[Federal Register Volume 84, Number 95 (Thursday, May 16, 2019)]
[Proposed Rules]
[Pages 22226-22317]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-09025]
[[Page 22225]]
Vol. 84
Thursday,
No. 95
May 16, 2019
Part II
Commodity Futures Trading Commission
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17 CFR Parts 1, 39, and 140
Derivatives Clearing Organization General Provisions and Core
Principles; Proposed Rule
Federal Register / Vol. 84 , No. 95 / Thursday, May 16, 2019 /
Proposed Rules
[[Page 22226]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 39, and 140
RIN 3038-AE66
Derivatives Clearing Organization General Provisions and Core
Principles
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission) is
proposing amendments to certain regulations applicable to registered
derivatives clearing organizations (DCOs). These proposed amendments
would, among other things, address certain risk management and
reporting obligations, clarify the meaning of certain provisions,
simplify processes for registration and reporting, and codify existing
staff relief and guidance. In addition, the Commission is proposing
technical amendments to certain provisions, including certain
delegation provisions, in other parts of its regulations.
DATES: Comments must be received by July 15, 2019.
ADDRESSES: You may submit comments, identified by ``Derivatives
Clearing Organization General Provisions and Core Principles'' and RIN
3038-AE66, by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (FOIA), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\
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\1\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I (2018), and are accessible on the
Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the FOIA.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
202-418-5096, [email protected]; Parisa Abadi, Associate Director, 202-
418-6620, [email protected]; Eileen R. Chotiner, Senior Compliance
Analyst, 202-418-5467, [email protected]; Abigail S. Knauff, Special
Counsel, 202-418-5123, [email protected]; Division of Clearing and Risk,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Project KISS
B. Regulatory Framework for DCOs
II. Amendments to Part 1--General Regulations Under the Commodity
Exchange Act
A. Written Acknowledgment From Depositories--Sec. 1.20
B. Governance and Conflicts of Interest--Sec. Sec. 1.59, 1.63,
and 1.69
III. Amendments to Part 39--Subpart A--General Provisions Applicable
to DCOs
A. Definitions--Sec. 39.2
B. Procedures for Registration--Sec. 39.3
C. Procedures for Implementing DCO Rules and Clearing New
Products
IV. Amendments to Part 39--Subpart B--Compliance With Core
Principles
A. Compliance With Core Principles--Sec. 39.10
B. Financial Resources--Sec. 39.11
C. Participant and Product Eligibility--Sec. 39.12
D. Risk Management--Sec. 39.13
E. Treatment of Funds--Sec. 39.15
F. Default Rules and Procedures--Sec. 39.16
G. Rule Enforcement--Sec. 39.17
H. Reporting--Sec. 39.19
I. Public Information--Sec. 39.21
J. Governance Fitness Standards, Conflicts of Interest, and
Composition of Governing Boards--Sec. Sec. 39.24, 39.25, and 39.26
K. Legal Risk--Sec. 39.27
L. Fully-Collateralized Positions
V. Amendments to Part 39--Subpart C--Provisions Applicable to SIDCOs
and DCOs That Elect To Be Subject to the Provisions
A. Financial Resources for SIDCOs and Subpart C DCOs--Sec.
39.33
B. Risk Management for SIDCOs and Subpart C DCOs--Sec. 39.36
C. Additional Disclosure for SIDCOs and Subpart C DCOs--Sec.
39.37
D. Corrections to Subpart C Regulations
VI. Amendments to Appendix A to Part 39--Form DCO
VII. Amendments to Appendix B to Part 39--Subpart C Election Form
VIII. Amendments to Part 140--Organization, Functions, and
Procedures of the Commission
IX. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
A. Project KISS
The Commission is engaging in an agency-wide review of its rules,
regulations, and practices to make them simpler, less burdensome, and
less costly, and to make progress on G-20 regulatory reforms. This
initiative is called Project KISS, which stands for ``Keep It Simple,
Stupid.'' \2\ Consistent with these objectives, the Commission is
proposing amendments to regulations applicable to DCOs to, among other
things, enhance certain risk management and reporting obligations,
clarify the meaning of certain provisions, simplify processes for
registration and reporting, and codify existing relief and guidance.
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\2\ See Remarks of Acting Chairman J. Christopher Giancarlo
before the 42nd Annual International Futures Industry Conference in
Boca Raton, FL, Mar. 15, 2017, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20. On February 24, 2017,
President Donald J. Trump issued Executive Order 13777: Enforcing
the Regulatory Reform Agenda (E.O. 13777). E.O. 13777 directs
federal agencies, among other things, to designate a Regulatory
Reform Officer and establish a Regulatory Reform Task Force.
Although the CFTC, as an independent federal agency, is not bound by
E.O. 13777, the Commission is nevertheless engaging in an agency-
wide review of its rules, regulations, and practices to make them
simpler, less burdensome, and less costly. See Request for
Information, 82 FR 23756 (May 24, 2017).
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B. Regulatory Framework for DCOs
Section 5b(c)(2) of the Commodity Exchange Act (CEA) sets forth
core principles with which a DCO must comply in order to be registered
and to maintain registration as a DCO (DCO Core Principles).\3\ In
2011, the Commission adopted regulations in
[[Page 22227]]
subparts A and B of part 39 to implement the DCO Core Principles.\4\ In
2013, the Commission adopted regulations in subpart C of part 39 \5\ to
establish additional standards for compliance with the DCO Core
Principles for those DCOs that have been designated as systemically
important (SIDCOs) by the Financial Stability Oversight Council in
accordance with Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act).\6\ The subpart C regulations
are consistent with the Principles for Financial Market Infrastructures
(PFMIs), published by the Committee on Payments and Market
Infrastructures (CPMI) and the Technical Committee of the International
Organization of Securities Commissions (IOSCO).\7\ Other DCOs may elect
to opt-in to the subpart C requirements (subpart C DCOs) in order to
achieve status as a qualifying central counterparty (QCCP).\8\
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\3\ 7 U.S.C. 7a-1.
\4\ See Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR 69334 (Nov. 8, 2011) (codified at 17 CFR part
39); Customer Clearing Documentation, Timing of Acceptance for
Clearing, and Clearing Member Risk Management, 77 FR 21278 (Apr. 9,
2012) (further amending Sec. 39.12).
\5\ Derivatives Clearing Organizations and International
Standards, 78 FR 72476 (Dec. 2, 2013).
\6\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010).
\7\ See CPMI-IOSCO, Principles for Financial Market
Infrastructures (Apr. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.
\8\ In July 2012, the Basel Committee on Banking Supervision,
the international body that sets standards for the regulation of
banks, published the ``Capital Requirements for Bank Exposures to
Central Counterparties'' (Basel CCP Capital Requirements), which
describes standards for capital charges arising from bank exposures
to central counterparties (CCPs) related to over-the-counter
derivatives, exchange-traded derivatives, and securities financing
transactions. The Basel CCP Capital Requirements create financial
incentives for banks, including their subsidiaries and affiliates,
to clear financial derivatives with CCPs that are prudentially
supervised in a jurisdiction where the relevant regulator has
adopted rules or regulations that are consistent with the standards
set forth in the PFMIs. Specifically, the Basel CCP Capital
Requirements introduce new capital charges based on counterparty
risk for banks conducting financial derivatives transactions through
a CCP. These incentives include (1) lower capital charges for
exposures arising from derivatives cleared through a QCCP, and (2)
significantly higher capital charges for exposures arising from
derivatives cleared through non-qualifying CCPs. A QCCP is defined
as an entity that (i) is licensed to operate as a CCP and is
permitted by the appropriate regulator to operate as such, and (ii)
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 PFMIs. The failure of a CCP to achieve QCCP
status could result in significant costs to its bank customers.
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Since the part 39 regulations were adopted, Commission staff has
worked with DCOs to address questions regarding interpretation and
implementation of the requirements established in the regulations. In
light of this, the Commission believes it would be helpful to revise or
clarify certain provisions of part 39 and to codify staff relief or
guidance granted in the interim. The Commission is also proposing a few
new requirements with respect to default procedures and event-specific
reporting in response to recent events. The Commission believes these
changes will provide greater clarity and transparency for DCOs and DCO
applicants and lead to more effective DCO compliance and risk
management generally.
