarily subject clearing entities to the risk of duplicative or 
inconsistent regulation.\102\ The commenter expressed the belief that 
avoiding unnecessarily duplicative or, worse, inconsistent regulation 
is key to maximizing effective regulation and the use of limited 
regulatory activities.\103\ The commenter stated that avoiding 
unnecessarily duplicative regulation will also allow the Commission to 
focus its resources on the particular activities within its 
jurisdiction that present increased risks and should therefore be 
subject to increased supervision. The commenter urged the Commission, 
in implementing enhanced standards for covered clearing agencies, to 
take a more flexible approach that is not ``one-size-fits-all'' and 
considers the overall regulatory status of the relevant clearing 
agency.\104\
---------------------------------------------------------------------------

    \101\ See ICEEU at 7-8.
    \102\ See id. at 1-2.
    \103\ See id. at 8.
    \104\ See id. at 2.
---------------------------------------------------------------------------

    With respect to these two commenters, the Commission notes, as 
previously discussed, that the Commission has consulted with the CFTC, 
FRB, and FSOC in the development of these rules to, in part, avoid 
unnecessarily duplicative or inconsistent regulation with respect to 
clearing agencies that are dually registered in the United States. With 
respect to such clearing agencies--as well as clearing agencies 
regulated by authorities in other jurisdictions--the Commission is 
nonetheless mindful, pursuant to the comprehensive framework for 
regulating swaps and security-based swaps established in Title VII, 
that the SEC has been given regulatory authority over security-based 
swaps. CCPs that clear security-based swaps present risks to the 
securities markets that must be subject to appropriate risk management. 
The Commission's intent with respect to Rule 17Ad-22(e) is, in part, to 
take another incremental step under Rule 17Ad-22 to ensure that these 
risks are appropriately managed consistent with the purposes of the 
Exchange Act, the Clearing Supervision Act, and Title VII of the Dodd-
Frank Act.\105\ In this regard, the Commission does not believe that it 
has taken a ``one-size-fits-all'' approach; rather, the Commission has, 
through Rule 17Ad-22, sought to apply requirements commensurate and 
appropriate to the risk posed by the clearing agency functions and 
activities specific to covered clearing agencies as they exist in, and 
serve, the U.S. securities markets. The Commission acknowledges that 
other rules and regulations may apply to a covered clearing agency that 
are similar in scope or purpose to Rule 17Ad-22(e). However, the 
presence of similar regulations does not negate the Commission's 
obligation to ensure that risk in the U.S. securities markets is 
appropriately managed consistent with the purposes of the Exchange Act, 
the Clearing Supervision Act, and Title VII of the Dodd-Frank Act. 
Further, because Rule 17Ad-22(e) and other comparable regulations--
including those of the CFTC--are based on the same international 
standards,\106\ the potential for inconsistent regulation is low. The 
commenters have provided no examples suggesting that Rule 17Ad-22(e) is 
inconsistent with another comparable regulation. Nonetheless, Part 
I.A.6 above discusses the process by which the Commission could 
consider the attendant facts and circumstances in assessing the 
application of Rule 17Ad-22(e) to a non-U.S. covered clearing agency 
that is subject to similar regulation in its home jurisdiction, and 
Part II.A.2 further discusses comments regarding the risk of 
duplicative or inconsistent regulation targeted to security-based swap 
clearing agencies subject to similar regulation in the home 
jurisdiction.
---------------------------------------------------------------------------

    \105\ See supra Part I.A.
    \106\ See supra notes 1-2, 43, and accompanying text.
---------------------------------------------------------------------------

    Finally, one commenter noted that opportunities for regulatory 
arbitrage may exist based on differences between the Commission's 
proposed approach and rules adopted by the CFTC.\107\ Opportunities for 
regulatory arbitrage only exist, however, when there are gaps or 
conflicting regulations for the same matter. Here, as noted above, the 
Commission and CFTC have separate and distinct statutory mandates, as 
set forth in the Exchange Act and the Commodity Exchange Act, 
respectively, for the different markets they regulate. The Commission 
has specific authority over the national system for clearance and 
settlement of U.S. securities transactions, including transactions 
involving security-based swaps.\108\ Under the Clearing Supervision 
Act, the Commission also has specific authority over those SIFMUs for 
which it is the

[[Page 70796]]

supervisory agency. In this regard, such a regulatory structure does 
not on its face create opportunities for regulatory arbitrage based on 
any differences between the Commission's proposed approach and rules 
adopted by the CFTC.
---------------------------------------------------------------------------

    \107\ See OSEC at 2.
    \108\ See supra Parts I.A.1 and 2.
---------------------------------------------------------------------------

5. Flexible Versus Prescriptive Approaches to Regulation, and the Role 
of Rule Filings Under Rule 19b-4
    One commenter supported the proposed approach that covered clearing 
agencies be allowed flexibility to use their market experience and 
understanding of their institutions to shape the implementation of 
proposed Rule 17Ad-22(e).\109\ The commenter emphasized that a flexible 
and holistic approach would allow a clearing agency to make decisions 
from a perspective of overall risk management, which may be more 
productive than a more prescriptive approach.\110\ Another commenter 
was broadly supportive of the proposed rules, noting that the rules 
provide covered clearing agencies with the necessary flexibility to 
design and structure their policies and procedures to take into account 
the differences among clearing agencies.\111\ The commenter expressed 
the view that the Commission generally achieved the appropriate balance 
between taking a principles-based approach (providing clearing agencies 
with flexibility) and a more prescriptive, granular approach (limiting 
a clearing agency's discretion).\112\ The commenter also expressed the 
belief that the precise form of the written policies and procedures 
required by proposed Rule 17Ad-22(e) should be a matter for the 
clearing agency to determine, and the commenter listed among such 
policies and procedures the following: Service guides, operational 
agreements, compliance procedures, link agreements, and protocols.\113\ 
A third commenter, in contrast, was concerned that the proposed rules 
rely inordinately on internal risk testing and standards rather than a 
clear set of external, regulatory demands.\114\ In the commenter's 
view, financial firms often view their policies and procedures as mere 
inconveniences.
---------------------------------------------------------------------------

    \109\ See OCC at 3.
    \110\ See id. at 4.
    \111\ See DTCC at 3.
    \112\ See id.
    \113\ See DTCC at 12-13.
    \114\ See OSEC at 2.
---------------------------------------------------------------------------

    The Commission does not believe that policies and procedures 
established by covered clearing agencies and required pursuant to Rule 
17Ad-22(e) can or would be viewed as ``mere inconveniences.'' In 
proposing Rule 17Ad-22(e) the Commission stated--and continues to 
believe--that it is important for covered clearing agencies to use 
their experience and understanding of the markets they serve to shape 
the rules, policies, and procedures implementing proposed Rule 17Ad-
22(e).\115\ Nonetheless, as discussed above, Rule 17Ad-22(e) provides 
the Commission with a uniform set of requirements against which a 
covered clearing agency can be monitored, inspected, and examined. 
Additionally, the Commission notes that, in using its experience to 
shape the policies and procedures that implement Rule 17Ad-22(e), a 
covered clearing agency must at all times comply with the requirements 
of both Section 19 of the Exchange Act and the rules and regulations 
thereunder for SROs, as well as, for designated clearing agencies, the 
advance notice requirements of the Clearing Supervision Act and the 
rules and regulations thereunder.\116\ Under Section 19(g) of the 
Exchange Act, a registered clearing agency (as an SRO) must comply with 
its own rules and, absent reasonable justification or excuse, enforce 
compliance with its own rules by its participants.\117\
---------------------------------------------------------------------------

    \115\ See CCA Standards proposing release, supra note 5, at 
29517.
    \116\ See supra Parts I.A.1 and 2.
    \117\ See 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

    One of the above commenters further stated that there should be no 
change in the requirement for filing proposed rule changes under Rule 
19b-4 under the Exchange Act, and noted that not all written policies 
and procedures that would be adopted by a clearing agency in compliance 
with the proposed rule would be the subject of rule filings under Rule 
19b-4.\118\ The Commission notes that the amendments to Rule 17Ad-22 do 
not alter the definition of a rule or a proposed rule change under the 
Exchange Act, nor do the amendments change a registered clearing 
agency's obligation to file proposed rule changes under Rule 19b-
4.\119\
---------------------------------------------------------------------------

    \118\ See DTCC at 13; see also supra notes 11-13 and 
accompanying text (providing an overview of the requirement to 
submit proposed rule changes to the Commission for review).
    \119\ See supra note 12 and accompanying text.
---------------------------------------------------------------------------

6. Consistency With the PFMI
    Five commenters generally supported the Commission's proposed 
approach at least in part because they believed it would reflect 
consistency with the PFMI, as described further below.
    One commenter supported the Commission's efforts to update its 
rules for clearing agencies to take into account the PFMI and to 
provide support for determinations by non-U.S. banking regulators that 
covered clearing agencies satisfy the requirements for QCCP status 
under the BCBS capital framework.\120\ The commenter expressed the 
belief that it would be beneficial for the Commission's rules to recite 
the Commission's intent to establish standards for covered clearing 
agencies that are consistent with the PFMI and to interpret them in 
that context so long as it does not result in inconsistency with the 
Exchange Act or other Commission regulations, noting that the CFTC 
included such provision in its regulations for systemically important 
derivatives clearing organizations (``SIDCOs'').\121\ In this regard, 
the commenter noted that one of the elements of the QCCP definition 
under the BCBS capital framework is that the relevant regulator has 
``publicly indicated'' that it applies to a CCP, on an ongoing basis, 
domestic rules and regulations that are consistent with the PFMI.\122\ 
As previously discussed, the Commission has publicly indicated that, in 
developing Rule 17Ad-22(e), the Commission has, among other things, 
considered the relevant international standards, including the 
PFMI.\123\ The Commission also believes, as previously discussed in 
Part I.A.5, that the requirements applicable to clearing agencies set 
forth in the Exchange Act and the rules thereunder, including the rules 
adopted today, are consistent with the PFMI, and that the rules set 
forth below are a continuation of the Commission's active effort to 
foster the development of the national clearance and settlement system 
consistent with the requirements of the Exchange Act.
---------------------------------------------------------------------------

    \120\ See ISDA at 1.
    \121\ See ISDA at 1-2 & n.4 (citing CFTC requirements at 17 CFR 
39.40).
    \122\ See id. at 1.
    \123\ See supra notes 1-2 and accompanying text; see also CCA 
Standards proposing release, supra note 5, at 29508 & n.1.
---------------------------------------------------------------------------

    A second commenter similarly supported the Commission's proposal to 
adopt enhanced regulatory standards that are consistent with the PFMI 
and that would facilitate the ability of covered clearing agencies to 
be considered QCCPs.\124\ A third commenter welcomed the efforts of the 
Commission to implement standards for clearing agencies that are 
consistent with the PFMI.\125\ A fourth commenter noted that enhanced 
standards are necessary to ensure that the Commission's regulation of 
CCPs is consistent with international standards, including the PFMI--
which serves as a

[[Page 70797]]

prerequisite to obtaining QCCP status under the BCBS capital 
framework--and CPSS-IOSCO's consultative report Recovery of Financial 
Market Infrastructures (``Consultative Recovery Report'').\126\
---------------------------------------------------------------------------

    \124\ See LCH at 2.
    \125\ See ICEEU at 1.
    \126\ See The Clearing House at 1-2. The Commission notes that, 
since the comment letter was submitted, CPMI-IOSCO has published a 
final report on this topic. See supra note 41 (citing to the final 
report).
---------------------------------------------------------------------------

    A fifth commenter noted that the Commission's approach differs from 
the PFMI in some areas (e.g., segregation and portability and liquidity 
risk), reflecting the nature of the securities markets and the 
particular requirements of the Exchange Act.\127\ The commenter 
supported this approach because covered clearing agencies need to have 
appropriate flexibility to implement timely modifications to relevant 
parameters, assumptions, and approaches. The commenter also expressed 
the belief that the Commission has generally struck the appropriate 
balance with respect to incorporating the PFMI principles and the level 
of granular requirements thereunder.\128\
---------------------------------------------------------------------------

    \127\ See DTCC at 3.
    \128\ See id.
---------------------------------------------------------------------------

    A sixth commenter, in contrast to the above commenters, urged the 
Commission to adopt the key considerations of each principle identified 
in the PFMI and to strengthen the proposed rules to affirmatively 
require robust standards and procedures that ensure accountability, 
independence, and financial stability.\129\ To the extent that the 
commenter identified a particular key consideration that the Commission 
should include as a requirement in Rule 17Ad-22(e), it is discussed and 
addressed in Part II.C. As a general matter, the Commission believes 
that the requirements applicable to clearing agencies set forth in the 
Exchange Act and the rules thereunder, including the rules adopted 
today, are consistent with the PFMI. The Commission also believes Rule 
17Ad-22(e) achieves the appropriate balance between imposing new 
requirements on covered clearing agencies and allowing each covered 
clearing agency, subject to its obligations and responsibilities as an 
SRO under the Exchange Act, to design its policies and procedures 
pursuant to Rule 17Ad-22(e). This approach is consistent with the 
Commission's existing approach under Rules 17Ad-22(b) and (d) and 
recognizes that each registered clearing agency has different 
organizational and operating structures and clears distinct products 
that warrant a tailored approach to governance and risk management 
respectively. The Commission notes that such a policies and procedures 
approach is also consistent with the Commission's existing regulation 
of SROs generally.\130\ In addition, in the discussion of each final 
rule under Rule 17Ad-22(e) in Part II.C, the Commission has provided 
guidance based on the key considerations in the PFMI.
---------------------------------------------------------------------------

    \129\ See Better Markets at 4-5.
    \130\ In the Commission's experience, proposed rule changes of 
the type necessary to implement the rules would generally entail 
changes to the SRO's written policies and procedures that must be 
submitted for Commission review and approval pursuant to Rule 19b-4 
under the Exchange Act. See supra note 12.
---------------------------------------------------------------------------

7. Other Comments
    The Commission also received several comments that were not 
directed to the substance of the CCA Standards proposal itself. These 
comments recommended study and rulemaking beyond the scope of the 
proposed amendments to Rule 17Ad-22 and Rule 17Ab2-2.\131\
---------------------------------------------------------------------------

    \131\ See ISDA at 4, 6 (recommending that the Commission (i) 
develop, in a subsequent rulemaking, more detailed rules that 
require customer-by-customer accounting of the collateral value held 
by the covered clearing agency with respect to security-based swap 
positions and impose corresponding limitations on the value of 
collateral that the covered clearing agency may apply towards losses 
on other customers' positions carried by the participant and (ii) 
commit to a study of insolvency of security-based swap clearing 
agencies with the goal of identifying uncertainties, proposing 
solutions, and fostering public discussion); CFA Institute at 2 
(expressing general concern regarding the central clearing of OTC 
swaps and derivatives, urging the Commission to take caution in 
regulating OTC swaps and derivatives, and asking the Commission to 
consider whether to require all OTC contracts, whether standardized 
or not, to be cleared); SRC at 2 (stating that the SEC and CFTC 
continue to lack the resources available to other self-funded 
financial regulators, creating structural weakness). The Commission 
also received one comment letter that recommended modifications to 
Rule 17Ad-22(e)(14) and other rulemaking outside the scope of Rule 
17Ad-22. See AMG-ICI at 8-12.
---------------------------------------------------------------------------

II. Description of the Amendments to Rule 17Ad-22 and Rule 17Ab2-2

    Below is a discussion of the amendments to Rule 17Ad-22 and Rule 
17Ab2-2. Part II.A discusses the scope of new Rule 17Ad-22(e). Part 
II.B discusses the Commission's principles-based approach to developing 
the requirements in Rule 17Ad-22(e). Part II.C discusses the 
requirements for covered clearing agencies under new Rule 17Ad-22(e) 
and the definitions that the Commission is adopting in Rule 17Ad-22(a). 
Part II.D discusses new Rule 17Ab2-2, Part II.E discusses new Rule 
17Ad-22(f), and Part II.F discusses the amendment to Rule 17Ad-22(d). 
Part II.G discusses the effective and compliance dates.\132\
---------------------------------------------------------------------------

    \132\ If any of the provisions of these rules, or the 
application thereof to any person or circumstance, is held to be 
invalid, such invalidity shall not affect other provisions or 
application of such provisions to other persons or circumstances 
that can be given effect without the invalid provision or 
application.
---------------------------------------------------------------------------

A. Scope of Rule 17Ad-22(e)

    To facilitate the approach to clearing agency regulation described 
in Part I.B, the Commission proposed to add five definitions to Rule 
17Ad-22(a) to identify those clearing agencies that would be subject to 
the requirements in Rule 17Ad-22(e). First, the Commission proposed to 
define ``financial market utility'' as defined in Section 803(6) of the 
Clearing Supervision Act.\133\ Second, the Commission proposed to 
define ``designated clearing agency'' as a clearing agency registered 
with the Commission under Section 17A of the Exchange Act that is 
designated as systemically important by the FSOC and for which the 
Commission is the supervisory agency as defined in Section 803(8) of 
the Clearing Supervision Act.\134\ Third, the Commission proposed to 
define ``clearing agency involved in activities with a more complex 
risk profile'' to mean a clearing agency registered with the Commission 
under Section 17A of the Exchange Act and that either (i) provides CCP 
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. Fourth, the Commission 
also proposed to define ``security-based swap'' to mean security-based 
swap as defined in Section 3(a)(68) of the Exchange Act.\135\ The 
Commission received no comments regarding these four definitions. The 
Commission is modifying the definition of ``clearing agency involved in 
activities with a more complex risk profile'' to strike ``and'' because 
it is unnecessary. The Commission is adopting the remaining three 
definitions as proposed.\136\
---------------------------------------------------------------------------

    \133\ See 12 U.S.C. 5462(6) (defining ``financial market 
utility'' pursuant to the Clearing Supervision Act); supra note 20 
(further discussing FMUs under the Clearing Supervision Act).
    \134\ Rule 17Ad-22 does not currently apply to entities 
operating pursuant to an exemption from clearing agency 
registration.
    \135\ See 15 U.S.C. 78c(a)(68).
    \136\ The Commission notes that, because of modifications to 
Rule 17Ad-22(a), the definition of ``financial market utility'' is 
being moved to Rule 17Ad-22(a)(7), the definition of ``designated 
clearing agency'' is being moved to Rule 17Ad-22(a)(6), the 
definition of ``security-based swap'' is being moved to Rule 17Ad-
22(a)(15). The definition of ``clearing agency involved in 
activities with a more complex risk profile'' remains in Rule 17Ad-
22(a)(4). See infra Part VI.

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[[Page 70798]]

    Fifth, the Commission proposed to define ``covered clearing 
agency'' to mean a designated clearing agency, a complex risk profile 
clearing agency for which the CFTC is not the supervisory agency, or 
any clearing agency determined to be a covered clearing agency by the 
Commission pursuant to proposed Rule 17Ab2-2. Commenters expressed 
several views on the entities and activities that should be included 
within the ``covered clearing agency'' definition. In Part I.C.4 above, 
the Commission considered comments focused generally on the potential 
for duplicative or inconsistent regulation as a result of the proposed 
scope of Rule 17Ad-22(e). Below is a discussion of comments directed to 
aspects of the definition of ``covered clearing agency.'' \137\ 
Comments directed to the scope of proposed Rule 17Ab2-2(a), which would 
have provided procedures for the Commission to determine whether a 
registered clearing agency is a covered clearing agency, are discussed 
separately in Part II.D. In light of those comments, the Commission has 
determined not to adopt proposed Rule 17Ab2-2(a), and therefore, in 
adopting the definition of ``covered clearing agency,'' the Commission 
has also determined to not adopt the proposed prong regarding 
determinations pursuant to Rule 17Ab2-2.\138\ Accordingly, the 
Commission is adopting the definition of ``covered clearing agency'' to 
mean a designated clearing agency or a complex risk profile clearing 
agency for which the CFTC is not the supervisory agency as defined in 
the Clearing Supervision Act.\139\
---------------------------------------------------------------------------

    \137\ The Commission notes that, because of modifications to 
Rule 17Ad-22(a), the definition of ``covered clearing agency'' is 
being moved to Rule 17Ad-22(a)(5). See infra Part VI.
    \138\ See infra Part II.D.2.a.
    \139\ In addition, as first noted in Part 0, in a separate 
release the Commission is proposing to modify the definition of 
`covered clearing agency' to include all CCPs, CSDs, and SSSs. See 
CCA Definition proposing release, supra note 82, at 25-26.
---------------------------------------------------------------------------

1. As Applied to CCPs Generally
    Four commenters supported applying enhanced standards to CCPs 
generally.\140\ One commenter noted that the mandatory clearing of OTC 
derivatives introduced following the 2008 financial crisis has 
heightened the need for enhanced standards for CCPs.\141\ A second 
commenter suggested that the Commission apply Rule 17Ad-22(e) to all 
clearing agencies to reduce the risk of failure and the problems such a 
failure would cause for investors.\142\ In so suggesting, the commenter 
cited to the size of the derivatives markets and the potential for 
disruption and systemic risk that those markets may have on covered 
clearing agencies.\143\ A third commenter similarly cited to the risks 
associated with derivatives trading that has shifted into clearing 
agencies.\144\ With respect to these three commenters, the Commission 
notes that, according to the ``covered clearing agency'' definition, a 
CCP is a covered clearing agency in either of the following 
circumstances: (i) If the CCP is a designated clearing agency; or (ii) 
if the CCP is a complex risk profile clearing agency,\145\ unless the 
CFTC is the supervisory authority under the Clearing Supervision Act. 
Accordingly, under the ``covered clearing agency'' definition, five of 
the six active CCPs registered with the Commission will be a covered 
clearing agency subject to Rule 17Ad-22(e). The Commission believes 
that it is important to take an initial step to establish coverage of 
Rule 17Ad-22(e) over this group of clearing agencies and is adopting 
the ``covered clearing agency'' definition with only the modification 
described above regarding Rule 17Ab2-2. However, in consideration of 
these comments, the Commission is proposing in a separate release to 
amend the definition of ``covered clearing agency'' so that it would 
apply to any registered clearing agency that, among other things, 
provides CCP services.\146\ Under this proposed definition, any CCP 
registered with the Commission would be a covered clearing agency.
---------------------------------------------------------------------------

    \140\ See CFA Institute at 2; OSEC at 3; The Clearing House at 
1; DTCC at 4 (recommending that any provision of the proposed rules 
that reflects best practices should be applied to all registered 
clearing agencies).
    \141\ See The Clearing House at 1.
    \142\ See CFA Institute at 2.
    \143\ See id. The commenter also suggests that, to account for 
these risks, the Commission reconsider whether all OTC contracts, 
whether standardized or not, ought to clear through covered clearing 
agencies. The Commission notes that whether OTC contracts ought to 
be subject to mandatory clearing requirements was not a subject of 
this rulemaking during the proposing stage, and the Commission 
therefore believes this comment is outside the scope of this 
rulemaking.
    \144\ See OSEC at 3.
    \145\ As previously discussed, security-based swap clearing 
agencies are a subset of complex risk profile clearing agencies 
under Rule17Ad-22(a)(5). See supra note 59.
    \146\ See CCA Definition proposing release, supra note 82, at 
25-43.
---------------------------------------------------------------------------

    The fourth commenter recommended that any provision of the proposed 
rules that reflects best practices should be applied to all registered 
clearing agencies, CCPs or otherwise.\147\ This comment has been 
previously addressed in Part I.C.2.\148\
---------------------------------------------------------------------------

    \147\ See DTCC at 4.
    \148\ See supra notes 77-78 and accompanying text.
---------------------------------------------------------------------------

2. As Applied to Security-Based Swap Clearing Agencies
    In contrast, three commenters sought to limit the scope of Rule 
17Ad-22(e) further than was proposed.\149\ The Commission believes 
these arguments are unpersuasive, for the reasons described below.
---------------------------------------------------------------------------

    \149\ See CME, ICEEU, and LCH.
---------------------------------------------------------------------------

    One of these commenters expressed the view that Rule 17Ad-22(e) 
should not apply to complex risk profile clearing agencies but only to 
designated clearing agencies, and that applying the enhanced regime of 
Rule 17Ad-22(e) to non-designated clearing agencies undermines the 
significance of being designated, which the commenter stated is 
inconsistent with the distinction Congress sought to create between 
systemically important clearing agencies and other non-designated 
clearing agencies.\150\ The commenter stated that the Commission should 
take an approach similar to the CFTC, whereby non-designated clearing 
agencies could choose to ``opt-in'' to the enhanced requirements of 
Rule 17Ad-22(e) if desired. The commenter further stated that security-
based swap clearing agencies should not automatically fall within the 
definition of a covered clearing agency, stating that it is not clear 
security-based swap clearing inherently raises issues that require 
enhanced standards as compared to other clearing activities.\151\
---------------------------------------------------------------------------

    \150\ See ICEEU at 3.
    \151\ See id. at 3-4.
---------------------------------------------------------------------------

    The Commission believes, however, that it is important to establish 
coverage of the enhanced standards of Rule 17Ad-22(e) for CCPs that 
clear security-based swaps. In the Commission's view, in addition to 
designations of systemic importance under the Clearing Supervision Act, 
Title VII of the Dodd-Frank Act sets out separate and equally important 
objectives. As described above, Title VII provides the Commission with 
enhanced authority to regulate security-based swaps, and, among other 
things, requires the Commission to adopt rules with respect to 
security-based swap clearing agencies.\152\ The Commission previously 
has noted that Title VII's mandate for the central clearing of security 
based swaps, wherever possible and appropriate, reinforces the need for 
proper risk management by security-

[[Page 70799]]

based swap clearing agencies to ensure the stability of the U.S. 
securities markets.\153\ The requirements in Rule 17Ad-22(e), among 
other things, help to mitigate the risks inherent in the functions of a 
CCP, including a CCP for security-based swaps, and therefore the 
Commission believes that requiring registered clearing agencies 
performing such CCP functions to comply with Rule 17Ad-22(e), in 
addition to those registered clearing agencies that are designated 
clearing agencies, is consistent with the framework of both Title VII 
and the Clearing Supervision Act. In light of these considerations, the 
Commission does not believe that an opt-in regime is appropriate for 
security-based swap clearing agencies.
---------------------------------------------------------------------------

    \152\ See supra note 17 and accompanying text.
    \153\ See CCA Standards proposing release, supra note 5, at 
29576.
---------------------------------------------------------------------------

    In the alternative, the commenter stated that application of Rule 
17Ad-22(e) should be limited to the particular business or product 
lines of a covered clearing agency that warrant application of the 
higher standards.\154\ The commenter noted that many clearing agencies 
clear a range of products, some of which are within and others outside 
of the Commission's jurisdiction. According to the commenter, for those 
clearing agencies only some activities, such as the clearing of 
security-based swaps, should trigger application of Rule 17Ad-22(e), 
and therefore the requirements in Rule 17Ad-22(e) should be limited to 
those business or product lines. The commenter noted that this would be 
applicable where the activity is substantially separate from other 
business lines, such as through the use of a separate guaranty fund. 
The commenter recognized that certain standards may not be easily 
applied to a particular business line,\155\ but noted that a 
categorical rule that does not take into account the scope of a 
particular clearing agency's security-based swap activities or the 
risks presented by them raises concerns.\156\
---------------------------------------------------------------------------

    \154\ See ICEEU at 7.
    \155\ See id. The commenter further states that this approach 
will help reduce the likelihood of clearing agencies being subject 
to inconsistent regulation. The Commission addressed this aspect of 
the comment above in Part I.C.4.
    \156\ See ICEEU at 7.
---------------------------------------------------------------------------

    Rule 17Ad-22(e) applies to a covered clearing agency and does not 
make distinctions among the various product or business lines that the 
covered clearing agency manages. In the Commission's experience, many 
aspects of a clearing agency's operations are managed at the entity 
level (i.e., as a clearing agency) irrespective of product or business 
line. For example, the clearing agency's legal framework, governance, 
risk management framework, financial risk management, and operational 
risk management are determined as part of the policies and procedures 
of the entity (i.e., the clearing agency), and therefore these areas 
are not separated out to apply exclusively to a particular business or 
product line.\157\ Thus, requirements in Rule 17Ad-22(e) directed to 
these aspects of a clearing agency's operations generally could not be 
easily applied only to a particular business or product line when the 
clearing agency's operations and risk management are organized at the 
entity level. The Commission believes that this approach avoids 
unnecessary complexity and fragmentation in the policies and procedures 
of a clearing agency. The operations and risk management of a covered 
clearing agency are closely interrelated across various activities in 
which the clearing agency engages, and within Rule 17Ad-22(e), the 
requirements have significant interactions among each other, with some 
building upon others or complementing others. The Commission believes 
that this generally also supports a holistic application of the 
requirements in Rule 17Ad-22(e).
---------------------------------------------------------------------------

    \157\ See infra Parts II.C.1-7, 17 (discussing each, 
respectively).
---------------------------------------------------------------------------

    However, the Commission understands that some covered clearing 
agencies may manage certain activities and risk at an entity level 
while others manage the same activities and risk at a business or 
product level. Covered clearing agencies retain the ability to 
distinguish among their products in crafting their policies and 
procedures. Because a covered clearing agency's practices are diverse 
and difficult to generalize, the Commission has sought to address such 
concerns in other ways, such as by streamlining the process for rule 
filings under Rule 19b-4 filed by dually registered clearing 
agencies.\158\ Specifically, for rule filings that primarily concern 
the clearing operations of a registered clearing agency that are not 
linked to securities clearing operations but only to clearing of 
products under the authority of the CFTC, the Commission provides a 
streamlined process for such rule filings to become effective upon 
filing with the Commission.\159\
---------------------------------------------------------------------------

    \158\ See Exchange Act Release No. 34-69284 (Apr. 3, 2013), 78 
FR 21046 (Apr. 9, 2013) (``Dually Registered CA release'').
    \159\ See id. at 21047.
---------------------------------------------------------------------------

    Additionally, two commenters urged the Commission to exclude non-
U.S. security-based swap clearing agencies registered with the 
Commission from the definition of ``covered clearing agency'' when they 
are regulated in their home jurisdictions under a regime that is 
consistent with the PFMI.\160\ The commenters stated that this approach 
would be consistent with the Commission's treatment under Rule 17Ad-
22(e) of dually registered SIDCOs for which the CFTC is the supervisory 
agency under the Clearing Supervision Act and believe a similar 
exclusion would be appropriate for clearing agencies subject to other 
regulatory frameworks.\161\ The commenters further stated that any 
decision to apply the enhanced standards for covered clearing agencies 
should take into account whether, and the extent to which, the clearing 
agency is already subject to similar or comparable standards under 
other regulation,\162\ noting that recognizing existing foreign 
regulation is consistent with the Commission's proposals on regulation 
of cross-border activities generally.\163\ In the commenters' view, the 
approach set out in the Commission's Cross-Border proposing release 
sensibly balanced the interests of the Commission with those of foreign 
regulators and appropriately considered the costs and benefits of 
adding additional regulatory requirements where the home country 
regulation is comparable.
---------------------------------------------------------------------------

    \160\ See ICEEU at 5-6; LCH at 3. The Commission has previously 
addressed more general comments regarding the risk of duplicative or 
inconsistent regulation above in Part I.C.4.
    \161\ See ICEEU at 5-6; LCH at 3.
    \162\ See id.
    \163\ See ICEEU at 6; LCH at 3 (citing Exchange Act Release No. 
34-69490 (May 1, 2013), 78 FR 30968, 31039 (May 23, 2013) (``Cross-
Border proposing release'')).
---------------------------------------------------------------------------

    In this regard, one commenter expressed the belief that deference 
to home country regulation is appropriate because both Rule 17Ad-22(e) 
and applicable U.K. regulations are consistent with the PFMI, noting 
that U.S. and U.K. regulators thus have generally aligned 
interests.\164\ In particular, the commenter cited, as comparable 
regulation to Rule 17Ad-22(e), regulation by the Bank of England under 
existing U.K. legislation and, for those clearing agencies that have 
been granted authorization as a CCP under EMIR, the regulations under 
EMIR.\165\ A second commenter echoed this viewpoint, noting that EMIR 
is consistent with the PFMI.\166\ Finally, one of the commenters stated 
that, in areas where the Commission determines that the home country 
regulation is not comparable and determines that additional regulation 
may be appropriate, any incremental regulation

[[Page 70800]]

under Rule 17Ad-22 should be targeted to those areas of 
difference.\167\
---------------------------------------------------------------------------

    \164\ See ICEEU at 6.
    \165\ See id.
    \166\ See LCH at 3.
    \167\ See ICEEU at 6.
---------------------------------------------------------------------------

    One commenter further stated that, at a minimum, a clearing agency 
subject to Rule 17Ad-22(e) in addition to comparable home regulation is 
subject to duplicative regulation, which is costly for both the 
clearing agency and its regulators and serves no meaningful regulatory 
purpose.\168\ The commenter also stated that it is critical that a 
clearing agency not be subject to inconsistent regulations in different 
jurisdictions, noting that such inconsistencies can arise not only when 
relevant regulations are different but also when regulators interpret 
substantially similar regulations in different ways. As a result, the 
commenter stated that a clearing agency can still be significantly 
burdened by being subject to two substantially similar sets of 
regulations, and in its view, the commenter expressed the view that it 
would be preferable to allow clearing agencies, where possible, to be 
subject to a single set of standards.\169\ The other commenter also 
supported an approach that would minimize duplicative requirements on 
those registered clearing agencies subject to both Rule 17Ad-22(e) and 
home regulation, while ensuring that all registered clearing agencies 
that clear security-based swaps are regulated in a manner that is 
consistent with the PFMI.\170\
---------------------------------------------------------------------------

    \168\ See ICEEU at 5.
    \169\ See id.
    \170\ See LCH at 3.
---------------------------------------------------------------------------

    In response to the above comments, the Commission does not believe 
that a non-U.S. security-based swap clearing agency regulated in its 
home jurisdiction, under a regime consistent with the PFMI, should be 
excluded, as a threshold matter, from designation as a covered clearing 
agency. As previously discussed in Part I.C.4, the Commission's intent 
with respect to Rule 17Ad-22(e) is, in part, to take another 
incremental step under Rule 17Ad-22 to ensure that risks inherent in 
certain CCP activity, including the central clearing of security-based 
swaps, are appropriately managed consistent with the purposes of the 
Exchange Act, the Clearing Supervision Act, and Title VII of the Dodd-
Frank Act. The Commission has, through Rule 17Ad-22, sought to apply 
requirements commensurate and appropriate to the risk posed by the 
clearing agency functions and activities specific to covered clearing 
agencies as they exist in, and serve, the U.S. securities markets. The 
Commission acknowledges that other rules and regulations may apply to a 
covered clearing agency that are similar in scope or purpose to Rule 
17Ad-22(e). However, the presence of similar regulations does not 
negate the Commission's obligation to ensure that risk in the U.S. 
securities markets is appropriately managed consistent with the 
purposes of the Exchange Act, the Clearing Supervision Act, and Title 
VII of the Dodd-Frank Act.
    Further, because Rule 17Ad-22(e) and other comparable regulations 
are based on the same international standards,\171\ the Commission 
believes the potential for any inconsistent regulation is low. Indeed, 
applying Rule 17Ad-22(e) to a covered clearing agency that is also 
subject to comparable regulation consistent with the PFMI in its home 
jurisdiction should improve harmonization between the Commission's 
regulatory regime and that of the home jurisdiction, which would reduce 
the burdens associated with the presence of similar regulation under 
multiple regulatory regimes. In addition, because clearing agency 
practices are diverse and difficult to generalize, the Commission has 
sought to address concerns about duplicative regulation in other ways, 
such as through streamlining the process for rule filings under Rule 
19b-4 filed by clearing agencies dually registered with the Commission 
and the CFTC so that rule filings that do not pertain to securities 
clearing operations become effective upon filing with the Commission, 
without pre-effective notice and opportunity for comment.\172\ In 
addition, Part I.A.6 above discusses the process by which the 
Commission could consider the attendant facts and circumstances in 
assessing the application of Rule 17Ad-22(e) to a non-U.S. covered 
clearing agency that is subject to similar regulation in its home 
jurisdiction.
---------------------------------------------------------------------------

    \171\ See supra notes 1-2, 43, and accompanying text.
    \172\ See Dually Registered CA release, supra note 158, at 
21047.
---------------------------------------------------------------------------

3. As Applied to Dually Registered Clearing Agencies
    One commenter noted that the proposed definition is sufficiently 
broad to enable the Commission to include SIDCOs. The commenter stated 
that the potential for a SIDCO to be determined to be a covered 
clearing agency is inconsistent with the Commission's acknowledgment of 
the purposes of the Clearing Supervision Act and there being 
duplicative requirements for some dually registered entities.\173\ The 
commenter recommended that the Commission expressly exclude from the 
definition of ``covered clearing agency'' those clearing agencies for 
which the CFTC is the supervisory agency pursuant to the Clearing 
Supervision Act. The Commission notes that the definition of ``covered 
clearing agency'' does expressly exclude those clearing agencies for 
which the CFTC is the supervisory agency. As previously discussed, in a 
separate release, the Commission is proposing to amend the definition 
of a covered clearing agency, and addresses the potential effects of 
the proposed amendment on clearing agencies dually registered with the 
CFTC.\174\
---------------------------------------------------------------------------

    \173\ See CME at 3.
    \174\ See CCA Definition proposing release, supra note 82, at 
39-42.
---------------------------------------------------------------------------

B. Principles-Based Approach to Rule 17Ad-22(e)

    Rule 17Ad-22(e) requires a covered clearing agency to establish, 
implement, maintain and enforce written policies and procedures that 
address a variety of issues, as described in detail below. The 
Commission's approach sets forth requirements that a covered clearing 
agency must achieve when developing its written policies and 
procedures. With a number of exceptions, Rule 17Ad-22(e) does not 
prescribe a specific tool or arrangement to achieve its requirements. 
The Commission believes that when determining the content of its 
policies and procedures, each covered clearing agency must have the 
ability to consider its unique characteristics and circumstances, 
including ownership and governance structures, effect on direct and 
indirect participants, membership base, markets served, and the risks 
inherent in products cleared. This ability, however, is subject to the 
requirements of the SRO rule filing and advance notice processes, which 
provide some opportunities for the public and participants to comment 
on the covered clearing agency's rules, policies, and procedures.
    The Commission does not believe that a granular or prescriptive 
approach to its regulation of covered clearing agencies would be 
appropriate, nor would such an approach ensure that a covered clearing 
agency does not become a transmission mechanism for systemic risk. 
Moreover, the Commission believes that the primarily principles-based 
approach reflected in Rule 17Ad-22(e) will help a covered clearing 
agency continue to develop policies and procedures that can effectively 
meet the evolving risks and challenges in the markets that the covered 
clearing agency serves. It has

[[Page 70801]]

been the Commission's experience that particular securities markets 
(e.g., equities, fixed income, and options) have their unique 
conventions, characteristics, and structure that are best addressed on 
a market-by-market basis. The Commission recognizes that a less 
prescriptive approach can help promote efficient and effective 
practices and encourage regulated entities to consider how to manage 
their regulatory obligations and risk management practices in a way 
that complies with Commission rules, while considering the particular 
characteristics of their business, and believes the approach reflected 
in across Rule 17Ad-22, including new paragraph (e), is consistent with 
this approach. Such a principles-based approach also is consistent with 
the approach taken in Rule 17Ad-22(d).\175\
---------------------------------------------------------------------------

    \175\ See, e.g., Clearing Agency Standards adopting release, 
supra note 5, at 66231-32 (noting, with respect to credit exposures 
and margin requirements under Rule 17Ad-22(d), that a less 
prescriptive and more flexible rule sets a more appropriate baseline 
standard and stressing the importance of considering different 
markets characterized by different trading patterns, volumes, 
liquidity, transparency and other unique market characteristics when 
determining the appropriate risk management mechanisms for a 
particular clearing agency).
---------------------------------------------------------------------------

    As a general matter, the Commission believes that using broadly 
prescriptive requirements that, on an absolute and ex ante basis, 
prohibit a covered clearing agency's use of particular tools makes it 
more difficult for a covered clearing agency to maintain flexibility, 
subject to its obligations and responsibilities as an SRO under the 
Exchange Act, to address the ever-evolving challenges and risks 
inherent in the securities markets. Accordingly, the Commission 
believes that the approach adopted here appropriately preserves such 
flexibility for a covered clearing agency, and the broader market, to 
respond to particular risks or issues arising in its operations in an 
effective manner.
    Finally, in certain instances, commenters have suggested that the 
Commission either prohibit or endorse a covered clearing agency's use 
of particular tools or rules, policies, or procedures. As discussed in 
more detail below, the Commission generally declines to take such an 
approach because it is inconsistent with the principles-based approach 
reflected in Rule 17Ad-22(e). Instead, the Commission's approach to 
Rule 17Ad-22(e) is designed to allow the Commission to consider 
particular tools in the context of the specific facts and circumstances 
facing a clearing agency in light of its governance structure, the 
products it clears, and the markets it serves. In addition, in 
consideration of the issues raised by commenters, the Commission has 
provided guidance consistent as to what a covered clearing agency 
generally should consider when developing and maintaining its policies 
and procedures consistent with Rule 17Ad-22(e).

C. Requirements for Covered Clearing Agencies Under Rule 17Ad-22(e)

    Below is a discussion of each of the requirements in new Rule 17Ad-
22(e), the related new definitions in Rule 17Ad-22(a), and the comments 
received by the Commission that were targeted to specific elements of 
those requirements and definitions.\176\ As previously noted, the 
Commission is adopting Rule 17Ad-22(e) and the related definitions in 
Rule 17Ad-22(a) substantially as proposed.\177\ To the extent the 
Commission is adopting any modifications either to the requirements in 
Rule 17Ad-22(e) or the definitions in Rule 17Ad-22(a), such 
modifications are discussed in detail below. Moreover, the below 
sections are organized by the particular rules under Rule 17Ad-22(e), 
with discussion of the definitions incorporated into the overall 
substantive discussion of each particular rule. Further, in the 
discussion of each final rule below, the Commission has included 
guidance that a covered clearing agency generally should consider as it 
develops and maintains its rules, policies, and procedures in 
compliance with Rule 17Ad-22(e). As previously noted, this guidance is 
based, in part, on the key considerations in the PFMI.\178\ The 
Commission intends for this guidance to be read in conjunction with the 
relevant requirements set forth in Rule 17Ad-22(e), so as to provide 
further explanation of the types of issues a covered clearing agency 
generally should consider when implementing those requirements. The 
Commission does not intend for this guidance to expand, diminish, or 
otherwise modify the requirements under Rule 17Ad-22(e).
---------------------------------------------------------------------------

    \176\ Comments that were of a general nature have been discussed 
in Part I.C.
    \177\ See supra Part I.B.
    \178\ See supra Part I.C.6.
---------------------------------------------------------------------------

1. Rule 17Ad-22(e)(1): Legal Risk
a. Proposed Rule
    As 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.\179\ The Commission proposed 
Rule 17Ad-22(a)(20) to define ``transparent'' to mean that relevant 
documentation is disclosed, as appropriate, to the Commission and other 
relevant authorities, to clearing members and customers of clearing 
members, to the owners of the covered clearing agency, and to the 
public, to the extent consistent with other statutory and Commission 
requirements.\180\
---------------------------------------------------------------------------

    \179\ See CCA Standards proposing release, supra note 5, at 
29519-20.
    \180\ See id. In addition, the Commission notes that the 
definition of ``transparent'' is also used in Rules 17Ad-22(e)(2) 
and (10). See infra Parts II.C.2 and 10.
---------------------------------------------------------------------------

b. Comments Received and Commission Response
i. Use of Legal Opinions
    One commenter supported the Commission's proposal that each covered 
clearing agency have policies and procedures that provide for a well-
founded, clear, transparent, and enforceable legal basis for each of 
its activities in all relevant jurisdictions, and noted that legal 
uncertainty can increase risk.\181\ A second commenter stated that the 
Commission explicitly should require a covered clearing agency to 
obtain, on at least an annual basis, legal opinions on the 
enforceability of structures used to contain losses within a clearing 
service upon the insolvency of the clearing service or the covered 
clearing agency, including closeout netting, right of set-off, 
classification as a repurchase-style transaction, and collateral 
protection opinions, and then disclose these opinions to its 
participants.\182\
---------------------------------------------------------------------------

    \181\ See CFA Institute at 5.
    \182\ See The Clearing House at 18.
---------------------------------------------------------------------------

    In satisfying the requirements in Rule 17Ad-22(e)(1), a covered 
clearing agency could include within its policies and procedures a 
requirement regarding legal opinions as to certain matters, such as the 
enforceability of structures used to contain losses within a clearing 
service upon the insolvency of the clearing service or the covered 
clearing agency. The use of legal opinions may be one consideration but 
compliance with Rule 17Ad-22(e)(1) ultimately requires that the covered 
clearing agency's policies and procedures, taken as a whole, to be 
reasonably designed to provide for a well-founded, clear, transparent, 
and enforceable legal basis for each aspect of its activities in all 
relevant jurisdictions. Whether legal opinions are useful to a covered 
clearing agency and, if so, what form they ought to take or subject 
matter they ought to address, may vary on a case-by-case

[[Page 70802]]

basis depending on the particular facts and circumstances. Because the 
appropriate use of legal opinions will vary on a case-by-case basis, 
the Commission does not believe it is appropriate to modify Rule 17Ad-
22(e)(1) to include a specific requirement for legal opinions 
addressing particular matters.\183\
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    \183\ The Commission notes that every registered clearing agency 
must keep and preserve at least one copy of all documents as shall 
be made or received by it in the course of its business as such and 
in the conduct of its self-regulatory activity. 17 CFR 240.17a-1.
---------------------------------------------------------------------------

ii. Definition of ``Transparent''
    One commenter, although supportive of the Commission's proposal to 
require covered clearing agencies to develop policies and procedures to 
fulfill the requirements of Rule 17Ad-22(e), noted that, because some 
policies and procedures may include commercially sensitive information, 
it would be inappropriate to require a covered clearing agency to 
disclose all of its policies and procedures. The commenter stated that 
it would be helpful for the language of the rules to explicitly reflect 
this reality, which was acknowledged by the Commission in the preamble 
to the proposed rules.\184\
---------------------------------------------------------------------------

    \184\ See id.
---------------------------------------------------------------------------

    The Commission acknowledges that disclosure of certain information, 
for example, proprietary or commercially sensitive information, may not 
be appropriate to be disclosed publicly or to all parties. Because the 
definition of ``transparent'' is limited to relevant documentation, as 
appropriate, and does not conflict with other statutory and Commission 
requirements on confidentiality and disclosure, it does not lead to the 
concerns noted by the commenter. The Commission already noted in 
proposing the rule that certain types of information, such as 
confidential information, may not be appropriate for disclosure in some 
circumstances and to some parties. In addition, the level of disclosure 
required will necessarily depend on the particular facts and 
circumstances. The definition of ``transparent'' provides a covered 
clearing agency with some discretion to develop written policies and 
procedures addressing disclosures and the use of confidential or 
proprietary information, consistent with statutory and Commission 
requirements. To improve clarity, the Commission is modifying the 
definition of ``transparent'' to mean 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 documentation required under paragraphs (e)(1), (2), 
and (10) is disclosed to the Commission and, as appropriate, 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. Below, the Commission provides additional guidance regarding 
the definition of ``transparent.''
c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(1) as proposed and 
adopting the definition of ``transparent'' as described above but 
moving it to Rule 17Ad-22(a)(19) because of other modifications to Rule 
17Ad-22(a).\185\ Because the Commission recognizes that there may be a 
number of ways to address compliance with Rule 17Ad-22(e)(1), the 
Commission is providing the following guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures to address legal risk:
---------------------------------------------------------------------------

    \185\ See infra Part VI.
---------------------------------------------------------------------------

     Whether its policies and procedures for legal risk provide 
a high degree of certainty for each material aspect of its activities 
in all relevant jurisdictions;
     whether its rules, policies and procedures, and contracts 
are clear, understandable, and consistent with relevant laws and 
regulations;
     whether it can articulate the legal basis for its 
activities to the relevant authorities, participants, and, where 
relevant, participants' customers, in a clear and understandable way;
     whether it has rules, policies and procedures, and 
contracts that are enforceable in all relevant jurisdictions, and 
whether it has a high degree of certainty that actions taken by it 
under such rules, policies and procedures, and contracts will not be 
voided, reversed, or subject to stays; and
     whether, if it conducts business in multiple 
jurisdictions, it can identify and mitigate the risks arising from any 
potential conflict of laws across jurisdictions.
    The Commission notes that a covered clearing agency operating in 
multiple jurisdictions under Rule 17Ad-22(e)(1) generally should 
address any conflicts of law issues that it may encounter.\186\
---------------------------------------------------------------------------

    \186\ In addition, for covered clearing agencies, the ``relevant 
jurisdiction'' includes the United States and any other jurisdiction 
where the covered clearing agency operates.
---------------------------------------------------------------------------

    With respect to the definition of ``transparent,'' the Commission 
notes that certain types of information, such as confidential 
information, may not be appropriate for public disclosure or disclosure 
to certain third parties and that confidential information could be 
reflected in policies and procedures with respect to the security of 
information technology or other critical systems, such as, for example, 
as part of business continuity planning. The Commission also notes that 
generally a covered clearing agency could meet the definition of 
``transparent'' by posting relevant documentation to its Web site.

2. Rule 17Ad-22(e)(2): Governance

a. Proposed Rule
    As proposed, Rules 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; support the 
public interest requirements in Section 17A of the Exchange Act and the 
objectives of owners and participants; and establish that the board of 
directors and senior management have appropriate experience and skills 
to discharge their duties and responsibilities.\187\
---------------------------------------------------------------------------

    \187\ See CCA Standards proposing release, supra note 5, at 
29520-22.
---------------------------------------------------------------------------

b. Comments Received and Commission Response
i. Scope of Interests To Consider
    The scope of interests required to be considered as part of Rule 
17Ad-22(e)(2)(iii) attracted a range of comments. One commenter 
conveyed strong support for the Commission's requirement that covered 
clearing agencies adopt policies and procedures for clear and 
transparent governance arrangements that prioritize safety and 
efficiency, noting that decisions made by covered clearing agencies 
could have an impact on multiple financial markets and 
jurisdictions.\188\ The commenter urged that governance measures should 
support the objectives of owners and participants and, with respect to 
certain matters, the public interest. The commenter also noted that a 
clearing agency's reactions to competition could undermine the safety 
and soundness of the clearing agency as well as the industry as a 
whole.\189\
---------------------------------------------------------------------------

    \188\ See CFA Institute at 6.
    \189\ See id.
---------------------------------------------------------------------------

    A second commenter sought to clarify that proposed Rule 17Ad-
22(e)(2)(iii) would not encompass the interests of participants' 
customers and other stakeholders.\190\ This commenter expressed the 
belief that the Commission's proposed approach, in

[[Page 70803]]

which the objectives of participants' customers and other stakeholders 
are not explicitly stated in Rule 17ad-22(e)(2)(iii), is consistent 
with the PFMI.\191\ The commenter acknowledged that the Commission and 
other regulators must consider the interests of indirect participants, 
but the commenter noted that their interests are adequately addressed 
through participation of a sufficient number of independent directors 
or through other means.\192\ A third commenter expressed support for 
the proposed standards, believing that a principles based-formulation 
is generally appropriate, but the commenter also expressed the belief 
that proposed Rule 17Ad-22(e)(2) should provide clear processes for 
consideration of participants' views and involvement of participants in 
the covered clearing agency's decision-making process.\193\
---------------------------------------------------------------------------

    \190\ See OCC at 4-5.
    \191\ See id. (discussing CFTC Rule 39.32(a)(1)(iv) and, as 
proposed, FRB Rule 234.3(a)(2)(iii)).
    \192\ See id. at 5.
    \193\ See ISDA at 2; see also infra notes 212, 215 and 
accompanying text (discussing other concerns raised by the 
commenter).
---------------------------------------------------------------------------

    The Commission believes that the first commenter's concern is 
addressed by the fact that policies and procedures under Rule 17Ad-
22(e)(2) reasonably designed to support the public interest 
requirements in Section 17A of the Exchange Act generally should 
consider whether they support the stability of the broader financial 
system of the United States.\194\ For example, as noted by the first 
commenter, a covered clearing agency could consider the public interest 
in its response to large scale price moves or position changes.\195\
---------------------------------------------------------------------------

    \194\ As previously discussed, the Commission has stated that 
the public interest is a broad concept that includes 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, protecting investors, and fostering fair 
and efficient markets. See supra Part II.C.2.a.
    \195\ See CFA Institute at 6.
---------------------------------------------------------------------------

    With respect to the second and third commenters,\196\ the 
Commission is modifying proposed Rule 17Ad-22(e)(2) to include new 
paragraph (vi), which requires policies and procedures for governance 
arrangements that consider the interests of participants' customers, 
securities issuers and holders, and other relevant stakeholders of the 
covered clearing agency.\197\ Under new paragraph (vi), other relevant 
stakeholders are persons that access the national system for clearance 
and settlement indirectly (e.g., institutional and retail investors), 
entities that rely on the national system for clearance and settlement 
to effectively provide services to investors and market participants, 
and other market infrastructures. Other relevant stakeholders currently 
include, for example, transfer agents, liquidity providers, and other 
linked market infrastructures, including exchanges, matching service 
providers, and payment systems. This new paragraph complements Section 
17A(b)(3)(C), which requires the rules of a clearing agency to assure 
fair representation of its shareholders and participants in the 
selection of its directors and the administration of its affairs.\198\ 
This requirement for fair representation necessarily applies to 
policies and procedures adopted and maintained by a covered clearing 
agency pursuant to Rule 17Ad-22(e)(2). Consistent with this 
requirement, the Commission believes that a covered clearing agency 
generally should, in selecting its directors and administering its 
affairs, consider the interests of owners, participants, participants' 
customers, securities issuers and holders, and other relevant 
stakeholders to, consistent with the public interest requirements in 
Section 17A, strike an appropriate balance among the potentially 
competing views of such other stakeholders represented within a covered 
clearing agency. As noted by one commenter below, the inclusion of 
independent directors on the board may be one mechanism for helping to 
ensure that the relevant views are presented and considered,\199\ 
provided the covered clearing agency's overall corporate governance 
structure is consistent with the fair representation and public 
interest requirements in Section 17A of the Exchange Act. The 
Commission notes, further, that the approach a covered clearing agency 
may take in considering such views could vary depending on the 
ownership structure or organizational form of the covered clearing 
agency. A covered clearing agency operating under a mutualized utility 
model where losses are fully mutualized among its participant-owners 
may take a different approach to consider the interests of all the 
relevant stakeholders compared to a covered clearing agency operating 
under a different model, such as one where it is owned by another 
organization, is operated as a for-profit entity, and/or is publicly 
listed and traded.
---------------------------------------------------------------------------

    \196\ See supra notes 190-193 and accompanying text.
    \197\ See Rule 17Ad-22(e)(2)(vi), infra Part VI; see also infra 
Part II.C.2.c.
    \198\ See 15 U.S.C. 78q-1(b)(3)(C).
    \199\ See ICI at 14-15; see also infra Part II.C.2.b.ii below 
(discussing comments regarding public or independent representation 
on the board of directors).
---------------------------------------------------------------------------

ii. Representation on the Board of Directors
    Commenters generally supported the requirement in proposed Rule 
17Ad-22(e)(2)(iv) that requires members of the board of directors and 
senior management to have the skills and experience to perform their 
duties and responsibilities.\200\ Multiple commenters, however, 
advocated for the inclusion of additional requirement related to the 
board of directors. One commenter urged the Commission to require that 
covered clearing agencies have public or independent representation on 
their boards.\201\ The commenter also urged the Commission to define 
independent directors to exclude parties with significant business 
relationships with the covered clearing agency, cross-directorships, or 
controlling shareholdings, as well as executives, officers, or 
employees of the covered clearing agency or its affiliate.\202\ Another 
commenter recommended that the Commission require a covered clearing 
agency to include representatives of both buy-side and sell-side market 
participants on the board.\203\ The commenter stated that some equities 
clearing agencies and stock exchanges already include investor 
representatives on their boards to benefit from a diverse group of 
market participants.\204\ The commenter expressed the view that 
stakeholder involvement at the board level would minimize conflicts of 
interest by balancing commercial interests of covered clearing agencies 
with those of other stakeholders.\205\ The commenter also expressed the 
view that the risk committee of a covered clearing agency should 
include a wide range of indirect participants, as the customers of 
clearing members also have an interest in ensuring adequate and diverse 
stakeholder representation in the covered clearing agency, in addition 
to transparency in the decision making process.\206\
---------------------------------------------------------------------------

    \200\ See, e.g., CFA Institute at 6 (noting that those 
responsible for the operations of a covered clearing agency should 
be capable of performing the required decision-making in light of 
the systemic importance of covered clearing agencies); OCC at 5 
(believing that covered clearing agencies are well positioned to 
determine which individuals have the appropriate experience, skills, 
incentives, and integrity to discharge their duties and 
responsibilities in a way that reflects the particular needs of each 
covered clearing agency).
    \201\ See Better Markets at 7; Fidelity at 3-4; ICI at 14.
    \202\ See Better Markets at 7.
    \203\ See ICI at 14.
    \204\ See id.
    \205\ See id. at 14-15.
    \206\ See id. at 15.

