[Federal Register Volume 81, Number 198 (Thursday, October 13, 2016)]
[Proposed Rules]
[Pages 70744-70784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23892]
[[Page 70743]]
Vol. 81
Thursday,
No. 198
October 13, 2016
Part II
Securities and Exchange Commission
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17 CFR Part 240
Definition of Covered Clearing Agency; Proposed Rule
Federal Register / Vol. 81 , No. 198 / Thursday, October 13, 2016 /
Proposed Rules
[[Page 70744]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-78963; File No. S7-23-16]
RIN 3235-AL48
Definition of Covered Clearing Agency
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule amendments.
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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') proposes to amend the definition of ``covered clearing
agency'' under Rule 17Ad-22 to mean a registered clearing agency that
provides the services of a central counterparty (``CCP''), central
securities depository (``CSD''), or a securities settlement system
(``SSS''). The Commission also proposes a definition of ``securities
settlement system'' and proposes to amend the definitions of ``central
securities depository services'' to facilitate the proposed amendment
to ``covered clearing agency.'' In addition, the Commission proposes to
amend the definition of ``sensitivity analysis'' under Rule 17Ad-22 to
expand the scope of covered clearing agencies subject to requirements
thereunder. These amendments are proposed 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'').
DATES: Submit comments on or before December 12, 2016.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an email to [email protected]. Please include
File Number S7-23-16 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090.
All submissions should refer to File Number S7-23-16. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.
Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's Web site. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at http://www.sec.gov to receive notifications by
email.
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 proposes to amend the
definition of ``covered clearing agency'' in Rule 17Ad-22(a)(5) to mean
a registered clearing agency that provides the services of a CCP, CSD,
or SSS. The Commission further proposes to define ``securities
settlement system'' under Rule 17Ad-22 to mean a clearing agency that
enables securities to be transferred and settled by book entry
according to a set of predetermined multilateral rules.\1\ The
Commission also proposes to amend Rule 17Ad-22(a)(3) to define
``central securities depository'' to mean a clearing agency that is a
securities depository as described in Section 3(a)(23)(A) of the
Exchange Act.\2\
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\1\ To facilitate this proposed addition, the Commission would
renumber the remaining definitions in Rule 17Ad-22(a).
\2\ See 15 U.S.C. 78c(a)(23)(A).
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In addition, the Commission proposes to amend the definition of
``sensitivity analysis'' in Rule 17Ad-22(a)(16) to expand its coverage,
so that the policies and procedures of all covered clearing agencies
that are CCPs provide for a sensitivity analysis that considers the
most volatile relevant periods, where practical, that have been
experienced by the markets served by the covered clearing agency.\3\
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\3\ If the proposed definition of ``securities settlement
system'' is adopted, the definition of ``sensitivity analysis''
would move to Rule 17Ad-22(a)(17).
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In developing these proposed amendments, Commission staff has
consulted with the Financial Stability Oversight Council (``FSOC''),
Commodity Futures Trading Commission (``CFTC''), and Board of Governors
of the Federal Reserve System (``FRB'').\4\ The Commission has also
considered the relevant international standards as required by Section
805(a)(2)(A) of the Clearing Supervision Act.\5\ The relevant
international standards for CCPs, CSDs, and SSSs are the Principles for
Financial Market Infrastructures (``PFMI'').\6\
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\4\ See 12 U.S.C. 5472.
\5\ See 12 U.S.C. 5464(a)(2)(A).
\6\ 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.
The PFMI sets forth twenty-four principles for financial market
infrastructures (``FMIs''), 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 standards can be implemented. See id. at
17. Commission staff co-chaired the working group within CPSS-IOSCO
that drafted both the consultative and final versions of the PFMI.
In 2014, the CPSS became the Committee on Payments and Market
Infrastructures (``CPMI'').
CPMI-IOSCO has 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 of CCPs: Further
guidance on the PFMI (Aug. 2016, consultative report), available at
http://www.bis.org/cpmi/publ/d149.pdf.
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Table of Contents
I. Introduction
A. Regulatory Framework
1. Exchange Act
2. Dodd-Frank Act
3. Rule 17Ad-22
B. Distinctions among Clearing Agencies
1. Registered Clearing Agencies
2. Exempt Clearing Agencies
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II. Proposed Amendments Under Rule 17AD-22
A. Definition of ``Covered Clearing Agency''
1. Critical Functions Common among CCPs, CSDs, and SSSs
2. Critical Functions Specific to CCPs, CSDs, or SSSs
3. Increasing Scrutiny of CCP, CSD, and SSS Functions
4. Expanded Coverage under the Definition of ``Covered Clearing
Agency''
B. Definition of ``Securities Settlement System''
C. Definition of ``Central Securities Depository''
D. Definition of ``Sensitivity Analysis''
E. Request for Comments
III. Economic Analysis
A. Economic Background
B. Baseline
1. Regulatory Framework for Registered Clearing Agencies
2. Current Practices
C. Consideration of Benefits, Costs, and the Effect on
Competition, Efficiency, and Capital Formation
1. Economic Effects Related to Registered Clearing Agencies
2. Economic Effects Related to Future Registrants
3. Alternatives
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)
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 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)(12)
12. Rule 17Ad-22(e)(13)
13. Rule 17Ad-22(e)(14)
14. Rule 17Ad-22(e)(15)
15. Rule 17Ad-22(e)(16)
16. Rule 17Ad-22(e)(17)
17. Rule 17Ad-22(e)(18)
18. Rule 17Ad-22(e)(19)
19. Rule 17Ad-22(e)(20)
20. Rule 17Ad-22(e)(21)
21. Rule 17Ad-22(e)(22)
22. Rule 17Ad-22(e)(23)
23. Total Burden for Rule 17Ad-22(e)
24. Total Burden for Rule 17Ad-22(c)(1)
D. Collection of Information is Mandatory
E. Confidentiality
F. Request for Comments
V. Small Business Regulatory Enforcement Fairness Act
VI. Regulatory Flexibility Act Certification
A. Registered Clearing Agencies
B. Certification
VII. Statutory Authority
I. Introduction
The Commission preliminarily believes that amending the definition
of ``covered clearing agency'' would further the Commission's ongoing
efforts to enhance the regulatory framework for clearing agencies.\7\
As discussed below, the Commission preliminarily believes that
registered clearing agencies providing the services of CCPs, CSDs, and
SSSs perform a critical role for the U.S. securities markets and the
broader U.S. financial system by helping to reduce risk and by
providing transparency to the markets. In light of this critical role,
the Commission preliminary believes that the definition of ``covered
clearing agency'' should be expanded to include all such clearing
agencies, which would make them subject to the enhanced requirements of
Rule 17Ad-22(e).
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\7\ With these proposed rule amendments and guidance, the
Commission is not re-opening comment on the rules adopted by the
Commission in the CCA Standards adopting release with respect to
those entities already subject to the adopted rules. See Exchange
Act Release No. 34-78961, (Sept. 28, 2016) (``CCA Standards adopting
release'').
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A. Regulatory Framework
Below is an overview of the relevant regulatory requirements for
registered clearing agencies and for clearing agencies operating
pursuant to an exemption from registration (``exempt clearing
agencies'').
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.\8\ 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.\9\
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\8\ 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'').
\9\ See 15 U.S.C. 78q-1(a)(2)(A).
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As discussed further below, clearing agencies are broadly defined
in the Exchange Act and undertake a variety of functions.\10\ Under
Section 17A and Rule 17Ab2-1,\11\ 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.\12\ 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.\13\ Section
17A(b)(1) further provides that upon the
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Commission's motion or upon a clearing agency's application, the
Commission may conditionally or unconditionally exempt a clearing
agency from any provision of Section 17A of the Exchange Act or the
rules or regulations thereunder if the Commission finds that such
exemption is 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 and funds.\14\
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\10\ See 15 U.S.C. 78c(a)(23)(A); see also infra note 40 and
accompanying text (setting forth the definition of ``clearing
agency'' under the Exchange Act).
\11\ See 17 CFR 240.17Ab2-1.
\12\ See 15 U.S.C. 78q-1(b)(3)(A)-(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).
\13\ See 15 U.S.C. 78q-1(b)(3)(A), (C), (D), (F).
\14\ See 15 U.S.C. 78q-1(b)(1).
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Following this registration process, 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.\15\ Another of these tools is the rule
filing process for self-regulatory organizations (``SROs''),\16\ 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.\17\ 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.\18\
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 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.\19\
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\15\ See 17 CFR 240.17a-1(a) through (c); see also 15 U.S.C
78q(a)(1), (2).
\16\ Upon registration, registered clearing agencies are SROs
under Section 3(a)(26) of the Exchange Act. See 15 U.S.C.
78c(a)(26).
\17\ 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.
\18\ 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).
\19\ See 15 U.S.C. 78q-1(d).
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In addition, Commission staff conducts examinations of registered
and exempt clearing agencies to assess, among other things, existing
and emerging risks, compliance with applicable statutory and regulatory
requirements (including any terms and conditions set forth in an order
granting registration or an exemption from registration), 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.\20\ 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.\21\
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\20\ See 15 U.S.C. 78u(a).
\21\ 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.\22\
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\22\ 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'').\23\ 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.\24\ FSOC has designated certain
FMUs as systemically important or likely to become systemically
important (``SIFMUs'').\25\ 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'').\26\ 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.\27\ The Clearing Supervision Act also provides for enhanced
coordination between the Commission and FRB by allowing for regular on-
site examinations and information sharing.\28\ 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.\29\ In
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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.\30\
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\23\ 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).
\24\ 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).
\25\ 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).
\26\ 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);
see also 17 CFR 240.17Ad-22(a)(8) (defining ``designated clearing
agency'').
\27\ See 12 U.S.C. 5465(e).
\28\ See 12 U.S.C. 5466.
\29\ 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) (``Risk
Management Supervision Report'').
\30\ See 12 U.S.C. 5464(a)(2). The Commission notes that, under
Rule 17Ad-22(a)(8), a SIFMU for which the Commission is the
supervisory agency is a ``designated clearing agency.'' See 17 CFR
240.17Ad-22(a)(8).
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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.\31\ 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.\32\ 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.\33\
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\31\ See Exchange Act Release No. 34-71699 (Mar. 12, 2014), 79
FR 16865 (Mar. 26, 2014), corrected at 79 FR 29507, 29513 (May 22,
2014) (``CCA Standards proposing release''); see also 17 CFR
240.17Ad-22; Exchange Act Release No. 34-68080 (Oct. 22, 2012), 77
FR 66219, 66225-26 (Nov. 2, 2012) (``Clearing Agency Standards
adopting release'').
\32\ See Clearing Agency Standards adopting release, supra note
31, at 66224-25.
\33\ See 17 CFR 240.17Ad-22(b), (d).
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Contemporaneously with this proposal, the Commission has taken
another step in its development of an enhanced regulatory regime for
clearing agencies and expanded the requirements under Rule 17Ad-22 by
adopting new paragraph (e).\34\ Rule 17Ad-22(e) builds on the existing
framework by establishing requirements for registered clearing agencies
that meet the definition of a ``covered clearing agency,'' as discussed
further below. Rule 17Ad-22(e) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to address the following topics
concerning its operation and governance:
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\34\ See CCA Standards adopting release, supra note 7, at 463-
477.
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General organization (including legal basis, governance, a
framework for the comprehensive management of risks, and recovery
planning);
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.
As described in the CCA Standards adopting release, a covered
clearing agency is subject to the requirements in Rule 17Ad-22(e),
whereas a registered clearing agency that is not a covered clearing
agency is subject to the requirements in Rule 17Ad-22(d).\35\ As noted
in the CCA Standards adopting release, the Commission continues to
believe that the availability of Rules 17Ad-22(d) and (e) help ensure
that the Commission can efficiently regulate registered clearing
agencies depending on the specific activity and risks that each type of
clearing agency poses to the U.S. markets.\36\ In particular, Rule
17Ad-22(d) provides a set of requirements for registered clearing
agencies that are not covered clearing agencies. The Commission expects
to continue to use these two sets of requirements to regulate the
national system for clearance and settlement as the varied entities
that constitute it, including both covered clearing agencies and
registered clearing agencies that are not covered clearing agencies,
continue to emerge and evolve.
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\35\ See CCA Standards adopting release, supra note 7, at 36-40.
Rule 17Ad-22(d) sets forth minimum requirements for the operation
and governance of registered clearing agencies. Under this rule
proposal, all registered clearing agencies and covered clearing
agencies would remain subject to the requirements in Section 17A of
the Exchange Act and the relevant Commission rules and regulations
thereunder, including Rules 17Ad-22(a) and (c). Covered clearing
agencies would also remain subject to Rule 17Ad-22(e), and
registered clearing agencies that are not covered clearing agencies
would remain subject to Rule 17Ad-22(d). Registered clearing
agencies that provide CCP services would also remain subject to Rule
17Ad-22(b).
\36\ See id. at 38.
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B. Distinctions Among Clearing Agencies
Section 17A of the Exchange Act was adopted in response to the
paperwork crisis of the late 1960s that nearly brought the securities
industry to a standstill and directly or indirectly resulted in the
failure of large numbers of broker-dealers because the industry's
clearance and settlement procedures were inefficient and lacked
automation.\37\ When Congress added Section 17A to the Exchange Act as
part of the Securities Acts Amendments of 1975, it made the following
four findings: (i) The prompt and accurate clearance and settlement of
securities transactions, including the transfer of record ownership and
the safeguarding of securities and funds related thereto, are necessary
for the protection of investors and persons facilitating transactions
by and acting on behalf of investors; (ii) inefficient procedures for
clearance and settlement impose unnecessary costs on investors and
persons facilitating transactions by and acting on behalf of investors;
(iii) new data processing and communications techniques create the
opportunity for more efficient, effective, and safe procedures for
clearance and settlement; and (iv) the linking of all clearance and
settlement facilities and the development of uniform standards and
procedures for clearance and settlement will reduce unnecessary costs
and increase the protection of investors and persons facilitating
transactions by and acting on behalf of investors.\38\ Congress
therefore directed the Commission to facilitate the establishment of a
national system for the prompt and accurate clearance and settlement of
securities transactions.\39\ The Commission's ability to achieve these
goals and its supervision of the national system for clearance and
settlement is based upon
[[Page 70748]]
the regulation of the various entities that operate as clearing
agencies.
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\37\ The paperwork crisis resulted from sharply increased
trading volumes and historic industry inattention to securities
processing, as demonstrated by inefficient, duplicative and highly
manual clearance and settlement system, poor records, insufficient
controls over funds and securities, and use of untrained personnel
to perform processing functions. See, e.g., Commission, Study of
Unsafe and Unsound Practices of Brokers and Dealers, H.R. Doc. No.
231, 92d Cong., 1st Sess. 13 (1971).
\38\ See 15 U.S.C. 78q-1(a)(1)(A) through (D).
\39\ See 15 U.S.C. 78q-1 et seq.; see also supra note 8.
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In defining ``clearing agency,'' Section 3(a)(23) of the Exchange
Act contemplates a broad variety of roles and functions. Pursuant to
Section 3(a)(23), a ``clearing agency'' is any person who does the
following:
Acts as an intermediary in making payments or deliveries
or both in connection with securities transactions;
provides facilities for the comparison of data regarding
the terms of settlement of securities transactions, to reduce the
number of settlements of securities transactions, or for the allocation
of securities settlement responsibilities;
acts as a custodian of securities in connection with a
system for the central handling of securities whereby all securities of
a particular class or series of any issuer deposited within the system
are treated as fungible and may be transferred, loaned, or pledged by
bookkeeping entry, without physical delivery of securities certificates
(such as a securities depository); or
otherwise permits or facilitates the settlement of
securities transactions or the hypothecation or lending of securities
without physical delivery of securities certificates (such as a
securities depository).\40\
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\40\ See 15 U.S.C. 78c(a)(23)(A); see also supra note 10 and
accompanying text. In light of its potential breadth, the definition
excludes, among others, any national securities exchange or
registered securities association solely by reason of its providing
facilities for comparison of data respecting the terms of settlement
of securities transactions effected on such exchange or by means of
any electronic system operated or controlled by such association.
See 15 U.S.C. 78c(a)(23)(B)(ii).
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From these broad categories, a number of different types of
clearing agencies have emerged under the Commission's regulatory
oversight of the national system for clearance and settlement.\41\ As
discussed below, the Commission's historical approach in drawing
distinctions among the various clearing agencies operating within the
national system for clearance and settlement has, to a large degree,
been predicated on the range of clearing agency functions performed
within that system and whether, in response to these and other
elements, the appropriate regulatory response is registration or an
exemption from registration. Where registration is required, the
complete set of regulation adopted by the Commission pursuant to its
authority under Section 17A of the Exchange Act applies. As discussed
above, those clearing agencies that perform on a broad basis CCP and
CSD services have been required to register and are subject to the full
range of Commission rules and regulations for clearing agencies.\42\
Where the Commission has granted an exemption from registration,
exemptive conditions tailored to the particular clearing agency
functions performed by the clearing agency operate as the primary
regulatory requirements.
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\41\ In addition to those discussed below in Part I.B, the
Commission has also previously stated that entities called
``clearing corporations'' fall within the definition of ``clearing
agency'' under the Exchange Act. Clearing corporations provide a
range of clearance and settlement services but may not necessarily
fall within the definition of ``CCP'' or ``CSD.'' See Exchange Act
Release No. 20221 (Sept. 23, 1983), 48 FR 45167 (Oct. 3, 1983)
(order approving the clearing agency registration of four
depositories and four clearing corporations).
\42\ The Commission has also granted an exemption from
registration as a clearing agency to certain entities that perform a
limited amount of CSD services for U.S. securities in certain
instances. See infra note 54.
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1. Registered Clearing Agencies
Three common functions of registered clearing agencies are the
functions of a CCP, CSD, and SSS. Each is described below.
A clearing agency performs the functions of a CCP when it
interposes itself between the counterparties to a trade, acting
functionally as the buyer to every seller and the seller to every
buyer.\43\ Currently, CCPs make up five of the six active clearing
agencies registered with the Commission, and four of those five CCPs
are covered clearing agencies subject to Rule 17Ad-22(e).\44\
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\43\ See 17 CFR 240.17Ad-22(a)(1); Clearing Agency Standards
adopting release, supra note 31, at 66229.
\44\ The CCPs that make up five of the six active clearing
agencies registered with the Commission are Fixed Income Clearing
Corporation (``FICC''), ICE Clear Credit (``ICC''), ICE Clear Europe
(``ICEEU''), National Securities Clearing Corporation (``NSCC''),
and The Options Clearing Corporation (``OCC''). As discussed in more
detail below, of those five CCP006ICC is the only CCP that is
currently not a covered clearing agency subject to Rule 17Ad-22(e).
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A clearing agency performs the functions of a CSD when it (i) acts
as a custodian of securities in connection with a system for the
central handling of securities whereby all securities of a particular
class or series of any issuer deposited within the system are treated
as fungible and may be transferred, loaned, or pledged by bookkeeping
entry without physical delivery of securities certificates, or (ii)
otherwise permits or facilitates the settlement of securities
transactions or the hypothecation or lending of securities without
physical delivery of securities certificates.\45\ A CSD may also
provide asset services, which may include the administration of
corporate actions and redemptions. One of the six active registered
clearing agencies provides securities depository services for the U.S.
securities markets and is commonly referred to as a CSD.\46\ This
clearing agency providing CSD services is also a covered clearing
agency subject to Rule 17Ad-22(e).
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\45\ See 15 U.S.C. 78c(a)(23)(A); 17 CFR 240.17Ad-22(a)(2).
\46\ See 17 CFR 240.17Ad-22(a)(3); Clearing Agency Standards
adopting release, supra note 31, at 66229. This registered clearing
agency is the Depository Trust Company (``DTC'').
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A clearing agency also may perform the functions of an SSS. An SSS
is generally understood to be a clearing agency that enables securities
to be transferred and settled by book entry according to a set of
predetermined multilateral rules.\47\ In the Commission's experience,
SSS functions may be performed in a single registered clearing agency
that also provides CSD services. For example, on prior occasions the
Commission has included book-entry transfers as among the functions of
a CSD.\48\ In the U.S. securities markets, such functions are currently
performed by the one registered clearing agency providing securities
depository services noted above, which is a covered clearing agency
subject to Rule 17Ad-22(e).\49\
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\47\ See infra notes 83-88 and accompanying text (describing the
range of services that a clearing agency may provide in connection
with the settlement of securities transactions).
\48\ See, e.g., Clearing Agency Standards adopting release,
supra note 31, at 66253.
\49\ See, e.g., Exchange Act Release No. 34-77991 (June 3,
2016), 81 FR 37232, 37232-33 (June 9, 2016) (notice describing in
part the relationship between DTC's depository and book-entry
services).