The Commission has carefully considered the costs and benefits
associated with the proposed amendments, and invites commenters to
provide data and analysis regarding any aspect of the proposed
rulemaking. In addition to the amendments proposed herein, the
Commission requests comment for any other aspects of part 39 that
commenters believe the Commission should clarify or otherwise amend.
II. Amendments to Part 1--General Regulations Under the Commodity
Exchange Act
A. Written Acknowledgment From Depositories--Sec. 1.20
Regulation 1.20(d)(1) requires that a futures commission merchant
(FCM) obtain a written acknowledgment from each depository with which
the FCM deposits futures customer funds.\9\ The written acknowledgment
must conform to a template letter set forth in appendix A to Sec.
1.20, and the template letter includes certain requirements set forth
in Sec. 1.20(d)(3) through (6). Regulation 1.20(d)(1) further
provides, however, that an FCM is not required to obtain a written
acknowledgment from a DCO that has adopted rules that provide for the
segregation of customer funds in accordance with all relevant
provisions of the CEA and the Commission's rules and orders thereunder.
The Commission is proposing to amend Sec. 1.20(d) to clarify that the
requirements listed in Sec. 1.20(d)(3) through (6) do not apply to a
DCO, or to an FCM that clears through that DCO, if the DCO has adopted
rules that provide for the segregation of customer funds. The proposed
changes are not intended to be substantive, but rather to reflect the
Commission's intent when Sec. 1.20 was last amended. Nonetheless, the
Commission emphasizes that it has ample means of obtaining information
regarding accounts held at a DCO under Sec. 1.20 by virtue of its
ongoing oversight and supervision of DCOs. The Commission also is
proposing to amend Sec. 1.20(d)(7) and (8) to explicitly account for
FCMs that deposit customer funds with a DCO and thus are not required
to obtain a written acknowledgment letter.
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\9\ Regulation 22.5 applies the written acknowledgment letter
requirements of Sec. 1.20(d) to FCMs and DCOs in connection with
the holding of cleared swaps customer collateral.
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B. Governance and Conflicts of Interest--Sec. Sec. 1.59, 1.63, and
1.69
In the course of adopting the current part 39 regulations, the
Commission removed and replaced Sec. 39.2,\10\ which had exempted DCOs
from all Commission regulations except for those specified therein (the
``Sec. 39.2 exemption''). The Commission noted that the Sec. 39.2
exemption failed to account for regulations applicable to DCOs that
were adopted later, such as Sec. 1.49.\11\ The Commission further
noted that removal of the Sec. 39.2 exemption would subject DCOs only
to Sec. 1.49 and three additional regulations: Sec. Sec. 1.59
(activities of self-regulatory organization employees, governing board
members, committee members, and consultants); 1.63 (service on self-
regulatory organization governing boards or committees by persons with
disciplinary histories); and 1.69 (voting by interested members of
self-regulatory organization governing boards and various
committees).\12\ The Commission explained that these three provisions
would be superseded by regulations the Commission had proposed to
implement Core Principles O (Governance Arrangements), P (Conflicts of
Interest), and Q (Composition of Governing Boards).\13\
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\10\ The current Sec. 39.2 sets forth definitions of terms used
in part 39.
\11\ See Risk Management Requirements for Derivatives Clearing
Organizations, 76 FR 3698, 3714 (Jan. 20, 2011) (proposed rule).
\12\ Id. at 3714 & n.77.
\13\ See Requirements for Derivatives Clearing Organizations,
Designated Contract Markets, and Swap Execution Facilities Regarding
the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010)
(proposed rule); Governance Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities; Additional Requirements Regarding the Mitigation of
Conflicts of Interest, 76 FR 722 (Jan. 6, 2011) (proposed rule).
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However, the Commission did not adopt those regulations, and
Sec. Sec. 1.59, 1.63, and 1.69 became applicable to DCOs. The
Commission is now proposing to adopt implementing regulations for Core
Principles O, P, and Q by moving certain requirements from subpart C,
which is applicable to only SIDCOs and subpart C DCOs, to subpart B,
which is applicable to all registered
[[Page 22228]]
DCOs (discussed further below). Therefore, the Commission is proposing
to restore DCOs' exemption from Sec. Sec. 1.59, 1.63, and 1.69 by
removing ``clearing organization'' from the definition of ``self-
regulatory organization'' in each of those regulations. The Commission
is also proposing to amend Sec. 1.64 to remove language that makes
clear that the provision does not apply to DCOs. The amendments to the
other provisions make that language no longer necessary.
III. Amendments to Part 39--Subpart A--General Provisions Applicable to
DCOs
A. Definitions--Sec. 39.2
Regulation 39.2 sets forth definitions applicable to terms used in
part 39 of the Commission's regulations. Since Sec. 39.2 was adopted,
the Commission has adopted definitions for some of the same terms that
apply in other Commission regulations. Accordingly, the Commission is
proposing amendments to Sec. 39.2 in order to maintain consistency
with terms defined elsewhere in Commission regulations and to provide
clarity with respect to the use of these terms.
1. Business Day
Regulation 39.19(b)(3) defines ``business day,'' but because the
definition is contained within Sec. 39.19, it is not clear that it is
applicable to uses of the term ``business day'' elsewhere in part 39.
The Commission is therefore proposing to remove Sec. 39.19(b)(3) and
include the definition of ``business day'' in Sec. 39.2. The
Commission also is proposing to clarify that the term ``Federal
holidays'' in the ``business day'' definition refers to the schedule of
U.S. federal holidays established under 5 U.S.C. 6103. The Commission
is specifying this because some DCOs registered with the Commission are
located outside the United States. Finally, the Commission is defining
``foreign holiday'' as a day on which a DCO and its domestic financial
markets are closed for a holiday that is not a Federal holiday in the
United States, and adding the term to the list of exceptions to the
definition of ``business day.'' The Commission believes there is no
reason to require foreign DCOs to report on a non-trading day.
2. Customer
Regulation 39.2 defines ``customer,'' for purposes of part 39, as a
person trading in any commodity named in the definition of
``commodity'' in section 1a(9) of the CEA or in Sec. 1.3 of the
Commission's regulations, or in any swap as defined in section 1a(47)
of the CEA or in Sec. 1.3. The definition further distinguishes a
customer from the owner or holder of a house account.
After Sec. 39.2 was adopted, the Commission amended the definition
of ``customer'' in Sec. 1.3, to mean any person who uses a futures
commission merchant, introducing broker, commodity trading advisor, or
commodity pool operator as an agent in connection with trading in any
commodity interest. The Commission also amended the definition of
``commodity interest'' in Sec. 1.3 to include any swap as defined in
the CEA, by the Commission, or jointly by the Commission and the
Securities and Exchange Commission.
Because the definition of ``customer'' in Sec. 1.3 now encompasses
the definition in Sec. 39.2, the Commission believes that the
definition in Sec. 39.2 is unnecessary and may create uncertainty.
Therefore, the Commission is proposing to remove the definition of
``customer'' in Sec. 39.2, leaving the definition in Sec. 1.3 as the
applicable definition for purposes of part 39.
3. Customer Account or Customer Origin
Regulation 39.2 defines ``customer account or customer origin'' as
a clearing member account held on behalf of customers that is subject
to section 4d(a) or section 4d(f) of the CEA. After Sec. 39.2 was
adopted, the Commission adopted the definition of ``customer account''
in Sec. 1.3 to include both a futures account and a cleared swaps
customer account, which are accounts subject to sections 4d(a) and
4d(f) of the CEA, respectively.
The Commission believes that having a definition of ``customer
account or customer origin'' in Sec. 39.2 and a definition of
``customer account'' in Sec. 1.3 may create uncertainty. Because the
part 39 regulations use both ``customer account'' and ``customer
origin'' terms, the Commission is proposing to amend the definition of
``customer account or customer origin'' in Sec. 39.2 to cross-
reference the definition of ``customer account'' in Sec. 1.3, rather
than removing the definition or the term ``customer origin.''
4. Enterprise Risk Management
The Commission is proposing to define ``enterprise risk
management'' because the term is used in proposed Sec. 39.10(d), which
is discussed below.
5. Fully-Collateralized Position
The Commission is proposing to define ``fully-collateralized
position'' in conjunction with proposed exceptions from several part 39
regulations for DCOs that clear fully-collateralized positions, as
discussed below.