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

[[Page 70804]]

    After careful consideration of the comments, the Commission has 
determined not to modify Rule 17Ad-22(e)(2) to include specific 
requirements related to public or independent representation on the 
covered clearing agency's board or risk committee. The Commission 
believes that new paragraph (vi), previously discussed above, 
sufficiently addresses the concerns raised by the commenters because it 
requires specific policies and procedures for governance arrangements 
that consider the interests of a wide range of market participants. In 
addition, public representation, combined with clear requirements for 
the qualifications of the board of directors, could improve the 
functioning of the board and could be one way to ensure that the 
covered clearing agency has governance arrangements consistent with the 
fair representation requirements of Section 17A(b)(3)(C) of the 
Exchange Act, provided that the covered clearing agency's governance 
structure, as a whole, is consistent with the fair representation and 
public interest requirements in Section 17A of the Exchange Act. The 
Commission is declining to modify Rule 17Ad-22(e)(2) to further specify 
that a particular director represent the interests of buy-side or sell-
side market participants. The Commission notes that public or 
independent representation are one possible approach to governance that 
can help ensure consistency with the fair representation and public 
interest requirements in Section 17A of the Exchange Act. In addition, 
and for the same reasons, the Commission is declining to modify Rule 
17Ad-22(e)(2) to provide further specification regarding business 
relationships and affiliates because these topics, like the above, are 
already addressed by the fair representation requirement in Section 
17A(b)(3)(C) and the public interest requirements of Section 17A of the 
Exchange Act.
    Separate from the above, one commenter also encouraged the 
Commission to specify that independent directors must support the 
objectives of customers and the public, rather than simply the clearing 
members.\207\ The Commission notes that Rule 17Ad-22(e)(2)(iii) 
requires policies and procedures that support not only the public 
interest considerations of Section 17A of the Exchange Act but also the 
objectives of both owners and participants. In addition, the Commission 
generally believes that the governance arrangements of a covered 
clearing agency should include consideration of the interests of 
participants' customers and other stakeholders, and this is why the 
Commission is modifying proposed Rule 17Ad-22(e)(2), as previously 
discussed, to include new paragraph (vi), which requires policies and 
procedures for governance arrangements that consider the interests of 
participants' customers and other stakeholders. Further, the Commission 
notes that the requirements of Section 17A(b)(3)(F) of the Exchange 
Act, which require that the rules of a clearing agency be designed to, 
in general, protect investors and the public interest, also address the 
commenter's concern.
---------------------------------------------------------------------------

    \207\ See Better Markets at 7.
---------------------------------------------------------------------------

iii. Accountability of the Board of Directors and Senior Management
    One commenter expressed concern that the proposed rules fail to 
foster accountability by the board and management, and the commenter 
requested that the Commission require covered clearing agencies to 
clearly document the roles and responsibilities of the board of 
directors and management and implement governance arrangements that 
specify clear and direct lines of responsibility.\208\ To address this 
concern, the Commission is modifying proposed Rule 17Ad-22(e)(2) to 
include new paragraph (v) to require each covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for governance arrangements 
that specify clear and direct lines of responsibility.\209\ The 
Commission believes that such policies and procedures should generally 
entail documenting the responsibilities of the board of directors and 
senior management, which could help foster accountability and 
complement the requirements described above that address the 
qualifications of the board and management. The Commission believes 
that this additional requirement will assist a covered clearing agency 
in formulating its policies and procedures for assessing the 
qualifications of board members and management by requiring the covered 
clearing agency to further specify the roles that each individual would 
fulfill and the lines of responsibility that would exist within the 
board and within management. The Commission believes that such 
accountability can help ensure that a covered clearing agency is well-
positioned to fulfill its risk management obligations. For example, the 
Commission believes that a covered clearing agency should clearly 
define roles and responsibilities for addressing governance over 
financial risk (including credit risk, margin, and liquidity risk), 
operational risk, and other risks reflected in the covered clearing 
agency's risk management framework.
---------------------------------------------------------------------------

    \208\ See id. at 3.
    \209\ See Rule 17Ad-22(e)(2)(v), infra Part VI; ; see also infra 
Part II.C.2.c.
---------------------------------------------------------------------------

iv. Conflicts of Interest
    One commenter stated that proposed Rule 17Ad-22(e)(2) does not 
require covered clearing agencies to resolve conflicts of interests 
among board members and management and urged the Commission explicitly 
to require covered clearing agencies to document and maintain policies 
and procedures governing the resolution of conflicts of interests that 
may impact certain decisions by the board of directors.\210\ The 
Commission notes, as discussed above, that the commenter's concern is 
addressed by Section 17A(b)(3)(F) of the Exchange Act, which requires 
that the rules of a clearing agency be designed, in general, to protect 
investors and the public interest.\211\
---------------------------------------------------------------------------

    \210\ See Better Markets at 6.
    \211\ In addition, the Commission has solicited comments on 
proposed rules designed to further address conflicts of interest. 
See CCA Standards proposing release, supra note 5, at 29589 & n.664; 
see also Exchange Act Release No. 34-64017 (Mar. 3, 2011), 76 FR 
14472 (Mar. 16, 2011) (proposing Rule 17Ad-25 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 (Oct. 
26, 2010) (proposing Regulation MC to mitigate conflicts of interest 
at security-based swap clearing agencies).
---------------------------------------------------------------------------

v. Crisis or Emergency Decision-Making
    One commenter stated that governance arrangements should explicitly 
address decision-making during a crisis or emergency and require the 
covered clearing agency to obtain the views and approval of member 
representatives (such as through its risk committee or otherwise) 
before taking any material action in response to an emergency.\212\ 
After careful consideration, the Commission declines to modify Rule 
17Ad-22(e)(2) to specifically address decision-making in a crisis or 
emergency, and the Commission believes that Rule 17Ad-22(e) addresses 
such circumstances as proposed. For instance, Rule 17Ad-22(e)(2) 
requires policies and procedures for governance 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 and the objectives of owners and participants. A covered 
clearing agency

[[Page 70805]]

should generally consider whether its governance arrangements for 
decision-making in the ordinary course are appropriate for a crisis or 
emergency circumstance in light of the requirements in Rule 17Ad-
22(e)(2).
---------------------------------------------------------------------------

    \212\ See ISDA at 2.
---------------------------------------------------------------------------

    In addition, Rule 17Ad-22(e)(3) requires policies and procedures 
that maintain a sound risk management framework for comprehensively 
managing risks that arise in or are borne by the covered clearing 
agency. Such policies and procedures must be designed to identify, 
measure, monitor, and manage those risks and include plans for the 
recovery and orderly wind-down of the covered clearing agency.\213\ The 
Commission believes that such a framework for comprehensively managing 
risk generally should consider the need for decision-making in crisis 
or emergency circumstances.
---------------------------------------------------------------------------

    \213\ See Rule 17Ad-22(e)(3)(i), (ii), infra Part VI.
---------------------------------------------------------------------------

vi. Disclosure of Major Board Decisions
    Three commenters responded to a question asking whether the 
Commission should require covered clearing agencies to have policies 
and procedures that provide for governance arrangements that ensure 
major decisions are disclosed to the public.\214\ One commenter 
recommended that the proposed rule expressly require that major board 
decisions having a broad market impact be disclosed to all relevant 
stakeholders and the public, except to the extent that such disclosure 
is inconsistent with statutory and regulatory confidentiality 
restrictions. The commenter noted that the CFTC has included this 
provision in its requirements for SIDCOs.\215\ Another commenter, 
however, expressed the belief that such a requirement is unnecessary 
and that the interests of public stakeholders in having visibility into 
major decisions are adequately served through the participation of 
independent directors, through the rule filing process, and the 
existing voluntary disclosure practices.\216\ A third commenter 
expressed the view that publication of board resolutions prior to a 
determinative decision would be confusing, potentially misleading or 
market moving, and could deter open discussions amongst members of the 
board of directors.\217\
---------------------------------------------------------------------------

    \214\ See CCA Standards proposing release, supra note 5, at 
29522.
    \215\ See ISDA at 2 n.5 (citing 17 CFR 39.32).
    \216\ See OCC at 5.
    \217\ See LCH at 4.
---------------------------------------------------------------------------

    After careful consideration, the Commission declines to modify Rule 
17Ad-22(e)(2). The Commission notes that existing requirements for 
registered clearing agencies under Exchange Act Rule 19b-4 provide a 
mechanism for publishing notice of proposed rule changes, which in 
general must be approved by board action or under authority delegated 
by the board, to clearing members, the relevant stakeholders, the 
Commission, and the public.\218\ Designated clearing agencies are 
further required to submit advance notices under the Clearing 
Supervision Act, which provides another mechanism for disclosure.\219\ 
In addition, the requirements in Rule 17Ad-22(e)(23) regarding 
disclosure will also provide stakeholders and the public with 
information regarding certain operations and decisions of covered 
clearing agencies.\220\
---------------------------------------------------------------------------

    \218\ See supra Part I.C.5 (further describing the obligations 
of a clearing agency with respect to proposed rule changes).
    \219\ See supra Part I.A.2.
    \220\ See infra Part II.C.23.
---------------------------------------------------------------------------

vii. Incentives and Skin in the Game
    One commenter stated that the Commission should enhance or clarify 
Rule 17Ad-22(e)(2) to ensure that covered clearing agencies have 
appropriate incentives to oversee and manage risk in a manner 
consistent with the public interest and objectives of participants. 
According to the commenter, safeguards should exist to ensure that a 
covered clearing agency with authority to adopt rules, policies, or 
procedures governing or affecting risk to participants does not face 
undue incentives to take on excessive risk in pursuit of increased 
earnings.\221\ The Commission believes that Rule 17Ad-22(e)(2) 
sufficiently addresses the commenter's concern by requiring policies 
and procedures 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.\222\ Rule 17Ad-22(e)(3), 
discussed below, also requires policies and procedures for the 
comprehensive management of risk, and other requirements in Rule 17Ad-
22(e) are specifically designed to establish a risk management 
framework that sufficiently accounts for a wide spectrum of risks that 
a covered clearing agency may identify, assess, manage, and mitigate. 
Further, the Commission believes that, taken as a whole, Rule 17Ad-
22(e) requires each covered clearing agency to undertake careful and 
ongoing consideration of the risks faced and posed by its 
operations.\223\
---------------------------------------------------------------------------

    \221\ See The Clearing House at 7-8.
    \222\ See supra Part II.C.2.a. and note 194 (describing the 
scope of the public interest requirements under Section 17A of the 
Exchange Act).
    \223\ See supra Parts II.A.2 and II.C.2.b.i (further discussing 
the risks posed by a covered clearing agency's ownership structure, 
organizational form, markets served, and products cleared).
---------------------------------------------------------------------------

    The same commenter also stated that safeguards should exist to 
ensure that any default management decision-making body has appropriate 
incentives.\224\ The commenter stated that the Commission should 
require that any decision-making body responsible for administering a 
covered clearing agency's default management policies and procedures be 
composed of constituencies with significant exposure to potential loss 
as a consequence of the default management process.\225\
---------------------------------------------------------------------------

    \224\ See The Clearing House at 8.
    \225\ See The Clearing House at 2, 9. The commenter further 
elaborated that the assumption of risk by a CCP must be governed by 
a risk management committee comprised of persons whose interests are 
aligned by exposure to the losses associated with such risks 
(including members and, where a CCP has capital at risk in the 
waterfall, representatives of the CCP), with those members with the 
greatest risk exposure within the CCP constituting the majority of 
such committee. The commenter added that such a structure would 
ensure that the CCP's risk management function is appropriately 
aligned with risk mitigation incentives. See id., annex at 15.
---------------------------------------------------------------------------

    With respect to these comments, the Commission believes, as 
discussed above, that Rule 17Ad-22(e)(2) includes requirements designed 
to ensure governance arrangements that clearly prioritize the safety 
and efficiency of the covered clearing agency, support the public 
interest requirements in Section 17A of the Exchange Act applicable to 
clearing agencies, and support the objectives of owners and 
participants. In addition, the Commission believes that the requirement 
in Section 17A(b)(3)(F) of the Exchange Act to have rules designed, in 
general, to protect investors help ensure that a covered clearing 
agency's risk management functions are appropriately aligned with the 
goal of risk mitigation and responsive to the legitimate concerns of 
the relevant constituents. The Commission does not believe that an 
approach in which a CCP's default management process must be governed 
by a decision-making body composed of constituencies with significant 
exposure to potential loss as a consequence of the default management 
process is appropriate. Instead, the Commission believes that covered 
clearing agencies should be afforded discretion to structure their 
default management committees and manage incentives in light of the 
needs of their unique ownership or governance structures, provided that 
their governance arrangements are consistent with the requirements of 
the

[[Page 70806]]

Exchange Act and rules and regulations thereunder, including Section 
17A(b)(3)(C), concerning the fair representation of shareholders or 
members and participants in the administration of the covered clearing 
agency's affairs. The Commission believes that decisions regarding 
default management should reside with those who have extensive 
expertise and expert knowledge of the tools available at the covered 
clearing agency to manage a default. Further, even if the risk 
exposures of clearing members are generally stable, they can change, 
perhaps rapidly, during periods of market stress.
    Lastly, the commenter stated that, to ensure that a covered 
clearing agency's governance arrangements align with the public 
interest and the interest of constituencies subject to the risk of a 
clearing agency default, the Commission should require a covered 
clearing agency to commit its own capital on a pre-funded basis to 
satisfy its losses arising from the default of one or more participants 
in an amount that equals or exceeds 10% of the aggregate participant 
contribution to the clearing or guaranty fund of the covered clearing 
agency. Further, the commenter stated that the Commission should 
require that a covered clearing agency provide, in its relevant rules, 
policies, or procedures, that upon the occurrence of a default or 
series of defaults and application of all available assets of the 
defaulting participant(s) to satisfy resulting losses, the covered 
clearing agency shall apply its own capital contribution to the 
relevant clearing or guaranty fund in full to satisfy any remaining 
losses prior to the application of any (a) contributions by non-
defaulting participants to the clearing or guaranty fund or (b) 
assessments that the covered clearing agency require non-defaulting 
participants to contribute following the exhaustion of such 
participant's funded contributions to the relevant clearing or guaranty 
fund.\226\ The commenter expressed concern that, absent such a 
requirement, a CCP's own exposure to its clearing or guaranty fund(s)--
often described as ``skin in the game''--is generally quite limited and 
capped at the amount of the CCP's funded or dedicated 
contribution.\227\ The commenter stated that the absence of ``skin-in-
the-game'' insulates a CCP's owners from losses at the CCP even though 
they benefit from the fee income associated with increased activity at 
the CCP, regardless of the incremental risk presented by such 
activity.\228\ The commenter stated that, particularly in the case of 
for-profit CCPs (or CCPs whose owners or risk decision-makers are not 
subject to default risk assumed by the CCP), this misalignment of risk 
and reward creates moral hazard and is inconsistent with supporting the 
public interest and the objectives of participants.\229\
---------------------------------------------------------------------------

    \226\ See The Clearing House at 2.
    \227\ See id. at 8.
    \228\ See id.
    \229\ See id.
---------------------------------------------------------------------------

    After careful consideration, the Commission declines to modify Rule 
17Ad-22(e) to specifically include a ``skin-in-the-game'' requirement. 
The Commission believes that, taken as a whole, Rule 17Ad-22(e)(2) 
facilitates robust governance arrangements and the management of 
competing incentives. The Commission believes it is appropriate to 
provide covered clearing agencies with flexibility, subject to their 
obligations and responsibilities as SROs under the Exchange Act, to 
structure their default management processes to take into account the 
particulars of their financial resources, ownership structures, and 
risk management frameworks. The Commission believes that the proper 
alignment of incentives is an important element of a covered clearing 
agency's risk management practices, and notes that ``skin-in-the-game'' 
may play a role in those risk management practices in many instances 
but in other instances may not be essential to a robust governance 
framework.
c. Final Rule
    As discussed above, the Commission is adopting Rule 17Ad-22(e)(2) 
with modifications.\230\ First, the Commission is adopting new 
paragraph (v), which requires a covered clearing agency's governance 
arrangements to specify clear and direct lines of responsibility, as 
discussed above.
---------------------------------------------------------------------------

    \230\ See Rule 17Ad-22(e)(2), infra Part VI.
---------------------------------------------------------------------------

    Second, the Commission is adopting new paragraph (vi) to require a 
covered clearing agency's governance arrangements to consider the 
interests of participants' customers, securities issuers and holders, 
and other relevant stakeholders of the covered clearing agency. The 
comments received in response to Rule 17Ad-22(e)(2) expressed concern 
as to whether a covered clearing agency will have governance 
arrangements sufficiently robust to incorporate the views of the 
relevant stakeholders and to withstand the influence of potentially 
improper incentives. The Commission believes that this modification 
alleviates these concerns by adding a requirement to consider the 
interests of the relevant stakeholders.
    Further, because the Commission recognizes that there may be a 
number of ways to address compliance with Rule 17Ad-22(e)(2), the 
Commission is providing the following guidance that a covered clearing 
agency generally should consider in establishing and maintaining its 
policies and procedures:
     Whether it has objectives that place a high priority on 
the safety and efficiency of the covered clearing agency and explicitly 
support financial stability and other relevant public interest 
considerations; \231\
---------------------------------------------------------------------------

    \231\ For these purposes, the relevant public interest 
considerations are the public interest requirements in Section 17A 
of the Exchange Act. See Rule 17Ad-22(e)(2)(iii), infra Part VI.
---------------------------------------------------------------------------

     whether it has documented governance arrangements that 
provide clear and direct lines of responsibility and accountability, 
and whether these arrangements are disclosed to owners, relevant 
authorities, participants, and, at a more general level, the public;
     whether the roles and responsibilities of its board of 
directors are clearly specified, and whether there are documented 
procedures for the functioning of the board of directors, such as 
procedures for identifying, addressing, and managing member conflicts 
of interest, and for reviewing the board's overall performance and the 
performance of its individual members regularly;
     whether the board of directors contains suitable members 
with the appropriate skills and incentives to fulfill the board's 
multiple roles, and whether the board of directors should include non-
executive board members;
     whether the roles and responsibilities of management have 
been clearly specified and whether management has the appropriate 
experience, mix of skills, and the integrity necessary to discharge 
their responsibilities for the operation and risk management of the 
covered clearing agency;
     whether the board of directors has established a clear, 
documented risk-management framework that includes the covered clearing 
agency's risk-tolerance policy, assigns responsibilities and 
accountability for risk decisions, and addresses decision making in 
crises and emergencies, and whether the governance arrangements ensure 
that the risk-management and internal control functions have sufficient 
authority, independence, resources, and access to the board; and
     whether the board of directors has ensured that the 
covered clearing

[[Page 70807]]

agency's design, rules, overall strategy, and major decisions reflect 
appropriately the legitimate interests of its direct and indirect 
participants and other relevant stakeholders, and whether major 
decisions have been clearly disclosed to relevant stakeholders and, 
where this is broad market impact, the public.\232\
---------------------------------------------------------------------------

    \232\ For a discussion of relevant stakeholders, see Part 
II.C.2.b.i.
---------------------------------------------------------------------------

    A covered clearing agency also generally should consider 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. Policies and procedures under 
Rule 17Ad-22(e)(2)(iv) could consider, among other things, requirements 
as to industry experience relevant to the services provided by the 
covered clearing agency, educational background, the absence of a 
disciplinary record, or other factors relevant to the qualifications of 
nominees being considered. With respect to Rules 17Ad-22(e)(2)(iv) and 
(v), the Commission notes that a covered clearing agency generally 
should seek to ensure that board members and senior management do not 
have conflicts of interest because conflicts of interest could 
undermine the decision-making process within a covered clearing agency 
or interfere with the ability of board members and senior management to 
discharge their duties and responsibilities.
    In addition, the Commission believes that processes concerning 
decision-making by a covered clearing agency during a crisis generally 
should consider the views of member representatives and relevant 
stakeholders before the covered clearing agency takes any material 
action. Further any such policies and procedures must be consistent 
with the fair representation requirement in Section 17A(b)(3)(C) of the 
Exchange Act and the requirement in Section 17A(b)(3)(F) of the 
Exchange Act that a clearing agency's rules be designed, in general, to 
protect investors and the public interest.\233\ Based on these 
requirements, the Commission expects that views of members will be well 
represented in the governance of the covered clearing agency, including 
in the design of governance processes for crisis or emergency decision-
making. In light of the variation of business models across covered 
clearing agencies, the Commission believes each covered clearing agency 
generally should consider how best to involve members and other 
relevant stakeholders in the decision-making of the covered clearing 
agency, provided that each covered clearing agency's decision-making 
process is designed to be consistent with the fair representation, 
investor protection, and public interest requirements of Section 17A of 
the Exchange Act.
---------------------------------------------------------------------------

    \233\ See 15 U.S.C. 78q-1(b)(3)(C), (F).
---------------------------------------------------------------------------

3. Rule 17Ad-22(e)(3): Framework for the Comprehensive Management of 
Risks
a. Proposed Rule
    As 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.\234\ 
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. 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 that 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. 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. Proposed Rule 17Ad-
22(e)(3)(iv) would also 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. Finally, 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.\235\
---------------------------------------------------------------------------

    \234\ See CCA Standards proposing release, supra note 5, at 
29522-24.
    \235\ See id.
---------------------------------------------------------------------------

b. Comments Received and Commission Response
i. General Comments
    Multiple commenters expressed support for the proposed rule.\236\ 
One commenter expressed support for the added attention in the proposed 
rules to managing the risks faced by clearing agencies, emphasizing in 
particular the proposed requirements for recovery and wind-down 
plans.\237\ The commenter stated that a recovery and wind-down plan is 
essential to containing wide-spread contagion and noted that the 
requirement would be appropriate for all registered clearing 
agencies.\238\ The same commenter expressed support for requiring 
independence for those conducting audits, as such would be necessary 
for establishing good corporate practices and the integrity of the 
audit process.\239\ The commenter, however, also expressed concern that 
the proposed rule could be insufficient in preventing systemic failure 
of covered clearing agency systems during a financial panic as a result 
of new financial products not performing as expected during times of 
market stress.\240\ Similarly, a second commenter stated that, given 
the role CCPs play in, and the risks they pose to, the financial 
markets, CCPs must benefit from the full panoply of risk-management 
tools, including strong loss absorbing capital, margin, and regular 
stress testing requirements (including assessing how the failure of 
multiple, large clearing members would affect the CCP).\241\
---------------------------------------------------------------------------

    \236\ See CFA Institute at 1; SRC at 1-2; OCC at 6.
    \237\ See CFA Institute at 1.
    \238\ See id. at 1, 7. The Commission notes that it is beyond 
the scope of this rulemaking to establish new requirements for 
clearing agencies other than covered clearing agencies.
    \239\ See id. at 7.
    \240\ See id.
    \241\ See SRC at 1-2.
---------------------------------------------------------------------------

    With respect to the latter two comments, the Commission believes 
that proposed Rule 17Ad-22(e), taken as a whole, is designed to 
mitigate the potential for systemic failures and the failures of CCPs 
more generally by requiring a covered clearing agency to establish 
policies and procedures relating to their governance and operation. 
Specifically, requirements in

[[Page 70808]]

Rule 17Ad-22(e) address capital,\242\ margin,\243\ and stress testing 
\244\--in addition to other areas of risk management, such as 
collateral,\245\ credit risk,\246\ liquidity risk,\247\ links,\248\ and 
participant default \249\--to help ensure that covered clearing 
agencies benefit from a range of risk management tools and can continue 
operating in times of market stress. Moreover, Rule 17Ad-22(e)(3) 
includes requirements for policies and procedures that reflect a 
comprehensive framework for risk management and includes additional 
requirements for policies and procedures that specifically establish an 
independent audit committee and recovery and wind-down plans. The 
Commission discusses these elements of Rule 17Ad-22(e)(3) further in 
Parts II.C.3.b.ii and iii below.
---------------------------------------------------------------------------

    \242\ See infra Part II.C.15 (describing requirements under Rule 
17Ad-22(e)(15)).
    \243\ See infra Part II.C.6 (describing requirements under Rule 
17Ad-22(e)(6)).
    \244\ See infra Parts II.C.4 and 7 (describing requirements 
under Rules 17Ad-22(e)(4) and (7)).
    \245\ See infra Part II.C.5 (describing requirements under Rule 
17Ad-22(e)(5)).
    \246\ See infra Part II.C.4 (describing requirements under Rule 
17Ad-22(e)(4)).
    \247\ See infra Part II.C.7 (describing requirements under Rule 
17Ad-22(e)(7)).
    \248\ See infra Part II.C.20 (describing requirements under Rule 
17Ad-22(e)(20)).
    \249\ See infra Part II.C.13 (describing requirements under Rule 
17Ad-22(e)(13)).
---------------------------------------------------------------------------

ii. Independence of the Audit Committee
    One commenter stated that the Commission struck an appropriate 
balance in requiring policies and procedures that provide for an 
independent audit committee and permitting the board of directors to 
establish the criteria for independence.\250\ The commenter expressed 
the view that the definition of independence should be judged in the 
context of the particular covered clearing agency, noting that there is 
value in having persons with extensive industry experience serving on 
its audit committee, and it would not want to preclude from service 
such persons most likely to have the relevant experience.
---------------------------------------------------------------------------

    \250\ See OCC at 6.
---------------------------------------------------------------------------

iii. Recovery and Wind-Down Plans
    Multiple commenters expressed views on proposed requirements 
concerning recovery and wind-down plans.\251\ One commenter stated that 
covered clearing agencies should create robust and credible resolution 
plans to ensure that they and policymakers can plan for and mitigate 
the potential systemic consequences of a CCP failure without taxpayer 
support.\252\ The commenter noted that important portions of these 
plans, including the size and nature of loss-absorbing buffers, should 
be made public so that the public and counterparties can assess the 
risks associated with the CCP and its members.\253\ With respect to the 
disclosure of important aspects of these plans, the Commission notes 
that Rules 17Ad-22(e)(23)(iv) and (v), discussed below,\254\ would 
require policies and procedures that provide for a comprehensive public 
disclosure that describes material rules, policies, and procedures 
regarding a covered clearing agency's recovery and wind-down plans, 
updated every two years or more frequently as necessary so that the 
disclosure remains accurate in all material respects.
---------------------------------------------------------------------------

    \251\ See SRC at 2. In addressing comments regarding recovery 
and wind-down plans, the Commission generally understands that: (i) 
When a financial company becomes non-viable as a going concern or 
insolvent, recovery refers to actions taken that allow the financial 
company to sustain its critical operations and services; (ii) 
resolution (or wind-down), by contrast, refers to the transferring 
of the financial company's critical operations and services to an 
alternate entity.
    \252\ See SRC at 2.
    \253\ See id.
    \254\ See infra Part II.C.23.
---------------------------------------------------------------------------

    Another commenter noted that wind-down may not be a workable option 
for critical market infrastructure providers that are the sole 
providers in a given market. The commenter expressed the view that 
while covered clearing agencies should analyze the feasibility of an 
orderly wind-down in their plans and include it when appropriate, 
recovery strategies (i.e., strategies to allocate losses outside of, 
and without requiring, an orderly wind-down and before the need to 
initiate resolution proceedings) are the most effective way to promote 
financial stability, ensure the continuation of services, and 
distribute losses in a fair and economically efficient manner.\255\ The 
Commission is mindful of this concern and believes that, in conducting 
its planning, a covered clearing agency generally should consider sole 
provider status as one of many factors in a range of potential 
considerations related to recovery or wind-down, including a 
consideration of which options may be the most feasible or workable. 
The Commission does not believe, however, that a covered clearing 
agency's sole provider status necessarily precludes wind-down and, 
thus, a covered clearing agency is required to have policies and 
procedures to establish plans for both recovery and orderly wind-down 
pursuant to Rule 17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    \255\ See DTCC at 6.
---------------------------------------------------------------------------

    A third commenter stated that, while the CCA Standards proposing 
release helps draw attention to the importance of recovery and wind-
down plans having a sound legal basis, the release provides little 
guidance with regard to the content of such plans or stakeholder 
consultation procedures with respect to their adoption.\256\ The 
commenter noted that, because the issues surrounding the recovery and 
resolution of CCPs are novel and complex, new rules, policies, and 
procedures addressing recovery and resolution that go beyond existing, 
capped assessment powers would be appropriate subject matter for a 
detailed review by the Commission and public comment.\257\ To 
facilitate a review and public comment, the commenter expressed the 
view that the Commission should articulate principles-based standards 
against which orderly recovery and wind-down plans could be assessed, 
including limited and predictable liabilities of clearing participants; 
non-disruption of expectations regarding close-out netting sets; 
consistency with accounting criteria for the netting of cleared 
exposures for financial statement and regulatory capital purposes; a 
requirement that loss-allocation rules not put any non-defaulting 
clearing member or customer of a clearing member in a worse position 
than under a liquidation in the event of the insolvency of the covered 
clearing agency; due consideration of the effects on incentives for 
participation in the default management process and clearing agency 
moral hazard risks; and transparency in relation to the default 
management process, loss allocations, and the decision-making process 
governing recovery and wind-down.\258\
---------------------------------------------------------------------------

    \256\ See ISDA at 3.
    \257\ See id.
    \258\ See id.
---------------------------------------------------------------------------

    First, the Commission believes that the factors described by the 
commenter, among others, are factors that a covered clearing agency 
could consider in developing its recovery and wind-down plans, but the 
Commission is declining to articulate requirements for all recovery and 
wind-down plans. The Commission believes that, given the nature of 
recovery and resolution planning, such plans are likely to closely 
reflect the specific characteristics of the covered clearing agency, 
including its ownership, organizational, and operational structures, as 
well as the size, systemic importance, global reach, and/or the risks 
inherent in the products it

[[Page 70809]]

clears.\259\ In particular, the Commission notes that the available 
recovery tools will vary depending on the products cleared. Second, the 
Commission also believes that recovery and wind-down plans should be 
subject to public comment and Commission review. The Commission 
believes that recovery and wind-down plans, and material changes 
thereto, would constitute a proposed rule change under Section 19(b) of 
the Exchange Act and, for designated clearing agencies, an advance 
notice under the Clearing Supervision Act because such plans and 
material changes thereto would constitute changes to a stated policy, 
practice or interpretation of the covered clearing agency and, for 
designated clearing agencies, a proposed change to its rules, 
procedures, or operations that could materially affect the nature or 
level of risks presented by the designated clearing agency.\260\
---------------------------------------------------------------------------

    \259\ See supra Parts II.A.2 and II.C.2.b.i (further discussing 
the differing characteristics of a covered clearing agency related 
to its ownership structure, organizational form, markets served, and 
products cleared).
    \260\ See supra Part I.C.5 (further describing the obligations 
of a clearing agency with respect to proposed rule changes under 
Rule 19b-4 and advance notices under the Clearing Supervision Act).
---------------------------------------------------------------------------

    The commenter further stated that recovery tools such as forced 
allocation, initial margin haircutting of non-defaulting clearing 
members, invoicing back, or partial non-voluntary tear-ups should be 
avoided, and that pro-rata reduction in a covered clearing agency's 
payment obligations should be considered only as a loss allocation 
measure of last resort after all the resources in the clearing 
waterfall have been exhausted.\261\ The commenter noted that this 
method is transparent and predictable, creating incentives for 
surviving participants to actively engage in the default management 
process and to bid aggressively in the resulting auction process.\262\ 
The commenter acknowledged, however, that the sequencing and 
application of any recovery mechanisms may vary by product type and the 
nature of the covered clearing agency's participants, such as, for 
example, how certain mechanisms would apply to retail 
participants.\263\
---------------------------------------------------------------------------

    \261\ See ISDA at 3. Similarly, two other commenters also 
recommend that the Commission specifically prohibit covered clearing 
agencies from using variation margin and initial margin haircutting 
as recovery tools to continue operation in times of financial 
distress. See Fidelity at 3-4; see also ICI at 13-14.
    \262\ See ISDA at 3.
    \263\ See id. at 4.
---------------------------------------------------------------------------

    As a general matter, the Commission believes it is not productive 
to apply such requirements for recovery and wind-down plans in a one-
size-fits-all approach for covered clearing agencies. The Commission 
believes that recovery and wind-down plans should be considered 
holistically, taking into consideration the covered clearing agency's 
governance structure, products cleared, loss allocation rules, and 
mutualized structure, as applicable, because it is not possible to 
assess the utility of a particular recovery tool in isolation and 
without the context of the recovery plan as a whole. The Commission 
also believes that transparent governance arrangements can help ensure 
that members, their customers, and, as appropriate, the public have 
sufficient means to provide input on any recovery tools ultimately 
included in recovery and wind-down plans. In Part II.C.3.c below, the 
Commission provides guidance regarding the types of considerations that 
a covered clearing agency generally should consider in developing its 
recovery tools.
    Finally, the commenter suggested that the Commission's rule should 
state explicitly that covered clearing agencies' recovery and wind-down 
plans must define the quantitative and qualitative criteria that would 
trigger the implementation of each type of plan.\264\ The commenter did 
not specify what types of quantitative or qualitative criteria should 
trigger implementation.
---------------------------------------------------------------------------

    \264\ See ISDA at 4.
---------------------------------------------------------------------------

    After careful consideration, the Commission declines to establish a 
requirement that recovery and wind-down plans have qualitative and 
quantitate trigger criteria. The Commission believes that such a 
requirement would not sufficiently take into account the unique 
characteristics of each covered clearing agency. The Commission 
believes it is not possible to assess the utility of a particular 
approach in isolation and without the context of the recovery plan and 
the covered clearing agency as a whole. Further, the Commission 
believes that transparent governance arrangements can help ensure that 
members, their customers, and, as appropriate, the public have 
sufficient means to provide input on any recovery tools ultimately 
included in recovery and wind-down plans and therefore believes that 
consideration of such elements of a covered clearing agency's recovery 
and wind-down plan is best left to the applicable rule filings and 
advance notice processes discussed previously.
iv. Additional Requirements
    One commenter supported the proposed requirements in Rule 17Ad-
22(e)(3) but urged the Commission to establish additional requirements 
in three areas to ensure accountability and independence.\265\
---------------------------------------------------------------------------

    \265\ See Better Markets at 8-9.
---------------------------------------------------------------------------

    First, the commenter encouraged the Commission to require the risk 
management framework at covered clearing agencies to assign 
responsibilities and accountabilities for risk decisions and address 
crisis and emergency decision-making. The Commission believes that Rule 
17Ad-22(e)(2), as modified and discussed in Part II.C.2 above, 
appropriately addresses these concerns. Specifically, Rule 17Ad-
22(e)(2)(v), as adopted, requires that a covered clearing agency's 
policies and procedures document the responsibilities of the board of 
directors and senior management and specify clear and direct lines of 
responsibility. In the above discussion, the Commission also 
specifically noted the importance of clear and direct lines of 
responsibility in addressing crises and facilitating appropriate 
decision-making in emergency situations.\266\
---------------------------------------------------------------------------

    \266\ See supra Part II.C.2.b.iii.
---------------------------------------------------------------------------

    Second, the commenter urged the Commission to require the board of 
directors to have a risk committee comprised of and led by a majority 
of independent directors; the risk committee to have a clear mandate 
and operating procedures; and the risk committee to have access to 
external expert advice.\267\ The commenter also encouraged the 
Commission to implement enhanced measures to ensure that important risk 
management functions are appropriately insulated from conflicts of 
interest among board members representing clearing members. The 
Commission believes that the rule as proposed already addresses these 
concerns. Rule 17Ad-22(e)(3)(iii) requires a covered clearing agency's 
policies and procedures to provide risk management and internal audit 
personnel with, among other things, sufficient independence from 
management and access to the board of directors. In addition, proposed 
Rule 17Ad-22(e)(3)(iv) requires policies and procedures that provide 
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. With respect to 
having a risk committee comprised of and led by a majority of 
independent directors, the Commission

[[Page 70810]]

notes that although it may be appropriate for a risk committee to be 
comprised of and led by a majority of independent directors, the 
Commission believes that the covered clearing agency would have to 
consider its particular facts and circumstances, and that it is 
inappropriate to prescribe a particular structure for risk committees 
in Rule 17Ad-22(e)(3). The Commission further notes that the definition 
of independence should reflect the objective of establishing and 
maintaining robust risk management.
---------------------------------------------------------------------------

    \267\ See Better Markets at 9.
---------------------------------------------------------------------------

    Third, the commenter requested that the Commission require a 
covered clearing agency to have a chief risk officer responsible for 
implementing the risk management framework and making recommendations 
to the risk management committee or board of directors. The Commission 
believes that establishing a chief risk officer is one way to structure 
a risk management framework consistent with Rule 17Ad-22(e)(3) and 
notes that, currently, each covered clearing agency has a chief risk 
officer responsible for implementing the covered clearing agency's risk 
management framework. The Commission recognizes that these 
responsibilities are critically important but does not believe it is 
necessary to prescribe a chief risk officer because other distributions 
of responsibility among the roles within a covered clearing agency may 
also be consistent with the requirements of the Exchange Act, provided 
that the responsibilities are clearly specified, the persons occupying 
the specified roles have appropriate experience and skills to discharge 
their duties and responsibilities, and the responsibilities 
comprehensively encompass the risk management needs of the clearing 
agency.
c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(3) with one 
modification. To make clear that the audit committee described in Rule 
17Ad-22(e)(3)(iv) and the independent audit committee described in Rule 
17Ad-22(e)(3)(v) are not separate audit committees, the Commission is 
adding ``independent'' before audit committee in Rule 17Ad-
22(e)(3)(iv).\268\ In addition, because the Commission recognizes that 
there may be a number of ways to address compliance with Rule 17Ad-
22(e)(3), the Commission is providing the following guidance that a 
covered clearing agency generally should consider in establishing and 
maintaining policies and procedures for its framework for the 
comprehensive management of risk:
---------------------------------------------------------------------------

    \268\ See Rule 17Ad-22(e)(3), infra Part VI.
---------------------------------------------------------------------------

     Whether it has risk management policies, procedures, and 
systems that enable it to identify, measure, monitor, and manage the 
range of risks that arise in or are borne by the covered clearing 
agency and whether the risk management frameworks are subject to 
periodic review;
     whether it provides incentives to participants and, where 
relevant, their customers to manage and contain the risks they pose to 
the covered clearing agency;
     whether it regularly reviews the material risks it bears 
from and poses to other entities (including other clearing agencies, 
settlement banks, liquidity providers, and service providers) as a 
result of interdependencies and develop appropriate risk management 
tools to address these risks;
     whether it can identify scenarios that may potentially 
prevent it from being able to provide its critical operations and 
services as a going concern and assess the effectiveness of a full 
range of options for recovery or orderly wind-down, and whether it has 
prepared appropriate plans for its recovery or orderly wind-down based 
on the results of that assessment; and
     whether it has provided relevant authorities with the 
information needed for purposes of recovery and resolution planning.
    The Commission notes that a comprehensive approach to risk 
management means policies and procedures should be designed 
holistically, be consistent with each other, and work effectively 
together to mitigate the risk of financial losses to a covered clearing 
agency's members and participants in the markets it serves. The 
Commission further notes that each covered clearing agency must have 
its own policies and procedures encompassing a framework for the 
``comprehensive'' management of risks. For example, if a covered 
clearing agency's parent or holding company were to adopt a company-
wide risk management framework, the covered clearing agency 
nevertheless would itself need to adopt or ratify those policies and 
procedures pursuant to the requirements of the rule filing process 
under Rule 19b-4 and, if applicable, the advance notice process under 
the Clearing Supervision Act,\269\ with respect to its own business to 
meet the requirements of Rule 17Ad-22(e)(3).
---------------------------------------------------------------------------

    \269\ See supra Parts I.A.1 and 2.
---------------------------------------------------------------------------

    With respect to Rule 17Ad-22(e)(3)(i), the board of directors of a 
covered clearing agency generally should consider whether to subject 
all material components of the covered clearing agency's risk 
management policies and procedures to review due to the critical role 
that risk management plays in promoting prompt and accurate clearance 
and settlement. Further, such review generally should take a holistic 
view of the full range of risk management policies, procedures, and 
systems, rather than consider each on an individual or case-by-case 
basis. In addition, a covered clearing agency generally should perform 
the annual review under Rule 17Ad-22(e)(3)(i) once every twelve months.
    With respect to recovery and wind-down plans, each covered clearing 
agency generally should develop its plans expeditiously to facilitate 
regulatory review by the Commission and other relevant regulatory 
bodies. In particular, the Commission believes that a covered clearing 
agency generally should have policies and procedures to provide the 
relevant resolution authorities with information needed for the 
purposes of resolution planning under applicable authority, including 
any plans prepared pursuant to Rule 17Ad-22(e)(3). The Commission works 
with the FDIC and other resolution authorities, as appropriate, to help 
ensure the development of effective resolution strategies for covered 
clearing agencies; providing the Commission and the FDIC information 
for resolution planning would promote the ongoing development of these 
strategies.
    In addition, with respect to recovery tools, a covered clearing 
agency generally should consider the following when developing its 
recovery tools: (i) Whether the set of recovery tools comprehensively 
addresses how the covered clearing agency would continue to provide 
critical services in all relevant scenarios; (ii) the extent to which 
each tool is reliable, timely, and has a strong legal basis; (iii) 
whether the tools are transparent and designed to allow those who would 
bear losses and liquidity shortfalls to measure, manage, and control 
their potential losses and liquidity shortfalls; (iv) whether the tools 
create appropriate incentives for the covered clearing agency's owners, 
direct and indirect participants, and other relevant stakeholders; and 
(v) whether the tools are designed to minimize the negative impact on 
direct and indirect participants and the financial system more broadly.
4. Rule 17Ad-22(e)(4): Credit Risk
a. Proposed Rule
    As proposed, Rule 17Ad-22(e)(4) would require a covered clearing 
agency

[[Page 70811]]

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, 
including by, at a minimum, meeting the seven requirements specified in 
the rule.\270\
---------------------------------------------------------------------------

    \270\ See CCA Standards proposing release, supra note 5, at 
29525-27.
---------------------------------------------------------------------------

    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 participant fully with a 
high degree of confidence. 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). The Commission also proposed 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.\271\ 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). Proposed Rule 17Ad-22(e)(4)(iv) would 
require a covered 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. 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.
---------------------------------------------------------------------------

    \271\ See id. at 29525. The Commission received no comments 
regarding the proposed definition and is adopting it as proposed. 
Because of other modifications to Rule 17Ad-22(a), the definition of 
``systemically important in multiple jurisdictions'' is being moved 
to Rule 17Ad-22(a)(18). See Rule 17Ad-22(a)(18), infra Part VI.
---------------------------------------------------------------------------

    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.\272\ The Commission also proposed 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.\273\ Proposed Rule 17Ad-22(e)(4)(vi) 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 or become less liquid, and when the size or concentration of 
positions held by the entity's participants increases significantly, 
the proposed rule would 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. Proposed Rule 17Ad-22(e)(4)(vi) 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 
in proposed Rules 17Ad-22(e)(4)(i) through (iii), as applicable.\274\
---------------------------------------------------------------------------

    \272\ See id. at 29526-27.
    \273\ See id. at 29527. The Commission received no comments 
regarding the proposed definition and, based on its supervisory 
experience, is adopting it with modifications, as discussed further 
below. Because of other modifications to Rule 17Ad-22(a), the 
definition of ``stress testing'' is also being moved to Rule 17Ad-
22(a)(17). See Rule 17Ad-22(a)(17), infra Part VI.
    \274\ See id. at 29526-27.
---------------------------------------------------------------------------

    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 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.\275\ The 
Commission also proposed to define ``conforming model validation'' in 
Rule 17Ad-22(a)(5) to mean an evaluation of the performance of each 
material risk management model used by a covered clearing agency, 
including initial margin models, liquidity risk models, and models used 
to generate guaranty fund requirements, along with the related 
parameters and assumptions associated with such models.\276\ The 
proposed definition would further 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

[[Page 70812]]

being validated so that risk models can be candidly assessed.\277\
---------------------------------------------------------------------------

    \275\ See id. at 29527.
    \276\ See id.
    \277\ The Commission is modifying the definition to strike the 
word ``conforming,'' as described in Part II.C.4.c below. Because of 
this and other modifications to Rule 17Ad-22(a), the Commission is 
moving the definition of ``model validation'' to Rule 17Ad-22(a)(9). 
See infra Part VI.
---------------------------------------------------------------------------

b. Comments Received and Commission Response
i. Distinguishing CCPs From CSDs
    One commenter stated that proposed Rule 17Ad-22(e)(4) should 
distinguish between the types of risks faced by CCPs versus central 
securities depositories (``CSDs'') (e.g., the requirement that CSDs 
hold the financial resources they maintain to cover the risk of 
participant default in a guaranty or clearing fund).\278\ The commenter 
recommended that the provision be revised to clarify the portions of 
proposed Rule 17Ad-22(e)(4) that are intended to apply to covered 
clearing agencies that are CCPs, and those that should apply to covered 
clearing agencies that are CSDs.\279\ As a general matter, the 
Commission believes that Rule 17Ad-22(e)(4) appropriately distinguishes 
between the risks inherent in CCPs and CSDs. For example, Rule 17Ad-
22(e)(4)(ii) requires policies and procedures that meet ``cover two'' 
for CCPs that are systemically important or engaged in activities with 
a more complex risk profile, while Rules 17Ad-22(e)(4)(i) and (iii) 
require policies and procedures for financial resources for all other 
covered clearing agencies, including CSDs.\280\ With respect to Rule 
17Ad-22(e)(4)(v), which requires a covered clearing agency to have 
policies and procedures for maintaining the financial resources 
required under Rules 17Ad-22(e)(4)(i) through (iii) in combined or 
separately maintained clearing or guaranty funds, ``clearing or 
guaranty fund'' would also include the participant fund of a CSD.\281\ 
The Commission believes that this statement clarifies how Rule 17Ad-
22(e)(4) would apply to both CCPs and CSDs, and therefore addresses the 
concern raised by the commenter.
---------------------------------------------------------------------------

    \278\ See DTCC at 5.
    \279\ See id. at 5; id. at A-1 (suggesting drafting 
clarifications to proposed Rule 17Ad-22(e)(4)).
    \280\ See supra Part II.C.4.a.
    \281\ See id. at 5.
---------------------------------------------------------------------------

ii. Prefunded Financial Resources
    One commenter expressed support for proposed Rule 17Ad-22(e)(4)(iv) 
but sought clarification on the role of using default insurance to 
satisfy the rule.\282\ The Commission is aware that default insurance 
has been discussed among industry participants as a tool to help CCPs 
manage credit risk. While the viability of any particular default 
insurance plan would necessarily depend on the particulars of the 
underlying insurance agreement, the Commission notes that the financial 
resource requirements in Rule 17Ad-22(e)(4) must be prefunded and may 
not be conditional as is typical with insurance payments. Therefore, 
the use of default insurance generally would not be consistent with the 
requirement that certain financial resources be prefunded under Rule 
17Ad-22(e)(4)(iv).
---------------------------------------------------------------------------

    \282\ See Barnard at 2.
---------------------------------------------------------------------------

    While generally supportive of the rule, another commenter expressed 
concern that members of covered clearing agencies may have difficulty 
meeting their obligations to the covered clearing agency if the covered 
clearing agency delays in exercising its authority to require members 
to provide additional guaranty funds after such funds are exhausted 
following the default of a member.\283\ To address this concern, the 
commenter stated that it would be appropriate to ensure that such 
guaranty funds are properly funded in advance of market stress. The 
Commission believes that the provisions in proposed Rule 17Ad-22(e)(4) 
adequately address whether the guaranty fund is properly funded in 
advance of market stress and is therefore declining to modify the rule. 
Rule 17Ad-22(e)(4)(i) requires policies and procedures for maintaining 
sufficient financial resources to cover a covered clearing agency's 
credit exposure to each participant fully with a high degree of 
confidence through its margin system and collateral requirements, while 
Rules 17Ad-22(e)(4)(ii) and (iii) require a covered clearing agency to 
have policies and procedures that meet either ``cover two'' or ``cover 
one'' on an ongoing basis. In addition, the Commission notes that Rule 
17Ad-22(e)(4)(iv) excludes assessments for additional guaranty fund 
contributions when calculating the financial resources available, 
preventing a covered clearing agency from considering among its 
financial resources contributions that are not prefunded.
---------------------------------------------------------------------------

    \283\ See CFA Institute at 7-8.
---------------------------------------------------------------------------

    A third commenter stated that, in addition to pre-funded capital 
and guaranty funds, it should be clear, in advance, that clearing 
members (and not the FRB or taxpayers) stand behind the organization 
should it run into financial trouble.\284\ The Commission notes that 
Rule 17Ad-22(e)(3)(ii) requires policies and procedures reasonably 
designed to ensure that a covered clearing agency establishes plans for 
the recovery or wind-down of a covered clearing agency necessitated by 
credit losses, liquidity shortfalls, losses from general business risk, 
or any other losses. The Commission believes that such recovery and 
wind-down plans are an effective tool that can help a covered clearing 
agency establish policies and procedures for managing losses in excess 
of its default management and general business risk resources.\285\ The 
provisions of Rule 17Ad-22(e)(5), discussed below, are also intended to 
help ensure that a covered clearing agency is resilient in times of 
market stress by requiring policies and procedures that limit the 
assets it accepts as collateral to those with low credit, liquidity, 
and market risks, and that set and enforce appropriately conservative 
haircuts and concentration limits on collateral the covered clearing 
agency accepts to manage its or its participants' credit exposure.\286\ 
Requirements for stress testing in Rule 17Ad-22(e)(4) and margin in 
Rule 17Ad-22(e)(6) further support the resiliency of a covered clearing 
agency by requiring the covered clearing agency to have policies and 
procedures that are designed to appropriately size guaranty fund 
contributions and margin to market risks.\287\ In addition, 
requirements in Rule 17Ad-22(e)(18) for policies and procedures 
relating to participation in the covered agency require (i) objective 
and risk-based criteria for participation, (ii) participants to have 
sufficient financial resources and robust operational capacity to meet 
obligations arising from participation in the covered clearing agency, 
and (iii) monitor compliance with such participation criteria on an 
ongoing basis.\288\ Taken as a whole, the Commission believes that the 
requirements in Rule 17Ad-22(e) comprehensively promote the resiliency 
of a covered clearing agency and, in particular, its ability to 
withstand periods of market stress.
---------------------------------------------------------------------------

    \284\ See SRC at 2.
    \285\ See supra Part II.C.3.b.iii.
    \286\ See infra Part II.C.5.
    \287\ See infra Parts II.C.4.b.iv (discussing stress testing) 
and II.C.6 (discussing margin).
    \288\ See infra Part II.C.18.
---------------------------------------------------------------------------

iii. Segregation of Guaranty Funds
    One commenter suggested that, to prevent the spread of losses from 
one product or asset type to participants or customers participating in 
another product or asset type, as well as to avoid the inequitable 
treatment of participants clearing less liquid product or asset types, 
the Commission should require a covered clearing agency to implement 
policies and procedures that would,

[[Page 70813]]

upon the insolvency of a particular clearing service or the clearing 
agency as a whole, contain related losses within the particular 
clearing service.\289\ The commenter stated that the Commission should 
require covered clearing agencies to maintain separate clearing or 
guaranty funds for product or asset types that exhibit materially 
different liquidity profiles.\290\ The commenter also stated that 
combined clearing or guaranty funds, in contrast, transmit losses from 
one product or asset type to participants and customers participating 
in another product or asset type in a manner that promotes contagion 
and systemic risk, which the commenter believes is inconsistent with 
the PFMI.\291\ The commenter further argued that combined clearing or 
guaranty funds are not consistent with the requirement for the 
equitable treatment of participants in Section 17A(b)(3)(D) of the 
Exchange Act where the cleared products display materially different 
liquidity characteristics.\292\
---------------------------------------------------------------------------

    \289\ See The Clearing House at 3, 17.
    \290\ See id. at 17.
    \291\ See id.
    \292\ See id. (citing 15 U.S.C. 78q-1(b)(3)(D)).
---------------------------------------------------------------------------

    First, the Commission notes that Section 17A(b)(3)(D), which sets 
forth one of the determinations that the Commission must make in 
registering a clearing agency, does not concern clearing or guaranty 
fund contributions; rather Section 17A(b)(3)(D) of the Exchange Act 
states that the rules of the clearing agency must provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
its participants.\293\
---------------------------------------------------------------------------

    \293\ For purposes of this section, the Commission is assuming 
that ``clearing fund,'' in contrast to guaranty fund, refers to a 
combined pool of both margin collections and guaranty fund 
contributions.
---------------------------------------------------------------------------

    Second, the Commission believes that a clearing agency can use both 
margin--targeted to the risk profile of the participant and used to 
satisfy losses attributed to the participant--and guaranty or clearing 
fund contributions--targeted to the risk profile of the participant and 
then mutualized in a pooled fund to satisfy losses attributable to the 
clearing agency--to help mitigate the transmission of losses across 
participants. The Commission disagrees with the commenter's suggestion 
that a pooled fund necessarily promotes contagion and systemic risk; a 
pooled fund may offer certain benefits. For instance, a pooled fund can 
help mitigate the possibility that participants in the clearing agency 
will be called upon to help satisfy losses when a defaulting 
participant is unable to satisfy those losses, and a clearing agency 
should carefully assess the structure of its default waterfall to 
analyze the potential risk mitigation tools that might be employed in 
the default waterfall, including the use of margin and the use of a 
guaranty or clearing fund. To the extent that a clearing agency uses 
guaranty or clearing fund contributions to mutualize risk across 
participants, the clearing agency generally should value margin and 
guaranty fund contributions so that the contributions are commensurate 
to the risks posed by the participants' activity. The clearing agency 
also generally should consider the appropriate balance of 
individualized and pooled elements within its default waterfall, with a 
careful consideration of whether the balance of those elements 
mitigates risk and to what extent an imbalance among those elements 
might encourage moral hazard, in that one participant may take more 
risks because the other participants bear the costs of those risks.
    The commenter also suggested that, to facilitate effective risk 
management and better protect participant/customer collateral, the 
Commission should require covered clearing agencies to calculate, 
collect, and maintain clearing or guaranty fund contributions and 
participants' initial margin requirements independent of each other, 
subject to an appropriate transition period.\294\ The commenter 
observed that some covered clearing agencies do not maintain separate 
clearing or guaranty fund requirements and initial margin requirements, 
making it more difficult for participants to model and manage the risks 
they face from the covered clearing agency.\295\ In addition, the 
commenter stated that commingling the treatment of clearing or guaranty 
fund contributions with initial margin exposes non-defaulting 
participants (and potentially their customers) to the risk of losing 
their initial margin in the event of another participant's default, a 
result inconsistent with the protection of non-defaulting participant/
customer collateral.\296\ The commenter stated that initial margin of 
non-defaulting participants and their clearing customers should not be 
at risk as part of the default waterfall.\297\
---------------------------------------------------------------------------

    \294\ See The Clearing House at 3, 17, 18.
    \295\ See id. at 17.
    \296\ See id.
    \297\ See id. at 17, 18.
---------------------------------------------------------------------------

    Further, the commenter recommended that the Commission modify 
proposed Rule 17Ad-22(e)(4)(v) to require a covered clearing agency 
that provides clearing services for two or more product or asset types 
that have materially different liquidity characteristics to segregate 
the clearing services for each such product or asset type and organize 
and structure itself and adopt such rules as shall be necessary to (i) 
continue operations for other clearing services notwithstanding the 
need to wind down operations for a particular clearing service and (ii) 
prevent the use of a particular clearing service's resources to cover 
losses that occur in a separate clearing service.\298\
---------------------------------------------------------------------------

    \298\ See The Clearing House at 18.
---------------------------------------------------------------------------

    The Commission is declining to incorporate these specific 
recommendation into Rule 17Ad-22(e)(4)(v). To the extent that these 
types of commingled arrangements are employed, they must be prefunded 
and therefore agreed to by the participants ex ante, prior to becoming 
members of the covered clearing agency. The Commission acknowledges 
that loss mutualization and other pooling-of-resources arrangements 
involve trade-offs that a clearing agency generally should carefully 
assess and balance. A covered clearing agency may be better able to 
manage multiple defaults in extreme conditions more efficiently using 
pooled resources because the pooled resources would be greater than the 
resources of any single defaulting participant. Further, because the 
arrangements are prefunded, participants can model and manage the risks 
they face from the clearing agency while being able to take into 
account the amount of resources that they have provided to the clearing 
agency. The pooling of resources, however, can increase 
interdependencies among, and therefore the potential risks to, 
participants of the clearing agency. The Commission believes that 
considering the use of loss mutualization and other pooling-of-
resources arrangements generally should, to minimize systemic risk, 
balance the safety and soundness of the covered clearing agency against 
the potential for increased exposures among participants that may arise 
from the manner the covered clearing agency holds financial resources. 
The Commission further notes that, pursuant to Rule 17Ad-22(e)(23), a 
covered clearing agency must establish, implement, maintain, and 
enforce written policies reasonably designed to disclose, among other 
things, key aspects of its default rules and procedures and the risks, 
fees, and other material costs participants incur by participating in 
the covered clearing agency. The availability of these policies and 
procedures should allow participants to understand in advance a covered 
clearing agency's reliance on

[[Page 70814]]

either on a defaulter-pays approach or a pooling-of-resources 
approach.\299\
---------------------------------------------------------------------------

    \299\ See infra Parts II.C.18 and II.C.23 (describing 
requirements under Rule 17Ad-22(e) for access and participation and 
disclosure of rules, key procedures, and market data).
---------------------------------------------------------------------------

iv. Stress Testing
    Commenters generally supported the use of stress testing and model 
validation and the approach taken in Rule 17Ad-22(e)(4),\300\ but one 
commenter recommended that the rule also include a requirement for 
reverse stress testing. In the commenter's view, reverse stress testing 
is a useful tool to manage expectations and to help anticipate 
financial resource requirements in extreme conditions.\301\ The 
Commission also believes that reverse stress testing can be a useful 
tool to evaluate the adequacy of financial resources, but the 
Commission is declining to modify Rule 17Ad-22(e)(4) to specifically 
mandate this practice so that each covered clearing agency retains 
flexibility, subject to its obligations and responsibilities as an SRO 
under the Exchange Act, to develop its stress testing framework in 
light of the ever-evolving challenges and risks inherent in the 
securities markets. Below the Commission provides additional guidance 
on the requirement that relates to stress testing in the rule.
---------------------------------------------------------------------------

    \300\ See, e.g., CFA Institute at 8; OCC at 9.
    \301\ See Barnard at 2.
---------------------------------------------------------------------------

c. Final Rule
    As previously noted, the Commission is adopting the definition 
``systemically important in multiple jurisdictions'' as proposed, but 
because of other modifications to Rule 17Ad-22(a), the definition is 
being moved to Rule 17Ad-22(a)(18).\302\ The Commission is modifying 
the definition of ``stress testing'' to mean the estimation of credit 
or liquidity exposures that would result from the realization of 
potential stress scenarios, such as extreme price changes, multiple 
defaults, or changes in other valuation inputs and assumptions. The 
Commission believes that this modification, and in particular the 
removal of ``but plausible,'' helps ensure that policies and procedures 
for stress testing comprehensively consider a range of stress scenarios 
that may be used in sizing the guaranty fund, in light of the variation 
in markets served and products cleared by covered clearing 
agencies.\303\ Because of other modifications to Rule 17Ad-22(a), the 
definition is being moved to Rule 17Ad-22(a)(17).\304\ The Commission 
is also modifying the definition of ``conforming model validation'' by 
striking ``conforming'' since the Commission has not separately defined 
``model validation'' in Rule 17Ad-22(a). Because of this and other 
modifications to Rule 17Ad-22(a), the definition of ``model 
validation'' has been moved to Rule 17Ad-22(a)(9).\305\
---------------------------------------------------------------------------

    \302\ See supra note 271; see also Rule 17Ad-22(a)(18), infra 
Part VI.
    \303\ The Commission notes that this does not alter the coverage 
requirements in Rules 17Ad-22(e)(4)(ii) and (iii), which require 
policies and procedures that enable a covered clearing agency to 
maintain financial resources 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 participant family (in the 
case of ``cover one'') or two participant families (in the case of 
``cover two'') that would potentially cause the largest aggregate 
credit exposure for the covered clearing agency in extreme but 
plausible market conditions. See infra Part VI.
    \304\ See supra note 271; see also Rule 17Ad-22(a)(17), infra 
Part VI.
    \305\ See Rule 17Ad-22(a)(9), infra Part VI. The Commission is 
also striking ``conforming'' from Rules 17Ad-22(e)(6)(vii) and 
(e)(7)(vii) consistent with the new ``model validation'' term. See 
infra Parts II.C.6.c and II.C.7.c.
---------------------------------------------------------------------------

    In addition, the Commission is adopting Rule 17Ad-22(e)(4) with 
modifications.\306\ First, the Commission is modifying Rule 17Ad-
22(e)(4)(v) so that it references only paragraphs (e)(4)(ii) and (iii) 
(and not paragraph (e)(4)(i)) because a covered clearing agency may 
hold financial resources consistent with Rule 17Ad-22(e)(4)(i), such as 
initial margin, separately from the guaranty or clearing fund.\307\ 
Second, the Commission is modifying Rule 17Ad-22(e)(4)(vii) to conform 
to the revised definition of ``model validation'' and striking ``to be 
performed'' from the rule to be consistent with the corresponding 
requirement for model validation of liquidity risk models in Rule 17Ad-
22(e)(7)(vii). Third, the Commission is making a technical correction 
to Rule 17Ad-22(e)(4)(iv) to make clear that prefunded financial 
resources should be exclusive of assessments for additional guaranty 
fund contributions or other resources that are not prefunded by 
modifying Rule 17Ad-22(e)(4)(iv) to state ``exclusive of'' assessments 
rather than ``excluding'' assessments. Fourth, the Commission is 
modifying Rule 17Ad-22(e)(4)(vi)(A) to refer to ``stress testing'' 
rather than ``a stress test'' to improve consistency with the 
definition of ``stress testing'' in Rule 17Ad-22(a)(17). Fifth, the 
Commission is revising Rule 17Ad-22(e)(4)(vi)(C) to replace ``and'' 
with ``or'' so that the criteria for conducting analysis more 
frequently than monthly are disjunctive rather than conjunctive, since 
the criteria described may not be correlated to each other. This 
modification is consistent with the Commission's description of the 
proposed rule in the CCA Standards proposing release.\308\ Sixth, the 
Commission is correcting a technical error in Rule 17Ad-
22(e)(4)(vi)(D): references to paragraphs (e)(4)(iv)(B) and (C) will be 
changed to paragraphs (e)(4)(vi)(B) and (C) respectively. Sixth, the 
Commission is moving requirements proposed in Rule 17Ad-22(e)(13) to 
Rule 17Ad-22(e)(4) so that all requirements pertinent to a covered 
clearing agency's management of credit risk are contained in one rule. 
This modification and the related rule text are discussed in Part 
II.C.13.c.
---------------------------------------------------------------------------

    \306\ See Rule 17Ad-22(e)(4), infra Part VI.
    \307\ See CCA Standards proposing release, supra note 5, at 
29526.
    \308\ See id. at 29526 (for Rule 17Ad-22(e)(4)(iv)), 29526-27 
(for Rule 17Ad-22(e)(4)(vi)(C)).
---------------------------------------------------------------------------

    Further, because the Commission recognizes that there may be a 
number of ways to address compliance with Rule 17Ad-22(e)(4), the 
Commission is providing the following guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures that address credit risk:
     Whether it has established a robust framework to manage 
its credit exposures to its participants and the credit risks arising 
from its payment, clearing, and settlement processes, mindful that 
credit exposures may arise from current exposures, potential future 
exposures,\309\ or both;
---------------------------------------------------------------------------

    \309\ See infra Part II.C.6 (discussing potential future 
exposures in more detail).
---------------------------------------------------------------------------

     whether it has identified sources of credit risk and can 
routinely measure and monitor credit exposures, using appropriate risk 
management tools to control these risks;
     if it provides CCP services, whether it has covered its 
current and potential future exposures to each participant fully with a 
high degree of confidence using margin and other prefunded financial 
resources, and (i) if it is involved in activities with a more-complex 
risk profile or is systemically important in multiple jurisdictions, 
whether it maintains additional financial resources to cover a wide 
range of potential stress scenarios including but not limited to the 
default of the two participants and their affiliates that would 
potentially cause the largest aggregate credit exposure for the covered 
clearing agency in extreme but plausible market conditions, or (ii) in 
the case of all other covered clearing agencies, whether it maintains 
additional financial resources sufficient to cover a wide range of 
potential stress scenarios including but not limited to the default of 
the participant and its affiliates that would potentially cause

[[Page 70815]]

the largest aggregate credit exposure for the covered clearing agency 
in extreme but plausible market conditions;
     if it provides CCP services, whether it has, consistent 
with Rules 17Ad-22(e)(2) and (e)(3), documented its supporting 
rationale for, and has appropriate governance arrangements relating to, 
the amount of total financial resources it maintains;
     if it provides CCP services: whether it determines the 
amount and regularly tests the sufficiency of its total financial 
resources available in the event of a default or multiple defaults in 
extreme but plausible market conditions through rigorous stress 
testing; whether it has clear procedures to report the result of its 
stress tests to the appropriate decision makers at the covered clearing 
agency and can use these results to evaluate the adequacy of and any 
appropriate adjustments to its total financial resources; whether it 
performs stress tests daily using standard and predetermined parameters 
and assumptions; whether it performs, on at least a monthly basis, a 
comprehensive and thorough analysis of stress testing scenarios, 
models, and underlying parameters and assumptions used 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; whether it performs this analysis more frequently 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 significant; and whether it performs a full 
validation of its risk management model at least annually;
     if it provides CCP services, whether it considers, in 
conducting stress testing, the effect of a wide range of relevant 
stress scenarios in terms of both defaulters' positions and possible 
price changes in liquidation periods, and whether scenarios include 
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, and a spectrum of forward-looking stress scenarios in a 
variety of extreme but plausible market conditions; and
     whether it has established explicit rules and procedures 
that address fully any credit losses the covered clearing agency may 
face as a result of any individual or combined default among its 
participants with respect to any of their obligations to the covered 
clearing agency, addressing how potentially uncovered credit losses 
would be allocated, including the repayment of any funds the covered 
clearing agency may borrow from liquidity providers, and indicating the 
covered clearing agency's process to replenish any financial resources 
that the covered clearing agency may employ during a stress event so it 
can continue to operate in a safe and sound manner.
    With respect to Rule 17Ad-22(e)(4)(i), ``high degree of 
confidence'' generally refers to the meaning of the term as it is used 
in statistical analysis.\310\ With respect to Rule 17Ad-22(e)(4)(ii) 
and (iii), a covered clearing agency generally should use statistical 
methods to develop models that estimate the financial resources 
required. With respect to the relationship among Rules 17Ad-
22(e)(4)(i), (ii), and (iii), the Commission notes that the 
requirements to examine credit exposure under foreseeable stress 
scenarios including extreme but plausible market conditions in proposed 
Rules 17Ad-22(e)(4)(ii) and (iii), as applicable, means a covered 
clearing agency generally should consider how its credit exposure 
modeled under such conditions differs from its credit exposure modeled 
under normal market conditions to positions of such participants, which 
it would also be required to measure, pursuant to proposed Rule 17Ad-
22(e)(4)(i). With respect to Rule 17Ad-22(e)(4)(iv), the Commission 
notes the following:
---------------------------------------------------------------------------

    \310\ See, e.g., Arthur S. Goldberger, A Course in Econometrics 
122-23 (Harvard Univ. Press, 2003) (defining confidence intervals 
for parameter estimates).
---------------------------------------------------------------------------

     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 until an 
assessment has been levied and collected, previously paid-in 
participant contributions to the covered clearing agency's default fund 
could be counted, to the extent the covered 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, may also be 
treated in this manner.
     The ability to draw down under a revolving loan facility 
could not be counted towards prefunded resources because funds from 
such a loan facility would not be in the covered clearing agency's 
immediate possession until they were drawn down, but the covered 
clearing agency could count borrowed funds already drawn down, such as 
under a term loan or other credit facility.
    With respect to stress testing under Rule 17Ad-22(e)(4)(vi) as a 
general matter, the Commission believes that reverse stress testing can 
be a useful tool to evaluate the adequacy of financial resources. The 
Commission believes that a covered clearing agency generally should 
consider incorporating the use of reverse stress testing into its 
policies and procedures under Rule 17Ad-22(e)(4)(vi), and if a covered 
clearing agency determines not to use reverse stress testing, it 
generally should indicate why in its policies and procedures. With 
respect to the references to ``high volatility'' and ``less liquid'' 
referenced in Rule 17Ad-22(e)(4)(vi), the Commission notes that what 
would constitute such circumstances may vary across asset classes.
    With respect to the definition of ``model validation'' and its use 
in Rule 17Ad-22(e)(4)(vii), a covered clearing agency generally should 
consider a person free from influence when that person does not perform 
functions associated with the clearing agency's models and does not 
report to a person who performs these functions. The definition of 
``model validation'' does not require policies and procedures for 
separating model review from model development or for maintaining two 
separate quantitative teams within the clearing agency. With respect to 
Rule 17Ad-22(e)(4)(vii) and policies and procedures for performing the 
model validation not less than annually, a covered clearing agency 
generally should perform the model validation not less than once every 
twelve months.
    With respect to Rule 17Ad-22(e)(4)(viii), the Commission notes that 
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 decide to auction or allocate open 
positions to its participants, but, to the extent possible, a covered 
clearing agency generally should allow non-defaulting members to 
continue to manage their positions in the ordinary course. In 
developing policies and procedures pursuant to Rule 17Ad-22(e)(4)(ix), 
a covered clearing agency generally should consider specifying 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

[[Page 70816]]

facilities. A covered clearing agency generally should have 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.
5. Rule 17Ad-22(e)(5): Collateral
a. Proposed Rule
    As 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 
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. In addition, Rule 17Ad-
22(e)(5) would require a covered clearing agency to 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.\311\
---------------------------------------------------------------------------

    \311\ See CCA Standards proposing release, supra note 5, at 
29528.
---------------------------------------------------------------------------

b. Comments Received
    Commenters were generally supportive of the proposed approach, but 
two commenters supported further clarification regarding the type of 
collateral a covered clearing agency can accept.\312\
---------------------------------------------------------------------------

    \312\ See CFA Institute at 8; OCC at 9.
---------------------------------------------------------------------------

    One commenter stressed that the ability to accept equity securities 
as collateral is critically important to its systemic risk mitigation 
efforts and believes that it should be permitted to continue accepting 
such securities as collateral within its existing framework.\313\ The 
commenter sought to clarify that an appropriately designed portfolio 
margining system that permits the use of equity collateral complies 
with the requirements of proposed Rule 17Ad-22(e)(5) with respect to 
quality of collateral. In response, the Commission believes that, for a 
portfolio margining system to comply with Rule 17Ad-22(e)(5), it would 
necessarily have to consider whether such equity collateral has low 
credit, liquidity, and market risk. This may require a consideration of 
whether the collateral carries wrong-way risk. The Commission provides 
further guidance on this point in Part II.C.5.c below.
---------------------------------------------------------------------------

    \313\ See OCC at 10.
---------------------------------------------------------------------------

    One commenter recommended that the Commission consider establishing 
prescriptive standards for eligible collateral.\314\ Among other 
things, the commenter recommended limiting initial margin to cash in 
highly liquid currencies, obligations guaranteed by a sovereign that 
are highly liquid, corporate bonds that are highly liquid, equities 
that are highly liquid, and gold. The commenter further recommended 
limiting the assets that a covered clearing agency may accept as 
initial margin to collateral that a central bank would accept under an 
ordinary-course facility, is deliverable against the collateralized 
exposure, or is otherwise subject to conservative risk management 
practices that the Commission has determined to be adequate to mitigate 
the incremental risks associated with the collateral because a central 
bank would not accept it under an ordinary-course facility and it is 
not deliverable against the collateralized exposure. The commenter 
further recommended aggregate limits on each type of collateral posted 
as initial margin. The commenter also recommended that the Commission 
prohibit a covered clearing agency from accepting as initial margin 
securities issued by a participant or any of its affiliates.\315\
---------------------------------------------------------------------------

    \314\ See The Clearing House at 2-3, 9-11.
    \315\ See id. at 10.
---------------------------------------------------------------------------

    The Commission is mindful of the concerns raised by the commenter 
but, given the range of products that covered clearing agencies clear, 
declines to restrict the types of collateral to the assets identified 
by the commenter. A covered clearing agency should have flexibility, 
consistent with the requirements in Rule 17Ad-22(e)(5), to react to 
changing market conditions. The Commission notes that a covered 
clearing agency is required under Rule 17Ad-22(e)(5) to have policies 
and procedures that assess what assets have low credit, liquidity, and 
market risks in light of its broader risk management framework and, 
likewise, what haircuts and concentration limits are necessary to 
effectively manage its credit exposure.
c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(5) as proposed.\316\ 
Because the Commission recognizes that there may be a number of ways to 
address compliance with Rule 17Ad-22(e)(5), the Commission is providing 
the following guidance that a covered clearing agency generally should 
consider in establishing and maintaining policies and procedures that 
address collateral:
---------------------------------------------------------------------------

    \316\ See Rule 17Ad-22(e)(5), infra Part VI.
---------------------------------------------------------------------------

     Whether it has generally limited the assets it accepts as 
collateral to those with low credit, liquidity, and market risks;
     whether it has established prudent valuation practices and 
developed haircuts that are regularly tested and take into account 
stressed market conditions;
     to reduce the need for procyclical adjustments, whether it 
has established stable and conservative haircuts that have been 
calibrated to include periods of stressed market conditions, to the 
extent practical and prudent;
     whether it has avoided concentrated holdings of certain 
assets where this would significantly impair the ability to liquidate 
such assets quickly without significant adverse price affects;
     if it accepts cross-border collateral, whether it has 
mitigated the risks associated with the use of cross-border collateral 
and ensured that the collateral can be used in a timely manner; and
     whether it uses a collateral management system that has 
been well-designed and is operationally flexible.