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Five of the six active registered clearing agencies noted above are
SIFMUs--i.e., they have been designated systemically important by FSOC
pursuant to the Clearing Supervision Act.\50\ As previously discussed,
the Clearing Supervision Act provides for, among other things, the
enhanced regulation of SIFMUs, reflecting the fact that such entities
are critical market infrastructures that may pose a systemic risk to
the U.S. financial system. Each of the SIFMUs have
[[Page 70749]]
generally been described as providing the services of a CCP or CSD.\51\
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\50\ On July 18, 2012, the FSOC designated as systemically
important the following then-registered clearing agencies: CME Group
(``CME''), DTC, FICC, ICC, NSCC, and OCC. The Commission is the
supervisory agency for DTC, FICC, NSCC, and OCC, and the CFTC is the
supervisory agency for CME and ICC. The Commission jointly regulates
ICC and OCC with the CFTC. In addition, the Commission jointly
regulates ICE Clear Europe (``ICEEU''), which has not been
designated as systemically important by FSOC, with the CFTC and Bank
of England. DTC, FICC, NSCC, OCC, and ICEEU are covered clearing
agencies subject to Rule 17Ad-22(e).
\51\ See, e.g., FSOC, 2012 Annual Report, at 163-187, available
at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
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2. Exempt Clearing Agencies
In addition to registered clearing agencies, currently the
Commission has granted exemptions from clearing agency registration to
five exempt clearing agencies.\52\ The Commission's exemptive orders
contain tailored conditions that, among other things, take into account
the range of clearing agency functions performed by each entity. Three
exempt clearing agencies provide trade matching services, which are
services that generally constitute comparison of data respecting the
terms of settlement of securities transactions.\53\ The remaining two
exempt clearing agencies are non-U.S. entities that perform a limited
range of clearing agency functions, including certain CSD and
collateral management services.\54\
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\52\ The five exempt clearing agencies are Clearstream,
Euroclear Bank SA/NV, Omgeo Matching Services--US, LLC, Bloomberg
STP LLC, and SS&C Technologies, Inc. See infra notes 53-54 (citing
the exemption orders for each).
\53\ See Exchange Act Release No. 34-76514 (Nov. 24, 2015) 80 FR
75387 (Dec. 1, 2015) (``BSTP and SS&C exemption''); Exchange Act
Release No. 34-44188 (Apr. 17, 2001), 66 FR 20494 (Apr. 23, 2001);
see also Exchange Act Release No. 34-39829 (Apr. 6, 1998), 63 FR
17943 (Apr. 13, 1998) (providing interpretive guidance and
requesting comment on the confirmation and affirmation of securities
trades and matching).
\54\ See Exchange Act Release No. 34-39643 (February 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 addition, prior to the effective date of Title VII of the Dodd-
Frank Act, the Commission issued a temporary exemption from the
registration requirements for clearing agencies in Section 17A(b) of
the Exchange Act to entities providing certain services, now sometimes
referred to as post-trade processing services, for security-based swaps
(``SBS exemption order'').\55\ To date, six entities providing a range
of such post-trade processing services are relying upon the SBS
exemption order. The Commission stated that the exemptive order was
necessary because the Dodd-Frank Act had expanded the definition of
``security'' to include security-based swaps, and therefore entities
performing the functions of a clearing agency with respect to security-
based swaps would be required to register under Section 17A(b)(1) of
the Exchange Act upon the effective date of Title VII.\56\ Those
functions, as described by the Commission in the SBS exemption order,
generally constitute certain collateral management, trade matching, and
tear up or compression functions.\57\
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\55\ See Exchange Act Release No. 34-64796 (July 1, 2011), 76 FR
39963 (July 7, 2011).
\56\ In addition, as part of its consideration of whether future
rulemaking for post-trade processing clearing agencies would be
appropriate, the Commission noted that it may consider whether to
apply rules to clearing agencies engaged in PCS activities
identified in the Clearing Supervision Act. See Clearing Agency
Standards adopting release, supra note 31, at 66228. In particular,
the Clearing Supervision Act identifies the following as PCS
activities: (i) calculation and communication of unsettled financial
transactions between counterparties; (ii) netting of transactions;
(iii) provision and maintenance of trade, contract, or instrument
information; (iv) management of risks and activities associated with
continuing financial transactions; (v) transmittal and storage of
payment instructions; (vi) movement of funds; (vii) final settlement
of financial transactions; and (viii) other similar functions that
the FSOC may determine. See 12 U.S.C. 5462(7); see also supra note
30 and accompanying text.
\57\ An expanded explanation of these different functions can be
found in the SBS exemption order. See SBS exemption order, supra
note 55, at 39964.
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II. Proposed Amendments Under Rule 17Ad-22
The Commission adopted Rule 17Ad-22(e) to strengthen the
substantive regulation of clearing agencies, promote the safe and
reliable operation of covered clearing agencies, and improve
efficiency, transparency, and access to covered clearing agencies. 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. Of particular note, the requirements in Rule 17Ad-22(e)
that address policies and procedures for transparency, governance,
financial risk management, and operational risk management help ensure
that covered clearing agencies are robust and stable.\58\
---------------------------------------------------------------------------
\58\ See CCA Standards adopting release, supra note 7, at 475-
477, 463, 464-471, 474; see also supra note 34 and accompanying
text.
---------------------------------------------------------------------------
The Commission is proposing to expand the coverage of Rule 17Ad-
22(e) so that all registered clearing agencies performing the functions
of a CCP, CSD, or SSS would be subject to Rule 17Ad-22(e). To
facilitate this amendment, the Commission is proposing in Part II.B a
definition of ``securities settlement system'' and in Part II.C to
amend the definition of ``central securities depository services.'' In
addition, the Commission also is proposing in Part II.D to amend the
definition of ``sensitivity analysis'' to expand its coverage, so that
the policies and procedures of all covered clearing agencies that are
CCPs provide for a sensitivity analysis that considers the most
volatile relevant periods, where practical, that have been experienced
by the markets served by the covered clearing agency. In Part II.E, the
Commission seeks comment on each of the proposed amendments.
A. Definition of ``Covered Clearing Agency''
Rule 17Ad-22(a)(5) currently defines a covered clearing agency as a
registered clearing agency that: (i) has been designated as
systemically important by the FSOC and for which the Commission is the
supervisory agency under the Clearing Supervision Act (``designated
clearing agency''); or (ii) provides CCP services for security-based
swaps or is determined by the Commission to be involved in activities
with a more complex risk profile (``complex risk profile clearing
agency''), for which the CFTC is not the supervisory agency under the
Clearing Supervision Act.\59\ In the CCA Standards proposing release,
the Commission sought comment on whether the scope of Rule 17Ad-22(e)
was appropriate and whether the definition of ``covered clearing
agency'' was appropriate and sufficiently clear given the requirements
proposed.\60\
---------------------------------------------------------------------------
\59\ See 17 CFR 240.17Ad-22(a)(5).
\60\ See id. at 29516-17.
---------------------------------------------------------------------------
In the CCA Standards adopting release, the Commission took an
important first step to establish coverage of the enhanced requirements
in Rule 17Ad-22(e) over an initial group of registered clearing
agencies. In light of the comments received on the CCA Standards
proposing release, the Commission is now proposing to amend the
definition of a ``covered clearing agency'' to broaden this coverage so
that it encompasses all registered clearing agencies performing the
functions of a CCP, CSD, or SSS. These functions are critical to the
U.S. securities markets and the broader U.S. financial system and
implicate the types of activities and risks that Rule 17Ad-22(e) is
designed to address. Specifically, the Commission proposes that the
definition of ``covered clearing agency'' be amended to mean a
registered clearing agency that provides the services of a CCP, CSD, or
SSS.
The Commission preliminarily believes that the proposed amendment
to the ``covered clearing agency'' definition, which takes into account
the specific functions performed by registered clearing agencies, would
lead to greater regulatory consistency among
[[Page 70750]]
all registered clearing agencies that perform these critical functions.
Additionally, by focusing on functions rather than designation as
systemically important, activities with a more complex risk profile, or
the presence of another regulator, the proposed definition of ``covered
clearing agency'' would ensure that all clearing agencies performing
these critical functions are subject to enhanced requirements that
address the particular services provided by and risks inherent in these
critical functions.
1. Critical Functions Common among CCPs, CSDs, and SSSs
Although the definition of ``clearing agency'' in the Exchange Act
is broad, there are certain activities which, by virtue of their
significance to the U.S. financial system generally, and the national
system for clearance and settlement in particular, support the
application of enhanced requirements. Among these are those clearing
agency activities that, at a general level, concern the concentration
and management of risk and the potential transmission of systemic risk.
Registered clearing agencies that provide CCP, CSD, or SSS services
perform common functions that implicate the concentration and
management of risk and the resulting systemic risk concerns. The
Commission therefore believes that it is appropriate to propose to
expand the definition of ``covered clearing agency'' to subject all
such registered clearing agencies to Rule 17Ad-22(e) because Rule 17Ad-
22(e) includes enhanced requirements that help mitigate the systemic
risk concerns raised by these activities, such as a requirement for
policies and procedures regarding a framework for the comprehensive
management of such risk and requirements for policies and procedures
that address, among other things, financial and general business risk
management, settlement risks, and transparency.\61\
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\61\ See 17 CFR 240.17Ad-22(e)(3) through (10), (15), (23).
---------------------------------------------------------------------------
Financial risk management is an essential aspect of the role that
each of these registered clearing agencies provides for the U.S.
securities markets, both for their own participants and participants in
the broader U.S. financial system. Establishing requirements for
policies and procedures governing such risk management practices is a
cornerstone of Rule 17Ad-22(e). For example, with respect to credit
risk, Rule 17Ad-22(e)(4) requires that each covered clearing agency
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
arising from its payment, clearing, and settlement processes.\62\ With
respect to liquidity risk, Rule 17Ad-22(e)(7) requires that each
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to effectively
measure, monitor, and manage the liquidity risk that arises in or is
borne by the covered clearing agency, including measuring, monitoring,
and managing its settlement and funding flows on an ongoing and timely
basis and its use of intraday liquidity.\63\ Rule 17Ad-22(e)(5) and (6)
also include enhanced requirements for policies and procedures to
manage collateral and maintain a risk-based margin, with particular
requirements that help to ensure resilient stress testing of a covered
clearing agency's financial resources.\64\
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\62\ See 17 CFR 240.17Ad-22(e)(3). While Rule 17Ad-22(d) also
includes some requirements for policies and procedures related to
credit risk, Rule 17Ad-22(e) includes enhanced requirements related
to, among other things, stress testing.
\63\ See 17 CFR 240.17Ad-22(e)(7). Rule 17Ad-22(d) does not
include requirements for policies and procedures related to the
management of liquidity risk.
\64\ See 17 CFR 240.17Ad-22(e)(5), (6).
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General business risk is another potential risk that these types of
registered clearing agencies, as entities that concentrate risk, must
manage, and Rule 17Ad-22(e) includes enhanced requirements for policies
and procedures that manage general business risk. Specifically, Rule
17Ad-22(e)(3) requires policies and procedures that provide for a
comprehensive risk management framework that addresses a variety of
risks, including both financial risk and general business risk.\65\
Rule 17Ad-22(e)(15) further requires that each covered clearing agency
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to 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 as a
going concern if those losses materialize.\66\ Other requirements in
Rule 17Ad-22(e) flow from the management of these risks as well.
Notably, Rule 17Ad-22(e)(3) requires policies and procedures reasonably
designed to ensure that a covered clearing agency 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.\67\ Rule 17Ad-22(e)(15)
complements this requirement with requirements for 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).\68\ The
Commission preliminarily believes that a registered clearing agency
that provides CCP, CSD, or SSS services should be subject to enhanced
requirements for maintaining policies and procedures that manage
business risk and provide for recovery and wind-down plans. These
enhanced business risk requirements would benefit not only the clearing
agency but also participants and the public. Likewise, recovery and
wind-down plans help ensure that CCPs, CSDs, SSSs, and policymakers can
plan for and mitigate the potential systemic consequences of a wind-
down or failure.
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\65\ See 17 CFR 240.17Ad-22(e)(3). Rule 17Ad-22(d) does not
include comparable requirements.
\66\ See 17 CFR 240.17Ad-22(e)(15). Rule 17Ad-22(d) does not
include requirements for policies and procedures related to the
management of business risk.
\67\ See 17 CFR 240.17Ad-22(e)(3)(ii).
\68\ See 17 CFR 240.17Ad-22(e)(15)(ii).
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Facilitating settlement and mitigating settlement risks is another
essential role played by these registered clearing agencies, CSDs and
SSSs in particular, and another important component of Rule 17Ad-22(e)
is enhanced requirements for policies and procedures governing
settlement. For example, Rule 17Ad-22(e) includes requirements directed
to settlement finality, physical delivery, and money settlements.\69\
Importantly, it also includes rules with enhanced requirements for
depository functions and settlement systems.\70\
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\69\ See 17 CFR 240.17Ad-22(e)(8), (9), (10).
\70\ See 17 CFR 240.17Ad-22(e)(11). Rule 17Ad-22(d)(10) also
includes requirements for policies and procedures related to the
immobilization or dematerialization of securities certificates and
the transfer of them by book entry, but does not include
requirements for, among other things, policies and procedures
relating to ensuring the integrity of securities issues,
safeguarding the rights of securities issuers and holders,
preventing the unauthorized creation or deletion of securities, or
conducting periodic and at least daily reconciliation of securities
issues. See 17 CFR 240.17Ad-22(d)(10).
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[[Page 70751]]
Providing transparency to the markets is another essential role
that these registered clearing agencies facilitate in the markets they
serve by each maintaining a set of rules and procedures that govern
their participants, their clearance and settlement services, and their
risk management framework. Each registered clearing agency that
provides CCP, CSD, or SSS services has rules that, while they may vary
according to the characteristics of the markets they serve, generally
govern how they clear transactions or trades submitted by participants,
calculate whether and how much each participant owes in margin or to
the clearing or participant fund on either a gross or net basis,
receive securities from participants that owe securities, deliver
securities to participants that are owed securities, collect payments
from participants that owe money, and pay participants that are owed
money. Rule 17Ad-22(e)(23)(iv) also requires a covered clearing agency
to have policies and procedures that provide for a comprehensive public
disclosure of its material rules, policies, and procedures regarding
the requirements in Rule 17Ad-22(e).\71\ Increased transparency helps
market participants manage their risks, thereby reducing systemic risk
concerns across the U.S. financial system.
---------------------------------------------------------------------------
\71\ See 17 CFR 240.17Ad-22(e)(23)(iv). No comparable
requirement exists in Rule 17Ad-22(d).
---------------------------------------------------------------------------
Each of the above roles, common across the registered clearing
agencies that provide CCP, CSD, and SSS services, is addressed by the
enhanced requirements in Rule 17Ad-22(e), and therefore the Commission
believes that expanding the definition of ``covered clearing agency''
to include those registered clearing agencies that are integral in
either performing these functions or managing these risks, as
appropriate, will help to further strengthen the national system for
clearance and settlement and help to further mitigate risk to the
broader U.S. financial system.
2. Critical Functions Specific to CCPs, CSDs, or SSSs
In addition to the critical roles common across CCPs, CSDs, and
SSSs, each such clearing agency also performs unique functions that
support expanded coverage of the ``covered clearing agency'' definition
and, through it, application of Rule 17Ad-22(e) to such clearing
agencies because, as discussed further below, Rule 17Ad-22(e) also
includes enhanced requirements with respect to these functions.
First, with respect to CCPs, the Commission is proposing that the
definition of ``covered clearing agency'' be expanded so that CCPs
would be subject to Rule 17Ad-22(e) in all circumstances. The
Commission has, on previous occasions, noted that increasing reliance
by market participants on CCPs supports the application of enhanced
regulatory requirements that address the risks posed by such
activity.\72\ For example, market participants may rely on CCPs because
clearing and settling a high volume of financial transactions
multilaterally through a CCP can allow for greater efficiency and lower
costs than settling bilaterally.\73\ In addition, CCPs are often able
to manage risks for their participants related to the clearing and
settling of financial transactions more effectively, and, in some
cases, reduce certain risks such as the risk that a purchaser of a
security will not receive the security or that a seller of a security
will not receive payment for the security.\74\ CCPs have also become
increasingly important given the mandated central clearing of certain
swaps and security-based swaps that is required by the Dodd-Frank
Act.\75\
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\72\ See CCA Standards adopting release, supra note 7, at 257-
264; Clearing Agency Standards adopting release, supra note 31, at
66264-65 (noting, among other things, that the effectiveness of a
CCP's risk controls and the adequacy of its financial resources are
critical aspects of the infrastructure of the market it serves).
\73\ See, e.g., Risk Management Supervision Report, supra note
29, at 8.
\74\ See, e.g., id. at 8.
\75\ See, e.g., id. at 3.
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CCPs confer certain benefits to the markets in which they operate,
but can also pose substantial risk not only to individual market
participants but also to the broader financial system, due in part to
the fact that central clearing concentrates risk. Disruption to such
functions, or failure on the part of the clearing agency to meet its
obligations, could, result in significant costs to the clearing agency
itself and its members and create a potential source of contagion
affecting other market participants or the broader U.S. financial
system.\76\ 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. Each CCP
determines how best to manage its credit and liquidity risks,
consistent with its regulatory framework and as appropriate for the
products it clears and the market it serves. For example, participants
must meet membership requirements to join a CCP. Each CCP determines
who meets its membership criteria and continues to monitor its
membership to ensure that the members continue to meet these criteria.
Similarly, each CCP is responsible for determining its own margin
models and ensuring that each member meets its obligations under the
margin models. When the Commission adopted Rule 17Ad-22(e), it sought
to impose enhanced requirements to an initial group of registered
clearing agencies that concentrated risk because they were either
designated systemically important or engaged in activities with a more
complex risk profile. Now, the Commission believes it is appropriate to
propose to expand the coverage of the ``covered clearing agency''
definition to include all CCPs because, as described above, CCP
operations generally concentrate risk and can also act as a transfer
mechanism for risk, and Rule 17Ad-22(e) includes enhanced requirements
that help mitigate the risks that CCP functions carry. In particular,
Rule 17Ad-22(e) includes requirements
[[Page 70752]]
for the management of credit and liquidity risk, the development of
recovery and wind-down plans, and tiered participation
arrangements,\77\ and the Commission believes that applying these
requirements to all CCPs will help further mitigate systemic risk to
the U.S. financial system.
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\76\ See generally Darrell Duffie, Ada Li & Theo Lubke, Policy
Perspectives on OTC Derivatives Market Infrastructure, at 9 (Fed.
Reserve Bank N.Y. Staff Reps., Mar. 2010), available at http://www.newyorkfed.org/research/staff_reports/sr424.pdf (``If a CCP is
successful in clearing a large quantity of derivatives trades, the
CCP is itself a systemically important financial institution. The
failure of a CCP could suddenly expose many major market
participants to losses. Any such failure, moreover, is likely to
have been triggered by the failure of one or more large clearing
members, and therefore to occur during a period of extreme market
fragility.''); Craig 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); 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); Domanski, Dietrich, Leonardo Gambacorta, and Cristina
Picillo. ``Central clearing: trends and current issues.'' BIS
Quarterly Review December (2015), available at https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf (describing links between CCP financial
risk management and systemic risk); Wendt, Froukelien, Central
counterparties: addressing their too important to fail nature
(2015), available at http://papers.ssrn.com/sol3/Delivery.cfm/wp1521.pdf?abstractid=2568596&mirid=1&type=2 (assessing the
potential channels for contagion arising from CCP
interconnectedness).
\77\ See 17 CFR 240.17Ad-22(e)(4), (7), (19).
---------------------------------------------------------------------------
Second, the Commission is similarly proposing that a clearing
agency providing CSD services also be a covered clearing agency. The
Commission has noted on previous occasions the importance of CSDs to
the U.S. securities markets. For example, the Commission has noted that
CSDs are critical elements of the national system for clearance and
settlement,\78\ and that the establishment of consistent standards for
CCP and CSD operations is an important goal that underpinned the
enactment of Section 17A of the Exchange Act.\79\ CSDs play a key role
in modern financial markets, where, for many issuers, transactions in
securities often involve no transfer of physical certificates.\80\ Such
paperless trading generally improves transactional efficiency but for
such benefits to accrue, market participants must have confidence that
CSDs can correctly account for the number of securities in their
custody and for the book entries that allocate securities across
participant accounts. The Commission therefore is proposing that CSDs
also be subject to Rule 17Ad-22(e) in all circumstances because of the
important role they play in the national system for clearance and
settlement of securities. Rule 17Ad-22(e)(11) established enhanced
requirements specific to CSDs. Rule 17Ad-22(e)(11)(i) requires a
covered clearing agency that provides central securities depository
(``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. Rule 17Ad-22(e)(11)(ii) requires 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, Rule 17Ad-
22(e)(11)(iii) requires 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.\81\ In
addition, Rule 17Ad-22(e) generally strengthens the substantive
regulations of clearing agencies through, among other things,
requirements for the comprehensive management of risk and the
development of recovery and wind-down plans, which are equally
important to CSDs.\82\ Therefore, the Commission believes that applying
Rule 17Ad-22(e) to all clearing agencies providing CSD services will
further help mitigate risk to the U.S. financial system.