6. Key Personnel
The Commission is proposing to add ``chief information security
officer'' to the list of positions identified in the definition of
``key personnel'' in Sec. 39.2. In the event of a cybersecurity
incident, it is critical that Commission staff be able to quickly
contact the person at each DCO responsible for responding to the
incident to assess the DCO's response as well as to coordinate efforts
among DCOs as necessary.
B. Procedures for Registration--Sec. 39.3
1. Application Procedures--Sec. 39.3(a)
The Commission is proposing to make several changes to its
procedures for registration as a DCO, set forth in Sec. 39.3.
Regulation 39.3(a)(1) refers to ``[a]n organization desiring to be
registered as a [DCO],'' while Sec. 39.3(a)(2) refers to ``[a]ny
person seeking to register as a [DCO].'' To make the language
consistent, the Commission is proposing to revise Sec. 39.3(a)(1) and
(2) to refer to an ``entity seeking to register as a [DCO].'' The
Commission is proposing additional changes to Sec. 39.3(a)(1) to
improve the clarity of the text.
Regulation 39.3(a)(2) requires an applicant for DCO registration to
submit to the Commission a completed Form DCO, which is provided in
appendix A to part 39.\14\ Since the adoption of Form DCO, the
Commission has identified several areas in which changes to Form DCO
are needed. Many of the revisions to the part 39 regulations proposed
herein would require corresponding changes to Form DCO. Therefore, the
Commission is proposing to revise Form DCO as discussed in Section VI.
below.
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\14\ At the time Sec. 39.3(a)(2) was adopted, Form DCO was the
only appendix to part 39. Since then, appendices have been added to
part 39, and Form DCO is now set forth in appendix A. Therefore, the
Commission is proposing to revise Sec. 39.3(a)(2) to reference
``Form DCO . . . as provided in appendix A to this part.''
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Regulation 39.3(a)(3) provides that at any time during the
application review process, the Commission may request that the DCO
applicant submit supplemental information in order for the Commission
to process the application. An applicant is required to ``file
electronically'' such supplemental information with the Secretary of
the Commission, in the format and manner specified by the Commission.
The Commission is proposing to amend Sec. 39.3(a)(3) to require an
applicant to ``provide'' such supplemental information and to delete
the
[[Page 22229]]
requirement that it be filed with the Secretary of the Commission. By
making these changes, yet retaining the requirement that the
information be provided in the format and manner specified by the
Commission, the Commission and DCO applicants would have greater
flexibility. For example, the Commission would be able to permit an
applicant to provide requested information through a presentation to
Commission staff.
Regulation 39.3(a)(5) provides for certain sections of a DCO
application to be made public, including the ``first page of the Form
DCO cover sheet.'' The regulation refers to Form DCO as it appears in
the print edition of the Code of Federal Regulations. However, the
Commission is aware that Form DCO may appear differently in other
sources, so the Commission is proposing to amend Sec. 39.3(a)(5) to
specify that the ``first page of the Form DCO cover sheet (up to and
including the General Information section)'' will be made public. The
Commission is also proposing to revise the provision to include
specific references to the Form DCO exhibits that will be made public.
Finally, the Commission is proposing to adopt new Sec. 39.3(a)(6),
which would permit the Commission to extend the 180-day review period
for DCO applications specified in Sec. 39.3(a)(1) for any period of
time to which the applicant agrees in writing. This provision would be
similar to Sec. 40.5(d)(2), which allows the Commission to extend the
review period for rules submitted for Commission review and approval,
if the registered entity that submitted the rule agrees in writing. The
Commission believes it is important to have the ability to extend the
review period for a DCO application so that, in the event that any
issues or concerns arise that cannot be resolved in a timely manner,
the Commission does not find itself in the position of having to deny
the application.
2. Stay of Application Review--Sec. 39.3(b)
Regulation 39.3(b)(2) provides for delegation to the Director of
the Division, with the concurrence of the General Counsel, the
authority to notify an applicant ``seeking designation under section
6(a) of the [CEA]'' that the application is materially incomplete and
the running of the 180-day period is stayed. By its terms, section 6(a)
of the CEA applies only to designation of contract markets. However,
under Sec. 39.3(a), the Commission applies the same procedures to DCO
applications. Because DCOs are ``registered'' and not ``designated,''
the Commission is substituting ``registration'' for ``designation'' in
Sec. 39.3(b)(2).
3. Amendment of an Order of Registration--Sec. 39.3(a)(2)
Regulation 39.3(a)(2) specifies that any person seeking to register
as a DCO, any applicant amending its pending application, and any
registered DCO seeking to amend its order of registration must submit
to the Commission a completed Form DCO, which must include a cover
sheet, all applicable exhibits, and any supplemental materials,
including amendments thereto, as provided in appendix A to part 39. The
Form DCO instructions correspond to this requirement and currently
specify that requests for amending a registration order and any
associated exhibits must be submitted via Form DCO.
The Commission is proposing to change the requirements regarding a
DCO's request to amend an order of registration. First, the Commission
proposes to amend Sec. 39.3(a)(2) and Form DCO to eliminate the
required use of Form DCO to request an amended order of registration
from the Commission. Under current practice, a DCO is permitted to file
a request for an amended order with the Commission rather than
submitting Form DCO. Commission staff typically will review the
request, obtain additional information from the DCO where necessary,
and subsequently recommend to the Commission whether to grant or deny
the amended order. Given current practice, the Commission believes that
an updated Form DCO is not needed to request an amended order of
registration. Second, the Commission proposes to amend Sec. 39.3(a)(4)
to state that an applicant only needs to file amended exhibits and
other information when filing a Form DCO to update a pending
application.
Consistent with existing Commission practice and the proposal to
eliminate the use of Form DCO to request an amended registration order,
the Commission is proposing new Sec. 39.3(d) to establish a separate
process for such requests. A DCO would be required to provide the
Commission with any additional information and documentation necessary
to review a request to amend an order of registration. The Commission
would issue an amended order if the Commission determines that the DCO
would continue to maintain compliance with the Act and the Commission's
regulations after such an amendment. Further, the Commission may also
issue an amended order of registration subject to conditions. The
Commission also proposes to specify that it may decline to issue an
amended order based upon a determination that the DCO would not
continue to maintain compliance with the Act and the Commission's
regulations upon such amendment.
4. Dormant Registration--Sec. 39.3(d)
Regulation 39.3(d) establishes the procedure for a dormant DCO to
reinstate its registration before it can begin ``listing or relisting''
products for clearing. The Commission is proposing to replace ``listing
or relisting'' with ``accepting'' to more accurately describe a DCO's
activities. The Commission also proposes to renumber Sec. 39.3(d) as
Sec. 39.3(e).
5. Vacation of Registration--Sec. 39.3(e)
Section 7 of the CEA and Sec. 39.3(e) of the Commission's
regulations permit a DCO to request that the Commission vacate its
registration. Orders of vacation of registration issued by the
Commission have included requirements based on section 7 of the CEA and
other Commission regulations that are not specifically listed in Sec.
39.3(e). The Commission is proposing to amend Sec. 39.3(e) to codify
these requirements and provide greater transparency to any DCO that is
considering vacating its registration. To implement the proposed
changes, the Commission is proposing to renumber current Sec. 39.3(e)
as Sec. 39.3(f)(1).
Section 7 of the CEA requires any registered entity that wishes to
have its registration vacated to make a written request to the
Commission. Section 7 also requires that the request be made at least
90 days prior to the date on which the registered entity wants the
vacation to take effect. The Commission is proposing to adopt Sec.
39.3(f)(1)(i) to specifically require a DCO to state in its request the
date it wishes to have its registration vacated and to make the request
at least 90 days prior to that date.
The Commission is also proposing to adopt Sec. 39.3(f)(1)(ii) to
require a DCO to state in its request how it intends to transfer or
otherwise unwind all open positions at the DCO. Under the proposed
rule, any actions to transfer or unwind positions would be required to
reflect the interests of affected clearing members and their customers.
The Commission believes this requirement will help ensure that a DCO
that plans to voluntarily cease its clearing activity will do so with
minimal disruptions to its members and the markets it serves.
The Commission is proposing to adopt Sec. 39.3(f)(1)(iii) and (iv)
to require a DCO to continue to maintain its books and records after
its registration has
[[Page 22230]]
been vacated for the requisite statutory and regulatory retention
periods, and to require a DCO to make all such books and records
available for inspection by any representative of the Commission or the
United States Department of Justice after its registration has been
vacated, as set forth in Sec. 1.31 of the Commission's regulations.
