[Federal Register Volume 82, Number 67 (Monday, April 10, 2017)]
[Notices]
[Pages 17300-17302]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-07101]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80378; File No. S7-03-14]


Order Granting a Temporary Exemption to Covered Clearing Agencies 
From Compliance With Rule 17Ad-22(e)(3)(ii) and Certain Requirements in 
Rules 17Ad-22(e)(15)(i) and (ii) Under the Securities Exchange Act of 
1934

April 5, 2017.

I. Introduction

    On September 28, 2016, the Securities and Exchange Commission 
(``Commission'') adopted amendments to Rule 17Ad-22 pursuant to Section 
17A of the Securities Exchange Act of 1934 (``Exchange Act'') and Title 
VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
of 2010.\1\ Among other things, the amendments added new Rule 17Ad-
22(e), which establishes an enhanced regulatory framework for 
registered clearing agencies that meet the definition of a covered 
clearing agency.\2\ The amendments to Rule 17Ad-22 became effective on 
December 12, 2016, and covered clearing agencies must be in compliance 
with the amendments by April 11, 2017.\3\ For the reasons discussed 
below, the Commission is using its authority under Section 17A(b)(1) of 
the Exchange Act to grant covered clearing agencies a temporary 
exemption from compliance with Rule 17Ad-22(e)(3)(ii) and certain 
requirements in Rules 17Ad-22(e)(15)(i) and (ii) until December 31, 
2017.
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    \1\ See Exchange Act Release No. 34-78961 (Sept. 28, 2016), 81 
FR 70786 (Oct. 13, 2016) (``CCA Standards Adopting Release'').
    \2\ Under Rule 17Ad-22(a)(5), ``covered clearing agency'' means 
(i) a designated clearing agency or (ii) a clearing agency involved 
in activities with a more complex risk profile for which the 
Commodity Futures Trading Commission is not the supervisory agency 
as defined in Section 803(8) of the Payment, Clearing, and 
Settlement Supervision Act of 2010 (``Clearing Supervision Act''). 
See 17 CFR 240.17Ad-22(a)(5).
     In addition, Rule 17Ad-22(a)(6) defines ``designated clearing 
agency'' to mean a clearing agency registered with the Commission 
under Section 17A of the Exchange Act that is designated 
systemically important by the Financial Stability Oversight Council 
pursuant to the Clearing Supervision Act and for which the 
Commission is the supervisory agency as defined in Section 803(8) of 
the Clearing Supervision Act. Rule 17Ad-22(a)(4) defines ``clearing 
agency involved in activities with a more complex risk profile'' to 
mean a clearing agency registered with the Commission under Section 
17A of the Exchange Act that: (i) Provides central counterparty 
(``CCP'') services for security-based swaps; (ii) has been 
determined by the Commission to be involved in activities with a 
more complex risk profile at the time of its initial registration; 
or (iii) is subsequently determined by the Commission to be involved 
in activities with a more complex risk profile pursuant to Rule 
17Ab2-2(b) under the Exchange Act. See 17 CFR 240.17Ad-22(a)(4), 
(6).
    \3\ See CCA Standards Adopting Release at 70848.
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II. Background

    Rule 17Ad-22(e) generally requires a covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to address, among other things, its 
governance arrangements and risk management framework.\4\ Rule 17Ad-
22(e)(3) requires a covered clearing agency to establish, implement, 
maintain and enforce policies and procedures reasonably designed to 
maintain a sound risk management framework for comprehensively managing 
legal, credit, liquidity, operational, general business, investment, 
custody, and other risks that arise in or are borne by the covered 
clearing agency, and which, among other things, includes plans for 
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.\5\ In adopting Rule 17Ad-
22(e)(3)(ii), the Commission stated its belief that recovery and wind-
down plans, and material changes thereto, would constitute a proposed 
rule change under Section 19(b) of the Exchange Act and, for designated 
clearing agencies, an advance notice under the Clearing Supervision 
Act, subjecting them to Commission review and public comment.\6\
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    \4\ See id. at 70792.
    \5\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \6\ See CCA Standards Adopting Release at 70809.
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    In addition, Rule 17Ad-22(e)(15) requires a covered clearing agency 
to 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 and 
services as a going concern if those losses materialize, including, 
among other things, by (i) determining the amount of liquid net assets 
funded by equity based upon its general business risk profile and the 
length of time required to achieve a recovery or orderly wind-down, as 
appropriate, of its critical operations and services if such action is 
taken and (ii) holding liquid net assets funded by equity equal to the 
greater of either (x) six months of its current operating expenses or 
(y) the amount determined by the board of directors to be sufficient to 
ensure a recovery or orderly wind-down of critical operations and 
services of the covered clearing agency, as contemplated by the 
recovery and wind-down plans established under Rule 17Ad-
22(e)(3)(ii).\7\
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    \7\ 17 CFR 240.17Ad-22(e)(15)(i), (ii).
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III. Discussion