---------------------------------------------------------------------------
\78\ See BSTP and SS&C exemption, supra note 53, at 75398
(noting that a CSD is ``a critical element of the national system
for clearance and settlement'').
\79\ See Clearing Agency Standards adopting release, supra note
34, at 66273.
\80\ See CCA Standards proposing release, supra note 31, at
29603.
\81\ See CCA Standards adopting release, supra note 7, at 472.
\82\ See id. at 91-105 (describing the requirements under Rule
17Ad-22(e)(3)).
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Lastly, while in the U.S. securities markets the functions of an
SSS are typically performed by a registered clearing agency that also
provides CSD services, the Commission has also noted that clearing
agencies provide a broad range of services in connection with the
settlement of securities transactions.\83\ For example, the Commission
has previously noted that clearing agencies ``provide differing
clusters of services for their participants.'' \84\ In particular,
``[c]learing corporations generally receive trade data respecting
exchanges or [over-the-counter] trades between broker-dealers and
compare, account for and settle the netted securities transactions.''
\85\ Over the years, the Commission has registered a number of entities
as clearing agencies that provide a variety of securities settlement
services. These services include facilitating the settlement of
transactions executed by specialists on an exchange,\86\ providing
clearance and settlement services for mortgage-backed securities
transactions,\87\ and facilitating the clearance and settlement of
cross-border transactions.\88\ These SSSs play a vital role in
fostering the proper functioning of financial markets, but if they are
not effectively managed they have the potential to act as transmission
channels for financial shocks, particularly on days of market stress.
---------------------------------------------------------------------------
\83\ See Exchange Act Release No. 34-20221 (Sept. 23, 1983), 48
FR 45167, 45169 & n.32 (Oct. 3, 1983) (in describing the accounting
processes that generate securities settlement obligations,
distinguishing NSCC's ``continuous net settlement'' system from a
``daily balance order'' system); Exchange Act Release No. 34-21335
(Sept. 20, 1984), 49 FR 37879, 37879 (Sept. 26, 1984) (in describing
the functions performed by the Boston Stock Exchange Clearing
Corporation (``BSECC''), noting that BSECC transmits data to NSCC
for processing and collects and pays members' daily settlement
obligations at NSCC and DTC);
\84\ See 48 FR at 45169.
\85\ See id. (citations omitted).
\86\ See id. at 45173-77 (approving the registration of the
Stock Clearing Corporation of Philadelphia subject to conditions).
\87\ See Exchange Act Release No. 34-24046 (Feb. 2, 1987), 52 FR
4218 (Feb. 10. 1987) (order granting registration as a clearing
agency to MBS Clearing Corporation).
\88\ See Exchange Act Release No. 34-26812 (May 12, 1989), 54 FR
21691 (May 19, 1989) (order approving temporary registration as a
clearing agency of the International Securities Clearing
Corporation).
---------------------------------------------------------------------------
The Commission also believes that a clearing agency providing SSS
services can raise credit, market, and operational risk concerns.\89\
The Commission preliminarily believes that these functions, whether
performed independently or consolidated with other clearing agency
functions in a single registered clearing agency, support application
of the enhanced standards in Rule 17Ad-22(e).\90\ In recent years, the
Commission has adopted requirements for the policies and procedures of
certain clearing agencies under Rule 17Ad-22 to help achieve delivery
versus payment and eliminate principal risk,\91\ both of which relate
to the provision of SSS services. The Commission adopted Rule 17Ad-
22(e) to strengthen the substantive regulations applicable to clearing
agencies to address, among other things, credit, market, and
operational risk. Because SSS operations present these types of risk,
the Commission is proposing to apply Rule 17Ad-22(e) to all entities
performing these SSS functions.
---------------------------------------------------------------------------
\89\ The Commission notes that, currently, no registered
clearing agency provides only SSS services in the United States.
Nonetheless, the Commission preliminarily believes that SSSs,
because they are financial market infrastructures that provide
centralized services similar to CCPs and CSDs, can also serve as
potential transmission mechanisms for systemic risk and should
therefore also be subject to the same requirements as CCPs and CSDs.
In this regard, the Commission notes that Rule 17Ad-22(e)(12)
includes requirements specific to settlement systems. See CCA
Standards adopting release, supra note 7, at 472.
\90\ See generally Report of the Senate Committee on Banking,
Housing & Urban Affairs, S. Rep. No. 94-75, at 5, 91 (recognizing
book-entry transfer as one of three basic clearing agency functions
before consolidating it, along with clearing and the transfer of
record ownership, into a single definition of ``clearing agency'' in
the Exchange Act).
\91\ See 17 CFR 240.17Ad-22(d)(13), (e)(12).
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[[Page 70753]]
3. Increasing Scrutiny of CCP, CSD, and SSS Functions
In response to the CCA Standards proposing release, the Commission
received a number of comments on the proposed scope of the definition
of covered clearing agency asking the Commission to expand the scope of
the covered clearing agency definition and therefore the coverage of
Rule 17Ad-22(e).\92\ Specifically, one commenter endorsed efforts to
promote financial stability through the application of heightened
standards for covered clearing agencies, particularly those that
provide CCP services for security-based swaps and other derivatives,
noting that the mandatory clearing of OTC derivatives introduced
following the 2008 financial crisis has heightened the need for
enhanced standards for CCPs.\93\ 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, citing the size of the derivatives markets, and the
potential for disruption and systemic risk that these markets may have
on covered clearing agencies.\94\ A third commenter recommended that
any provision of the proposed rules that reflects best practices should
be applied across all clearing agencies.\95\ Each of these comments
supports an approach under which registered clearing agencies are
subject to the enhanced standards in Rule 17Ad-22(e) where they perform
critical clearing agency functions that concentrate risk and could
serve as mechanisms for the transfer of systemic risk. Consistent with
these comments, the proposed application of Rule 17Ad-22(e) to all
registered clearing agencies that provide CCP, CSD, and SSS services
would strengthen the Commission's substantive regulation of clearing
agencies by imposing enhanced requirements for risk management policies
and procedures that help mitigate systemic risk.
---------------------------------------------------------------------------
\92\ See CCA Standards adopting release, supra note 7, at 53-65.
\93\ See The Clearing House at 1.
\94\ See CFA Institute at 2.
\95\ See DTCC at 4.
---------------------------------------------------------------------------
In contrast to the above commenters, one commenter endorsed the
Commission's adopted definition of ``covered clearing agency'' and
supported not applying Rule 17Ad-22(e) to registered clearing agencies
that were dually registered with the CFTC and SEC, where the CFTC is
the supervisory authority under the Clearing Supervision Act.\96\ The
commenter also believed that subjecting a dually registered clearing
agency to requirements under Rule 17Ad-22(e) and the CFTC's regime
would result in duplicative regulation.\97\ The Commission
preliminarily believes that, as discussed in Part II.A.4 below,
although the proposed amendment to the definition of ``covered clearing
agency'' would subject some dually registered clearing agencies to
similar regulations under the Commission's and CFTC's comparable
regimes, expanding the definition to include dually registered clearing
agencies is nonetheless appropriate.
---------------------------------------------------------------------------
\96\ See CME at 2.
\97\ See id.
---------------------------------------------------------------------------
4. Expanded Coverage Under the Definition of ``Covered Clearing
Agency''
The proposed amendment to the definition of ``covered clearing
agency'' would differ in two ways from the existing definition of
``covered clearing agency.'' First, it would no longer reference
whether a clearing agency has been designated systemically important by
the FSOC and for which the Commission is the supervisory agency under
the Clearing Supervision Act. Second, it would remove references to
clearing agencies that provide CCP services for security-based swaps or
are involved in activities the Commission determines to have a more
complex risk profile, unless the CFTC is the supervisory agency under
the Clearing Supervision Act. Amending the definition of ``covered
clearing agency'' in this way would replace these two categories of
clearing agencies with clearing agencies providing the services of a
CCP, CSD, or SSS and thereby expand the range of entities that fall
within the definition of ``covered clearing agency.'' Accordingly,
under the proposed amendment to the definition, whether a registered
clearing agency is a SIFMU or dually registered with the Commission and
the CFTC would no longer be relevant to application of the ``covered
clearing agency'' definition or Rule 17Ad-22(e).
Thus, the potential for registered clearing agencies to be subject
to Rule 17Ad-22(e) would increase under the proposed amendment. In
particular, under the proposed amendment to the definition, the
narrower set of complex risk profile clearing agencies for which the
CFTC is not the supervisory agency would be replaced with the full
universe of registered clearing agencies that provide CCP, CSD, or SSS
services. In light of the discussion above regarding the critical
functions common among and specific to CCPs, CSDs, and SSSs, the
Commission preliminarily believes that such an expansion is appropriate
in order to help further mitigate systemic risk to the U.S. financial
system.
Preliminarily, the Commission believes that such an approach is
appropriate even though it may subject clearing agencies that are
dually registered with the Commission and CFTC to similar requirements
in some instances. In this regard, the Commission first notes that the
staff 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.\98\ CCPs that clear security-based
swaps present risks to the securities markets that must be subject to
appropriate risk management. As noted in the CCA Standards adopting
release, the Commission's intent with respect to Rule 17Ad-22(e) was,
in part, to take an 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.\99\ The Commission believes that the proposed
amendments to the definition of ``covered clearing agency'' represent
another incremental step to help ensure that these risks are
appropriately managed consistent with each of the above statutes. The
Commission has, through Rule 17Ad-22(e) sought to apply requirements
commensurate and appropriate to the risk posed by the clearing agency
functions and activities specific to
[[Page 70754]]
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
consistent with the same international standards,\100\ the potential
for inconsistent regulation is low.
---------------------------------------------------------------------------
\98\ This dual framework for the regulation of CCPs for swaps
and security-based swaps by the Commission and the CFTC was recently
recognized by the European Commission in its equivalence decision
for the CFTC. The European Commission has indicated that it will
conduct a separate equivalence analysis for CCPs clearing securities
and security-based swaps. 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.
\99\ See CCA Standards adopting release, supra note 7, at 45.
\100\ See CCA Standards adopting release, supra note 7, at 45.
---------------------------------------------------------------------------
Further, in the CCA Standards adopting release, the Commission
addressed comments regarding the risk of duplicative regulation that
may result for clearing agencies dually registered with the Commission
and the CFTC,\101\ and noted that the Commission has previously
addressed concerns about duplication in the rule filing process by
streamlining the process under Rule 19b-4 for dually registered
clearing agencies.\102\ Specifically, for rule filings that primarily
concern the clearing operations of a registered clearing agency that do
not pertain to securities clearing operations but only to clearing of
products under the authority of the CFTC, the Commission made a policy
decision to provide a streamlined process for such rule filings to
become effective upon filing with the Commission, without pre-effective
notice and opportunity for comment.\103\
---------------------------------------------------------------------------
\101\ See id. at 44-46.
\102\ See Exchange Act Release No. 34-69284 (Apr. 3, 2013), 78
FR 21046 (Apr. 9, 2013).
\103\ See id. at 21047.
---------------------------------------------------------------------------
Finally, with respect to the proposed removal of designated
clearing agencies from the ``covered clearing agency'' definition, the
Commission notes that each designated clearing agency under Title VIII
provides either CCP or CSD services and, therefore, would remain a
covered clearing agency under the proposed amendment to the definition
of ``covered clearing agency.'' \104\ Moreover, the proposed shift to a
function-oriented definition of ``covered clearing agency'' would not
cause any of the registered clearing agencies that currently fall
within the definition to be excluded. DTC, FICC, ICEEU, NSCC, and OCC
all perform CCP, CSD, and/or SSS services.
---------------------------------------------------------------------------
\104\ See supra note 50.
---------------------------------------------------------------------------
The proposed amendment to the definition would expand the scope of
covered clearing agencies by one additional clearing agency, ICC.
Although ICC is a designated SIFMU and provides CCP services for
security-based swaps, the CFTC is its supervisory agency, so it is not
a covered clearing agency under the adopted definition.
B. Definition of ``Securities Settlement System''
To facilitate the proposed amendment to the definition of ``covered
clearing agency,'' the Commission is also proposing to define
``securities settlement system'' to mean a clearing agency that enables
securities to be transferred and settled by book entry according to a
set of predetermined multilateral rules. The Commission understands
that this is the generally accepted meaning of the term.\105\ The
Commission preliminarily believes that this definition appropriately
captures the critical functions performed by SSSs described above,
including the role that SSSs have in concentrating and managing risk on
behalf of their participants. The proposed definition would, among
other things, include a clearing agency that facilitates the settlement
of transactions executed by specialists on an exchange, provides
clearance and settlement services for mortgage-backed securities
transactions, or facilities the clearance and settlement of cross-
border transactions.\106\
---------------------------------------------------------------------------
\105\ See supra note 6.
\106\ See supra notes 83-88.
---------------------------------------------------------------------------
C. Definition of ``Central Securities Depository''
Consistent with the proposed amendment to the definition of
``covered clearing agency,'' and to improve consistency with both the
definition of ``central counterparty'' in Rule 17Ad-22(a)(2) and the
proposed definition of ``securities settlement system,'' the Commission
is proposing to amend the definition of ``central securities depository
services'' in Rule 17Ad-22(a)(3). Rule 17Ad-22(a)(3) as adopted defines
``central securities depository services'' to mean services of a
clearing agency that is a securities depository as described in Section
3(a)(23)(A) of the Exchange Act. The Commission is proposing to amend
Rule 17Ad-22(a)(3) so that it would instead define ``central securities
depository'' to mean a clearing agency that is a securities depository
as described in Section 3(a)(23)(A) of the Exchange Act.
This modification would not alter the meaning of Rule 17Ad-22(a)(3)
other than to improve consistency with (i) the definition of ``central
counterparty'' and its use throughout Rule 17Ad-22, and (ii) the
proposed definition of ``securities settlement system'' and its
proposed use under Rule 17Ad-22. The Commission preliminarily believes
that this proposed modification is therefore appropriate so that the
definition of ``covered clearing agency'' is workable.
D. Definition of ``Sensitivity Analysis''
The Commission is also proposing to amend the definition of
``sensitivity analysis'' under Rule 17Ad-22 to remove the reference to
``a covered clearing agency involved in activities with a more complex
risk profile'' from paragraph (ii). Pursuant to the proposed amendment,
all covered clearing agencies that are CCPs, rather than just those
involved in activities with a more complex risk profile, as part of
developing and maintaining policies and procedures for performing
sensitivity analysis pursuant to Rule 17Ad-22(e)(6), would need to
consider the most volatile relevant periods, where practical, that have
been experienced by the markets served by the clearing agency.
Under the existing definition of ``sensitivity analysis,'' the
Commission applies the requirements for policies and procedures
regarding volatile relevant periods only to covered clearing agencies
that are complex risk profile clearing agencies. While this approach
applies the requirements related to sensitivity analysis to CCPs that
clear security-based swaps, it does not apply the requirements to other
clearing agencies that provide CCP services. Under the Commission's
proposed amendment to the ``sensitivity analysis'' definition, these
requirements for policies and procedures would apply to all covered
clearing agencies that are CCPs. The Commission believes that policies
and procedures for considering the most volatile relevant periods,
where practical, that have been experienced by the markets served by a
covered clearing agency promote sound risk management and help mitigate
systemic risk. The Commission therefore preliminarily believes that
expanding the coverage of this requirement to all CCPs will help
mitigate risks to the U.S. financial system. In light of the
Commission's proposal to expand the coverage of the ``covered clearing
agency'' definition to all CCPs, the Commission preliminarily believes
it is important to also require that any currently registered CCP or
CCP that may register with the Commission in the future be subject to
the same requirement to help mitigate risks to the U.S. financial
system. Based on its supervisory experience, the Commission
[[Page 70755]]
preliminarily believes that all active CCPs currently registered with
the Commission have policies and procedures for sensitivity analysis
though they may vary in their application.
In addition, in order to improve consistency within the definition
of sensitivity analysis, the Commission is proposing to separate the
two elements that appear in current paragraph (i) into two separate
paragraphs and renumber the existing paragraphs accordingly. Thus,
``sensitivity analysis'' would mean 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;
(ii) uses actual portfolios and, where applicable, hypothetical
portfolios that reflect the characteristics of proprietary positions
and customer positions; (iii) considers the most volatile relevant
periods, where practical, that have been experienced by the markets
served by the clearing agency; and (iv) 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. This proposed modification would not alter the meaning or
application of the definition of ``sensitivity analysis,'' but is
designed to improve clarity regarding the number of discrete elements
contained in the definition.
E. Request for Comments
The Commission requests comment on all aspects of the proposed
amendments to the definitions of ``covered clearing agency,'' ``central
securities depository,'' and ``sensitivity analysis'' and the proposed
definition of ``securities settlement system,'' including whether the
definitions are sufficiently clear and, if not, how they should be
changed. In addition, the Commission requests comment on the following
specific issues. In all cases, responses should be supported by
detailed explanation and analysis and, where possible, empirical
evidence.
In describing the functions or services of a covered
clearing agency as those of a CCP, CSD, or SSS, has the Commission's
proposal appropriately classified the functions/services of a covered
clearing agency? Are there other clearing agency functions or services
that the Commission should consider including in the definition of
``covered clearing agency?'' If so, explain why these functions or
services should be included and how these functions relate to the
policy goals and requirements in Rule 17Ad-22(e). In addition, please
explain whether any of the clearing agency functions included in the
proposed definition of ``covered clearing agency'' should be excluded
and why such an exclusion is appropriate.
Will the proposed approach to expanding the definition of
``covered clearing agency'' result in duplicative costs for CCPs, CSDs,
and SSSs? If so, what are these costs?
Should any of the requirements under Rule 17Ad-22(e) be
altered as they relate to the new entities under the proposed expansion
of the ``covered clearing agency'' definition? Please explain.
In referencing a securities depository as described in
Section 3(a)(23)(A) of the Exchange Act, does the proposed definition
of ``central securities depository'' sufficiently describe the
functions of a CSD? Why or why not? What other functions, if any,
should be included in the definition of ``central securities
depository?''
The definition of ``central securities depository'' would
continue to appear in Rule 17Ad-22(d)(14).\107\ However, as a result of
the proposed amendment to the ``covered clearing agency'' definition, a
registered clearing agency that performs CSD services would be a
covered clearing agency subject to Rule 17Ad-22(e) and would not be
subject to the requirements in Rule 17Ad-22(d). Accordingly, should the
Commission modify Rule 17Ad-22(d)(14) in light of the proposed
amendments? If so, how should the Commission apply Rule 17Ad-22(d)(14)
to a registered clearing agency that is not a covered clearing agency?
---------------------------------------------------------------------------
\107\ Rule 17Ad-22(d)(14) requires a registered clearing agency
other than a covered clearing agency to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to institute risk controls, including collateral
requirements and limits to cover the clearing agency's credit
exposure to each participant family exposure fully, that ensure
timely settlement in the event that the participant with the largest
payment obligation is unable to settle when the clearing agency
provides CSD services and extends intraday credit to participants.
See 17 CFR 240.17Ad-22(d)(14).
---------------------------------------------------------------------------
Do commenters agree with the proposed definition of
``securities settlement system?'' Should there be another definition?
If so, why? Does the definition sufficiently describe the functions of
an SSS? Is it sufficiently clear what ``according to a set of
predetermined multilateral rules'' means? Please provide examples of
SSS activities.
In light of the proposed amendment to the definition of
``sensitivity analysis,'' would a covered clearing agency have to make
changes to its policies and procedures for conducting sensitivity
analysis to comply with the new definition? If so, explain the current
policies and procedures of covered clearing agencies relevant to
conducting sensitivity analysis and how they would need to be changed.
The Commission also requests information regarding the anticipated
costs of any such changes to policies and procedures. The Commission
also requests information regarding the potential benefits.
III. Economic Analysis
The Commission is sensitive to the economic consequences and
effects of the proposed amendments, including their benefits and costs.
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.\108\ Further, as noted above, Section 17A of the Exchange
Act directs the Commission, when using its authority to facilitate the
establishment of a national system for clearance and settlement of
securities transactions, 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.\109\ 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.\110\
---------------------------------------------------------------------------
\108\ See 15 U.S.C. 78c(f).
\109\ See supra Part I.A.1.