The Commission has included this requirement in previous orders of
vacation based on Sec. 39.3(f), which states that a vacation of
registration ``shall not affect any action taken or to be taken by the
Commission based upon actions, activities or events occurring during
the time that the entity was registered with the Commission.'' \15\ The
Commission is proposing this requirement to further ensure that a DCO
does not destroy its books and records in order to hinder or avoid
Commission action following the vacation of its registration.
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\15\ To accommodate the proposed changes, the Commission is
proposing to include this sentence as part of Sec. 39.3(f)(1).
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Finally, section 7 of the CEA requires the Commission to
``forthwith send a copy'' of the notice that was filed with the
Commission requesting vacation and the order of vacation to all other
registered entities. The Commission is proposing to adopt Sec.
39.3(f)(2) to specify that this requirement will be met by posting the
required documents on the Commission's website. This provision was
written and amended before the internet expanded to its current form
and level of access.\16\ The Commission believes that posting the
required documents on its website is the most effective and efficient
way of providing the required information to all registered entities,
as well as the public.
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\16\ The requirement to send a copy of the notice and order was
first included in section 7 in 1922. The Grain Futures Act, Public
Law 67-331 ch. 369, sec. 7, 42 Stat. 1002 (1922). Section 7 was most
recently amended in 2000, to cover all types of registered entities,
including DCOs. Commodity Futures Modernization Act of 2000, Public
Law 106-554, Title I, sec. 123(a)(17), 114 Stat. 2763 (2000).
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6. Request for Transfer of Registration and Open Interest--Sec.
39.3(f)
Regulation 39.3(f) establishes procedures that a DCO must follow to
request the transfer of its DCO registration and positions comprising
open interest for clearing and settlement, in anticipation of a
corporate change. Regulation 39.3(f) also pertains to instances in
which a corporate change results in the transfer of all or
substantially all of a DCO's assets to another legal entity.
Commission staff has found that the requirements of Sec. 39.3(f)
have created confusion for DCOs which merely want to convert the DCO
from one type of legal entity to another or change the place of
domicile for the DCO's legal entity without changing the DCO's
operations or transferring the DCO's registration to new ownership. The
Commission also recognizes that a transfer of open interest would not
necessarily be tied to a corporate change.\17\ For example, a DCO may
wish to transfer open interest to another DCO that is also a subsidiary
of the same parent company, or to another DCO in connection with
ceasing its clearing services for a particular product.
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\17\ The Commission notes, however, that a transfer of open
interest in this regard would not be in the context of a default,
which would typically involve a DCO transferring positions from one
FCM to another FCM.
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To separate the procedures for a request to transfer open interest
from those procedures to report a change to the DCO's corporate
structure or ownership, the Commission is proposing changes to Sec.
39.3(f), to be renumbered as Sec. 39.3(g), to simplify the
requirements for requesting a transfer of open interest and remove
references to transfers of registration and requirements regarding
corporate changes. Proposed Sec. 39.3(g) would only apply to instances
in which a DCO requests to transfer its open interest. Changes to the
DCO's ownership would continue to be addressed under Sec.
39.19(c)(4)(viii) (proposed to be renumbered as Sec. 39.19(c)(4)(ix)).
Additionally, as discussed further below, the Commission is proposing
to require a DCO to report a change to the legal name under which it
operates in proposed Sec. 39.19(c)(4)(xi). The Commission is also
proposing conforming changes to Sec. 39.19(c)(4)(ix) to remove cross-
references to Sec. 39.3(f).
Under the proposed amendments to Sec. 39.3(g), a DCO seeking to
transfer its open interest would be required to submit rules for
Commission approval pursuant to Sec. 40.5,\18\ rather than submitting
a request for an order at least three months prior to the anticipated
transfer. In an effort to simplify the existing requirements, the
proposed change would permit the transfer to take effect after a 45-day
Commission review period. The 45-day review period would be intended to
ensure that clearing members are made aware of the intended transfer
and to determine whether the transferee DCO is suitable to take on the
transfer \19\ and would be able to continue to operate in compliance
with the CEA and the Commission's regulations. As part of its
submission pursuant to Sec. 40.5, the DCO would be required to
include: (1) The underlying agreement that governs the transfer; (2) a
description of the transfer, including the reason for the transfer and
its impact on the rights and obligations of clearing members and market
participants holding positions that comprise the DCO's open interest;
(3) a discussion of the transferee's ability to comply with the CEA,
including the DCO Core Principles, and the Commission's regulations
thereunder; (4) the transferee's rules marked to show changes that
would result from acceptance of the transferred positions; (5) a list
of products for which the DCO requests transfer of open interest; and
(6) a representation by the transferee that it is in and will maintain
compliance with the CEA, including the DCO Core Principles, and the
Commission's regulations thereunder upon transfer of the open interest.
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\18\ SIDCOs should consider whether the facts and circumstances
of the approval sought pursuant to a Sec. 40.5 filing also obligate
a SIDCO to file a Sec. 40.10 submission.
\19\ The Commission notes that, under the existing framework,
positions cleared for U.S. customers must be cleared by a registered
DCO, while proprietary positions of U.S. persons may be cleared by
registered or exempt DCOs. As a result, the Commission would need to
ensure that the positions are transferred to an entity that is
appropriately registered or exempt from DCO registration.
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C. Procedures for Implementing DCO Rules and Clearing New Products
1. Request for Approval of Rules--Sec. 39.4(a)
Regulation 39.4(a) specifies that an applicant for registration or
a registered DCO may request, pursuant to the procedures set forth in
Sec. 40.5, that the Commission approve any or all of its rules prior
to their implementation. In practice, the Commission's review of
applications for DCO registration includes review of the applicant's
rules, which are required to be submitted as Exhibit A-2 to Form DCO.
The Commission's issuance of an order of registration as a DCO
constitutes an approval of the applicant's rules that were submitted as
part of the application. Accordingly, the Commission is proposing to
delete the reference in Sec. 39.4(a) to an applicant for registration,
as it is unnecessary for an applicant to separately request approval of
its rules.
2. Portfolio Margining--Sec. 39.4(e)
Regulation 39.4(e) establishes certain procedural requirements that
apply to a DCO seeking approval for a futures account portfolio
margining program. Under Sec. 39.4(e), a DCO seeking to provide a
portfolio margining program under which securities would be held in
[[Page 22231]]
a futures account is required to petition the Commission for an order
``under section 4d of the [CEA].'' To conform terminology to other
provisions in part 39 which distinguish between futures accounts
subject to section 4d(a) of the CEA and cleared swaps accounts subject
to section 4d(f) of the CEA, the Commission is proposing to substitute
``section 4d(a)'' for ``section 4d'' in Sec. 39.4(e).
IV. Amendments to Part 39--Subpart B--Compliance With Core Principles
A. Compliance With Core Principles--Sec. 39.10
1. Chief Compliance Officer--Sec. 39.10(c)
Regulation 39.10(c)(1)(ii) requires that a DCO's chief compliance
officer (CCO) report to the board of directors or the senior officer of
the DCO. The Commission recognizes that a legal entity registered as a
DCO may engage in substantial activities not related to clearing, in
which case it may be more appropriate for the CCO to report to the
senior officer responsible for the DCO's clearing activities. For
example, traditionally, exchanges have had clearing operations as a
component of their overall structure. In some instances, the exchange
is the same legal entity as the DCO, and therefore, the senior officer
of the entity would not necessarily be focused on the clearing
operations. In light of this, the Commission is proposing to amend
Sec. 39.10(c)(1)(ii) to permit the CCO to report to the senior officer
responsible for the DCO's clearing activities. The Commission also is
proposing to amend Sec. 39.10(c)(4)(i) to permit the CCO to submit the
annual report (which is discussed below) to the senior officer
responsible for the DCO's clearing activities.\20\
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\20\ Regulation 39.10(c)(3) also requires the CCO to ``provide
the annual report to the board of directors or the senior officer.''
Because this requirement is set forth in greater detail in Sec.
39.10(c)(4)(i), the Commission is proposing to remove, rather than
amend, the language in Sec. 39.10(c)(3).