In assessing what assets have low credit, liquidity, and market risks, 
a covered clearing agency's policies and procedures also generally 
should account for wrong-way risk, such as the risk that arises from 
accepting as initial margin securities issued by a participant or any 
of its affiliates.\317\ Policies and procedures for haircuts and 
concentration limits generally should account for wrong-way risk by 
limiting the acceptance of collateral that would likely lose value in 
the event that the participant providing the collateral defaults. For 
example, this would be true when accepting equity securities of the 
participant itself or its affiliates. Further, to reduce the need for 
procyclical adjustments,\318\ a covered clearing agency generally 
should consider establishing stable and

[[Page 70817]]

conservative haircuts that are calibrated to include periods of 
stressed market conditions, to the extent practicable and prudent.
---------------------------------------------------------------------------

    \317\ Wrong-way risk can be either general or specific. General 
wrong-way risk arises at a CCP when the potential losses of either a 
participant's portfolio or a participant's collateral is correlated 
with the default probability of that participant. Specific wrong-way 
risk arises at a CCP when an exposure to a participant is highly 
likely to increase when the creditworthiness of that participant is 
deteriorating.
    \318\ In this context, procyclicality typically refers to 
changes in risk-management practices that are positively correlated 
with market, business, or credit cycle fluctuations that may cause 
or exacerbate financial stability. While changes in collateral 
values tend to be procyclical, collateral arrangements can increase 
procyclicality if haircut levels fall during periods of low market 
stress and increase during periods of high market stress.
---------------------------------------------------------------------------

    In addition, with respect to policies and procedures for reviewing 
the sufficiency of its collateral haircuts and concentration limits not 
less than annually, a covered clearing agency generally should perform 
the review not less than once every twelve months using persons who are 
independent from management and have appropriate technical skills.
6. Rule 17Ad-22(e)(6): Margin
a. Proposed Rule
    As 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.\319\ 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. 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. 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. The Commission also proposed 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.\320\ 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. 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.
---------------------------------------------------------------------------

    \319\ See CCA Standards proposing release, supra note 5, at 
29528-31.
    \320\ See id. at 29529. The Commission received no comments 
regarding the proposed definition and is adopting it as proposed. 
Because of other modifications to Rule 17Ad-22(a), the definition of 
``potential future exposure'' is being moved to Rule 17Ad-22(a)(13). 
See infra Part VI.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(e)(6)(vi) would require a covered clearing 
agency that provides CCP services 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 considering 
modifications to ensure the backtesting practices are appropriate for 
determining the adequacy of its margin resources. Proposed Rule 17Ad-
22(e)(6)(vi) would also require a covered clearing agency's policies 
and procedures to include conducting a conforming sensitivity analysis 
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 participants increases or 
decreases significantly. Proposed Rule 17Ad-22(e)(6)(vi) 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.\321\
---------------------------------------------------------------------------

    \321\ See id. at 29530.
---------------------------------------------------------------------------

    With respect to proposed Rule 17Ad-22(e)(6)(vi), the Commission 
proposed 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.\322\ The Commission received no comments 
regarding the proposed definition and is adopting it as proposed.\323\ 
The Commission also proposed to define ``sensitivity analysis'' to mean 
an analysis that involves analyzing the sensitivity of a model to its 
assumptions, parameters, and inputs.\324\ The Commission also proposed 
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.\325\ 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. The proposed definition would also require a 
conforming sensitivity analysis to 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.\326\
---------------------------------------------------------------------------

    \322\ See id.
    \323\ See Rule 17Ad-22(a)(1), infra Part VI.
    \324\ See CCA Standards proposing release, supra note 5, at 
29530.
    \325\ See id.
    \326\ See CCA Standards proposing release, supra note 5, at 
29530. The Commission received no comments regarding the proposed 
definitions, and the Commission is combining them into one 
definition of ``sensitivity analysis'' to avoid the use of both 
``sensitivity analysis'' and ``conforming sensitivity analysis'' in 
Rule 17Ad-22, as discussed further below. See infra Part II.C.6.c.
---------------------------------------------------------------------------

    Finally, proposed Rule 17Ad-22(e)(6)(vii) would require a covered 
clearing agency that provides CCP services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to require not less than annually a conforming model 
validation of the

[[Page 70818]]

covered clearing agency's margin system and related models.\327\
---------------------------------------------------------------------------

    \327\ See CCA Standards proposing release, supra note 5, at 
29531; see also supra note 305 and accompanying text (modifying the 
term ``conforming model validation'' to ``model validation,'' and 
moving it to Rule 17Ad-22(a)(9)).
---------------------------------------------------------------------------

b. Comments Received and Commission Response
i. Minimum Liquidation Periods for Initial Margin
    One commenter expressed the view that the requirements in Rule 
17Ad-22(e)(6) are reasonable.\328\ In contrast, another commenter noted 
that the proposed rules would address initial margin liquidation period 
requirements through the Commission's supervisory process rather than 
establish a minimum liquidation period as part of the covered clearing 
agency's initial margin methodology.\329\ The commenter stated that, at 
a minimum, the Commission should establish minimum liquidation period 
standards that, as a supervisory matter, are transparent to the public. 
To promote transparency and international consistency, the commenter 
also stated that the Commission should modify Rule 17Ad-22(e)(6)(iii) 
to establish minimum liquidation periods for initial margin calculation 
that are consistent with international standards.\330\
---------------------------------------------------------------------------

    \328\ See CFA Institute at 1, 8-9.
    \329\ See The Clearing House at 14.
    \330\ See id. at 3, 14, 15.
---------------------------------------------------------------------------

    The Commission is declining to establish minimum liquidation 
periods as part of a covered clearing agency's initial margin 
methodology. The Commission recognizes that liquidation periods are a 
critical assumption for any margin methodology and vary by product 
type. Accordingly, liquidation periods generally should be tailored to 
the market conditions and risks of the products being cleared. Because 
market conditions vary and the risks of the products being cleared over 
time may change, the Commission believes that a rule or rules 
establishing criteria for minimum liquidation periods may not be 
sufficiently tailored to changing circumstances as financial markets 
evolve. A covered clearing agency generally should consider reviewing 
liquidation periods as part of its regular review, testing, and 
verification of its margin system under Rule 17Ad-22(e)(6).
ii. Model Validation
    One commenter supported the proposed requirement that a qualified 
person who is free from influence should perform the annual model 
validation for credit and margin risk, but the commenter asked the 
Commission to go further with the ``free from influence'' 
requirement.\331\ The commenter noted the inevitable and indirect 
pressures employees may face and suggested that the models be validated 
annually by a qualified and independent organization with no financial 
stake in the outcome.\332\ The Commission previously addressed comments 
on this topic when it adopted Rule 17Ad-22(b)(4). At that time, the 
Commission stated that it was not persuaded that model validation must 
be performed by an outside, independent expert.\333\ The Commission 
believes that objectivity can be preserved where the person performing 
the model validation is an employee of the covered clearing agency by a 
variety of means, including, for example, separating employees 
responsible for model validation from those in the covered clearing 
agency responsible for the day-to-day functioning of the model and the 
business lines that use the model. As a general matter, mechanisms 
ensuring that any employees responsible for model validation remain 
independent from those responsible for using the model on a day-to-day 
basis would satisfy this requirement of the rule.
---------------------------------------------------------------------------

    \331\ See Better Markets at 9. The Commission notes that this 
``free from influence'' requirement applies to model validation 
requirements in Rules 17Ad-22(e)(4), (e)(6), and (e)(7). See Rule 
17Ad-22(a)(9), infra Part VI.
    \332\ See Better Markets at 9-10.
    \333\ See Clearing Agency Standards adopting release, supra note 
5, at 66238.
---------------------------------------------------------------------------

iii. Intraday Margin on a Net Basis and Multilateral Netting Across 
CCPs
    One commenter supported intraday margin on a net basis and 
encouraged multilateral netting across CCPs. The commenter stated that, 
to prevent intraday variation margin calls from having destabilizing 
effects, the Commission should, pending the development of market-wide 
solutions, require a covered clearing agency making an intraday margin 
call to simultaneously net variation margin that is payable to 
participants.\334\
---------------------------------------------------------------------------

    \334\ See The Clearing House at 3, 14.
---------------------------------------------------------------------------

    After careful consideration, the Commission declines to accept the 
commenter's suggestion because it would be inconsistent with the 
overall approach to Rule 17Ad-22(e). The Commission notes that the 
circumstances that could give rise to intraday margin calls at a 
covered clearing agency may vary significantly (e.g., intraday 
volatility, large changes in participant positions), and may present 
varied challenges. Although there may be circumstances where it would 
be appropriate for a covered clearing agency to incorporate policies 
and procedures such as those suggested by the commenter, the 
Commission's approach to Rule 17Ad-22(e) is to provide flexibility to 
covered clearing agencies, subject to their obligations and 
responsibilities as SROs under the Exchange Act, to design and 
structure their policies and procedures to take into account the 
differences among clearing agencies. With respect to intraday margin as 
a general matter, Rule 17Ad-22(e)(6)(ii) requires policies and 
procedures for having the capacity to collect intraday margin in 
defined circumstances, which generally would include margin calls on 
both a scheduled and unscheduled basis.
c. Final Rule
    As previously discussed, the Commission is adopting the definitions 
of ``backtesting'' and ``potential future exposure'' as proposed.\335\ 
As noted above, the Commission is combining the definitions of 
``sensitivity analysis'' and ``conforming sensitivity analysis.'' In 
addition, the Commission believes that while hypothetical portfolios 
are often useful and important in conducting a sensitivity analysis, 
hypothetical portfolios may not be appropriate in certain cases. The 
Commission is modifying the definition so that, under new Rule 17Ad-
22(a)(16), ``sensitivity analysis'' means an analysis that involves 
analyzing the sensitivity of a model to its assumptions, parameters, 
and inputs 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 
conditions. Sensitivity analysis must use actual and, where applicable, 
hypothetical portfolios that reflect the characteristics of proprietary 
positions and 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

[[Page 70819]]

conditions as defined in a covered clearing agency's risk 
policies.\336\ The Commission believes that this reduces the potential 
for confusion resulting from the use of two separate definitions.
---------------------------------------------------------------------------

    \335\ See supra notes 320 and 323. Due to modifications to Rule 
17Ad-22(a), the definition of ``potential future exposure'' is being 
moved to Rule 17Ad-22(a)(13). The definition of ``backtesting'' 
remains in Rule 17Ad-22(a)(1). See infra Part VI.
    \336\ See Rule 17Ad-22(a)(16), infra Part VI.
---------------------------------------------------------------------------

    The Commission is also adopting modifications to Rule 17Ad-
22(e)(6).\337\ First, the Commission is modifying Rule 17Ad-22(e)(6) to 
remove references to ``conforming'' consistent with the modification to 
the definitions of ``sensitivity analysis'' discussed above and of 
``model validation'' discussed in Part II.C.4.c. Second, to improve 
clarity, the Commission is modifying Rule 17Ad-22(e)(6)(v) to require 
policies and procedures that use reliable sources of timely price data 
and that ``use'' procedures and sound valuation models for addressing 
circumstances in which pricing data are not readily available or 
reliable. Third, because backtests are conducted with respect to the 
margin model and not the margin resources themselves, the Commission is 
modifying Rule 17Ad-22(e)(6)(vi)(A) to replace the phrase ``margin 
resources'' with ``margin model.'' Fourth, to avoid conflating 
sensitivity analysis with backtesting, the Commission is modifying 
Rules 17Ad-22(e)(6)(vi)(B) and (C) to clarify that a sensitivity 
analysis should be conducted of the margin model and not of margin 
resources. Specifically, the rule text will replace the phrase ``margin 
resources'' with the phrase ``margin model.'' The modifications to 
Rules 17Ad-22(e)(6)(vi)(A), (B), and (C) are consistent with the 
discussion of the proposed rule in the CCA Standards proposing 
release.\338\ Fifth, the Commission is modifying Rule 17Ad-
22(e)(6)(vi)(C) to replace ``and'' with ``or'' so that the criteria for 
conducting analysis more frequently than monthly are disjunctive rather 
than conjunctive, since the criteria described may not be correlated to 
each other. This modification is consistent with the Commission's 
description of the proposed rule in the CCA Standards proposing 
release.\339\
---------------------------------------------------------------------------

    \337\ See Rule 17Ad-22(e)(6), infra Part VI.
    \338\ See CCA Standards proposing release, supra note 5, at 
29530-31.
    \339\ See id. at 29530.
---------------------------------------------------------------------------

    Further, because the Commission recognizes that there may be a 
number of ways to address compliance with Rule 17Ad-22(e)(6), the 
Commission is providing the following guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures for margin:
     Whether its margin system has established margin levels 
commensurate with the risks and particular attributes of each product, 
portfolio, and market it serves;
     whether it has a reliable source of timely price data for 
its margin system and policies and procedures, including sound 
valuation models, for addressing circumstances in which pricing data 
are not readily available or reliable;
     whether it has adopted initial margin models and 
parameters that are risk-based and generate margin requirements 
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;
     whether initial margin meets an established single-tailed 
confidence level of at least 99 percent with respect to the estimated 
distribution of future exposure; whether, if it calculates margin at 
the portfolio level, this applies to each portfolio's distribution of 
future exposure; whether, if it calculates margin at more granular 
levels, such as at the sub-portfolio level or by product, this is met 
for the corresponding distributions of future exposure; and whether the 
model (i) uses a conservative estimate of the time horizons for the 
effective hedging or close out of the particular types of products 
cleared by the covered clearing agency (including in stressed market 
conditions), (ii) has an appropriate method for measuring credit 
exposure that accounts for relevant product risk factors and portfolio 
effects across products, and (iii) to the extent practicable and 
prudent, limits the need for destabilizing, procyclical changes;
     whether it marks participant positions to market and 
collects variation margin at least daily to limit the build-up of 
current exposures and has the authority and operational capacity to 
make intraday margin calls and payments, both scheduled and 
unscheduled, to participants;
     in calculating margin requirements, whether it allows 
offsets or reductions in required margin across products that it clears 
or between products that it and another clearing agency clear, if the 
risk of one product is significantly and reliably correlated with the 
risk of the other product; and where two or more clearing agencies are 
authorized to offer cross-margining, whether they have appropriate 
safeguards and harmonized overall risk management systems;
     whether it analyzes and monitors its model performance and 
overall margin coverage by conducting rigorous daily backtesting and at 
least monthly, and more frequent when appropriate, sensitivity 
analysis; whether it regularly conducts an assessment of the 
theoretical and empirical properties of its margin model for all 
products it clears; in conducting sensitivity analysis of the model's 
coverage, whether the covered clearing agency has taken into account a 
wide range of parameters and assumptions that reflect possible market 
conditions, including the most volatile periods that have been 
experienced by the markets the covered clearing agency serves and 
extreme changes in the correlations between prices; and
     whether it regularly reviews and validates its margin 
system.
    With respect to Rule 17Ad-22(e)(6)(iii), and policies and 
procedures related to margin calculations, a covered clearing agency 
generally should consider whether it calculates margin sufficient to 
cover its potential future exposure to each participant.
    With respect to Rule 17Ad-22(e)(6)(iv) and policies and procedures 
for price data, the Commission notes that in selecting price data 
sources, a covered clearing agency generally should consider the 
ability of the provider to provide data in a variety of market 
conditions, including periods of market stress, and not select data 
sources based on their cost alone to ensure that such price data 
sources are reliable.
    With respect to Rule 17Ad-22(e)(6)(v) and policies and procedures 
for measuring portfolio effects, the Commission notes that measuring 
portfolio effects across products means a covered clearing agency 
generally should take into account netting procedures or offsets 
through which credit exposure may be reduced in measuring credit 
exposure, including the use of portfolio margining procedures across 
products where applicable.
    With respect to Rule 17Ad-22(e)(6)(vii) and policies and procedures 
for performing the model validation not less than annually, a covered 
clearing agency generally should perform the model validation not less 
than once every twelve months using persons who are independent from 
management and have appropriate technical skills.
7. Rule 17Ad-22(e)(7): Liquidity Risk
a. Proposed Rule
    As 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

[[Page 70820]]

by it, by meeting, at a minimum, the ten requirements specified in the 
rule.\340\
---------------------------------------------------------------------------

    \340\ See CCA Standards proposing release, supra note 5, at 
29531-37.
---------------------------------------------------------------------------

    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.\341\
---------------------------------------------------------------------------

    \341\ See id. at 29531.
---------------------------------------------------------------------------

    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 that 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.\342\ The 
Commission also proposed Rule 17Ad-22(a)(15) to define ``qualifying 
liquid resources,'' which would include three types of assets, in each 
relevant currency:
---------------------------------------------------------------------------

    \342\ See id.
---------------------------------------------------------------------------

     Cash held either at the central bank of issue or at 
creditworthy commercial banks;
     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.\343\
---------------------------------------------------------------------------

    \343\ See id.
---------------------------------------------------------------------------

    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,\344\ 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.
---------------------------------------------------------------------------

    \344\ See 12 U.S.C. 5465(a).
---------------------------------------------------------------------------

    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.
    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, tests with each 
liquidity provider, to the extent practicable, its procedures and 
operational capacity for accessing each type of relevant liquidity 
resource.
    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; (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; 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. 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.\345\
---------------------------------------------------------------------------

    \345\ See CCA Standards proposing release, supra note 5, at 
29534.
---------------------------------------------------------------------------

    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.\346\
---------------------------------------------------------------------------

    \346\ See id.; see also supra notes 275-305 and accompanying 
text (discussing generally the requirements accompanying the 
definition of ``model validation'').
---------------------------------------------------------------------------

    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.
    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.\347\
---------------------------------------------------------------------------

    \347\ See CCA Standards proposing release, supra note 5, at 
29534.
---------------------------------------------------------------------------

    Finally, 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 that 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

[[Page 70821]]

aggregate payment obligation 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.
b. Comments Received and Commission Response
i. General Approach
    Six commenters expressed general support for the proposed 
rule.\348\ Of these, one commenter stated that proposed Rule 17Ad-
22(e)(7) was prudent and appropriate in light of the need for covered 
clearing agencies to maintain adequate liquidity to minimize systemic 
risks and that, by requiring ongoing testing and monitoring of 
underlying assumptions, covered clearing agencies should be able to 
identify potential problems with sufficient time to respond without 
significant disruptions.\349\ Four commenters expressed support for the 
Commission's proposed approach to qualifying liquid resources other 
than committed funding arrangements,\350\ which is discussed further 
below in Part II.C.7.b.iii.
---------------------------------------------------------------------------

    \348\ See, e.g., Barnard at 1 (supporting the proposal, 
especially as to its proposed financial risk management and 
liquidity risk requirements); CFA Institute at 9; CME at 4; DTCC at 
6; The Clearing House at 3, 13; OCC at 11.
    \349\ See CFA Institute at 9.
    \350\ See CME at 4; DTCC at 6 (noting the appropriate balance in 
the proposed rule between the need to have sufficient reliable 
liquidity resources to meet ongoing settlement obligations in the 
event of participant default, and the realities of the availability 
and costs of committed liquidity funding); OCC at 11 (supporting the 
expansion of qualifying liquid resources beyond committed funding 
arrangements); The Clearing House at 3, 13 (noting that the proposed 
rule's use of highly reliable funding arrangements, in addition to 
committed arrangements, provides needed flexibility and is 
consistent with the PFMI).
---------------------------------------------------------------------------

ii. Due Diligence for Liquidity Providers
    Two commenters stated that the requirement in proposed Rule 17Ad-
22(e)(7)(iv) regarding policies and procedures to perform due diligence 
of liquidity providers must take into account the context of the due 
diligence being performed.\351\ One of these commenters stated that 
commercial lenders are not likely to provide their borrowers with non-
public information on their internal policies and controls,\352\ and 
that accordingly covered clearing agencies should not be expected to 
evaluate a commercial lender's internal risk controls.\353\ First, in 
the experience of Commission staff, liquidity facilities may not 
consist only of traditional commercial loans. For example, a covered 
clearing agency may seek out committed repurchase agreement facilities 
with counterparties other than traditional commercial lenders. In such 
a circumstance, the commenter's experience with such counterparties may 
be different than with a traditional commercial lender.\354\ 
Accordingly, in contrast to the commenter's assertion, a covered 
clearing agency may engage in a relationship with a liquidity provider 
that is not a typical commercial lender and therefore may be more 
willing to facilitate due diligence. Second, while the Commission 
acknowledges that a lender may choose not to provide their borrowers 
with non-public information on certain internal policies and controls, 
the proposed rule does not require a covered clearing agency's policies 
and procedures regarding due diligence for liquidity providers to 
specifically review all internal policies and controls. Rather, it 
requires due diligence policies and procedures that confirm the covered 
clearing agency has a reasonable basis to believe that a liquidity 
provider understands and manages the liquidity provider's liquidity 
risks and the capacity to perform as required under its commitments to 
provide liquidity to the covered clearing agency. If, in performing due 
diligence consistent with its policies and procedures formulated in 
accordance with the rule, a covered clearing agency cannot confirm that 
it has a reasonable basis to believe both of the required criteria, 
then the covered clearing agency would not have a liquidity provider 
consistent with Rule 17Ad-22(e)(7)(iv).
---------------------------------------------------------------------------

    \351\ See DTCC at 7; LCH at 4.
    \352\ See DTCC at 7.
    \353\ See id.
    \354\ See infra Part II.C.7.b.iii (further discussing such 
repurchase agreement facilities).
---------------------------------------------------------------------------

    The second commenter stated that it is not appropriate to require a 
covered clearing agency to perform due diligence on a central bank 
acting as its liquidity provider and requests that the rules clarify 
that the requirements under Rule 17Ad-22(e)(7)(iv) do not apply where a 
central bank is a liquidity provider for a covered clearing 
agency.\355\ The Commission does not believe that the rule needs to be 
modified to account for this circumstance, however, as the policies and 
procedures of the covered clearing agency could account for the 
different circumstances that arise when a central bank is acting as a 
liquidity provider.
---------------------------------------------------------------------------

    \355\ See LCH at 4.
---------------------------------------------------------------------------

    A third commenter expressed the view that the Commission should 
clarify the due diligence requirements of proposed Rule 17Ad-
22(e)(7)(iv) to expressly require a covered clearing agency to take 
into account the potential wrong-way risk associated with reliance on 
participants or their affiliates as liquidity providers.\356\ The 
commenter further stated that the Commission should take additional 
steps to mitigate wrong-way risk by requiring a covered clearing agency 
to ensure the appropriate diversification of its liquidity providers 
and limit its reliance on its participants or their affiliates as 
potential sources of liquidity.\357\ The Commission believes that 
diversifying liquidity providers may be helpful because such 
diversification would result in less concentrated, and potentially more 
manageable, financial commitments among a covered clearing agency's 
liquidity providers. For example, a covered clearing agency generally 
should conduct an assessment of the liquidity provider's business in 
light of both the covered clearing agency's own business and the 
composition of its existing liquidity providers. In turn, a covered 
clearing agency could assess the likelihood that a liquidity provider 
might be unable to meet its own liquidity demands at the same time as 
the covered clearing agency was facing a liquidity shortfall and 
attempting to draw on liquidity from its liquidity provider, allowing 
the covered clearing agency to account for the potential wrong-way risk 
associated with reliance on participants or their affiliates as 
liquidity providers. Although there may be circumstances where it would 
be appropriate for a covered clearing agency to incorporate the 
policies and procedures such as those suggested by the commenter, the 
Commission's approach to Rule 17Ad-22(e) focuses on principles. The 
circumstances may vary, and a covered clearing agency should 
appropriately manage its risks as they arise, considering the full set 
of tools available and its risk management framework. Accordingly, 
after careful consideration, the Commission declines to accept the 
commenter's suggestion with respect to wrong-way risk because it would 
be inconsistent with the overall approach to Rule 17Ad-22(e).\358\
---------------------------------------------------------------------------

    \356\ See The Clearing House at 13.
    \357\ See id. at 3.
    \358\ See supra Part II.B.
---------------------------------------------------------------------------

    In addition, the commenter stated that the reliance on committed 
funding arrangements in proposed Rule 17Ad-22(a)(15) may lead to this 
overreliance on participants or their affiliates for liquidity.\359\ 
The Commission addresses

[[Page 70822]]

this aspect of the comment below in Part II.C.7.b.iii.
---------------------------------------------------------------------------

    \359\ See The Clearing House at 3.
---------------------------------------------------------------------------

iii. Qualifying Liquid Resources
    Commenters generally supported the Commission's proposed approach 
to determining qualifying liquid resources. One commenter supported the 
Commission's overall approach and, in particular, the inclusion of 
assets that are readily available and convertible into cash through 
repurchase agreements.\360\ Another commenter supported the 
Commission's approach to the definition of ``qualifying liquid 
resources,'' and expressed the view that expansion of qualifying liquid 
resources beyond committed funding arrangements is necessary to ensure 
the proper functioning of covered clearing agencies.\361\ The commenter 
noted that a committed liquidity facility would generally be preferable 
over a non-committed facility, but the commenter also acknowledged that 
other aspects of a facility (e.g., size or cost of the facility) may 
tip the balance toward selection of the non-committed facility. In 
particular, the commenter emphasized the unique liquidity needs of 
clearing entities, the limited number and capacity of liquidity 
providers in the market that are willing and able to participate in 
committed liquidity facilities for clearing entities, and the 
commercial and regulatory realities that could constrain the 
availability of committed facilities for covered clearing 
agencies.\362\ The Commission is mindful of these concerns, but notes 
that policies and procedures providing for the use of uncommitted 
facilities must also satisfy the terms of Rule 17Ad-22(e)(15) to 
address general business and operational risk that could arise from 
such uncommitted facilities.
---------------------------------------------------------------------------

    \360\ See CME at 4.
    \361\ See OCC at 11.
    \362\ See id. at 11-12.
---------------------------------------------------------------------------

    One commenter stated that requiring covered clearing agencies to 
rely on committed funding arrangements in all cases could increase a 
covered clearing agency's reliance on its participants or their 
affiliated banks and potentially exacerbate a liquidity crisis by 
transferring the risk of a covered clearing agency to its liquidity 
providers and vice versa.\363\ However, the comment assumes that the 
rule prohibits reliance on other types of facilities or prearranged 
funding arrangements, which is not the case. To some degree, the 
purpose of a liquidity facility is to transfer risk from the covered 
clearing agency to its liquidity providers. Further, the resources 
described in the definition of ``qualifying liquid resources'' should 
be viewed as part of a hierarchy, where cash should be the primary 
source of liquid resources, followed first by prearranged funding 
arrangements and last by other assets readily available and eligible 
for pledging to a relevant central bank in a jurisdiction that permits 
such pledges. In addition, within the class of prearranged funding 
arrangements, available committed arrangements without material adverse 
change (``MAC'') provisions generally should be obtained before seeking 
to obtain other prearranged funding arrangements determined to be 
highly reliable even in extreme but plausible market conditions by the 
covered clearing agency's board of directors. The Commission believes 
that a covered clearing agency generally should consider having 
policies and procedures that establish a preference for cash and 
prearranged funding arrangements, but the Commission acknowledges that 
a covered clearing agency's policies and procedures may need to account 
for the extent to which such resources are available to them given the 
size of their liquidity demands.
---------------------------------------------------------------------------

    \363\ See The Clearing House at 13.
---------------------------------------------------------------------------

    With respect to whether and how repurchase agreements might fit 
within the definition of qualifying liquid resources, one commenter 
stated that prearranged and highly reliable funding arrangements may be 
demonstrated through non-committed repurchase agreement facilities with 
major bank-dealers.\364\ According to the commenter, a covered clearing 
agency relying on such a facility would need to ensure that it is 
structured appropriately to be highly reliable, taking into account the 
fact that a facility may be used in a clearing member default scenario 
in extreme market circumstances. The commenter also stated that a 
covered clearing agency's procedures for making draws on uncommitted 
repurchase facilities should specifically contemplate the timing of 
close-out arrangements for defaulted clearing members and should 
provide for draws on such facilities to be made by specified times 
during business day mornings to ensure that dealer banks have 
sufficient time to facilitate liquidation of the U.S. Treasury 
securities. The commenter believed this approach would be fully 
consistent with the PFMI.\365\ The Commission notes that this type of 
approach, reflected in the policies and procedures of a covered 
clearing agency as part of a broader attempt to define qualifying 
liquid resources comprehensively, could be consistent with the 
Commission's definition of 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, assuming it 
was subject to a not less than annual review.\366\ The Commission 
believes that the board of directors of a covered clearing agency 
generally should rely on rigorous analysis of the properties of a 
prearranged funding arrangement, in making a determination that it was 
highly reliable in extreme but plausible market conditions.
---------------------------------------------------------------------------

    \364\ See ISDA at 4.
    \365\ See id.
    \366\ Such policies and procedures should also address the due 
diligence of the liquidity provider, as discussed above. See supra 
Part II.C.7.b.ii.
---------------------------------------------------------------------------

    With respect to the rule's reference to ``material adverse change 
provisions,'' two commenters recommended that the reference be removed. 
One commenter noted that the proposed rule text appears to be in 
tension with the preamble of the CCA Standards proposing release 
because it includes, among qualifying liquid resources, prearranged 
funding arrangements other than committed arrangements, but only where 
such arrangements have no MAC provisions.\367\ The commenter stated 
that, by definition, a non-committed facility is uncommitted and 
therefore MAC provisions are inapplicable.\368\ The commenter further 
noted that this is a liquidity standard not set forth in the PFMI, 
which will lead to confusion and inconsistency in attempting to apply 
the standard. The commenter recommended that the reference to MAC 
clauses in the proposed definition of ``qualifying liquid resources'' 
be removed.\369\ The second commenter similarly recommended that the 
Commission remove the reference to MAC clauses in the definition of 
qualifying liquid resources for prearranged funding arrangements other 
than committed arrangements, noting that Master Repurchase Agreements 
do not have MAC clauses because they are uncommitted facilities.\370\
---------------------------------------------------------------------------

    \367\ See ISDA at 5.
    \368\ See id.
    \369\ See id.
    \370\ See CME at 4.
---------------------------------------------------------------------------

    In response to the comments, the Commission is modifying the 
proposed definition of ``qualifying liquid resources'' so that only 
paragraph (A) includes a prohibition on MAC clauses. For uncommitted 
facilities, because they are by their terms uncommitted, the party 
providing an uncommitted facility generally would have no need to 
include a MAC clause. In contrast, a party providing a committed 
facility could choose to contract into an

[[Page 70823]]

arrangement with or without a MAC clause, at the party's discretion. As 
noted above, the Commission believes that a covered clearing agency 
generally should consider having policies and procedures that establish 
a preference for cash and prearranged funding arrangements. Within the 
category of prearranged funding arrangements, the Commission also 
believes that a covered clearing agency generally should preference 
committed arrangements over other types of prearranged funding 
arrangements, and that within the category of committed arrangements, a 
covered clearing agency generally should preference those without MAC 
clauses over those with MAC clauses. The Commission notes that a 
covered clearing agency would, when relying on a committed funding 
arrangement with a MAC clause pursuant to the definition of 
``qualifying liquid resources,'' also need to have policies and 
procedures demonstrating that such committed facility was a prearranged 
funding arrangement determined to be highly reliable even in extreme 
but plausible market conditions by the board of directors following a 
review conducted for this purpose no less than annually. The Commission 
also believes that, as a general matter, policies and procedures 
regarding qualifying liquid resources, including those related to 
prearranged funding arrangements, would constitute a proposed rule 
change under Section 19(b) of the Exchange Act and, for designated 
clearing agencies, an advance notice under the Clearing Supervision 
Act.
c. Final Rule
    The Commission is adopting two modifications to the definition of 
``qualifying liquid resources'' and, because of other modifications to 
Rule 17Ad-22(a), moving the definition to Rule 17Ad-22(a)(14).\371\ The 
Commission is modifying paragraph (ii) so that the reference to MAC 
clauses is tied to committed arrangements rather than prearranged 
funding arrangements more generally, as previously described in Part 
II.C.7.b.iii. In addition, because not all central banks permit 
pledging certain assets that are readily available and eligible for 
pledging, the Commission is modifying paragraph (iii) to clarify that 
practices with respect to routine credit at a central bank may vary 
across jurisdictions.
---------------------------------------------------------------------------

    \371\ See Rule 17Ad-22(a)(14), infra Part VI.
---------------------------------------------------------------------------

    The Commission is also adopting Rule 17Ad-22(e)(7) with 
modifications.\372\ First, the Commission is modifying Rule 17Ad-
22(e)(4)(vi)(A) to refer to ``stress testing'' rather than ``a stress 
test'' to improve consistency with the definition of ``stress testing'' 
in Rule 17Ad-22(a)(17). Second, the Commission is modifying Rule 17Ad-
22(e)(7)(vi)(C) in two ways. To improve consistency with Rule 17Ad-
22(e)(4)(vi)(C), the Commission is adding ``or'' to link ``display high 
volatility'' with ``become less liquid'' because these concepts are 
intended to describe events related to the products cleared or markets 
served. This change corrects a typographical error in the CCA Standards 
proposing release.\373\ The Commission is also replacing ``and'' with 
``or'' in Rule 17Ad-22(e)(7)(vi)(C) so that the criteria for conducting 
analysis more frequently than monthly are disjunctive rather than 
conjunctive, since the list of criteria is open to other appropriate 
circumstances described in a covered clearing agency's policies and 
procedures and may not be correlated. Third, the Commission is making 
two modifications in adopting Rule 17Ad-22(e)(7)(vi)(D) to correct 
technical errors in the proposed rule text: (i) References to 
paragraphs (e)(6)(vii)(B) and (C) will be changed to paragraphs 
(e)(7)(vi)(B) and (C) respectively; and (ii) the rule will refer to the 
covered clearing agency's ``liquidity'' risk management framework, 
rather than its ``credit'' risk management framework. These 
modifications are consistent with the Commission's discussion of the 
proposed rule in the CCA Standards proposing release.\374\ Fourth, the 
Commission is striking ``conforming'' from Rule 17Ad-22(e)(7)(vii) to 
be consistent with the modifications to the definition of ``model 
validation'' discussed in Part II.C.4.c.
---------------------------------------------------------------------------

    \372\ See Rule 17Ad-22(e)(7), infra Part VI.
    \373\ See CCA Standards proposing release, supra note 5, at 
29534.
    \374\ See id.
---------------------------------------------------------------------------

    Further, because the Commission recognizes that there may be a 
number of ways to address compliance with Rule 17Ad-22(e)(7), the 
Commission is providing the following guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures that address liquidity risk:
     Whether it has a robust framework to manage its liquidity 
risks from its participants, settlement banks, nostro agents, custodian 
banks, liquidity providers, and other entities;
     whether it has effective operational and analytical tools 
to identify, measure, and monitor its settlement and funding flows on 
an ongoing and timely basis, including its use of intraday liquidity;
     whether it maintains sufficient liquid resources in all 
relevant currencies to settle securities-related payments, make 
required variation margin payments, and meet other payment obligations 
on time with a high degree of confidence under a wide range of 
potential stress scenarios, including but not limited to the default of 
the participant and its affiliates that would generate the largest 
aggregate payment obligation to the covered clearing agency in extreme 
but plausible market conditions;
     for the purpose of meeting its minimum liquid resource 
requirement, whether its qualifying liquid resources in each currency 
include cash at the central bank of issue and at creditworthy 
commercial banks, committed lines of credit, committed foreign exchange 
swaps, and committed repos, as well as highly marketable collateral 
held in custody and investments that are readily available and 
convertible into cash with prearranged and highly reliable funding 
arrangements, even in extreme but plausible market conditions;
     whether it supplements its qualifying liquid resources 
with other forms of liquid resources and, if so, whether these liquid 
resources are in the form of assets likely to be saleable or acceptable 
as collateral for lines of credit, swaps, or repos on an ad hoc basis 
following a default, even if this cannot be reliably prearranged or 
guaranteed in extreme market conditions;
     if it does not have access to routine central bank credit, 
whether it takes account of what collateral is typically accepted by 
the relevant central bank, as such assets may be more likely to be 
liquid in stressed circumstances, and does not assume the availability 
of emergency central bank credit as a part of its liquidity plan;
     whether it obtains a high degree of confidence, through 
rigorous due diligence, that each provider of its minimum required 
qualifying liquid resources, whether a participant of the FMI or an 
external party, has sufficient information to understand and to manage 
its associated liquidity risks, and that it has the capacity to perform 
as required under its commitment;
     where relevant to assessing a liquidity provider's 
performance reliability with respect to a particular currency, whether 
a liquidity provider's potential access to credit from the central bank 
of issue may be taken into account;
     whether it regularly tests its procedures for accessing 
its liquid resources at a liquidity provider;

[[Page 70824]]

     if it has access to central bank accounts, payment 
services, or securities services, whether it uses these services, where 
practical, to enhance its management of liquidity risk;
     whether it determines the amount and regularly tests the 
sufficiency of its liquid resources through rigorous stress testing; 
whether it has clear procedures to report the results of its stress 
tests to appropriate decision makers at the covered clearing agency and 
to use these results to evaluate the adequacy of and adjust its 
liquidity risk-management framework;
     in conducting stress testing, whether it considers a wide 
range of relevant scenarios, including 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, and a spectrum of 
forward-looking stress scenarios in a variety of extreme but plausible 
market conditions;
     whether such scenarios take into account the design and 
operation of the covered clearing agency, include all entities that 
might pose material liquidity risks to the covered clearing agency 
(such as settlement banks, nostro agents, custodian banks, liquidity 
providers, and linked clearing agencies), and where appropriate, cover 
a multiday period, and, whether, in all cases, it documents its 
supporting rationale for, and has appropriate governance arrangements 
relating to, the amount and form of total liquid resources it 
maintains;
     whether it has explicit rules and procedures that enable 
the covered clearing agency to effect same-day and, where appropriate, 
intraday and multiday settlement of payment obligations on time 
following any individual or combined default among its participants;
     whether these rules and procedures address unforeseen and 
potentially uncovered liquidity shortfalls and should aim to avoid 
unwinding, revoking, or delaying the same-day settlement of payment 
obligations; \375\ and
---------------------------------------------------------------------------

    \375\ The Commission notes that while Rule 17Ad-22(e)(7)(viii) 
requires policies and procedures to address foreseeable liquidity 
shortfalls, a covered clearing agency also generally should consider 
how best to identify unforeseen and potentially uncovered liquidity 
shortfalls. For example, a covered clearing agency may be able to 
identify unforeseen liquidity shortfalls using hypothetical stress 
scenarios and reverse stress testing of liquid resources.
---------------------------------------------------------------------------

     whether these rules and procedures indicate the covered 
clearing agency's process to replenish any liquidity resources it may 
employ during a stress event, so that it can continue to operate in a 
safe and sound manner.

In addition, with respect to creditworthy commercial banks under Rule 
17Ad-22(a)(14), a covered clearing agency generally should assess the 
creditworthiness of its commercial banks, such as by considering their 
particular circumstances in which they operate and the markets which 
they service.
    With respect to assets convertible into cash under Rule 17Ad-
22(a)(14), the Commission notes that the mere ownership of assets that 
a covered clearing agency may consider readily available and 
convertible into cash--based on factors such as the historical volume 
of trading in a particular market for such asset--depending on the 
circumstances may not count towards its ``qualifying liquid resources'' 
unless one of the prearranged funding arrangements in place would allow 
the covered clearing agency to receive cash in a timely manner. With 
respect to the requirements for qualifying liquid resources more 
generally, the Commission notes that a covered clearing agency 
generally 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.\376\
---------------------------------------------------------------------------

    \376\ For purposes of complying with Rule 17Ad-22(e)(7)(ii), 
factors that may be relevant for a covered clearing agency to 
consider when defining its qualifying liquid resources could 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.
---------------------------------------------------------------------------

    With respect to Rule 17Ad-22(e)(7)(ii), the Commission notes that, 
for example, if payment obligations were denominated in U.S. dollars, 
the minimum liquidity resource requirement would refer to a U.S. dollar 
amount.
    With respect to Rule 17Ad-22(e)(7)(iii) and access to routine 
credit at a central bank, the Commission notes that a covered clearing 
agency is not required to use central bank account services but, 
rather, is required to establish, implement, maintain and enforce 
written policies and procedures reasonably designed facilitate such use 
when available and practical. As noted above, whether the services are 
available or considered to be practical may vary across 
jurisdictions.\377\ 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.
---------------------------------------------------------------------------

    \377\ The Commission notes that the term ``central bank'' is not 
limited to a Federal Reserve Bank. A covered clearing agency based 
in or operating outside of the United States that has access to 
routine credit at other central banks would be able to take this 
into consideration when assessing the amount of its qualifying 
liquid resources.
---------------------------------------------------------------------------

    With respect to Rule 17Ad-22(e)(7)(iv) and the policies and 
procedures for due diligence required thereunder, ``due diligence'' has 
the same meaning as is commonly understood by market participants. A 
covered clearing agency generally should not rely solely on 
representations made by a liquidity provider but instead should conduct 
an assessment of the liquidity provider's business, in light of the 
covered clearing agency's own business and the composition of its 
existing liquidity providers. Policies and procedures to develop a 
reasonable basis under Rule 17Ad-22(e)(7)(iv) could include 
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.
    With respect to Rule 17Ad-22(e)(7)(v), a covered clearing agency 
generally should test its access to liquidity resources by verifying 
that a liquidity provider is able to provide the relevant liquidity 
resources in the manner intended under the terms of a funding 
arrangement and without undue delay by, for example, promptly funding a 
draw on the covered clearing agency's credit facility. The Commission 
recognizes that testing procedures also could include test draws funded 
by the liquidity provider or tests of electronic connectivity between 
the covered clearing agency and the liquidity provider. Testing with 
liquidity providers may not always be practicable in the absence of 
committed liquidity arrangements. In addition, a covered clearing 
agency generally should conduct the testing not less than once every 
twelve months.

[[Page 70825]]

    With respect to Rule 17Ad-22(e)(7)(vii) and policies and procedures 
for performing the model validation not less than annually, a covered 
clearing agency generally should perform the model validation not less 
than once every twelve months.
    With respect to Rule 17Ad-22(e)(7)(viii) and foreseeable liquidity 
shortfalls, foreseeable liquidity shortfalls could include potential 
shortfalls that can be identified through testing a covered clearing 
agency's financial resources.\378\ 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 the covered clearing agency is unable to 
obtain liquidity pursuant to prearranged funding arrangements that are 
uncommitted.
---------------------------------------------------------------------------

    \378\ See supra note 375.
---------------------------------------------------------------------------

    With respect to Rule 17Ad-22(e)(7)(x), a covered clearing agency is 
not required to adopt a ``cover two'' standard for liquidity risk but 
is responsible for undertaking such an analysis at least once a year, 
pursuant to the covered clearing agency's policies and procedures under 
Rule 17Ad-22(e)(7)(x). In making any determination regarding the sizing 
of a covered clearing agency's liquid resources to exceed ``cover 
one,'' a covered clearing agency could consider, among other things, 
(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.
8. Rule 17Ad-22(e)(8): Settlement Finality
a. Proposed Rule
    As 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.\379\
---------------------------------------------------------------------------

    \379\ See CCA Standards proposing release, supra note 5, at 
29537-38.
---------------------------------------------------------------------------

b. Comments Received
    The Commission received no comments regarding the proposed rule.
c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(8) with one 
modification.\380\ To remove potential ambiguity as to the timing of 
settlement finality under the rule, the Commission is modifying Rule 
17Ad-22(e)(8) to state that the point at which settlement is final is 
``to be'' 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. As modified, Rule 17Ad-22(e)(8) identifies the point at 
which settlement is final, which must be defined in a covered clearing 
agency's written policies and procedures, and removes the potential 
ambiguity that could have allowed an alternative interpretation of the 
rule that did not clearly link the concept of settlement finality to 
``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.''
---------------------------------------------------------------------------

    \380\ See Rule 17Ad-22(e)(8), infra Part VI.
---------------------------------------------------------------------------

    Further, because the Commission recognizes that there may be a 
number of ways to address compliance with Rule 17Ad-22(e)(8), the 
Commission is providing the following guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures that address settlement finality:
     Whether its policies and procedures clearly define the 
point at which settlement is final;
     whether it completes final settlement no later than the 
end of the value date, and preferably intraday or in real time, to 
reduce settlement risk; and
     whether it clearly defines the point after which unsettled 
payments, transfer instructions, or other obligations may not be 
revoked by a participant.

In addition, clearly defining the point at which settlement is final 
might include adopting policies and procedures (i) establishing that a 
cut-off point after which unsettled payments, transfer instructions, or 
other obligations may not be revoked by a clearing member and (ii) 
providing clearing members with guidance regarding extensions for 
members with operating problems, such as the approval or duration of 
such extensions. Policies or procedures creating material uncertainty 
regarding when final settlement will occur or that 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 generally would 
not comply with Rule 17Ad-22(e)(8). With respect to policies and 
procedures requiring intraday or real-time finality to reduce risk, 
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 would be reasonable, 
whether in economic or other terms, to implement.
9. Rule 17Ad-22(e)(9): Money Settlements
    As 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 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 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.\381\
---------------------------------------------------------------------------

    \381\ See CCA Standards proposing release, supra note 5, at 
29538-39.
---------------------------------------------------------------------------

    The Commission received no comments regarding the proposed rule and 
is adopting it as proposed.\382\ Because the Commission recognizes that 
there may be a number of ways to address compliance with Rule 17Ad-
22(e)(9), the Commission is providing the following guidance that a 
covered clearing agency generally should consider in establishing and 
maintaining policies and procedures that address money settlements:
---------------------------------------------------------------------------

    \382\ See Rule 17Ad-22(e)(9), infra Part VI.
---------------------------------------------------------------------------

     Whether it conducts its money settlements in central bank 
money, where practical and available, to avoid credit and liquidity 
risks;
     if it does not use central bank money, whether it conducts 
its money settlements using a settlement asset with little or no credit 
or liquidity risk;

[[Page 70826]]

     if it settles in commercial bank money, whether it 
monitors, manages, and limits its credit and liquidity risks arising 
from commercial settlement banks by, for example, establishing and 
monitoring adherence to strict criteria for its settlement banks that 
take account of, among other things, their regulation and supervision, 
creditworthiness, capitalization, access to liquidity, and operational 
reliability, and whether it monitors and manages the concentration of 
credit and liquidity exposures to its commercial settlement banks;
     if it conducts money settlements on its own books, whether 
it minimizes and strictly controls its credit and liquidity risks; and
     whether its legal agreements with any settlement banks 
state clearly when transfers on the books of individual settlement 
banks are expected to occur, that transfers are to be final when 
effected, and that funds received are transferable as soon as possible 
at a minimum by the end of the day, and ideally intraday, to enable the 
covered clearing agency and its participants to manage credit and 
liquidity risks.

While Rule 17Ad-22(e)(9) would permit a covered clearing agency to use 
multiple settlement banks to monitor and manage concentration of 
payments among its commercial settlement banks, in such circumstances 
its policies and procedures generally should 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.
    In addition, the Commission believes that a covered clearing agency 
generally should consider using commercial bank money only when central 
bank money is not practicable or available. In some cases, the use of 
central bank money may not be practical because direct access to 
central bank accounts and payment services may not be available to all 
clearing agencies or members in all circumstances. For example, when a 
covered clearing agency operates in multiple currencies, certain 
central bank accounts may not be operational at the time money 
settlements occur.
10. Rule 17Ad-22(e)(10): Physical Delivery Risks
    As 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.\383\
---------------------------------------------------------------------------

    \383\ See CCA Standards proposing release, supra note 5, at 
29539-40.
---------------------------------------------------------------------------

    The Commission received no comments regarding the proposed rule and 
is adopting it as proposed.\384\ Because the Commission recognizes that 
there may be a number of ways to address compliance with Rule 17Ad-
22(e)(10), the Commission is providing the following guidance that a 
covered clearing agency generally should consider in establishing and 
maintaining policies and procedures that address physical delivery 
risks:
---------------------------------------------------------------------------

    \384\ See Rule 17Ad-22(e)(10), infra Part VI.
---------------------------------------------------------------------------

     Whether its rules clearly state its obligations with 
respect to the delivery of physical instruments or commodities; and
     whether it has identified, monitored, and managed the 
risks and costs associated with the storage and delivery of physical 
instruments or commodities.

The Commission notes that practices regarding physical delivery vary 
based on the types of assets that a covered clearing agency settles. 
Nevertheless, a covered clearing agency generally should consider 
having policies and procedures that state clearly which asset classes 
it accepts for physical delivery and the procedures surrounding the 
delivery of each. In addition, physical delivery may require the 
involvement of multiple parties, including the clearing agency itself, 
its members, customers, custodians, and transfer agents. In particular, 
a covered clearing agency generally should consider having policies and 
procedures that address its relationship with transfer agents generally 
and, in particular, with respect to instructions for deposit and 
withdrawal at a custodian.
    A covered clearing agency could employ several different 
arrangements pursuant to the requirements of Rule 17Ad-22(e)(10). For 
example, if a covered clearing agency takes physical delivery of 
securities from its members in return for payments of cash, then it 
generally should inform its members of the extent of the clearing 
agency's obligations to make payment. A covered clearing agency 
generally should employ policies and procedures that clearly state any 
obligations it incurs to members for losses incurred in the delivery 
process. Policies and procedures generally should also 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. Such policies and 
procedures can help mitigate operational risks associated with physical 
deliveries by including provisions to review and assess the 
qualifications of potential employees, including, among other things, 
reference and background checks and employee training. Such policies 
and procedures could also relate to theft, loss, counterfeiting, 
deterioration of or damage to assets, and employee duties for the 
recordkeeping for and holding of physical assets.
11. Rule 17Ad-22(e)(11): CSDs
a. Proposed Rule
    As proposed, Rule 17Ad-22(e)(11)(i) would require a covered 
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 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. Proposed Rule 17Ad-
22(e)(11)(ii) would require a covered clearing agency that provides CSD 
services 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, prevent the unauthorized creation or deletion of securities, 
and conduct periodic and at least daily reconciliation of securities 
issues it maintains. Finally, proposed Rule 17Ad-22(e)(11)(iii) would 
require a covered clearing agency that provides CSD services 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.\385\
---------------------------------------------------------------------------

    \385\ See CCA Standards proposing release, supra note 5, at 
29540-43.
---------------------------------------------------------------------------

b. Comment Received and Commission Response
    The Commission received one comment regarding proposed Rule 17Ad-
22(e)(11). The commenter expressed concern that the language in 
proposed Rule 17Ad-22(e)(11)(i), which requires the policies and 
procedures of a covered clearing agency providing

[[Page 70827]]

CSD services to be reasonably designed to ensure the integrity of 
securities issues, differs materially from PFMI Principle 11 and FRB's 
Regulation HH, both of which require that an entity ``help'' ensure the 
integrity of securities issues.\386\ The commenter also expressed the 
concern that no covered clearing agency is in a position to guarantee 
the integrity of the securities.\387\ As a result, the commenter urged 
the Commission to include the words ``to help'' before ``ensure,'' to 
avoid any interpretation that clearing agencies providing CSD services 
are held to a materially higher standard than the commenter believes is 
the Commission's intention.\388\ In the alternative, the commenter 
proposed the substitution of another phrase (e.g., ``to promote'' or 
``to protect'') that accurately characterized the cooperative nature of 
CSDs.\389\
---------------------------------------------------------------------------

    \386\ See DTCC at 7 (emphasis in original).
    \387\ See id. at 7.
    \388\ See id. at 8.
    \389\ See id.
---------------------------------------------------------------------------

    In response to the comment received, the Commission notes that the 
rule text does not require a covered clearing agency to ensure or 
guarantee the integrity of securities issues; rather, Rule 17Ad-
22(e)(11) requires policies and procedures reasonably designed to 
ensure the integrity of securities issues. The Commission believes that 
the policies and procedures nature of the rule mitigates the concern 
raised by the commenter because the rule requires a covered clearing 
agency to ensure that its policies and procedures are reasonably 
designed to ensure the integrity of securities issues and it does not 
require a covered clearing agency to ensure the integrity of securities 
issues. The Commission is not modifying proposed Rule 17Ad-22(e)(11) to 
add the words ``to help'' before ``ensure'' because, in the 
Commission's view, such an addition would inappropriately weaken the 
rule. Although the rule does not require a guarantee of the integrity 
of securities issues, the rule does require reasonably designed 
policies and procedures. Rule 17Ad-22(e)(11) recognizes that reasonably 
designed policies and procedures with respect to the integrity of 
securities issues is important for investor protection. In this regard, 
the Commission believes that such policies and procedures generally 
should be designed to prohibit overdrafts and debit balances in 
securities accounts, which can create unauthorized issuances of 
securities that undermine the integrity of the covered clearing 
agency's services.
c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(11) as proposed.\390\ 
Because the Commission recognizes that there may be a number of ways to 
address compliance with Rule 17Ad-22(e)(11), the Commission is 
providing the following guidance that a covered clearing agency 
generally should consider in establishing and maintaining policies and 
procedures that address CSD services:
---------------------------------------------------------------------------

    \390\ See Rule 17Ad-22(e)(11), infra Part VI.
---------------------------------------------------------------------------

     Whether it has appropriate rules, procedures, and 
controls, including robust accounting practices, to safeguard the 
rights of securities issuers and holders, to prevent the unauthorized 
creation or deletion of securities, and to conduct periodic and at 
least daily reconciliation of the securities it maintains;
     whether it prohibits overdrafts and debit balances in 
securities accounts;
     whether it maintains securities in an immobilized or 
dematerialized form for their transfer by book entry and, where 
appropriate, whether it provides incentives to immobilize or 
dematerialize securities;
     whether it protects assets against custody risk through 
appropriate rules and procedures consistent with its legal framework;
     whether it employs a robust system that ensures 
segregation between its own assets and the securities of its 
participants and segregation among the securities of participants; and
     whether it identifies, measures, monitors, and manages its 
risks from other activities that it may perform and whether additional 
tools may be necessary to address such risks.