\110\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
The proposed amendments to three definitions in Rule 17Ad-22(a)
would generally expand the scope of registered clearing agencies
subject to Rule 17Ad-22(e). The Commission is proposing to amend the
definition of ``covered clearing agency'' in Rule 17Ad-22(a)(5) by
focusing directly on clearing agency functions. Thus the amended
definition of ``covered clearing agency'' covers all clearing agencies
that provide the services of a CCP, CSD, or SSS. The Commission is also
proposing a
[[Page 70756]]
conforming amendment to the definition of ``central securities
depository services'' in Rule 17Ad-22(a)(3), and the Commission is
proposing to amend the definition of ``sensitivity analysis'' in Rule
17Ad-22(a)(17). As discussed in more detail below, the Commission
preliminarily believes the proposed amendments to Rule 17Ad-22(a) would
cause one additional registered clearing agency to fall within the
definition of ``covered clearing agency'' and become subject to
requirements of Rule 17Ad-22(e).
A. Economic Background
The Commission believes that the proposed amendments would support
improvements in risk management at registered clearing agencies not
currently subject to Rule 17Ad-22(e) as adopted with respect to
systemic risk, as well as with respect to legal, credit, liquidity,
general business, custody, investment, and operational risk.
As noted in the CCA Standards adopting release, registered clearing
agencies have become an essential part of the infrastructure of the
U.S. securities markets.\111\ 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.\112\ 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.\113\ 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.
---------------------------------------------------------------------------
\111\ See CCA Standards adopting release, supra note 7, at 257.
\112\ 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).
\113\ See supra Part I.A.2.
---------------------------------------------------------------------------
As the Commission discussed in the CCA Standards adopting release,
clearing agencies have incentives to implement a risk management
framework that can effectively manage the risks posed by central
clearing.\114\ 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 have a lower economic
stake in the clearing agency than member-owners under a mutualized
structure.
---------------------------------------------------------------------------
\114\ See CCA Standards adopting release, supra note 7, at 259-
260.
---------------------------------------------------------------------------
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 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.\115\
---------------------------------------------------------------------------
\115\ See 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------
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.\116\ This tension may
result in a clearing agency making decisions that result in tradeoffs
between the costs and benefits of risk management that may not fully
reflect the costs and benefits that accrue to other financial market
participants as a result of its decisions. For example, because the
current market to provide central clearing is characterized by high
barriers to entry and limited competition,\117\ the market power
exercised by clearing agencies in the markets they serve may reduce
incentives to invest in risk management systems.\118\ 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.\119\ Such a failure represents a financial network
externality imposed by clearing agencies on the broader financial
system and suggests that
[[Page 70757]]
financial stability, as a public good, may be under-produced in
equilibrium.
---------------------------------------------------------------------------
\116\ See supra Parts I.A.1 and 2 (describing the requirements
under the Exchange Act and the Dodd-Frank Act).
\117\ See CCA Standards proposing release, supra note 31, at
29576.
\118\ See infra Part III.C.1.c (discussing the effect on
competition).
\119\ 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.
---------------------------------------------------------------------------
B. Baseline
In order to perform its analysis of the likely economic effects of
the proposed amendments to Rule 17Ad-22(a), the Commission is using an
economic baseline that considers the current market for clearance and
settlement services as it exists at the time of this proposal. As
discussed above,\120\ the Commission preliminarily believes that the
proposed amendment to the definition of ``covered clearing agency''
will likely result in one additional registered clearing agency, ICC,
becoming subject to the requirements in Rule 17Ad-22(e). Further, as
discussed below, the Commission preliminarily believes that the
proposed amendments potentially affect ICEEU even though the amendment
to the definition of ``covered clearing agency'' will not change
ICEEU's current status as a covered clearing agency.\121\ The
Commission's baseline therefore includes the two entities in the market
for clearance and settlement services--ICC and ICEEU--that the
Commission believes would be affected by the proposed amendments. In
addition to current market practices at these entities, the baseline
includes rules adopted by the Commission, including rules adopted in
the CCA Standards adopting release, as well as rules adopted by other
regulators, including those in other jurisdictions to the extent that
these rules affect the cost structure, business and market practices of
the above-mentioned entities. The following section discusses the
elements of the baseline that are relevant for the economic analysis of
the proposed amendments.
---------------------------------------------------------------------------
\120\ See supra Part II.A.4.
\121\ See infra Part III.C.1.c.
---------------------------------------------------------------------------
Pursuant to the adoption of amendments to Rule 17Ad-22,\122\ five
registered clearing agencies--DTC, FICC, ICEEU, NSCC and OCC--currently
meet the definition of ``covered clearing agency''. Table 1 below
provides basic membership statistics for the two clearing agencies--ICC
and ICEEU--that the Commission preliminarily believes would be affected
by the proposed amendments to Rule 17Ad-22(a).
---------------------------------------------------------------------------
\122\ See CCA Standards adopting release, supra note 7, at 458-
459.
Table 1--Membership Statistics for ICE Clear Credit & ICE Clear Europe
123
------------------------------------------------------------------------
Number
------------------------------------------------------------------------
Clear Credit Members.......................................... 30
ICE Clear Europe Members...................................... 80
--Clear Europe Members that clear CDS......................... 21
------------------------------------------------------------------------
To further assess the economic effects of the proposed amendments
to Rule 17Ad-22(a), 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 the
entities that would be affected by the proposed amendments to Rule
17Ad-22(a). Each is discussed further below.
---------------------------------------------------------------------------
\123\ Membership statistics are taken from the Web sites of each
of the listed clearing agencies as of March 2016. 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.
---------------------------------------------------------------------------
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 a
national system for the prompt and accurate clearance and settlement of
securities transactions and provides for the registration of clearing
agencies.\124\ Section 19 of the Exchange Act sets forth the general
registration requirements for clearing agencies as SROs, their
responsibility as SROs to file proposed rule changes with the
Commission for review and approval, and, in general, the provisions
relating to Commission oversight of SROs.\125\ Titles VII and VIII of
the Dodd-Frank Act have expanded the Commission's role with respect to
the regulation of central clearing. Specifically, Title VII amended
Section 17A of the Exchange Act by adding new paragraphs (g) through
(j), which provide the Commission with authority to adopt rules
governing security-based swap clearing agencies.\126\ The Clearing
Supervision Act, adopted in Title VIII, provides for enhanced
regulation of SIFMUs and, more generally, for enhanced coordination
among the Commission, CFTC, and FRB by facilitating examinations and
information sharing.\127\ As noted above, on July 18, 2012, the FSOC
designated as SIFMUs five registered clearing agencies.\128\
---------------------------------------------------------------------------
\124\ See supra Part I.A.1.
\125\ See supra notes 16-18 and accompanying text.
\126\ See supra note 22 and accompanying text.
\127\ See supra notes 23-30 and accompanying text.
\128\ See supra note 50.
---------------------------------------------------------------------------
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.\129\ 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.\130\ To address these
potential market failures, Rule 17Ad-22 was adopted to strengthen the
substantive regulation of clearing agencies, promote the safe and
reliable operation of clearing agencies, improve efficiency,
transparency, and access to clearing agencies, and promote consistency
with international standards.\131\
---------------------------------------------------------------------------
\129\ See supra note 31 and accompanying text.
\130\ See Clearing Agency Standards adopting release, supra note
31, at 66263.
\131\ See id. at 66225-26, 66263-64.
---------------------------------------------------------------------------
Today, the Commission adopted amendments to Rule 17Ad-22 and new
Rule 17Ab2-2. Rule 17Ad-22(a)(5) provides the definition of ``covered
clearing agency,'' and Rule 17Ad-22(e) establishes standards for the
operation and governance of registered clearing agencies that meet the
definition of a covered clearing agency. Rule 17Ab2-2 provides a
process by which the Commission may determine or rescind past
determinations about, whether a covered clearing agency is systemically
important in multiple jurisdictions, and whether any of the activities
of a clearing agency providing CCP services, including clearing
agencies registered with the Commission for the purpose of clearing
security-based swaps, have a more complex risk profile.\132\
---------------------------------------------------------------------------
\132\ See CCA Standards adopting release, supra note 7, at 456-
477.
---------------------------------------------------------------------------
Finally, efforts by the CFTC to adopt rules that are consistent
with the PFMI are also relevant to the economic analysis of the
proposed amendments to Rule 17Ad-22(a).\133\ The CFTC has issued rules
for derivatives clearing organizations and systemically important
derivatives clearing
[[Page 70758]]
organizations (``SIDCOs'') which it indicated are intended to be
consistent with the PFMI.\134\ ICC, the registered clearing agency that
the Commission anticipates will fall into the revised covered clearing
agency definition, is a clearing agency registered with the Commission
that is also supervised by the CFTC as a SIDCO under subpart C of Part
39 of the Commodity Exchange Act.
---------------------------------------------------------------------------
\133\ See id. at 272.
\134\ See Derivatives Clearing Organizations and International
Standards, Final Rule, 78 FR 72477 (Dec. 2, 2013).
---------------------------------------------------------------------------
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.
As discussed above,\135\ the Commission preliminarily believes that
the proposed revision to Rule 17Ad-22(a) will likely result in one
additional registered clearing agency, ICE Clear Credit, falling within
the definition of covered clearing agency. Further, the Commission
preliminarily believes that the proposed amendments may affect ICE
Clear Europe (ICEEU) even though these amendments will not change
ICEEU's current status as a covered clearing agency.\136\ An overview
of the current practices of these entities is set forth below and
includes discussion of 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 intended solely for the
purpose of analyzing the economic effects of the proposed amendments
and is based on the Commission's general understanding of current
practices as of the date of this proposal, informed by information
published by registered clearing agencies, as well as the Commission's
experience supervising registered clearing agencies.
---------------------------------------------------------------------------
\135\ See Part II.A.4.
\136\ See infra Part III.C.1.c.
---------------------------------------------------------------------------
a. General Organization
i. Legal Risk
Legal risk is the risk that a registered clearing agency's rules,
policies, or procedures may not be enforceable and concerns, among
other things, its contracts, the rights of members, netting
arrangements, discharge of obligations, and settlement finality. Cross-
border activities of a registered clearing agency may also present
elements of legal risk.
Rule 17Ad-22(d)(1) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for a well-founded,
transparent, and enforceable legal framework for each aspect of its
activities in all relevant jurisdictions.\137\ 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 in order to promote the
transparency of their legal framework.\138\
---------------------------------------------------------------------------
\137\ See 17 CFR 240.17Ad-22(d)(1); Clearing Agency Standards
adopting release, supra note 31, at 66245-46.
\138\ 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.
---------------------------------------------------------------------------
ii. Governance
Rule 17Ad-22(d)(8) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to have governance arrangements that are
clear and transparent to fulfill the public interest requirements in
Section 17A of the Exchange Act applicable to clearing agencies, to
support the objectives of owners and participants, and to promote the
effectiveness of the clearing agency's risk management procedures.\139\
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.
---------------------------------------------------------------------------
\139\ See 17 CFR 240.17Ad-22(d)(8); see also Clearing Agency
Standards adopting release, supra note 31, at 66251-52.
---------------------------------------------------------------------------
Each registered clearing agency has a board that governs its
operations and supervises senior management. Each registered clearing
agency also has an independent audit committee of the board and has
established a board committee or committee of members tasked with
overseeing the clearing agency's risk management functions.
iii. Amended 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.\140\ 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.\141\ 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.\142\
---------------------------------------------------------------------------
\140\ See 17 CFR 240.17Ad-22(b) and (d); see also Clearing
Agency Standards adopting release, supra note 31.
\141\ See 17 CFR 240.17Ad-22(d)(4); see also Clearing Agency
Standards adopting release, supra note 31, at 66248-49.
\142\ See 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------
In addition to meeting these requirements, the Commission
understands that registered clearing agencies also specify actions to
be taken when their resources are insufficient to cover losses faced by
the registered clearing agency.\143\ These actions may include
assessment rights on clearing members, forced allocation, and contract
termination.
---------------------------------------------------------------------------
\143\ See David Elliot, Central Counterparty Loss-Allocation
Rules, at tbl. 1A (Bank of England Financial Stability Paper No. 20,
Apr. 2013), available at http://www.bankofengland.co.uk/research/Documents/fspapers/fs_paper20.pdf (noting the loss-allocation rules
applied at the end of a clearing agency waterfall).
---------------------------------------------------------------------------
b. Financial Risk Management
Registered clearing agencies that provide CCP services have a
variety of options available to mitigate the financial risks to which
they are exposed. While the manner in which a CCP chooses to mitigate
these financial risks depends on the precise nature of the CCP's
obligations, a common set of procedures have been implemented by
[[Page 70759]]
many CCPs to manage credit and liquidity risks. Broadly, these
procedures enable CCPs to manage their risks by reducing the likelihood
of member defaults, limiting potential losses and liquidity pressure in
the event of a member default, implementing mechanisms that allocate
losses across members, and providing adequate resources to cover losses
and meet payment obligations as required.
Registered clearing agencies that provide CCP services must be able
to effectively measure their credit exposures in order to properly
manage those exposures. A CCP faces the risk that its exposure to a
member can change as a result of a change in prices, positions, or
both. CCPs can ascertain current credit exposures to each member by, in
some cases, marking each member's outstanding contracts to current
market prices and, to the extent permitted by their rules and supported
by law, by netting any gains against any losses. Rule 17Ad-22 includes
certain requirements related to financial risk management by CCPs,
including requirements to measure credit exposures to members and to
use margin requirements to limit these exposures. These requirements
are general in nature and provide registered clearing agencies
flexibility to measure credit risk and set margin. Within the bounds of
Rule 17Ad-22, CCPs may employ models and choose parameters that they
conclude are appropriate to the markets they serve.
The current practices of registered clearing agencies that provide
CCP services generally include the following procedures: (1) Measuring
credit exposures at least once a day; (2) setting margin coverage at a
99% confidence level over some set period; (3) using risk-based models;
(4) establishing a fund that mutualizes losses of defaults by one or
more participants that exceed margin coverage; (5) maintaining
sufficient financial resources to withstand the default of at least the
largest participant family,\144\ 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.\145\
---------------------------------------------------------------------------
\144\ See, e.g., IMF, Publication of Financial Sector Assessment
Program Documentation--Detailed Assessment of Observance of the
National Securities Clearing Corporation's Observance of the CPSS-
IOSCO Recommendations for Central Counterparties, at 10 (May 2010),
available at http://www.imf.org/external/pubs/ft/scr/2010/cr10129.pdf (assessing NSCC's observance of Recommendation 5 from
the RCCP that a CCP should maintain sufficient financial resources
to withstand, at a minimum, the default of a participant to which it
has the largest exposure in extreme but plausible market conditions;
also noting that NSCC began evaluating itself against this standard
in 2009 and has backtesting results to support that it maintained
sufficient liquidity to cover the failure of the largest affiliated
family 99.98% of the time during the period from January through
April 2009); IMF, Publication of Financial Sector Assessment Program
Documentation--Detailed Assessment of Observance of the Fixed Income
Clearing Corporation--Government Securities Division's Observance of
the CPSS-IOSCO Recommendations for Central Counterparties, at 9-10
(2010), available at http://www.imf.org/external/pubs/ft/scr/2010/cr10130.pdf (finding that FICC's Government Securities Division
observed the requirement to maintain enough financial resources to
meet the default of its largest participant in extreme but plausible
market conditions).
\145\ 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.\146\ Several CCPs have policies
and procedures designed to require measuring credit exposures multiple
times per day.
---------------------------------------------------------------------------
\146\ 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.\147\ 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.\148\ Accordingly, the Commission
notes that Rule 17Ad-22(b)(3) imposes a ``cover two'' requirement on
CCPs for security-based swaps in order to protect such CCPs from the
extreme jump-to-default risk and nonlinear payoffs associated with the
nature of the financial products they clear and the participants in the
markets they serve. Meanwhile, CCPs that clear products other than
security-based swaps are subject to a ``cover one'' requirement.\149\
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.\150\
---------------------------------------------------------------------------
\147\ See 17 CFR 240.17Ad-22(b)(2).
\148\ See id.
\149\ See CCA Standards adopting release, supra note 7, at 105-
112 (discussing the requirements for ``cover one'' and ``cover
two'').
\150\ 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.
ICC recently modified its policies and procedures related to stress
testing frameworks indicating that the modifications were designed to
ensure that it meets regulatory requirements under Rule 17Ad-
22(b)(3).\151\
---------------------------------------------------------------------------
\151\ See Self-Regulatory Organizations; ICE Clear Credit LLC;
Notice of Filing of Amendment 1 and Order Approving Proposed Rule
Change, as modified by Amendment 1 Thereto, to Update and Formalize
the ICC Stress Testing Framework, Exchange Act Release No. 34-77982
(June. 2, 2016).
---------------------------------------------------------------------------
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.\152\ This margin
can also be used to reduce a CCP's losses in the event of a participant
default.
---------------------------------------------------------------------------
\152\ See 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------
Registered clearing agencies that provide CCP services take
positions as substituted counterparties once their
[[Page 70760]]
trade guarantee goes into effect. Therefore, if a counterparty whose
obligations the registered clearing agency has guaranteed defaults, the
covered clearing agency may face market risk, which can take one of two
forms. First, a covered clearing agency is subject to the risk of
movement in the market prices of the defaulting member's open
positions. Where a seller defaults and fails to deliver a security, the
covered clearing agency may need to step into the market to buy the
security in order to complete settlement and deliver the security to
the buyer. Similarly, where a buyer defaults, the covered clearing
agency may need to meet payment obligations to the seller. Thus, in the
interval between when a member defaults and when the covered clearing
agency must meet its obligations as a substituted counterparty in order
to complete settlement, market price movements expose the covered
clearing agency to market risk. Second, the covered clearing agency may
need to liquidate non-cash margin collateral posted by the defaulting
member. The covered clearing agency is therefore exposed to the risk
that erosion in market prices of the collateral posted by the
defaulting member could result in the covered clearing agency having
insufficient financial resources to cover the losses in the defaulting
member's open positions.
To manage their exposure to market risk resulting from fulfilling a
defaulting member's obligations, registered clearing agencies compute
margin requirements using inputs such as portfolio size, volatility,
and sensitivity to various risk factors that are likely to influence
security prices. Moreover, since the size of price movements is, in
part, a function of time, registered clearing agencies may limit their
exposure to market risk by marking participant positions to market
daily and, in some cases, more frequently. CCPs also use similar
factors to determine haircuts applied to assets posted by members in
satisfaction of margin requirements. To manage market risk associated
with collateral liquidation, CCPs consider the current prices of assets
posted as collateral and price volatility, asset liquidity, and the
correlation of collateral assets and a member's portfolio of open
positions. Further, because CCPs need to value their margin assets in
times of financial stress, their rulebooks may include features such as
market-maker domination charges that increase clearing fund obligations
regarding open positions of members in securities in which the member
serves as a dominant market maker. The reasoning behind this charge is
that, should a member default, liquidity in products in which the
member makes markets may fall, leaving these positions more difficult
to liquidate for non-defaulting participants.
Rule 17Ab-22(b)(2) also requires a registered clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide for
risk-based models and parameters to set margin requirements.\153\ 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.\154\ 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.\155\
---------------------------------------------------------------------------
\153\ See id.
\154\ See 17 CFR 240.17Ad-22(a)(4).
\155\ See BCBS, International Convergence of Capital Measurement
and Capital Standards: A Amended Framework (June 2004), available at
http://www.bis.org/publ/bcbs107.pdf; see also Darryll Hendricks &
Beverly Hirtle, New Capital Rule Signals Supervisory Shift
(Secondary Mortgage Mkts, Sept. 1998), available at http://www.freddiemac.com/finance/smm/july98/pdfs/hen_hirt.pdf.
Prior to this standard, banks measured value-at-risk using a
range of confidence intervals from 90-99%. See BCBS, An Internal
Model-Based Approach to Market Risk Capital Requirements, at 12
(Apr. 1995), available at http://www.bis.org/publ/bcbs17.pdf. When
determining the minimum quantitative standards for calculating risk
measurements, the BCBS noted then the importance of specifying ``a
common and relatively conservative confidence level,'' choosing the
99% confidence interval over other less conservative measures. See
id.
Since its adoption in 1998, the standard has become a generally
recognized practice of banks to quantify credit risk as the worst
expected loss that a portfolio might incur over an appropriate time
horizon at a 99% confidence interval. See Kenji Nishiguchi, Hiroshi
Kawai & Takanori Sazaki, Capital Allocation and Bank Management
Based on the Quantification of Credit Risk, at 83 (FRBNY Econ.
Policy Rev., Oct. 1998), available at http://www.newyorkfed.org/research/epr/98v04n3/9810nish.pdf; Jeff Aziz & Narat Charupat,
Calculating Credit Exposure and Credit Loss: A Case Study, at 34
(Sept. 1998), available at http://www.bis.org/bcbs/ca/alrequse98.pdf.
---------------------------------------------------------------------------
Rule 17Ad-22(b)(2) also requires a registered clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to review such
margin requirements and the related risk-based models and parameters at
least monthly.\156\ 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.\157\
---------------------------------------------------------------------------
\156\ See 17 CFR 240.17Ad-22(b)(2).
\157\ See 17 CFR 240.17Ad-22(b)(4).