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Regulation 39.10(c)(3)(i) requires the CCO to prepare an annual
report that contains a description of the DCO's written policies and
procedures, including the code of ethics and conflict of interest
policies. The Commission is proposing to amend this requirement to
allow a DCO to incorporate by reference the parts of its most recent
CCO annual report containing such description, to the extent that the
DCO's written policies and procedures have not materially changed since
they were most recently described in a previously submitted CCO annual
report. This is intended to help make the process of preparing the CCO
annual report more efficient by not requiring the report to repeat
potentially lengthy descriptions of policies and procedures that have
already been described in a CCO annual report previously submitted to
the Commission. However, to ensure that the descriptions remain current
and easily accessible, the Commission is proposing to allow this
incorporation by reference only to a CCO annual report submitted to the
Commission within the five-year period prior to the date of the CCO
annual report containing such incorporation by reference. The
Commission believes that this timeframe is appropriate given the record
retention requirements of Sec. 39.20. The Commission wishes to stress
that this ability to incorporate by reference only applies to
descriptions of policies and procedures that have not materially
changed and does not apply to the CCO's assessment of their
effectiveness or other requirements outside of Sec. 39.10(c)(3)(i).
The Commission also is proposing to amend Sec. 39.10(c)(3)(ii)(A),
which requires the CCO to prepare an annual report that reviews each
``core principle and applicable Commission regulation,'' and with
respect to each, identifies the compliance policies and procedures that
are designed to ensure compliance ``with the core principle.'' In order
to be consistent with the first part of the requirement, the Commission
is proposing to change the language of the second part to ``with each
core principle and applicable regulation.'' The Commission is further
proposing to amend Sec. 39.10(c)(3)(ii) to clarify that, for SIDCOs
and subpart C DCOs, this includes the Commission's regulations in
subpart C of part 39. In addition, the Commission is further proposing
to require that the compliance policies and procedures be identified
``by name, rule number, or other identifier'' to clarify that this
provision is intended to require the CCO annual report to clearly and
specifically identify the policies and procedures intended to comply
with each core principle and applicable regulation.
Finally, Sec. 39.10(c)(4)(i) requires the CCO to provide the
annual report to the board of directors or senior officer of the DCO
for review prior to submitting it to the Commission. The Commission is
proposing to amend the provision to require that this process be
described in the annual report, including providing the date on which
the report was submitted to the board of directors or senior officer.
The Commission notes that Sec. 39.10(c)(4)(i) already requires the
submission of the report to the board of directors or senior officer to
be recorded in the board of directors' meeting minutes or otherwise, as
evidence of compliance with this requirement. However, the Commission
believes that it is reasonable to require similar disclosure in the CCO
annual report so that compliance is evident outside the context of an
examination of the DCO's board of directors' meeting minutes or other
records. The Commission notes that some DCOs already describe this
process in the cover letter submitted along with the CCO annual report,
but the Commission prefers that this description appear in the annual
report itself or in an annex, schedule, or exhibit attached to and
included with the annual report. The Commission is also proposing to
amend Sec. 39.10(c)(4)(ii) by removing the requirement that the CCO
annual report be submitted concurrently with the DCO's fiscal year-end
audited financial statement, to be consistent with a proposed change to
Sec. 39.19(c)(3)(iv) described below.
2. Enterprise Risk Management--Sec. 39.10(d)
The Commission is proposing to add new Sec. 39.10(d) \21\ to
specifically provide that a DCO is required to have a program of
enterprise risk management, which would be defined in Sec. 39.2 as an
enterprise-wide strategic business process intended to identify
potential events that may affect the enterprise and to manage the
probability or impact of those events on the enterprise as a whole,
such that the overall risk remains within the enterprise's risk
appetite and provides reasonable assurance that the DCO can continue to
achieve its objectives, including compliance with the CEA and
[[Page 22232]]
Commission regulations. The proposed definition is intended to be
applicable to a variety of corporate structures, including stand-alone
DCOs, legal entities that are a DCO but also perform other functions
(such as a DCM), and corporate groups that consist of a DCO and legally
separate but affiliated entities.\22\
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\21\ The Commission is proposing to place the requirement for an
enterprise risk management program in Sec. 39.10, which codifies
Core Principle A (pertaining to compliance with the DCO Core
Principles generally), to emphasize the broad application of an
enterprise risk management program to a DCO's operations and
services. The Commission previously declined to adopt an enterprise
risk management requirement applicable to DCOs in a rulemaking
pertaining to a specific Core Principle--Core Principle I, ``System
Safeguards''--because such a requirement ``must be addressed in a
more comprehensive fashion involving more than the system safeguards
context alone, and thus are not appropriate for this rulemaking.''
See System Safeguards Testing Requirements for Derivatives Clearing
Organizations, 81 FR 64322, 64332 (Sept. 19, 2016). Other Commission
regulations codify various specific aspects of risk management. For
example, Sec. 39.13 codifies Core Principle D, which focuses on
market risk and credit risk; Sec. 39.18 codifies Core Principle I,
which addresses system safeguards; and Sec. 39.27 codifies Core
Principle R, which addresses legal risk. By including the enterprise
risk management requirement in Sec. 39.10, the Commission intends
to underscore that a properly designed and managed enterprise risk
management program covers all risks.
\22\ The term ``enterprise-wide'' is intended to require that
the process of identifying, assessing, measuring, monitoring, and
managing risk apply to the entire legal entity and its affiliates as
a collective whole, with the objective to manage the risks to the
DCO. A DCO would satisfy its obligations under paragraph (d)(1) (and
paragraphs (d)(2) and (3), as discussed below) if it is part of a
corporate group that has in place an enterprise risk management
program that includes the DCO within its scope and complies with the
requirements of this section.
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An enterprise risk management program requires an entity to assess
all potential risks it faces, including but not limited to systemic,
cyber, legal, credit, liquidity, concentration, general business,
operational, custody and investment, conduct, financial, reporting,
compliance, governance, strategic, and reputational risks. An
enterprise risk management program also requires the entity to identify
and assess those risks on an enterprise-wide basis, meaning that it
must consider whether individual risks across the organization and its
affiliates are interrelated and may create a combined exposure to the
entity that differs from the sum of the individual risks, and must
measure, monitor, and manage such risks accordingly. Additionally, an
enterprise risk management program requires an assessment of both the
nominal or inherent risk that exists prior to the establishment of any
risk mitigation activities (i.e., controls) as well as the residual
risk that remains once such mitigation activities or risk responses are
taken into account.
Existing Commission regulations already require a DCO to manage its
risks.\23\ However, the Commission has found that some DCOs lack a
formal enterprise risk management program that addresses their risks on
an enterprise-wide basis. Therefore, proposed Sec. 39.10(d)(1) and (2)
would require a DCO to implement an enterprise risk management program
and establish and maintain an enterprise risk management framework.
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\23\ For example, Sec. 39.11(a) requires a DCO to identify and
adequately manage its general business risks; Sec. 39.13(a)
requires a DCO to ensure that it possesses the ability to manage the
risks associated with discharging the responsibilities of the DCO
through the use of appropriate tools and procedures; and Sec.
39.13(b) requires a DCO to establish and maintain written policies,
procedures, and controls which establish an appropriate risk
management framework that, at a minimum, clearly identifies and
documents the range of risks to which the DCO is exposed and
addresses the monitoring and management of the entirety of those
risks.
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Consistent with Sec. 39.10(b), the Commission does not intend to
be overly prescriptive by requiring specific standards and
methodologies. A DCO should develop an enterprise risk management
program that works best for its specific risk exposures, product types,
customer base, market segment, and organizational structure, among
other things, as long as the program meets the proposed minimum
standards and any other legal and regulatory requirements.
Therefore, proposed Sec. 39.10(d)(3) would require a DCO to follow
generally accepted standards and industry best practices with respect
to the development and ongoing monitoring of its enterprise risk
management framework, assessment of the performance of the enterprise
risk management program, and the management and mitigation of risk to
the DCO. The Commission is mindful that best practices evolve and
change over time and does not, therefore, wish to prescribe specific
standards in its regulations.\24\
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\24\ In the interests of offering guidance to DCOs, however, the
Commission notes that standards similar to those developed by the
Committee of Sponsoring Organizations of the Treadway Commission or
the International Organization for Standardization are currently
among those that would reasonably be considered in the development
of an enterprise risk management program. Although different
standards may use different terminology for the same concept, these
standards have some commonalities, such as the statement of risk
appetite and the use of a risk register or logs to record any losses
or risks above a given threshold. These standards are noted here to
assist DCOs in identifying standards that they may wish to adopt or
consider in designing and implementing their risk management
frameworks; there may be other internationally-recognized standards
that may be used in addition to or instead of the standards
mentioned above. In the interests of transparency, a DCO should
specify the standards or industry best practices it uses as part of
its enterprise risk management program.