In addition, the Commission notes that Rule 17Ad-22(e)(11)(i) is not 
intended to prohibit a covered clearing agency from continuing to hold 
physical certificates on behalf of its members where such securities 
currently exist in paper form or from providing other custody-only 
services.\391\ The Commission's rules do not prohibit, and in some 
respects contemplate, the issuance of securities certificates. For 
example, Rule 17Ad-22(e)(11)(i) would not prohibit a covered clearing 
agency from holding American depositary shares in custody.\392\
---------------------------------------------------------------------------

    \391\ For example, the Commission understands that, in the 
United States, CSD services currently include the provision of 
custody-only services, in addition to book-entry transfer and 
related services that may also include providing custody.
    \392\ An American depositary receipt (``ADR''), whether in a 
program sponsored or unsponsored by a foreign issuer, is the 
physical certificate that evidences American depositary shares, 
which represent an ownership interest in a specified number of 
securities of a foreign issuer that have been deposited with a 
depositary. See Securities Act Release No. 33-6894 (May 23, 1991) 56 
FR 24420, 24421 n.5 (May 30, 1991). The shares of a foreign issuer 
that underlie an ADR are usually held by a custodian appointed by 
the depositary in the country of incorporation of the foreign 
issuer, may be in paper certificate form, and may be in the ultimate 
custody of the CSD.
---------------------------------------------------------------------------

    The Commission also notes that the custody risk described in Rule 
17Ad-22(e)(11)(iii) may be related to both physical delivery risk and 
operational risk, the latter including risks such as theft, loss, 
counterfeiting, and deterioration or damage to assets. To mitigate such 
risks, a covered clearing agency could consider obtaining insurance 
coverage to help ensure that (i) records of securities held in custody 
accurately reflect holdings, and (ii) employee duties for the 
recordkeeping and holding of securities are separate and discrete 
duties. The Commission notes that dematerialization of securities alone 
does not eliminate the applicability of any requirements to protect 
against custody risk and instead may create new sources of risk, such 
as hacking or digital piracy.
12. Rule 17Ad-22(e)(12): Exchange-of-Value Settlement Systems
    As proposed, Rule 17Ad-22(e)(12) would require a covered clearing 
agency, for transactions that involve 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, regardless of whether the covered clearing 
agency settles on a gross or net basis and when finality occurs.\393\
---------------------------------------------------------------------------

    \393\ See CCA Standards proposing release, supra note 5, at 
29543-44.
---------------------------------------------------------------------------

    In response to a request for comment as to whether there are 
circumstances where it is not feasible or practicable, in an exchange-
of-value settlement context, to ensure that the settlement of one 
obligation is final if and only if the settlement of the corresponding 
obligation is final, the Commission received one comment. The commenter 
stated that such a situation occurs when the settlement of a CDS 
contract occurs following a credit event.\394\ In this case, the 
commenter stated that there may be some non-delivery versus payment 
obligations to be settled, such as loans, and that at least one CCP has 
policies and procedures to address this situation to secure settlement. 
The commenter expressed the belief that Rule 17Ad-

[[Page 70828]]

22(e)(12) should encompass this situation.\395\
---------------------------------------------------------------------------

    \394\ See LCH at 4.
    \395\ See id. at 4-5.
---------------------------------------------------------------------------

    In response, the Commission notes that the commenter has not 
described a linked obligation as contemplated under Rule 17Ad-
22(e)(12), such as the delivery of securities against payment of either 
cash or securities in connection with the purchase or sale of a 
security, because the commenter has described a non-delivery versus 
payment obligation. The Commission therefore believes that the comment 
is not within the scope of the settlement mechanisms contemplated by 
Rule 17Ad-22(e)(12). While the Commission believes that a covered 
clearing agency generally should have policies and procedures to 
address ``free-of-payment'' deliveries or the settlement of non-
delivery versus payment obligations if it accepts non-delivery versus 
payment obligations, Rule 17Ad-22(e)(12) addresses settlement 
mechanisms that eliminate principal risk by ensuring that the final 
settlement of one obligation occurs if and only if the final settlement 
of the linked obligation occurs.
    The Commission also notes that Rule 17Ad-22(e)(8) requires a 
covered clearing agency to have policies and procedures to define the 
point at which settlement is final. Where a covered clearing agency's 
policies and procedures for ensuring settlement finality apply only 
when settlement of the corresponding obligation is final, the covered 
clearing agency may wish to consider corresponding policies and 
procedures that address legal, contractual, operational, and other 
risks.
    The Commission is adopting Rule 17Ad-22(e)(12) as proposed.\396\
---------------------------------------------------------------------------

    \396\ See Rule 17Ad-22(e)(12), infra Part VI.
---------------------------------------------------------------------------

13. Rule 17Ad-22(e)(13): Participant-Default Rules and Procedures
a. Proposed Rule
    As 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. 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. 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. Finally, 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 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.\397\
---------------------------------------------------------------------------

    \397\ See CCA Standards proposing release, supra note 5, at 
29544-46.
---------------------------------------------------------------------------

b. Comments Received and Commission Response
i. Limitations on Replenishment of Resources
    One commenter stated that the Commission's rule should explicitly 
require that replenishment of resources through compulsory means (such 
as assessments on clearing members) be subject to a well-defined 
cap.\398\ The Commission is declining to modify Rule 17Ad-22(e)(13) to 
impose a ``cap'' on the replenishment of resources by a covered 
clearing agency. Consideration of whether a cap is appropriate depends 
on a number of factors related to the covered clearing agency's 
recovery plan as a whole and cannot be viewed in isolation, including, 
in particular, what measures a covered clearing agency could implement 
in the event that a covered clearing agency experienced losses that 
exceeded the ``cap.'' Given this uncertainty and that each covered 
clearing agency is structured and operated differently, and that 
collectively they clear different products with different risk profiles 
and employ different default management procedures, the Commission 
believes that a cap may not be appropriate in all circumstances and 
could potentially increase, rather than decrease, systemic risk because 
it may impede the covered clearing agency's ability to replenish 
resources to cover losses in the event of a participant default.\399\
---------------------------------------------------------------------------

    \398\ See ISDA at 4.
    \399\ See infra Part III.B.3.a.viii (discussing the economic 
effects of Rule 17Ad-22(e)(13)).
---------------------------------------------------------------------------

    As a general matter, the Commission also believes that the 
commenters' recommendation would be inconsistent with the principles-
based approach set forth in Rule 17Ad-22(e).\400\ The Commission 
believes that establishing prescriptive standards (such as a cap) that, 
on an absolute and ex ante basis, prohibit a covered clearing agency's 
use of particular tools for replenishment would make it more difficult 
for a covered clearing agency to maintain an appropriate balance 
between affording its participants predictability and certainty, and 
ensuring that the covered clearing agency can effectively manage risk. 
The Commission also notes that policies and procedures related to such 
caps or other alternative approaches to limitations on the 
replenishment of resources would be related to the development of a 
covered clearing agency's recovery and wind-down plans under Rule 17Ad-
22(e)(3).\401\ The Commission has previously stated in Part 
II.C.3.b.iii above that, given the nature of recovery planning--as here 
with caps--such plans are likely to closely reflect the unique 
characteristics of the covered clearing agency and will vary depending 
on the products cleared. The Commission believes that these mechanisms 
under Rule 17Ad-22(e) would help a covered clearing agency to 
appropriately consider, review, and address the need for a cap on 
replenishment, pursuant to its governance arrangements.
---------------------------------------------------------------------------

    \400\ See supra Part II.B.
    \401\ See supra Part II.C.3.b.iii.
---------------------------------------------------------------------------

ii. Risks of Certain Loss Allocation and Limiting Participant Liability
    Two commenters recommended models for loss allocation to non-
defaulting customers of clearing members.\402\ One of these commenters 
urged the Commission to provide clarification and guidance that Rule 
17Ad-22(e)(13) would (i) ensure participant liability is limited, 
ascertainable, and manageable and (ii) require a covered clearing 
agency to adopt rules specifying and providing risk disclosure 
regarding so-called ``end of waterfall'' scenarios.\403\ The commenter 
stated that guidance is necessary to ensure that Rule 17Ad-22(e)(13) 
complements the requirements

[[Page 70829]]

of Rule 17Ad-22(b)(1),\404\ certain guidance in the Consultative 
Recovery Report,\405\ and a number of risk management practices 
relevant for participants of covered clearing agencies.\406\ In this 
regard, the commenter noted that participants are subject to single 
counterparty credit limits, certain accounting criteria for netting 
their positions cleared at a CCP, and regulatory capital 
requirements.\407\ The commenter also noted that such guidance is 
necessary to ensure that a covered clearing agency does not become a 
transmission mechanism for systemic risk. As a general matter, the 
commenter expressed opposition to any CCP risk management practice that 
constitutes an unpredictable and uncontrollable loss allocation 
arrangement or a restriction on participant withdrawal. For this 
purpose, the commenter asked the Commission to adopt the following 
clarification and guidance that: (i) A covered clearing agency must 
address the consequences of circumstances in which the covered clearing 
agency's credit losses upon the default of one or more participants 
exceed the resources designated to absorb such losses; (ii) a covered 
clearing agency may not provide for (1) the forced allocation of a 
defaulted portfolio to a non-defaulting participant other than through 
a successfully completed auction process or otherwise with the 
participant's agreement, (2) invoicing to non-defaulting participants 
of losses on cleared positions in the portfolio(s) of one or more 
defaulting participants or (3) non-voluntary tear-ups of previously 
matched and cleared positions; and (iii) a covered clearing agency must 
clearly specify the process for, and effective time of, withdrawal from 
participant status such that a participant may withdraw upon the later 
of (1) the closeout or transfer of all its positions and (2) a 
reasonable prior notice period, without subjecting such withdrawal to a 
discretionary or subjective approval requirement or subjecting the 
withdrawing participant to liability for increased exposures after the 
effective time of withdrawal.\408\ The remainder of the requested 
clarification and guidance would entail affording participants 
increased certainty regarding what exposures and obligations might 
arise where a CCP encounters an ``end of waterfall'' scenario. For this 
reason, the commenter also asked the Commission to clarify that a 
covered clearing agency may not redefine the economic terms of 
outstanding cleared contracts without a reasonable prior notice and 
transition period prior to effectiveness.\409\
---------------------------------------------------------------------------

    \402\ See The Clearing House at 4; Vanguard at 6-7.
    \403\ See The Clearing House at 4. With respect to these 
comments, the Commission understands an ``end of waterfall'' 
scenario to be a scenario where a covered clearing agency suffers 
losses that, due to the default of one or more participants, exceed 
in the aggregate the loss-absorbing resources in the covered 
clearing agency's default risk management waterfall.
    \404\ See 17 CFR 240.17Ad-22(b)(1). Rule 17Ad-22(b)(1) states 
that a clearing agency that performs CCP services shall establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to measure its credit exposures to its 
participants at least once a day and limit its exposures to 
potential losses from defaults by its participants under normal 
market conditions so that the operations of the clearing agency 
would not be disrupted and non-defaulting participants would not be 
exposed to losses that they cannot anticipate or control.
    \405\ See supra note 126.
    \406\ See The Clearing House at 4.
    \407\ See The Clearing House at 5.
    \408\ See id. at 6. The commenter has also sought clarification 
and guidance regarding emergency authority or decision-making at 
covered clearing agencies and disclosures regarding such decision-
making and participant-default rules and procedures. See The 
Clearing House at 6-7. These comments have been addressed separately 
in Parts II.C.2.b and II.C.23.b.
    \409\ See id. at 7.
---------------------------------------------------------------------------

    The second commenter urged the Commission to prohibit the use of 
non-defaulting customer initial, variation and excess margin to aid in 
the recovery of a covered clearing agency in the event of financial 
stress, such as from credit losses, liquidity shortfalls, or other 
losses.\410\ According to the commenter, in such a case losses would 
effectively be allocated to participants who have not contributed to 
the loss. The commenter contended that such exposure is not present in 
the OTC swaps market, where customer assets are protected in segregated 
custody accounts. The commenter also stated that participants have no 
means to assess and mitigate such risk, since they do not have 
transparency into the financial health and risk management practices of 
their fellow participants, security-based swap dealers, or the covered 
clearing agency itself. The commenter instead urged the Commission to 
consider the development of enhanced recordkeeping and reporting, 
enhanced oversight and compliance, enhanced risk management and 
mitigation, increased contributions by SBSDs and increased 
contributions to, and management of, the covered clearing agency 
guaranty fund.\411\
---------------------------------------------------------------------------

    \410\ See Vanguard at 6-7.
    \411\ See id. at 7.
---------------------------------------------------------------------------

    Much of the clarification and guidance sought by the commenters, in 
the Commission's view, would entail broad, ex ante prohibitions on a 
number of specific default management practices of CCPs, including the 
use of uncapped assessment authority, prohibitions on the use of non-
defaulting customer initial, variation, and excess margin to aid in 
recovery, forced allocations of defaulted clearing portfolios, 
invoicing back of losses arising from a defaulting participant's 
positions, and partial non-voluntary tear-ups of previously matched and 
cleared positions. As discussed further above,\412\ Rule 17Ad-22(e) 
does not prescribe a specific tool or arrangement to achieve its 
requirements. The Commission believes that when determining the content 
of its policies and procedures with respect to default management, each 
covered clearing agency must have the ability to enhance its policies 
and procedures to meet the evolving challenges and risks in the 
securities market that the covered clearing agency serves. Consistent 
with the goals sought by the commenters, the Commission has developed 
through the amendments to Rule 17Ad-22 and new Rule 17Ab2-2, an 
enhanced oversight and compliance framework that includes enhanced 
requirements for the policies and procedures of a covered clearing 
agency that govern financial risk management generally and, in 
particular, the risk management of guaranty or clearing funds. The 
Commission therefore is not adopting the changes sought by these 
commenters.
---------------------------------------------------------------------------

    \412\ See supra Part II.B.
---------------------------------------------------------------------------

    The Commission believes that each covered clearing agency generally 
should consider evaluating the strengths and weaknesses of respective 
tools so that the covered clearing agency can choose the set most 
appropriate for each relevant recovery scenario, including the sequence 
in which they should be used. As previously noted in Part II.C.13.b.i, 
ensuring that a covered clearing agency does not become a transmission 
mechanism for systemic risk means, in part, striking an appropriate 
balance between affording its participants predictability and 
certainty, on the one hand, and ensuring that the covered clearing 
agency can effectively manage risk so that it can effectively continue 
its risk mitigating function within the broader financial system, on 
the other. As a general matter, the Commission believes that striking 
such a balance can be difficult using broadly prescriptive standards 
that, on an absolute and ex ante basis, prohibit a covered clearing 
agency's application of certain risk management tools. Furthermore, 
particular requirements under Rule 17Ad-22(e) should not be viewed in 
isolation but instead should be considered holistically and in light of 
other requirements under the Exchange Act and the Clearing Supervision 
Act.
    The Commission believes that policies and procedures for 
participant default generally should be established,

[[Page 70830]]

maintained, and enforced pursuant to the covered clearing agency's 
governance process, which must be consistent with the requirements of 
Section 17A of the Exchange Act, Section 19 of the Exchange Act, and 
the rules and regulations thereunder, including Rule 19b-4. The 
individual topics raised by the commenters would have implications for 
the development of a covered clearing agency's recovery and wind-down 
plans; however, as noted in Part II.C.3.b.iii above in connection with 
the Commission's prior discussion of recovery and wind-down plans, the 
impact of such recovery tools the covered clearing agency's recovery 
and wind-down plan can only be considered in the context of the plan as 
a whole and not in isolation. The organizational and governance 
structures of covered clearing agencies vary, as do the composition of 
their members and the products they clear, and each is relevant to 
consideration of potential loss allocation mechanisms.
iii. Stakeholder Participation in Periodic Testing
    One commenter expressed concern that the requirement in proposed 
Rule 17Ad-22(e)(13)(iii) for policies and procedures to require 
participants and, where practicable, other stakeholders in the covered 
clearing agency to participate in periodic testing and review of its 
default procedures may be read to require a covered clearing agency to 
mandate the participation of all its participants in such tests.\413\ 
The commenter expressed concern that such a requirement would not be 
realistically achievable, of sufficient benefit to outweigh the time 
and costs, or appropriate given the sensitive nature of information 
involved in such tests. The commenter expressed the belief that covered 
clearing agencies can accomplish the objective of proposed Rule 17Ad-
22(e)(13)(iii) by methods other than mandating participation in annual 
closeout tests and requested discretion and flexibility to achieve such 
objective.\414\
---------------------------------------------------------------------------

    \413\ See DTCC at 8-9.
    \414\ See id.
---------------------------------------------------------------------------

    First, the Commission notes that the commenter provided no estimate 
of the time or costs of testing.\415\ More generally, the Commission 
notes that the testing requirements in proposed Rule 17Ad-
22(e)(13)(iii) are similar to requirements for members or participants 
to participant in business continuity and disaster recovery plans 
testing under Regulation SCI, and therefore registered clearing 
agencies are already subject to requirements for members to participate 
in such testing and have had to consider how to treat sensitive 
material in such testing. As with Rule 1004 of Regulation SCI, the 
Commission continues to believe that participation rates by members and 
participants in voluntary industry-led testing has generally been low, 
and that mandatory participation is the best means to achieve effective 
and coordinated testing with assured participation by the more 
significant members and participants.\416\ The Commission notes, 
however, that proposed Rule 17Ad-22(e)(13)(iii) does not specify that 
all participants in the clearing agency participate in every periodic 
test and review of its default procedures. A covered clearing agency 
may designate in its policies and procedures that certain participants, 
or certain categories of participants, be designated for participation 
in certain tests.
---------------------------------------------------------------------------

    \415\ See supra Part III.B.3.a.viii (discussing the economic 
effect of Rule 17Ad-22(e)(13)(iii)).
    \416\ See Regulation SCI adopting release, supra note 30, at 
72349.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(13) with one 
modification.\417\ As previously noted,\418\ the Commission is moving 
the requirements in proposed Rules 17Ad-22(e)(13)(i) and (ii) to Rules 
17Ad-22(e)(4)(viii) and (ix), respectively, to consolidate requirements 
for management of a covered clearing agency's default waterfall within 
a single rule. The Commission believes this modification improves 
consistency between Rules 17Ad-22(e)(4) and (7). Specifically, Rule 
17Ad-22(e)(4) includes requirements intended to facilitate the 
management of credit risk, and proposed Rules 17Ad-22(e)(13)(i) and 
(ii) include requirements to address the allocation of credit losses 
and the replenishment of funds. Similarly, Rule 17Ad-22(e)(7) includes 
requirements intended to facilitate the management of liquidity risk, 
and Rules 17Ad-22(e)(7)(viii) and (ix) include requirements to address 
liquidity shortfalls and replenish liquid resources. In contrast, Rule 
17Ad-22(e)(13) requires a covered clearing agency to have policies and 
procedures addressing its authority and operational capacity to take 
timely action to contain losses and liquidity demands, and proposed 
Rule 17Ad-22(e)(13)(iii) included requirements for the testing of 
default procedures. Accordingly, the rules have been reorganized.
---------------------------------------------------------------------------

    \417\ See Rule 17Ad-22(e)(13), infra Part VI.
    \418\ See supra Part II.C.4.c.
---------------------------------------------------------------------------

    Further, because the Commission recognizes that there may be a 
number of ways to address compliance with Rule 17Ad-22(e)(13), the 
Commission is providing the following guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures that address participant-default rules and 
procedures:
     Whether it has default rules and procedures that enable it 
to continue to meet its obligations in the event of a participant 
default and that address the replenishment of resources following a 
default;
     whether it is well prepared to implement its default rules 
and procedures, including any appropriate discretionary procedures 
provided for in its rules;
     whether it publicly discloses key aspects of its default 
rules and procedures;
     whether it involves its participants and other 
stakeholders in the testing and review of its default procedures, 
including any close-out procedures; and
     whether such testing and review is conducted at least 
annually or following material changes to the rules and procedures to 
ensure that the testing and review are practical and effective.

In addition, a covered clearing agency that has financial and 
operational triggers for default generally should clearly define these 
triggers.\419\ Where triggers are not automatic through the application 
of objective standards or thresholds, the Commission believes the 
discretion afforded a covered clearing agency to declare defaults 
should be clearly defined. 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.
---------------------------------------------------------------------------

    \419\ See Clearing Agency Standards, supra note 5, at 29544. 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. Rule 17Ad-22(e)(17) includes 
requirements related to operational risk management. See infra Part 
II.C.17. In addition, the Commission has also adopted Regulation 
SCI, which establishes requirements for SROs, among other entities, 
with respect to operational risk management. See supra note 30 and 
accompanying text.
---------------------------------------------------------------------------

    With respect to policies and procedures related to managing a 
participant default, the Commission believes that such policies and 
procedures generally should address, among other things (i) accessing 
credit facilities, (ii) managing (which may include hedging open 
positions and

[[Page 70831]]

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. Based on 
its supervisory experience, the Commission believes that default 
procedures would generally set forth (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 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).
    With respect to the operational capacity necessary to comply with 
requirements to contain losses, the Commission believes that the 
following measures could help promote 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.
    With respect to the policies and procedures for testing and review 
of default procedures, including any close-out procedures, a covered 
clearing agency generally should perform the testing and review not 
less than once every twelve months. In addition, a covered clearing 
agency generally should make efforts to secure the participation of all 
stakeholders in testing and review of default procedures, but the 
Commission recognizes that a covered clearing agency may have limited 
ability to require said participation by all such stakeholders in all 
circumstances.
14. Rule 17Ad-22(e)(14): Segregation and Portability
a. Proposed Rule
    As proposed, Rule 17Ad-22(e)(14) would apply only to a covered 
clearing agency that is either a security-based swap clearing agency or 
a complex risk profile clearing agency. Rule 17Ad-22(e)(14) 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.\420\
---------------------------------------------------------------------------

    \420\ See CCA Standards proposing release, supra note 5, at 
29546-47.
---------------------------------------------------------------------------

b. Comments Received and Commission Response
    The Commission received multiple comments on Rule 17Ad-22(e)(14) 
and, more generally, the Commission's regime for segregation and 
portability in the U.S. securities markets. While some commenters 
supported the Commission's proposed principles-based approach, a number 
of commenters expressed a preference for an approach that would 
prescribe, and in some instances mandate, a specific segregation and 
portability framework. In addition, two commenters sought clarification 
on certain aspects of the proposal relating to portability and 
protection of customer assets held at a common covered clearing agency 
participant. The Commission discusses these three groups of comments in 
turn below.
    One commenter strongly supported efforts to improve the protection 
of customer positions and collateral.\421\ Another commenter also 
expressed general support for the Commission's objective of protecting 
customer collateral posted in connection with clearing security-based 
swaps, and stated that the implementation of a regulatory structure 
that provided for appropriate protection of collateral would reduce 
systemic risk by bolstering confidence that losses related to 
counterparty risk would be manageable.\422\
---------------------------------------------------------------------------

    \421\ See OCC at 12.
    \422\ See Fidelity at 1.
---------------------------------------------------------------------------

    Several commenters, however, urged the Commission to modify the 
proposed rule's approach to the treatment of customer positions, 
particularly with respect to security-based swaps. Three commenters 
noted the importance of coordinating efforts with other regulators to 
ensure that the Commission's rules are consistent with other regulatory 
regimes.\423\ Two commenters expressed related concerns that the 
proposal could result in significantly weaker protections for security-
based swaps than exist in the OTC market or in the rules for cleared 
swaps adopted by the CFTC.\424\ Of these, one commenter opposed the 
Commission's approach of providing covered clearing agencies with 
discretion to adopt policies and procedures regarding holding of margin 
for security-based swaps.\425\ The commenter stated that the Commission 
should instead adopt a mandatory threshold level of protection for 
customer margin for security-based swaps that is consistent with the 
protections afforded to swaps and that is appropriate to the breadth 
and depth of the security-based swap market.\426\ Moreover, the same 
commenter, along with two other commenters, recommended that the 
Commission explicitly adopt the LSOC model as a framework for the 
segregation and portability of customer positions,\427\ and two of the 
three commenters also urged that the Commission's LSOC regime be 
mandatory and uniform.\428\
---------------------------------------------------------------------------

    \423\ See id. at 4-5 (noting CFTC requirements); LCH at 5 
(noting both CFTC requirements and requirements under EMIR); 
Vanguard at 2 (noting CFTC requirements).
    \424\ See Fidelity at 1-4; Vanguard at 2.
    \425\ See Vanguard at 4.
    \426\ See id. (referencing the objectives and principles for the 
risk management standards prescribed under 12 U.S.C. 5464(b)); see 
also supra note 18.
    \427\ See Fidelity at 1-4; ICI at 4, 6; Vanguard at 2.
    \428\ See ICI at 4; Fidelity at 3-4.
---------------------------------------------------------------------------

    In addition, one commenter that urged the Commission to adopt a 
specific LSOC mandate also expressed several other related comments. 
The commenter expressed the need for covered clearing agencies to 
provide individual segregation as an option for customers.\429\ The 
commenter also recommended that both initial and variation margin be 
passed on to the covered clearing agency, with all excess margin held 
in a segregated account (the ``LSOC with excess'' model).\430\ The 
commenter further expressed the belief that security-based swap dealers 
and broker-dealers should not be authorized to rehypothecate or use 
customer margin or excess margin in its

[[Page 70832]]

business.\431\ Finally, in conjunction with another commenter, this 
commenter also submitted a second comment letter noting that, to 
implement LSOC for security-based swap positions, the Commission would 
need to undertake several initiatives in addition to revising Rule 
17Ad-22(e)(14), including amending rules under SIPA, revising proposed 
Rule 18a-4 under the Exchange Act, amending Rule 15c3-3 under the 
Exchange Act, and permanently extending the relief provided in the 
Portfolio Margining order.\432\
---------------------------------------------------------------------------

    \429\ See ICI at 12-13.
    \430\ See id. at 4-5.
    \431\ See id. at 5. Because the commenter's recommendation would 
govern the activities of security-based swap dealers and broker-
dealers, the Commission notes that it is beyond the scope of Rule 
17Ad-22.
    \432\ See AMG-ICI at 8-12. The commenter also noted that the 
adoption of a sound and workable segregation regime is essential to 
ensure that counterparties are protected in bankruptcy. See ICI at 
11-12. The Commission agrees that the development of a covered 
clearing agency's segregation and portability regime should consider 
the operational and bankruptcy implications of such a regime. The 
Commission also notes that the tools available to a covered clearing 
agency considering such implications will necessarily depend on the 
legal regime applicable to the covered clearing agency. The 
commenter recommended that the Commission articulate in a proposal 
the operational and bankruptcy implications of such a structure to 
provide market participants the opportunity to comment on these 
issues. See id. at 4. The Commission believes, however, that the 
operational and bankruptcy implications will depend on the 
particular tools that a covered clearing agency employs in its 
segregation and portability regime and also on the legal regimes 
within which the covered clearing agency operates. Because the 
Commission is taking a principles-based approach in Rule 17Ad-22(e), 
the Commission is not making such a proposal under Rule 17Ad-22(e).
---------------------------------------------------------------------------

    After careful consideration, the Commission declines to modify Rule 
17Ad-22(e)(14) to explicitly prescribe or mandate the segregation and 
portability frameworks described immediately above. The Commission 
notes that Rule 17Ad-22(e)(14) provides covered clearing agencies with 
flexibility, subject to their obligations and responsibilities as SROs 
under the Exchange Act, to determine policies and procedures with 
respect to the means of segregation and portability consistent with the 
rule. Furthermore, in contrast with the views expressed by the 
commenters above, the Commission believes that Rule 17Ad-22(e)(14) 
already requires a mandatory threshold level of protection for customer 
margin for security-based swaps similar to the threshold level of 
protection for swaps because it requires policies and procedures 
reasonably designed to both (i) 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, and 
(ii) protect such positions and related collateral from the default or 
insolvency of that participant.
    The Commission believes that prescribing the particular frameworks 
identified by the commenters would be inconsistent with the 
Commission's principles-based approach to Rule 17Ad-22(e).\433\ 
Although a tool or method like LSOC might be appropriate for a covered 
clearing agency operating in certain domestic markets to meet the 
requirements of Rule 17Ad-22(e)(14), in other markets other tools or 
methods, such as an individual segregation method, may also provide the 
threshold level of protection sought by the commenters while being 
consistent with the rule. Moreover, in contrast to the markets for cash 
and listed options in the United States, where the structure for 
segregation and portability is primarily maintained at the broker-
dealer level,\434\ in the market for security-based swaps the 
segregation and portability structure resides in CCPs, and those 
entities have taken different approaches reflective of the needs of 
their different structures, members, markets served, and products 
cleared. For example, the Commission notes that one commenter 
understood Rule 17Ad-22(e)(14) to permit a covered clearing agency to 
employ either an LSOC model, consistent with the requirements set forth 
by the CFTC, or an individual segregation model, consistent with 
EMIR.\435\ Accordingly, the Commission does not believe, as requested 
by the commenters, that the Commission should mandate LSOC on a uniform 
basis across security-based swap and complex risk profile clearing 
agencies.
---------------------------------------------------------------------------

    \433\ See supra Part II.A.4.
    \434\ 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 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); 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).
    \435\ See LCH at 5.
---------------------------------------------------------------------------

    Notwithstanding its decision not to adopt an approach that 
prescribes or mandates a specific portability and segregation 
framework, the Commission notes that it has been mindful of the 
existing structures for segregation and portability for security-based 
swaps in the United States, and has granted relief intended to allow 
investors to participate in the market for security-based swaps. 
Notably, the Commission has issued an order granting conditional 
exemptive relief from compliance with certain provisions of the 
Exchange Act in connection with a program to commingle and portfolio 
margin customer positions in cleared credit default swaps, which 
include both swaps and security-based swaps, in a segregated account 
established and maintained in accordance with Section 4d(f) of the 
Commodity Exchange Act.\436\ In this regard, the Commission observes 
that the individual segregation method is one tool that provides a

[[Page 70833]]

threshold level of protection to customers and may be a tool that a 
covered clearing agency determines to employ consistent with the 
requirements of Rule 17Ad-22(e)(14). The Commission also observes that 
under the ``LSOC with excess'' model, customer margin is segregated 
from clearing member margin, and therefore that framework, like LSOC 
and individual segregation as previously described, is also a tool that 
may also be relevant to a covered clearing agency's consideration of 
how to implement a framework consistent with the requirements of Rule 
17Ad-22(e)(14).
---------------------------------------------------------------------------

    \436\ See Exchange Act Release No. 34-68433 (Dec. 14, 2012), 77 
FR 75211 (Dec. 19, 2012) (``Portfolio Margining order'').
---------------------------------------------------------------------------

    In addition, the Commission received two comments that asked the 
Commission to clarify certain aspects of Rule 17Ad-22(e)(14). One 
commenter noted that there could be tension between the competing goals 
of (i) customer portability and (ii) the need for a covered clearing 
agency to ensure the safety and soundness of itself and the 
markets.\437\ The commenter urged the Commission to recognize the need 
for a covered clearing agency to balance these competing priorities and 
to avoid any interpretation of proposed Rule 17Ad-22(e)(14) that 
prohibits a covered clearing agency from liquidating positions, 
including customer positions, where liquidation is reasonably necessary 
for the protection of the covered clearing agency.\438\ In response, 
the Commission believes that efforts to enable portability at security-
based swap clearing agencies should be encouraged, but the Commission 
also recognizes that non-defaulting clearing members should not be 
required to take on customer positions to avoid putting the non-
defaulting clearing member at risk, exceeding the member's ability to 
risk manage the customer's portfolio, or existing or creating 
inconsistencies with the member's risk profile. If a customer's 
positions cannot be ported, they will instead be liquidated. Therefore, 
the Commission does not believe the comment is inconsistent with either 
current practice or Rule 17Ad-22(e)(14), which does not prohibit the 
liquidation of customer positions in the event porting would be 
impracticable, contrary to the customer's preferences, or pose 
increased risk to the markets or non-defaulting members.
---------------------------------------------------------------------------

    \437\ See OCC at 12.
    \438\ See id.
---------------------------------------------------------------------------

    A second commenter stated that the proposed rule is silent on the 
issue of protections from fellow-customer risk (i.e., protecting the 
positions and related collateral of a participant's customers from 
losses associated with the positions of other customers of that 
participant), and that Section 3E(e) of the Exchange Act prohibits 
clearing agencies from using deposited property as belonging to any 
person other than the swaps customer of the depositing broker, dealer, 
or security-based swap dealer.\439\ The commenter recommended that the 
Commission make explicit that a covered clearing agency's policies and 
procedures must give effect to Section 3E(e) and that the covered 
clearing agency should publicly disclose the manner in which its 
procedures do so.\440\ In response, the Commission notes that Section 
3E(e) of the Exchange Act already prohibits such activity and, 
therefore any proposed rule change under Rule 19b-4 would need to be 
consistent with Section 3E(e).
---------------------------------------------------------------------------

    \439\ See ISDA at 5.
    \440\ See id. at 5-6.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(14) as proposed. The 
Commission is applying Rule 17Ad-22(e)(14) only to security-based swap 
clearing agencies and complex risk profile clearing agencies because 
existing rules for the cash securities and listed options markets 
applicable to broker-dealers already promote segregation and 
portability to protect customer positions and funds in those markets. 
In proposing Rule 17Ad-22(e)(14), the Commission noted that it intended 
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 CCP or CSD services play a central 
role.\441\ This approach is consistent with the PFMI.
---------------------------------------------------------------------------

    \441\ See CCA Standards proposing release, supra note 5, at 
29546.
---------------------------------------------------------------------------

    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; \442\ (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 (iii) the clearing 
agency has no recourse to funds of customers of members. Therefore, 
neither portability nor segregation occur as a practical matter at the 
CCP level under the current market structure for cash securities and 
listed options.\443\ Further, customer positions and funds in the cash 
securities and listed options markets are protected under the 
Securities Investor Protection Act of 1970 (``SIPA'').\444\
---------------------------------------------------------------------------

    \442\ 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).
    \443\ See CCA Standards proposing release, supra note 5, at 
29546.
    \444\ 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.
---------------------------------------------------------------------------

    With respect to portability, the Commission notes the portability 
requirement in Rule 17Ad-22(e)(14) would not apply only upon a member 
default; instead, a covered clearing agency to which Rule 17Ad-
22(e)(14) applies generally 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. Under Rule 17Ad-22(e)(14), a 
security-based swap clearing agency or complex risk profile clearing 
agency generally should structure its portability arrangements in a way 
that makes it highly likely that the positions and collateral of a 
defaulting member's customers could be effectively transferred to one 
or more other members.
    Consistent with its response to the commenters discussed above, the 
Commission recognizes that there may be a number of ways to address 
compliance with Rule 17Ad-22(e)(14). Therefore, the Commission is 
providing the following guidance that a covered clearing agency subject 
to Rule 17Ad-22(e)(14) generally should consider in establishing and 
maintaining policies and procedures for segregation and portability:
     Whether it has, at a minimum, segregation and portability 
arrangements that effectively protect a participant's customers' 
positions and related collateral from the default or insolvency of that 
participant;
     if it additionally offers protection of such customer 
positions and collateral against the concurrent default of the 
participant and a fellow customer, whether it takes steps to ensure 
that such protection is effective;

[[Page 70834]]

     whether it employs an account structure that enables it 
readily to identify positions of a participant's customers and to 
segregate related collateral, and whether it maintains customer 
positions and collateral in individual customer accounts or in omnibus 
customer accounts;
     whether it structures its portability arrangements in a 
way that makes it highly likely that the positions and collateral of a 
defaulting participant's customers will be transferred to one or more 
other participants;
     whether it discloses its rules, policies, and procedures 
relating to the segregation and portability of a participant's 
customers' positions and related collateral, and, in particular, 
whether it discloses whether customer collateral is protected on an 
individual or omnibus basis; and
     whether it discloses any constraints, such as legal or 
operational constraints, that may impair its ability to segregate or 
port a participant's customers' positions and related collateral.
15. Rule 17Ad-22(e)(15): General Business Risk
a. Proposed Rule
    As 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 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.\445\ 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. 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). 
Additionally, proposed Rule 17Ad-22(e)(15)(ii) would require 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.\446\ 
Finally, proposed Rule 17Ad-22(e)(15)(iii) would 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.\447\
---------------------------------------------------------------------------

    \445\ See CCA Standards proposing release, supra note 5, at 
29547-48.
    \446\ See id. at 29548-49.
    \447\ See id. at 29549.
---------------------------------------------------------------------------

b. Comments Received
    Most commenters expressed general support for the Rule 17Ad-
22(e)(15), but a number of commenters also raised specific areas of 
concern and encouraged the Commission to adopt specific, and in some 
cases prescriptive, requirements under the rule. The Commission 
addresses each of these comments in turn below.
i. General Comments
    One commenter expressed support for the proposed requirements for 
clearing agencies to identify and monitor general business risk, manage 
liquid assets, and maintain a viable plan for raising additional equity 
when needed.\448\ The commenter believed that such requirements 
contribute to avoiding disruptions in the operations of clearing 
agencies, as well as the broader market. The commenter also expressed 
support for the proposed rule's requirements to identify, monitor and 
manage general business risk and to hold sufficient liquid assets in a 
manner allowing for a recovery or orderly wind-down if necessary.\449\ 
A second commenter expressed support for the proposed requirement that 
covered clearing agencies hold sufficient capital to cover potential 
general business and operational losses and to enable continuation of 
business operations and noted a belief that six months of operating 
expenses is an appropriate base level of funding.\450\ A third 
commenter generally endorsed the Commission's proposal to require a 
covered clearing agency to maintain liquid net assets sufficient to 
allow the covered clearing agency to continue to operate for no less 
than six months.\451\ A fourth commenter also generally supported the 
Commission's proposal.\452\ Finally, one commenter requested that the 
Commission phase-in implementation of Rule 17Ad-22(e)(15),\453\ and 
that comment is addressed in Part II.G above.
---------------------------------------------------------------------------

    \448\ See CFA Institute at 1-2.
    \449\ See id. at 10.
    \450\ See DTCC at 9.
    \451\ See OCC at 13.
    \452\ See CFA Institute at 10.
    \453\ See OCC at 15 (noting that it would be in a position to 
comply with such requirement by no later than January 1, 2015).
---------------------------------------------------------------------------

ii. Application to Derivatives Clearing
    One commenter expressed concern that the proposed requirement would 
be inadequate to address the potential for general business losses 
incurred by a covered clearing agency that clears large quantities of 
bespoke swap and derivative instruments, and therefore the commenter 
urged the Commission to reassess whether clearing of bespoke 
instruments is appropriate in light of the potential problems in 
predicting the performance of such instruments during times of 
stress.\454\ The Commission notes that the purpose of proposing Rule 
17Ad-22(e) was not to reassess whether the clearing of bespoke 
instruments is appropriate, but to focus on the regulatory framework 
for the regulation of covered clearing agencies and address, among 
other things, governance and financial risk management. Therefore, the 
Commission believes that the comment is beyond the scope of this 
rulemaking.
---------------------------------------------------------------------------

    \454\ See CFA Institute at 10.
---------------------------------------------------------------------------

iii. Liquid Net Assets
    The Commission received multiple comments related to the liquid net 
assets required under Rule 17Ad-22(e)(15)(ii). One commenter stated 
that, in addition to pre-funded capital and guaranty funds, it should 
be clear, in advance, that clearing members (and not the FRB or 
taxpayers) stand behind the organization should it run into financial 
trouble.\455\ The Commission believes that Rule 17Ad-22(e), taken as a 
whole, already contemplates and addresses the commenter's concern. As 
previously noted, the rule requires policies and procedures reasonably 
designed to promote in a comprehensive way the resiliency of a covered 
clearing agency and, in particular, its ability to

[[Page 70835]]

withstand periods of market stress.\456\ The Commission notes as a 
general matter that the liquid net assets described in the rule should 
not be confused with the accounting term ``net liquid assets.'' For 
purposes of Rule 17Ad-22(e)(15)(ii), a covered clearing agency 
generally should consider liquid net assets to mean cash or highly 
liquid securities. When liquid net assets are funded by equity, a 
covered clearing agency generally should consider equity to mean common 
stock, disclosed reserves, and other related earnings. In addition, the 
Commission notes that Rule 17Ad-22(e)(3)(ii) separately requires 
policies and procedures for plans for recovery or orderly wind-down.
---------------------------------------------------------------------------

    \455\ See SRC at 2; see also supra note 284 and accompanying 
text.
    \456\ See supra notes 284-288 and accompanying text (discussing 
similar position from commenter regarding Rule 27Ad-22(e)(5)).
---------------------------------------------------------------------------

    Two commenters urged the Commission not to take too narrow a view 
of what sources of funding would be considered liquid net assets funded 
by equity under the proposed rule.\457\ The first commenter believed 
that in calculating its six-month liquid asset coverage, a CCP should 
be allowed to include projected revenues of the CCP over the same six-
month period, subject to an appropriate haircut.\458\ The commenter 
also requested that the Commission clarify that a buffer, such as a 
contingent capital arrangement requiring clearing members to contribute 
funds, should be considered an appropriate source of equity funding 
under the rule.\459\ On these two issues, the Commission believes that 
the commenter has identified policies and procedures that would not 
satisfy Rule 17Ad-22(e)(15). Among other things, Rule 17Ad-
22(e)(15)(ii) requires policies and procedures for holding liquid net 
assets funded by equity. If a covered clearing agency is relying on 
projected revenues or on obtaining liquid net assets through contingent 
arrangements, then the covered clearing agency is not holding liquid 
net assets funded by equity. The focus of Rule 17Ad-22(e)(15)(ii) is 
mitigating the risk that a covered clearing agency would be unable to 
perform its obligations as a going concern; to minimize such 
performance risk, the covered clearing agency must necessarily have 
assets that are readily available, such as cash reserves or cash 
equivalents. Projected revenues, like contingent funding mechanisms, do 
not provide certainty that a covered clearing agency can continue to 
perform its obligations when general business losses arise because the 
assets may be unavailable to satisfy business losses.
---------------------------------------------------------------------------

    \457\ See DTCC at 10; OCC at 13.
    \458\ See OCC at 14.
    \459\ See id.
---------------------------------------------------------------------------

    The same commenter and a second commenter also urged the Commission 
to clarify and broadly construe what constitutes equity capital to 
include noncumulative perpetual preferred stock, which would be 
permanently available.\460\ One of these commenters noted that such 
preferred stock constitutes additional tier 1 capital under the BCBS 
capital framework and expressed the belief that the elements of capital 
that constitute tier 1 capital should be permitted to count as equity 
under the proposed rule.\461\ In response, the Commission believes that 
the question of whether a particular noncumulative preferred stock 
would constitute equity capital would depend on the terms and 
conditions of each instrument and therefore such instruments would need 
to be assessed on a case-by-case basis. The Commission therefore 
declines to adopt the position urged by the commenter.
---------------------------------------------------------------------------

    \460\ See DTCC at 10; OCC at 14.
    \461\ See DTCC at 10-11.
---------------------------------------------------------------------------

    The same commenter further expressed an expectation that liquid net 
assets funded by equity would be calculated by comparing the clearing 
agency's shareholders equity to proprietary cash and liquid marketable 
securities and deducting unaffiliated third-party debt.\462\ The 
commenter believed that it is appropriate for a covered clearing 
agency, where it has significant shareholder equity, to be able to 
liquefy that equity via intercompany funding so long as the requisite 
amount of cash and/or liquid securities is held and maintained at the 
covered clearing agency level. The commenter also emphasized the role 
that holding company structures play in funding their affiliates, 
noting that the holding company may have broader access to financial 
markets to liquefy the equity base of their subsidiaries.\463\ The 
commenter argued that such financing would provide a high level of 
flexibility to meet a covered clearing agency's needs. In response to 
the commenter, the Commission is unable to opine on these particular 
calculations of the commenter's liquid net assets because the 
determination of whether a particular liquid net asset calculation 
meets the requirements of Rule 17Ad-22(e)(15)(ii) would need to be made 
on a detailed, case-by-case basis. The Commission would need to 
understand and evaluate, for example, the covered clearing agency's 
particular capital structure, the types of securities being held, the 
nature and extent of the covered clearing agency's debt holdings, the 
structure and elements of the intercompany funding arrangement 
described by the commenter, and the nature of the access that the 
holding company has to the relevant markets for the purposes of 
liquefying any subsidiary equity and how that access differs from that 
of the covered clearing agency.
---------------------------------------------------------------------------

    \462\ See id. at 10.
    \463\ See id.
---------------------------------------------------------------------------

    In response to the commenter's position regarding the role that a 
holding company structure may play in addressing the requirement of 
Rule 17Ad-22(e)(15), the Commission reiterates prior statements made 
above that the requirements of Rule 17Ad-22(e) apply to each covered 
clearing agency registered with the Commission. Therefore, for example, 
if a covered clearing agency's parent or holding company were to adopt 
a company-wide framework addressing the issues covered in Rule 17Ad-
22(e)(15), the covered clearing agency nevertheless would itself need 
to adopt or ratify those policies and procedures with respect to its 
own business to meet the requirements of Rule 17Ad-22(e)(15).\464\ As 
adopted, pursuant to Rule 17Ad-22(e)(15)(ii) each covered clearing 
agency is required 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.
---------------------------------------------------------------------------

    \464\ See supra Part II.C.3.c.
---------------------------------------------------------------------------

iv. Viable Plan To Raise Additional Equity
    With respect to the requirement for a covered clearing agency's 
policies and procedures to be reasonably designed to have a viable 
plan, updated annually, for raising additional equity when the covered 
clearing agency's equity falls below or close to the amount required by 
the proposed rule, one commenter believed that the proposed rule should 
require capital-raising to occur prior to a covered clearing agency 
approaching the required equity threshold.\465\ Otherwise, the 
commenter stated, the covered clearing agency may be unable to raise 
the needed equity due to market conditions.\466\ In response, the

[[Page 70836]]

Commission notes that Rule 17Ad-22(e)(15)(iii), as proposed, addresses 
the commenter's concern by requiring that the plan be viable when the 
covered clearing agency's equity falls below or close to the amount 
required by the proposed rule. However, the Commission is providing 
further guidance below to clarify its position further.
---------------------------------------------------------------------------

    \465\ See CFA Institute at 10.
    \466\ See id.
---------------------------------------------------------------------------

    Another commenter expressed the belief that an annual review of the 
plan for raising additional equity is unnecessary and that a biannual 
review is sufficient, provided that the plan is reviewed sooner should 
changes occur.\467\ The Commission continues to believe, however, that 
an annual review is an appropriate interval to help ensure that each 
covered clearing agency is mindful of changing market conditions. The 
Commission believes that, in a two-year window between biannual 
reviews, so much time passes that a covered clearing agency may find 
that market conditions have changed so significantly that a once-viable 
plan to raise additional equity is no longer viable. A yearly review 
cycle helps ensure that the covered clearing agency remains aware of 
changing market conditions, facilitating on an annual basis incremental 
updates to the plan in response to said changing market conditions. 
Further, the Commission believes that a covered clearing agency could 
adopt policies and procedures that provide for more frequent review in 
response to changing market conditions, and that such policies and 
procedures would help a covered clearing agency better react to periods 
of market stress. Therefore, the Commission has determined not to adopt 
the commenter's suggested approach.
---------------------------------------------------------------------------

    \467\ See DTCC at 11.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(15) as proposed. Because 
the Commission recognizes that there may be a number of ways to address 
compliance with Rule 17Ad-22(e)(15), the Commission is providing the 
following guidance that a covered clearing agency generally should 
consider in establishing and maintaining policies and procedures that 
address general business risk:
     Whether it has robust management and control systems to 
identify, monitor, and manage general business risks, including losses 
from poor execution of business strategy, negative cash flows, or 
unexpected and excessively large operating expenses;
     whether it holds liquid net assets funded by equity (such 
as common stock, disclosed reserves, or other retained earnings) so 
that it can continue operations and services as a going concern if it 
incurs general business losses;
     whether the amount of liquid net assets funded by equity 
it holds is determined by 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;
     whether it maintains a viable recovery or orderly wind-
down plan and holds sufficient liquid net assets funded by equity to 
implement this plan that, at a minimum, are funded by equity equal to 
at least six months of current operating expenses, in addition to 
resources held to cover participant defaults or other risks addressed 
by its financial resources;
     whether assets held to cover general business risk are 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
     whether it maintains a viable plan, approved by the board 
of directors and updated no less than annually, for raising additional 
equity should its equity fall close to or below the amount needed.
    With respect to Rule 17Ad-22(e)(15)(iii) and the policies and 
procedures for maintaining a viable plan, the Commission believes that 
a viable plan generally should enable the covered clearing agency to 
hold sufficient liquid net assets to achieve recovery or orderly wind-
down. Therefore, the Commission believes that a covered clearing 
agency's policies and procedures generally should define when a covered 
clearing agency's equity falls close to the amount required by the 
rule, so that the covered clearing agency has policies and procedures 
that clearly define when the covered clearing agency should initiate 
the plan to raise additional equity. In developing such policies and 
procedures, a covered clearing agency generally should consider and 
account for circumstances that may require a certain length of time 
before any plan can be implemented. For example, before obtaining 
shareholder approval to issue new shares, a covered clearing agency may 
need to call a special meeting subject to a notice period.
    In addition, with respect to the plan under Rule 17Ad-
22(e)(15)(iii) being approved by the board of directors and updated at 
least annually, the board of a covered clearing agency generally should 
perform the approval not less than once every twelve months.
16. Rule 17Ad-22(e)(16): Custody and Investment Risks
a. Proposed Rule
    As 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. Proposed Rule 17Ad-22(e)(16) would also require a 
covered clearing agency 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.
b. Comments Received and Commission Response
    The Commission received one comment on proposed Rule 17Ad-
22(e)(16), which generally sought consideration of more prescriptive or 
granular aspects to the Commission's approach.\468\ The commenter made 
several points about the proposed rule. First, the commenter noted that 
to mitigate the risks to participants from current CCP practices for 
participant collateral, including commingling, rehypothetication or 
title transfer arrangements, and investment practices, the Commission 
should provide additional guidance regarding the specific protections a 
covered clearing agency must employ to safeguard participants' 
collateral and invest such collateral in instruments with minimal 
credit, market, and liquidity risks.\469\ Moreover, the commenter 
stated its belief that house collateral is inadequately segregated, 
current investment practices expose members to unnecessary risk of 
loss, and CCP investment policies and practices expose members to 
interest rate and credit risk through investments in higher-risk and 
longer-term instruments, putting member principal at risk.\470\
---------------------------------------------------------------------------

    \468\ See The Clearing House at 3, 11-12.
    \469\ See id. at 3, 11.
    \470\ See id. at 11.
---------------------------------------------------------------------------

    The commenter stated that, due to commingling and inadequate 
traceability, participants' rights to the return of their collateral 
upon the insolvency of a CCP are often uncertain and could be 
impaired.\471\ The commenter also noted that some CCPs are permitted to 
rehypothecate participant securities collateral or to secure their 
investments using title

[[Page 70837]]

transfer arrangements, each of which exposes participants to potential 
loss due to the unavailability of participant collateral (or its 
liquidation value) in the CCP's insolvency.\472\
---------------------------------------------------------------------------

    \471\ See id.
    \472\ See id.
---------------------------------------------------------------------------

    For the purpose of minimizing investment risk and the risk of loss 
of participant collateral, the commenter recommended that the 
Commission confirm the applicability of the following protections with 
respect to a covered clearing agency's treatment of participant 
collateral:
     Limit a CCP's ability to encumber or impair participants' 
rights in guaranty fund contributions and initial margin posted to the 
CCP in support of proprietary positions.\473\
---------------------------------------------------------------------------

    \473\ See id. at 11-12.
---------------------------------------------------------------------------

     Specify standards for the establishment, designation, and 
maintenance of accounts for the safekeeping of participant collateral, 
and related requirements to ensure the treatment of such funds as 
belonging to the relevant participants in the event of the insolvency 
of the covered clearing agency and otherwise; \474\
---------------------------------------------------------------------------

    \474\ See id. at 12.
---------------------------------------------------------------------------

     Further specify the types of highly liquid investments 
(and, as applicable, eligible counterparties and issuers), and related 
concentration and weighted average maturity limits, applicable to the 
investment of participant collateral, as well as the capital of the 
covered clearing agency committed to the default waterfall; \475\
---------------------------------------------------------------------------

    \475\ See id.
---------------------------------------------------------------------------

     Prohibit the rehypothecation of non-cash collateral of 
non-defaulting participants and limit such rehypothecation in the case 
of a defaulting participant to circumstances where an immediate 
liquidation of the non-cash collateral would lead to severe asset value 
depreciation; \476\ and
---------------------------------------------------------------------------

    \476\ See id.
---------------------------------------------------------------------------

     Require to use pledged arrangements when taking 
collateral, except where title transfer arrangements are necessitated 
by applicable law.\477\
---------------------------------------------------------------------------

    \477\ See id.
---------------------------------------------------------------------------

    The commenter also recommended that the Commission specify a 
covered clearing agency's disclosure obligations with respect to its 
collateral investment activities, including the extent of reuse of 
participant collateral, eligible counterparties for collateral 
rehypothecation, the covered clearing agency or participant's rights to 
the collateral posted to it and the covered clearing agency's 
investment policies, balances, and concentrations.\478\
---------------------------------------------------------------------------

    \478\ See id.
---------------------------------------------------------------------------

    Much of the clarification and guidance sought by the commenter, in 
the Commission's view, would entail the imposition of prescriptive and 
granular requirements on covered clearing agencies with respect to 
their custody and investment risks. Such ex ante requirements would be 
inconsistent with the Commission's principles-based approach to Rule 
17Ad-22(e).\479\ Although it is possible that the commenter's 
suggestions could be appropriate in certain circumstances, the 
Commission believes that these comments do not take into account the 
variation among covered clearing agencies with respect to the different 
markets served, products cleared, and risk management needs. 
Nevertheless, the Commission believes that Rule 17Ad-22(e)(16) already 
encompasses the commenter's suggestions, and that many covered clearing 
agencies already employ and can continue to consider these suggestions 
when designing or revising policies and procedures under the rule. The 
Commission therefore believes that no modifications to Rule 17Ad-
22(e)(16) are necessary.
---------------------------------------------------------------------------

    \479\ See supra Part II.B.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(16) as proposed. Because 
the Commission recognizes that there may be a number of ways to address 
compliance with Rule 17Ad-22(e)(16), the Commission is providing the 
following guidance that a covered clearing agency generally should 
consider in establishing and maintaining policies and procedures that 
address custody and investment risk:
     Whether it holds its own and its participants' assets at 
supervised and regulated entities that have robust accounting 
practices, safekeeping procedures, and internal controls that fully 
protect these assets;
     whether it has prompt access to its assets and the assets 
provided by participants, when required;
     whether it evaluates and understands its exposures to its 
custodian banks, taking into account the full scope of its 
relationships with each;
     whether its investment strategy is consistent with its 
overall risk management strategy and fully disclosed to its 
participants; and
     whether its investments are secured by, or claims on, 
high-quality obligors, allowing for quick liquidation with little, if 
any, adverse price effect.
    The Commission also notes that 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 access these assets 
promptly. The Commission therefore believes that covered clearing 
agencies, in seeking to satisfying the requirements of Rule 17Ad-
22(e)(16), generally should 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. The 
Commission further notes that the rule does not require that a covered 
clearing agency invest its own and its participants' assets but that it 
have policies and procedures for investing such assets in instruments 
with minimal credit, market, and liquidity risks when it determines to 
so invest.
17. Rule 17Ad-22(e)(17): Operational Risk Management
a. Proposed Rule
    As 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. In proposing Rule 17Ad-22(e)(17), the 
Commission noted that 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.\480\
---------------------------------------------------------------------------

    \480\ See CCA Standards proposing release, supra note 5, at 
29551.
---------------------------------------------------------------------------

    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. Proposed Rule 17Ad-22(e)(17)(ii) would require a 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. Finally, proposed Rule 17Ad-22(e)(17)(iii) 
would require a covered clearing agency to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide for a

[[Page 70838]]

business continuity plan that addresses events posing a significant 
risk of disrupting operations.\481\
---------------------------------------------------------------------------

    \481\ See id.
---------------------------------------------------------------------------

b. Comments Received and Commission Response
    The Commission received one comment that generally supported the 
Commission's approach in Rule 17Ad-22(e)(17). The commenter expressed a 
belief that most, if not all, businesses of the size and significance 
of a covered clearing agency must commit to and undertake plans to 
manage operations in the event of a disruption, including through the 
adoption of a formal business continuity plan.\482\ The commenter also 
argued that anything less risks major repercussions and the loss of 
investor trust. In response, the Commission notes that Rule 17Ad-
22(e)(17) addresses the commenter's concerns by including requirements 
for policies and procedures with respect to a business continuity plan.
---------------------------------------------------------------------------

    \482\ See CFA Institute at 11.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(17) with one 
modification: Because the text in Rule 17Ad-22(e)(17)(ii) for 
``establishing and maintaining policies and procedures reasonably 
designed'' is duplicative of the requirement under Rule 17Ad-22(e) to 
have policies and procedures reasonably designed to establish, 
maintain, implement, and enforce the requirements thereunder, the 
Commission is removing the duplicative text. In addition, the 
Commission notes that Rule 17Ad-22(e)(17) includes similar provisions 
to Rule 17Ad-22(d)(4), and that, like Rule 17Ad-22(d)(4), Rule 17Ad-
22(e)(17) concerns operational risks that stem from deficiencies in 
internal controls, human errors, and management failures.\483\ The 
Commission also notes that Rule 17Ad-22(e)(17) includes requirements 
related to operational risk management in addition to the requirements 
in Regulation SCI, previously discussed in Part I.A.4. The Commission 
therefore notes that a covered clearing agency, in seeking to address 
the requirements of Rule 17Ad-22(e)(17), generally should remain 
mindful of related requirements under other Commission rules and 
regulation.
---------------------------------------------------------------------------

    \483\ See CCA Standards proposing release, supra note 5, at 
29551; see also infra Part IV.C.17 (also discussing the similar 
provisions between Rules 17Ad-22(e)(17) and (d)(4)); Clearing Agency 
Standards, supra note 5, at 66248 (discussing Rule 17Ad-22(d)(4)).
---------------------------------------------------------------------------

    Further, because the Commission recognizes that there may be a 
number of ways to address compliance with Rule 17Ad-22(e)(17), the 
Commission is providing the following guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures that address operational risk:
     Whether it establishes a robust operational risk-
management framework with appropriate systems, policies, procedures, 
and controls to identify, monitor, and manage operational risks;
     whether its board of directors clearly define the roles 
and responsibilities for addressing operational risk and whether it 
endorses the covered clearing agency's operational risk-management 
framework;
     whether it clearly defines operational reliability 
objectives and whether it has policies in place that are designed to 
achieve its service-level objectives;
     whether the covered clearing agency ensures that it has 
scalable capacity adequate to handle increasing stress volumes and to 
achieve its service-level objectives;
     whether it has comprehensive physical and information 
security policies that address all potential vulnerabilities and 
threats;
     whether it has a business continuity plan that addresses 
events posing a significant risk of disrupting operations, including 
events that could cause a wide-scale or major disruption; and
     whether it identifies, monitors, and manages the risks 
that key participants, other covered clearing agencies, and service and 
utility providers might pose to its operations.
    With respect to ``adequate, scalable capacity'' under Rule 17Ad-
22(e)(17)(ii), the Commission believes that a covered clearing agency 
generally should have operational systems that can be extended or 
expanded based on its anticipated business needs. Further, the 
Commission believes that, to help limit disruptions that may impede the 
proper functioning of a covered clearing agency, covered clearing 
agencies generally should review their operations for potential 
weaknesses and develop appropriate systems, controls, and procedures to 
address weaknesses the rule seeks to mitigate.
18. Rule 17Ad-22(e)(18): Access and Participation Requirements
    As 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. Proposed Rule 17Ad-22(e)(18) also would require that a 
covered clearing agency 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.\484\
---------------------------------------------------------------------------

    \484\ See CCA Standards proposing release, supra note 5, at 
29551-52.
---------------------------------------------------------------------------

    The Commission received one comment regarding Rule 17Ad-22(e)(18). 
The commenter expressed support for the fair and open participation 
requirements under the proposed rule, the public disclosure of such 
participation criteria under the proposed rule, and the proposed 
requirement that such criteria be risk-based.\485\
---------------------------------------------------------------------------

    \485\ See CFA Institute at 11.
---------------------------------------------------------------------------

    The Commission is adopting Rule 17Ad-22(e)(18) as proposed. 
Moreover, because the Commission recognizes that there may be a number 
of ways to address compliance with Rule 17Ad-22(e)(18), the Commission 
is providing the following guidance that a covered clearing agency 
generally should consider in establishing and maintaining policies and 
procedures that address access and participation requirements:
     Whether it allows for fair and open access to its 
services, including by direct and where relevant, indirect participants 
and other covered clearing agencies, based on reasonable risk-related 
participation requirements;
     whether its participation requirements are justified in 
terms of the safety and efficiency of the covered clearing agency and 
the markets it serves, are tailored to and commensurate with its 
specific risks, and are publicly disclosed; and
     whether it monitors compliance with its participation 
requirements on an ongoing basis and clearly defines and publicly 
discloses procedures for facilitating the suspension and orderly exit 
of a participant that breaches, or no longer meets, the participation 
requirements.
    The Commission also notes that, in contrast to other requirements 
in Rule 17Ad-22(e) where the term ``transparent'' is used in the 
context of facilitating disclosure ``where appropriate,'' the 
requirement here for policies and procedures reasonably