---------------------------------------------------------------------------
To meet resource requirements under Rule 17Ad-22(b)(3),\158\ ICC
recently adjusted its risk calculations and models to account for
accumulation of wrong-way risk at the portfolio level.\159\
---------------------------------------------------------------------------
\158\ See Self-Regulatory Organizations; ICE Clear Credit LLC;
Notice of Filing of Proposed Rule Change, Exchange Act Release No.
34-75119 (June 8, 2015) at note 7.
\159\ See Self-Regulatory Organizations; ICE Clear Credit LLC;
Notice of Filing of Amendments No. 1 and 2 and Order Granting
Accelerated Approval of Proposed Rule Change, as Modified by
Amendments No. 1 and 2, to Revise the ICC Risk Management Framework,
Exchange Act Release No. 34-75887 (Sept. 10, 2015).
---------------------------------------------------------------------------
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 in order to make payments to
participants in net credit positions. If a participant does not have
sufficient funds or securities in the form required to fulfill a
payment obligation immediately when due (even though it may be able to
pay at some future time), or if a settlement bank is unable to make an
incoming payment on behalf of a participant, a registered clearing
agency may face a funding shortfall. Such funding shortfalls may occur
due to a lack of financial resources necessary to meet delivery or
payment obligations, however even registered clearing agencies that do
hold sufficient financial resources to meet their obligations may not
carry those in the
[[Page 70761]]
form required for delivery or payments to participants.
A registered clearing agency that provides CCP services may hold
additional financial resources to cover potential funding shortfalls in
the form of collateral. As noted above, CCPs may take the liquidity of
collateral into account when determining member obligations. Applying
haircuts to illiquid assets posted as margin mitigates the liquidity
risk associated with selling margin assets in the event of participant
default. Some registered CCPs also arrange for liquidity provision from
other financial institutions using lines of credit. Additionally, some
registered clearing agencies enter into prearranged funding agreements
with their members pursuant to their rules. For example, members of one
registered clearing agency are obligated to enter into repurchase
agreements against securities that would have been delivered to a
defaulting member.
ICC has disclosed a liquidity management program that includes
stress testing of liquidity requirements to meet settlement obligations
over a range of different horizons under extreme but plausible market
conditions.\160\ ICC also reports that its liquidity resources include
cash, U.S. Treasury securities, and committed repurchase
agreements.\161\
---------------------------------------------------------------------------
\160\ See ICE Clear Credit Disclosure Framework, note 145 supra,
at 18.
\161\ See id.
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c. Settlement
Rule 17Ad-22(d)(5) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to employ money settlement arrangements
that eliminate or strictly limit the clearing agency's settlement bank
risks and require funds transfers to the clearing agency to be final
when effected.\162\ 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.\163\
Accordingly, for example, certain registered clearing agencies have
policies and procedures that 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.\164\
---------------------------------------------------------------------------
\162\ See 17 CFR 240.17Ad-22(d)(5).
\163\ See 17 CFR 240.17Ad-22(d)(12).
\164\ See 17 CFR 240.17Ad-22(d)(15).
---------------------------------------------------------------------------
d. CSDs and Exchange-of-Value Settlement Systems
i. CSDs
Rule 17Ad-22(d)(10) requires a registered clearing agency that
provides CSD services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain
securities in an immobilized or dematerialized form for transfer by
book entry to the greatest extent possible. Currently, some securities,
such as mutual fund securities and government securities, are issued
primarily or solely on a dematerialized basis. Dematerialized shares do
not exist as physical certificates but are held in book entry form in
the name of the owner (which, where the master security holder file is
not maintained on paper due to the use of technology, is also referred
to as electronic custody). Other types of securities may be issued in
the form of one or more physical security certificates, which could be
held by the CSD to facilitate immobilization. Alternatively, securities
may be held by the beneficial owner in record name, in the form of
book-entry positions, where the issuer offers the ability for a
security holder to hold through the direct registration system. Whether
immobilization occurs at the CSD or through direct registration depends
on what is provided for by the issuer.
When a trade occurs, the depository's accounting system credits one
participant account and debits another participant account.
Transactions between counterparties in dematerialized shares are
recorded by the registrar responsible for maintaining the paper or
electronic register of security holders, such as by a transfer agent,
and reflected in customer accounts.
Registered CSDs currently reconcile ownership positions in
securities against CSD ownership positions on the security holders list
daily, mitigating the risk of unauthorized creation or deletion of
shares.
ii. Exchange-of-Value Settlement Systems
Rule 17Ad-22(d)(13) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to eliminate principal risk by linking
securities transfers to funds transfers in a way that achieves delivery
versus payment,\165\ 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.
---------------------------------------------------------------------------
\165\ See 17 CFR 240.17Ad-22(d)(13); see also Clearing Agency
Standards adopting release, supra note 31, at 66256.
---------------------------------------------------------------------------
For example, one registered clearing agency has rules governing its
continuous net settlement (``CNS'') system, under which it becomes the
counterparty for settlement purposes at the point its trade guarantee
attaches, thereby assuming the obligation of its members that are
receiving securities to receive and pay for those securities, and the
obligation of members that are delivering securities to make the
delivery. Unless the clearing agency has invoked its default rules, it
is not obligated to make those deliveries until it receives from
members with delivery obligations deliveries of such securities;
rather, deliveries that come into CNS ordinarily are promptly
redelivered to parties that are entitled to receive them through an
allocation algorithm. Members are obligated to take and pay for
securities allocated to them in the CNS process. These rules also
provide mechanisms to allow receiving members a right to receive high
priority in the allocation of deliveries, and also permit a member to
buy-in long positions that have not been delivered to it by the close
of business on the scheduled settlement date.
e. Default Management
i. Participant-Default Rules and Procedures
Rule 17Ad-22(d)(11) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to make key aspects of its default
procedures publicly available and establish default procedures that
ensure it can take timely action to contain losses and
[[Page 70762]]
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. The registered clearing agency the Commission anticipates
will fall within the definition of covered clearing agency as a result
of the proposed amendments conduct testing of its default procedures at
least annually, including participation by clearing members.
ii. Segregation and Portability
No rule under the Exchange Act currently requires a registered
clearing agency through its written policies and procedures to enable
the portability of positions of a member's customers and the collateral
provided in connection therewith. Additionally, no rule under the
Exchange Act currently requires a registered clearing agency through
its written policies and procedures to protect the positions of a
member's customers from the default or insolvency of the member.\166\
---------------------------------------------------------------------------
\166\ See CCA Standards adopting release, supra note 7, at 189-
193 (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).
---------------------------------------------------------------------------
ICC maintains rules and procedures that facilitate the segregation
and portability of positions of a clearing member's customers and the
collateral provided to it with respect to those positions.\167\ ICC's
rules are designed to comply with the CFTC's requirements addressing
custody, segregation, and investment of customer margin provided in
respect of cleared swaps. ICC thus segregates customer funds pursuant
to the ``legally segregated, operationally commingled'' (``LSOC'')
model found under Part 22 of the CFTC Regulations.\168\ Under the LSOC
model if a customer defaults, ICC may apply clearing member funds and
defaulting customer funds to cover losses, but may not use collateral
provided by non-defaulting customers. Additionally, under ICC rules,
each clearing member that carries customer positions must, upon request
of a customer, transfer or novate that customers position to one or
more other clearing members designated by the customer, subject to the
consent of the transferee; satisfaction by the customer of any margin
requirements imposed by the transferor on any positions remaining at
the transferor; and the completion of all required transfer
documentation.\169\
---------------------------------------------------------------------------
\167\ See ICE Clear Credit Disclosure Framework, supra note 145,
at 26.
\168\ See id.
\169\ See id.
---------------------------------------------------------------------------
f. General Business and Operational Risk Management
i. General Business Risk
Business risk refers to the risks and potential losses arising from
a registered clearing agency's administration and operation as a
business enterprise that are neither related to member default nor
separately covered by financial resources designated to mitigate credit
or liquidity risk. While Rule 17Ad-22 sets forth requirements for
registered clearing agencies to identify, monitor, and mitigate or
eliminate a broad array of risks through written policies and
procedures, no rule under the Exchange Act expressly requires a
registered clearing agency through its written policies and procedures
to identify, monitor, and manage general business risk or to meet a
capital requirement. 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.
ICC maintains financial resources that, pursuant to regulation as a
SIDCO by the CFTC,\170\ are sufficient to cover twelve months of
operating costs.\171\ ICC has publicly stated its belief that an
orderly wind-down of its business would take between six and twelve
months.\172\
---------------------------------------------------------------------------
\170\ See 17 CFR 39.39(d).
\171\ See ICE Clear Credit Disclosure Framework, supra note 145,
at 27.
\172\ See id.
---------------------------------------------------------------------------
ii. Custody and Investment Risks
Registered clearing agencies face default risk from commercial
banks that they use to effect money transfers among participants, to
hold overnight deposits, and to safeguard collateral. Rule 17Ad-
22(d)(3) requires a registered clearing agency to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to (i) hold assets in a manner that minimizes risk of loss or
delay in its access to them; and (ii) invest assets in instruments with
minimal credit, market, and liquidity risks.\173\ Registered clearing
agencies currently seek to minimize the risk of loss or delay in access
by holding assets that are highly liquid (e.g., cash, U.S. Treasury
securities, or securities issued by a U.S. government agency) and by
engaging banks to custody the assets and facilitate settlement.
Typically, registered clearing agencies take steps to ensure that
assets held in custody are protected from claims from the custodian's
creditors using trust accounts or equivalent arrangements.
Additionally, designated clearing agencies may have access to credit at
a Federal Reserve Bank or other relevant central bank, to the extent
such services are not already available as the result of other laws and
regulations.\174\
---------------------------------------------------------------------------
\173\ See 17 CFR 240.17Ad-22(d)(3).
\174\ See CCA Standards adopting release, supra note 7, at 159
(discussing the requirements under Rule 17Ad-22(e)(7)(iii)).
---------------------------------------------------------------------------
ICC's Treasury Operations Policies and Procedures provide for the
use of a Federal Reserve Account, the use of a committed repurchase
facility and outside investment managers to invest guarantee fund and
margin cash.\175\
---------------------------------------------------------------------------
\175\ See ``Self-Regulatory Organizations; ICE Clear Credit LLC;
Order Approving Proposed Rule Change to Revise the ICC Treasury
Operations Policies and Procedures'' Exchange Act Release No. 34-
74456 (Mar. 6, 2015).
---------------------------------------------------------------------------
iii. Operational Risk
Operational risk refers to a broad category of potential losses
arising from deficiencies in internal processes, personnel, and
information technology. Registered clearing agencies face operational
risk from both internal and external sources, including human error,
system failures, security breaches, and natural or man-made disasters.
Rule 17Ad-22(d)(4) requires a registered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to identify sources of operational risk and to
minimize those risks through the development of appropriate systems,
controls and procedures.\176\ It also requires a registered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to (i) implement systems that are
reliable and secure, and have adequate, scalable capacity; and (ii)
have business continuity plans that
[[Page 70763]]
allow for timely recovery of operations and fulfillment of a clearing
agency's obligations.\177\
---------------------------------------------------------------------------
\176\ See 17 CFR 240.17Ad-22(d)(4).
\177\ 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.\178\ 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.\179\
---------------------------------------------------------------------------
\178\ Many of these practices had been previously developed
pursuant to other Commission requirements. See CCA Standards
adopting release, supra note 7, at 19-21, 181-182, 294-295
(discussing related requirements under Regulation SCI).
\179\ 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.
---------------------------------------------------------------------------
The Commission adopted Regulation SCI in November 2014, in part, to
reduce the occurrence of systems issues, and enhance resiliency when
systems problems do occur at certain SROs, such as registered clearing
agencies. In particular, Regulation SCI requires that clearance and
settlement systems be designed to accomplish end-of-day settlement on
the day of a wide-scale disruption. Accordingly, Regulation SCI
requires registered clearing agencies to have policies and procedures
in place for business continuity as well as disaster recovery plans
that include maintaining sufficiently resilient and geographically
diverse backup and recovery capabilities that are reasonably designed
to achieve two-hour resumption of critical SCI systems following a
wide-scale disruption.\180\
---------------------------------------------------------------------------
\180\ See 17 CFR 242.1001(a)(2).
---------------------------------------------------------------------------
g. Access
i. Access and Participation Requirements
Rule 17Ad-22(b)(5) requires a registered clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide the
opportunity for a person that does not perform any dealer or security-
based swap dealer services to obtain membership on fair and reasonable
terms at the clearing agency to clear securities for itself or on
behalf of other persons.\181\ 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.\182\ 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.\183\
---------------------------------------------------------------------------
\181\ See 17 CFR 240.17Ad-22(b)(5).
\182\ See 17 CFR 240.17Ad-22(b)(6).
\183\ 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.\184\
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.
---------------------------------------------------------------------------
\184\ 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 the registered clearing
agencies likely to be affected by the proposed rule amendment.\185\
Current membership generally reflects features of cleared markets. The
decision to become a clearing member depends on the products being
cleared, the structure of these asset markets as well as the current
state of regulation for cleared markets.
---------------------------------------------------------------------------
\185\ See supra Part III.B.
---------------------------------------------------------------------------
ii. Tiered Participation Arrangements
Tiered participation arrangements occur when clearing members
(direct participants) provide access to clearing services to third
parties (indirect participants). No rule under the Exchange Act
currently requires a registered clearing agency through its written
policies and procedures to identify, monitor, and manage material risks
arising from tiered participation arrangements. The Commission
understands, however, that certain registered clearing agencies have
policies and procedures currently in place in order to identify,
monitor, or manage such arrangements. Specifically, such clearing
agencies rely on information gathered from, and distributed by, direct
participants in order to manage these tiered participation
arrangements. For example, under some covered clearing
[[Page 70764]]
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.
ICC does not currently have tiered participation arrangements.\186\
---------------------------------------------------------------------------
\186\ See ICE Clear Credit Disclosure Framework, supra note 145,
at 32.
---------------------------------------------------------------------------
iii. Links
Rule 17Ad-22(d)(7) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to evaluate the potential sources of
risks that can arise when the clearing agency establishes links either
cross-border or domestically to clear or settle trades, and ensure that
the risks are managed prudently on an ongoing basis.\187\
---------------------------------------------------------------------------
\187\ 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.\188\ Registered clearing
agencies that provide CCP services currently establish links to allow
members to realize collateral and other operational efficiencies. ICC
does not offer inter-operability links with other CCPs.
---------------------------------------------------------------------------
\188\ See Exchange Act Release No. 34-52784 (Nov. 16, 2005), 71
FR 70902 (Nov. 23, 2005); Exchange Act Release No. 34-55239 (Feb. 5,
2007), 72 FR 6797 (Feb. 13, 2007).
---------------------------------------------------------------------------
h. Efficiency
i. Efficiency and Effectiveness
Rule 17Ad-22(d)(6) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to require the clearing agency to be
cost-effective in meeting the requirements of participants while
maintaining safe and secure operations.\189\ Registered clearing
agencies have procedures to control costs and to regularly review
pricing levels against operating costs. These clearing agencies may use
a formal budgeting process to control expenditures, and may review
pricing levels against their costs of operation during the annual
budget process. Registered clearing agencies also analyze workflows in
order to make recommendations to improve their operating efficiency.
---------------------------------------------------------------------------
\189\ See 17 CFR 240.17Ad-22(d)(6).
---------------------------------------------------------------------------
ii. Communication Procedures and Standards
Although no rule under the Exchange Act expressly requires a
registered clearing agency through its written policies and procedures
to use or accommodate relevant internationally accepted communication
procedures and standards, the Commission believes that registered
clearing agencies already use these standards. Registered clearing
agencies typically rely on electronic communication with market
participants, including members. For example, some registered clearing
agencies have rules in place stating that clearing members must
retrieve instructions, notices, reports, data, and other items and
information from the clearing agency through electronic data retrieval
systems. Some registered clearing agencies have the ability to rely on
signatures transmitted, recorded, or stored through electronic,
optical, or similar means. Other clearing agencies have policies and
procedures that provide for certain emergency meetings using telephonic
or other electronic notice.
i. Transparency
Transparency requirements and disclosures by registered clearing
agencies serve to limit the size of potential information asymmetries
between registered clearing agencies, their members, and market
participants. Rule 17Ad-22(d)(9) requires a registered clearing agency
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide market participants with
sufficient information for them to identify and evaluate risks and
costs associated with using the clearing agency's services.\190\
Information regarding the operations and services of each registered
clearing agency can be viewed publicly either on the clearing agency's
Web site or a Web site maintained by an affiliate of the clearing
agency. Because registered clearing agencies are SROs,\191\ they 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.\192\
---------------------------------------------------------------------------
\190\ See 17 CFR 240.17Ad-22(d)(9).
\191\ See supra Part I.A.1.
\192\ See supra notes 17-18.
---------------------------------------------------------------------------
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.
As required by CFTC regulations,\193\ ICC completes and publicly
discloses its responses to the Disclosure Framework for Financial
Market Infrastructures published by the CPMI-IOSCO. Besides a
principle-by-principle narrative disclosure describing the registered
clearing agency's approach to observing the PFMI, the public disclosure
also includes an executive summary, a summary of major changes since
the last update of the disclosure, and a general background on the
registered clearing agency that includes descriptions of the registered
clearing agency and the markets it serves, the registered clearing
agency's general organization, legal and regulatory framework, and
systems design and operations.\194\
---------------------------------------------------------------------------
\193\ See 17 CFR 39.37.
\194\ See ICE Clear Credit Disclosure Framework, supra note 145,
at 2.
---------------------------------------------------------------------------
C. Consideration of Benefits, Costs, and the Effect on Competition,
Efficiency, and Capital Formation
The discussion below sets forth the potential economic effects
stemming from the proposed amendments to Rule 17Ad-22(a) and considers
the effects of the rules on efficiency, competition, and capital
formation. The aggregate economic effects arising from the proposed
amendments arise from two sources, the proposed amendments' likely
effects on existing registered clearing agencies and the proposed
amendments' likely effects on clearing agencies that may register with
the Commission in the future. In this section, we consider the
potential benefits, costs, and likely effects on efficiency,
competition, and capital formation that may arise from these two
sources separately. As discussed below, the Commission acknowledges
that, when viewed in isolation, the economic effects related to
existing registered
[[Page 70765]]
clearing agencies are likely to be low in magnitude. Nevertheless, when
taken together with the economic effects related to future registrants,
the Commission preliminarily believes that the economic effects of the
proposed amendments could be substantial, particularly insofar as they
subject future registrants that are CCPs, CSDs, and SSSs, and are thus
likely to play critical roles in the clearance and settlement system,
to the enhanced requirements in Rule 17Ad-22(e).
1. Economic Effects Related to Registered Clearing Agencies
As noted above, the Commission anticipates that, as a result of the
proposed amendments to Rule 17Ad-22(a), one additional registered
clearing agency, ICC, would meet the definition of covered clearing
agency. The Commission preliminarily believes that the addition of ICC
as a covered clearing agency will incrementally extend the systemic
benefits of risk management discussed in the CCA Standards adopting
release. These benefits consist of improved financial stability,\195\ a
reduction in the ambiguity associated with holding cleared assets in
the presence of credit and settlement risk, and a reduction in market
fragmentation arising from different requirements across regulatory
regimes.\196\ The Commission preliminarily believes that the extension
of these benefits will likely be incremental and only appear to the
extent that the proposed amendments would result in changes to ICC
policies and procedures because, as mentioned above, ICC is also
regulated as a SIDCO by the CFTC \197\ and because Rule 17Ad-22(e) is
consistent with comparable regulatory provisions adopted by the
CFTC.\198\ The following section attempts to estimate particular
benefits that could accrue to ICC and its members as a result of ICC
being more likely to qualify as a QCCP under the proposed rules.\199\
The sections that follow also discuss the costs and the effect on
efficiency, competition and capital formation of ICC becoming a covered
clearing agency.
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\195\ See CCA Standards adopting release, supra note 7, at 376-
380.
\196\ See CCA Standards adopting release, supra note 7, at 302-
317.
\197\ See supra Part III.B.1.
\198\ See infra Part III.C.1.b.
\199\ 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 Capital
Requirements for Bank Exposures to Central Counterparties (Apr.
2014), available at http://www.bis.org/publ/bcbs282.pdf (``BCBS
capital framework''); See also 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), at 62103.
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a. Benefits
Pursuant to the proposed amendments ICC will be more likely to
qualify as a QCCP with respect to cleared security-based swap
transactions 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. Because Rule 17Ad-22(e) is consistent with the PFMI, the
Commission preliminarily believes that foreign bank clearing members as
well as foreign banks clearing indirectly through clearing members of
ICC may benefit from its qualification as a QCCP. In particular ICC's
qualification as a QCCP would result in its foreign bank clearing
members and foreign bank indirect participants facing lower capital
requirements with respect to cleared security-based swap 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. Moreover, ICC's
non-U.S. bank clearing members may experience lower capital
requirements with respect to cleared security-based swap transactions
relative to the baseline in which foreign banking regulators do not
determine ICC to be a QCCP. \200\
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\200\ The Commission notes that benefits to bank clearing
members may be contingent upon regulators in other jurisdictions
taking action to recognize the QCCP status of the registered
clearing agency that will become a covered clearing agency due to
the proposed amendments.