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The Commission has observed that some DCOs tend to ``silo''
responsibility for complying with their statutory and regulatory
obligations given the diverse nature of the relevant risks. For
example, risk management personnel might be primarily responsible for
compliance with Core Principle D, while information technology
personnel might be primarily responsible for managing the risks
addressed by Core Principle I. To ensure that the enterprise risk
management program is managed appropriately, the Commission is
proposing Sec. 39.10(d)(4), which would require a DCO to identify as
its enterprise risk officer an appropriate individual that exercises
the full responsibility and authority to manage the DCO's enterprise
risk management function.\25\
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\25\ The Commission is proposing to require that the DCO
``identify,'' rather than ``designate,'' the enterprise risk officer
because, for certain corporate structures, the enterprise risk
officer would most appropriately be an officer of a parent or other
affiliate of the DCO. As a result, the DCO may not always be the
entity that may properly ``designate'' the enterprise risk officer.
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The enterprise risk officer would be required to have the
authority, independence, resources, expertise, and access to relevant
information necessary to fulfil the responsibilities of such position.
The Commission believes that the independence of the enterprise risk
officer is a critical factor in allowing such officer to operate
effectively and has concerns about the potential for senior officers to
interfere with the enterprise risk officer's performance of his or her
responsibilities. The Commission requests comment regarding whether the
enterprise risk officer should be required to report directly to the
board of directors of the organization for which the enterprise risk
officer is responsible for managing the risks, whether such
organization is the DCO or its corporate parent or other affiliate. The
Commission also requests comment as to whether a DCO's chief risk
officer should be permitted to also serve as its enterprise risk
officer.
B. Financial Resources--Sec. 39.11
Regulation 39.11 implements Core Principle B, which requires a DCO
to possess financial resources that, at a minimum, exceed the total
amount that would enable the DCO to meet its financial obligations to
its clearing members notwithstanding a default by the clearing member
creating the largest financial exposure for the DCO in extreme but
plausible market conditions and to cover its operating costs for a
period of one year, as calculated on a rolling basis. The Commission is
proposing to revise or clarify several aspects of Sec. 39.11,
including revising the language of Sec. 39.11(a) to make it more
consistent with Core Principle B.
1. Calculation of Largest Financial Exposure and Stress Tests--Sec.
39.11(a)(1), (c)(1) and (2).
Regulation 39.11(a)(1) requires a DCO to maintain financial
resources sufficient to meet its financial obligations to its clearing
members notwithstanding a default by the clearing member creating the
largest financial exposure for the DCO in extreme but plausible market
conditions. Regulation 39.11(c)(1) requires a DCO to perform ``stress
testing'' in order to determine the
[[Page 22233]]
financial resources required to satisfy Sec. 39.11(a)(1). As an
initial matter, the Commission is proposing to change the wording to
``stress tests'' to use the term defined in Sec. 39.2. This is not
intended to change the meaning of Sec. 39.11(c)(1).
Although Sec. 39.11(c)(1) grants a DCO reasonable discretion in
determining the methodology used to calculate its financial resources
requirement, Commission staff has noted inconsistencies in how DCOs
treat excess collateral on deposit when conducting stress tests. These
inconsistencies lessen the usefulness of the stress tests. Accordingly,
the Commission is proposing additional minimum requirements that a DCO
would have to follow in determining its exposure in accordance with
Sec. 39.11(c)(1).
In particular, the Commission is proposing to add Sec.
39.11(c)(2)(i)(A) \26\ to require a DCO to calculate its largest
financial exposure net of the clearing member's required initial margin
amount on deposit. In other words, the DCO may not take into account
excess collateral on deposit or initial margin required but not yet
received. This would focus a DCO's analysis on the resources that would
actually be available to the DCO during times of stress and is
consistent with recent guidance issued by CPMI-IOSCO suggesting that
when assessing the adequacy of their financial resources, CCPs should
take into account only prefunded financial resources and ignore
voluntary excess contributions.\27\ Consistent with this change, the
Commission is proposing to remove Sec. 39.11(b)(1)(i), which permits
margin to be used to satisfy the requirements of Sec. 39.11(a)(1),
because the required initial margin amount on deposit for the clearing
member will be applied before determining the largest financial
exposure for the DCO in extreme but plausible market conditions.
Therefore, the margin would not be available to also cover the
exposure.
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\26\ The Commission is proposing to renumber current Sec.
39.11(c)(2) as Sec. 39.11(c)(3).
\27\ See CPMI-IOSCO, Resilience of central counterparties:
Further guidance on the PFMI (July 2017), Principles 4.2.4, 4.2.5,
available at https://www.bis.org/cpmi/publ/d163.pdf.
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Additionally, the Commission is proposing Sec. 39.11(c)(2)(ii) to
require that when stress tests produce losses in both customer and
house accounts, a DCO must combine the customer and house stress test
losses of each clearing member using the same stress test scenario.
Finally, the Commission is proposing several provisions designed to
ensure customer funds are treated properly when a DCO is calculating
its largest financial exposure. Proposed Sec. 39.11(c)(2)(i)(B) would
require a DCO to use customer initial margin only to the extent
permitted by parts 1 and 22 of the Commission's regulations. Proposed
Sec. 39.11(c)(2)(iii) would clarify that when calculating its largest
financial exposure, a DCO may net any gains in the house account with
customer losses, if permitted by the DCO's rules; however, a DCO may
not net losses in the house account with gains in the customer account.
Proposed Sec. 39.11(c)(2)(iv) would further clarify that, with respect
to a clearing member's cleared swaps customer account, a DCO may net
gains for one customer against losses for another customer only to the
extent permitted by the DCO's rules.
2. Assessments--Sec. 39.11(d)(2)
Regulation 39.11(d)(2) sets out certain conditions that apply to a
DCO's use of assessments for additional guaranty fund contributions in
calculating the financial resources available to meet its obligations
under Sec. 39.11(a)(1). Regulation 39.11(d)(2)(iv) provides that the
DCO shall only count the value of assessments, after a 30 percent
haircut, ``to meet up to 20 percent of those obligations.'' The
Commission has been advised that the phrase ``those obligations,''
which is a reference to the obligations discussed in the introductory
language of Sec. 39.11(d)(2), has created some uncertainty. Therefore,
for clarity, the Commission is proposing to replace the phrase ``those
obligations'' with ``the total amount required under paragraph (a)(1)
of this section.''
3. Liquidity of Financial Resources--Sec. 39.11(e)
Regulation 39.11(e)(1)(ii) requires that the financial resources
allocated by a DCO to meet the requirements of Sec. 39.11(a)(1) (i.e.,
its default resources) be sufficiently liquid to enable the DCO to
fulfill its obligations as a central counterparty during a one-day
settlement cycle. Regulation 39.11(e)(1)(ii) further requires that
those resources include cash, U.S. Treasury obligations, or high
quality, liquid, general obligations of a sovereign nation (i.e., cash
or cash equivalents), in an amount greater than or equal to the average
of its clearing members' average pays over the last fiscal quarter.\28\
If that amount is less than what a DCO needs to fulfill its obligations
during a one-day settlement cycle, Sec. 39.11(e)(1)(iii) permits a DCO
to take into account a committed line of credit for the purpose of
meeting the remainder of the requirement.
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\28\ The Commission wishes to clarify that the cash, U.S.
Treasury obligations, or high quality, liquid, general obligations
of a sovereign nation required to be held under Sec.
39.11(e)(1)(ii) do not have to be attributable to the DCO's own
capital but can be attributable to any of the acceptable financial
resources included in Sec. 39.11(a)(1).