[[Page 70839]]

designed to establish ``publicly disclosed'' criteria for participation 
would necessarily require that the relevant policies and procedures be 
reasonably designed to provide for disclosure of such criteria for 
participation. The Commission also notes that membership standards at 
covered clearing agencies generally should seek to limit the potential 
for member defaults and, as a result, losses to non-defaulting members 
in the event of a member default. Using risk-based criteria helps to 
protect investors by limiting the participants of a covered clearing 
agency to those for which the covered clearing agency has assessed the 
likelihood of default.
19. Rule 17Ad-22(e)(19): Tiered Participation Arrangements
a. Proposed Rule
    As 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''). In addition, proposed Rule 17Ad-
22(e)(19) would 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.\486\
---------------------------------------------------------------------------

    \486\ See CCA Standards proposing release, supra note 5, at 
29553.
---------------------------------------------------------------------------

b. Comments Received and Commission Response
    The Commission received several comments regarding tiered 
participation arrangements under Rule 17Ad-22(e)(19). One commenter 
believed that regular reviews of tiered participation arrangements are 
an important part of a covered clearing agency's ability to perform 
prompt and accurate clearance and settlement, to protect investors, and 
to safeguard securities and funds.\487\ However, some commenters 
focused on particular aspects of the proposal in seeking to have the 
Commission consider a specific approach or issue. Comments directed to 
these particular substantive aspects of Rule 17Ad-22(e)(19) are 
discussed below.
---------------------------------------------------------------------------

    \487\ See CFA Institute at 11-12.
---------------------------------------------------------------------------

i. Need for Due Diligence of Indirect Participants
    One commenter believed that the Commission did not provide 
sufficient guidance regarding who would be indirect participants of a 
covered clearing agency and, as a result, cannot ascertain whether it 
is correctly reading the proposed rule.\488\ The commenter further 
expressed the view that it is not appropriate for a covered clearing 
agency to perform due diligence on the clients of its clearing members 
for the following reasons:
---------------------------------------------------------------------------

    \488\ See LCH at 5.
---------------------------------------------------------------------------

     The covered clearing agency has no direct, contractual 
relationship to these clients;
     Performing due diligence on what may be a very large 
number of clients could be very burdensome for the covered clearing 
agency; and
     Clients may object to due diligence inquiries from a 
covered clearing agency and choose to move their business to another 
CCP that is not required to perform such due diligence.\489\
---------------------------------------------------------------------------

    \489\ See id.
---------------------------------------------------------------------------

    Instead, the commenter expressed a view that a covered clearing 
agency can reasonably rely on the due diligence that its clearing 
members perform on their clients and should not have to perform its own 
due diligence on these indirect participants.\490\
---------------------------------------------------------------------------

    \490\ See id.
---------------------------------------------------------------------------

    In response, the Commission first notes that the scope of Rule 
17Ad-22(e)(19) does not only contemplate clients of clearing members. 
Instead, the rule also contemplates situations where other parties may 
enter into a contractual arrangement with a clearing member, 
particularly arrangements that create credit exposures to the clearing 
member, such as where a third party acts as guarantor to an obligation 
on behalf of the clearing member, may be indirect participants in the 
covered clearing agency. The Commission therefore believes that the 
alternative approach suggested by the commenter above does not entirely 
contemplate the scope of indirect participants addressed by the Rule 
17Ad-22(e)(19).
    The Commission acknowledges that there are limits on the extent to 
which a covered clearing agency can, in practice, observe or influence 
a direct participant's commercial or contractual relationships, and 
that these limits will, in turn, affect the appropriateness of a 
covered clearing agency performing due diligence on its indirect 
participants. However, a clearing agency will often have access to 
information, including through the due diligence that a member performs 
on its clients as well as information on transactions undertaken on 
behalf of indirect participants. A clearing agency can also set direct 
participation requirements that may include criteria relating to how 
direct participants manage relationships with their customers in-so-far 
as these criteria are relevant for the safe, efficient, and effective 
operation of the clearing agency. Accordingly, a covered clearing 
agency generally should have the ability to identify the types of risk 
that could arise from tiered participation and should monitor 
concentrations of such risk. Further, the Commission notes that some 
direct and indirect participants of the covered clearing agency will be 
registered with the Commission as, for example, a broker-dealer, and 
therefore be subject to their own requirements for reporting and 
financial responsibility,\491\ which a covered clearing agency could 
use in developing policies and procedures for tiered participation 
arrangements. In light of the availability of the tools described 
above, the Commission does not believe that the commenter's suggestion 
for a covered clearing agency to rely on due diligence performed by its 
clearing members is an appropriate alternative for the purposes of 
addressing the requirements a covered clearing agency must satisfy 
under Rule 17Ad-22(e)(19).
---------------------------------------------------------------------------

    \491\ See, e.g., 17 CFR 240.15c3-1, 15.c3-3 (setting forth net 
capital and customer protection requirements for broker-dealers); 17 
CFR 240.17h-1T, 17h-2T (setting forth requirements that certain 
broker-dealers maintain, preserve, and file a quarterly summary of 
certain information regarding those affiliates, subsidiaries and 
holding companies whose business activities are reasonably likely to 
have a material impact on their own financial and operating 
condition); 17 CFR 240.17a-3, 17a-4, 17a-5, 17a-11 (setting forth 
requirements for broker-dealers to maintain books and records, file 
periodic reports including quarterly and annual financial 
statements, and report to the Commission and the appropriate SRO 
regarding net capital, recordkeeping, and other operational 
problems, within certain time periods).
---------------------------------------------------------------------------

ii. Need To Obtain Information From Clearing Members
    One commenter expressed concern that proposed Rule 17Ad-22(e)(19) 
could be interpreted as requiring a covered clearing agency to obtain 
information from its clearing members identifying with specificity each 
of the customers attached to each cleared transaction and to routinely 
monitor customer-level risk with respect to each such customer.\492\ 
The commenter acknowledged that covered clearing agencies should have 
the ability to gather certain information from its

[[Page 70840]]

direct participants and that some circumstances may require clearing 
agencies to monitor the systemic risk created by one or more 
significant indirect participants, but the commenter believed it is 
inappropriate for a covered clearing agency to routinely police the 
systemic risks created by each indirect participant.\493\ In response, 
the Commission notes that Rule 17Ad-22(e)(19) requires a covered 
clearing agency to have policies and procedures governing risk 
management that considers a clearing member's customer relationships, 
but it does not require a covered clearing agency to actively risk 
manage those customer relationships on behalf of each clearing member. 
Instead, Rule 17Ad-22(e)(19) requires policies and procedures that 
identify, monitor, and manage the material risks to the covered 
clearing agency arising from tiered participation arrangements. Such 
policies and procedures would require a covered clearing agency to 
account for the range of risks stemming from each clearing member, 
which necessarily includes risks resulting from the clearing member's 
relationships with its customers, as previously described above. To 
engage in effective risk management of a clearing member, the covered 
clearing agency would need a complete picture of cleared transactions 
attributed to each clearing member, but it may require less specific 
information from the clearing member with respect to customers so long 
as the information it does receive provides the covered clearing agency 
with a comprehensive understanding of the material risks posed to the 
covered clearing agency by each clearing member.\494\
---------------------------------------------------------------------------

    \492\ See OCC at 15.
    \493\ See id.
    \494\ See supra note 491 (describing examples of such 
information that is available for certain participants that are 
separately registered with the Commission).
---------------------------------------------------------------------------

iii. Recommendation for a Risk-Based Approach
    One commenter expressed the belief that covered clearing agencies 
should use a risk-based approach when developing policies and 
procedures to implement the requirement that a covered clearing agency 
have policies and procedures reasonably designed to identify, monitor, 
and manage the risks to the clearing agency arising from indirect 
participants.\495\ The commenter expressed the belief that a covered 
clearing agency should provide direct participants with information 
relevant to their activities (both direct and indirect) that is 
available to the clearing agency, thus enabling direct participants to 
use such information to evaluate and manage its correspondent customer 
relationships.\496\ The commenter also expressed a view that a covered 
clearing agency should evaluate the risks presented to it by indirect 
relationships in the context of a direct participant's overall risk 
management policies and procedures.\497\ The commenter expressed the 
belief that such policies will need to take into account the level of 
information available to the covered clearing agency and that there 
needs to be a distinction between the supervisory oversight of the 
direct participant by its primary supervisor and the type of oversight 
that a clearing agency can be expected to provide.
---------------------------------------------------------------------------

    \495\ See DTCC at 11.
    \496\ See id.
    \497\ See id.
---------------------------------------------------------------------------

    The Commission agrees that such a risk-based approach could be one 
approach to achieving compliance with Rule 17Ad-22(e)(19), but believes 
that each covered clearing agency should determine the appropriate 
approach for determining compliance with Rule 17Ad-22(e)(19) in light 
of the composition of its members and the products they clear, as well 
as its risk management framework. Policies and procedures at a covered 
clearing agency for managing risks from indirect participants will 
necessarily be constrained to some degree by the lack of a direct 
contractual agreement between the covered clearing agency itself and 
the indirect participant. The Commission notes, however, that 
evaluating and managing the risk from direct participants, pursuant to 
Rule 17Ad-22(e)(19), would require policies and procedures consistent 
with the Commission's statements in Parts II.C.19.b.i and ii above. As 
noted there, the Commission acknowledges that direct and indirect 
participants in a covered clearing agency may be regulated entities 
themselves subject to reporting and other requirements that may help 
facilitate the covered clearing agency's management of risk from tiered 
participation arrangements.\498\
---------------------------------------------------------------------------

    \498\ See supra notes 491, 494, and accompanying text.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(19) as proposed. Because 
the Commission recognizes that there may be a number of ways to address 
compliance with Rule 17Ad-22(e)(19), the Commission is providing the 
following guidance that a covered clearing agency generally should 
consider in establishing and maintaining policies and procedures that 
address tiered participation arrangements:
     Whether a covered clearing agency ensures that its rules, 
procedures, and agreements allow it to gather sufficient information 
about indirect participation to identify, monitor, and manage any 
material risks to the covered clearing agency arising from such tiered 
participation arrangements;
     whether it identifies material dependencies between direct 
and indirect participants that might affect the covered clearing 
agency;
     whether it identifies indirect participants responsible 
for a significant proportion of transactions processed by the covered 
clearing agency and indirect participants whose transaction volumes or 
values are large relative to the capacity of the direct participants 
through which they access the covered clearing agency to manage the 
risks arising from these transactions; and
     whether it regularly reviews risks arising from tiered 
participation arrangements and takes mitigation action when 
appropriate.
    In addition to the guidance above, the Commission notes that, when 
addressing its compliance with Rule 17Ad-22(e)(19), a covered clearing 
agency could consider whether its rules, policies, procedures, and 
agreements with direct participants allow it to gather basic 
information about indirect participants to identify, monitor, and 
manage any material risks to the covered clearing agency arising from 
such tiered participation arrangements. This information should help 
enable the covered clearing agency to identify (i) the proportion of 
activity that direct participants conduct on behalf of indirect 
participants, (ii) direct participants that act on behalf of a material 
number of indirect participants, (iii) indirect participants with 
significant volumes or values of transactions in the system, and (iv) 
indirect participants whose transaction volumes or values are large 
relative to those of the direct participants through which they access 
the covered clearing agency. In this vein, a covered clearing agency 
could consider an indirect participant's status as a designated market 
maker or supplemental liquidity provider in identifying material risks 
to the covered clearing agency. A covered clearing agency could also 
consider different trading strategies or changes in trading strategies 
used by indirect participants in identifying, monitoring, and managing 
material risks to the covered clearing agency.
    The Commission also notes that Rule 17Ad-22(e)(19) is intended to 
promote the ongoing management of risks associated with tiered 
participation arrangements stemming from the

[[Page 70841]]

dependencies and risk exposures that such arrangements can create. 
However, because proposed Rule 17Ad-22(e)(19) only addresses the 
situation where indirect participants in the covered clearing agency 
rely on direct participants, the Commission notes that Rule 17Ad-
22(e)(19) would not apply in the circumstance where a covered clearing 
agency providing CSD services has members that are broker-dealers 
maintaining accounts for retail customers.
20. Rule 17Ad-22(e)(20): Links
a. Proposed Rule
    As 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.\499\ In proposing the rule, the Commission 
proposed to define ``link'' in 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.\500\
---------------------------------------------------------------------------

    \499\ See CCA Standards proposing release, supra note 5, at 
29553.
    \500\ See id. at 29554. The Commission received no comments 
regarding the definition of ``link'' and is adopting it with one 
modification, as discussed in Part II.C.20.c. Because of other 
modifications to Rule 17Ad-22(a), the definition of ``link'' is also 
being moved to Rule 17Ad-22(a)(8). See infra Part VI.
---------------------------------------------------------------------------

b. Comments Received and Commission Response
    The Commission received no comments regarding the substance of the 
proposed rule. One comment requested that the Commission phase-in 
implementation of Rule 17Ad-22(e)(20),\501\ and that comment is 
addressed in Part II.G below.
---------------------------------------------------------------------------

    \501\ See DTCC at 13-14 & n.46.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(20) as proposed.\502\ 
The Commission is adopting the definition of ``link'' with one 
modification and moving it to Rule 17Ad-22(a)(8), as previously 
discussed.\503\ Specifically, in the definition of ``link,'' the 
Commission is replacing the word ``venues'' with ``markets'' to improve 
consistency with Rule 17Ad-22(e)(20).\504\
---------------------------------------------------------------------------

    \502\ See Rule 17Ad-22(e)(20), infra Part VI.
    \503\ See supra note 500.
    \504\ See Rule 17Ad-22(a)(8), infra Part VI.
---------------------------------------------------------------------------

    Further, because the Commission recognizes that there may be a 
number of ways to address compliance with Rule 17Ad-22(e)(20), the 
Commission is providing the following guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures that address links:
     Whether it identifies, monitors, and manages all potential 
sources of risk arising from the link arrangement, before entering into 
a link arrangement and on an ongoing basis once the link is 
established;
     whether a link has a well-founded legal basis, in all 
relevant jurisdictions, that support its design and provides adequate 
protection to the covered clearing agencies involved in the link;
     whether linked CSDs measure, monitor, and manage the 
credit and liquidity risk arising from each other;
     whether provisional transfers of securities between linked 
CSDs are prohibited or, at a minimum, the retransfer of provisionally 
transferred securities are prohibited prior to the transfer becoming 
final.
     whether an investor CSD can only establish a link with an 
issuer CSD if the arrangement provides a high level of protection for 
the rights of the investor CSD's participants;
     whether an investor CSD that uses an intermediary to 
operate a link with an issuer CSD measures, monitors, and manages the 
additional risks arising from the use of the intermediary.
     before entering into a link with a CCP, whether it 
identifies and manages the potential spill-over effects from the 
default of the linked CCP; and
     when in a CCP link arrangement, whether it is able to 
cover, at least on a daily basis, its current and potential future 
exposures to the linked CCP and its participants, if any, fully with a 
high degree of confidence without reducing the covered clearing 
agency's ability to fulfill its obligations to its own participants at 
any time.
    In addition, the Commission reiterates that the requirements for 
policies and procedures for linkages must be addressed by each covered 
clearing agency at the level of the covered clearing agency.\505\ 
Therefore, each covered clearing agency under Rule 17Ad-22(e) would 
itself need to adopt or ratify policies and procedures for linkages 
with respect to its own business, even if it is a member of a group or 
under a holding company that has group-level policies and procedures.
---------------------------------------------------------------------------

    \505\ See supra Part II.B.3.c.
---------------------------------------------------------------------------

21. Rule 17Ad-22(e)(21): Efficiency and Effectiveness
    As 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. Proposed Rule 17Ad-22(e)(21)(i) through (iv) would 
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.\506\
---------------------------------------------------------------------------

    \506\ See CCA Standards proposing release, supra note 5, at 
29554.
---------------------------------------------------------------------------

    The Commission received one comment in support of the proposed 
approach. The commenter expressed support for the requirement that a 
covered clearing agency review its efficiency and effectiveness in 
meeting the requirements of its participants and the markets it serves 
and for the specific areas to be reviewed as set forth in proposed Rule 
17Ad-22(e)(21).\507\
---------------------------------------------------------------------------

    \507\ See CFA Institute at 12.
---------------------------------------------------------------------------

    The Commission is adopting Rule 17Ad-22(e)(21) with one 
modification: The Commission is removing reference to ``recorded'' 
products under Rule 17Ad-22(e)(21)(iii) because recording products is 
not a function of covered clearing agencies. In addition, because the 
Commission recognizes that there may be a number of ways to address 
compliance with Rule 17Ad-22(e)(21), the Commission is providing the 
following guidance that a covered clearing agency generally should 
consider in establishing and maintaining policies and procedures that 
address efficiency and effectiveness:
     Whether its design meets the needs of its participants and 
the markets it serves, particularly with regard to choice of a 
clearance and settlement arrangement, operating structure, scope of 
products cleared, settled, or recorded, and use of technology and 
procedures;
     whether it clearly defines goals and objectives that are 
measurable and achievable, such as in the areas of minimum service 
levels, risk-management expectations, and business priorities; and

[[Page 70842]]

     whether it establishes mechanisms for the regular review 
of its efficiency and effectiveness.
22. Rule 17Ad-22(e)(22): Communication Procedures and Standards
a. Proposed Rule
    As 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.
b. Comments Received and Commission Response
    Two commenters expressed views regarding Rule 17Ad-22(e)(22). The 
first commenter supported the Commission's proposed rules requiring the 
use of internationally accepted communication procedures and standards. 
The commenter expressed the belief that such a requirement will result 
in more effective communication with direct and indirect participants 
and will result in a more prompt and accurate process.\508\
---------------------------------------------------------------------------

    \508\ See CFA Institute at 12.
---------------------------------------------------------------------------

    The second commenter noted that users of its systems that process 
transactions only in a particular market typically rely on long-
standing, highly automated communications methods and messaging formats 
that are viewed as industry-standard, regardless of international 
standards. The commenter urged that these users not be required to 
retool their communication systems in such a market to comply with 
international communication standards and that such a requirement may 
impose substantial costs devoid of any material benefits. The commenter 
noted that the proposed rule permits a covered clearing agency to 
accommodate international standards as an equally appropriate means of 
satisfying the requirement as is the exclusive use of a standard (e.g., 
a clearing agency providing such an accommodation can permit users who 
wish to use international standards exclusively to do so, without 
forcing those users who do not wish (and have no need to) use the 
international standards to convert to them). Additionally, the 
commenter read the proposed provision as intending to provide 
sufficient flexibility to enable a covered clearing agency, when 
evaluating systems upgrades or new services, to take into account 
several factors to select the protocol that it deems most appropriate 
for the circumstances.\509\
---------------------------------------------------------------------------

    \509\ See DTCC at 11-12.
---------------------------------------------------------------------------

    In response to the second commenter, the Commission notes that Rule 
17Ad-22(e)(22) requires policies and procedures that at a minimum 
accommodate international standards. A covered clearing agency that 
does not rely on existing international standards as part of its own 
communication protocols could comply with Rule 17Ad-22(e)(22) by having 
policies and procedures that require its systems to be able to receive 
communications from and transmit communications to a system that uses 
the international standards. However, the Commission also believes that 
accommodating international standards does not require implementing 
international standards as the only or primary communication protocol, 
particularly if other automated messaging formats exist that are widely 
used and considered industry standard in the United States.
c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(22) as proposed.\510\ 
The Commission notes that 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.
---------------------------------------------------------------------------

    \510\ Relevant internationally accepted communication procedures 
and standards could include messaging standards such as SWIFT, FIX, 
and FpML.
---------------------------------------------------------------------------

23. Rule 17Ad-22(e)(23): Disclosure of Rules, Key Procedures, and 
Market Data
a. Proposed Rule
    As 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. Proposed Rule 17Ad-
22(e)(23)(i)-(iii) 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 incur by participating in the covered 
clearing agency; and (iii) publicly disclose relevant basic data on 
transaction volume and values.
    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.\511\ Proposed Rule 17Ad-22(e)(23)(v) would also 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.\512\
---------------------------------------------------------------------------

    \511\ See id. at 29556.
    \512\ See id. at 29557.
---------------------------------------------------------------------------

b. Comments Received and Commission Response
    One commenter expressed support for the Commission's proposed 
requirements regarding the disclosures set forth in proposed Rule 17Ad-
22(e)(23). The commenter expressed the belief that such disclosures are 
necessary to enhance transparency and allow investors and other 
participants to obtain the information necessary to evaluate covered 
clearing agencies and also believes that such an approach may

[[Page 70843]]

add to market discipline.\513\ A second commenter expressed support for 
strong and effective transparency requirements for covered clearing 
agencies.\514\ However, a number of commenters requested that the 
Commission consider amending the rule to incorporate more granular or 
prescriptive guidance and requirements, with a particular focus on 
achieving consistency with international standards and enhanced 
disclosures regarding emergency actions by covered clearing agencies. 
The Commission discusses these particular comments below.
---------------------------------------------------------------------------

    \513\ See CFA Institute at 13.
    \514\ See The Clearing House at 15.
---------------------------------------------------------------------------

i. Comprehensive Public Disclosure
    One commenter read the leading language in proposed Rule 17Ad-
22(e)(23)(iv) to imply a requirement to create a comprehensive document 
that should address how the clearing agency's governance arrangements, 
legal structure, approach to risk management, and financial 
arrangements operate, as opposed to implying a separate obligation to 
publicly disclose all such policies and procedures, irrespective of 
whether they relate to internal operational policies or are otherwise 
comprehended within the requirements of 17Ad-22(e)(23)(i).\515\ The 
Commission believes that the commenter's interpretation of the leading 
language in proposed Rule 17Ad-22(e)(23)(iv) is consistent with the 
requirements of the rule.
---------------------------------------------------------------------------

    \515\ See DTCC at 13.
---------------------------------------------------------------------------

    In the CCA Standards proposing release, the Commission made several 
statements regarding the requirements under Rule 17Ad-22(e)(23):
     With respect to the basic data and performance statistics 
envisioned by the rule, the Commission identified, as relevant to the 
requirement, 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 thereof over specified periods, as well as 
targets for recovery.
     With respect to the standard-by-standard summary 
narrative, the Commission sought to elicit a summary discussion of the 
covered clearing agency's implementation of policies and procedures 
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 (22).
     With respect to material changes to the disclosure, the 
Commission stated that it would expect a covered clearing agency to 
consider its particular circumstances, such as, for example, changes in 
the scope of services provided by the covered clearing agency, in 
satisfying this requirement.\516\
---------------------------------------------------------------------------

    \516\ See CCA Standards proposing release, supra note 5, at 
29557.
---------------------------------------------------------------------------

    The Commission further notes that the comprehensive public 
disclosure is intended to elicit all material information that would 
address compliance with each of the requirements in Rule 17Ad-22(e), 
along with information such as its function and the markets it serves 
and basic data and performance statistics. Moreover, in proposing Rule 
17Ad-22(e)(23), the Commission also stated that two purposes of Rule 
17Ad-22(e)(23) were to (i) provide participants with the information 
necessary to, at a minimum, identify and evaluate the risks and costs 
associated with the use of a covered clearing agency, thereby promoting 
transparency and enhancing competition and market discipline, and (ii) 
provide other stakeholders, including regulators and the public, with 
information that facilitates informed oversight and decision-making 
regarding each covered clearing agency.
    The Commission is modifying Rule 17Ad-22(e)(23)(iv) so that the 
language more closely tracks the categories of requirements in Rule 
17Ad-22(e) and the statements immediately above. The purpose of this 
modification is to make clear that the comprehensive public disclosure 
is intended to describe the material rules, policies and procedures of 
the covered clearing agency related to compliance with Rule 17Ad-22(e), 
rather than require a complete disclosure of all rules, policies, and 
procedures. As adopted, the leading language of Rule 17Ad-22(e)(23)(iv) 
will require policies and procedures providing for a comprehensive 
public disclosure that describes the covered clearing agency's material 
rules, policies, and procedures regarding its legal, governance, risk 
management, and operating framework, accurate in all material respects 
at the time of publication.
ii. Consistency With International Standards
    One commenter recommended that the Commission provide guidance that 
it will interpret and administer Rule 17Ad-22(e)(23) as being 
consistent with PFMI disclosure framework to ensure that clearing 
participants have sufficient information to conduct diligence and 
assess the risks of exposure to a covered clearing agency and to 
maintain consistency with evolving international standards.\517\ In 
response, and as previously noted, the Commission intends to interpret 
and administer Rule 17Ad-22(e)(23) consistent with Section 17A of the 
Exchange Act and, to the extent consistent with Section 17A, with 
relevant international standards such as the PFMI and the PFMI 
disclosure framework.\518\ Additionally, the Commission notes that a 
covered clearing agency could consider the PFMI quantitative 
disclosures to develop its policies and procedures in compliance with 
Rule 17Ad-22(e)(23).\519\ The Commission believes that the PFMI, the 
PFMI disclosure framework, and the PFMI quantitative disclosures can be 
useful tools to help a covered clearing agency consider how to disclose 
information to its participants, other relevant stakeholders, or the 
public. However, the Commission also notes that publishing the PFMI 
disclosure framework or the PFMI quantitative disclosures does not, in 
and of itself, constitute compliance with Rule 17Ad-22(e)(23).\520\ As 
previously discussed, Rule 17Ad-22(e)(23) requires that a covered 
clearing agency (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 incur by 
participating in the covered clearing agency; and (iii) publicly 
disclose relevant basic data on transaction volume and values. It also 
requires, as discussed in Part II.C.23.b.i, a comprehensive public 
disclosure consistent with Rule 17Ad-22(e)(23)(iv). The Commission 
believes that covered clearing agencies may use a number of different 
approaches to make disclosures under Rule 17Ad-22(e)(23), and the 
Commission notes that policies and procedures for such disclosures must 
be in compliance with Rule 17Ad-22(e)(23).
---------------------------------------------------------------------------

    \517\ See ISDA at 6; see also supra note 41 (providing a 
citation for the PFMI disclosure framework).
    \518\ See supra Part I.A.5. (discussing the relevant 
international standards).
    \519\ See supra note 41 (providing a citation for the PFMI 
quantitative disclosures).
    \520\ A covered clearing agency independently prepares and 
publishes these disclosure documents, and the Commission does not 
review, opine on, or approve them.
---------------------------------------------------------------------------

iii. Disclosures Regarding Emergency Actions
    One commenter stated that, when taking emergency actions, CCPs must 
consider the interests of members and

[[Page 70844]]

market stability in addition to those of CCP owners.\521\ The commenter 
identified the following concerns:
---------------------------------------------------------------------------

    \521\ See The Clearing House, annex, at 24.
---------------------------------------------------------------------------

     Changes to CCP rules and procedures and other actions 
taken during emergencies can affect the economic position of members, 
imposing unexpected losses and liquidity demands, and can thus have 
spillover effects in the broader market.\522\
---------------------------------------------------------------------------

    \522\ See id.
---------------------------------------------------------------------------

     Unchecked and unbounded discretion could permit a CCP to 
alter the fundamental economic relationship between it and its members 
without notice or a chance for members to evaluate the consequences of 
such changes.\523\
---------------------------------------------------------------------------

    \523\ See id. at 25.
---------------------------------------------------------------------------

    In response, the Commission notes that the above comments are most 
directly relevant to the Commission's discussion of crisis and 
emergency decision-making with respect to Rule 17Ad-22(e)(2). The 
Commission has previously addressed comments regarding crisis or 
emergency decision-making in Part II.C.2.b.v.
iv. Disclosures Regarding Participant-Default Rules and Procedures
    One commenter recommended that the Commission make some 
clarifications to the requirement in proposed Rule 17Ad-22(e)(23)(ii) 
that a covered clearing agency provide sufficient detail to enable 
participants to identify and evaluate the risks they incur by 
participating in the covered clearing agency. Specifically, the 
commenter recommended that the Commission require the covered clearing 
agency to disclose (i) to its participants the policies and procedures 
established by the covered clearing agency pursuant to proposed Rule 
17Ad-22(e)(13), and (ii) to its participants and their customers, the 
financial risks to which they would be subject in a scenario in which 
the covered clearing agency's credit losses upon the default of one or 
more participants exceed the resources designated to absorb such 
losses.\524\ As discussed above in connection with the requirements for 
the comprehensive public disclosure, the two purposes of proposing Rule 
17Ad-22(e)(23) were to (i) provide participants with the information 
necessary to, at a minimum, identify and evaluate the risks and costs 
associated with the use of a covered clearing agency, and (ii) provide 
other stakeholders, including regulators and the public, with 
information that facilitates informed oversight and decision-making 
regarding each covered clearing agency.\525\ Pursuant to Rule 17Ad-
22(e)(23)(iv), the comprehensive public disclosure is intended to 
provide participants with the information necessary to, at a minimum, 
identify and evaluate the risks and costs associated with the use of a 
covered clearing agency. In addition, a covered clearing agency's 
recovery and wind-down plans consistent with Rule 17Ad-22(e)(3) would 
also provide further insight into the financial risks to which 
participants and their customers may be subject in a scenario in which 
the covered clearing agency's credit losses exceed the resources 
designated to absorb such losses. Accordingly, the Commission believes 
that the required public disclosure will encompass the information that 
the commenter seeks.
---------------------------------------------------------------------------

    \524\ See The Clearing House at 7.
    \525\ See supra Part II.C.23.b.i.
---------------------------------------------------------------------------

    The same commenter also recommended that the Commission clarify 
that a covered clearing agency may not, pursuant to emergency authority 
or otherwise, modify its rules, policies, or procedures in a manner 
that would materially increase a non-defaulting participant's exposure 
to loss or the extent of the covered clearing agency's recourse to a 
non-defaulting participant's assets, or redefine the economic terms of 
outstanding cleared contracts, without a reasonable prior notice and 
transition period prior to effectiveness.\526\ The commenter further 
stated that a reasonable prior notice period for such a modification 
would be one that is sufficient to enable a non-defaulting participant 
to complete the process of withdrawal from participant status, in 
accordance with the rules of the covered clearing agency, under 
reasonable assumptions that take into account the demonstrated 
liquidity of the relevant product or asset type.\527\ In addition, the 
commenter stated that any such modification that takes place following 
the occurrence of a default or series of defaults involving one or more 
participants and prior to expiration of the covered clearing agency's 
``cooling-off period'' should not take effect until after the 
expiration of that period.\528\ For the commenter's purposes, the term 
``cooling-off period'' referred to the period following the default of 
one or more participants during which losses accrued by the covered 
clearing agency may be satisfied by recourse to the clearing or 
guaranty fund contributions of non-defaulting participants, 
notwithstanding the intervening withdrawal from participant status of 
one or more such participants.\529\ The commenter's recommendations 
contemplated that cooling-off periods will continue to be specified in 
the rules of a covered clearing agency, subject to Commission review. 
According to the commenter, although appropriate cooling-off periods 
may vary by product or asset type, the commenter believed that the 
Commission should, in reviewing a covered clearing agency's rules, 
ensure that its cooling-off period(s) are of sufficient duration 
following a participant default (or the last in a series of 
substantially contemporaneous participant defaults) to allow the 
relevant market to return to stability under reasonable 
assumptions.\530\ In response, the Commission notes that the above 
comments are beyond the scope of Rule 17Ad-22(e)(23), which pertains to 
disclosures, but instead are relevant to crisis and emergency decision-
making, which are discussed above in Part II.C.2.b.v.
---------------------------------------------------------------------------

    \526\ See The Clearing House at 7.
    \527\ See id. at 7 n.16.
    \528\ See id.
    \529\ See id.
    \530\ See id.
---------------------------------------------------------------------------

v. Additional Disclosures
    One commenter believed that, to enhance participants' ability to 
evaluate their risks, the Commission should require a covered clearing 
agency to provide their participants with additional, more specific 
disclosures regarding its default rules and procedures, custody and 
collateral investment activities, methodologies for determining initial 
margin requirements and clearing or guaranty fund contributions, stress 
testing methodologies, and the covered clearing agency's treatment of 
participant initial margin and clearing or guaranty fund 
contributions.\531\ The Commission notes that each of these topic areas 
are addressed by requirements under Rule 17Ad-22(e),\532\ and therefore 
these topic

[[Page 70845]]

areas are also the types of material information that would constitute 
elements of the comprehensive public disclosure required under Rule 
17Ad-22(e)(23)(iv).\533\
---------------------------------------------------------------------------

    \531\ See The Clearing House at 3, 15. The commenter further 
stated that, based on current disclosure practices, members are 
unable to effectively measure or manage their risk exposure to CCPs, 
and that disclosure to a CCP's risk committee is generally 
insufficient due to confidentiality restrictions, which prevents the 
risk committee from being able to share relevant information with 
their employer clearing member (and, further, not all clearing 
members even have employees on the CCP's risk committee). See id., 
annex at 26, 27.
    \532\ See supra Parts II.C.4 (discussing requirements for 
guaranty fund contributions, allocation of losses pursuant to the 
default waterfall, and stress testing for credit risk under Rule 
17Ad-22(e)(4)), II.C.5 (discussing requirements for collateral under 
Rule 17Ad-22(e)(5)), II.C.6 (discussing requirements for margin 
under Rule 17Ad-22(e)(6)), II.C.7 (discussing requirements for 
stress testing for liquidity risk under Rule 17Ad-22(e)(7)), II.C.13 
(discussing requirements for participant-default rules and 
procedures under Rule 17Ad-22(e)(13)), and II.C.16 (discussing 
requirements for custody and investment policies under Rule 17Ad-
22(e)(16)).
    \533\ See supra Part II.C.23.b.i.
---------------------------------------------------------------------------

    To facilitate sufficient disclosure, the commenter recommended that 
the Commission adopt the recommendations developed by the FRB of New 
York's Payments Risk Committee for participant due diligence of CCPs in 
these and other areas.\534\ The commenter stated that obtaining 
information in these areas is necessary for participants to adequately 
identify and evaluate the risks they incur by participating in a CCP. 
Like the PFMI disclosure framework and the PFMI quantitative 
disclosures, the framework set forth by the FRB Payments Risk Committee 
may be another useful tool to help a covered clearing agency consider 
how best to disclose information to its participants, other relevant 
stakeholders, or the public, but, as noted above, should not be viewed 
as a substitute for compliance with Rule 17Ad-22(e)(23) and the 
requirements of Section 17A of the Exchange Act. The Commission further 
notes that the disclosure required by Rule 17Ad-22(e)(23) marks a 
significant increase in the level and detail of disclosure that a 
covered clearing agency will be required to provide to its participants 
and the public, and that such disclosure will also encompass much of 
the information covered in the framework established by the FRB 
Payments Risk Committee. Therefore, the Commission declines to further 
modify Rule 17Ad-22(e)(23).
---------------------------------------------------------------------------

    \534\ See The Clearing House at 15; see also Payments Risk 
Committee, Recommendations for Supporting Participant Due Diligence 
of Central Counterparties (Feb. 5, 2013).
---------------------------------------------------------------------------

    The commenter further stated that because a CCP's internal models 
are not usually disclosed at a sufficient level of detail, participants 
are often unable to predict initial margin requirements, clearing or 
guaranty fund contributions, or possible loss allocations accurately 
and, as a result, cannot anticipate exposures or hedge resulting 
risks.\535\ The commenter also stated that participants typically do 
not have sufficient insight into the stress framework and stress 
scenarios that are intended to ensure sufficiency of total financial 
resources and as such are unable to determine the CCP's ability to 
withstand multiple participants' failures or market stress.\536\ As 
noted above, the disclosure required by policies and procedures under 
Rule 17Ad-22(e)(23) marks a significant increase in the level and 
detail of disclosure that a covered clearing agency will be required to 
provide to its participants and the public and addresses in significant 
portion the commenter's concerns.
---------------------------------------------------------------------------

    \535\ See The Clearing House at 15.
    \536\ See id.
---------------------------------------------------------------------------

    In addition, to promote participants' ability to identify and 
evaluate their risks, the commenter recommended that the Commission 
clarify that a covered clearing agency must provide to its participants 
each fiscal quarter, or at any time upon request, the following minimum 
information:
     The methodologies for determining initial margin 
requirements and clearing or guaranty fund contributions, at a level of 
detail adequate to enable participants to replicate the covered 
clearing agency's calculations; \537\
---------------------------------------------------------------------------

    \537\ See The Clearing House at 16.
---------------------------------------------------------------------------

     The methodologies for stress testing the adequacy of the 
clearing or guaranty fund, including the assumptions and scenarios that 
formed the basis of the stress test and the results of the stress test, 
which shall include but not be limited to an analysis of the adequacy 
of the defaulting participant's resources available to cover losses 
arising from the liquidation, transfer or termination of the positions 
in its portfolio; \538\ and
---------------------------------------------------------------------------

    \538\ See id. The commenter stated that stress frameworks 
mandated by the Commission should form the baseline set of 
assumptions/scenarios for a covered clearing agency, and those 
frameworks should be based on sufficiently severe stressed 
macroeconomic conditions to provide a consistent initial baseline 
from which covered clearing agencies can begin to estimate the 
extent of their need for loss-absorbing resources. These baseline 
assumptions/scenarios should be bolstered by specific scenarios 
unique to the particular asset class and should include 
idiosyncratic stresses on basis and higher order risk exposures 
embedded in the covered clearing agency's portfolio. See id. at 16 
n.44.
---------------------------------------------------------------------------

     The covered clearing agency's treatment and segregation of 
participant initial margin and clearing or guaranty fund 
contributions.\539\
---------------------------------------------------------------------------

    \539\ See The Clearing House at 16.
---------------------------------------------------------------------------

    In suggesting that such information be required to be disclosed, 
the commenter suggested that members of CCPs should also be able to 
accurately predict the fees, margin requirements and guaranty fund 
contribution requirements associated with participation in the CCP and 
changes to the member's portfolio or clearing activity.
    Where the above disclosure is not possible, the commenter stated 
that the Commission should instead require a covered clearing agency to 
develop computational solutions that provide its participants with the 
ability to determine the costs, initial margin, clearing or guaranty 
fund contributions, clearing or guaranty fund performance and loss 
allocations associated with changes to each respective participant's 
portfolio or hypothetical portfolio, participant defaults and other 
relevant information.\540\ Mandating disclosure of this frequency and 
granularity would be inconsistent with the principles-based approach 
the Commission is taking in Rule 17Ad-22(e), and Rule 17Ad-22(e)(23) 
addresses in significant portion the commenter's concerns.
---------------------------------------------------------------------------

    \540\ See The Clearing House at 16.
---------------------------------------------------------------------------

    The commenter also stated that CCPs should be required to provide 
advance notice to members of any proposed changes to policies, 
procedures, models, or other elements of the CCPs' operations that 
could have a material adverse economic effect on members. According to 
the commenter, such advance notice is necessary to protect members' 
ability to manage their risk by withdrawal from the CCP if necessary, 
and further CCPs should seek member input on any such changes through a 
formal consultation process to the extent possible.\541\ The Commission 
believes that the rule filing process under Section 19(b) of the 
Exchange Act and Rule 19b-4 thereunder, as well as the process for 
advance notices under Section 806(e) of the Clearing Supervision Act, 
address this comment, including by providing the opportunity for member 
input upon the proposed rule change.
---------------------------------------------------------------------------

    \541\ See id.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(e)(23) with modifications. 
First, the Commission is striking the language ``maintain clear and 
comprehensive rules and procedures'' under Rule 17Ad-22(e)(23) because 
Rule 17Ad-22(e) already requires that a covered clearing agency have 
written policies and procedures reasonably designed to establish, 
implement, maintain and enforce the requirements thereunder. Consistent 
with this change, the Commission is also striking ``providing'' from 
Rule 17Ad-22(e)(23)(iv). Second, the Commission is modifying paragraph 
(iv) as described in Part II.C.23.b.i. Third, the Commission is also 
modifying paragraph (iv)(D) to correct technical errors in the proposed 
rule text so that it refers to the standards set forth in paragraphs 
(e)(1) through (23) (rather than (e)(1) through (22)). The Commission 
believes that providing a summary narrative for Rule 17Ad-22(e)(23) is 
appropriate because Rule 17Ad-22(e)(23) requires policies and

[[Page 70846]]

procedures 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 incur by 
participating in the covered clearing agency; and (iii) publicly 
disclose relevant basic data on transaction volume and values, in 
addition to requiring the standard-by-standard summary narrative 
required by Rule 17Ad-22(e)(23)(iv)(D). A summary narrative for Rule 
17Ad-22(e)(23) would allow for a better understanding of a covered 
clearing agency's policies and procedures for compliance with this 
rule.
    Further, because the Commission recognizes that there may be a 
number of ways to address compliance with Rule 17Ad-22(e)(23), the 
Commission is providing the following guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures that address disclosure of rules, key 
procedures, and market data:
     Whether it adopts clear and comprehensive rules and 
procedures that are fully disclosed to participants;
     whether it discloses clear descriptions of the system's 
design and operations, as well as its and participants' rights and 
obligations, so that participants can assess the risks they would incur 
by participating in the covered clearing agency;
     whether it provides all necessary and appropriate 
documentation and training to facilitate participants' understanding of 
the covered clearing agency's rules and procedures and the risks they 
face from participating in the covered clearing agency;
     whether it publicly discloses its fees at the level of 
individual service it offers as well as its policies on any available 
discounts; and
     whether it completes regularly and discloses publicly 
responses to the PFMI disclosure framework.
    In addition, the Commission notes that, as with public disclosures 
contemplated in conjunction with Rule 17Ad-22(e)(23), a covered 
clearing agency could comply with the proposed requirement by posting 
the relevant documentation to its Web site.

D. Rule 17Ab2-2

1. Proposed Rule
    The Commission proposed Rule 17Ab2-2 to establish procedures for 
the Commission to make determinations affecting covered clearing 
agencies. 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. 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 statement of 
written reasons supporting the determination. In proposing Rule 17Ab2-
2, the Commission noted that determinations could be made as part of 
the registration process upon receiving an application for registration 
as a clearing agency or at some point after registration, if the 
Commission determines that a 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.\542\
---------------------------------------------------------------------------

    \542\ See CCA Standards proposing release, supra note 5, at 
29557-58.
---------------------------------------------------------------------------

    As proposed, Rule 17Ab2-2 provides the Commission with procedures 
for making determinations in the following three cases:
     Pursuant to 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. 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.\543\
---------------------------------------------------------------------------

    \543\ See id. at 29558.
---------------------------------------------------------------------------

     Pursuant to 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.'' 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; \544\ or (iii) such other 
factors as the Commission may deem appropriate in the circumstances. 
The Commission also noted that analysis of other factors 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.\545\
---------------------------------------------------------------------------

    \544\ 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).
    \545\ See CCA Standards proposing release, supra note 5, at 
29558.
---------------------------------------------------------------------------

     Pursuant to Rule 17Ab2-2(c), the Commission may, if it 
deems appropriate, determine whether any of the activities of a 
clearing agency providing CCP 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 (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; or (ii) such other characteristics as it deems 
appropriate in the circumstances. \546\
---------------------------------------------------------------------------

    \546\ See id. at 29559.
---------------------------------------------------------------------------

2. Comments Received and Commission Response
    The Commission received two comments that generally supported the 
Commission's approach in Rule 17Ab2-2 \547\ However, a number of 
commenters also raised concerns about particular procedural and 
substantive aspects of the Rule 17Ab2-2, and the Commission discusses 
each of these in turn below.
---------------------------------------------------------------------------

    \547\ See CFA Institute at 5, 14; OSEC at 2.

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[[Page 70847]]

a. Determinations Regarding ``Covered Clearing Agency'' Status 
Generally
    One commenter argued that Rule 17Ab2-2 lacks clear standards for 
determining when and according to which standards a registered clearing 
agency would be found to be a covered clearing agency, and further 
stated that such determinations are based upon factors that may be 
entirely defined by the Commission during the determinations process 
itself.\548\ In response to this comment, and in light of the 
Commission's separate proposal to amend the definition of ``covered 
clearing agency,'' \549\ the Commission has determined not to adopt 
Rule 17Ab2-2(a). Because the Commission had determined not to adopt 
Rule 17Ab2-2(a), the subsequent paragraphs in Rule 17Ab2-2 will be 
renumbered accordingly.
---------------------------------------------------------------------------

    \548\ See CME at 3.
    \549\ See CCA Definition proposing release, supra note 82, at 
25-26.
---------------------------------------------------------------------------

b. Determinations Regarding ``Covered Clearing Agency'' Status for 
Dually Registered Entities
    In another commenter's view, any decision to apply the enhanced 
standards for covered clearing agencies should take into account 
whether, and the extent to which, the clearing agency is already 
subject to similar or comparable standards under other regulation.\550\ 
The commenter noted that the proposed rules take this approach with 
respect to dually registered SIDCOs for which the CFTC is the 
supervisory agency under the Clearing Supervision Act and believed a 
similar exclusion would be appropriate for clearing agencies subject to 
other regulatory frameworks.\551\ The commenter cited as examples 
regulation by the Bank of England under existing U.K. legislation and, 
for those clearing agencies that have been granted authorization as a 
CCP under EMIR, the regulations under EMIR.\552\
---------------------------------------------------------------------------

    \550\ See ICEEU at 4-5.
    \551\ See id. at 5.
    \552\ See id.
---------------------------------------------------------------------------

    Because the Commission has determined not to adopt Rule 17Ab2-2(a), 
the commenter's concerns regarding determinations under Rule 17Ab2-2(a) 
for dually registered clearing agencies have been addressed.
c. Determinations Regarding ``Complex Risk Profile''
    One commenter expressed concern about the proposed criteria for 
determining whether a clearing agency is involved in activities with a 
more complex risk profile under proposed Rule 17Ab2-2(c), which 
triggers enhanced requirements for policies and procedures related to 
credit and liquidity risk management.\553\ The commenter believed that 
it is necessary to consider additional factors, including the 
proportion of the covered clearing agency's clearing activities 
involving higher risk products as well as the manner in which it 
manages those risks. In the absence of considering such additional 
factors, the commenter expressed concern that a trivial amount of 
clearing of credit default options, in comparison to more standardized 
options, could trigger a cover two requirement, when a clearing agency 
may have other means to address the added risk, such as through an 
enhanced margin system.\554\ The commenter suggested that the 
Commission clarify that it is not its intention to interpret the rules 
in such a manner.\555\ A second commenter believed that the proposed 
wording of paragraphs (1) and (2) under proposed Rule 17Ab2-2(c) is 
vague.\556\ The commenter believed it is unclear whether 
``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 ``such 
other characteristics as it deems appropriate in the circumstances'' 
are independent analyses by which a clearing agency may be judged or 
whether they should be considered jointly.
---------------------------------------------------------------------------

    \553\ See OCC at 7.
    \554\ See id.
    \555\ See id. at 8.
    \556\ See Joyce.
---------------------------------------------------------------------------

    In response to these comments, the Commission is modifying the 
proposed criteria to be considered in determining whether any of the 
activities of a clearing agency providing CCP services have a more 
complex risk profile in Rule 17Ab2-2 to remove the reference to 
``[s]uch other characteristics as it may deem appropriate in the 
circumstances, as factors supporting a finding of a more complex risk 
profile.'' \557\ Further, the Commission notes that it could, as part 
of its analysis under the rule, also consider the extent to which a 
clearing agency clears financial instruments that are characterized by 
discrete jump-to-default price changes or that are highly correlated 
with potential participant defaults. The Commission believes that this 
approach mitigates the concern raised by the commenter that a clearing 
agency clearing only a trivial amount of credit default options could 
be subject to the ``cover two'' requirement in Rule 17Ad-22(e)(4).
---------------------------------------------------------------------------

    \557\ In addition, as noted in Part II.D.2.a, the Commission has 
determined not to adopt proposed Rule 17Ab2-2(a). The Commission is 
therefore renumbering Rule 17Ab2-2 so that proposed Rule 17Ab2-2(c) 
is being moved to Rule 17Ab2-2(b). See infra Part VI.
---------------------------------------------------------------------------

    In addition, in light of the concerns regarding the scope of such 
other characteristics as the Commission may deem appropriate in the 
circumstances, the Commission is also removing the similar criteria--
``such other factors as it may deem appropriate in the 
circumstances''--from proposed Rule 17Ab2-2(b).\558\
---------------------------------------------------------------------------

    \558\ As discussed in Part II.D.2.a above, the Commission has 
determined not to adopt proposed Rule 17Ab2-2(a), and therefore, in 
adopting proposed Rule 17Ab2-2(b), the Commission is moving it to 
Rule 17Ab2-2(a). See infra Part VI.
---------------------------------------------------------------------------

d. Sufficiency of Procedures Generally
    One commenter stated that proposed Rule 17Ab2-2 does not provide 
the subjected clearing agency with an opportunity for a hearing.\559\ 
The commenter further stated that it is not apparent under the proposed 
framework that a registered clearing agency would be able to 
meaningfully impact any proceeding in which the Commission seeks to 
determine that it should be subject to the requirements for covered 
clearing agencies, exacerbating regulatory uncertainty.\560\
---------------------------------------------------------------------------

    \559\ See CME at 3.
    \560\ See id.
---------------------------------------------------------------------------

    As discussed above, the Commission has determined not to adopt Rule 
17Ab2-2(a), and therefore no process would exist under Rule 17Ab2-2 by 
which the Commission could designate a registered clearing agency as a 
covered clearing agency. The Commission notes, nonetheless, that the 
procedures set forth in Rule 17Ab2-2, as previously discussed, include 
provisions for publishing notice of the Commission's intention to 
consider determinations under Rule 17Ab2-2, including a brief statement 
of the grounds under consideration, and for providing at least a 30-day 
public comment period. The Commission believes that this should provide 
a clearing agency with ample opportunity to present data, views, and 
arguments supporting why it should not be subject to the requirements 
for covered clearing agencies. Nevertheless, the rule also provides 
that the clearing agency subject to the proposed determination may be 
provided an opportunity for hearing, which provides the possibility of 
an opportunity for additional input.
e. Procedures for Removing ``Covered Clearing Agency'' Status
    One commenter believed that the Commission should establish a 
process,

[[Page 70848]]

including a public comment period, for determinations regarding covered 
clearing agency status and recommends that a process for removing that 
status (due to, for example, a change in circumstances such that the 
clearing agency no longer meets the criteria for designation) also be 
established. The commenter stated that it should include a public 
comment period and advance notice to clearing members of at least 180 
days prior to the effectiveness of such change in status.\561\ The 
Commission believes that such procedures will ensure that each clearing 
agency is subject to the appropriate rule set on an ongoing basis. In 
response to this comment, the Commission is adding new paragraph (d) to 
Rule 17Ab2-2 to provide for a process to rescind any determination made 
pursuant to Rule 17Ab2-2(a), (b), or (c). This new rule includes the 
same procedural elements as for determinations under Rules 17Ab2-2(b) 
and (c), including publication with a 30-day comment period. The 
commenter requested that clearing members be provided notice at least 
180 days prior to the effectiveness of a change in status. The 
Commission believes that the effective date for any such determination 
should be based on the facts and circumstances of the clearing agency 
for which removal of covered clearing agency status is being 
considered.
---------------------------------------------------------------------------

    \561\ See ISDA at 2.
---------------------------------------------------------------------------

3. Final Rule
    The Commission has determined not to adopt proposed Rule 17Ab2-
2(a), as discussed above. The Commission is adopting proposed Rules 
17Ab2-2(b) through (g) with the modifications described above. Because 
the Commission is not adopting proposed Rule 17Ab2-2(a), the Commission 
is renumbering the remaining paragraphs under Rule 17Ab2-2 accordingly.

E. Rule 17Ad-22(f)

    As proposed, Rule 17Ad-22(f) would codify the Commission's 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.\562\ The 
Commission received no comments regarding the proposed rule and is 
adopting Rule 17Ad-22(f) as proposed.
---------------------------------------------------------------------------

    \562\ See 12 U.S.C. 5466(c); see also 12 U.S.C. 1818 (relevant 
provisions under the Federal Deposit Insurance Act).
---------------------------------------------------------------------------

F. Amendment to Rule 17Ad-22(d)

    To facilitate consistency between existing Rule 17Ad-22(d) and 
proposed Rule 17Ad-22(e), the Commission proposed to amend the first 
paragraph of Rule 17Ad-22(d) so that it would not apply to covered 
clearing agencies. Rule 17Ad-22(d) provides that a registered clearing 
agency shall establish, implement, maintain and enforce written 
policies and procedures reasonably designed to fulfill the requirements 
of Rules 17Ad-22(d)(1) through (15), as applicable. As proposed, the 
amended Rule 17Ad-22(d) would instead apply only to a registered 
clearing agency other than a covered clearing agency.
    The Commission received general comments regarding the overall 
structure and application of Rule 17Ad-22 in light of proposed Rule 
17Ad-22(e) and the existing requirements under Rule 17Ad-22(d), and has 
addressed those comments in Part I.C.2. The Commission did not receive 
any comments addressed to the proposed amendment to the first paragraph 
of Rule 17Ad-22(d), and the Commission is adopting the amendment as 
proposed.

G. Effective and Compliance Dates

    One commenter believed that a phase-in of Rule 17Ad-22(e) is 
necessary and appropriate.\563\ The commenter suggested that the 
implementation phase-in extend to at least one year following 
publication of Rule 17Ad-22(e), citing in particular the requirements 
related to linkages in Rule 17Ad-22(e)(20) and views that compliance 
with such rules will require extensive cooperation and coordination 
among the relevant entities.\564\ Another commenter specifically 
requested sufficient time for covered clearing agencies to implement 
the requirements with respect to equity capital funding pursuant to 
proposed Rule 17Ad-22(e)(15).\565\
---------------------------------------------------------------------------

    \563\ See DTCC at 13.
    \564\ See id. at 13-14 & n.46.
    \565\ See OCC at 15. The Commission has since issued an order 
approving a proposed rule change by OCC concerning a proposed 
capital plan. See Exchange Act Release No. 34-74452 (Mar. 6, 2015), 
80 FR 13058 (Mar. 12, 2015) (order approving proposed rule change by 
OCC concerning a proposed capital plan for raising additional 
capital that would support its function as a SIFMU).
---------------------------------------------------------------------------

    The amendments to Rule 17Ad-22 and new Rule 17Ab2-2 will become 
effective 60 days after publication in the Federal Register 
(``effective date''). As proposed, a covered clearing agency would have 
been required to meet the requirements of Rule 17Ad-22(e) on the 
effective date. However, after consideration of the views of the 
commenters, the Commission has determined to adopt a compliance date of 
120 days after the effective date (``compliance date''). The Commission 
believes it is important to establish enhanced requirements for covered 
clearing agencies given the potentially significant risks posed by 
their size, systemic importance, global reach, and/or the risks 
inherent in the products they clear, and therefore continues to believe 
that implementation of the requirements in Rule 17Ad-22(e) should be 
prompt. The Commission notes that one commenter requesting a phase-in 
approach for Rule 17Ad-22(e)(15) stated it would be in compliance with 
the proposed requirements no later than January 1, 2015,\566\ which has 
already passed. The other commenter raised several concerns regarding 
the need to review existing policies and procedures, develop and draft 
new policies and procedures, submit, where appropriate, proposed rule 
changes and advance notices for Commission review, raise additional 
capital or qualifying liquid resources, and hire and train additional 
personnel.\567\ The Commission believes that the additional time it is 
providing with the compliance date of 120 days after the effective date 
addresses this concern.
---------------------------------------------------------------------------

    \566\ See supra note 565.
    \567\ See DTCC at 14.
---------------------------------------------------------------------------

    In addition, one commenter requested that the Commission clarify 
how it intends to apply the rules to applications for registration as a 
clearing agency that are pending when the rules are finalized.\568\ The 
Commission intends to review any application for registration as a 
clearing agency pursuant to the requirements of Section 17A of the 
Exchange Act and the rules and regulations thereunder, including Rule 
17Ad-22 and any amendments thereto, and notes that the compliance date 
would apply to all covered clearing agencies, including an applicant 
for registration as a clearing agency whose application is pending upon 
the compliance date that would, if registered, meet the definition of a

[[Page 70849]]

covered clearing agency. In reviewing such an application, Section 
17A(b)(3) of the Exchange Act requires that a clearing agency shall not 
be registered unless the Commission determines that an applicant's 
rules and operations satisfy each of the requirements set forth in 
Section 17A(b)(3).\569\ Following registration, any registered clearing 
agency that falls within the definition of a covered clearing agency 
would need to address compliance with each of the requirements in Rule 
17Ad-22(e) no later than the compliance date.
---------------------------------------------------------------------------

    \568\ See LCH at 3.
    \569\ See 15 U.S.C. 78q-1(b)(3).
---------------------------------------------------------------------------

    The Commission also notes that the staff regularly conducts 
examinations, including those required under Section 807 of the 
Clearing Supervision Act,\570\ and supervisory reviews of registered 
clearing agencies that are covered clearing agencies.\571\ Accordingly, 
the staff will periodically evaluate the results of these reviews and 
examinations of covered clearing agencies to evaluate the extent to 
which covered clearing agencies have achieved and maintained compliance 
with Rule 17Ad-22(e); the various outcomes observed in how the covered 
clearing agencies seek to implement the requirements of Rule 17Ad-
22(e), and possible reasons for such variations; and any other 
observations relevant to implementation of Rule 17Ad-22(e).
---------------------------------------------------------------------------

    \570\ Section 807 annual examinations of designated clearing 
agencies are conducted in order to determine: (1) The nature of the 
operations of, and the risks borne by, the designated financial 
market utility; (2) the financial and operational risks presented by 
the designated market utility to financial institutions, critical 
markets, or the broader financial system; (3) the resources and 
capabilities of the designated financial market utility to monitor 
and control such risks; (4) the safety and soundness of the 
designated financial market utility; and (5) the designated 
financial market utility's compliance with the Clearing Supervision 
Act and the rules and orders prescribed under the Clearing 
Supervision Act. See 12 U.S.C. 5466(a).
    \571\ See supra Part I.A.1.
---------------------------------------------------------------------------

III. Economic Analysis

    As noted above, registered clearing agencies have become an 
essential part of the infrastructure of the U.S. securities markets. 
Many securities transactions are centrally cleared by clearing 
agencies, and central clearing has become more prevalent in the market 
for security-based swaps.\572\ For example, in the cash markets, DTCC 
processed $1.508 quadrillion in financial transactions in 2015. Within 
DTCC, NSCC processed an average daily value of $976.6 billion in equity 
securities, FICC cleared $917.1 trillion of transactions in government 
securities and $48.2 trillion of transactions in agency mortgage-backed 
securities, and DTC settled $112.3 trillion of securities and held 
securities valued at $45.4 trillion.\573\ In the listed options 
markets, OCC cleared more than 4.1 billion contracts and held margin of 
$98.3 billion at the end of 2015.\574\
---------------------------------------------------------------------------

    \572\ The Commission is using ``central clearing'' here and 
below to refer to both the clearance and settlement of securities 
transactions. In this regard, ``clearing'' is performed by a CCP, 
and ``settlement'' is performed for certain securities transactions 
by a CSD, which then holds those securities in its role as the 
central depository. Because clearing agencies can provide either CCP 
or CSD services, the Commission uses ``clearing agencies'' here and 
below to refer to CCPs and CSDs collectively. ``Registered clearing 
agencies'' are those CCPs and CSDs that are registered with the 
Commission.
    \573\ See DTCC, 2015 Annual Report, available at http://www.dtcc.com/annuals/2015/index.php.
    \574\ See OCC, 2015 Annual Report, available at http://www.theocc.com/components/docs/about/annual-reports/occ-2015-annual-report.pdf.
---------------------------------------------------------------------------

    While central clearing generally benefits the markets in which it 
is available, clearing agencies can pose substantial risk to the 
financial system as a whole, due in part to the fact that central 
clearing concentrates risk in the clearing agency. Disruption to a 
clearing agency's operations, or failure on the part of a clearing 
agency to meet its obligations, could therefore serve as a potential 
source of contagion, resulting in significant costs not only to the 
clearing agency itself or its members but also to other market 
participants or the broader U.S. financial system.\575\ As a result, 
proper management of the risks associated with central clearing is 
necessary to ensure the stability of the U.S. securities markets and 
the broader U.S. financial system. The mandate in Title VII of the 
Dodd-Frank Act for central clearing of security-based swaps, wherever 
possible and appropriate, further reinforces this need.\576\ When a 
clearing agency provides CCP services, central clearing replaces 
bilateral counterparty exposures with exposures against the clearing 
agency. Consequently, a move from voluntary clearing to mandatory 
clearing of security-based swaps, holding the volume of security-based 
swap transactions constant, would increase economic exposures against 
clearing agencies that centrally clear security-based swaps. Increased 
exposures in turn raise the possibility that these clearing agencies 
may serve as a transmission mechanism for systemic events.
---------------------------------------------------------------------------

    \575\ See generally Dietrich Domanski, Leonardo Gambacorta, and 
Cristina Picillo, Central Clearing: Trends and Current Issues, BIS 
Quarterly Review (Dec. 2015), available at https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf (describing links between CCP financial risk 
management and systemic risk); 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 
clearing entities have failed or come close to failing in the past, 
including in connection with the 1987 market break); Froukelien 
Wendt, Central Counterparties: Addressing Their Too Important to 
Fail Nature (IMF Working Paper, Jan. 2015), available at http://papers.ssrn.com/sol3/Delivery.cfm/wp1521.pdf (assessing the 
potential channels for contagion arising from CCP 
interconnectedness); 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).
    \576\ See supra Part I.A.2.
---------------------------------------------------------------------------

    Clearing agencies have incentives to implement a risk management 
framework that can effectively manage the risks posed by central 
clearing. 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 reduce the 
likelihood that a member default or operational outage would disrupt 
settlement of a particular transaction or set of transactions. Second, 
some clearing agencies operate as member-owned utilities and mutualize 
default risk across their members, and thus non-defaulting participants 
are subject to losses that occur above the defaulter's margin and 
clearing fund. Clearing agencies that operate under such models thus 
have an economic interest in sound risk management to reduce the 
expected level of losses that must be mutualized. Other clearing 
agencies are publicly traded and therefore could have different 
incentives because non-member-owners may have a lower economic stake in 
the clearing agency than member-owners under a mutualized structure. 
Such an ownership structure could increase the incentive for owners, 
particularly those that are non-members, to take risks, though these 
incentives may be tempered by rules of the clearing agency

[[Page 70850]]

that are consistent with Section 17A(b)(3)(C) of the Exchange Act, 
which requires that the clearing agency's rules assure fair 
representation of its shareholders and participants in the selection of 
the clearing agency's directors and administration of its affairs.\577\
---------------------------------------------------------------------------

    \577\ See 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

    Further, Section 17A of the Exchange Act requires that the rules of 
a clearing agency protect investors and the public interest.\578\ 
Nevertheless, incentives for sound risk management may be tempered by 
pressures to reduce costs and maximize profits that are distinct from 
goals set forth in governing statutes.\579\ This tension may result in 
a clearing agency making decisions that result in tradeoffs between the 
costs and benefits of risk management that are not socially efficient 
because a clearing agency's decision-making process may not fully 
reflect the costs and benefits that accrue to other financial market 
participants as a result of its decisions. 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 entities within the financial system that 
are connected to them through relationships with their clearing 
members.\580\ Such a failure represents a financial network externality 
imposed by clearing agencies on the broader financial system and 
suggests that financial stability, as a public good, may be under-
produced in equilibrium.
---------------------------------------------------------------------------

    \578\ See 15 U.S.C. 78q-1(b)(3)(F).
    \579\ See supra Parts I.A.1 and 2 (describing the requirements 
under the Exchange Act and the Clearing Supervision Act).
    \580\ 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 amendments to Rule 17Ad-22 
and Rule 17Ab2-2 represent a strengthening of the Commission's 
regulation of registered clearing agencies. In particular, Rule 17Ad-
22(e) establishes requirements for the operation and governance of 
registered clearing agencies that meet the definition of ``covered 
clearing agency.'' The Commission believes that the more specific 
requirements imposed by Rule 17Ad-22(e) will further mitigate the 
potential for moral hazard associated with risk management at a covered 
clearing agency. For instance, in the absence of policies and 
procedures that require periodic stress-testing and validation of 
credit and liquidity risk models, a covered clearing agency could 
potentially choose to recalibrate models in periods of low volatility 
and avoid recalibration in periods of high volatility, causing it to 
underestimate the risks that it faces during periods of market stress. 
The Commission believes that the specific requirements in Rule 17Ad-
22(e) with respect to stress testing and validation of credit and 
liquidity models would be more effective at mitigating these particular 
manifestations of incentive misalignments than the requirements in 
Rules 17Ad-22(b) or (d).
    The Commission believes, as a result, that Rule 17Ad-22(e) provides 
a general benefit of reducing the likelihood of a clearing agency 
failure. This general benefit accrues to the extent that clearing 
agencies do not already conform to the requirements in Rule 17Ad-22(e). 
Despite the potential incentive problems noted above, and perhaps in 
anticipation of regulatory efforts, some registered clearing agencies 
have already taken steps to update their policies and procedures in 
manners that may be consistent with the requirements in Rule 17Ad-
22(e). The Commission also notes that, in some instances, the practices 
that Rule 17Ad-22(e) codifies as minimum requirements are current 
practices at some registered clearing agencies. In these cases, the 
Commission believes that imposing these requirements on covered 
clearing agencies will have the effect of imposing consistent, higher 
minimum risk management standards across all covered clearing agencies. 
In adopting these rules, the Commission is also mindful of the benefits 
that would accrue by adopting regulatory approaches that are generally 
consistent with those of the CFTC and FRB.
    The Commission is sensitive to the economic consequences and 
effects of the amendments to Rule 17Ad-22 and Rule 17Ab2-2, including 
their benefits and costs. The Commission acknowledges that, since many 
of these rules require a covered clearing agency to adopt new policies 
and procedures, the economic effects and consequences of these 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.\581\ 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.\582\ Section 23(a)(2) of the Exchange Act 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.\583\
---------------------------------------------------------------------------

    \581\ See 15 U.S.C. 78c(f).
    \582\ See supra Part I.A.1.
    \583\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission has attempted to quantify the benefits and costs 
anticipated to flow from the amendments to Rule 17Ad-22 and Rule 17Ab2-
2. In the CCA Standards proposing release, the Commission requested 
comment on all aspects of the economic analysis of the proposed rules, 
including their benefits and costs, as well as any effect the proposed 
rules may have on competition, efficiency, and capital formation, and 
encouraged commenters to provide data and analysis to help further 
quantify or estimate the potential benefits and costs of the proposed 
rules. Although it did not receive comments specifically directed at 
the economic analysis, the Commission has considered the comments, and, 
as in some cases indicated below, certain data needed to quantify the 
costs and benefits associated with the rules remains 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.
    As discussed above,\584\ the Commission believes that Rule 17Ad-
22(e), in requiring reasonably designed policies and procedures strikes 
an appropriate balance between directing covered clearing agencies to 
engage in specific conduct or practices and allowing each covered 
clearing agency to design its own policies and procedures without any 
framework. In adopting Rule 17Ad-22(e), the Commission is providing 
guidance to help covered clearing agencies identify and develop 
reasonable policies and

[[Page 70851]]

procedures. The guidance outlines key issues and building blocks that a 
covered clearing agency generally should consider as it develops 
policies and procedures in compliance with Rule 17Ad-22(e). While this 
guidance provides covered clearing agencies with additional information 
about the types of considerations that may be relevant to meeting 
requirements under Rule 17Ad-22(e), the Commission does not believe 
that considering these issues will entail substantial costs beyond the 
estimates presented below.
---------------------------------------------------------------------------

    \584\ See Part II.B.
---------------------------------------------------------------------------

    Overall, the Commission believes that the amendments to Rule 17Ad-
22 and Rule 17Ab2-2 should result in improvements in risk management 
with respect to systemic risk, as well as with respect to legal, 
credit, liquidity, general business, custody, investment, and 
operational risk. Further, the Commission believes that the amendments 
to Rule 17Ad-22 should 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 
requirements for the management of liquidity risk and general business 
risk, an increase in financial stability may occur as a result of 
higher risk management standards at covered clearing agencies that 
lower the probability that either covered clearing agencies or their 
members default. As explained in Part III.B.2, reduced default 
probabilities for covered clearing agencies may, in turn, improve 
efficiency and capital formation.

