[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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

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

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).
---------------------------------------------------------------------------

    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'').
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

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

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

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

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

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

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

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

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \226\ See 17 CFR 240.17Ad-22(e)(5); CCA Standards adopting 
release, supra note 7, at 466-467.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \235\ See 17 CFR 240.17Ad-22(e)(14); CCA Standards adopting 
release, supra note 7, at 473-474.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \236\ See 17 CFR 240.17Ad-22(e)(15); CCA Standards adopting 
release, supra note 7, at 474.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \237\ See 17 CFR 240.17Ad-22(e)(16); CCA Standards adopting 
release, supra note 7, at 474.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \238\ See 17 CFR 240.17Ad-22(e)(17); CCA Standards adopting 
release, supra note 7, at 474.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \239\ See 17 CFR 240.17Ad-22(e)(18); CCA Standards adopting 
release, supra note 7, at 474.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \240\ See 17 CFR 240.17Ad-22(e)(19); CCA Standards adopting 
release, supra note 7, at 474.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \242\ See 17 CFR 240.17Ad-22(e)(21); CCA Standards adopting 
release, supra note 7, at 475.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \243\ See 17 CFR 240.17Ad-22(e)(22); CCA Standards adopting 
release, supra note 7, at 475.
---------------------------------------------------------------------------

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

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

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

    \245\ See CCA Standards adopting release, supra note 7, at 416-
418.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
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    \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.
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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\
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    \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.
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    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

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

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