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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 ICC attaining QCCP
status will likely accrue at least in part, to its foreign clearing
members or its foreign indirect participants subject to the BCBS
capital framework with respect to their cleared security-based swap
transactions.\201\ As a result of lower risk weights applied to
exposures and a cap on capital requirements against default fund
obligations, ICC's qualification as a QCCP may, for those of its
clearing members that are subject to the BCBS capital framework, lead
to an improved capital position relative to bank members of non-QCCPs
with respect to their cleared security-based swap transactions. This
may lower funding costs for bank members of QCCPs.
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\201\ For a discussion of the effects of QCCP status on
competition between bank and non-bank clearing members, see CCA
Standards adopting release, supra note 7, at 317-322.
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In quantifying the benefits of achieving QCCP status, the
Commission based its estimate on publicly available information with
regard to ICC. To estimate the upper bound for the potential benefits
accruing to bank clearing members at ICC as a result of its QCCP
status, the Commission identified a sample of 15 bank clearing members
at ICC 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.\202\ The Commission then allocated
trade exposures and default fund exposures across the sample of
[[Page 70766]]
bank clearing members based on the level of risk-weighted assets.\203\
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, ICC
obtains QCCP status, and banks are allowed to apply a 2% risk weight to
trade exposures and a 1250% risk weight to default fund exposures up to
a total exposure cap of 20% of trade exposures.\204\ If ICC 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 ICC 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 $12.9 million per year, or approximately 0.01% of the total
2015 net income reported by bank clearing members at ICC.\205\
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\202\ The Commission used the set of entities it identified as
banks on ICC's member list, available at https://www.theice.com/clear-credit/participants. 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, http://www.federalreserve.gov/releases/h10/hist/.
\203\ For example, one bank in the sample, with 5.06% of total
risk-weighted assets, was assigned 5.06% of the total trade and
default fund exposures while another bank in the sample, with 3.51%
of total risk weighted assets, was assigned 3.51% of these
exposures. Because trade exposures of ICC members against ICC are
nonpublic, the Commission used the balance of ICC margin deposits
and deposits in lieu of margin held at ICC, $14.2 billion, as a
proxy for trade exposures. ICC's 2015 clearing fund deposits were
valued at $1.56 billion. See ICC, 2015 Annual Report, available at
https://www.theice.com/publicdocs/regulatory_filings/ICE_Clear_Credit_Financial_Statements_2014_2015.pdf
\204\ 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 199, Annex 4, paras. 121-25 (outlining two methods for
computing default fund exposures).
\205\ The Commission first quantified the benefits related to
ICC's attaining QCCP status for ICC's bank clearing members and bank
indirect participants with respect to all reported exposures. Over
the period March 2009 through August 2016 the gross notional value
of security-based swap transactions cleared by ICE Clear Credit
comprised 9% of the total value of all CDS transactions cleared
(see: https://www.theice.com/clear-credit). Based on this
information the Commission arrived at the benefits to ICC's bank
clearing members and bank indirect participants from ICC's attaining
QCCP status with respect to security-based swap transactions by
multiplying the total benefits by 0.09.
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The Commission's analysis is limited in several respects and relies
on several assumptions about the nature of trade exposures to ICC.
First, a limitation of our proxy for trade exposures and our use of
ICC'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. As a result, the Commission assumes, for the purposes of
establishing an upper bound for the benefits to market participants
that are associated with QCCP status for ICC under the adopted rules,
that the balance of both ICC's margin account and ICC'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 ICC 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 in the absence
of QCCP status for ICC for security-based swap clearing. 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 ICC would bind in an environment with zero weight
placed on bank exposures to CCPs.\206\
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\206\ The Commission notes that, at present, no bank in its
sample of bank clearing members of ICC 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 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 10.5%, exceeding the BCBS capital framework's
minimum by 2.0%.
---------------------------------------------------------------------------
For the purposes of quantifying potential benefits from QCCP
status, the Commission has also assumed that banks choose to adjust to
new capital requirements by deleveraging. In particular, the Commission
assumed that banks would respond by reducing risk-weighted assets
equally across all risk classes until they reach the minimum tier one
capital ratio under the Basel framework of 8.5%. We measure the ongoing
costs to each non-U.S. bank by multiplying the implied change in total
assets by each bank's return on assets, estimated using up to 12 years
of annual financial statement data.\207\
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\207\ This data has been taken from Compustat. Due to data
limitations, for certain banks a shorter window was used for this
calculation. The minimum sample window was nine years.
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The BCBS capital framework for exposures to CCPs yields 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 capital
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 QCCPs to the QCCP's non-U.S. bank
clearing members, 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 a ``crowding out'' of
members of QCCPs that are not banks and that will not experience
benefits with respect to the BCBS capital framework. This may result in
an unintended consequence of an increased concentration of clearing
activity among ICC's bank clearing members. This increased
concentration could mean that each of the remaining
[[Page 70767]]
clearing members becomes more important from the standpoint of systemic
risk transmission since, for example, 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 Commission preliminarily believes that the benefits of ICC
attaining QCCP status may depend on whether foreign bank clearing
members of ICC are currently able to shift their clearing business from
ICC to alternative clearing agencies that serve similar markets. In
this regard, the Commission notes that ICC and ICEEU have several
overlapping members and ICC clears all the contracts that ICEEU clears.
Thus in a situation where ICEEU is a QCCP while ICC is not, common
foreign bank members of the two agencies may obtain many of the
benefits of ICC having QCCP status by moving their clearing business to
ICEEU.
However, under such a scenario, the benefits of ICC having QCCP
status for security-based swaps would not be fully realized for a
number of reasons. First, not all clearing members of ICC are also
clearing members of ICEEU. These members will not be able to move their
clearing business to ICEEU. Second, ICEEU only clears a subset of the
contracts that ICC does. Thus even common foreign bank members of ICC
and ICEEU may not be able to move their entire clearing business from
ICC to ICEEU. The Commission therefore preliminarily believes that the
extent to which foreign bank clearing members of ICC could obtain QCCP
benefits by moving their clearing business from ICC to ICEEU is
limited.
b. Costs
As noted above, ICC is a SIDCO that is also regulated by the CFTC.
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 statements adopted
by the FRB and the rules adopted by the CFTC, as each of the three rule
sets are intended to be consistent with 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.
Because of the abovementioned similarities between the CFTC's
regulatory regime for SIDCOs and Rule 17Ad-22(e), the Commission
preliminarily believes that, at the time of this proposal, ICC's
policies and procedures are already likely to be in compliance with
many of the requirements in Rule 17Ad-22(e). The Commission further
notes that ICC's principle-by-principle summary narrative disclosure
suggests that it would be unlikely to need to make significant changes
to its operations, policies, and procedures in order to comply with
Rule 17Ad-22(e).\208\
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\208\ See ICE Clear Credit Disclosure Framework, supra note 145.
---------------------------------------------------------------------------
In light of the abovementioned similarity between the CFTC's
regulatory regime for SIDCOs and Rule 17Ad-22(e), the Commission
preliminarily believes the economic costs that ICC will bear as a
result of the proposed amendments will be related to the establishment,
implementation and maintenance of certain policies and procedures under
Rule 17Ad-22(e). We preliminarily estimate these costs will at most
include one-time costs of approximately $667,917 \209\ and annual costs
of approximately $146,249.\210\
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\209\ Calculated as ((Assistant General Counsel for 440 hours at
$440 per hour) + (Chief Compliance Officer for 146 hours at $501 per
hour) + (Chief Financial Officer for 50 hours at $501 per hour) +
(Compliance Attorney for 377 hours at $345 per hour) + (Computer
Operations Department Manager for 344 hours at $416 per hour) +
(Financial Analyst for 70 hours at $259 per hour) + (Senior Business
Analyst for 85 hours at $259 per hour) + (Senior Programmer for 75
hours at $313 dollars per hour) + (Senior Risk Management Specialist
for 114 hours at $338 per hour)) = $667,917.
\210\ Calculated as ((Administrative Assistant for 20 hours at
$76 per hour) + (Compliance Attorney for 279 hours at $345 per hour)
+ (Computer Operations Department Manager for 12 hours at $416 per
hour) + (Risk Management Specialist for 183 hours at $188 per hour)
+ (Senior Business Analyst for 22 hours at $259 per hour) + (Senior
Risk Management Specialist for 10 hours at $338 per hour)) =
$146,249 per year. 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.
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c. Effects on Efficiency, Competition, and Capital Formation
The proposed amendments do not alter the covered clearing agency
status of DTC, FICC, NSCC and OCC. The Commission preliminarily
believes that the proposed amendments will not change the behavior of
market participants associated with these entities and will therefore
not generate any economic benefits or costs for these entities.
Further, even though the proposed amendments do not alter the covered
clearing agency status of ICEEU, the Commission preliminarily believes
that they are likely to generate economic effects for this entity. This
is because ICC clears all security-based transactions that are cleared
by ICEEU. Because the proposed amendments are likely to result in
uniform regulatory requirements for similar risks at both clearing
agencies, they could potentially cause business to shift from ICEEU to
ICC. This could translate into a loss of economies of scale for ICEEU
which, in turn, would result in higher clearing fees and higher
transaction costs in cleared products.
2. Economic Effects Related to Future Registrants
Besides affecting the application of Rule 17Ad-22 to the existing
set of registered clearing agencies, the proposed amendments to Rule
17Ad-22 would, if adopted, affect the regulation of clearing agencies
that register with the Commission in the future. In particular, under
the proposed revision to Rule 17Ad-22(a)(5), any clearing agency that
provides the services of a CCP, CSD, or SSS would be a covered clearing
agency. This means that covered clearing agencies would no longer be
limited to those that have been designated as systemically important by
the FSOC or are involved in activities that meet the definition of
activities with a complex risk profile, nor would clearing agencies for
which the CFTC is the supervisory agency under the Clearing Supervision
Act be excluded.
Because the Commission is unable to predict with any precision the
number of clearing agencies likely to register in the future, much less
the number that are likely to be CCPs, CSDs, or SSSs, it is unable to
quantify the aggregate economic effects that would flow as a result of
the effect of the proposed amendments to Rule 17Ad-22(a) on future
registrants. The Commission notes, however, that it preliminarily
believes that the proposed amendments would generally increase the
likelihood Rule 17Ad-22(e) would apply to a new registrant. Where
possible, the
[[Page 70768]]
Commission has attempted to estimate the benefits and costs it would
expect the proposed amendments to Rule 17Ad-22(a) to have on a single
new registrant.
a. Benefits
The Commission preliminarily believes that a benefit of the
proposed amendments may be that they reduce the costs that potential
entrants into the market for clearance and settlement services could
expect to face to determine whether they would face regulation as
covered clearing agencies. Under the proposed amendments, any
registered clearing agency that expects to provide the services of a
CCP, CSD, or SSS would also expect to be subject to Rule 17Ad-22(e)
without requiring additional information about FSOC designation or a
Commission determination that its activities have a more complex risk
profile. To the extent that this reduces the need for potential
entrants that engage in those services to assess whether they are
likely to be regulated as covered clearing agencies, the proposed
amendments could reduce the costs associated with registration. The
Commission preliminarily believes that a reasonable estimate of cost
reduction a single registrant is likely to experience is $3,382,
attributable to reduced legal expenses associated with determining
whether or not the registrant will also be regulated as a covered
clearing agency.\211\
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\211\ The Commission calculated this reduction in costs as
((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)) = $3,382.
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In the absence of the proposed amendments, without designation by
the FSOC or a Commission determination, a registered clearing agency
would be subject to Rule 17Ad-22(d). The proposed amendments increase
the likelihood that new entrants into the market for clearance and
settlement services would be subject to Rule 17Ad-22(e). Generally, to
the extent that the requirements under Rule 17Ad-22(e) impose higher
risk management standards on potential entrant CCPs, CSDs, and SSSs
than they would impose on themselves while subject to Rule 17Ad-22(d),
the Commission preliminarily believes the proposed amendments to Rule
17Ad-22(a) may improve financial stability. As discussed in the CCA
Standards adopting release, some of this increased stability may come
as a result of lower activity as Rule 17Ad-22(e) causes participants of
these new entrants 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.\212\ Increased
stability may also come as a result of the higher risk management
standards at potential entrants effectively lowering the probability
that either the entrant clearing agencies or their members default.
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\212\ See CCA Standards adopting release, supra note 7, at 380.
---------------------------------------------------------------------------
b. Costs
In the absence of the proposed amendments, without designation by
the FSOC or a Commission determination, a registered clearing agency
would be subject to Rule 17Ad-22(d). To the extent that requirements
under Rule 17Ad-22(e) would impose additional costs on potential
entrants who would otherwise be regulated under Rule 17Ad-22(d), the
Commission believes that the proposed amendments may impose additional
costs on potential entrants.
In the CCA Standards adopting release,\213\ the Commission
estimated specific costs that registered clearing agencies would bear
related to holding sufficient qualifying liquid resources under Rule
17Ad-22(e)(7). These estimates depended on information about the
current operation of registered clearing agencies that are subject to
Rule 17Ad-22(e) and so the Commission is unable to provide precise
estimates of costs associated with these requirements that potential
entrants may bear as a result of the proposed amendments to Rule 17Ad-
22(a). However if a potential entrant resembles the average covered
clearing agency, the Commission would expect compliance with Rule 17Ad-
22(e)(7) to cost the entrant between $24 million and $40 million.\214\
In addition, the Commission estimates the startup compliance costs
associated with policies and procedures for a potential entrant that is
not a CSD to be substantially similar to the costs estimated in the CCA
Standards adopting release, $608,578.\215\ Furthermore, 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 for a potential
entrant, as estimated in the CCA Standards adopting release.\216\
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\213\ See id. at 346.
\214\ To arrive at this range, the Commission divided the
maximum and minimum costs associated with compliance estimated in
the CCA Standards adopting release by 5 covered clearing agencies.
See id.
\215\ The total initial cost for an entrant that is not a CSD
and does engage in activities with a more complex risk profile was
calculated as follows: ((Assistant General Counsel for 428 hours at
$467 per hour) + (Compliance Attorney for 365 hours at $310 per
hour) + (Administrative Assistant for 2 hours at $72 per hour) +
(Computer Operations Department Manager for 300 hours at $361 per
hour) + (Senior Business Analyst for 85 hours at $245 per hour) +
(Senior Risk Management Specialist for 114 hours at $249 per hour) +
(Chief Compliance Office for 102 hours at $441 per hour) + (Senior
Programmer for 53 hours at $282 per hour) + (Chief Financial Officer
for 50 hours at $892 per hour) + (Financial Analyst for 70 hours at
$245 per hour)) = $592,215. Because only Rule 17Ad-22(e)(11) applies
solely to CSDs and many of the other parts of Rule 17Ad-22(e) do not
apply to CSDs, the Commission believes the initial cost of an
entrant that is a CSD would be lower.
\216\ To estimate 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 778.
The Commission estimates the total cost of review for each clearing
agency as follows: ((Board Review for 32 hours at $1000 per hour) +
(Management Review for 16 hours at $461 per hour)) = $39,376. The
Commission requests comment on this estimate.
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c. Effects on Efficiency, Competition, and Capital Formation
The Commission preliminarily believes there are unlikely to be
substantial direct effects on efficiency and capital formation from the
proposed amendments' impact on potential entrants. The Commission
acknowledges, however, that there are potential effects on competition
that may arise from how the proposed amendments would affect the
regulatory treatment of registered clearing agencies and the barriers
to entry into the market for services provided by CCPs, CSDs, and SSSs.
The proposed amendments would likely result in more consistent
regulatory treatment of firms that provide similar services to
securities markets. By imposing Rule 17Ad-22(e) on all CCPs, CSDs, and
SSSs, regardless of FSOC designation or their engagement in activities
with a more complex risk profile, the proposed amendments to Rule 17Ad-
22(a) would mitigate the risk that registered clearing agencies with
similar businesses would be subject to substantially different
regulatory regimes. The Commission preliminarily believes that more
uniform treatment under the proposed amendments may provide a more
level playing field for CCPs, CSDs, and SSSs. By contrast, in the
absence of the proposed amendments, an entrant CCP, CSD, or SSS, that
did not engage in activity with a more complex risk profile could
initially receive a
[[Page 70769]]
competitive advantage by being regulated under 17Ad-22(d) until
becoming a designated clearing agency because they may internalize less
of the risk they pose to the financial system.
On the other hand, as discussed in the CCA Standards adopting
release, costs resulting from regulation under Rule 17Ad-22(e) as a
result of the proposed amendments to Rule 17Ad-22(a) may have the
effect of raising already high barriers to entry.\217\ 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.\218\
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\217\ See CCA Standards adopting release, supra note 7, at 317-
318.
\218\ See, e.g., Clearing Agency Standards adopting release,
supra note 31, at 66263 n.481.
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3. Alternatives
As an alternative to the proposed approach, the Commission
considered alternative definitions of ``covered clearing agency.''
Specifically, the Commission considered more limited definitions that
would not have included CSDs or SSSs along with CCPs within the
definition. An alternative approach that included only CCPs within the
definition of ``covered clearing agency'' would still include ICC in
the set of covered clearing agencies. The Commission preliminarily
believes that such an approach compares unfavorably to the proposed
approach because, as discussed in Parts II.A.1 and 2, CSDs perform a
critical role in the U.S. securities settlement markets by helping to
reduce risk and by providing transparency to the markets and, hence, it
is appropriate to apply enhanced requirements under Rule 17Ad-22(e) to
CSDs.
Similarly, the Commission could have proposed to exclude SSSs from
the definition of covered clearing agency. This would have no effect on
the set of registered entities that would be covered clearing agencies
and no effect on the immediate economic effects of the proposed
amendments. However, this could potentially mean that an entrant
clearing agency that solely performs the functions of an SSS would be
subject only to Rule 17Ad-22(d). As above, the Commission preliminarily
believes that it is appropriate to apply enhanced requirements under
Rule 17Ad-22(e) to SSSs because of the critical role they play in the
national system for clearance and settlement.
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.'' \219\ 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.\220\
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\219\ See 44 U.S.C. 3501 et seq.; 44 U.S.C. 3502(3).
\220\ See 44 U.S.C. 3507(a)(1)(D); see also 5 CFR
1320.5(a)(1)(iv).
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Certain provisions of Rule 17Ad-22(e) impose 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 proposing to
revise the respondents under Rule 17Ad-22(e) to account for the
proposed amendment to the definition of ``covered clearing agency'' and
related amendments, the Commission will use the same title and control
number: ``Clearing Agency Standards for Operation and Governance,'' OMB
Control No. 3235-0695.
A. Summary of Collection of Information and Use of Information \221\
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\221\ In addition to the discussion of the purposes of the
collections of information set forth in Part IV.A, 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.
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1. Rule 17Ad-22(e)(1)
Rule 17Ad-22(e)(1) requires 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.\222\
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\222\ See 17 CFR 240.17Ad-22(e)(1); CCA Standards adopting
release, supra note 7, at 463.
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The purpose of this collection of information 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)
Rules 17Ad-22(e)(2)(i) through (iii) require a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to provide for governance
arrangements that are clear and transparent, clearly prioritize the
safety and efficiency of the covered clearing agency, and support the
public interest requirements of Section 17A of the Exchange Act, and
the objectives of owners and participants. Rules 17Ad-22(e)(2)(iv) and
(v) require a covered clearing agency to establish, implement, maintain
and enforce written policies and procedures reasonably designed to
establish that the board of directors and senior management have
appropriate experience and skills to discharge their duties and
responsibilities and to specify clear and direct lines of
responsibility. Rule 17Ad-22(e)(2)(vi) requires a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to consider the interests of
participants' customers, securities issuers and holders, and other
relevant stakeholders of the clearing agency.\223\
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\223\ See 17 CFR 240.17Ad-22(e)(2); CCA Standards adopting
release, supra note 7, at 463.
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The purpose of this collection of information 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 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)
Rule 17Ad-22(e)(3) requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain a sound risk management
[[Page 70770]]
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. Rule 17Ad-
22(e)(3)(i) requires 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. Rule 17Ad-22(e)(3)(ii) requires 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. Rule 17Ad-
22(e)(iii) requires 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. Rule 17Ad-22(e)(3)(iv) requires 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 independent audit
committee of the board of directors, respectively. Rule 17A-22(e)(3)(v)
requires a covered clearing agency to establish, implement, maintain
and enforce written policies and procedures reasonably designed to
provide for an independent audit committee.\224\
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\224\ See 17 CFR 240.17Ad-22(e)(3); CCA Standards adopting
release, supra note 7, at 464.
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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)
Rule 17Ad-22(e)(4) requires 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.