A. Economic Baseline

    To consider the effect of the amendments to Rule 17Ad-22 and Rule 
17Ab2-2 on market activity, including possible effects on efficiency, 
competition, and capital formation, the Commission is using an economic 
baseline that considers the current market for central clearing, 
including the number of registered clearing agencies, the distribution 
of members across these clearing agencies, and the volume of 
transactions these clearing agencies process. As noted above, there are 
currently five registered clearing agencies that provide CCP services 
and one that provides CSD services, and these entities processed and 
cleared a large number of contracts and securities. For example, for 
2015 DTCC reported processing over $1.5 quadrillion in financial market 
transactions, DTCC cleared over 4.1 billion in contract volume, and ICE 
cleared over 6 million futures and OTC contracts each day.\585\
---------------------------------------------------------------------------

    \585\ See supra notes 573-574 and accompanying text.
---------------------------------------------------------------------------

    With respect to the distribution of members across clearing 
agencies, Table 1 shows that membership rates vary.
---------------------------------------------------------------------------

    \586\ Membership statistics are taken from the Web sites of each 
of the listed clearing agencies as of March 2016. See DTCC, DTC 
Member Directories, available at http://www.dtcc.com/client-center/dtc-directories; DTCC, FICC-GOV Member Directories, available at 
http://www.dtcc.com/client-center/ficc-gov-directories; DTCC, FICC-
MBS Member Directories, available at http://www.dtcc.com/client-center/ficc-mbs-directories; DTCC, NSCC Member Directories, 
available at http://www.dtcc.com/client-center/nscc-directories; 
ICE, ICE Clear Credit Participants, available at https://www.theice.com/clear-credit/participants; ICE, ICE Clear Europe 
Membership, available at https://www.theice.com/clear-europe/membership; OCC, Member Directory, http://www.optionsclearing.com/membership/member-information.

   Table 1--Membership Statistics for Registered Clearing Agencies 586
------------------------------------------------------------------------
                                                                Number
------------------------------------------------------------------------
DTC................................  Full Service Members..          255
FICC...............................  GSD Members...........          106
                                     MBSD Members..........           77
ICE................................  Clear Credit Members..           30
                                     Clear Europe Members..           80
                                     --Clear Europe Members           21
                                      that clear CDS.
NSCC...............................  Full Service Members..          163
OCC................................  Total Members.........          114
------------------------------------------------------------------------

    The Commission notes that registered clearing agencies are 
currently characterized by specialization and limited competition. 
Central clearing exhibits high barriers to entry and economies of 
scale. These features of the existing market, and the resulting 
concentration of central clearing within a handful of entities, informs 
the Commission's examination of the effects of the amendments to Rule 
17Ad-22 and Rule 17Ab2-2 on competition, efficiency, and capital 
formation, as discussed further below.\587\
---------------------------------------------------------------------------

    \587\ See infra Part III.B.2 (discussing the effect of the 
adopted rules on competition, efficiency, and capital formation).
---------------------------------------------------------------------------

    To further assess the economic effects of the amendments to Rule 
17Ad-22 and Rule 17Ab2-2, including possible effects on efficiency, 
competition, and capital formation, the Commission is also considering 
as part of the baseline (i) the current regulatory framework for 
registered clearing agencies, and (ii) the current practices of 
registered clearing agencies that relate to Rule 17Ad-22(e). Each is 
discussed further below.
1. Regulatory Framework for Registered Clearing Agencies
    As previously discussed, the current regulatory framework for 
registered clearing agencies begins with Section 17A of the Exchange 
Act, which directs the Commission to facilitate the establishment of 
(i) a national system for the prompt and accurate clearance and 
settlement of securities transactions and (ii) linked or coordinated 
facilities for clearance and settlement of securities transactions. 
Further, Section 17A and Rule 17Ab2-1 require an entity that meets the 
definition of a clearing agency to register with the Commission or 
obtain from the Commission an exemption from registration prior to 
performing the functions of a clearing agency.\588\ After registration, 
the Commission supervises registered clearing agencies using various 
tools, including (i) the rule filing process for SROs set forth in 
Section 19(b) of the Exchange Act and rules thereunder, (ii) 
examinations of clearing agencies, and (iii) other provisions of the 
Exchange Act.\589\ Titles VII and VIII of the Dodd-Frank Act have 
expanded the Commission's role with respect to the regulation of 
clearing agencies. Specifically, Title VII amended Section 17A of the 
Exchange Act by adding, among other provisions, new paragraphs (g) 
through (j), which provide the Commission with authority to adopt rules 
governing security-based swap clearing agencies.\590\ The Clearing 
Supervision Act, adopted in Title VIII, provides for enhanced 
regulation of SIFMUs and, more generally, for enhanced coordination 
between the Commission and FRB by facilitating regulator on-site 
examinations and information sharing. It further provides that the 
Commission and CFTC shall coordinate with the FRB to jointly develop 
risk management supervision programs for SIFMUs and that the Commission 
and CFTC can each prescribe risk management standards governing the 
operations related to the PCS activities of SIFMUs for which each is 
the supervisory agency, in consultation with the FSOC and FRB and 
taking into consideration relevant international standards and existing 
prudential requirements.\591\
---------------------------------------------------------------------------

    \588\ See supra Part I.A.1.
    \589\ See supra notes 11-16 and accompanying text.
    \590\ See supra note 17 and accompanying text.
    \591\ See supra notes 18-25 and accompanying text.
---------------------------------------------------------------------------

    In 2012, the Commission adopted Rule 17Ad-22 under the Exchange Act 
to strengthen the substantive regulation

[[Page 70852]]

of registered clearing agencies, promote the safe and reliable 
operation of registered clearing agencies, and improve efficiency, 
transparency, and access to registered clearing agencies.\592\ In its 
economic analysis of the Clearing Agency Standards release, 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.\593\ The requirements in Rule 17Ad-22 establish an enhanced 
regulatory framework for clearing agencies that raise systemic risk 
concerns due to, among other things, their size, systemic importance, 
global reach, or the risks inherent in the products they clear.\594\
---------------------------------------------------------------------------

    \592\ See supra note 26 and accompanying text.
    \593\ See CCA Standards proposing release, supra note 5, at 
29579.
    \594\ See supra note 29 and accompanying text.
---------------------------------------------------------------------------

a. Determinations by the Commission
    Among other things, the Commission makes determinations regarding 
the registration of clearing agencies and proposed rule changes. Rule 
17Ad-22(d) has applied to registered clearing agencies since January 
2013, and no mechanism exists under Rule 17Ad-22 for the Commission to 
make determinations of the type that appear in Rule 17Ab2-2.\595\
---------------------------------------------------------------------------

    \595\ See supra Part II.D.
---------------------------------------------------------------------------

b. BCBS Capital Framework
    In addition to requirements under the Exchange Act, the Dodd-Frank 
Act, and Rule 17Ad-22, other regulatory efforts are relevant to the 
Commission's analysis of the economic effects of Rule 17Ad-22(e). In 
2012, the BCBS first published the capital framework, which sets forth 
rules governing the capital charges arising from bank exposures to CCPs 
related to OTC derivatives, exchange-traded derivatives, and securities 
financing transactions, and the BCBS finalized the framework in 
2014.\596\ The BCBS capital framework is designed to 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 PFMI. Specifically, 
the BCBS capital framework introduces new capital charges based on 
counterparty risk for banks conducting derivatives transactions or 
securities financing transactions through a CCP.\597\
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    \596\ See supra note 44 and accompanying text.
    \597\ Since the BCBS capital 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 BCBS 
capital framework. Each would meet the definition of ``covered 
clearing agency.''
---------------------------------------------------------------------------

    Capital charges under the BCBS capital 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. These 
weights have increased as banking regulators have adopted rules 
consistent with the BCBS capital framework. The risk weight assigned 
under the BCBS capital framework varies depending on whether the 
counterparty is a QCCP. For example, risk weights for trade exposures 
to a CCP generally would vary between twenty and 100 percent depending 
on the CCP's credit quality, while trade exposures to a QCCP would 
carry only a two-percent risk weight.\598\ In addition, bank exposures 
to CCP default funds would carry a risk weight of 1250 percent. While 
bank exposures to QCCP default funds will also carry a 1250 percent 
risk weight at low levels, under the BCBS capital framework, default 
fund exposures' contribution to a bank's risk weighted assets will be 
limited to at most eighteen percent of the bank's trade exposures to a 
given QCCP.
---------------------------------------------------------------------------

    \598\ The BCBS capital framework, as well as the rules adopted 
by the FRB and Office of the Comptroller of the Currency consistent 
with that framework, applies lower risk weights of two or four 
percent to indirect exposures of banks to QCCPs. See BCBS capital 
framework, supra note 44, paras. 114-15; Regulatory Capital Rules, 
supra note 45, at 62103.
---------------------------------------------------------------------------

    Many jurisdictions have already adopted rules that implement 
requirements under the BCBS capital framework. For example, the BCBS 
reports that, as of March 2016, all twenty-seven member jurisdictions 
have risk-based capital rules in force, twenty-four have rules for 
countercyclical capital buffers, and twenty-three have implemented or 
drafted rules related to systematically important banks.\599\ In the 
United States, the FRB and Office of the Comptroller of the Currency 
jointly issued regulatory capital rules for U.S. banks consistent with 
the BCBS capital framework effective January 1, 2014. The rules subject 
bank exposures to CCPs and QCCPs to increased risk weights as specified 
in the BCBS capital framework.\600\ In addition to specifying risk 
weights, the rules define the term QCCP for banks supervised by the FRB 
and the Office of the Comptroller of the Currency. According to these 
rules, QCCP status applies to any CCP that is a SIFMU or, if not 
located in the United States, any CCP that is regulated and supervised 
in a manner equivalent to a SIFMU.\601\ In addition, a CCP can become a 
QCCP if it meets the following standards: It requires all parties to 
contracts cleared by the CCP to be fully collateralized on a daily 
basis; and it is regulated by the FRB and demonstrates to the 
satisfaction of the FRB that the CCP is (i) in sound financial 
condition, (ii) subject to supervision by the Commission, CFTC, or FRB 
or, if not located in the United States, subject to effective oversight 
by a national supervisory authority in its home country, and (iii) 
meets or exceeds the risk management standards for CCPs established 
under the Dodd-Frank Act or, if not located in the United States, meets 
or exceeds similar risk-management standards established under the law 
of its home country that are consistent with international standards 
for CCP risk management as established by the relevant standard setting 
body. Under this definition, each covered clearing agency would be a 
QCCP either because it is a SIFMU or because it is a CCP that is 
regulated and supervised in a manner equivalent to a SIFMU, and 
therefore U.S. bank clearing members would be subject to the lower 
capital requirements on exposures to QCCPs under the BCBS capital 
framework.
---------------------------------------------------------------------------

    \599\ See BCBS, Tenth progress report on adoption of the Basel 
regulatory framework, at 1 (Apr. 2016), available at https://www.bis.org/bcbs/publ/d354.pdf.
    \600\ See 12 CFR 217.2 (defining ``qualifying central 
counterparty''); see also Regulatory Capital Rules, supra note 45, 
at 62166.
    \601\ See 12 CFR 217.2.
---------------------------------------------------------------------------

    Within the European Union, EMIR permits legal persons incorporated 
under the law of an EU member state to use non-EU CCPs only if those 
CCPs have been recognized under EMIR. Further, only non-EU CCPs 
recognized under EMIR will meet the conditions necessary to be 
considered a QCCP for EU bank clearing members. Article 25 of EMIR 
outlines a recognition procedure for non-EU CCPs and Article 89 
provides a timeline for recognition.\602\ FICC, NSCC, and OCC have 
applied for recognition under EMIR.\603\ In February

[[Page 70853]]

2016, the European Commission and CFTC announced that they will follow 
a common approach for CCPs. The European Commission plans to adopt an 
equivalence decision that will allow ESMA to recognize U.S. CCPs 
regulated by the CFTC, such that these entities can provide services in 
the EU while complying primarily with CFTC rules and regulations.\604\
---------------------------------------------------------------------------

    \602\ 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.
    \603\ 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 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 TRs (EMIR) (Dec. 16, 2013), 
available at https://www.esma.europa.eu/sites/default/files/library/list_of_applicants_tc-ccps.pdf.
    \604\ See ESMA, ESMA resumes U.S. CCP recognition process 
following EU-U.S. agreement available at https://www.esma.europa.eu/sites/default/files/library/2016-278_eu-us_approach_ccp_equivalence.pdf.
---------------------------------------------------------------------------

    Additionally, the BCBS capital framework, as adopted by the FRB, 
Office of the Comptroller of the Currency, and banking regulators in 
other jurisdictions, impose capital requirements related to 
unconditionally cancellable commitments and other off-balance sheet 
exposures. For example, the FRB and Office of the Comptroller of the 
Currency require banks to include ten percent of the notional amount of 
unconditionally cancellable commitments in their calculation of total 
leverage exposure.\605\ The rules place a floor of three percent on the 
ratio of tier one capital to total assets for banks subject to advanced 
approaches to risk-based capital rules.\606\ To the extent that 
clearing agencies rely on financial resources from banks as part of 
their risk management activities, these constraints on off-balance 
sheet exposures could raise the cost of such activities.
---------------------------------------------------------------------------

    \605\ See Regulatory Capital Rules, supra note 45, at 62169.
    \606\ See id. at 62284. The Regulatory Capital Rules require 
compliance no later than 2018.
---------------------------------------------------------------------------

c. Other Regulatory Efforts
    Efforts by the CFTC and FRB to adopt rules that are consistent with 
the PFMI are also relevant to the economic analysis of the amendments 
to Rule 17Ad-22. Both the CFTC and FRB have indicated publicly that 
they have completed all measures necessary to incorporate fully the 
PFMI into their regulatory frameworks.\607\
---------------------------------------------------------------------------

    \607\ See supra note 43.
---------------------------------------------------------------------------

2. Current Practices
    Current industry practices are a critical element of the economic 
baseline for registered clearing agencies. Registered clearing agencies 
must operate in compliance with Rule 17Ad-22, though they may vary in 
the particular ways they achieve such compliance. Some variation in 
practices across registered clearing agencies derives from the products 
they clear and the markets they serve. The Commission also understands 
that, since it published the CCA Standards proposing release, some 
registered clearing agencies have amended their rules with the aim of 
achieving consistency with some of the standards in the PFMI. Because 
the Commission believes that the requirements in Rule 17Ad-22(e) are 
consistent with the PFMI and further the objectives of Section 17A of 
the Exchange Act, the Clearing Supervision Act, and Title VII of the 
Dodd-Frank Act, the Commission also believes that Rule 17Ad-22(e) 
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 adoption and 
reflects the Commission's experience supervising registered clearing 
agencies.
a. 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.\608\ Each registered clearing 
agency makes a large portion of these policies and procedures available 
to members and participants. In addition, each also publishes their 
rule books and other key procedures publicly to promote the 
transparency of their legal frameworks.\609\
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    \608\ See 17 CFR 240.17Ad-22(d)(1); CCA Standards proposing 
release, supra note 5, at 29580.
    \609\ The rule book of each registered clearing agency, as well 
as select policies and procedures, are publicly available on each 
registered clearing agency's Web site.
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b. 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.\610\ 
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.
---------------------------------------------------------------------------

    \610\ See 17 CFR 240.17Ad-22(d)(8); see also CCA Standards 
proposing release, supra note 5, at 29581.
---------------------------------------------------------------------------

    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 Rule 17Ad-
22(e) as covered clearing agencies currently include non-management 
members.
    Since the Commission proposed Rule 17Ad-22(e), certain registered 
clearing agencies have revised their governance policies. For example, 
some clearing agencies have established additional committees of the 
board to focus on risk management and technology issues,\611\ and one 
clearing agency has modified its nomination process for directors and 
increased the number of public directors on its board of 
directors.\612\
---------------------------------------------------------------------------

    \611\ See, e.g., Exchange Act Release No. 34-77042 (Feb. 3, 
2016), 81 FR 6915 (Feb. 9, 2016) (order approving the adoption by 
OCC of a charter of a new committee of the board of directors, the 
technology committee); Exchange Act Release No. 34-74026 (Jan. 9, 
2015), 80 FR 2160 (Jan. 15, 2015) (order approving proposed rule 
change related to ICE Clear Europe's board risk committee).
    \612\ See Exchange Act Release No. 34-72564 (July 8, 2014), 79 
FR 40824 (July 14, 2014) (order approving a proposed rule change by 
OCC concerning the consolidation of the governance committee and 
nominating committee into a single committee, changes to the 
nominating process for directors, and increasing the number of 
public directors on board of directors).

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[[Page 70854]]

c. 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.\613\ 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.\614\ 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.\615\
---------------------------------------------------------------------------

    \613\ See 17 CFR 240.17Ad-22(b) and (d); see also Clearing 
Agency Standards adopting release, supra note 5.
    \614\ See 17 CFR 240.17Ad-22(d)(4); see also Clearing Agency 
Standards adopting release, supra note 5, at 66248-49.
    \615\ 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 their 
losses.\616\ These actions may include assessment rights on clearing 
members, forced allocation, and contract termination. Since the 
Commission proposed Rule 17Ad-22(e), certain clearing agencies have 
modified policies and procedures that address how resources are 
collected from members to manage financial risks. For example, one 
clearing agency has revised its rules to require that intraday margin 
be collected and margin assets not withdrawn when a member's reasonably 
anticipated settlement obligations would exceed the liquidity resources 
available to the clearing agency to satisfy those clearing 
obligations.\617\
---------------------------------------------------------------------------

    \616\ 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).
    \617\ See Exchange Act Release No. 34-72266 (May 28, 2014), 79 
FR 32008 (June 3, 2014) (notice of filing and immediate 
effectiveness of proposed rule change by OCC to require that 
intraday margin be collected and margin assets not be withdrawn when 
a clearing member's reasonably anticipated settlement obligations to 
the clearing agency would exceed the clearing agency's liquidity 
resources available to satisfy such obligations).
---------------------------------------------------------------------------

d. 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 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; and (6) in the case of security-based swap 
transactions, maintaining enough financial resources to be able to 
withstand the default of their two largest participant families.\618\
---------------------------------------------------------------------------

    \618\ 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.\619\ Several CCPs have policies 
and procedures designed to require measuring credit exposures multiple 
times per day.
---------------------------------------------------------------------------

    \619\ 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.\620\ 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.\621\ Accordingly, the Commission 
notes that Rule 17Ad-22(b)(3) imposes a ``cover two'' requirement on 
CCPs for security-based swaps to protect such CCPs from the

[[Page 70855]]

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.\622\ 
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.\623\
---------------------------------------------------------------------------

    \620\ See 17 CFR 240.17Ad-22(b)(2).
    \621\ See id.
    \622\ See supra Part II.C.4.a (discussing the requirements for 
``cover one'' and ``cover two'').
    \623\ 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.
    Since the Commission proposed Rule 17Ad-22(e), certain clearing 
agencies have amended some of their policies with regards to credit 
risk. Such modifications include, for example, provisions that require 
real-time submission of all locked-in trade data submitted for trade 
recording and prohibit pre-netting and other practices that prevent 
real-time trade submission.\624\ Another clearing agency has made 
modifications to its policies and procedures for stress testing 
frameworks.\625\
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    \624\ See Exchange Act Release No. 34-69890 (June 28, 2013), 78 
FR 40538 (July 5, 2013) (order approving NSCC's proposed rule change 
to require that all locked-in trade data submitted to it for trade 
recording be submitted in real-time).
    \625\ See Exchange Act Release No. 34-77982 (June 2, 2016), 81 
FR 36979 (June 8, 2016) (order approving ICE Clear Credit's proposed 
rule change to update and formalize its stress testing framework).
---------------------------------------------------------------------------

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.\626\ This margin 
can also be used to reduce a CCP's losses in the event of a participant 
default.
---------------------------------------------------------------------------

    \626\ 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 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 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 use risk-based 
models and parameters to set margin requirements.\627\ The generally 
recognized standard for such models and parameters is, under normal 
market conditions, price movements that 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.\628\ 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.\629\
---------------------------------------------------------------------------

    \627\ See id.
    \628\ See 17 CFR 240.17Ad-22(a)(4). The Commission notes that 
because of modifications to Rule 17Ad-22(a), the definition of 
``normal market conditions'' is being moved to Rule 17Ad-22(a)(11). 
The Commission is not altering the definition of ``normal market 
conditions.'' See Rule 17Ad-22(a)(11), infra Part VI.
    \629\ 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.

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[[Page 70856]]

    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.\630\ 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.\631\
---------------------------------------------------------------------------

    \630\ See 17 CFR 240.17Ad-22(b)(2).
    \631\ See 17 CFR 240.17Ad-22(b)(4).
---------------------------------------------------------------------------

    Certain clearing agencies have amended their policies and 
procedures governing collateral and margin requirements since the 
Commission proposed Rule 17Ad-22(e). For example, one clearing agency 
has amended its rules to require that intraday margin be collected and 
to prohibit margin from being withdrawn if the agency anticipates that 
the settlement obligations would exceed the liquidity resources 
available to the agency to satisfy such settlement obligations.\632\
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    \632\ See Exchange Act Release No. 34-72266 (May 28, 2014), 79 
FR 32008 (June 3, 2014) (notice of filing and immediate 
effectiveness of OCC's proposed rule change to require that intraday 
margin be collected and margin assets not be withdrawn when a 
clearing member's reasonably anticipated settlement obligations 
would exceed the clearing agency's liquidity resources available to 
satisfy such settlement obligations).
---------------------------------------------------------------------------

    Other revisions include modifications to risk models to monitor 
margin coverage and risk exposure. For example, modifications include 
accounting for factors such as procyclicality or implied volatility of 
certain options to reflect future market fluctuations.\633\ Amendments 
to backtesting procedures are designed to assist clearing agencies in 
determining the amount of margin to collect from clearing members.\634\
---------------------------------------------------------------------------

    \633\ See, e.g., Exchange Act Release No. 34-72756 (Aug. 4, 
2014), 79 FR 46479 (Aug. 8, 2014) (order approving ICE Clear 
Europe's proposed rule change to credit default swap risk policies); 
Exchange Act Release No. 34-76781 (December 28, 2015), 81 FR 135 
(order approving OCC's proposed rule change to modify its margin 
methodology by incorporating variations in implied volatility).
    \634\ See, e.g., Exchange Act Release No. 34-75290 (June 24, 
2015), 80 FR 37323 (June 30, 2015) (notice of no objection to OCC's 
advance notice concerning modifications to backtesting procedures in 
order to enhance monitoring of margin coverage and model risk 
exposure).
---------------------------------------------------------------------------

    Additionally, certain modifications address exposure to wrong-way 
risk. For example, one clearing agency revised its margin methodology 
as applied to the family-issued securities of certain members to 
exclude these securities from the volatility component and then by 
charging an amount calculated, in part, by applying a haircut rate to 
the absolute value of the long net unsettled positions in the member's 
family-issued securities.\635\ Other clearing agencies have adjusted 
their risk models to account for accumulation of general wrong-way risk 
at the portfolio level, while others have modified their policies with 
respect to the assets accepted as permitted cover, as well as limits on 
the value of the collateral that may be accepted as permitted 
cover.\636\
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    \635\ See Exchange Act Release No. 34-76077 (Oct. 5, 2015), 80 
FR 61256 (Oct. 9, 2015) (notice of no objection to NSCC's proposed 
rule change to enhance its margining methodology as applied to 
family-issued securities of certain members).
    \636\ See, e.g., Exchange Act Release No. 34-75887 (Sept. 10, 
2015), 80 FR 55672 (Sept. 16, 2015) (order approving ICE Clear 
Credit's proposed rule change to revise its risk management 
framework).
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iii. Liquidity Risk
    In addition to credit risk and the aforementioned market risk, 
registered clearing agencies also face liquidity or funding risk. 
Currently, covered clearing agencies have varying degrees of formality 
with respect to their standards and practices relating to liquidity 
shortfalls. To complete the settlement process, registered clearing 
agencies that employ netting rely on incoming payments from 
participants in net debit positions 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, under certain pre-defined 
circumstances, 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. Since the Commission proposed Rule 17Ad-22(e), certain 
clearing agencies have amended their policies and procedures regarding 
liquidity risk including, for example, through sources such as 
committed credit facilities, private placements of debt, and committed 
securities repurchase agreements. Such provisions can assist the 
ability of clearing agencies to complete settlement obligations, 
particularly in the instances where a clearing member defaults. 
Additionally, certain clearing agencies have clarified certain rules by 
which they manage liquidity, including how they will access and use 
internal liquidity resources.\637\
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    \637\ See, e.g., Exchange Act Release No. 34-72944 (Aug. 28, 
2014), 79 FR 52789 (Aug. 28, 2014) (order approving ICE Clear 
Credit's proposed rule change related to its authority to use 
guaranty fund and house initial margin as an internal liquidity 
resource).
---------------------------------------------------------------------------

e. 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

[[Page 70857]]

or strictly limit the clearing agency's settlement bank risks and 
require funds transfers to the clearing agency to be final when 
effected.\638\ 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.\639\ 
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.\640\
---------------------------------------------------------------------------

    \638\ See 17 CFR 240.17Ad-22(d)(5).
    \639\ See 17 CFR 240.17Ad-22(d)(12).
    \640\ See 17 CFR 240.17Ad-22(d)(15).
---------------------------------------------------------------------------

    Since the Commission proposed Rule 17Ad-22(e), certain clearing 
agencies have amended their policies and procedures governing money 
settlements. These include, for example, provisions to convert U.S. 
Treasuries into cash when the sale of pledged securities cannot be 
settled on a same-day basis.\641\
---------------------------------------------------------------------------

    \641\ See Exchange Act Release No. 34-74456 (March 6, 2015), 80 
FR 13055 (Mar. 12, 2015) (order approving ICE Clear Credit's 
proposed rule change to revise its Treasury operations policies and 
procedures).
---------------------------------------------------------------------------

f. 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. 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.
g. 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,\642\ 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.
---------------------------------------------------------------------------

    \642\ See 17 CFR 240.17Ad-22(d)(13); see also Clearing Agency 
Standards adopting 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.
h. 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.
i. 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.\643\
---------------------------------------------------------------------------

    \643\ See supra note 434 (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).

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

[[Page 70858]]

    Since the Commission proposed Rule 17Ad-22(e), certain clearing 
agencies have modified their policies and procedures on segregation and 
portability. These amendments include implementing changes to the 
structure of customer accounts to enhance segregation options for 
customers and establishing new types of individually segregated 
accounts and omnibus accounts for cleared transactions, as well as 
modifications to these frameworks, as well as adopting an individual 
client segregation framework and modifications related to the omnibus 
client segregation model.\644\ There have also been changes specifying 
certain fees applicable to segregated customer accounts, margin flow 
comingled accounts, and individually segregated sponsored 
accounts.\645\
---------------------------------------------------------------------------

    \644\ See, e.g., Exchange Act Release Nos. 34-72755 (Aug. 4, 
2014), 79 FR 46481 (Aug. 8, 2014), 34-72754 (Aug. 4, 2014), 79 
FR46477 (Aug. 8, 2014) (approval orders related to ICE Clear 
Europe's proposed rule changes related to segregation and 
portability), and 34-73344 (Oct. 14, 2014), 76 FR 62694 (Oct. 20, 
2014) (notice of filing and immediate effectiveness of proposed rule 
change related to segregation and portability).
    \645\ See, e.g., Exchange Act Release No. 34-75657 (Aug.10, 
2015), 80 FR 48937 (Aug. 14, 2015) (notice of filing and immediate 
effectiveness of ICE Clear Europe's proposed rule change to adopt 
revised fee schedule).
---------------------------------------------------------------------------

j. 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.
    Since the Commission proposed Rule 17Ad-22(e), certain clearing 
agencies have revised their policies and procedures related to general 
business risk. Such modifications include amendments to a shareholder 
agreement that are intended to increase the working capital available 
to conduct the business of the operating subsidiaries and allow the 
clearing agencies to maintain operations for a longer period during 
times of financial stress.\646\
---------------------------------------------------------------------------

    \646\ See Exchange Act Release No. 34-74142 (Jan. 27, 2015), 80 
FR 5188 (Jan. 30, 2015) (notice of no objection to NSCC and FICC 
advance notices to amend and restate the third and amended restated 
shareholders agreement).
---------------------------------------------------------------------------

k. 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.\647\ 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, a designated clearing agency may have or gain access to a 
Federal Reserve account and services.\648\ Since the Commission 
proposed Rule 17Ad-22(e), certain clearing agencies have made 
modifications to the procedures and policies related to custody and 
investment risks. For example, one clearing agency adopted rules 
addressing certain investment losses on margin and guaranty fund 
contributions provided by clearing members.\649\
---------------------------------------------------------------------------

    \647\ See 17 CFR 240.17Ad-22(d)(3).
    \648\ See supra Part II.C.7 (discussing the requirements under 
Rule 17Ad-22(e)(7)(iii)).
    \649\ See Exchange Act Release No. 34-72551 (July 8, 2014), 79 
FR 16361 (July 14, 2014) (order approving ICE Clear Europe's 
proposed rule change regarding investment losses and non-default 
losses).
---------------------------------------------------------------------------

l. 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.\650\ 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, resilient, 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.\651\
---------------------------------------------------------------------------

    \650\ See 17 CFR 240.17Ad-22(d)(4).
    \651\ See id.
---------------------------------------------------------------------------

    As a result, registered clearing agencies have developed and 
currently maintain plans to ensure 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.\652\ 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.\653\
---------------------------------------------------------------------------

    \652\ Many of these practices had been previously developed 
pursuant to prior Commission guidelines. See supra Part I.A.1 
(discussing related requirements under Regulation SCI).
    \653\ 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.
---------------------------------------------------------------------------

    As discussed above, the Commission adopted Regulation SCI in 
November 2014, in part, to help reduce the occurrence of systems 
issues, and improve resiliency when systems problems do occur at 
certain SROs, such as registered clearing agencies and to enhance the 
Commission's oversight and enforcement of securities market technology 
infrastructure. Regulation

[[Page 70859]]

SCI requires that registered clearing agencies, as SCI entities, have 
policies and procedures that include business continuity and disaster 
recovery plans that include maintaining backup and recovery 
capabilities sufficiently resilient and geographically diverse and that 
are reasonably designed to achieve two-hour resumption of critical SCI 
systems following a wide-scale disruption. In particular, as discussed 
above, in the Regulation SCI adopting release the Commission explained 
its view that for clearance and settlement systems a return to ``normal 
operations'' following a systems disruption would include all steps 
necessary to effectuate timely and accurate end of day settlement.\654\ 
Since the Commission proposed Rule 17Ad-22(e), certain clearing 
agencies have revised aspects of their operational risk policies and 
procedures, including for the purposes of complying with Regulation 
SCI. For example, one clearing agency revised its policies and 
procedures for testing of business continuity and disaster recovery 
plans, including with respect to a member's requirement to participate 
in such testing.\655\
---------------------------------------------------------------------------

    \654\ See supra note 37 and accompanying text.
    \655\ See Exchange Act Release No. 34-76278 (Oct. 27, 2015), 80 
FR 67450 (Nov. 2, 2015) (notice of filing and immediate 
effectiveness of FICC's proposed rule change to provide additional 
details regarding the requirement that members participate in annual 
testing of business continuity and disaster recovery plans).
---------------------------------------------------------------------------

m. 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.\656\ 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.\657\ 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.\658\
---------------------------------------------------------------------------

    \656\ See 17 CFR 240.17Ad-22(b)(5).
    \657\ See 17 CFR 240.17Ad-22(b)(6).
    \658\ See 17 CFR 240.17Ad-22(b)(7).
---------------------------------------------------------------------------

    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.\659\ 
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.
---------------------------------------------------------------------------

    \659\ 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.\660\ Current membership generally reflects features of 
cleared markets. The decision to become a clearing member depends on 
the products being cleared and 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.
---------------------------------------------------------------------------

    \660\ See supra Part III.A.
---------------------------------------------------------------------------

n. 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 to identify, monitor, or 
manage such arrangements. Specifically, such clearing agencies rely on 
information gathered from, and distributed by, direct participants 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.

[[Page 70860]]

o. 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.\661\
---------------------------------------------------------------------------

    \661\ 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.\662\ Registered clearing 
agencies that provide CCP services currently establish links to allow 
members to realize collateral and other operational efficiencies.
---------------------------------------------------------------------------

    \662\ 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).
---------------------------------------------------------------------------

p. 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.\663\ 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 to 
make recommendations to improve their operating efficiency.
---------------------------------------------------------------------------

    \663\ See 17 CFR 240.17Ad-22(d)(6).
---------------------------------------------------------------------------

q. 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.
r. Disclosure
    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.\664\ 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 a registered clearing agency 
is an SRO,\665\ it must file with the Commission any proposed rule or 
any proposed change in, addition to, or deletion from its rules, and 
the Commission reviews all proposed rule changes and publishes them for 
comment.\666\ Proposed rule changes also are available for public 
viewing on each clearing agency's Web site.
---------------------------------------------------------------------------

    \664\ See 17 CFR 240.17Ad-22(d)(9).
    \665\ See supra Part I.A.1.
    \666\ See supra notes 12-13.
---------------------------------------------------------------------------

    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.
    Finally, the Commission notes that most registered clearing 
agencies currently publish on their Web sites their responses to the 
PFMI quantitative disclosures.\667\ These disclosures are to be updated 
semi-annually.
---------------------------------------------------------------------------

    \667\ See supra note 41.
---------------------------------------------------------------------------

B. 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 adopted rules. The section begins by framing more 
general economic issues related to the amendments to Rule 17Ad-22 and 
Rule 17Ab2-2. The discussion that follows considers the effects of the 
rules on efficiency, competition, and capital formation. The section 
ends with a discussion of the benefits and costs flowing from specific 
provisions of the amendments to Rule 17Ad-22 and Rule 17Ab2-2.
1. General Economic Considerations
    This section considers potential impacts of the 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 amendments to Rule 
17Ad-22. 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 to 
other financial market participants through their responses to clearing 
member default.
    The centralization of clearance and settlement activities at 
covered clearing agencies allows market participants to reduce costs, 
increase operational

[[Page 70861]]

efficiency, and manage risks more effectively.\668\ 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.
---------------------------------------------------------------------------

    \668\ Cf. PFMI, supra note 2, at 9.
---------------------------------------------------------------------------

b. Discretion
    The Commission recognizes that the degree of discretion permitted 
by the amendments to Rule 17Ad-22 partially determines their economic 
effect. Even where current practices at covered clearing agencies would 
not need to change significantly to comply with the rules, as adopted, 
covered clearing agencies could still potentially face costs associated 
with the limitations on discretion that will result from the 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 Rule 17Ad-
22(e) value the ability to periodically allow net liquid assets to drop 
below the minimum level specified by the rules, they may incur 
additional costs because under Rule 17Ad-22(e) 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 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 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. 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.\669\ Such investors may heavily weigh 
worst-case scenarios when they decide whether to hold the asset. The 
Commission 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 \670\ 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.\671\
---------------------------------------------------------------------------

    \669\ 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).
    \670\ 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.
    \671\ 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 believes that the 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 CFTC and 
FRB, and internationally, since cleared markets are global in nature 
and linked to one another through common participants.
    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 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. Differences across regulatory regimes could also affect the 
products that a clearing agency chooses to clear. In turn, a shift in 
product choice could result in more concentrated liquidity for certain 
markets.
---------------------------------------------------------------------------

    \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 believes that such consistency would prevent the application 
of inconsistent regulation 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 BCBS capital framework.\673\
---------------------------------------------------------------------------

    \673\ See BCBS capital framework, supra note 44.
---------------------------------------------------------------------------

    Based on its consultation and coordination with other regulators, 
the Commission believes Rule 17Ad-22(e) is consistent and comparable, 
where possible and appropriate, with the rules and policy statement 
adopted by the FRB and the rules adopted by the CFTC, as well as the 
headline principles in the PFMI. The Commission's rules differ from 
those requirements adopted by the CFTC and FRB in terms of the specific 
portions of the key considerations and explanatory text in the PFMI 
that are, or are not, referenced or emphasized.
    Further, CPMI-IOSCO members are also in various stages of 
implementing the standards in the PFMI into their own regulatory 
regimes, and the Commission believes that adopting a set of 
requirements generally consistent with the relevant international 
standards would result in diminished

[[Page 70862]]

likelihood that participants in cleared markets would restructure and 
operate in less-regulated markets.\674\ Additionally, international 
standards such as the BCBS capital framework could create complications 
for U.S. clearing agencies not subject to regulations based on the PFMI 
as a result of the BCBS capital 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 
BCBS capital framework because, for instance, the regulatory framework 
is not consistent with the PFMI, 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 BCBS capital framework.\675\
---------------------------------------------------------------------------

    \674\ See supra note 43.
    \675\ See supra notes 44-45 and infra Part III.B.1.e (discussing 
the BCBS capital framework and the economic effect of QCCP status 
under the BCBS capital framework, respectively).
---------------------------------------------------------------------------

d. Concentration
    The economic effects associated with the amendments to Rule 17Ad-22 
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.\676\ 
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.\677\
---------------------------------------------------------------------------

    \676\ See supra note 39 (defining ``financial market 
infrastructure'').
    \677\ Cf. PFMI, supra note 2, 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,\678\ particularly when combined with the cost reduction 
pressures noted previously.\679\ 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.\680\
---------------------------------------------------------------------------

    \678\ The Commission notes that this result depends on the 
relationship between the cost of innovations in risk management and 
the private benefits to a clearing agency in terms of reduced 
default risk. Absent competitive pressures, a clearing agency may 
nevertheless invest in the development of risk management practices 
so long as the marginal benefits of risk reduction exceed the 
marginal cost.
    \679\ See 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.
    \680\ 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 amendments to Rule 
17Ad-22 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,\681\ 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.
---------------------------------------------------------------------------

    \681\ 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 situation 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. Moreover, customers would have fewer resources 
or options for obtaining such services, clearing agencies would have 
fewer non-defaulting members to take on defaulting members portfolios, 
and clearing agencies that rely on clearing members to participate in 
default auctions would hold auctions with fewer participants. The 
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.\682\ However, adequate regulation of capital levels and 
margin amounts at surviving clearing members could mean that, though 
shocks to these members may be larger, the propagation of shocks may be 
limited to a smaller set of entities and their equity holders.
---------------------------------------------------------------------------

    \682\ See, e.g., Mark J. Roe, Clearinghouse Overconfidence, 101 
Cal. L. Rev. 1641 (2013), available at http://scholarship.law.berkeley.edu/californialawreview/vol101/iss6/3 
(arguing that counterparty risk concentrated within CCPs may be 
transferred to the broader financial system through links between 
clearing members and their clients).
---------------------------------------------------------------------------

e. QCCP Status and Externalities on Clearing Members
    An effect of the amendments to Rule 17Ad-22 is that covered 
clearing agencies required to comply with the adopted rules may be more 
likely to qualify as QCCPs in non-U.S. jurisdictions that have adopted 
the BCBS capital framework's QCCP definition. Under the BCBS capital 
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 PFMI.\683\ Because the amendments to Rule 17Ad-22 are 
consistent with the PFMI, the Commission believes that foreign bank 
clearing members of certain covered clearing agencies and foreign banks

[[Page 70863]]

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 
BCBS capital 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 FRB and the Office of 
the Comptroller of the Currency have already adopted rules implementing 
the BCBS capital framework 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,\684\ the adopted 
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.\685\
---------------------------------------------------------------------------

    \683\ See supra notes 44-45 and accompanying text (discussing 
the BCBS capital framework).
    \684\ See infra Part III.B.1.e.
    \685\ The Commission notes that benefits to banks that may arise 
as a result of the rules may be contingent upon regulators in other 
jurisdictions taking action to recognize the QCCP status of covered 
clearing agencies.
---------------------------------------------------------------------------

    The BCBS capital framework affects capital requirements for bank 
exposures to central counterparties in two important ways. The first 
relates to trade exposures, defined under the BCBS capital framework 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 BCBS capital framework imposes 
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 BCBS capital 
framework.\686\ 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 BCBS capital framework may 
experience an improved capital position relative to bank members of 
non-QCCPs. This may lower funding costs for bank members of QCCPs.\687\
---------------------------------------------------------------------------

    \686\ For a discussion of the effects of QCCP status on 
competition between bank and non-bank clearing members, see Part 
III.B.2.a.
    \687\ See supra note 597 (noting that the Commission currently 
expects the lower capital treatment under the BCBS capital framework 
to affect registered clearing agencies FICC, ICEEU, and OCC, each of 
which would meet the definition of a ``covered clearing agency'').
---------------------------------------------------------------------------

    Non-U.S. banks that are constrained by BCBS tier one capital 
requirements would face a shock to risk-weighted assets once capital 
rules come into force.\688\ The size of the shock depends on 
regulators' determinations with regard to QCCP status. Regardless of 
the size of the shock and 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.
---------------------------------------------------------------------------

    \688\ As discussed above, the FRB and Office of Comptroller of 
the Currency have adopted rules implementing capital requirements 
under the BCBS capital framework that make capital treatment for 
exposures to CCPs independent of the adopted rules for U.S. banks 
regulated by these two agencies, and therefore the Commission 
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.\689\ 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 28 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 2015.\690\ 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.\691\ 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 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.\692\ 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 estimates that benefits associated with OCC 
obtaining QCCP status stemming from lower capital requirements against 
trade exposures to QCCPs as a result of the adopted rules to have an 
upper bound of $1.2 billion per year, or approximately 0.73% of the 
total 2015 net income reported by the sample of bank clearing members 
at OCC.
---------------------------------------------------------------------------

    \689\ Under the BCBS capital 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.
    \690\ 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, 2015 total assets, risk weighted assets, net 
income, and tier 1 capital ratios were collected from Y-9C reports 
available at the National Information Center, https://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 December 31, 2015 exchange rates obtained from the Federal 
Reserve, available at http://www.federalreserve.gov/releases/h10/hist/.
    \691\ For example, one bank in the sample, with 5.53% of total 
risk-weighted assets, was assigned 5.53% of the total trade and 
default fund exposures while another bank in the sample, with 4.21% 
of total risk weighted assets, was assigned 4.21% 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, $73.54 billion, as a 
proxy for trade exposures. OCC's 2015 clearing fund deposits were 
valued at $12.08 billion. See OCC, 2015 Annual Report, available at 
http://www.optionsclearing.com/components/docs/about/annual-reports/occ-2015-annual-report.pdf.
    \692\ The BCBS capital 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 BCBS capital framework, supra 
note 44, 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

[[Page 70864]]

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 BCBS capital framework, and non-bank clearing 
members who would not. The Commission 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 adopted 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.
    Lower capital requirements on trade exposures to OCC would produce 
effects in the real economy only under certain conditions. First, 
agency problems, taxes, or other capital market imperfections could 
result in banks targeting a particular capital structure. Second, 
capital constraints on bank clearing members subject to the BCBS 
capital framework must bind so that higher capital requirements on bank 
clearing members subject to the BCBS capital 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 publicly 
available data, however, it is not currently possible to determine 
whether capital constraints will bind for bank clearing members when 
rules applying the BCBS capital framework 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.\693\
---------------------------------------------------------------------------

    \693\ The Commission notes that, at present, no bank in its 
sample of bank clearing members of OCC is bound by capital 
requirements under the BCBS capital framework. For U.S. bank holding 
companies, tier 1 capital ratios were collected from Y-9C reports 
available at the National Information Center, https://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. The Commission used data from 2013-2016 for its sample of 
U.S. bank clearing members, and from 2012-2015 for its sample of 
non-U.S. bank clearing members and assumed no bank-specific 
countercyclical capital buffers for these banks. This suggests a 
minimum tier 1 capital ratio of 10.1%, exceeding the BCBS minimum by 
1.6%.
---------------------------------------------------------------------------

    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 14 years 
of annual financial statement data.\694\
---------------------------------------------------------------------------

    \694\ This data has been taken from Compustat and from publicly 
available financial statements. Due to data limitations, for certain 
banks a shorter window was used for this calculation. The minimum 
sample window was six years.
---------------------------------------------------------------------------

    The BCBS 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 BCBS capital 
framework allows participants to reflect the shorter close-out period 
of cleared transactions in their capitalized exposures. The BCBS 
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 BCBS capital framework share some of the benefits of QCCP 
status.
    Furthermore, the fact that the BCBS capital framework applies to 
bank clearing members may have important implications for competition 
and concentration. While Rule 17Ad-22(e) may extend lower capital 
requirements against exposures to CCPs to non-U.S. bank clearing 
members of covered clearing agencies,\695\ the benefits of QCCP status 
will still be limited to bank clearing members. However, the costs 
associated with compliance with Rule 17Ad-22(e) 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 BCBS capital framework. 
This may result in an unintended consequence of increased concentration 
of clearing activity among bank clearing members. As noted in Part 
III.B.1.d, this increased concentration could mean that each remaining 
clearing member becomes more important from the standpoint of systemic 
risk transmission.
---------------------------------------------------------------------------

    \695\ See supra note 45 and accompanying text (noting that banks 
supervised by the FRB and 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. Additionally, 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 amendments to Rule 17Ad-22 and 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 amendments to Rule 
17Ad-22, the Commission 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 that conform to the 
requirements in Rule 17Ad-22(e). Additionally, the Commission believes 
that consistency with international regulatory frameworks, as embodied 
by the PFMI, 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

[[Page 70865]]

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.\696\ Any costs resulting from the adopted 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.\697\
---------------------------------------------------------------------------

    \696\ See, e.g., CCA Standards proposing release, supra note 5, 
at 29593.
    \697\ See id.
---------------------------------------------------------------------------

    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 adopted 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 Rule 17Ad-22(e) 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.\698\ 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.
---------------------------------------------------------------------------

    \698\ See supra Part III.B.1.d (discussing concentration both in 
the market for clearing services and among clearing members).
---------------------------------------------------------------------------

    The Commission also acknowledges that 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. 
Exits by clearing members could also reduce the resources available for 
customers to obtain replacement clearing services.
    The Commission 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 
adopted 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 believes that 
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 
adopted 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 BCBS 
capital framework. Therefore, consistency with the PFMI 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 members will find it less costly to deal with QCCPs. Failure 
to establish requirements consistent with the PFMI 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 BCBS capital 
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 adopted rules increase the likelihood that banking regulators that 
have implemented the BCBS capital 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 adopted 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 adopted rules could potentially disadvantage any registered 
clearing agencies that are not covered

[[Page 70866]]

clearing agencies.\699\ The Commission also notes that the ability of 
registered clearing agencies to voluntarily apply for covered clearing 
agency status under 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 BCBS capital framework.
---------------------------------------------------------------------------

    \699\ See supra note 597 (noting that the Commission currently 
expects the lower capital treatment under the BCBS capital framework 
to affect registered clearing agencies FICC, ICEEU, and OCC, each of 
which would meet the definition of a ``covered clearing agency'' in 
Rule 17Ad-22(a)(5)).
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    Further competitive effects may flow from the adoption as a result 
of the determinations under 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. Moreover, these 
additional costs could raise barriers to entry in the market or to opt 
out of clearing altogether.
b. Efficiency
    The 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 amendments. First, because the amendments result in general 
consistency with the PFMI and requirements adopted by the CFTC and FRB, 
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 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 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 Rule 17Ad-22(e).
    Finally, price efficiency and the efficiency of risk sharing among 
market participants may be affected by the 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.\700\ Enhanced risk management by clearing agencies 
may reduce this component of transaction costs. By reducing deviations 
of prices from fundamental value, the 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,\701\ then this 
transmission channel may result in more efficient allocation of risk. 
On the other hand, the 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 cleared products and 
opportunities for risk sharing among investors in these markets.
---------------------------------------------------------------------------

    \700\ 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.
    \701\ 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 669 and accompanying text.
---------------------------------------------------------------------------

c. Capital Formation
    The implications for capital formation that flow from the 
amendments to Rule 17Ad-22 and Rule 17Ab2-2 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 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.\702\
---------------------------------------------------------------------------

    \702\ See supra Part III.B.1 (discussing the economic effects of 
the rules on the market for clearing services).
---------------------------------------------------------------------------

    At the same time, the Commission believes that the standards 
contemplated under the 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.\703\ Conceptually, 
the component of transaction costs that reflects counterparty credit 
risk insures one counterparty against the default of

[[Page 70867]]

another.\704\ 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.
---------------------------------------------------------------------------

    \703\ See supra Part III.B.1.a (discussing the economic effects 
of the rules on systemic risk).
    \704\ See supra note 700.
---------------------------------------------------------------------------

    If, on balance, the adopted 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 Amendments to Rule 17Ad-22 and Rule 17Ab2-2
    The discussion below outlines the costs and benefits considered by 
the Commission as they relate to the rules being adopted 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 III.B.1 and include, in particular, the costs and benefits 
stemming from the availability of QCCP status under the BCBS capital 
framework. 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 adopted 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 I.A.1.a.i(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 Rules 17Ad-22(e)(7)(i) and (ii). Another example, discussed in 
Part I.A.1.a.i(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 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. Rule 17Ad-22(e)
    The Commission recognizes that the scope of Rule 17Ad-22(e) is an 
important determinant of its economic effect. Having considered the 
anticipated costs and benefits associated with Rule 17Ad-22(e), the 
Commission believes Rule 17Ad-22(e) should apply to a ``covered 
clearing agency,'' as defined in Rule 17Ad-22(a)(5).\705\ In 
particular, as discussed below, the Commission believes that an 
important benefit resulting from the enhanced risk management 
requirements in the rules is a reduction in the risk of a failure of a 
covered clearing agency. For example, these benefits may be significant 
due to the clearing agencies' 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.
---------------------------------------------------------------------------

    \705\ See Part II.A.1.
---------------------------------------------------------------------------

    As an alternative, the Commission could have extended the scope of 
Rule 17Ad-22(e) to cover all registered clearing agencies. The 
Commission acknowledges, however, that clearing agencies are involved 
in differing products and markets that carry varying levels of risk. 
Further, the costs of compliance with the 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 believes that the scope of Rule 17Ad-22(e) appropriately 
preserves the potential for the continuing development of the national 
system for clearance and settlement and maintains innovation in the 
operation of registered clearing agencies.\706\
---------------------------------------------------------------------------

    \706\ The Commission notes that under 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 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 BCBS capital 
framework.
---------------------------------------------------------------------------

i. Rule 17Ad-22(e)(1): Legal Risk
    Because, as noted above, Rule 17Ad-22(e)(1) would require 
substantially the same set of policies and procedures as Rule 17Ad-
22(d)(1),\707\ the Commission believes that 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 III.B.1.
---------------------------------------------------------------------------

    \707\ See supra note 179; supra Part II.C.1 (discussing the full 
set of requirements under Rule 17Ad-22(e)(1)); supra Part III.A.2.a 
(discussing current practices among registered clearing agencies 
regarding legal risk); see also 17 CFR 240.17Ad-22(d)(1).
---------------------------------------------------------------------------

ii. Rule 17Ad-22(e)(2): Governance
    Each covered clearing agency has a board of directors that governs 
its operations and oversees its senior management. Rule 17Ad-22(e)(2) 
would establish more detailed requirements for governance arrangements 
at covered clearing agencies relative to those imposed on registered 
clearing agencies under Rule 17Ad-22(d)(8).\708\
---------------------------------------------------------------------------

    \708\ See supra Part II.C.2 (discussing the full set of 
requirements under Rule 17Ad-22(e)(2)).
---------------------------------------------------------------------------

    The Commission understands that any covered clearing agency subject 
to the rule has policies and procedures in place that clearly 
prioritize the risk management and efficiency of the clearing agency. 
However, the Commission believes that covered clearing agencies do not 
already have in place policies and procedures with respect to other 
requirements under Rule 17Ad-22(e)(2). Based on its supervisory 
experience, the Commission believes that some covered clearing agencies 
may need to update their policies and procedures to comply with 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 to determine the 
extent to determine which they do not meet the requirements of the 
amendments. The estimated costs in terms of paperwork are discussed in 
Part IV. If, as a result of new policies and procedures, a covered 
clearing agency is required to recruit new directors, the Commission 
estimates a cost per director of $73,912.\709\
---------------------------------------------------------------------------

    \709\ 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 $73,912 
estimate reflects this amount in 2015 dollars, using consumer price 
inflation data provided by the Bureau of Labor Statistics.
---------------------------------------------------------------------------

    While there are potential costs associated with compliance, the 
Commission believes that benefits would potentially accrue from these 
requirements. Specifically, the Commission 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 Rule 17Ad-22(e)(2)

[[Page 70868]]

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 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 believes that they flow 
predominantly from a reduced probability of covered clearing agency 
default.
iii. Rule 17Ad-22(e)(3): Comprehensive Framework for the Management of 
Risks
    The Commission believes that 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.\710\ 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 
rules work in tandem with one another. For example, such an approach 
could result in risk-based membership standards under Rule 17Ad-
22(e)(18) that are consistent with policies and procedures related to 
the allocation of credit losses under Rule 17Ad-22(e)(13)(i). The 
Commission 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.
---------------------------------------------------------------------------

    \710\ See supra Part II.C.3 (discussing the full set of 
requirements under Rule 17Ad-22(e)(3)).
---------------------------------------------------------------------------

    Additionally, the rule extends requirements under Rules 17Ad-
22(d)(4) and 17Ad-22(d)(11) by requiring plans for recovery and orderly 
wind-down.\711\ To the extent that covered clearing agencies do not 
already have such plans in place, they would incur incremental costs to 
develop such plans. Recovery and resolution planning can 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 
orderly 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 believes that recovery and 
orderly wind-down plans ensure that a covered clearing agency is able 
to remain resilient in times of market stress.
---------------------------------------------------------------------------

    \711\ See supra Part II.C.3.b.iii (discussing the requirements 
for recovery and orderly wind-down plans under Rule 17Ad-
22(e)(3)(ii)).
---------------------------------------------------------------------------

    Based on its supervisory experience, the Commission believes that 
all covered clearing agencies have an independent audit committee of 
the board. The Commission further believes that most covered clearing 
agencies already have policies or procedures that may be relevant to 
issues arising in recovery and/or wind-down of clearing operations. 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 such policies and procedures and further 
development of plans for recovery and orderly wind-down and to 
registered clearing agencies that become covered clearing agencies.
iv. Rules 17Ad-22(e)(4) through (7): Financial Risk Management
(1) Rule 17Ad-22(e)(4): Credit Risk
    Rule 17Ad-22(e)(4) would establish requirements for credit risk 
management by covered clearing agencies.\712\ Based on its supervisory 
experience, the Commission believes that all entities that would be 
covered clearing agencies are already in compliance with 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 adopted rules currently maintain financial 
resources to meet the ``cover two'' requirement.\713\ All covered 
clearing agencies exclude resources that are not prefunded when 
calculating this coverage.\714\ As a result, the Commission 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 Rules 17Ad-22(e)(4)(ii) and (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.
---------------------------------------------------------------------------

    \712\ See supra Part II.C.4 (discussing the full set of 
requirements under Rule 17Ad-22(e)(4)).
    \713\ 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 Rule 
17Ab2-2. See supra Part II.D (discussing the determinations process 
under Rule 17Ab2-2).
    \714\ See supra Part III.A.2.d.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 requirements 
on the affected clearing agencies, the Commission 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

[[Page 70869]]

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.\715\
---------------------------------------------------------------------------

    \715\ Cf. PFMI, supra note 2, at 43 (discussing Principle 4, 
Explanatory Note 3.4.19).
---------------------------------------------------------------------------