A. Background and Exemptive Request

    As noted in the CCA Standards Adopting Release, the Commission 
believes that, taken together, the policies and procedures requirements 
related to recovery and wind-down plans in Rules 17Ad-22(e)(3)(ii) and 
(15) should help ensure that a covered clearing agency is able to 
remain resilient in times of market stress and to sustain its 
operations for sufficient time to achieve orderly wind-down if such

[[Page 17301]]

action is necessary.\8\ Unlike some other aspects of Rule 17Ad-22(e), 
until now recovery and wind-down plans have not been part of the 
Commission's regulatory framework for registered clearing agencies.\9\
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    \8\ See CCA Standards Adopting Release at 70868, 70876.
    \9\ As discussed in CCA Standards Adopting Release, certain 
requirements in Rule 17Ad-22(e) contain requirements substantially 
similar to those in Rule 17Ad-22(d) or reflect current practices at 
registered clearing agencies. Certain other requirements in Rule 
17Ad-22(e) 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). A few requirements have no comparable 
requirement under Rule 17Ad-22(d) and therefore may require more 
extensive changes to policies and procedures or other additional 
steps to achieve compliance. See id. at 70891.
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    Since the adoption of Rule 17Ad-22(e), Commission staff has been 
aware of the ongoing development of recovery and wind-down plans by 
covered clearing agencies in anticipation of the April 11, 2017 
compliance date. Nevertheless, the development of recovery and wind-
down plans continues to present novel and complex questions, and one 
entity, on behalf of its three subsidiaries that are covered clearing 
agencies, has requested that the Commission provide a temporary 
exemption from compliance until December 31, 2017 so that the clearing 
agencies can finalize their recovery and wind-down plans.\10\ The 
entity states its view that recovery and wind-down plans are an 
important new input into industry efforts to manage systemic risk that 
must be carefully designed to address concerns unique to each covered 
clearing agency and its members.\11\ The entity asserts that the topic 
of recovery and wind-down remains under active discussion in the 
industry, that a substantial amount of work remains to be completed, 
and that it would be prudent to provide for a longer period of time for 
consultation concerning the relevant documents and filings under the 
Rule 19b-4 and advance notice processes related to recovery and wind-
down plans.\12\ The entity believes, in particular, that covered 
clearing agencies, their members, and other interested persons would 
benefit from further thought development concerning whether and how the 
plans should address the continued provision of critical operations and 
services in the event that recovery tools fail. The entity emphasizes 
that additional time is necessary because of the complexity of the 
planning process, the need for further discussion and consultation, and 
the advisability of conducting appropriate member outreach prior to the 
submission of formal filings under the Rule 19b-4 and advance notice 
processes.\13\
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    \10\ See letter from Michael C. Bodson, President and Chief 
Executive Officer, The Depository Trust & Clearing Corporation, Feb. 
15, 2017, https://www.sec.gov/comments/s7-03-14/s70314-1594398-132354.pdf.
    \11\ See id. at 1.
    \12\ See id. at 2.
    \13\ See id.
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B. Exemptive Relief