Rule 17Ad-22(e)(4)(i) requires 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. Rule 17Ad-22(e)(4)(ii) requires 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 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. Meanwhile, Rule 17Ad-
22(e)(4)(iii) requires a covered clearing agency that is not subject to
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 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. Rule 17Ad-22(e)(4)(iv) requires a
covered clearing agency to establish, implement, maintain and enforce
written policies and procedures reasonably designed to include
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 Rules 17Ad-22(e)(4)(i) through (iii), as applicable.
Rule 17Ad-22(e)(4)(v) requires 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)(ii) and (iii), as applicable, in combined
or separately maintained clearing or guaranty funds.
Rule 17Ad-22(e)(4)(vi) requires 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 Rules 17Ad-22(e)(4)(i) through (iii), as applicable,
by conducting stress testing of its total financial resources at least
once each day using standard predetermined parameters and assumptions.
Rule 17Ad-22(e)(4)(vi) also requires 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, or 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.
Rule 17Ad-22(e)(4)(vi) also requires 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 Rules 17Ad-22(e)(4)(i) through (iii), as
applicable.
Rule 17Ad-22(e)(4)(vii) requires a covered clearing agency to
establish, implement, maintain and enforce
[[Page 70771]]
written policies and procedures reasonably designed to require 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 policies and procedures.
Rule 17Ad-22(e)(4)(viii) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to address 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.
Rule 17Ad-22(e)(4)(ix) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to describe 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.\225\
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\225\ See 17 CFR 240.17Ad-22(e)(4); CCA Standards adopting
release, supra note 7, at 464-466.
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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)
Rule 17Ad-22(e)(5) requires 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) requires 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.\226\
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\226\ See 17 CFR 240.17Ad-22(e)(5); CCA Standards adopting
release, supra note 7, at 466-467.
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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)
Rule 17Ad-22(e)(6) requires 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. Rule 17Ad-22(e)(6)(i)
requires 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. Rule 17Ad-22(e)(6)(ii) requires 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. Rule 17Ad-
22(e)(6)(iii) requires 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. Rule 17Ad-22(e)(6)(iv) requires 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 uses procedures and sound valuation models for
addressing circumstances in which pricing data are not readily
available or reliable. Rule 17Ad-22(e)(6)(v) requires 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.
Rule 17Ad-22(e)(6)(vi) requires 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. Rule 17Ad-22(e)(6)(vi) also requires 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 model at least once each day using
standard predetermined parameters and assumptions. Rule 17Ad-
22(e)(6)(vi) also requires 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 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. Rule 17Ad-22(e)(6)(vi) also requires 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 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, and when the size or concentration of positions held by the
covered clearing agency's participants increases or decreases
significantly. Rule 17Ad-22(e)(6)(vi) also requires 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
[[Page 70772]]
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.
Finally, Rule 17Ad-22(e)(6)(vii) requires a covered clearing agency
that provides CCP services to establish, implement, maintain and
enforce written policies and procedures reasonably designed to 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 Rule 17Ad-22(e)(3).\227\
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\227\ See 17 CFR 240.17Ad-22(e)(6); CCA Standards adopting
release, supra note 7, at 467-468.
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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)
Rule 17Ad-22(e)(7) requires 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.
Rule 17Ad-22(e)(7)(i) requires 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.
Rule 17Ad-22(e)(7)(ii) requires 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.
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, 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.
Rule 17Ad-22(e)(7)(iv) requires 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.
Rule 17Ad-22(e)(7)(v) requires 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.
Rule 17Ad-22(e)(7)(vi)(A) through (C) requires 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 Rule
17Ad-22(e)(7)(i) by (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 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. Rule 17Ad-22(e)(7)(vi)(D)
also requires 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 Rules 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.
Rule 17Ad-22(e)(7)(vii) requires 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 model validation of its liquidity risk models.
Rule 17Ad-22(e)(7)(viii) requires 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.
Rule 17Ad-22(e)(7)(ix) requires 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.
Rule 17Ad-22(e)(7)(x) requires 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
[[Page 70773]]
clearing agency involved in activities with a more complex risk
profile.\228\
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\228\ See 17 CFR 240.17Ad-22(e)(7); CCA Standards adopting
release, supra note 7, at 468-471.
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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. It 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. It is also to help ensure that a covered clearing agency manages
the risks posed by its liquidity providers.
8. Rule 17Ad-22(e)(8)
Rule 17Ad-22(e)(8) requires 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 to
be no later than the end of the day on which the payment or obligation
is due and, where necessary or appropriate, either intraday or in real
time.\229\
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\229\ See 17 CFR 240.17Ad-22(e)(8); CCA Standards adopting
release, supra note 7, at 471.
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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)
Rule 17Ad-22(e)(9) requires 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.\230\
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\230\ See 17 CFR 240.17Ad-22(e)(9); CCA Standards adopting
release, supra note 7, at 471.
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The purpose of this information collection is to promote
reliability in a covered clearing agency's settlement operations.
10. Rule 17Ad-22(e)(10)
Rule 17Ad-22(e)(10) requires 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.\231\
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\231\ See 17 CFR 240.17Ad-22(e)(10); CCA Standards adopting
release, supra note 7, at 472.
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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)
Rule 17Ad-22(e)(11)(i) requires 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. Rule 17Ad-22(e)(11)(ii) requires 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. Rule 17Ad-
22(e)(11)(iii) requires 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.\232\
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\232\ See 17 CFR 240.17Ad-22(e)(11); CCA Standards adopting
release, supra note 7, at 472.
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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)
Rule 17Ad-22(e)(12) requires 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.\233\
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\233\ See 17 CFR 240.17Ad-22(e)(12); CCA Standards adopting
release, supra note 7, at 472.
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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)
Rule 17Ad-22(e)(13) requires a covered clearing agencies providing
CCP services 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 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.\234\
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\234\ See 17 CFR 240.17Ad-22(e)(13); CCA Standards adopting
release, supra note 7, at 472-473.
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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)
Rule 17Ad-22(e)(14) requires 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.\235\
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\235\ See 17 CFR 240.17Ad-22(e)(14); CCA Standards adopting
release, supra note 7, at 473-474.
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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)
Rule 17Ad-22(e)(15) requires a covered clearing agency to
establish, implement, maintain and enforce
[[Page 70774]]
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. Rule 17Ad-
22(e)(15)(i) requires 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. Rule 17Ad-22(e)(15)(ii) requires 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). Rule 17Ad-
22(e)(15)(ii) also requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for monitoring its business operations
and reducing the likelihood of losses. Rule 17Ad-22(e)(15)(iii)
requires 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.\236\
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\236\ See 17 CFR 240.17Ad-22(e)(15); CCA Standards adopting
release, supra note 7, at 474.
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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)
Rule 17Ad-22(e)(16) requires 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. Rule 17Ad-22(e)(16) also requires 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.\237\
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\237\ See 17 CFR 240.17Ad-22(e)(16); CCA Standards adopting
release, supra note 7, at 474.
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17. Rule 17Ad-22(e)(17)
Rule 17Ad-22(e)(17) requires 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. Rule 17Ad-22(e)(17)(i) requires 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. Rule 17Ad-22(e)(17)(ii) requires 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, Rule 17Ad-22(e)(17)(iii) requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to provide for a business
continuity plan that addresses events posing a significant risk of
disrupting operations.\238\
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\238\ See 17 CFR 240.17Ad-22(e)(17); CCA Standards adopting
release, supra note 7, at 474.
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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)
Rule 17Ad-22(e)(18) requires 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. Rule 17Ad-22(e)(18) also requires 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.\239\
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\239\ See 17 CFR 240.17Ad-22(e)(18); CCA Standards adopting
release, supra note 7, at 474.
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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)
Rule 17Ad-22(e)(19) requires 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. In addition, Rule 17Ad-
22(e)(19) also requires 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.\240\
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\240\ See 17 CFR 240.17Ad-22(e)(19); CCA Standards adopting
release, supra note 7, at 474.
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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)
Rule 17Ad-22(e)(20) requires 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.\241\
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\241\ See 17 CFR 240.17Ad-22(e)(20); CCA Standards adopting
release, supra note 7, at 475.
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[[Page 70775]]
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)
Rule 17Ad-22(e)(21) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to require the covered clearing agency
to be efficient and effective in meeting the requirements of its
participants and the markets it serves. Additionally, the rule requires
a covered clearing agency to establish, implement, maintain and enforce
written policies and procedures reasonably designed to have the
management of a covered clearing agency regularly review the efficiency
and effectiveness of the covered clearing agency's (i) clearing and
settlement arrangement; (ii) operating structure, including risk
management policies, procedures, and systems; (iii) scope of products
cleared or settled; and (iv) use of technology and communications
procedures.\242\
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\242\ See 17 CFR 240.17Ad-22(e)(21); CCA Standards adopting
release, supra note 7, at 475.
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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)
Rule 17Ad-22(e)(22) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to use, or at a minimum, accommodate,
relevant internationally accepted communication procedures and
standards in order to facilitate efficient payment, clearing, and
settlement.\243\
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\243\ See 17 CFR 240.17Ad-22(e)(22); CCA Standards adopting
release, supra note 7, at 475.
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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)
Rule 17Ad-22(e)(23) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed 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) requires 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
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, 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 Rules 17Ad-22(e)(1) through (23) 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) also requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to ensure the comprehensive
public disclosure required under 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.
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 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, of the
financial and qualifying liquid resources necessary to meet the
requirements, as applicable, of Rules 17Ad-22(b)(3), (e)(4), and
(e)(7), and sufficient documentation to explain the methodology it uses
to compute such financial resources or qualifying liquid resources
requirement.
The purpose of the collection of information is to enable the
Commission to monitor the financial resources of registered clearing
agencies that provide CCP services.
B. Respondents
The requirements in Rule 17Ad-22(e) impose a PRA burden on covered
clearing agencies. Under the adopted definition of ``covered clearing
agency,'' Rule 17Ad-22(e) applies to five registered clearing agencies,
including four registered clearing agencies that provide CCP services
and one registered clearing agency that provides CSD and SSS services.
In the CCA Standards adopting release, the Commission estimated that
two additional entities might seek to register with the Commission.
Accordingly, the Commission estimated that the 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 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.
Under the proposed amendment to the definition of ``covered
clearing agency'' described above, Rule 17Ad-22(e) would instead apply
to six registered clearing agencies, including five registered clearing
agencies that provide CCP services and one registered clearing agency
that provides CSD and SSS services.\244\ The Commission
[[Page 70776]]
continues to believe that two additional entities might seek to
register with the Commission. Accordingly, the Commission preliminarily
estimates that, under the proposed amendment to the definition of
``covered clearing agency'' described above, a majority of the
requirements under Rule 17Ad-22(e) would have eight respondents, of
which (i) seven would be CCPs and one would be a CSD and (ii) two would
be security-based swap clearing agencies. The Commission also notes
that Rule 17Ad-22(e)(6) would now have seven respondents because it
only applies to CCPs, Rule 17Ad-22(e)(11) would continue to only have
one respondent because it only applies to CSDs, and Rule 17Ad-22(e)(14)
would continue to only have two respondents because it only applies to
security-based swap clearing agencies.
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\244\ See supra Part III.B and accompanying text. The additional
registered clearing agency that provides CCP services and that would
be subject to Rule 17Ad-22(e) under the proposed amendment to the
definition of ``covered clearing agency'' is currently a registered
clearing agency subject to Rule 17Ad-22(d).
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The PRA analysis for seven of the eight respondents appears in the
CCA Standards adopting release. Below, the Commission provides a PRA
analysis for the one remaining respondent that would be subject to Rule
17Ad-22(e) under the proposed amendment to the definition of ``covered
clearing agency,'' therefore reflecting the incremental annual
reporting and recordkeeping burdens resulting from the proposed
amendment to the definition of ``covered clearing agency.'' In
addition, because the one remaining respondent provides CCP services
and does not provide CSD services, the analysis does not include Rule
17Ad-22(e)(11).
C. Total Annual Reporting and Recordkeeping Burdens
As described in the CCA Standards adopting release,\245\ the
Commission continues to believe that 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.
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\245\ See CCA Standards adopting release, supra note 7, at 416-
418.
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Consistent with the CCA Standards adopting release, 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.
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)
Rule 17Ad-22(e)(1) contains substantially similar provisions to
Rule 17Ad-22(d)(1).\246\ 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 would include 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),\247\ the Commission preliminarily estimates that a
respondent clearing agency would incur an aggregate one-time burden of
approximately 8 hours to review and revise existing policies and
procedures.\248\
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\246\ See 17 CFR 240.17Ad-22(d)(1), (e)(1).
\247\ See CCA Standards adopting release, supra note 7, at 418-
419; Clearing Agency Standards adopting release, supra note 31, at
66260.
\248\ This figure was calculated as follows: ((Assistant General
Counsel for 2 hours) + (Compliance Attorney for 6 hours)) = 8 hours
x 1 respondent clearing agency = 8 hours.
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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,\249\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(1) would impose an aggregate annual burden on a respondent
clearing agency of 3 hours.\250\
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\249\ See CCA Standards adopting release, supra note 7, at 419;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\250\ This figure was calculated as follows: (Compliance
Attorney for 3 hours) x 1 respondent clearing agency = 3 hours.
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2. Rule 17Ad-22(e)(2)
Rule 17Ad-22(e)(2) contains similar provisions to Rule 17Ad-
22(d)(8) but also adds additional requirements that do not appear in
Rule 17Ad-22(d).\251\ 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
[[Page 70777]]
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),\252\ the Commission preliminarily estimates
that a respondent clearing agency would incur an aggregate one-time
burden of approximately 22 hours to review and revise existing policies
and procedures and to create new policies and procedures, as
necessary.\253\
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\251\ See 17 CFR 204.17Ad-22(d)(8), (e)(2).
\252\ See CCA Standards adopting release, supra note 7, at 420;
Clearing Agency Standards adopting release, supra note 31, at 66260.
\253\ This figure was calculated as follows: ((Assistant General
Counsel for 24 hours) + (Compliance Attorney for 10 hours)) = 22
hours x 1 respondent clearing agency = 22 hours.
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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,\254\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(2) would impose an aggregate annual burden on a respondent
clearing agency of 4 hours.\255\
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\254\ See CCA Standards adopting release, supra note 7, at 421;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\255\ This figure was calculated as follows: (Compliance
Attorney for 4 hours) x 1 respondent clearing agency = 4 hours.
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3. Rule 17Ad-22(e)(3)
While Rule 17Ad-22(d) requires registered clearing agencies to have
policies and procedures to manage certain risks,\256\ 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 preliminarily estimates that a respondent clearing agency
would incur an aggregate one-time burden of 57 hours to review and
revise existing policies and procedures and to create new policies and
procedures, as necessary.\257\
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\256\ See 17 CFR 240.17Ad-22(d), (e)(3).
\257\ 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 1 respondent clearing agency = 57
hours.
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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,\258\ the Commission preliminarily estimates
that the ongoing activities required by Rule 17Ad-22(e)(3) would impose
an aggregate annual burden on a respondent clearing agency of 49
hours.\259\ 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 includes a specific requirement that policies and procedures
for comprehensive risk management include review on a specified
periodic basis and approval by the board of directors annually.
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\258\ See CCA Standards adopting release, supra note 7, at 422-
423; Clearing Agency Standards adopting release, supra note 31, at
66260-63.
\259\ 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 1 respondent clearing agency = 49 hours.
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4. Rule 17Ad-22(e)(4)
The Commission has previously estimated 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.\260\ 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 estimates that a respondent clearing agency
would incur an aggregate one-time burden of 200 hours to review and
revise existing policies and procedures and to create new policies and
procedures, as necessary.\261\
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\260\ See Clearing Agency Standards adopting release, supra note
7, at 423.
\261\ 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 1 respondent
clearing agency = 200 hours.
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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,\262\
the Commission preliminarily estimates that the ongoing activities
required by Rule 17Ad-22(e)(4) would impose an aggregate annual burden
on a respondent clearing agency of 60 hours.\263\
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\262\ See CCA Standards adopting release, supra note 7, at 424-
425; Clearing Agency Standards adopting release, supra note 31, at
66260-63.
\263\ 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 1 respondent clearing agency = 60 hours.
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5. Rule 17Ad-22(e)(5)
Rule 17Ad-22(e)(5) contains similar provisions to Rule 17Ad-
22(d)(3).\264\ 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),\265\
the Commission preliminarily estimates that a respondent clearing
agency would incur an aggregate one-time burden of approximately 42
hours to review and review existing policies and procedures
[[Page 70778]]
and to create new policies and procedures, as necessary.\266\
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\264\ See 17 CFR 240.17Ad-22(d)(3), (e)(5).
\265\ See CCA Standards adopting release, supra note 7, at 425-
426; Clearing Agency Standards adopting release, supra note 31, at
66260-63.
\266\ 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 1 respondent clearing agency = 42
hours.
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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,\267\ the Commission preliminarily estimates
that the ongoing activities required by Rule 17Ad-22(e)(5) would impose
an aggregate annual burden on a respondent clearing agency of 36
hours.\268\ 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.
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\267\ See CCA Standards adopting release, supra note 7, at 426;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\268\ This figure was calculated as follows: ((Compliance
Attorney for 6 hours) + (Risk Management Specialist for 30 hours)) =
36 hours x 1 respondent clearing agency = 36 hours.
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6. Rule 17Ad-22(e)(6)
The Commission has previously estimated 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.\269\ 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 estimates that a respondent clearing agency would incur
an aggregate one-time burden of 180 hours to review and revise existing
policies and procedures and to create new policies and procedures, as
necessary.\270\
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\269\ See CCA Standards adopting release, supra note 7, at 427.
\270\ 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 1 respondent
clearing agency = 180 hours.
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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,\271\ the Commission preliminarily estimates that the ongoing
activities required by Rule 17Ad-22(e)(6) would impose an aggregate
annual burden on a respondent clearing agency of 60 hours.\272\
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\271\ See CCA Standards adopting release, supra note 7, at 427-
428; Clearing Agency Standards adopting release, supra note 31, at
66260-63.
\272\ 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 1 respondent clearing agency = 60 hours.
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7. Rule 17Ad-22(e)(7)
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.\273\ 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 preliminarily estimates that a respondent
clearing agency would incur an aggregate one-time burden of 330 hours
to review and revise existing policies and procedures.\274\
---------------------------------------------------------------------------
\273\ See CCA Standards adopting release, supra note 7, at 428.
\274\ 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 1 respondent
clearing agency = 330 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 Rule 17Ad-22,\275\ the Commission preliminarily estimates
that the ongoing activities required by Rule 17Ad-22(e)(7) would impose
an aggregate annual burden on a respondent clearing agency of 128
hours.\276\
---------------------------------------------------------------------------
\275\ See CCA Standards adopting release, supra note 7, at 429;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\276\ 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 1 respondent clearing agency = 128 hours.
---------------------------------------------------------------------------
8. Rule 17Ad-22(e)(8)
Rule 17Ad-22(e)(8) contains substantially similar provisions to
Rule 17Ad-22(d)(12).\277\ 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),\278\ the Commission preliminarily estimates that a
respondent clearing agency would incur an aggregate one-time burden of
approximately 12 hours to review and revise existing policies and
procedures.\279\
---------------------------------------------------------------------------
\277\ See 17 CFR 240.17Ad-22(d)(12), (e)(8).
\278\ See Clearing Agency Standards adopting release, supra note
31, at 66260.
\279\ 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 1 respondent clearing agency = 12 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 Rule 17Ad-22,\280\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(8) would impose an aggregate annual burden on
[[Page 70779]]
a respondent clearing agency of approximately 5 hours.\281\
---------------------------------------------------------------------------
\280\ See CCA Standards adopting release, supra note 7, at 429-
430; Clearing Agency Standards adopting release, supra note 31, at
66260-63.
\281\ This figure was calculated as follows: (Compliance
Attorney for 5 hours) x 1 respondent clearing agency = 5 hours.
---------------------------------------------------------------------------
9. Rule 17Ad-22(e)(9)
Rule 17Ad-22(e)(9) contains substantially similar provisions to
Rule 17Ad-22(d)(5).\282\ 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),\283\ the Commission preliminarily estimates that a
respondent clearing agency would incur an aggregate one-time burden of
approximately 12 hours to review and revise existing policies and
procedures.\284\
---------------------------------------------------------------------------
\282\ See 17 CFR 240.17Ad-22(d)(5), (e)(9).
\283\ See CCA Standards adopting release, supra note 7, at 431;
Clearing Agency Standards adopting release, supra note 31, at 66260.
\284\ 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 1 respondent clearing agency = 12 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 Rule 17Ad-22,\285\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(9) would impose an aggregate annual burden on a respondent
clearing agency of approximately 5 hours.\286\
---------------------------------------------------------------------------
\285\ See CCA Standards adopting release, supra note 7, at 431;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\286\ This figure was calculated as follows: (Compliance
Attorney for 5 hours) x 1 respondent clearing agency = 5 hours.