    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.\716\ 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 I.A.1.a.i(5).
---------------------------------------------------------------------------

    \716\ 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, 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.
    The Commission believes that most covered clearing agencies will be 
required to update their policies and procedures as a result of Rules 
17Ad-22(e)(4)(viii) and (ix). Clearing members may experience benefits 
from 17Ad-22(e)(4)(viii), 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 discussed further in Part 
III.B.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.\717\ 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.
---------------------------------------------------------------------------

    \717\ See, e.g., Elliot, supra note 616 (discussing various 
loss-allocation rules and CCP recovery and wind-down).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(ix) contains new provisions related to the 
replenishment of financial resources that do not appear in Rule 17Ad-
22(d)(11). The Commission believes that the 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.
(2) Rule 17Ad-22(e)(5): Collateral
    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.\718\ 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.
---------------------------------------------------------------------------

    \718\ See supra Part II.C.5 (discussing the full set of 
requirements under Rule 17Ad-22(e)(5)).
---------------------------------------------------------------------------

    By focusing on the nature of assets and not on accounts, the 
Commission believes the adopted rule may allow covered clearing 
agencies the ability to manage collateral more efficiently. In 
particular, under the adopted 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 adopted 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 rule, these covered clearing agencies and 
registered clearing agencies that become covered clearing agencies may 
experience additional costs as a result of the annual review 
requirements for the sufficiency of collateral haircut and 
concentration limit models. Based on its supervisory experience, the 
Commission 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 haircut requirement 
would also require additional resources. A range of costs for these new 
requirements is discussed in Part I.A.1.a.i(5). Adherence to these 
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) Rule 17Ad-22(e)(6): Margin
    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 rule also

[[Page 70870]]

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.\719\ 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 Rules 17Ad-22(e)(6)(i) through (v) and (vii), and some will have 
to update their policies and procedures to comply with Rule 17Ad-
22(e)(6)(vi).
---------------------------------------------------------------------------

    \719\ See supra Part II.C.6 (discussing the full set of 
requirements under Rule 17Ad-22(e)(6)).
---------------------------------------------------------------------------

    Similar to 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 become covered 
clearing agencies in the future, may incur incremental compliance costs 
as a result of the adopted 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 I.A.1.a.i(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,\720\ 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.
---------------------------------------------------------------------------

    \720\ 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) Rule 17Ad-22(e)(7): Liquidity Risk
    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.\721\ 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.
---------------------------------------------------------------------------

    \721\ See supra Part II.C.7 (discussing the full set of 
requirements under 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 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 Rule 17Ad-22(e)(7). These 
actions would entail compliance costs, as described in Part III.B.3.d. 
Further, the Commission believes that for some covered clearing 
agencies the adopted requirements would require them to establish new 
practices. The cost of adherence to the rule would likely be passed on 
to market participants in cleared markets, as discussed in more detail 
below.
    Under 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 Rule 17Ad-22(e)(4)(iii). Based on its supervisory experience, 
the Commission 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 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 increasing transaction costs.\722\ 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.
---------------------------------------------------------------------------

    \722\ See supra Part III.B.1.d (discussing the effect of the 
rules on concentration in the market for clearing services and among 
clearing members).
---------------------------------------------------------------------------

    Under 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 Rule 17Ad-
22(e)(7)(i) with qualifying liquid resources.\723\ 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

[[Page 70871]]

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 adopted rules allow 
covered clearing agencies some measure of flexibility, subject to their 
obligations and responsibilities as SROs under the Exchange Act, to 
manage their qualifying liquid resources and that covered clearing 
agencies would be able to use creditworthy commercial bank services 
where appropriate.
---------------------------------------------------------------------------

    \723\ See Rule 17Ad-22(a)(14), infra Part VI (defining 
``qualifying liquid resources'').
---------------------------------------------------------------------------

    Based on its supervisory experience, the Commission believes that 
some covered clearing agencies currently do not meet the liquidity 
requirements with qualifying liquid resources. As an alternative to the 
adopted 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 adopted 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 Rule 17Ad-22(e)(7)(ii) and their customers.
    The Commission notes that, under the adopted rules, covered 
clearing agencies have flexibility, subject to their obligations and 
responsibilities as SROs under the Exchange Act, 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 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 
Rule 17Ad-22(e)(7)(ii) may impose costs 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 Rule 17Ad-
22(a)(14) 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 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.\724\ 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.\725\ 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.\726\ 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 $2.3 trillion with 15 of 3,740 
facilities exceeding $10 billion in size.\727\ 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 requirements under Rule 17Ad-22(e)(7)(ii).
---------------------------------------------------------------------------

    \724\ 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).
    \725\ See id. at 11.
    \726\ 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).
    \727\ These estimates are based on the number of deals issued in 
2015 as reported by the DealScan database from Thomson Reuters 
Markets LLC. Suspended and cancelled deals were omitted. U.S. deals 
were defined based on the country of the borrower's principal 
executive offices, as reported in DealScan, due to data 
availability. In cases of multiple facilities within the deal, the 
loan deal date is the earliest facility date. Estimates for 
corporate borrowers refer to non-financial private sector borrowers.
---------------------------------------------------------------------------

    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 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

[[Page 70872]]

costs of between 15 and 25 basis points.\728\ 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 adopted rules, the 
costs experienced by members indirectly may exceed those associated 
with committed credit facilities.
---------------------------------------------------------------------------

    \728\ 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, if that 
jurisdiction permits such pledges or the transactions by the covered 
clearing agency. 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, subject to their 
obligations and responsibilities as SROs under the Exchange Act, with 
respect to resources used to comply with the liquidity risk management 
requirements of Rules 17Ad-22(e)(7)(i) and (ii).
    The total cost of maintaining qualifying liquid resources pursuant 
to 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 adopted rules, as well as clearing members' best alternative 
to holding cash and securities.\729\ 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 estimates that the cost of compliance 
with the adopted rules will be between $122 million and $204 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 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.\730\
---------------------------------------------------------------------------

    \729\ Covered clearing agencies may choose to allocate the costs 
associated with increased liquidity requirements 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).
    \730\ To produce this range, the Commission used a combination 
of publicly available information from SRO rule filings, comment 
letters, and 2015 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 adopted 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 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.
    This range estimate has been updated since the proposal. While 
it relies on the same methodology, this estimate relies on more 
recent financial information from covered clearing agencies. Cf. CCA 
Standards proposing release, supra note 5, at 29600.
---------------------------------------------------------------------------

    U.S. Treasury securities would not fall under the 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 III.A.2.k, 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.\731\ If, as an 
alternative to the adopted rules, the Commission included U.S. 
government securities in the definition of qualifying liquid resources, 
the Commission estimates the cost of complying with requirements under 
Rule 17Ad-22(e)(7)(i) and (ii) would be reduced by between $32 million 
and $204 million per year.\732\ The Commission believes,

[[Page 70873]]

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.\733\
---------------------------------------------------------------------------

    \731\ 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.
    \732\ The Commission re-estimated the level of prearranged 
funding agreements required to meet requirements under Rules 17Ad-
22(e)(7)(i) and (ii) using the data and methodology described in 
note 730, 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 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.
    As above, this range estimate has been updated since the 
proposal. While it relies on the same methodology, this estimate 
relies on more recent financial information from covered clearing 
agencies. Cf. CCA Standards proposing release, supra note 5, at 
29601.
    \733\ See 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(iii) requires 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 or other relevant central bank, when 
available and where determined to be practical by the board of 
directors, to enhance its management of liquidity risk.\734\ The 
Commission 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 adopted rule. The 
Commission understands, however, that central bank services may not be 
practical because direct access to central bank accounts and services 
may not be available to all clearing agencies or members in all 
circumstances.
---------------------------------------------------------------------------

    \734\ See Rule 17Ad-22(e)(7)(iii), infra Part VI.
---------------------------------------------------------------------------

    Rules 17Ad-22(e)(7)(iv) and (v) address relations between covered 
clearing agencies and their liquidity providers. The Commission 
believes that a key benefit of these adopted 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 Rule 17Ad-22(e)(7)(ii) and the 
definition of qualifying liquid resources in Rule 17Ad-22(a)(14). 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 adopted rule, to maintain and test the 
covered clearing agency's procedures and operational capacity for 
accessing liquidity under their agreements. The Commission believes 
that, besides the costs associated with new or updated policies and 
procedures discussed in Part IV.C, covered clearing agencies and 
liquidity providers may experience costs associated with the adopted 
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 
III.B.3.d.
    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 adopted rules are similar to requirements for testing and 
model validation for credit risk in Rules 17Ad-22(e)(4)(vi) and (vii), 
and the Commission believes that these adopted 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.
    Rule 17Ad-22(e)(7)(viii) addresses liquidity shortfalls at a 
covered clearing agency, and the Commission believes the adopted 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 adopted 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.\735\ The Commission believes the 
rule may reduce some of the flexibility covered clearing agencies have 
in the absence of the rule, which could impose additional costs on 
these clearing agencies as discussed in Part III.B.1.b.
---------------------------------------------------------------------------

    \735\ See supra Part III.B.2.b.
---------------------------------------------------------------------------

    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.\736\ 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 adopted 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.
---------------------------------------------------------------------------

    \736\ See Rule 17Ad-22(e)(7)(ix), infra Part VI.
---------------------------------------------------------------------------

    Finally, 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 two.'' \737\ 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 III.B.3.d.
---------------------------------------------------------------------------

    \737\ See Rule 17Ad-22(e)(7)(x), infra Part VI.

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

[[Page 70874]]

(5) Testing and Validation of Risk Models
    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 requirements for testing 
and validation do not conform to practices currently used by covered 
clearing agencies.\738\ 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 adopted rules.
---------------------------------------------------------------------------

    \738\ The Commission notes that while the stress testing 
provisions in 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 716.
---------------------------------------------------------------------------

    Based on its supervisory experience and discussions with industry 
participants, the Commission 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 Rules 17Ad-22(e)(4) and 17Ad-22(e)(7) through written policies 
and procedures, the Commission estimates the ongoing cost associated 
with hiring such consultants would be approximately $4,509,120 in the 
aggregate.\739\
---------------------------------------------------------------------------

    \739\ This figure was calculated as follows: 2 Consultants for 
40 hours per week at $653 per hour = $52,240 x 12 weeks = $644,160 
per clearing agency x 7 covered clearing agencies = $4,509,120. The 
$671 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 adopting release, 
supra note 5, at 66261.
---------------------------------------------------------------------------

    The Commission acknowledges that it could have, as an alternative, 
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 believes that the frequencies of 
testing and validation of financial risk models that it has adopted 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. Rules 17Ad-22(e)(8) Through (10): Settlement and Physical Delivery
    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 believes that the benefits and 
costs for the majority of covered clearing agencies will likely be 
limited. Registered clearing agencies that become 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 adopted 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 Rule 17Ad-22(e)(7)(iii), the Commission 
acknowledges there may be circumstances where it is appropriate for 
covered clearing agencies to use commercial banks for conducting money 
settlements even when comparable services are available from a central 
bank. Accordingly, the Commission believes it is appropriate to allow 
covered clearing agencies flexibility, subject to their obligations and 
responsibilities as SROs under the Exchange Act, 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.
vi. 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 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

[[Page 70875]]

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.\740\ 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.\741\
---------------------------------------------------------------------------

    \740\ 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).
    \741\ 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. To realize these 
benefits, the 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 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 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. 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 adopted requirements under Rule 17Ad-22(e)(12) are 
substantially the same as those in Rule 17Ad-22(d)(13).\742\ As a 
result, covered clearing agencies that have been in compliance with 
Rule 17Ad-22(d)(13) face no substantially new requirements under Rule 
17Ad-22(e)(12). The Commission expects the adopted 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 III.B.1. The economic effects may 
differ for registered clearing agencies that become covered clearing 
agencies in the future.
---------------------------------------------------------------------------

    \742\ See supra Part II.C.13 (discussing the full set of 
requirements under Rule 17Ad-22(e)(13)); supra Part III.A.2.g 
(discussing current practices among registered clearing agencies 
regarding exchange-of-value settlement systems); see also 17 CFR 
240.17Ad-22(d)(13).
---------------------------------------------------------------------------

viii. Rule 17Ad-22(e)(13): Participant-Default Rules and Procedures
    Rule 17Ad-22(e)(13) requires 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, Rule 17Ad-22(e)(13) 
requires policies and procedures that address the testing and review of 
default procedures.
    Based on its supervisory experience, the Commission 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 become covered clearing agencies 
in the future. The Commission also 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 rules. The 
Commission is unable to quantify the economic effects of participation 
in these tests at this time.
    As an alternative to the rules, the Commission could have adopted 
more prescriptive requirements for default procedures at covered 
clearing agencies. The Commission believes that differences in cleared 
assets and in the characteristics of clearing members supports allowing 
each covered clearing agency flexibility, subject to its obligations 
and responsibilities as an SRO under the Exchange Act, to determine its 
own default procedures pursuant to Rule 17Ad-22(e)(13).
ix. Rule 17Ad-22(e)(14): Segregation and Portability
    Rule 17Ad-22(e)(14) applies only to a covered clearing agency that 
is either a security-based swap clearing agency or a complex risk 
profile clearing agency. It requires 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 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.\743\
---------------------------------------------------------------------------

    \743\ See supra Part II.B.14.a (discussing applicability of Rule 
17Ad-22(e)(14) and the existing rules for the cash securities and 
listed options markets applicable to broker-dealers which already 
promote segregation and portability to protect customer positions 
and funds in those markets).
---------------------------------------------------------------------------

    Segregation and portability of customer positions serves a number 
of useful purposes in certain 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.\744\
---------------------------------------------------------------------------

    \744\ 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

[[Page 70876]]

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 view, for those clearing agencies 
to which Rule 17Ad-22(e)(14) applies, these adopted 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. Moreover, 
some clearing agencies may already employ the LSOC model for 
segregation and portability of customer positions in security-based 
swaps because of existing CFTC requirements for swaps.
    As a result, the costs and benefits of 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 believes that the current 
practices at covered clearing agencies to which the rule would apply 
already meet segregation requirements under the rule, so any costs and 
benefits for covered clearing agencies would flow from implementing 
portability requirements, though the rule 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. Rule 17Ad-22(e)(15): General Business Risk
    While 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, Rule 17Ad-22(e)(15) requires 
that covered clearing agencies have policies and procedures reasonably 
designed to address general business risk. The Commission 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 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 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 adopted 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 believes, 
however, that the rules, as adopted, afford covered clearing agencies 
sufficient flexibility, subject to their obligations and 
responsibilities as SROs under the Exchange Act, to determine 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 to 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 
believes, however, that by specifying that these resources be liquid in 
nature, the 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 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, the Commission 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 as a result of 
Rule 17Ad-22(e)(15).\745\ However, the Commission believes that based 
on current market practices, covered clearing agencies may not bear 
substantial costs to implement these policies and procedures. Table 2 
contains summary information from five registered clearing agencies 
obtained from quantitative disclosures made by these registered 
clearing agencies pursuant to the PFMI.\746\ These disclosures suggest 
that all five of these registered clearing agencies each currently hold 
more net liquid assets funded by equity than would be required to cover 
six months of operating expenses. While similar quantitative 
disclosures are not currently published by DTC, DTC does publish an 
annual disclosure framework pursuant to the PFMI,\747\ which states 
that as of June 30, 2014, DTC maintained liquid net assets funded by 
equity in an amount exceeding six months of its projected operating 
expenses.\748\ This analysis suggests that based on available 
information about liquid net assets funded by equity operating 
expenses, covered clearing agencies would not be required to raise 
additional equity capital to implement these policies and procedures 
with respect to net liquid assets.
---------------------------------------------------------------------------

    \745\ Additional equity capital may be raised through share 
issuance or by retaining earnings.
    \746\ See supra note 41.
    \747\ See id.
    \748\ See The Depository Trust Company Disclosure under the 
Principles for Financial Market Infrastructures (Dec. 2015), at 80, 
available at http://www.dtcc.com/legal/policy-and-compliance.

    Table 2--Net Liquid Assets Funded by Equity and Operating Expenses at Registered Clearing Agencies \749\
----------------------------------------------------------------------------------------------------------------
                                                              FICC       ICC       ICEEU       NSCC       OCC
----------------------------------------------------------------------------------------------------------------
Value of liquid net assets funded by equity..............        214         53        358        321        247

[[Page 70877]]

 
Six months of current operating expenses.................         77         23        138        144        243
----------------------------------------------------------------------------------------------------------------

    However, the Commission acknowledges that policies and procedure 
adopted by covered clearing agencies pursuant to Rule 17Ad-22(e)(15) 
may nevertheless result in certain costs for covered clearing agencies. 
First, covered clearing agencies would incur ongoing costs to 
implement, maintain, and enforce policies and procedures under Rule 
17Ad-22(e)(15). To the extent that maintenance and enforcement of these 
policies and procedures indicate that additional capital is required to 
manage a covered clearing agency's general business risks, it may 
determine that it needs to increase liquid net assets. Second, as a 
result of these new policies and procedures, covered clearing agencies 
will have less control over their capital structures, as by 
implementing these policies and procedures they would be compelled to 
maintain a certain minimum level of liquid net assets despite the 
availability of new, less liquid, investment opportunities. Absent 
market frictions, such a change in capital structure should have no 
effect on the value of a covered clearing agency.\750\ Nevertheless, 
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.
---------------------------------------------------------------------------

    \749\ The figures in Table 2 are based on quantitative 
disclosures published by registered clearing agencies pursuant to 
the PFMI. Figures for FICC and NSCC were obtained from CPMI IOSCO 
Quantitative Disclosure Results--2016 Q1 (June 30, 2016), available 
at http://www.dtcc.com/legal/policy-and-compliance; figures for OCC 
were obtained from PFMI Quantitative Disclosure (Mar. 31, 2016), 
available at http://www.optionsclearing.com/components/docs/about/corporate-information/pfmi-disclosures/quant-disclosure-janmar2016.pdf; figures for Ice Clear Europe were obtained from ICE 
Clear Europe--CDS (2016 Q1) available at https://www.theice.com/clear-europe/regulation#quantitative-disclosures; and figures for 
ICE Clear Credit were obtained from Regulatory Disclosures (2016 Q1) 
available at https://www.theice.com/clear-credit/regulation.
    \750\ See Franco Modigliani & Merton H. Miller, The Cost of 
Capital, Corporation Finance and the Theory of Investment, 48 a.m. 
Econ. Rev. 261 (1958) (showing the irrelevance of capital structure 
in perfect markets).
---------------------------------------------------------------------------

    Clearing agencies that issue equity to satisfy the new requirements 
would additionally face costs related to issuance. The Commission 
recognizes that the cost of maintaining additional equity resembles an 
insurance premium against the losses associated by market disruption in 
the absence of clearing services.
xi. Rule 17Ad-22(e)(16): Custody and Investment Risks
    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 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 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 believes that 
current practices at covered clearing agencies meet the requirements 
under 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. Rule 17Ad-22(e)(17): Operational Risk Management
    Because, as noted above, Rule 17Ad-22(e)(17) would require 
substantially the same set of policies and procedures as Rule 17Ad-
22(d)(4),\751\ the Commission believes that 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 III.B.1.
---------------------------------------------------------------------------

    \751\ See supra Part II.C.17 (discussing the full set of 
requirements under Rule 17Ad-22(e)(17)); see also 17 CFR 240.17Ad-
22(d)(4).
---------------------------------------------------------------------------

xiii. 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. 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 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.

[[Page 70878]]

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) 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 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 believes that some changes to policies and procedures at 
covered clearing agencies may be required under the rule.
(2) Rule 17Ad-22(e)(19): Tiered Participation Arrangements
    The Commission believes that Rule 17Ad-22(e)(19) may improve 
covered clearing agencies' ability to manage their 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.
    The data necessary to compute summary statistics that would be 
helpful in quantifying the costs and benefits of the 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 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 believes that certain 
covered clearing agencies already have policies and procedures in place 
that would satisfy the requirements of the rule even in the absence of 
such explicit requirements under existing rules. Costs and benefits 
from the rule would come from those other registered clearing agencies 
that require updates to their policies and procedures to come into 
compliance with the 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) 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, 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 Rule 17Ad-22(e)(20) differs only marginally 
from Rule 17Ad-22(d)(7), the Commission believes that the costs and 
benefits flowing from the adopted rule will be incremental, to the 
extent that the additional specificity in Rule 17Ad-22(e)(20) causes 
covered clearing agencies to modify current practices. The Commission 
has aggregated these costs below.
xiv. Rule 17Ad-22(e)(21): Efficiency and Effectiveness
    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

[[Page 70879]]

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 believes that requirements related to the efficient 
and effective operation of covered clearing agencies are appropriate 
given the market power enjoyed by these entities, as discussed in Part 
III.B.1.d. Limited competition in the market for clearing services may 
blunt incentives for covered clearing agencies to provide high quality 
services at low cost to market participants in the absence of 
regulation.
    Based on its supervisory experience, the Commission believes that 
some covered clearing agencies would be required to make updates to 
their policies and procedures as a result of the rule. As a result, the 
Commission expects incremental costs and benefits to flow from the 
adopted rule only to the extent that this additional specificity causes 
covered clearing agencies to modify current practices.
xv. Rule 17Ad-22(e)(22): Communication Procedures and Standards
    Based on its supervisory experience, the Commission believes that 
some changes to policies and procedures would be necessary to meet 
requirements under Rule 17Ad-22(e)(22).\752\ These costs are included 
as a part of implementation costs, as discussed below. However, the 
Commission understands that covered clearing agencies already 
accommodate internationally accepted communication procedures and 
standards and anticipates only incremental costs resulting from the 
rule, in addition to the above discussed benefits. Registered clearing 
agencies that may become 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 rule, resulting in more substantial 
costs.
---------------------------------------------------------------------------

    \752\ See supra Part II.C.22 (discussing the full set of 
requirements under Rule 17Ad-22(e)(22)).
---------------------------------------------------------------------------

xvi. 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. 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 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 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 Rules 17Ad-22(e)(1) through (22), and an 
executive summary. The 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 Rule 17Ad-22(e)(23)(iv), these disclosures would be made 
about specific categories related to the compliance with Rule 17Ad-
22(e) 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 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 
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

[[Page 70880]]

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 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.
    While it is possible that some covered clearing agencies will 
require changes to policies and procedures as a result of the adopted 
rules, the Commission believes that the effect of Rule 17Ad-22(e)(23) 
will not have a substantial impact on compliance costs because covered 
clearing agencies already gather data and information for preparing 
their responses to the PFMI quantitative disclosures, which are updated 
semiannually.
b. Rule 17Ab2-2
    Rule 17Ab2-2 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 Rule 17Ad-22(e). 
The Commission intends for Rule 17Ab2-2 to provide the Commission with 
discretion to consider those criteria relevant to the facts and 
circumstances of a registered clearing agency when subject to a 
determination.
    Rule 17Ab2-2(a) includes criteria the Commission may consider in 
determining whether a covered clearing agency is systemically important 
in multiple jurisdictions. 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 Rule 17Ad-22(e) may be partially determined by the 
decisions of other regulatory bodies.
    Rule 17Ab2-2(b), includes criteria that the Commission may use to 
determine that a clearing agency has a complex risk profile. For 
example, the Commission may consider the extent to which the clearing 
agency clears financial instruments that are characterized by discrete 
jump-to-default price changes or that are highly correlated with 
potential participant defaults.
    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 Rule 17Ab2-2 is providing transparency for the 
determinations process. Transparency may allow a registered clearing 
agency to plan for resulting obligations under Rule 17Ad-22(e).
    To the extent that Rule 17Ad-22(e) may increase costs for a covered 
clearing agency relative to its peers, such clearing agency may have 
incentives to restructure its business to avoid a Commission 
determination or otherwise exit any services made prohibitively 
expensive by such a determination. Such potential consequential effects 
would be among the considerations for the Commission to review in 
connection with any specific decision under 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. Any 
of these outcomes could result in inefficiencies. As discussed in Part 
III.B.1.c, registered clearing agencies may incur costs as a result of 
restructuring. Registered 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. Similarly, clearing agencies that limit their scale may 
provide lower levels of clearing services to the markets that they 
serve.
    The impact of adopting Rule 17Ab2-2, which can affect the 
application of Rule 17Ad-22(e), could have direct costs on covered 
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 under Rule 17Ab2-2, the Commission believes that a registered 
clearing agency's voluntary application would suggest that the 
applicant's private benefits from enhanced requirements under Rule 
17Ad-22(e) as a result of the Commission's determination that it is 
systemically important in multiple jurisdictions justify its costs. 
Quantifiable costs related to determinations under Rule a17Ab2-2 are 
noted in Part III.B.3.d.
    In response to a comment about establishing a process for a covered 
clearing agency to be removed from that status, the Commission has 
decided to adopt such procedures in Rule 17Ab2-2(c). Specifically, if a 
clearing agency no longer meets the determination of covered clearing 
status, it can apply to be removed. This ability to remove the enhanced 
requirements can facilitate a clearing agency's ability innovate or 
enter new markets. Collectively, this could support the continued 
development of the national system for clearance and settlement.
c. Rule 17Ad-22(f)
    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 rule.
d. Quantifiable Costs and Benefits
    As discussed above, the amendments to Rule 17Ad-22 and Rule 17Ab2-2 
would impose certain costs on covered clearing agencies. As discussed 
in Part III.B.3.a.ii, if a covered clearing agency is required to 
recruit new directors, the Commission estimates a cost per director of 
$73,912.\753\ As discussed in Part I.A.1.a.i(4), the Commission 
estimates costs associated with liquidity resources under Rules 17Ad-
22(e)(7) and (a)(15) would likely fall between $122 million and $204 
million per year across all covered clearing agencies. As discussed in 
Part I.A.1.a.i(5), the Commission 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 Rules 17Ad-22(e)(4) and (7) through policies and procedures, the 
Commission estimates the ongoing cost associated with hiring such 
consultants would be about $4,509,120 in the aggregate.\754\
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    \753\ See supra note 709.
    \754\ See supra Part I.A.1.a.i(5), in particular note 739.
---------------------------------------------------------------------------

    In addition, 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 estimates the 
cost of ongoing review for these adopted rules at approximately $39,376 
per year.\755\

[[Page 70881]]

The rules would also impose certain implementation burdens and related 
costs on covered clearing agencies.\756\ These costs generally include 
assessment costs to determine compliance with the adopted rules and 
costs related to new policies and procedures and updates to existing 
policies and procedures required by the rules. In Part IV.C, the 
Commission estimates the burdens of these implementation requirements 
for covered clearing agencies.
---------------------------------------------------------------------------

    \755\ 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 $461 per hour, based upon the Director 
of Compliance cost data from the SIFMA table, see infra note 756. 
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 $461 per hour)) = $39,376.
    \756\ To monetize the internal costs the Commission staff used 
data from the SIFMA publications, Management and Professional 
Earnings in the Security Industry--2013, and Office Salaries in the 
Securities Industry--2013, 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. These figures have been adjusted for 
inflation using data published by the Bureau of Labor Statistics. 
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 2016 were $306,789. A Grant Thornton LLP survey 
estimated that in 2016 public company CFOs will receive an average 
annual salary of $303,975. Using an approximate midpoint of these 
two estimates of $305,000 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 $906 per hour.
---------------------------------------------------------------------------

    For a new entrant into the set of covered clearing agencies from 
the set of registered clearing agencies, the Commission estimates the 
startup compliance costs associated with policies and procedures to be 
$592,215,\757\ and compliance costs associated with the determinations 
process under Rule 17Ab2-2 to be $7,764.\758\ Based on its supervisory 
experience, the Commission believes that in many cases registered 
clearing agencies are already in compliance with many of the 
requirements included in the 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 
estimates that the total costs across all existing covered clearing 
agencies will be $4,268,075.\759\ The Commission estimates that in the 
aggregate existing covered clearing agencies would be subject to 
ongoing costs associated with the rule in the amount of approximately 
$926,603 per year.\760\
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    \757\ 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 
$440 per hour) + (Compliance Attorney for 365 hours at $334 per 
hour) + (Administrative Assistant for 2 hours at $76 per hour) + 
(Computer Operations Department Manager for 300 hours at $416 per 
hour) + (Senior Business Analyst for 85 hours at $259 per hour) + 
(Senior Risk Management Specialist for 114 hours at $338 per hour) + 
(Chief Compliance Office for 102 hours at $501 per hour) + (Senior 
Programmer for 53 hours at $313 per hour) + (Chief Financial Officer 
for 50 hours at $906 per hour) + (Financial Analyst for 70 hours at 
$259 per hour)) = $626,850.
    \758\ The total cost associated with determinations under Rule 
17Ab2-2 was calculated as follows: ((Assistant General Counsel for 2 
hours at $440 per hour) + (Compliance Attorney for 3 hours at $300 
per hour) + (Outside Counsel for 5 hours at $400 per hour)) x 2 
registered clearing agencies = $7,764.
    \759\ The total initial cost was calculated as follows: 
((Assistant General Counsel for 2,906 hours at $440 per hour) + 
(Compliance Attorney for 2,475 hours at $334 per hour) + 
(Administrative Assistant for 14 hours at $76 per hour) + (Computer 
Operations Department Manager for 2,030 hours at $416 per hour) + 
(Senior Business Analyst for 565 hours at $259 per hour) + (Senior 
Risk Management Specialist for 773 hours at $338per hour) + (Chief 
Compliance Office for 699 hours at $501 per hour) + (Senior 
Programmer for 361 hours at $313 per hour) + (Chief Financial 
Officer for 350 hours at $906 per hour) + (Financial Analyst for 490 
hours at $259 per hour) + (Intermediate Accountant for 15 hours at 
$162 per hour)) = $4,268,075.
    \760\ The total ongoing cost was calculated as follows: 
((Compliance Attorney for 1,851 hours at $334 per hour) + 
(Administrative Assistant for 137 hours at $76 per hour) + (Senior 
Business Analyst for 151 hours at $259 per hour) + (Senior Risk 
Management Specialist for 70 hours at $338 per hour) + (Risk 
Management Specialist for 1,251 hours at $188 per hour)) = $926,603.
---------------------------------------------------------------------------

    A benefit of the 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 
III.B.1.e, the Commission provided an estimate of the upper bound of 
this benefit, $1.2 billion per year, or 0.73% of the aggregate 2015 net 
income reported by bank clearing members at OCC. The Commission 
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.\761\
---------------------------------------------------------------------------

    \761\ See supra note 689 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the 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 
adopted 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.

IV. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') imposes certain 
requirements on federal agencies in connection with the conducting or 
sponsoring of any ``collection of information.'' \762\ 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. Further, 44 U.S.C. 3507(a) provides that, before adopting or 
revising a collection of information requirement, an agency must, among 
other things, publish 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 (i) a title for the collection of 
information; (ii) a summary of the collection of information; (iii) a 
brief description of the need for the information and the proposed use 
of the information; (iv) a description of the likely respondents and 
proposed frequency of response to the collection of information; (v) an 
estimate of the paperwork burden that shall result from the collection 
of information; and (vi) notice that comments may be submitted to the 
agency and director of OMB.\763\
---------------------------------------------------------------------------

    \762\ See 44 U.S.C. 3501 et seq.; 44 U.S.C. 3502(3).
    \763\ See 44 U.S.C. 3507(a)(1)(D); see also 5 CFR 
1320.5(a)(1)(iv).
---------------------------------------------------------------------------

    Certain provisions of Rule 17Ad-22(e) impose new collection of 
information requirements under the PRA. The Commission submitted these 
collections of information to the OMB for review in accordance with 44 
U.S.C. 3507 and 5 CFR 1320.11. Because the Commission is revising the 
collection of information under Rule 17Ad-22 to account for new Rule 
17Ad-22(e), the Commission will use the same title and control number: 
``Clearing Agency Standards for Operation and Governance,'' OMB Control 
No. 3235-0695. Since Rule 17Ab2-2 contains a new collection of 
information requirement, the title and control number are 
``Determinations Affecting Covered Clearing Agencies,'' OMB Control No. 
3235-0728.
    The Commission provided notice of the below PRA estimates in the 
CCA Standards proposing release and

[[Page 70882]]

received no comments in response.\764\ As discussed further below, the 
Commission has modified the final PRA estimates to account for the 
modifications to Rules 17Ad-22(e) and 17Ab2-2 described in Part II and 
to Rule 17Ad-22(c)(1) described in Part I.C.3.
---------------------------------------------------------------------------

    \764\ See CCA Standards proposing release, supra note 5, at 
29560-75.
---------------------------------------------------------------------------

A. Summary of Collection of Information and Use of Information

    Below is a summary of the collection of information and the use of 
information for Rules 17Ad-22(e) and 17Ab2-2. The Commission received 
no comments regarding the summary or the use of information. In 
addition, because the Commission is modifying Rule 17Ad-22(c)(1) in 
response to comments addressed above, Rule 17Ad-22(c)(1) is also 
discussed below.\765\ The Commission notes that the policies and 
procedures would also be used by the Commission as part of its ongoing 
efforts to monitor and enforce compliance with the federal securities 
laws through, among other things, examinations and inspections.
---------------------------------------------------------------------------

    \765\ See supra Part I.C.3.
---------------------------------------------------------------------------

1. Rule 17Ad-22(e)(1)
    As 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. The Commission is adopting 
Rule 17Ad-22(e)(1) as proposed.\766\
---------------------------------------------------------------------------

    \766\ See supra Part II.C.1.
---------------------------------------------------------------------------

    The purpose of this information collection is to reduce the 
potential for legal risk at covered clearing agencies, such as the risk 
that participants face legal uncertainty due to a lack of clarity or 
completeness regarding conflicts with applicable laws.
2. Rule 17Ad-22(e)(2)
    As proposed, Rules 17Ad-22(e)(2)(i) through (iii) 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. Proposed 
Rule 17Ad-22(e)(2)(iv) would require a covered clearing agency to 
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.\767\
---------------------------------------------------------------------------

    \767\ See supra Part II.C.2.
---------------------------------------------------------------------------

    The Commission is adopting Rule 17Ad-22(e)(2) with two 
modifications, as previously discussed in Part II.C.2.c. First, the 
Commission is adding new paragraph (v) to require policies and 
procedures that specify clear and direct lines of responsibility. The 
Commission believes that clearly delineating lines of responsibility 
will help foster accountability of the board of directors and senior 
management, a concern expressed by commenters. The Commission also 
believes that this requirement complements the requirements in Rule 
17Ad-22(e)(iv) addressing the qualifications of the board and 
management.\768\ Second, the Commission is adopting new paragraph (vi) 
to require a covered clearing agency's governance arrangements to 
consider the interests of participants' customers, securities issuers 
and holders, and other relevant stakeholders of the covered clearing 
agency. The Commission believes that the comments received in response 
to Rule 17Ad-22(e)(2), at a general level, express concern as to 
whether a covered clearing agency will have governance arrangements 
sufficiently robust to incorporate the views of the relevant 
stakeholders and to withstand the influence of potentially improper 
incentives. The Commission believes that this modification helps 
mitigate these concerns by adding a requirement to consider the 
interests of the relevant stakeholders. The Commission also believes 
that they complement the other requirements in Rule 17Ad-22(e)(2) and 
flow from the existing requirements in Section 17A of the Exchange Act, 
in particular the fair representation, investor protection, and public 
interest requirements discussed previously.\769\
---------------------------------------------------------------------------

    \768\ See supra Part II.C.2.b.iii.
    \769\ See supra Part II.C.2.c.
---------------------------------------------------------------------------

    The purpose of this information collection is to prioritize the 
safety and efficiency of covered clearing agencies, to help ensure that 
each covered clearing agency's governance arrangements consider the 
interests of the relevant stakeholders, to promote the establishment of 
boards of directors at covered clearing agencies that are composed of 
qualified members with clear and direct lines of responsibility, and to 
promote accountability of the board of directors and senior management.
3. Rule 17Ad-22(e)(3)
    As 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. 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. 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. Proposed Rule 17Ad-22(e)(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. 
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. 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 is adopting Rule 17Ad-22(e)(3) with one 
modification. To make clear that the audit committee described in Rule 
17Ad-22(e)(3)(iv) and the independent audit committee described in Rule 
17Ad-22(e)(3)(v) are

[[Page 70883]]

not separate audit committees, the Commission is adding ``independent'' 
before audit committee in Rule 17Ad-22(e)(3)(iv).\770\
---------------------------------------------------------------------------

    \770\ See supra Part II.C.3.
---------------------------------------------------------------------------

    The purpose of this information collection is to enhance each 
covered clearing agency's ability to identify, monitor, and manage the 
risks that covered 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.
4. Rule 17Ad-22(e)(4)
    As 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.
    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 participant fully with a 
high degree of confidence. 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). Meanwhile, 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). Proposed Rule 17Ad-22(e)(4)(iv) would 
require a covered 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. 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.
    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. Proposed Rule 17Ad-22(e)(4)(vi) 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 or become less liquid, and when the size or concentration of 
positions held by the entity's participants increases significantly, 
the proposed rule would 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. Proposed Rule 17Ad-22(e)(4)(vi) 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 
in proposed Rules 17Ad-22(e)(4)(i) through (iii), as applicable.\771\
---------------------------------------------------------------------------

    \771\ See id. at 29526-27.
---------------------------------------------------------------------------

    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 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. The 
Commission also proposed to define ``conforming model validation'' to 
mean an evaluation of the performance of each material risk management 
model used by a covered clearing agency, including initial margin 
models, liquidity risk models, and models used to generate guaranty 
fund requirements, along with the related parameters and assumptions 
associated with such models. The proposed definition would further 
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 risk models can be candidly assessed.\772\
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    \772\ See supra Part II.C.4.
---------------------------------------------------------------------------

    The Commission is adopting Rule 17Ad-22(e)(4) with modifications, 
as previously discussed in Part II.C.4.c. The Commission is adopting 
two modifications to Rule 17Ad-22(e)(4)(vii). First, because the 
Commission is modifying the definition of ``conforming model 
validation'' by striking ``conforming,'' as previously discussed in 
Part II.C.4.c, the Commission is modifying Rule 17Ad-22(e)(4)(vii) to 
conform to the revised

[[Page 70884]]

definition. Second, to be consistent with the corresponding requirement 
for model validation of liquidity risk models in Rule 17Ad-
22(e)(7)(vii), the Commission is modifying Rule 17Ad-22(e)(4)(vii) by 
striking ``to be performed.'' \773\
---------------------------------------------------------------------------

    \773\ See supra Part II.C.4.c.
---------------------------------------------------------------------------

    The Commission is also adopting four other modifications to Rule 
17Ad-22(e)(4), as previously discussed in Part II.C.4.c. First, the 
Commission is modifying Rule 17Ad-22(e)(4)(v) so that it references 
only paragraphs (e)(4)(ii) and (iii) (and not paragraph (e)(4)(i)), 
consistent with the Commission's discussion of the proposed rule in the 
CCA Standards proposing release. Second, to make clear that prefunded 
financial resources should be exclusive of assessments for additional 
guaranty fund contributions or other resources that are not prefunded, 
the Commission is modifying Rule 17Ad-22(e)(4)(iv) to state ``exclusive 
of'' assessments rather than ``excluding'' assessments. Third, the 
Commission is modifying Rule 17Ad-22(e)(4)(vi)(A) to refer to ``stress 
testing'' rather than ``a stress test'' to improve consistency with the 
definition of ``stress testing'' in Rule 17Ad-22(a)(17). Fourth, the 
Commission is revising Rule 17Ad-22(e)(4)(vi)(C) to replace ``and'' 
with ``or'' so that the criteria for conducting analysis more 
frequently than monthly are disjunctive rather than conjunctive, since 
the criteria described may not be correlated to each other. Fifth, the 
Commission is correcting a technical error in Rule 17Ad-
22(e)(4)(vi)(D): references to paragraphs (e)(4)(iv)(B) and (C) will be 
changed to paragraphs (e)(4)(vi)(B) and (C) respectively. Sixth, the 
Commission is moving requirements proposed in Rule 17Ad-22(e)(13) to 
Rule 17Ad-22(e)(4) so that all requirements pertinent to a covered 
clearing agency's management of credit risk are contained in one rule. 
This modification is discussed below in Part IV.A.13.\774\
---------------------------------------------------------------------------

    \774\ See also supra Part II.C.13.c.
---------------------------------------------------------------------------

    The purpose of this information collection is to identify and limit 
credit exposures to participants and to satisfy all of its settlement 
obligations in the event of a participant default, to address the 
allocation of credit losses if collateral and other resources are 
insufficient to fully cover its credit exposures following a 
participant default, and to describe the covered clearing agency's 
process to replenish financial resources following such a default.
5. Rule 17Ad-22(e)(5)
    As 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. In addition, Rule 17Ad-22(e)(5) would require a covered 
clearing agency to 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. The Commission is 
adopting Rule 17Ad-22(e)(5) as proposed.\775\
---------------------------------------------------------------------------

    \775\ See supra Part II.C.5.
---------------------------------------------------------------------------

    The purpose of the information collection is to enable a covered 
clearing agency to be able to maintain sufficient collateral by using 
appropriately conservative haircuts and concentration limits.
6. Rule 17Ad-22(e)(6)
    As 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. 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. 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. 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. 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. 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.
    Proposed Rule 17Ad-22(e)(6)(vi) would require a covered clearing 
agency that provides CCP services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to 
establish a risk-based margin system that is monitored by management on 
an ongoing basis. Proposed Rule 17Ad-22(e)(6)(vi) would also require a 
covered clearing agency that provides CCP services 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 of its margin resources at 
least once each day using standard predetermined parameters and 
assumptions. Proposed Rule 17Ad-22(e)(6)(vi) would require a covered 
clearing agency that provides CCP services 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 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. Proposed Rule 17Ad-
22(e)(6)(vi) would require a covered clearing agency that provides CCP

[[Page 70885]]

services 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 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. Proposed Rule 17Ad-22(e)(6)(vi) would 
require a covered clearing agency that provides CCP services to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to regularly review, test, and verify 
its risk-based margin system by reporting the results of its analyses 
above 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, and any other relevant 
aspects of its credit risk management framework.\776\
---------------------------------------------------------------------------

    \776\ See id. at 29530.
---------------------------------------------------------------------------

    Finally, proposed Rule 17Ad-22(e)(6)(vii) would require a covered 
clearing agency that provides CCP services 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.\777\
---------------------------------------------------------------------------

    \777\ See supra Part II.C.6.
---------------------------------------------------------------------------

    The Commission is adopting Rule 17Ad-22(e)(6) with modifications, 
as previously discussed in Part II.C.6.c. First, the Commission is 
modifying Rule 17Ad-22(e)(6) to remove references to ``conforming'' 
consistent with the modification to the definitions of ``sensitivity 
``analysis'' discussed in Part II.C.6.c and of ``model validation'' 
discussed in Part II.C.4.c. Second, to improve clarity, the Commission 
is modifying Rule 17Ad-22(e)(6)(v) to require policies and procedures 
that use reliable sources of timely price data and that ``use'' 
procedures and sound valuation models for addressing circumstances in 
which pricing data are not readily available or reliable. Third, 
because backtests are conducted with respect to the margin model and 
not margin resources, the Commission is modifying Rule 17Ad-
22(e)(6)(vi)(A) to replace the phrase ``margin resources'' with 
``margin model.'' Fourth, to avoid conflating sensitivity analysis with 
backtesting, the Commission is modifying Rules 17Ad-22(e)(6)(vi)(B) and 
(C) to clarify that a sensitivity analysis should be conducted of the 
margin model and not of margin resources. Fifth, the Commission is 
modifying Rule 17Ad-22(e)(6)(vi)(C) to replace ``and'' with ``or'' so 
that the criteria for conducting analysis more frequently than monthly 
are disjunctive rather than conjunctive, since the criteria described 
may not be correlated to each other.
    The purpose of the information collection is to enable a covered 
clearing agency to be able to collect sufficient margin subject to 
regular sensitivity analysis, monthly backtesting, and an annual model 
validation.
7. Rule 17Ad-22(e)(7)
    As 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 in the rule.
    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.
    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 that 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.
    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, 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.
    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.
    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, tests with each 
liquidity provider, to the extent practicable, its procedures and 
operational capacity for accessing each type of relevant liquidity 
resource.
    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; (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; 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. 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

[[Page 70886]]

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.
    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.\778\
---------------------------------------------------------------------------

    \778\ See id.; see also supra notes 275-305 and accompanying 
text (discussing generally the requirements accompanying the 
definition of ``model validation'').
---------------------------------------------------------------------------

    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.
    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.
    Finally, 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 that 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.\779\
---------------------------------------------------------------------------

    \779\ See supra Part II.C.7.
---------------------------------------------------------------------------

    The Commission is adopting Rule 17Ad-22(e)(7) with modifications, 
as previously discussed in Part II.C.7.c. First, the Commission is 
modifying Rule 17Ad-22(e)(7)(vi)(A) to refer to ``stress testing'' 
rather than ``a stress test'' to improve consistency with the 
definition of ``stress testing'' in Rule 17Ad-22(a)(17). Second, the 
Commission is modifying Rule 17Ad-22(e)(7)(vi)(C) in two ways. To 
improve consistency with Rule 17Ad-22(e)(4)(vi)(C), the Commission is 
adding ``or'' to link ``display high volatility'' with ``become less 
liquid'' because these concepts are intended to describe events related 
to the products cleared or markets served. The Commission is also 
replacing ``and'' with ``or'' in Rule 17Ad-22(e)(7)(vi)(C) so that the 
criteria for conducting analysis more frequently than monthly are 
disjunctive rather than conjunctive, since the list of criteria is open 
to other appropriate circumstances described in a covered clearing 
agency's policies and procedures and may not be correlated. Third, the 
Commission is making two modifications in adopting Rule 17Ad-
22(e)(7)(vi)(D) to correct technical errors in the proposed rule text: 
(i) References to paragraphs (e)(6)(vii)(B) and (C) will be changed to 
paragraphs (e)(7)(vi)(B) and (C) respectively; and (ii) the rule will 
refer to the covered clearing agency's ``liquidity'' risk management 
framework, rather than its ``credit'' risk management framework. 
Fourth, the Commission is striking ``conforming'' from Rule 17Ad-
22(e)(7)(vii) to be consistent with the modifications to the definition 
of ``model validation'' discussed in Part II.C.4.c.
    The purpose of this information collection is to identify and limit 
liquidity risk so that a covered clearing agency can satisfy its 
settlement obligations on an ongoing and timely basis by holding a 
sufficient amount of qualifying liquid resources and performing regular 
stress testing of its liquid resources. The purpose of this information 
collection is also to help ensure that a covered clearing agency 
addresses foreseeable liquidity shortfalls and can replenish any liquid 
resources that it may employ in a stress event. The purpose of this 
information collection is also to help ensure that a covered clearing 
agency manages the risks posed by its liquidity providers.
8. Rule 17Ad-22(e)(8)
    As 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.\780\
---------------------------------------------------------------------------

    \780\ See supra Part II.C.8.
---------------------------------------------------------------------------

    The Commission is adopting Rule 17Ad-22(e)(8) with one 
modification, as previously discussed in Part II.C.8.c. To remove 
potential ambiguity as to the timing of settlement finality under the 
rule, the Commission is modifying Rule 17Ad-22(e)(8) to state that the 
point at which settlement is final is ``to be'' 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.
    The purpose of this information collection is to promote consistent 
standards of timing and reliability in the settlement process.
9. Rule 17Ad-22(e)(9)
    As 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 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 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. The Commission is adopting Rule 17Ad-
22(e)(9) as proposed.\781\
---------------------------------------------------------------------------

    \781\ See supra Part II.C.9.
---------------------------------------------------------------------------

    The purpose of this information collection is to promote 
reliability in a covered clearing agency's settlement operations.
10. Rule 17Ad-22(e)(10)
    As 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. The Commission is adopting Rule 17Ad-22(e)(10) as 
proposed.\782\
---------------------------------------------------------------------------

    \782\ See supra Part II.C.10.
---------------------------------------------------------------------------

    The purpose of this information collection is to provide a covered 
clearing agency's participants with the information necessary to 
evaluate the risks and costs associated with participation in the 
covered clearing agency.
11. Rule 17Ad-22(e)(11)
    As proposed, Rule 17Ad-22(e)(11)(i) would require a covered 
clearing agency

[[Page 70887]]

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 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. Proposed Rule 17Ad-22(e)(11)(ii) would require a covered 
clearing agency that provides CSD services 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, and conduct periodic 
and at least daily reconciliation of securities issues it maintains. 
Proposed Rule 17Ad-22(e)(11)(iii) would require a covered clearing 
agency that provides CSD services 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. The Commission is adopting Rule 17Ad-22(e)(11) as 
proposed.\783\
---------------------------------------------------------------------------

    \783\ See supra Part II.C.11.
---------------------------------------------------------------------------

    The purpose of this information collection is to reduce securities 
transfer processing costs and the risks associated with securities 
settlement and custody, as well as increase the speed and efficiency of 
the settlement process.
12. Rule 17Ad-22(e)(12)
    As proposed, Rule 17Ad-22(e)(12) would require a covered clearing 
agency, for transactions that involve 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, regardless of whether the covered clearing 
agency settles on a gross or net basis and when finality occurs. The 
Commission is adopting Rule 17Ad-22(e)(12) as proposed.\784\
---------------------------------------------------------------------------

    \784\ See supra Part II.C.12.
---------------------------------------------------------------------------

    The purpose of this information collection is to promote the 
elimination of principal risk in transactions with linked obligations.
13. Rule 17Ad-22(e)(13)
    As 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. 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. 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. Finally, 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 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.\785\
---------------------------------------------------------------------------

    \785\ See supra Part II.C.13.
---------------------------------------------------------------------------

    The Commission is adopting Rule 17Ad-22(e)(13) with modifications, 
as previously discussed in Part II.C.13.c and noted in Part IV.A.4. The 
Commission is moving the requirements in proposed Rules 17Ad-
22(e)(13)(i) and (ii) to Rules 17Ad-22(e)(4)(viii) and (ix), 
respectively, to consolidate requirements for management of a covered 
clearing agency's default waterfall within a single rule. The 
Commission believes this modification improves consistency between 
Rules 17Ad-22(e)(4) and (7). Specifically, Rule 17Ad-22(e)(4) includes 
requirements intended to facilitate the management of credit risk, and 
proposed Rules 17Ad-22(e)(13)(i) and (ii) include requirements to 
address the allocation of credit losses and the replenishment of funds. 
Similarly, Rule 17Ad-22(e)(7) includes requirements intended to 
facilitate the management of liquidity risk, and Rules 17Ad-
22(e)(7)(viii) and (ix) include requirements to address liquidity 
shortfalls and replenish liquid resources. In contrast, Rule 17Ad-
22(e)(13) is intended to ensure that a covered clearing agency has 
policies and procedures addressing its authority and operational 
capacity to take timely action to contain losses and liquidity demands, 
and proposed Rule 17Ad-22(e)(13)(iii) includes requirements related to 
the testing of default procedures.
    The purpose of this information collection 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.
14. Rule 17Ad-22(e)(14)
    As proposed, Rule 17Ad-22(e)(14) would require a covered clearing 
agency that is a security-based swap clearing agency or a complex risk 
profile 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. The 
Commission is adopting Rule 17Ad-22(e)(14) as proposed.\786\
---------------------------------------------------------------------------

    \786\ See supra Part II.C.14.
---------------------------------------------------------------------------

    The purpose of this information collection is to facilitate the 
safe and effective holding and transfer of customers' positions and 
collateral in the event of a participant's default or insolvency.
15. Rule 17Ad-22(e)(15)
    As 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 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. 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

[[Page 70888]]

appropriate, of its critical operations and services if such action is 
taken. 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 Rule 17Ad-22(e)(3)(ii). 
Additionally, proposed Rule 17Ad-22(e)(15)(ii) would require 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. Proposed 
Rule 17Ad-22(e)(15)(iii) would 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 rule, as discussed above. The Commission is 
adopting Rule 17Ad-22(e)(15) as proposed.\787\
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    \787\ See supra Part II.C.15.
---------------------------------------------------------------------------

    The purpose of this information collection is to mitigate the 
potential impairment of a covered clearing agency as a result of a 
decline in revenues or increase in expenses.
16. Rule 17Ad-22(e)(16)
    As 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. Proposed Rule 17Ad-22(e)(16) would also require a 
covered clearing agency 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. 
The Commission is adopting Rule 17Ad-22(e)(16) as proposed.\788\
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    \788\ See supra Part II.C.16.
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    The purpose of this information collection is to improve the 
ability of a covered clearing agency to meet its settlement 
obligations.
17. Rule 17Ad-22(e)(17)
    As 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. 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. Proposed Rule 17Ad-22(e)(17)(ii) 
would require a 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. 
Finally, proposed Rule 17Ad-22(e)(17)(iii) would require 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.
    The Commission is adopting Rule 17Ad-22(e)(17) with one 
modification: Because the text in Rule 17Ad-22(e)(17)(ii) for 
``establishing and maintaining policies and procedures reasonably 
designed'' is duplicative of the requirement under Rule 17Ad-22(e) to 
have policies and procedures reasonably designed to establish, 
maintain, implement, and enforce the requirements thereunder, the 
Commission is removing the duplicative text.\789\
---------------------------------------------------------------------------

    \789\ See supra Part II.C.17.
---------------------------------------------------------------------------

    The purpose of this information collection is to limit operational 
disruptions that may impede the proper functioning of a covered 
clearing agency.
18. Rule 17Ad-22(e)(18)
    As 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. Proposed Rule 17Ad-22(e)(18) would also require that a 
covered clearing agency 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. The Commission is adopting Rule 17Ad-
22(e)(18) as proposed.\790\
---------------------------------------------------------------------------

    \790\ See supra Part II.C.18.
---------------------------------------------------------------------------

    The purpose of this information collection 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 still ensuring that all qualified persons can 
access a covered clearing agency's services. The purpose of this 
information collection is also 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.
19. Rule 17Ad-22(e)(19)
    As 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''). In addition, proposed Rule 17Ad-
22(e)(19) would also 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. The Commission is adopting Rule 17Ad-22(e)(19) as 
proposed.\791\
---------------------------------------------------------------------------

    \791\ See supra Part II.C.19.
---------------------------------------------------------------------------

    The purpose of this information collection is to enable a covered 
clearing agency to identify and manage risks posed by non-member 
entities, such as the customers of clearing members.
20. Rule 17Ad-22(e)(20)
    As proposed, Rule 17Ad-22(e)(20) would require a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures

[[Page 70889]]

reasonably designed to identify, monitor, and manage risks related to 
any link with one or more other clearing agencies, FMUs, or trading 
markets.\792\ The Commission is adopting Rule 17Ad-22(e)(20) as 
proposed.
---------------------------------------------------------------------------

    \792\ See supra Part II.C.20.
---------------------------------------------------------------------------

    The purpose of this information collection is to enable a covered 
clearing agency to identify and manage risks posed by linkages to other 
entities, such as other clearing agencies, FMUs, or trading markets.
21. Rule 17Ad-22(e)(21)
    As 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. Proposed Rule 17Ad-22(e)(21) would also 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.
    The Commission is adopting Rule 17Ad-22(e)(21) with one 
modification: the Commission is removing reference to ``recorded'' 
products under Rule 17Ad-22(e)(21)(iii) because recording products is 
not a function of covered clearing agencies.\793\
---------------------------------------------------------------------------

    \793\ See supra Part II.C.21.
---------------------------------------------------------------------------

    The purpose of this information collection 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.
22. Rule 17Ad-22(e)(22)
    As 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. The Commission is adopting Rule 17Ad-
22(e)(22) as proposed.\794\
---------------------------------------------------------------------------

    \794\ See supra Part II.C.22.
---------------------------------------------------------------------------

    The purpose of this information collection is 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.
23. Rule 17Ad-22(e)(23)
    As 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. Proposed Rule 17Ad-
22(e)(23) 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 incur by participating in the covered clearing 
agency; and (iii) publicly disclose relevant basic data on transaction 
volume and values.
    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. Rule 17Ad-22(e)(23)(v) would also 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.\795\
---------------------------------------------------------------------------

    \795\ See supra Part II.C.23.
---------------------------------------------------------------------------

    The Commission is adopting Rule 17Ad-22(e)(23) with three 
modifications, as previously discussed in Part II.C.23.c. First, the 
Commission is striking the language ``maintain clear and comprehensive 
rules and procedures'' under Rule 17Ad-22(e)(23) because Rule 17Ad-
22(e) already requires that a covered clearing agency have written 
policies and procedures reasonably designed to establish, implement, 
maintain and enforce the requirements thereunder. Consistent with this 
change, the Commission is also striking ``providing'' from Rule 17Ad-
22(e)(23)(iv). Second, the Commission is modifying Rule 17Ad-
22(e)(23)(iv) so that the language more closely tracks the categories 
of requirements in Rule 17Ad-22(e). The purpose of this modification is 
to make clear that the comprehensive public disclosure is intended to 
describe the material rules, policies and procedures of the covered 
clearing agency related to compliance with Rule 17Ad-22(e), rather than 
require a complete disclosure of all rules, policies, and procedures. 
As adopted, Rule 17Ad-22(e)(23)(iv) will require policies and 
procedures providing for a comprehensive public disclosure that 
describes the covered clearing agency's material rules, policies, and 
procedures regarding its legal, governance, risk management, and 
operating framework, accurate in all material respects at the time of 
publication. Third, the Commission is also modifying paragraph (iv)(D) 
to correct technical errors in the proposed rule text so that it refers 
to the standards set forth in paragraphs (e)(1) through (23) (rather 
than (e)(1) through (22)). The Commission believes that providing a 
summary narrative for Rule 17Ad-22(e)(23) is appropriate because Rule 
17Ad-22(e)(23) requires policies and procedures 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 incur by participating in the 
covered clearing agency; and (iii) publicly disclose relevant basic 
data on transaction

[[Page 70890]]

volume and values, in addition to requiring the standard-by-standard 
summary narrative required by Rule 17Ad-22(e)(23)(iv)(D).
    The purpose of this information collection is to ensure that 
participants and prospective participants in a covered clearing agency 
are provided with a complete picture of the covered clearing agency's 
operations and risk management so that they can understand the risks 
and responsibilities of participation in the covered clearing agency.
24. Rule 17Ab2-2
    Proposed Rule 17Ab2-2 would establish procedures for the Commission 
to make determinations affecting covered clearing agencies in three 
cases:
     Pursuant to 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.
     Pursuant to 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.''
     Pursuant to 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.
    Under proposed Rule 17Ab2-2(e), in each of the above cases, 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. The Commission may also provide the 
clearing agency subject to the proposed determination opportunity for 
hearing regarding the proposed determination. Under proposed Rule 
17Ab2-2(f), in each of the above cases, notice of determinations would 
be given by prompt publication thereof, together with a statement of 
written reasons supporting the determination.\796\
---------------------------------------------------------------------------

    \796\ See supra Part II.D.
---------------------------------------------------------------------------

    The Commission is adopting Rule 17Ab2-2 with modifications. First 
the Commission has determined not to adopt proposed Rule 17Ab2-2(a). 
Second, with respect to proposed Rules 17Ab2-2(b) and (c),\797\ the 
Commission is removing the factors that reference such other 
characteristics or factors that the Commission deems appropriate in the 
circumstances. Third, the Commission is adopting a new paragraph to 
provide for a process to rescind any determination made pursuant to 
Rule 17Ab2-2. This new rule includes the same procedural elements as 
for determinations for application of covered clearing agency status, 
including publication with a 30-day comment period. Because the 
Commission is not adopting Rule 17Ab2-2(a), the Commission is also 
renumbering the remaining paragraphs accordingly.
---------------------------------------------------------------------------

    \797\ Because the Commission has determined not to adopt 
proposed Rule 17Ab2-2(a), the Commission is renumbering Rule 17Ab2-2 
accordingly, and proposed Rules 17Ab2-2(b) and (c) will therefore 
appear in Rules 17Ab2-2(a) and (b) respectively. See infra Part VI.
---------------------------------------------------------------------------

    The purpose of this information collection is to enable 
determinations by the Commission regarding the status of a registered 
clearing agency or a covered clearing agency, as applicable and as 
described above.
25. Rule 17Ad-22(c)(1)
    Rule 17Ad-22(c)(1) requires that, each fiscal quarter (based on 
calculations made as of the last business day of the clearing agency's 
fiscal quarter), or at any time upon Commission request, a registered 
clearing agency that performs CCP services shall calculate and maintain 
a record, in accordance with Rule 17a-1 under the Exchange Act,\798\ of 
the financial resources necessary to meet the requirements of paragraph 
(b)(3) of Rule 17Ad-22, and sufficient documentation to explain the 
methodology it uses to compute such financial resource requirement.
---------------------------------------------------------------------------

    \798\ See 17 CFR 240.17a-1.
---------------------------------------------------------------------------

    In response to the comments received,\799\ the Commission is 
modifying Rule 17Ad-22(c)(1) to require a registered clearing agency 
that performs CCP services to calculate and maintain a record of 
financial and qualifying liquid resources necessary to also meet 
paragraphs (e)(4) and (e)(7), as applicable, in addition to paragraph 
(b)(3). Because calculations under Rule 17Ad-22(b)(3) and (e)(4) would 
refer to the same financial resources at a covered clearing agency, the 
Commission anticipates that the calculations for each would be the same 
and would involve adjustments needed to synthesize and format existing 
information in a manner sufficient to explain the methodology the 
clearing agency uses to meet the requirements of the rule.
---------------------------------------------------------------------------

    \799\ See supra Part I.C.3.
---------------------------------------------------------------------------

    The purpose of this information collection is to require a CCP to 
calculate and document its financial and qualifying liquid resources 
necessary under Rules 17Ad-22.