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The Commission's intention was to require that at least a portion
of a DCO's default resources be sufficiently liquid to enable the DCO
to complete a one-day settlement cycle and that these liquid resources
include a certain amount of cash or cash equivalents. Then, if the cash
or cash-equivalent amount was not sufficient to meet the total one-day
settlement cycle liquidity requirement, a DCO could use a committed
line of credit to make up the difference.\29\ Regulation 39.11(b)(1),
however, which sets forth the types of financial resources that can be
considered as default resources, does not expressly permit the use of a
committed line of credit; \30\ it does permit the use of ``[a]ny other
financial resource deemed acceptable by the Commission.'' The result is
that Sec. 39.11(b)(1) only permits a DCO to use a committed line of
credit as part of its default resources if ``deemed acceptable by the
Commission,'' while Sec. 39.11(e)(1)(iii) seems to permit a DCO to use
a committed line of credit as part of its default resources up to the
amount needed to satisfy the ``one-day settlement cycle'' liquidity
requirement after cash or cash equivalents have been applied.
Accordingly, the Commission is proposing Sec. 39.11(e)(3) to clarify
that a committed line of credit or similar facility is a permitted
default resource up to the amount provided for in Sec.
39.11(e)(1)(ii), provided, however, that it is not counted twice to
meet the requirements of Sec. 39.11(e)(1)(ii) and Sec.
39.11(e)(2).\31\ The Commission is also proposing clarifying changes to
the text of Sec. 39.11(e)(1)(iii) and (e)(2).
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\29\ See Financial Resources Requirements for Derivatives
Clearing Organizations, 75 FR 63113, 63116 (Oct. 14, 2010) (proposed
rule).
\30\ In the notice of proposed rulemaking for Sec. 39.11, the
Commission noted that a committed line of credit or similar facility
is not listed as a financial resource available to a DCO to satisfy
the requirements of Sec. 39.11(a)(1) and (2). The Commission
further noted that a DCO may use a committed line of credit or
similar facility only to meet the liquidity requirements set forth
in Sec. 39.11(e)(1) and (2). Id. See also Derivatives Clearing
Organization General Provisions and Core Principles, 76 FR at 69350
(affirming this approach).
\31\ The Commission is proposing to renumber current Sec.
39.11(e)(3) as Sec. 39.11(e)(4).
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In addition, the Commission is proposing to change references to
``daily settlement pay'' in Sec. 39.11(e)(1)(ii) to ``daily settlement
variation pay'' in order to clarify that additional calls for
[[Page 22234]]
initial margin should not be included in the calculation.
4. Reporting Requirements--Sec. 39.11(f)
Regulation 39.11(f) sets forth reporting requirements for DCOs
concerning the financial resources they are required to maintain
pursuant to Sec. 39.11(a). After Sec. 39.11(f) was adopted, the
Commission adopted Sec. Sec. 39.33(a) and 39.39(d), which set forth
financial resources requirements for SIDCOs and subpart C DCOs, and
financial resources requirements for the recovery and wind-down plans
of SIDCOs and subpart C DCOs, respectively. The Commission is proposing
to amend several provisions of Sec. 39.11(f) by adding the words ``and
Sec. Sec. 39.33(a) and 39.39(d), if applicable,'' to clarify that
financial resources reporting by SIDCOs and subpart C DCOs should
encompass all financial resources requirements applicable to them under
part 39.
5. Financial Statements--Sec. 39.11(f)(1)(ii)
Regulation 39.11(f)(1)(ii) requires a DCO to file with the
Commission each fiscal quarter, or at any time upon Commission request,
a financial statement, including the balance sheet, income statement,
and statement of cash flows, of the DCO or of its parent company. Since
Sec. 39.11(f)(1)(ii) was implemented, some DCOs have filed the
financial statements of their parent companies. Because some of these
DCOs are part of a complex corporate structure, Commission staff has
had difficulty determining whether the entity covered by a particular
financial statement is the true, direct parent of the relevant DCO,
which, in turn, makes it difficult to accurately assess the financial
strength of the DCO. Therefore, the Commission is proposing to revise
Sec. 39.11(f)(1)(ii) to require that the financial statement provided
be that of the DCO and not the parent company.
In further regard to Sec. 39.11(f)(1)(ii), the Commission has
received many inquiries concerning the accounting standards that apply
to the preparation of the DCO's financial statements. Generally,
Commission regulations require financial statements to be prepared in
accordance with U.S. generally accepted accounting principles (U.S.
GAAP).\32\ Therefore, the Commission would expect DCOs to provide
financial statements prepared in accordance with U.S. GAAP. However,
the Commission recognizes that DCOs organized outside the United States
may prepare their financial statements in accordance with International
Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board (IASB), or pursuant to other country-
specific accounting standards. The Commission has permitted commodity
pool operators to file commodity pool financial statements prepared in
accordance with IFRS if the pool is organized under the laws of a
foreign jurisdiction, and certain other conditions are met.\33\
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\32\ See, e.g., Sec. Sec. 1.10(d)(3), 4.22(d), and
38.1101(b)(1).
\33\ See Sec. 4.22(d)(2).
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The Commission notes that the Securities and Exchange Commission
(SEC) has adopted financial reporting requirements for securities
clearing agencies that require U.S. GAAP, but permit the use of IFRS by
clearing agencies that are ``incorporated or organized under the laws
of any foreign country.'' \34\ The SEC stated in its adopting release
that it also recognizes the ``advantages of financial statement
disclosure that are limited to more widely applied bases of accounting
and may offer more utility to market participants, regulators, and
other stakeholders of clearing agencies.'' \35\ Therefore, it limited
the different bases of accounting upon which annual audited financial
statements may be prepared to IFRS and U.S. GAAP.\36\
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\34\ 17 CFR 240.17Ad-22(c)(2)(ii).
\35\ Clearing Agency Standards, 77 FR 66220, 66244 (Nov. 2,
2012) (final rule).
\36\ See id.
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The Commission therefore is proposing to revise Sec.
39.11(f)(1)(ii) to clarify that the financial statement must be
prepared in accordance with U.S. GAAP for DCOs incorporated or
organized under U.S. law, and in accordance with either U.S. GAAP or
IFRS issued by the IASB for DCOs incorporated or organized under the
laws of any foreign country.
In reviewing DCOs' financial statements, Commission staff has noted
that assets allocated by the DCO to meet the requirements of Sec.
39.11(a)(1) or (2) often are not identified accordingly. The Commission
therefore is proposing in Sec. 39.11(f)(1)(ii) and (f)(2)(i)
(discussed below) to require that assets allocated by the DCO for such
purpose must be clearly identified on the DCO's balance sheet as held
for that purpose.
In addition, the Commission is proposing to renumber current Sec.
39.11(f)(2) as Sec. 39.11(f)(1)(iv) and amend it to incorporate the
language of current Sec. 39.11(f)(4), which requires a DCO to submit
its quarterly financial report no later than 17 business days after the
end of the DCO's fiscal quarter or at a later time as permitted by the
Commission in its discretion in response to a DCO's request for an
extension.
6. Annual Reporting--Sec. 39.11(f)(2)
The Commission is proposing to revise Sec. 39.11(f)(2) to set
forth a DCO's annual financial reporting requirements (currently set
forth in Sec. 39.19(c)(3)(ii), which would also be revised) in the
same way Sec. 39.11(f)(1) sets forth a DCO's quarterly financial
reporting requirements (which are cross-referenced in Sec.
39.19(c)(2)).
In addition to its audited year-end financial statement, a DCO
would be required to submit: (1) A reconciliation, including
appropriate explanations, of its balance sheet when material
differences exist between it and the balance sheet in the DCO's
financial statement for the last quarter of the fiscal year or, if no
material differences exist, a statement so indicating, and (2) such
further information as may be necessary to make the statements not
misleading. Commission staff has encountered situations in which
significant discrepancies exist between a DCO's financial statements
for the last quarter of its fiscal year and its audited year-end
financial statement. There is often a simple explanation for this,
e.g., the discrepancies reflect a material change in a given foreign
exchange rate. The Commission believes a reconciliation will help
explain these discrepancies and will aid its review of the DCO's
financial statements.
7. Documentation Requirements--Sec. 39.11(f)(3)
Current Sec. 39.11(f)(3) requires a DCO to provide to the
Commission certain documentation related to its quarterly financial
reporting.\37\ The Commission has determined that requiring this
documentation each quarter is unnecessary where there is no change from
the prior submission. Therefore, the Commission is proposing to revise
Sec. 39.11(f)(3) to clarify that a DCO must send the documentation to
the Commission required under current paragraphs (f)(3)(i) and (ii)
(proposed to be renumbered as paragraphs (f)(3)(i)(A) and (i)(B)) only
upon the DCO's first submission under Sec. 39.11(f)(1) and in the
event of any change thereafter.