---------------------------------------------------------------------------
10. Rule 17Ad-22(e)(10)
Rule 17Ad-22(e)(10) contains substantially similar provisions to
Rule 17Ad-22(d)(15).\287\ 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)(15),\288\ the Commission preliminarily estimates that a
respondent clearing agency would incur an aggregate one-time burden of
approximately 12 hours to review and revise existing policies and
procedures.\289\
---------------------------------------------------------------------------
\287\ See 17 CFR 240.17Ad-22(d)(15), (e)(10).
\288\ See CCA Standards adopting release, supra note 7, at 432;
Clearing Agency Standards adopting release, supra note 31, at 66260.
\289\ 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 1 respondent clearing agency = 12 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 Rule 17Ad-22,\290\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(10) would impose an aggregate annual burden on a respondent
clearing agency of approximately 5 hours.\291\
---------------------------------------------------------------------------
\290\ See CCA Standards adopting release, supra note 7, at 432-
433; Clearing Agency Standards adopting release, supra note 31, at
66260-63.
\291\ This figure was calculated as follows: (Compliance
Attorney for 5 hours) x 1 respondent clearing agency = 5 hours.
---------------------------------------------------------------------------
11. Rule 17Ad-22(e)(12)
Rule 17Ad-22(e)(12) contains substantially similar provisions to
Rule 17Ad-22(d)(13).\292\ 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),\293\ the Commission preliminarily estimates that a
respondent clearing agency would incur an aggregate one-time burden of
approximately 12 hours to review and revise existing policies and
procedures.\294\
---------------------------------------------------------------------------
\292\ See 17 CFR 240.17Ad-22(d)(13), (e)(12).
\293\ See CCA Standards adopting release, supra note 7, at 434-
435; Clearing Agency Standards adopting release, supra note 31, at
66260.
\294\ 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 1 respondent clearing agency = 12 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 Rule 17Ad-22,\295\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(12) would impose an aggregate annual burden on a respondent
clearing agency of approximately 5 hours.\296\
---------------------------------------------------------------------------
\295\ See CCA Standards adopting release, supra note 7, at 435;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\296\ This figure was calculated as follows: (Compliance
Attorney for 5 hours) x 1 respondent clearing agency = 5 hours.
---------------------------------------------------------------------------
12. Rule 17Ad-22(e)(13)
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.\297\ 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 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),\298\ the Commission preliminarily believes that a respondent
clearing agency would incur an aggregate one-time burden of
approximately 60 hours to review and revise existing policies and
procedures
[[Page 70780]]
and to create new policies and procedures, as necessary.\299\
---------------------------------------------------------------------------
\297\ See 17 CFT 240.17Ad-22(d)(11), (e)(13).
\298\ See CCA Standards adopting release, supra note 7, at 436-
437; Clearing Agency Standards adopting release, supra note 31, at
66260-63.
\299\ 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 1 respondent clearing agency = 60 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,\300\
the Commission preliminarily estimates that the ongoing activities
required by Rule 17Ad-22(e)(13) would impose an aggregate annual burden
on a respondent clearing agency of approximately 9 hours.\301\
---------------------------------------------------------------------------
\300\ See CCA Standards adopting release, supra note 7, at 437;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\301\ This figure was calculated as follows: (Compliance
Attorney for 9 hours) x 1 respondent clearing agency = 9 hours.
---------------------------------------------------------------------------
13. Rule 17Ad-22(e)(14)
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.\302\ 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 36 hours to review and revise existing policies and
procedures.\303\
---------------------------------------------------------------------------
\302\ See, e.g., 77 FR 6336 (Feb. 7, 2012) (CFTC adopting rules
imposing LSOC on DCOs for cleared swaps). Because the respondent
clearing agency is subject to the CFTC's segregation and portability
requirements for cleared swaps, the Commission has previously
expected that the burden imposed by Rule 17Ad-22(e)(14) will be
limited. See CCA Standards adopting release, supra note 7, at 438.
\303\ 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 1 respondent clearing agency that
provides CCP services = 36 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 Rule 17Ad-22,\304\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(14) would impose an aggregate annual burden on a respondent
clearing agency of approximately 6 hours.\305\
---------------------------------------------------------------------------
\304\ See CCA Standards adopting release, supra note 7, at 438-
439; Clearing Agency Standards adopting release, supra note 31, at
66260-63.
\305\ This figure was calculated as follows: (Compliance
Attorney for 6 hours) x 1 respondent clearing agency = 6 hours.
---------------------------------------------------------------------------
14. Rule 17Ad-22(e)(15)
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.\306\ The Commission preliminarily estimates that
Rule 17Ad-22(e)(15) would impose an aggregate one-time burden on a
respondent clearing agency of 210 hours to review and revise existing
policies and procedures and to create new policies and procedures, as
necessary.\307\
---------------------------------------------------------------------------
\306\ See 17 CFR 240.17Ad-22(d), (e)(15).
\307\ 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 1 respondent clearing
agency = 210 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 Rule 17Ad-22,\308\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(15) would impose an aggregate annual burden on a respondent
clearing agency of 48 hours.\309\
---------------------------------------------------------------------------
\308\ See CCA Standards adopting release, supra note 7, at 439-
440; Clearing Agency Standards adopting release, supra note 31, at
66260-63.
\309\ 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 1 respondent
clearing agency = 48 hours.
---------------------------------------------------------------------------
15. Rule 17Ad-22(e)(16)
Rule 17Ad-22(e)(16) contains substantially similar provisions to
Rule 17Ad-22(d)(3).\310\ 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),\311\ the Commission preliminarily estimates that a
respondent clearing agency would incur an aggregate one-time burden of
approximately 20 hours to review and revise existing policies and
procedures.\312\
---------------------------------------------------------------------------
\310\ See 17 CFR 240.17Ad-22(d)(3), (e)(16).
\311\ See CCA Standards adopting release, supra note 7, at 440;
Clearing Agency Standards adopting release, supra note 31, at 66260.
\312\ 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 1 respondent clearing agency = 20 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 Rule 17Ad-22,\313\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(16) would impose an aggregate annual burden on a respondent
clearing agency of 6 hours.\314\
---------------------------------------------------------------------------
\313\ See CCA Standards adopting release, supra note 7, at 441;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\314\ This figure was calculated as follows: (Compliance
Attorney for 6 hours) x 1 respondent clearing agency = 6 hours.
---------------------------------------------------------------------------
16. Rule 17Ad-22(e)(17)
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.\315\ The Commission therefore expects that a respondent
clearing agency may have written rules, policies, and procedures
[[Page 70781]]
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),\316\ the Commission preliminarily estimates that a respondent
clearing agency would incur an aggregate one-time burden of 28 hours to
review and revise existing policies and procedures and to create new
policies and procedures, as necessary.\317\
---------------------------------------------------------------------------
\315\ See 17 CFR 240.17Ad-22(d)(4), (e)(17).
\316\ See CCA Standards adopting release, supra note 7, at 442;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\317\ 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 1 respondent clearing agency = 28 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,\318\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(17) would impose an aggregate annual burden on a respondent
clearing agency of 6 hours.\319\
---------------------------------------------------------------------------
\318\ See CCA Standards adopting release, supra note 7, at 442;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\319\ This figure was calculated as follows: (Compliance
Attorney for 6 hours) x 1 respondent clearing agency = 6 hours.
---------------------------------------------------------------------------
17. Rule 17Ad-22(e)(18)
Rule 17Ad-22(e)(18) contains similar provisions to Rules 17Ad-
22(b)(5) through (7) and (d)(2).\320\ 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),\321\ the Commission preliminarily
estimates that a respondent clearing agency would incur an aggregate
one-time burden of 44 hours to review and revise existing policies and
procedures and to create new policies and procedures, as
necessary.\322\
---------------------------------------------------------------------------
\320\ See 17 CFR 240.17Ad-22(b)(5)-(7), (d)(2), (e)(18).
\321\ See CCA Standards adopting release, supra note 7, at 443;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\322\ 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 1 respondent clearing agency = 44 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 Rule 17Ad-22,\323\ the Commission
preliminarily estimates that the ongoing activities required by the
rule would impose an aggregate annual burden on a respondent clearing
agency of 7 hours.\324\
---------------------------------------------------------------------------
\323\ See CCA Standards adopting release, supra note 7, at 443-
444; Clearing Agency Standards adopting release, supra note 31, at
66260-63.
\324\ This figure was calculated as follows: (Compliance
Attorney for 7 hours) x 1 respondent clearing agency = 7 hours.
---------------------------------------------------------------------------
18. Rule 17Ad-22(e)(19)
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).\325\ The Commission estimates that Rule 17Ad-22(e)(19)
imposes an aggregate one-time burden on respondent clearing agencies of
44 hours to review and revise existing policies and procedures and to
create new policies and procedures, as necessary.\326\
---------------------------------------------------------------------------
\325\ See 17 CFR 240.17Ad-22(d), (e)(19).
\326\ 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 1 respondent clearing
agency = 44 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,\327\ the Commission
preliminarily estimates that the ongoing activities required by the
rule would impose an annual aggregate burden on a respondent clearing
agency of 7 hours.\328\
---------------------------------------------------------------------------
\327\ See CCA Standards adopting release, supra note 7, at 444-
445; Clearing Agency Standards adopting release, supra note 31, at
66260.
\328\ This figure was calculated as follows: (Compliance
Attorney for 7 hours) x 1 respondent clearing agency = 7 hours.
---------------------------------------------------------------------------
19. Rule 17Ad-22(e)(20)
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).\329\ 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),\330\ the Commission preliminarily
believes that a respondent clearing agency would incur an aggregate
one-time burden of approximately 44 hours to review and revise existing
policies and procedures.\331\
---------------------------------------------------------------------------
\329\ See17 CFR 240.17Ad-22(d)(7), (e)(20).
\330\ See CCA Standards adopting release, supra note 7, at 445;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\331\ 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 1 respondent clearing agency = 44 hours.
---------------------------------------------------------------------------
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,\332\ the Commission
preliminarily estimates that the ongoing activities required by the
rule would impose an aggregate annual burden on a respondent clearing
agency of 7 hours.\333\
---------------------------------------------------------------------------
\332\ See CCA Standards adopting release, supra note 7, at 446;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\333\ This figure was calculated as follows: (Compliance
Attorney for 7 hours) x 1 respondent clearing agency = 7 hours.
---------------------------------------------------------------------------
[[Page 70782]]
20. Rule 17Ad-22(e)(21)
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).\334\ 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),\335\ the Commission preliminarily estimates that a respondent
clearing agency would incur an aggregate one-time burden of
approximately 32 hours to review and revise existing policies and
procedures.\336\
---------------------------------------------------------------------------
\334\ See 17 CFR 240.17Ad-22(d)(6), (e)(21).
\335\ See CCA Standards adopting release, supra note 7, at 447;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\336\ 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 1 respondent clearing agency = 32 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 Rule 17Ad-22,\337\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(21) would impose an aggregate annual burden on a respondent
clearing agency of 11 hours.\338\
---------------------------------------------------------------------------
\337\ See CCA Standards adopting release, supra note 7, at 447;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\338\ 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 1 respondent
clearing agency = 11 hours.
---------------------------------------------------------------------------
21. Rule 17Ad-22(e)(22)
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.\339\ Accordingly, the Commission preliminarily estimates that
Rule 17Ad-22(e)(22) would impose an aggregate one-time burden on a
respondent clearing agency of 24 hours to review and revise existing
policies and procedures.\340\
---------------------------------------------------------------------------
\339\ See 17 CFR 240.17Ad-22(d), (e)(22).
\340\ 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 1 respondent clearing agency = 24 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 ongoing monitoring and
compliance burdens with respect to Rule 17Ad-22,\341\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(22) would impose an aggregate annual burden on a respondent
clearing agency of 5 hours.\342\
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\341\ See CCA Standards adopting release, supra note 7, at 448;
Clearing Agency Standards adopting release, supra note 31, at 66260.
\342\ This figure was calculated as follows: (Compliance
Attorney for 5 hours) x 1 respondent clearing agency = 5 hours.
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22. Rule 17Ad-22(e)(23)
Rule 17Ad-22(e)(23) contains similar requirements to Rule 17Ad-
22(d)(9) but also imposes substantial new requirements.\343\ 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),\344\ the
Commission preliminarily estimates that a respondent clearing agency
would incur an aggregate one-time burden of 138 hours to review and
revise existing policies and procedures and to create policies and
procedures, as necessary.\345\
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\343\ See 17 CFR 240.17Ad-22(d)(9), (e)(23).
\344\ See CCA Standards adopting release, supra note 7, at 449;
Clearing Agency Standards adopting release, supra note 31, at 66260-
63.
\345\ 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 1 respondent clearing
agency = 138 hours.
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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,\346\ the Commission
preliminarily estimates that the ongoing activities required by Rule
17Ad-22(e)(23) would impose an aggregate annual burden on a respondent
clearing agency of 34 hours.\347\
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\346\ See CCA Standards adopting release, supra note 7, at 449-
450; Clearing Agency Standards adopting release, supra note 31, at
66260-63.
\347\ This figure was calculated as follows: (Compliance
Attorney for 34 hours) x 1 respondent clearing agency = 34 hours.
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23. Total Burden for Rule 17Ad-22(e)
The Commission preliminarily estimates that the aggregate initial
burden for a new respondent clearing agency under Rule 17Ad-22(e) would
be 1,567 hours. The aggregate ongoing burden for a new respondent
clearing agency under Rule 17Ad-22(e) would be 502 hours. Further, the
Commission preliminarily estimates that, under Rule 17Ad-22(e) and the
proposed amendment to the definition of ``covered clearing agency,''
all respondent clearing agencies would incur an aggregate initial
burden of 12,343 hours under Rule 17Ad-22(e) and an aggregate ongoing
burden of 4,039 hours.
24. Total Burden for Rule 17Ad-22(c)(1)
With respect to Rule 17Ad-22(c)(1), a respondent clearing agency is
a registered clearing agency that provides CCP services. In the CCA
Standards adopting 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 110 hours.\348\ The Commission preliminarily believes that
this estimate remains correct and that a respondent clearing agency
would incur an aggregate one-time burden of 110 hours to perform
adjustments needed to synthesize and
[[Page 70783]]
format existing information in a manner sufficient to explain the
methodology used to meet the requirements of Rule 17Ad-22(c)(1).\349\
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\348\ See CCA Standards adopting release, supra note 7, at 452-
453. 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.
\349\ 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 1 respondent
clearing agency = 110 hours.
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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.\350\ The Commission preliminarily
believes that this estimate remains correct and that the ongoing
activities required by Rule 17Ad-22(c)(1) would impose an aggregate
annual burden on respondent clearing agencies of 120 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 the rule.\351\
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\350\ 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.
\351\ 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 1
respondent clearing agency = 20 hours.
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D. Collection of Information Is Mandatory
The collection of information requirements for Rule 17Ad-22(c)(1)
and (e) are mandatory.
E. Confidentiality
The Commission preliminarily 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.\352\ 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.\353\
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\352\ See 17 CFR 240.17a-1 and 17a-4(e)(7).
\353\ 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).
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F. Request for Comments
The Commission invites comments on all of the above estimates.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission requests comment in
order to (a) evaluate whether the collection of information is
necessary for the proper performance of our functions, including
whether the information will have practical utility; (b) evaluate the
accuracy of our estimates of the burden of the collection of
information; (c) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; (d)
evaluate whether there are ways to minimize the burden of the
collection of information on those who respond, including through the
use of automated collection techniques or other forms of information
technology; and (e) determine whether there are cost savings associated
with the collection of information that have not been identified in
this proposal.
Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090, with reference to File Number S7-23-16.
Requests for materials submitted to OMB by the Commission with regard
to this collection of information should be in writing, with reference
to File Number S7-23-16, and be submitted to the Securities and
Exchange Commission, Office of FOIA Services, 100 F Street NE.,
Washington, DC 20549-2736. As OMB is required to make a decision
concerning the collections of information between 30 and 60 days after
publication, a comment to OMB is best assured of having its full effect
if OMB receives it by November 14, 2016.
V. Small Business Regulatory Enforcement Fairness Act
Under the Small Business Regulatory Enforcement Fairness Act of
1996, a rule is considered ``major'' where, if adopted, it results or
is likely to result in (i) an annual effect on the economy of $100
million or more (either in the form of an increase or a decrease); (ii)
a major increase in costs or prices for consumers or individual
industries; or (iii) significant adverse effect on competition,
investment, or innovation.\354\ The Commission requests comment on the
potential impact of the proposed amendments to Rule 17Ad-22 on the
economy on an annual basis, any potential increase in costs or prices
for consumers or individual industries, and any potential effect on
competition, investment, or innovation. Commenters are requested to
provide empirical data and other factual support for their views to the
extent possible.
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\354\ Public Law 104-121, 110 Stat. 857 (1996) (codified in
various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C.
601).
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VI. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') requires the Commission,
in promulgating rules, to consider the impact of those rules on small
entities.\355\ Section 603(a) of the Administrative Procedure Act,\356\
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.'' \357\ Section 605(b)
of the RFA states that this requirement shall not apply to any proposed
rule which, if adopted, would not have a significant impact on a
substantial number of small entities.\358\
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\355\ See 5 U.S.C. 601 et seq.
\356\ 5 U.S.C. 603(a).
\357\ Section 601(b) of the RFA permits agencies to formulate
their own definitions of ``small entities.'' See 5 U.S.C. 601(b).
The Commission has adopted definitions for the term ``small entity''
for the purposes of rulemaking in accordance with the RFA. These
definitions, as relevant to this proposed rulemaking, are set forth
in Rule 0-10, 17 CFR 240.0-10.
\358\ See 5 U.S.C. 605(b).
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A. Registered Clearing Agencies
The proposed amendments to Rule 17Ad-22 would apply to registered
clearing agencies that are CCPs, CSDs, or SSSs. For the purposes of
Commission rulemaking and as applicable to the amendments to Rule 17Ad-
22, 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.\359\
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\359\ See 17 CFR 240.0-10(d).
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[[Page 70784]]
Based on the Commission's existing information about the clearing
agencies currently registered with the Commission,\360\ the Commission
preliminarily believes that all such registered clearing agencies
exceed the thresholds defining ``small entities'' set out above. While
other clearing agencies may emerge and seek to register as clearing
agencies with the Commission, the Commission preliminarily does not
believe that any such entities would be ``small entities'' as defined
in Exchange Act Rule 0-10.\361\ Accordingly, the Commission
preliminarily believes that any such registered clearing agencies will
exceed the thresholds for ``small entities'' set forth in Exchange Act
Rule 0-10.
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\360\ 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.
\361\ 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.
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B. Certification
For the reasons described above, the Commission certifies that the
proposed amendments to Rule 17Ad-22 would not have a significant
economic impact on a substantial number of small entities for purposes
of the RFA. The Commission requests comment regarding this
certification. The Commission requests that commenters describe the
nature of any impact on small entities, including clearing agencies and
counterparties to security and security-based swap transactions, and
provide empirical data to support the extent of the impact.
VII. 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 proposes to amend Rule 17Ad-22.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of Proposed Amendment
In accordance with the foregoing, 17 CFR part 240, as amended
elsewhere in this issue of the Federal Register, is proposed to be
further amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE
0
1. The general authority citation for part 240 continues to read in
part 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, 78o-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.
* * * * *
Section 240.17Ad-22 is also issued under 12 U.S.C. 5461 et seq.
* * * * *
0
2. Amend Sec. 240.17Ad-22 by revising paragraphs (a)(3), (5), (15),
(16), (17), (18) and (19), and adding paragraph (a)(20) to read as
follows:
Sec. 240.17Ad-22 Standards for clearing agencies.
(a) * * *
(3) Central securities depository means 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)).
* * * * *
(5) Covered clearing agency means a registered clearing agency that
provides the services of a central counterparty, central securities
depository, or securities settlement system.
* * * * *
(15) Securities settlement system means a clearing agency that
enables securities to be transferred and settled by book entry
according to a set of predetermined multilateral rules.
(16) 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)).
(17) 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.
(ii) Uses actual portfolios and, where applicable, hypothetical
portfolios that reflect the characteristics of proprietary positions
and customer positions;
(iii) Considers the most volatile relevant periods, where
practical, that have been experienced by the markets served by the
clearing agency; and
(iv) 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.
(18) 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.
(19) Systemically important in multiple jurisdictions means, with
respect to a covered clearing agency, a covered clearing agency that
has been determined by the Commission to be systemically important in
more than one jurisdiction pursuant to Sec. 240.17Ab2-2.
(20) Transparent means, for the purposes of paragraphs (e)(1), (2),
and (10) of this section, to the extent consistent with other statutory
and Commission requirements on confidentiality and disclosure, that
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.
By the Commission.
Dated: September 28, 2016.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-23892 Filed 10-12-16; 8:45 am]
BILLING CODE 8011-01-P