B. Respondents

    In the CCA Standards proposing release, the Commission estimated 
that the majority of the requirements in Rule 17Ad-22(e) would have 
then applied to five registered clearing agencies, each of which met 
the definition of ``covered clearing agency.'' \800\ The Commission 
estimated that two additional entities might seek to register with the 
Commission and that, of those, one might be a security-based swap 
clearing agency. The Commission also noted that the number of covered 
clearing agencies subject to Rule 17Ad-22(e) could increase further if 
either (i) the FSOC were to designate additional clearing agencies as 
systemically important or (ii) Commission determinations under Rule 
17Ab2-2 found additional clearing agencies to be covered clearing 
agencies. The Commission noted, however, that it could not predict 
whether the FSOC might exercise such authority or whether such 
determinations under Rule 17Ab2-2 would be appropriate, and therefore 
estimated, for PRA purposes, that a majority of the requirements under 
Rule 17Ad-22(e) would have seven respondents, of which (i) six would be 
CCPs and one would be a CSD and (ii) two would be security-based swap 
clearing agencies. The Commission then further clarified that Rule 
17Ad-22(e)(6) would only have six respondents because it only applies 
to CCPs, Rule 17Ad-22(e)(11) would only have one respondent because it 
only applies to CSDs, and Rule 17Ad-22(e)(14) would only have two 
respondents because it only applies to security-based swap clearing 
agencies.
---------------------------------------------------------------------------

    \800\ See CCA Standards, supra note 5, at 29566. Specifically, 
under the definition, four registered clearing agencies would have 
been designated clearing agencies for which the Commission is the 
supervisory agency, and one registered clearing agency would have 
been a security-based swap clearing agency. Because of modifications 
to Rule 17Ad-22(a), the definition of ``covered clearing agency'' is 
being moved to Rule 17Ad-22(a)(5). See infra Part VI.
---------------------------------------------------------------------------

    With regard to Rule 17Ab2-2, the Commission estimated, for PRA 
purposes, that two registered clearing agencies or their members on 
their behalf might apply for a Commission determination or be subject 
to a Commission-initiated determination

[[Page 70891]]

regarding whether the registered clearing agency is a covered clearing 
agency, whether the registered clearing agency is involved in 
activities with a more complex risk profile, or whether the registered 
clearing agency, as a covered clearing agency, is systemically 
important in multiple jurisdictions.\801\
---------------------------------------------------------------------------

    \801\ See id. at 29567.
---------------------------------------------------------------------------

    With respect to Rule 17Ad-22(c)(1), which the Commission is 
modifying in response to comments received,\802\ the affected 
respondents would only be covered clearing agencies because the 
modifications to Rule 17Ad-22(c)(1) refer to requirements that only 
apply to covered clearing agencies subject to Rule 17Ad-22(e). 
Accordingly, the affected respondents are the same as under Rule 17Ad-
22(e).
---------------------------------------------------------------------------

    \802\ See supra Part I.C.3.
---------------------------------------------------------------------------

    The Commission received no comment regarding the estimates for 
Rules 17Ad-22(e) and 17Ab2-2 and continues to believe that the above 
estimates are appropriate for the below discussion of total annual 
reporting and recordkeeping burdens.

C. Total Annual Reporting and Recordkeeping Burdens

    As described in the CCA Standards proposing release, the Commission 
believes the information collected pursuant to Rule 17Ad-22(e) 
reflects, to a degree, existing policies and procedures at covered 
clearing agencies, but in some instances a covered clearing agency will 
be required to develop new policies and procedures. Thus, when a 
covered clearing agency reviews and updates its policies and procedures 
pursuant to Rule 17Ad-22(e), the Commission believes that the PRA 
burden may vary across the requirements under Rule 17Ad-22(e), 
depending on the complexity of the requirement in question and the 
extent to which a covered clearing agency already has policies and 
procedures consistent with the requirement. As a general matter, the 
portions of Rule 17Ad-22(e) for which the Commission expects a higher 
PRA burden are those provisions including requirements not comparable 
to any existing requirements under Rule 17Ad-22(d). Where the 
requirements do not reflect existing practices or the normal course of 
a covered clearing agency's activity, the PRA burden may entail, in 
addition to ongoing burdens, initial one-time burdens to develop new 
policies and procedures. The Commission received no comments regarding 
the accuracy of the estimated annual reporting and recordkeeping 
burdens for Rules 17Ad-22(e) or 17Ab2-2.
    As described in the CCA Standards proposing release,\803\ the 
Commission continues to believe that Rules 17Ad-22(e)(1), (8) through 
(10), (12), (14), (16), and (22) contain requirements either 
substantially similar to those in Rule 17Ad-22(d) or reflect current 
practices at covered clearing agencies. The Commission believes that a 
covered clearing agency may need to make only limited changes to its 
policies and procedures pursuant to the requirements in these rules. 
For example, a covered clearing agency may need to conduct a comparison 
of its existing policies and procedures against each rule to confirm 
that its policies and procedures are consistent with the requirements 
therein.
---------------------------------------------------------------------------

    \803\ See CCA Standards proposing release, supra note 5, at 
29567 & nn.440-443.
---------------------------------------------------------------------------

    The Commission also continues to believe that Rules 17Ad-22(e)(2), 
(3), (5), (11), (13), (17), (18), (20), and (21) contain provisions 
that are similar to those in Rule 17Ad-22(d) but would also impose 
additional requirements not found in Rule 17Ad-22(d). The Commission 
believes that a covered clearing agency may need to make changes to 
update its policies and procedures pursuant to the requirements in 
these rules. For example, a covered clearing agency may need to review 
and amend its existing rules, policies, and procedures but may not need 
to develop, design, or implement new operations or practices pursuant 
to these rules.
    For Rules 17Ad-22(e)(4), (6), (7), (15), (19), and (23), for which 
no comparable pre-existing requirements under Rule 17Ad-22 have been 
identified, the Commission continues to believe that a covered clearing 
agency may need to make more extensive changes to its policies and 
procedures, may need to implement new policies and procedures, and may 
need to take other steps pursuant to the requirements in these rules. 
For example, a covered clearing agency may need to develop, design, and 
implement new operations and practices. In these cases, the PRA burden 
is greater since these requirements may not reflect established 
practices or the normal course of a covered clearing agency's 
activities. Further, the PRA burden for these rules may entail both 
initial one-time burdens, such as create new policies and procedures, 
as well as ongoing burdens, such as requirements to make certain 
disclosures or perform certain types of review, on a periodic basis.
1. Rule 17Ad-22(e)(1)
    As described in Part IV.A.1, the Commission is adopting Rule 17Ad-
22(e)(1) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\804\
---------------------------------------------------------------------------

    \804\ See CCA Standards proposing release, supra note 5, at 
29567-68.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(1) contains substantially similar provisions to 
Rule 17Ad-22(d)(1).\805\ The Commission therefore expects that a 
respondent clearing agency has written rules, policies, and procedures 
substantially similar to the requirements in the rule and that the PRA 
burden includes the incremental burdens of reviewing current policies 
and procedures and revising them, where appropriate, pursuant to the 
rule. Accordingly, based on the similar provisions and the 
corresponding burden estimates previously made by the Commission for 
Rule 17Ad-22(d)(1),\806\ the Commission estimates that respondent 
clearing agencies will incur an aggregate one-time burden of 
approximately 56 hours to review and revise existing policies and 
procedures.\807\
---------------------------------------------------------------------------

    \805\ See 17 CFR 240.17Ad-22(d)(1); see also supra Part II.C.1.
    \806\ See Clearing Agency Standards adopting release, supra note 
5, at 66260.
    \807\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(1) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to Rule 17Ad-22,\808\ the Commission 
estimates that the ongoing activities required by Rule 17Ad-22(e)(1) 
impose an aggregate annual burden on respondent clearing agencies of 21 
hours.\809\
---------------------------------------------------------------------------

    \808\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \809\ This figure was calculated as follows: (Compliance 
Attorney for 3 hours) x 7 respondent clearing agencies = 21 hours.
---------------------------------------------------------------------------

2. Rule 17Ad-22(e)(2)
    As described in Part IV.A.2, the Commission is adopting Rule 17Ad-
22(e)(2) with modifications. In consideration of these modifications, 
the burden estimates for the rule have been modified from the 
preliminary estimates in the CCA Standards proposing release, as 
described below.
    Rule 17Ad-22(e)(2) contains similar provisions to Rule 17Ad-
22(d)(8) but also adds additional requirements that

[[Page 70892]]

do not appear in Rule 17Ad-22(d).\810\ The Commission therefore expects 
that a respondent clearing agency may have written rules, policies, and 
procedures similar to the requirements in the rule and that the PRA 
burden includes the incremental burdens of reviewing and revising 
current policies and procedures and creating new policies and 
procedures, as necessary, pursuant to the rule. Accordingly, based on 
the similar provisions and the corresponding burden estimates 
previously made by the Commission for Rule 17Ad-22(d)(8),\811\ the 
Commission preliminarily estimated that respondent clearing agencies 
would incur an aggregate one-time burden of approximately 154 hours to 
review and revise existing policies and procedures and to create new 
policies and procedures, as necessary.\812\ Because the modifications 
to Rule 17Ad-22(e)(2) noted above will require updating current 
policies and procedures or establishing new policies and procedures to 
ensure compliance, the Commission estimates that respondent clearing 
agencies will incur an aggregate one-time burden of approximately 175 
hours to review and revise existing policies and procedures and to 
create new policies and procedures, as necessary.\813\
---------------------------------------------------------------------------

    \810\ See 17 CFR 204.17Ad-22(d)(8); see also supra Part II.C.2.
    \811\ See Clearing Agency Standards adopting release, supra note 
5, at 66260.
    \812\ See CCA Standards proposing release, supra note 5, at 
29568. This figure was calculated as follows: ((Assistant General 
Counsel for 12 hours) + (Compliance Attorney for 10 hours)) = 22 
hours x 7 respondent clearing agencies = 154 hours.
    The Commission notes that the CCA Standards proposing release 
correctly identified the number of initial burden hours as 154 hours 
but incorrectly stated the burden estimate for Assistant General 
Counsel as 24 rather than 12 hours. See id.
    \813\ This figure was calculated as follows: ((Assistant General 
Counsel for 14 hours) + (Compliance Attorney for 11 hours)) = 25 
hours x 7 respondent clearing agencies = 175 hours.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(2) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to Rule 17Ad-22,\814\ the Commission 
preliminarily estimated that the ongoing activities required by Rule 
17Ad-22(e)(2) would impose an aggregate annual burden on respondent 
clearing agencies of 28 hours.\815\ Because the modifications to Rule 
17Ad-22(e)(2) noted above will require updating current policies and 
procedures or establishing new policies and procedures to ensure 
compliance, the Commission estimates that the ongoing activities 
required by Rule 17Ad-22(e)(2) will impose an aggregate annual burden 
on respondent clearing agencies of 35 hours.\816\
---------------------------------------------------------------------------

    \814\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \815\ See CCA Standards proposing release, supra note 5, at 
29568. This figure was calculated as follows: (Compliance Attorney 
for 4 hours) x 7 respondent clearing agencies = 28 hours.
    \816\ This figure was calculated as follows: (Compliance 
Attorney for 5 hours) x 7 respondent clearing agencies = 35 hours.
---------------------------------------------------------------------------

3. Rule 17Ad-22(e)(3)
    As described in Part IV.A.3, the Commission is adopting Rule 17Ad-
22(e)(3) with one modification. Because this modification is only 
technical or clarifying in nature, the Commission does not believe they 
will alter the PRA burdens described in the CCA Standards proposing 
release. The burden estimates below are unchanged from the CCA 
Standards proposing release.\817\
---------------------------------------------------------------------------

    \817\ See CCA Standards proposing release, supra note 5, at 
29568.
---------------------------------------------------------------------------

    While Rule 17Ad-22(d) requires registered clearing agencies to have 
policies and procedures to manage certain risks,\818\ Rule 17Ad-
22(e)(3) requires a comprehensive framework for risk management, under 
which policies and procedures for risk management are designed 
holistically, are consistent with each other, and work effectively 
together. Accordingly, the PRA burden requires a respondent clearing 
agency to revise its written rules, policies, and procedures to 
include, among other things, periodic review and plans for the recovery 
and orderly wind-down of the covered clearing agency. As a result, the 
Commission estimates that respondent clearing agencies will incur an 
aggregate one-time burden of 399 hours to review and revise existing 
policies and procedures and to create new policies and procedures, as 
necessary.\819\
---------------------------------------------------------------------------

    \818\ See 17 CFR 240.17Ad-22(d).
    \819\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(3) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures created in 
response to the rule and activities related to 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 Rule 17Ad-22,\820\ the Commission estimates that the ongoing 
activities required by Rule 17Ad(22)(e)(3) impose an aggregate annual 
burden on respondent clearing agencies of 343 hours.\821\ Additionally, 
the Commission notes that the estimated ongoing burden for Rule 17Ad-
22(e)(3) is similar to the initial one-time burden because the rule 
requires policies and procedures for review on a specified periodic 
basis and approval by the board of directors annually.
---------------------------------------------------------------------------

    \820\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \821\ 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.
---------------------------------------------------------------------------

4. Rule 17Ad-22(e)(4)
    As described in Part IV.A.4, the Commission is adopting Rule 17Ad-
22(e)(4) with modifications. While some of these modifications are only 
technical or clarifying in nature, the burden estimates for the rule, 
as described below, have been modified from the preliminary estimates 
in the CCA Standards proposing release to reflect that Rules 17Ad-
22(e)(13)(i) and (ii) are being adopted under Rule 17Ad-22(e)(4) as new 
Rules 17Ad-22(e)(4)(viii) and (ix).\822\
---------------------------------------------------------------------------

    \822\ The Commission notes that because the modifications to 
Rules 17Ad-22(e)(4) and (13) reflect only the moving of requirements 
from Rule 17Ad-22(e)(13) to Rule 17Ad-22(e)(4), the burden hours 
across the two rules remains unchanged.
---------------------------------------------------------------------------

    The Commission estimates that the PRA burdens for Rule 17Ad-
22(e)(4) are more significant than in other cases under Rule 17Ad-22(e) 
and may require a respondent clearing agency to make substantial 
changes to its written rules, policies, and procedures pursuant to the 
rule.\823\ In addition, Rule 17Ad-22(e)(4) will require a respondent 
clearing agency to make one-time systems adjustments so that it has the 
capability to test the sufficiency of its financial resources and to 
perform an annual model validation. As a result, the Commission 
preliminarily estimated that respondent clearing agencies would incur 
an aggregate one-time burden of 1,400 hours.\824\ Because the 
modifications to Rule 17Ad-22(e)(4) noted above will require updating 
current policies and procedures or establishing new policies and

[[Page 70893]]

procedures to ensure compliance, the Commission estimates that 
respondent clearing agencies will incur an aggregate one-time burden of 
approximately 1,533 hours to review and revise existing policies and 
procedures and to create new policies and procedures, as 
necessary.\825\
---------------------------------------------------------------------------

    \823\ See supra Part II.C.4.
    \824\ See CCA Standards proposing release, supra note 5, at 
29568. 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.
    \825\ This figure was calculated as follows: ((Assistant General 
Counsel for 74 hours) + (Compliance Attorney for 45 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)) = 219 hours x 7 respondent 
clearing agencies = 1,533 hours.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures developed in 
response to the rule and ongoing activities with respect to testing the 
sufficiency of its financial resources and performing the annual model 
validation. Based on the Commission's previous estimates for ongoing 
monitoring and compliance burdens with respect to Rule 17Ad-22,\826\ 
the Commission preliminarily estimated 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.\827\ 
Because the modifications to Rule 17Ad-22(e)(4) noted above will 
require updating current policies and procedures or establishing new 
policies and procedures to ensure compliance, the Commission estimates 
that the ongoing activities required by Rule 17Ad-22(e)(4) will impose 
an aggregate annual burden on respondent clearing agencies of 434 
hours.\828\
---------------------------------------------------------------------------

    \826\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \827\ See CCA Standards proposing release, supra note 5, at 
29569. 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.
    \828\ This figure was calculated as follows: ((Compliance 
Attorney for 26 hours) + (Administrative Assistant for 3 hours) + 
(Senior Business Analyst for 3 hours) + (Risk Management Specialist 
for 30 hours)) = 62 hours x 7 respondent clearing agencies = 434 
hours.
---------------------------------------------------------------------------

5. Rule 17Ad-22(e)(5)
    As described in Part IV.A.5, the Commission is adopting Rule 17Ad-
22(e)(5) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\829\
---------------------------------------------------------------------------

    \829\ See CCA Standards proposing release, supra note 5, at 
29569.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(5) contains similar provisions to Rule 17Ad-
22(d)(3).\830\ The Commission therefore expects that a respondent 
clearing agency has written rules, policies, and procedures 
substantially similar to the requirements in the rule and that the PRA 
burden includes the incremental burdens of reviewing current policies 
and procedures and revising them, where appropriate, pursuant to the 
rule. For example, a respondent clearing agency may need to develop new 
policies and procedures for an annual review of the sufficiency of its 
collateral haircuts and concentration limits. Accordingly, based on the 
similar policies and procedures requirements in and the Commission's 
previous corresponding burden estimates for Rule 17Ad-22(d)(3),\831\ 
the Commission estimates that respondent clearing agencies will incur 
an aggregate one-time burden of approximately 294 hours to review and 
revise existing policies and procedures and to create new policies and 
procedures, as necessary.\832\
---------------------------------------------------------------------------

    \830\ See 17 CFR 240.17Ad-22(d)(3); see also supra Part II.C.5.
    \831\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \832\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(5) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to the written policies and procedures created 
in response to the rule and also requires 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 Rule 17Ad-22,\833\ the Commission estimates that the ongoing 
activities required by the rule imposes an aggregate annual burden on 
respondent clearing agencies of 252 hours.\834\ The Commission notes 
that the estimated ongoing burden for Rule 17Ad-22(e)(5) is similar to 
the initial one-time burden because the rule requires policies and 
procedures for a not-less-than-annual review of the sufficiency of a 
covered clearing agency's collateral haircuts and concentration limits.
---------------------------------------------------------------------------

    \833\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \834\ 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.
---------------------------------------------------------------------------

6. Rule 17Ad-22(e)(6)
    As described in Part IV.A.6, the Commission is adopting Rule 17Ad-
22(e)(6) with modifications. Because these modifications are only 
technical or clarifying in nature, the Commission does not believe they 
will alter the PRA burdens described in the CCA Standards proposing 
release. Therefore, the burden estimates described below are unchanged 
from the CCA Standards proposing release.\835\
---------------------------------------------------------------------------

    \835\ See CCA Standards proposing release, supra note 5, at 
29569.
---------------------------------------------------------------------------

    The Commission estimates that the PRA burdens for Rule 17Ad-
22(e)(6) are more significant than in other cases under Rule 17Ad-22(e) 
and may require a respondent clearing agency to make substantial 
changes to its written rules, policies, and procedures pursuant to the 
rule.\836\ For example, Rule 17Ad-22(e)(6) requires one-time systems 
adjustments to perform daily backtesting and monthly (or more frequent) 
sensitivity analyses. As a result, the Commission preliminarily 
estimated that respondent clearing agencies would incur an aggregate 
one-time burden of 1,080 hours to review and revise existing policies 
and procedures and to create new policies and procedures, as 
necessary.\837\
---------------------------------------------------------------------------

    \836\ See id. at 29569 & n.469; see also supra Part II.C.6.
    \837\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to the written policies and procedures created 
in response to the rule and activities associated with daily 
backtesting, monthly (or more frequent) sensitivity analyses, and 
annual model validation. Based on the Commission's previous estimates 
for ongoing monitoring and compliance burdens with respect to Rule 
17Ad-22,\838\ the Commission estimates that the ongoing activities 
required by Rule 17Ad-22(e)(6) impose an aggregate annual burden on 
respondent clearing agencies of 360 hours.\839\
---------------------------------------------------------------------------

    \838\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \839\ 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.

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

[[Page 70894]]

7. Rule 17Ad-22(e)(7)
    As described in Part IV.A.7, the Commission is adopting Rule 17Ad-
22(e)(7) with modifications. Because these modifications are only 
technical or clarifying in nature, the Commission does not believe they 
will alter the PRA burdens described in the CCA Standards proposing 
release. Therefore, the burden estimates described below are unchanged 
from the CCA Standards proposing release.\840\
---------------------------------------------------------------------------

    \840\ See CCA Standards proposing release, supra note 5, at 
29569-70.
---------------------------------------------------------------------------

    The Commission estimates that the PRA burdens for Rule 17Ad-
22(e)(7) are more significant than in other cases under Rule 17Ad-22(e) 
and may require a respondent clearing agency to make substantial 
changes to its written rules, policies, and procedures pursuant to the 
rule.\841\ For example, Rule 17Ad-22(e)(7) requires one-time systems 
adjustments to test the sufficiency of its liquid resources, test its 
access to liquidity providers, and perform an annual model validation. 
As a result, the Commission estimates that respondent clearing agencies 
will incur an aggregate one-time burden of 2,310 hours to review and 
revise existing policies and procedures and to create new policies and 
procedures, as necessary.\842\
---------------------------------------------------------------------------

    \841\ See id. at 29569 & n.473; see also supra Part II.C.7.
    \842\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to policies and procedures created in response 
to the rule as well as activities related to testing the sufficiency of 
its liquidity resources, testing access to its liquidity providers, and 
performing an annual model validation. Based on the Commission's 
previous estimates for ongoing monitoring and compliance burdens with 
respect to existing Rule 17Ad-22,\843\ the Commission estimates that 
the ongoing activities required by Rule 17Ad-22(e)(7) impose an 
aggregate annual burden on respondent clearing agencies of 896 
hours.\844\
---------------------------------------------------------------------------

    \843\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \844\ 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.
---------------------------------------------------------------------------

8. Rule 17Ad-22(e)(8)
    As described in Part IV.A.8, the Commission is adopting Rule 17Ad-
22(e)(8) with one modification. Because these modifications are only 
technical or clarifying in nature, the Commission does not believe they 
will alter the PRA burdens described in the CCA Standards proposing 
release. Therefore, the burden estimates described below are unchanged 
from the CCA Standards proposing release.\845\
---------------------------------------------------------------------------

    \845\ See CCA Standards proposing release, supra note 5, at 
29570.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(8) contains substantially similar provisions to 
Rule 17Ad-22(d)(12).\846\ The Commission therefore expects that a 
respondent clearing agency has written rules, policies, and procedures 
substantially similar to the requirements in the rule and that the PRA 
burden includes the incremental burdens of reviewing current policies 
and procedures and revising them, where appropriate, pursuant to the 
rule. Accordingly, based on the similar provisions and the 
corresponding burden estimates previously made by the Commission for 
Rule 17Ad-22(d)(12),\847\ the Commission estimates that respondent 
clearing agencies will incur an aggregate one-time burden of 
approximately 84 hours to review and revise existing policies and 
procedures.\848\
---------------------------------------------------------------------------

    \846\ See 17 CFR 240.17Ad-22(d)(12); see also supra Part II.C.8.
    \847\ See Clearing Agency Standards adopting release, supra note 
5, at 66260.
    \848\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(8) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\849\ the 
Commission estimates that the ongoing activities required by Rule 17Ad-
22(e)(8) impose an aggregate annual burden on respondent clearing 
agencies of approximately 35 hours.\850\
---------------------------------------------------------------------------

    \849\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \850\ This figure was calculated as follows: (Compliance 
Attorney for 5 hours) x 7 respondent clearing agencies = 35 hours.
---------------------------------------------------------------------------

9. Rule 17Ad-22(e)(9)
    As described in Part IV.A.9, the Commission is adopting Rule 17Ad-
22(e)(9) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\851\
---------------------------------------------------------------------------

    \851\ See CCA Standards proposing release, supra note 5, at 
29570.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(9) contains substantially similar provisions to 
Rule 17Ad-22(d)(5).\852\ The Commission therefore expects that a 
respondent clearing agency has written rules, policies, and procedures 
substantially similar to the requirements in the rule and that the PRA 
burden includes the incremental burdens of reviewing current policies 
and procedures and revising them, where appropriate, pursuant to the 
rule. Accordingly, based on the similar provisions and the 
corresponding burden estimates previously made by the Commission for 
Rule 17Ad-22(d)(5),\853\ the Commission estimates that respondent 
clearing agencies will incur an aggregate one-time burden of 
approximately 84 hours to review and revise existing policies and 
procedures.\854\
---------------------------------------------------------------------------

    \852\ See 17 CFR 240.17Ad-22(d)(5); see also supra Part II.C.9.
    \853\ See Clearing Agency Standards adopting release, supra note 
5, at 66260.
    \854\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(9) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\855\ the 
Commission estimates that the ongoing activities required by Rule 17Ad-
22(e)(9) impose an aggregate annual burden on respondent clearing 
agencies of approximately 35 hours.\856\
---------------------------------------------------------------------------

    \855\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \856\ This figure was calculated as follows: (Compliance 
Attorney for 5 hours) x 7 respondent clearing agencies = 35 hours.
---------------------------------------------------------------------------

10. Rule 17Ad-22(e)(10)
    As described in Part IV.A.10, the Commission is adopting Rule 17Ad-
22(e)(10) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\857\
---------------------------------------------------------------------------

    \857\ See CCA Standards proposing release, supra note 5, at 
29570.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(10) contains substantially similar provisions to 
Rule 17Ad-22(d)(15).\858\ The Commission

[[Page 70895]]

therefore expects that a respondent clearing agency has written rules, 
policies, and procedures substantially similar to the requirements in 
the rule and that the PRA burden includes the incremental burdens of 
reviewing current policies and procedures and revising them, where 
appropriate, pursuant to the rule. Accordingly, based on the similar 
provisions and the corresponding burden estimates previously made by 
the Commission for Rule 17Ad-22(d)(15),\859\ the Commission estimates 
that respondent clearing agencies will incur an aggregate one-time 
burden of approximately 84 hours to review and revise existing policies 
and procedures.\860\
---------------------------------------------------------------------------

    \858\ See 17 CFR 240.17Ad-22(d)(15); see also supra Part 
II.C.10.
    \859\ See Clearing Agency Standards adopting release, supra note 
5, at 66260.
    \860\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(10) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\861\ the 
Commission estimates that the ongoing activities required by Rule 17Ad-
22(e)(10) impose an aggregate annual burden on respondent clearing 
agencies of approximately 35 hours.\862\
---------------------------------------------------------------------------

    \861\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \862\ This figure was calculated as follows: (Compliance 
Attorney for 5 hours) x 7 respondent clearing agencies = 35 hours.
---------------------------------------------------------------------------

11. Rule 17Ad-22(e)(11)
    As described in Part IV.A.11, the Commission is adopting Rule 17Ad-
22(e)(11) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\863\
---------------------------------------------------------------------------

    \863\ See CCA Standards proposing release, supra note 5, at 
29570-71.
---------------------------------------------------------------------------

    With respect to Rule 17Ad-22(e)(11), a respondent clearing agency 
is a registered clearing agencies that provides CSD services. Because 
Rule 17Ad-22(e)(11) contains similar provisions to Rule 17Ad-
22(d)(10),\864\ the Commission expects that such clearing agencies 
generally have written rules, policies, and procedures similar to the 
requirements imposed under the rule. Rule 17Ad-22(e)(11) also imposes 
additional requirements that do not appear in Rule 17Ad-22, and 
accordingly a covered clearing agency providing CSD services may need 
to review and revise its policies and procedures or create new policies 
and procedures, as necessary, as necessary, pursuant to the rule. Based 
on the similar policies and procedures requirements and the 
corresponding burden estimates made by the Commission for Rule 17Ad-
22(d)(10),\865\ the Commission estimates that the respondent clearing 
agency will incur a one-time burden of approximately 55 hours to review 
and revise existing policies and procedures and create new policies and 
procedures, as necessary.\866\
---------------------------------------------------------------------------

    \864\ See 17 CFR 240.17Ad-22(d)(10); see also supra Part 
II.B.11.
    \865\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \866\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(11) also imposes ongoing burdens on the respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\867\ the 
Commission estimates that the ongoing activities required by Rule 17Ad-
22(e)(11) impose a total annual burden on the respondent clearing 
agency of approximately 8 hours.\868\
---------------------------------------------------------------------------

    \867\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \868\ This figure was calculated as follows: (Compliance 
Attorney for 8 hours) x 1 respondent clearing agency = 8 hours.
---------------------------------------------------------------------------

12. Rule 17Ad-22(e)(12)
    As described in Part IV.A.12, the Commission is adopting Rule 17Ad-
22(e)(12) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\869\
---------------------------------------------------------------------------

    \869\ See CCA Standards proposing release, supra note 5, at 
29571.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(12) contains substantially similar provisions to 
Rule 17Ad-22(d)(13).\870\ The Commission therefore expects that a 
respondent clearing agency has written rules, policies, and procedures 
substantially similar to the requirements in the rule and that the PRA 
burden includes the incremental burdens of reviewing current policies 
and procedures and revising them, where appropriate, pursuant to the 
rule. Accordingly, based on the similar provisions and the 
corresponding burden estimates previously made by the Commission for 
Rule 17Ad-22(d)(13),\871\ the Commission estimates that respondent 
clearing agencies will incur an aggregate one-time burden of 
approximately 84 hours to review and revise existing policies and 
procedures.\872\
---------------------------------------------------------------------------

    \870\ See 17 CFR 240.17Ad-22(d)(13); see also supra Part 
II.C.12.
    \871\ See Clearing Agency Standards adopting release, supra note 
5, at 66260.
    \872\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(12) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\873\ the 
Commission estimates that the ongoing activities required by Rule 17Ad-
22(e)(12) impose an aggregate annual burden on respondent clearing 
agencies of approximately 35 hours.\874\
---------------------------------------------------------------------------

    \873\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \874\ This figure was calculated as follows: (Compliance 
Attorney for 5 hours) x 7 respondent clearing agencies = 35 hours.
---------------------------------------------------------------------------

13. Rule 17Ad-22(e)(13)
    As described in Part IV.A.13, the Commission is adopting Rule 17Ad-
22(e)(13) with modifications. The burden estimates for the rule, as 
described below, have been modified from the preliminary estimates in 
the CCA Standards proposing release to reflect that Rules 17Ad-
22(e)(13)(i) and (ii) are being adopted under Rule 17Ad-22(e)(4) as new 
Rules 17Ad-22(e)(4)(viii) and (ix).\875\
---------------------------------------------------------------------------

    \875\ See supra note 822.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(13) requires 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. Rule 
17Ad-22(e)(13) contains similar provisions to Rule 17Ad-22(d)(11) but 
also imposes additional requirements that do not appear in Rule 17Ad-
22.\876\ The Commission therefore expects that a respondent clearing 
agency may have written rules, policies, and procedures similar to some 
requirements in the rule and that the PRA burden includes the 
incremental burdens of reviewing and

[[Page 70896]]

revising existing policies and procedures pursuant to Rule 17Ad-
22(e)(13) and creating new 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)(11),\877\ the Commission preliminarily 
estimated 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.\878\ Because the modifications to Rule 17Ad-
22(e)(13) noted above will require updating current policies and 
procedures or establishing new policies and procedures to ensure 
compliance, the Commission estimates that respondent clearing agencies 
will incur an aggregate one-time burden of approximately 287 hours to 
review and revise existing policies and procedures and to create new 
policies and procedures, as necessary.\879\
---------------------------------------------------------------------------

    \876\ See 17 CFT 240.17Ad-22(d)(11); see also supra Part 
II.C.13.
    \877\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \878\ See CCA Standards proposing release, supra note 5, at 
29571. 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.
    \879\ This figure was calculated as follows: ((Assistant General 
Counsel for 6 hours) + (Compliance Attorney for 11 hours) + (Senior 
Business Analyst for 12 hours) + (Computer Operations Manager for 12 
hours)) = 41 hours x 7 respondent clearing agencies = 287 hours.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(13) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires policies and procedures for the 
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 Rule 17Ad-22,\880\ 
the Commission preliminarily estimated that the ongoing activities 
required by Rule 17Ad-22(e)(13) would impose an aggregate annual burden 
on respondent clearing agencies of approximately 63 hours.\881\ Because 
the modifications to Rule 17Ad-22(e)(13) noted above will require 
updating current policies and procedures or establishing new policies 
and procedures to ensure compliance, the Commission estimates that the 
ongoing activities required by Rule 17Ad-22(e)(13) will impose an 
aggregate annual burden on respondent clearing agencies of 49 
hours.\882\
---------------------------------------------------------------------------

    \880\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \881\ See CCA Standards proposing release, supra note 5, at 
29571. This figure was calculated as follows: (Compliance Attorney 
for 9 hours) x 7 respondent clearing agencies = 63 hours.
    \882\ This figure was calculated as follows: (Compliance 
Attorney for 7 hours) x 7 respondent clearing agencies = 49 hours.
---------------------------------------------------------------------------

14. Rule 17Ad-22(e)(14)
    As described in Part IV.A.14, the Commission is adopting Rule 17Ad-
22(e)(14) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\883\
---------------------------------------------------------------------------

    \883\ See CCA Standards proposing release, supra note 5, at 
29571-72.
---------------------------------------------------------------------------

    With respect to Rule 17Ad-22(e)(14), a respondent clearing agency 
is a registered clearing agency that provides CCP services for 
security-based swaps. Such clearing agencies generally have written 
policies and procedures regarding the segregation and portability of 
customer positions and collateral as a result of applicable rules and 
regulations notwithstanding Rule 17Ad-22.\884\ The Commission therefore 
expects that a respondent clearing agency has written rules, policies, 
and procedures substantially similar to the requirements in the rule 
and that the PRA burden includes the incremental burdens of reviewing 
current policies and procedures and revising them, where appropriate, 
pursuant to the rule. Accordingly, the Commission estimates that Rule 
17Ad-22(e)(14) imposes on respondent clearing agencies an aggregate 
one-time burden of 72 hours to review and revise existing policies and 
procedures.\885\
---------------------------------------------------------------------------

    \884\ See, e.g., 77 FR 6336 (Feb. 7, 2012) (CFTC adopting rules 
imposing LSOC on DCOs for cleared swaps); see also supra Part 
II.C.14. Because the respondent clearing agencies are subject to the 
CFTC's segregation and portability requirements for cleared swaps, 
the Commission expects that the burden imposed by Rule 17Ad-
22(e)(14) will be limited.
    \885\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(14) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\886\ the 
Commission believes that the ongoing activities required by Rule 17Ad-
22(e)(14) impose an aggregate annual burden on respondent clearing 
agencies of approximately 12 hours.\887\
---------------------------------------------------------------------------

    \886\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \887\ This figure was calculated as follows: (Compliance 
Attorney for 6 hours) x 2 respondent clearing agencies = 12 hours
---------------------------------------------------------------------------

15. Rule 17Ad-22(e)(15)
    As described in Part IV.A.15, the Commission is adopting Rule 17Ad-
22(e)(15) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\888\
---------------------------------------------------------------------------

    \888\ See CCA Standards proposing release, supra note 5, at 
29571.
---------------------------------------------------------------------------

    Because Rule 17Ad-22(d) does not include requirements related to 
general business risk, the Commission estimates that the PRA burdens 
for Rule 17Ad-22(e)(15) are more significant than in other cases under 
Rule 17Ad-22(e) and may require a respondent clearing agency to make 
substantial changes to its written rules, policies, and procedures 
pursuant to the rule.\889\ The Commission estimates that Rule 17Ad-
22(e)(15) will impose an aggregate one-time burden on respondent 
covered clearing agencies of 1,470 hours to review and revise existing 
policies and procedures and to create new policies and procedures, as 
necessary.\890\
---------------------------------------------------------------------------

    \889\ See 17 CFR 240.17Ad-22(d); see also supra Part II.C.15.
    \890\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15) also imposes ongoing burdens on a respondent 
clearing agency. Rule 17Ad-22(e)(15) requires 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 rule. Based on 
the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\891\ the 
Commission estimates that the ongoing activities required by Rule 17Ad-
22(e)(15) impose an aggregate annual burden on respondent clearing 
agencies of 336 hours.\892\
---------------------------------------------------------------------------

    \891\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \892\ 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.

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

[[Page 70897]]

16. Rule 17Ad-22(e)(16)
    As described in Part IV.A.16, the Commission is adopting Rule 17Ad-
22(e)(16) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\893\
---------------------------------------------------------------------------

    \893\ See CCA Standards proposing release, supra note 5, at 
29572.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(16) contains substantially similar provisions to 
Rule 17Ad-22(d)(3).\894\ The Commission therefore expects that a 
respondent clearing agency has written rules, policies, and procedures 
substantially similar to the requirements in the rule and that the PRA 
burden includes the incremental burdens of reviewing current policies 
and procedures and revising them, where appropriate, pursuant to the 
rule. Accordingly, based on the similar provisions and the 
corresponding burden estimates previously made by the Commission for 
Rule 17Ad-22(d)(3),\895\ the Commission estimates that respondent 
clearing agencies will incur an aggregate one-time burden of 
approximately 140 hours to review and revise existing policies and 
procedures.\896\
---------------------------------------------------------------------------

    \894\ See 17 CFR 240.17Ad-22(d)(3); see also supra Part II.C.16.
    \895\ See Clearing Agency Standards adopting release, supra note 
5, at 66260.
    \896\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(16) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\897\ the 
Commission estimates that the ongoing activities required by Rule 17Ad-
22(e)(16) impose an aggregate annual burden on respondent clearing 
agencies of 42 hours.\898\
---------------------------------------------------------------------------

    \897\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \898\ This figure was calculated as follows: (Compliance 
Attorney for 6 hours) x 7 respondent clearing agencies = 42 hours.
---------------------------------------------------------------------------

17. Rule 17Ad-22(e)(17)
    As described in Part IV.A.17, the Commission is adopting Rule 17Ad-
22(e)(17) with one modification. Because this modification is only 
technical or clarifying in nature, the Commission does not believe they 
will alter the PRA burdens described in the CCA Standards proposing 
release. The burden estimates for the rule are unchanged from the CCA 
Standards proposing release.\899\
---------------------------------------------------------------------------

    \899\ See CCA Standards proposing release, supra note 5, at 
29572-73.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(17) contains similar provisions to Rule 17Ad-
22(d)(4) but also imposes additional requirements that do not appear in 
Rule 17Ad-22.\900\ The Commission therefore expects that a respondent 
clearing agency may have written rules, policies, and procedures 
similar to the requirements in the rule and that the PRA burden 
includes the incremental burdens of reviewing and revising current 
policies and procedures and creating new policies and procedures, as 
necessary, pursuant to the 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)(4),\901\ the Commission estimates that respondent clearing 
agencies will incur an aggregate one-time burden of 196 hours to review 
and revise existing policies and procedures and to create new policies 
and procedures, as necessary.\902\
---------------------------------------------------------------------------

    \900\ See 17 CFR 240.17Ad-22(d)(4); see also supra Part II.C.17.
    \901\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \902\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(17) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to Rule 17Ad-22,\903\ the Commission 
estimates that the ongoing activities required by Rule 17Ad-22(e)(17) 
impose an aggregate annual burden on respondent clearing agencies of 
112 hours.\904\
---------------------------------------------------------------------------

    \903\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \904\ This figure was calculated as follows: (Compliance 
Attorney for 6 hours) x 7 respondent clearing agencies = 42 hours.
---------------------------------------------------------------------------

18. Rule 17Ad-22(e)(18)
    As described in Part IV.A.18, the Commission is adopting Rule 17Ad-
22(e)(18) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\905\
---------------------------------------------------------------------------

    \905\ See CCA Standards proposing release, supra note 5, at 
29573.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18) contains similar provisions to Rules 17Ad-
22(b)(5) through (7) and (d)(2).\906\ The Commission therefore expects 
that a respondent clearing agency may have written rules, policies, and 
procedures similar to the requirements in the rule and that the PRA 
burden includes the incremental burdens of reviewing and revising 
current policies and procedures and creating new policies and 
procedures, as necessary, pursuant to the rule. 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),\907\ the Commission estimates that 
respondent clearing agencies will incur an aggregate one-time burden of 
308 hours to review and revise existing policies and procedures and to 
create new policies and procedures, as necessary.\908\
---------------------------------------------------------------------------

    \906\ See 17 CFR 240.17Ad-22(b)(5)-(7), (d)(2); see also supra 
Part II.C.18.
    \907\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \908\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\909\ the 
Commission estimates that the ongoing activities required by the rule 
impose an aggregate annual burden on respondent clearing agencies of 49 
hours.\910\
---------------------------------------------------------------------------

    \909\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \910\ This figure was calculated as follows: (Compliance 
Attorney for 7 hours) x 7 respondent clearing agencies = 49 hours.
---------------------------------------------------------------------------

19. Rule 17Ad-22(e)(19)
    As described in Part IV.A.19, the Commission is adopting Rule 17Ad-
22(e)(19) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\911\
---------------------------------------------------------------------------

    \911\ See CCA Standards proposing release, supra note 5, at 
29573.
---------------------------------------------------------------------------

    Tiered participation arrangements are not addressed by Rule 17Ad-
22(d). The Commission therefore expects that a respondent clearing 
agency may need to create policies and procedures pursuant to Rule 
17Ad-22(e)(19).\912\ The

[[Page 70898]]

Commission estimates that Rule 17Ad-22(e)(19) imposes an aggregate one-
time burden on respondent clearing agencies of 308 hours to review and 
revise existing policies and procedures and to create new policies and 
procedures, as necessary.\913\
---------------------------------------------------------------------------

    \912\ See 17 CFR 240.17Ad-22(d); see also supra Part II.C.19.
    \913\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(19) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to Rule 17Ad-22,\914\ the Commission 
estimates that the ongoing activities required by the rule impose an 
annual aggregate burden on respondent clearing agencies of 49 
hours.\915\
---------------------------------------------------------------------------

    \914\ See Clearing Agency Standards adopting release, supra note 
5, at 66260.
    \915\ This figure was calculated as follows: (Compliance 
Attorney for 7 hours) x 7 respondent clearing agencies = 49 hours.
---------------------------------------------------------------------------

20. Rule 17Ad-22(e)(20)
    As described in Part IV.A.13, the Commission is adopting Rule 17Ad-
22(e)(20) with one modification. The burden estimates for the rule are 
unchanged from the CCA Standards proposing release.\916\
---------------------------------------------------------------------------

    \916\ See Clearing Agency Standards adopting release, supra note 
5, at 29573-74.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(20) contains similar provisions to Rule 17Ad-
22(d)(7) but also adds additional requirements that do not appear in 
Rule 17Ad-22(d).\917\ The Commission therefore expects that a 
respondent clearing agency may have written rules, policies, and 
procedures similar to the requirements in the rule and that the PRA 
burden includes the incremental burdens of reviewing and revising 
current policies and procedures and creating new policies and 
procedures, as necessary, pursuant to the rule. Accordingly, based on 
the similar policies and procedures requirements and compliance burdens 
associated with Rule 17Ad-22(d)(7),\918\ the Commission estimates that 
respondent clearing agencies will incur an aggregate one-time burden of 
approximately 308 hours to review and update existing policies and 
procedures.\919\ Rule 17Ad-22(e)(20) also imposes ongoing burdens on a 
respondent clearing agency. The rule requires ongoing monitoring and 
compliance activities with respect to its policies and procedures under 
the rule. Based on the Commission's previous estimates for ongoing 
monitoring and compliance burdens with respect to Rule 17Ad-22,\920\ 
the Commission estimates that the ongoing activities required by the 
rule impose an aggregate annual burden on respondent clearing agencies 
of 49 hours.\921\
---------------------------------------------------------------------------

    \917\ See17 CFR 240.17Ad-22(d)(7); see also supra Part II.C.20.
    \918\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \919\ See CCA Standards proposing release, supra note 5, at 
29573. 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.
    \920\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \921\ This figure was calculated as follows: (Compliance 
Attorney for 7 hours) x 7 respondent clearing agencies = 49 hours.
---------------------------------------------------------------------------

21. Rule 17Ad-22(e)(21)
    As described in Part IV.A.21, the Commission is adopting Rule 17Ad-
22(e)(21) with one modification. Because this modification is only 
technical or clarifying in nature, the Commission does not believe they 
will alter the PRA burdens described in the CCA Standards proposing 
release. The burden estimates for the rule are unchanged from the CCA 
Standards proposing release.\922\
---------------------------------------------------------------------------

    \922\ See CCA Standards proposing release, supra note 5, at 
29574.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(21) contains similar provisions to Rule 17Ad-
22(d)(6) but also adds additional requirements that do not appear in 
Rule 17Ad-22(d).\923\ The Commission therefore expects that a 
respondent clearing agency may have written rules, policies, and 
procedures similar to the requirements in the rule and that the PRA 
burden includes the incremental burdens of reviewing and revising 
current policies and procedures and creating new policies and 
procedures, as necessary, pursuant to the 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)(6),\924\ the Commission estimates that respondent clearing 
agencies will incur an aggregate one-time burden of approximately 224 
hours to review and revise existing policies and procedures.\925\
---------------------------------------------------------------------------

    \923\ See 17 CFR 240.17Ad-22(d)(6); see also supra Part II.C.21.
    \924\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \925\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(21) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to existing Rule 17Ad-22,\926\ the 
Commission estimates that the ongoing activities required by Rule 17Ad-
22(e)(21) impose an aggregate annual burden on respondent clearing 
agencies of 77 hours.\927\
---------------------------------------------------------------------------

    \926\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \927\ 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.
---------------------------------------------------------------------------

22. Rule 17Ad-22(e)(22)
    As described in Part IV.A.22, the Commission is adopting Rule 17Ad-
22(e)(22) as proposed. The burden estimates for the rule are unchanged 
from the CCA Standards proposing release.\928\
---------------------------------------------------------------------------

    \928\ See CCA Standards proposing release, supra note 5, at 
29574.
---------------------------------------------------------------------------

    Although Rule 17Ad-22(d) does not include any requirements with 
provisions similar to Rule 17Ad-22(e)(22), the Commission understands 
that covered clearing agencies currently use the relevant 
internationally accepted communication procedures and standards and 
therefore expects that a respondent clearing agency may need to make 
only limited changes to its policies and procedures under the 
rule.\929\ Accordingly, the Commission estimates that the rule imposes 
an aggregate one-time burden on respondent clearing agencies of 168 
hours to review and revise existing policies and procedures.\930\
---------------------------------------------------------------------------

    \929\ See 17 CFR 240.17Ad-22(d); see also supra Part II.C.22.
    \930\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(22) also imposes ongoing burdens on a respondent 
clearing agency. It requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for

[[Page 70899]]

ongoing monitoring and compliance burdens with respect to existing Rule 
17Ad-22,\931\ the Commission estimates that the ongoing activities 
required by Rule 17Ad-22(e)(22) impose an aggregate annual burden on 
respondent clearing agencies of 35 hours.\932\
---------------------------------------------------------------------------

    \931\ See Clearing Agency Standards adopting release, supra note 
5, at 66260.
    \932\ This figure was calculated as follows: (Compliance 
Attorney for 5 hours) x 7 respondent clearing agencies = 35 hours.
---------------------------------------------------------------------------

23. Rule 17Ad-22(e)(23)
    As described in Part IV.A.23, the Commission is adopting Rule 17Ad-
22(e)(23) with modifications. Because these modifications are only 
technical or clarifying in nature, the Commission does not believe they 
will alter the PRA burdens described in the CCA Standards proposing 
release. Therefore, the burden estimates described below are unchanged 
from the CCA Standards proposing release.\933\
---------------------------------------------------------------------------

    \933\ See CCA Standards proposing release, supra note 5, at 
29574.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(23) contains similar requirements to Rule 17Ad-
22(d)(9) but also imposes substantial new requirements.\934\ The 
Commission therefore expects that, although a respondent clearing 
agency may have written rules, policies and procedures similar to those 
required by some provisions under the rule, a respondent clearing 
agency will need to create new policies and procedures to address the 
other provisions. 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),\935\ the 
Commission estimates that respondent clearing agencies will incur an 
aggregate one-time burden of 966 hours to review and revise existing 
policies and procedures and to create policies and procedures, as 
necessary.\936\
---------------------------------------------------------------------------

    \934\ See 17 CFR 240.17Ad-22(d)(9); see also supra Part II.C.23.
    \935\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \936\ 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.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(23) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to Rule 17Ad-22,\937\ the Commission 
estimates that the ongoing activities required by Rule 17Ad-22(e)(23) 
impose an aggregate annual burden on respondent clearing agencies of 
238 hours.\938\
---------------------------------------------------------------------------

    \937\ See Clearing Agency Standards adopting release, supra note 
5, at 66260-63.
    \938\ This figure was calculated as follows: (Compliance 
Attorney for 34 hours) x 7 respondent clearing agencies = 238 hours.
---------------------------------------------------------------------------

24. Total Burden for Rule 17Ad-22(e)
    The Commission preliminarily estimated that respondent clearing 
agencies would incur an aggregate initial burden under Rule 17Ad-22(e) 
of 10,664 hours and an aggregate ongoing burden of 3,460 hours.\939\ In 
light of the modifications made by the Commission in adopting Rule 
17Ad-22(e) described above that will require updating current policies 
and procedures or establishing new policies and procedures to ensure 
compliance with the rule, the Commission estimates that respondent 
clearing agencies will incur an aggregate initial burden of 10,776 
hours under Rule 17Ad-22(e) and an aggregate ongoing burden of 3,537 
hours.
---------------------------------------------------------------------------

    \939\ See CCA Standards proposing release, supra note 5, at 
29574.
---------------------------------------------------------------------------

25. Total Burden for Rule 17Ab2-2
    As discussed in Part IV.A.24, Rule 17Ab2-2 establishes procedures 
for the Commission to make determinations affecting covered clearing 
agencies in certain circumstances.\940\ 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. To the extent such determinations are 
carried out by the Commission on its own initiative under Rule 17Ab2-2, 
the Commission expects that the PRA burdens on a respondent clearing 
agency would be limited. Accordingly, based on the Commission's 
previous estimates for ongoing monitoring and compliance burdens with 
respect to existing Rule 17Ad-22,\941\ the Commission preliminarily 
estimated 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.\942\ In consideration of the 
modifications made by the Commission in adopting Rule 17Ab2-2 as 
described above, the Commission estimates that respondent clearing 
agencies will incur an aggregate one-time burden of approximately 20 
hours to draft and review a determination request to the 
Commission.\943\
---------------------------------------------------------------------------

    \940\ See supra Part II.D.
    \941\ See Clearing Agency Standards adopting release, supra note 
5, at 66260.
    \942\ See CCA Standards proposing release, supra note 5, at 
29575. 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.
    \943\ This figure was calculated as follows: ((Assistant General 
Counsel for 2 hours) + (Staff Attorney for 3 hours) + (Outside 
Counsel for 5 hours)) = 10 hours x 2 respondent clearing agencies = 
20 hours.
---------------------------------------------------------------------------

26. Total Burden for Rule 17Ad-22(c)(1)
    As discussed in Part IV.A.25, the modifications to Rule 17Ad-
22(c)(1) impose a recordkeeping requirement on registered clearing 
agencies that are covered clearing agencies. With respect to Rule 17Ad-
22(c)(1), a respondent clearing agency is a registered clearing agency 
that provides CCP services. In the Clearing Agency Standards release, 
the Commission estimated that respondent clearing agencies would incur 
both initial and ongoing burdens under Rule 17Ad-22(c)(1). 
Specifically, the Commission estimated that Rule 17Ad-22(c)(1) would 
impose on a respondent clearing agency a one-time burden of 100 
hours.\944\ In light of the modifications to Rule 17Ad-22(c)(1) that 
affect covered clearing agencies, the Commission believes that 
respondent clearing agencies would incur an aggregate one-time burden 
of 660 hours to perform adjustments needed to synthesize and format 
existing information in a manner sufficient to explain the methodology 
used to meet the requirements of Rule 17Ad-22(c)(1).\945\
---------------------------------------------------------------------------

    \944\ See Clearing Agency Standards adopting release, supra note 
5, 66261-62. This figure was calculated as follows: ((Chief 
Compliance Officer at 40 hours) + (Computer Operations Department 
Manager at 40 hours) + (Senior Programmer at 20 hours)) = 100 hours.
    \945\ This figure was calculated as follows: ((Chief Compliance 
Officer at 44 hours) + (Computer Operations Department Manager at 44 
hours) + (Senior Programmer at 22 hours)) = 110 hours x 6 respondent 
clearing agencies = 660 hours.
---------------------------------------------------------------------------

    In addition, the Commission estimated that Rule 17Ad-22(c)(1) would 
impose ongoing burdens on a respondent clearing agency of three hours 
per respondent clearing agency per quarter, amounting to an aggregate 
annual burden of 12 hours.\946\ In light of the modifications to Rule 
17Ad-22(c)(1) that affect covered clearing agencies, the Commission 
believes that the ongoing activities required by Rule 17Ad-22(c)(1) 
will impose an aggregate annual burden on respondent clearing agencies 
of 120 hours to perform adjustments

[[Page 70900]]

needed to synthesize and format existing information in a manner 
sufficient to explain the methodology used to meet the requirements of 
the rule.\947\
---------------------------------------------------------------------------

    \946\ See Clearing Agency Standards adopting release, supra note 
5, 66262. This figure was calculated as follows: ((Compliance 
Attorney at 1 hour) + (Computer Operations Department Manager at 2 
hours)) = 3 hours per quarter x 4 quarters per year = 12 hours.
    \947\ This figure was calculated as follows: ((Compliance 
Attorney at 2 hours) + (Computer Operations Department Manager at 3 
hours)) = 5 hours per quarter x 4 quarters per year = 20 hours x 6 
respondent clearing agencies = 120 hours.
---------------------------------------------------------------------------

D. Collection of Information Is Mandatory

    The collection of information requirement for Rule 17Ad-22(e) is 
mandatory. The collection of information requirement for Rule 17Ab2-2 
is voluntary.

E. Confidentiality

    The Commission expects that the policies and procedures developed 
pursuant to Rule 17Ad-22(e) would be communicated to the participants, 
as applicable, of each respondent clearing agency and, as applicable, 
the public. A respondent clearing agency would be required to preserve 
such policies and procedures in accordance with, and for the periods 
specified in, Rules 17a-1 and 17a-4(e)(7) under the Exchange Act.\948\ 
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.\949\
---------------------------------------------------------------------------

    \948\ 17 CFR 240.17a-1 and 17a-4(e)(7).
    \949\ 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 Rule 17Ab2-2, the 
Commission also expects such information would be kept confidential 
subject to the provisions of applicable law.\950\
---------------------------------------------------------------------------

    \950\ See id.
---------------------------------------------------------------------------

V. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires the Commission, 
in promulgating rules, to consider the impact of those rules on small 
entities.\951\ Section 603(a) of the Administrative Procedure Act,\952\ 
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.'' \953\ The Commission 
certified in the CCA Standards proposing release, pursuant to Section 
605(b) of the RFA,\954\ that the proposed rules would not, if adopted, 
have a significant impact on a substantial number of small entities. 
The Commission received no comments on this certification.
---------------------------------------------------------------------------

    \951\ See 5 U.S.C. 601 et seq.
    \952\ See 5 U.S.C. 603(a).
    \953\ 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 are set forth in Rule 0-10, 17 CFR 240.0-10.
    \954\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

A. Registered Clearing Agencies

    The amendments to Rule 17Ad-22 and Rule 17Ab2-2 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 amendments to Rule 17Ad-
22 and new 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.\955\
---------------------------------------------------------------------------

    \955\ See 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

    Based on the Commission's existing information about the clearing 
agencies currently registered with the Commission,\956\ the Commission 
believes that such registered clearing agencies exceed the thresholds 
defining ``small entities'' set out above. While other clearing 
agencies may seek to register as clearing agencies with the Commission, 
the Commission does not believe that any such entities would be ``small 
entities'' as defined in Exchange Act Rule 0-10.\957\ Further, 
registered clearing agencies are only subject to the requirements of 
Rule 17Ad-22(e) if they meet the definition of a covered clearing 
agency, as described in Part II.A. Accordingly, the Commission believes 
that any such registered clearing agencies will exceed the thresholds 
for ``small entities'' set forth in Exchange Act Rule 0-10.
---------------------------------------------------------------------------

    \956\ In 2015, DTCC processed $1.508 quadrillion in financial 
transactions. Within DTCC, DTC settled $112.3 trillion of securities 
and held securities valued at $45.4 trillion, NSCC processed an 
average daily value of $976.6 billion in equity securities, and FICC 
cleared $917.1 trillion of transactions in government securities and 
$48.2 trillion of transactions in agency mortgage-backed securities. 
See DTCC, 2015 Annual Report, available at http://www.dtcc.com/annuals/2015/index.php. OCC cleared more than 4.1 billion contracts 
and held margin of $98.3 billion at the end of 2015. See OCC, 2015 
Annual Report, available at http://www.theocc.com/components/docs/about/annual-reports/occ-2015-annual-report.pdf. In addition, 
Intercontinental Exchange (``ICE'') averaged daily trade volume of 
9.3 million and revenues of $3.3 billion in 2015. See ICE at a 
glance, available at https://www.theice.com/publicdocs/ICE_at_a_glance.pdf.
    \957\ 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.
---------------------------------------------------------------------------

B. Certification

    For the reasons described above, the Commission certifies that the 
amendments to Rule 17Ad-22 and new Rule 17Ab2-2 will not have a 
significant economic impact on a substantial number of small entities.

VI. Statutory Authority

    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 is adopting amendments to Rule 17Ad-22 and 
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 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, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78ov-4, 
78o-10, 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.; and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; 
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, 
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *

[[Page 70901]]

    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 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; and
    (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.
    (b) 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 
whether the clearing agency clears financial instruments that are 
characterized by discrete jump-to-default price changes or that are 
highly correlated with potential participant defaults.
    (c) 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 to rescind any determination made 
pursuant to paragraph (a) or (b) of this section. In determining 
whether to rescind any such determination, the Commission may consider 
a change in circumstances such that the covered clearing agency no 
longer meets the criteria supporting the determination in effect.
    (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 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 revising paragraphs (a) and (c)(1), and 
(d) introductory text and adding paragraphs (e) and (f) to 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 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 Act (15 U.S.C. 78q-1) 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(b).
    (5) Covered clearing agency means a designated clearing agency or 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.).
    (6) 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.).
    (7) 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)).
    (8) 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 markets 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.
    (9) 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.
    (10) 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.
    (11) 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.
    (12) 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

[[Page 70902]]

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.
    (13) 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 percent with respect to the estimated 
distribution of future exposure.
    (14) 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, such as:
    (A) Committed arrangements without material adverse change 
provisions, 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 in a jurisdiction that 
permits said pledges or other transactions by the covered clearing 
agency.
    (15) Security-based swap means a security-based swap as defined in 
Section 3(a)(68) of the Act (15 U.S.C. 78c(a)(68)).
    (16) Sensitivity analysis means an analysis that involves analyzing 
the sensitivity of a model to its assumptions, parameters, and inputs 
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 conditions. 
Sensitivity analysis must use actual portfolios and, where applicable, 
hypothetical portfolios that reflect the characteristics of proprietary 
positions and 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.
    (17) Stress testing means the estimation of credit or liquidity 
exposures that would result from the realization of potential stress 
scenarios, such as extreme price changes, multiple defaults, or changes 
in other valuation inputs and assumptions.
    (18) 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.
    (19) 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 
documentation required under paragraphs (e)(1), (2), and (10) is 
disclosed to the Commission and, as appropriate, 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.
* * * * *
    (c) Record of financial resources and annual audited financial 
statements. (1) Each fiscal quarter (based on calculations made as of 
the last business day of the clearing agency's fiscal quarter), or at 
any time upon Commission request, a registered clearing agency that 
performs central counterparty services shall calculate and maintain a 
record, in accordance with Sec.  240.17a-1 of this chapter, of the 
financial and qualifying liquid resources necessary to meet the 
requirements, as applicable, of paragraphs (b)(3), (e)(4), and (e)(7) 
of this section, and sufficient documentation to explain the 
methodology it uses to compute such financial resources or qualifying 
liquid resources requirement.
* * * * *
    (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 Act (15 U.S.C. 78q-1) applicable to clearing agencies, and the 
objectives of owners and participants;
    (iv) Establish that the board of directors and senior management 
have appropriate experience and skills to discharge their duties and 
responsibilities;
    (v) Specify clear and direct lines of responsibility; and
    (vi) Consider the interests of participants' customers, securities 
issuers and holders, and other relevant stakeholders of the covered 
clearing agency.
    (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, 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 independent 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

[[Page 70903]]

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, exclusive of 
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)(ii) and (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 stress testing 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, or 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)(vi)(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;
    (vii) Performing a model validation for its credit 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 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; 
and
    (ix) 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.
    (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 uses 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 is 
regularly reviewed, tested, and verified by:
    (A) Conducting backtests of its margin model at least once each day 
using standard predetermined parameters and assumptions;
    (B) Conducting a sensitivity analysis of its margin model and a 
review of 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 sensitivity analysis of its margin model and a 
review of 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, or 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 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 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.

[[Page 70904]]

    (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 stress testing 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 or become less 
liquid, when the size or concentration of positions held by the 
clearing agency's participants increases significantly, or in other 
appropriate circumstances described in such policies and procedures; 
and
    (D) Reporting the results of its analyses under paragraphs 
(e)(7)(vi)(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 
liquidity risk management framework;
    (vii) Performing a 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 to be 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
    (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

[[Page 70905]]

demands and continue to meet its obligations by, at a minimum, 
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) Ensuring 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 or settled; 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) 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) A comprehensive public disclosure that describes its material 
rules, policies, and procedures regarding its legal, governance, risk 
management, and operating framework, 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;
    (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 (23) 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.

[[Page 70906]]

    (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: September 28, 2016.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-23891 Filed 10-12-16; 8:45 am]
 BILLING CODE 8011-01-P