    Section 17A(b)(1) of the Exchange Act provides that the Commission, 
by order and upon its own motion, may conditionally or unconditionally 
exempt any clearing agency or class of clearing agencies from any 
provisions of Section 17A or the rules and 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 transactions and the safeguarding of securities and 
funds.\14\
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    \14\ 15 U.S.C. 78q-1(b)(1).
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    Recognizing that the reasons stated by the entity may apply to 
covered clearing agencies generally, the Commission believes that all 
covered clearing agencies would benefit from additional time to 
finalize the development of their recovery and wind-down plans. As 
noted above, unlike some other aspects of Rule 17Ad-22(e), recovery and 
wind-down plans continue to present novel and complex questions. The 
recovery and wind-down plans described in Rule 17Ad-22(e)(3)(ii) are 
new requirements not previously included in the Commission's regulatory 
framework for clearing agencies, and the topics of recovery and wind-
down remain under active discussion in the industry. The Commission 
believes that providing additional time to develop recovery and wind-
down plans will facilitate further discussion, consultation, and member 
outreach by the covered clearing agencies that could help resolve the 
novel and complex questions presented. This in turn would help promote 
the development of plans that comprehensively address how a covered 
clearing agency could continue to provide critical operations and 
services in the event that recovery tools fail and that are consistent 
with the policies and procedures requirements of Rule 17Ad-
22(e)(3)(ii). Therefore, the Commission finds that a temporary 
exemption from compliance with Rule 17Ad-22(e)(3)(ii) until December 
31, 2017 is consistent with the public interest, the protection of 
investors, and the purposes of Section 17A of the Exchange Act.
    In addition, compliance with certain aspects of Rule 17Ad-22(e)(15) 
depends in part on a covered clearing agency having established 
recovery and wind-down plans under Rule 17Ad-22(e)(3)(ii). 
Specifically, these include the following: (i) The requirement in Rule 
17Ad-22(e)(15)(i) for policies and procedures for determining the 
amount of liquid net assets funded by equity based upon 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 (``RWP clause''); and (ii) clause (y) of Rule 17Ad-22(e)(15)(ii) 
requiring policies and procedures for holding liquid net assets funded 
by equity equal to 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). The Commission 
therefore finds that a temporary exemption from compliance with these 
subsections of Rule 17Ad-22(e)(15) until December 31, 2017 is 
consistent with the public interest, the protection of investors, and 
the purposes of Section 17A of the Exchange Act.
    The Commission is not granting relief from the April 11, 2017 
compliance date for any other provision of the amendments to Rule 17Ad-
22. In particular, the Commission notes that the temporary exemption 
from compliance does not apply to either of the following: (i) The 
requirement in Rule 17Ad-22(e)(15)(i) for policies and procedures for 
determining the amount of liquid net assets funded by equity based upon 
its general business risk profile; or (ii) clause (x) of Rule 17Ad-
22(e)(15)(ii) requiring policies and procedures for holding liquid net 
assets funded by equity equal to six months of the covered clearing 
agency's current operating expenses. Accordingly, as of the April 11, 
2017 compliance date for the amendments to Rule 17Ad-22, a covered 
clearing agency is required to have policies and procedures for 
determining the amount of liquid net assets funded by equity based upon 
its general business risk profile pursuant to Rule 17Ad-22(e)(15)(i) 
and for holding liquid net assets funded by equity equal to six months 
of the covered clearing agency's current operating expenses pursuant to 
clause (x) of Rule 17Ad-22(e)(15)(ii), regardless of whether the 
covered clearing agency has met the condition for obtaining relief 
under this temporary exemption.
    As a condition to obtaining relief under the temporary exemption, a

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covered clearing agency must notify the Commission in writing of its 
intent to rely upon the temporary exemption no later than April 11, 
2017.

IV. Conclusion

    The Commission hereby grants, pursuant to Section 17A(b)(1) of the 
Exchange Act, covered clearing agencies a temporary exemption from 
compliance with Rule 17Ad-22(e)(3)(ii), the RWP clause of Rule 17Ad-
22(e)(15)(i), and clause (y) of Rule 17Ad-22(e)(15)(ii) until December 
31, 2017, subject to the condition contained in this order.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07101 Filed 4-7-17; 8:45 am]
 BILLING CODE 8011-01-P