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\37\ The documentation explains (1) the methodology used to
compute financial resources requirements, and (2) the basis for the
DCO's determinations regarding valuation and liquidity requirements.
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The Commission also is proposing to renumber Sec.
39.11(f)(3)(iii), which concerns providing copies of agreements
establishing or amending a credit facility, insurance coverage, or
other arrangement, as Sec. 39.11(f)(3)(ii),
[[Page 22235]]
and add language specifying that copies of the agreements should
evidence or support the DCO's ability to meet applicable financial
resources and liquidity resources requirements.
8. Certification--Sec. 39.11(f)(4)
After Sec. 39.11 was adopted, the Division advised DCOs that the
quarterly financial report required under paragraph (f) should be
accompanied by a certification as to the accuracy of the report signed
by the person responsible for the accuracy and completeness of the
report.\38\ Such certification is required for submission of annual
chief compliance officer reports and Form 1-FR by FCMs, and is also
appropriate in these circumstances.\39\ The Commission is proposing to
amend Sec. 39.11(f)(4) to add this new requirement.
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\38\ Memorandum to All Registered DCOs from Ananda
Radhakrishnan, Director, Division of Clearing and Risk, June 7,
2012.
\39\ See 17 CFR 39.10(c)(4)(ii) (requiring certification of
annual reports by chief compliance officers); 17 CFR 1.10(d)(4)
(requiring certification of financial reports submitted by FCMs and
introducing brokers); see also 17 CFR 4.22(h) (requiring commodity
pool operators to certify periodic and annual financial reports); 17
CFR 4.27(e)(1) (requiring commodity pool operators and commodity
trading advisors to certify periodic reports).
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C. Participant and Product Eligibility--Sec. 39.12
Regulation 39.12 implements Core Principle C, which requires a DCO
to establish admission and continuing eligibility standards for its
members, as well as standards for determining the eligibility of
agreements, contracts, or transactions submitted to the DCO for
clearing. Several provisions in Sec. 39.12 require a DCO to ``adopt''
or ``establish'' rules. The Commission is proposing to amend those
provisions to require a DCO to ``have'' rules.\40\
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\40\ The Commission is also proposing to renumber paragraphs
(a)(5)(i)(A) and (B) and (a)(5)(ii) of Sec. 39.12(a)(5) as
paragraphs (a)(5)(ii), (iii), and (iv), respectively.
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Regulation 39.12(b)(2) provides that a DCO shall adopt rules
providing that all swaps with the same terms and conditions are
economically equivalent within the DCO. The Commission recognizes that
some DCOs do not clear swaps and it was not the intention of the
Commission to require DCOs that do not clear swaps to adopt the rules
required under this provision. Therefore, the Commission is proposing
to revise Sec. 39.12(b)(2) so that it explicitly applies only to DCOs
that clear swaps.
D. Risk Management--Sec. 39.13
Regulation 39.13 implements Core Principle D, which establishes
risk management standards for DCOs. The Commission is proposing to
clarify several aspects of Sec. 39.13.
1. Risk Management Framework--Sec. 39.13(b)
Regulation 39.13(b) requires a DCO to establish and maintain
written policies, procedures, and controls, approved by its board of
directors, which establish an appropriate risk management framework.
The introductory heading to this provision states that it is a
``[d]ocumentation requirement.'' The Commission is proposing to replace
``[d]ocumentation requirement'' with ``[r]isk management framework''
and is also proposing to replace the words ``establish and maintain''
with ``have and implement'' to make it clear that a DCO is not only
required to have a documented risk management framework but to put it
into action.
2. Limitation of Exposure to Potential Default Losses--Sec. 39.13(f)
Regulation 39.13(f) requires a DCO to limit its exposure to
potential losses from clearing member defaults to ``ensure'' that the
DCO's operations would not be disrupted and non-defaulting clearing
members would not be exposed to unanticipated or uncontrollable losses.
The Commission recognizes that a DCO cannot ensure protection from that
which it cannot anticipate. Therefore, the Commission is proposing to
replace ``ensure'' with ``minimize the risk'' and make conforming
changes to paragraphs (f)(1) and (2) of Sec. 39.13.
3. Margin Requirements--Sec. 39.13(g)
a. Methodology and Coverage--Sec. 39.13(g)(2)
Regulation 39.13(g)(2)(i) requires that a DCO have initial margin
requirements that are commensurate with the risks of each product and
portfolio, including any unusual characteristics of, or risks
associated with, particular products or portfolios. The regulation
currently notes that such risks ``include[ ] but [are] not limited to
jump-to-default risk or similar jump risk.'' The Commission is
proposing to amend Sec. 39.13(g)(2)(i) to note that such risks also
include ``concentration of positions.'' Recent events, including a
significant loss from a default at a central counterparty outside of
the Commission's jurisdiction, highlight the importance of addressing
those risks.
b. Independent Validation--Sec. 39.13(g)(3)
Regulation 39.13(g)(3) requires that a DCO's systems for generating
initial margin requirements, including its theoretical models, be
reviewed and validated by a qualified and independent party on a
regular basis. The provision further provides that the validation may
be conducted by independent contractors or employees of the DCO, as
long as they are not responsible for the development or operation of
the systems and models being tested. The Commission is proposing to
amend this provision to specify that ``on a regular basis'' means
annually and to also permit employees of an affiliate of the DCO to
conduct the validations. Based on experience since the provision was
adopted, the Commission believes an annual validation is sufficient.
The Commission also believes it is appropriate to permit employees of
an affiliate of the DCO to conduct the validations because, as with
independent contractors or employees of the DCO, the main concern is
that they not be persons responsible for development or operation of
the systems and models being tested.
c. Spreads and Portfolio Margins--Sec. 39.13(g)(4)
The Commission is amending Sec. 39.13(g)(4) to substitute the
phrase ``conceptual basis'' for the phrase ``theoretical basis'' in the
discussion of spread margin. This change would not alter the meaning of
the rule but would simply make the terminology consistent with that
used in the other Commission regulations.\41\
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\41\ See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 81 FR 636, 658 (Jan. 6, 2016).
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d. Back Tests--Sec. 39.13(g)(7)
The Commission is proposing new Sec. 39.13(g)(7)(iii) to clarify
that, in conducting back tests of initial margin requirements, a DCO
should compare portfolio losses only to those components of initial
margin that capture changes in market risk factors.
e. Gross Customer Margin--Sec. 39.13(g)(8)(i)
Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin
on a gross basis for each clearing member's customer account(s). After
the regulation was adopted, Division staff received several inquiries
regarding whether the provision applied to intraday settlements as well
as end-of-day settlements. In response, the Division advised DCOs that
the provision requires a DCO to collect
[[Page 22236]]
customer initial margin on a gross basis during any settlement cycle
(end-of-day or intraday) in which the DCO collects customer initial
margin. The Division also asked DCOs to notify the Division, in
writing, of any issues that could prevent a DCO from fully complying
with this requirement.\42\
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\42\ Memorandum to All Registered DCOs from Ananda
Radhakrishnan, Director, Division of Clearing and Risk, July 19,
2012.
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Although Sec. 39.13(g)(8)(i) does not differentiate between end-
of-day and intraday collections of customer initial margin, there are
significant operational issues that may affect the ability of clearing
members to accurately determine the positions of individual customers
on an intraday basis with respect to certain types of transactions
(e.g., transfers, give-ups, and allocations of block orders) and with
respect to certain types of market participants (e.g., locals and high
frequency traders). Therefore, intraday gross margin calculations may
result in some clearing members being charged too much margin and
others being charged too little margin, which could necessitate
significant end-of-day adjustments.
Regulation 39.13(g)(8)(i) is premised upon the ability of a DCO to
accurately determine the initial margin amounts that would be required
for each individual customer if each individual customer were a
clearing member. Accordingly, the Commission is proposing to amend
Sec. 39.13(g)(8)(i) to require a DCO to collect customer initial
margin from its clearing members on a gross basis only during its end-
of-day settlement cycle, in light of the operational issues that may
arise intraday. However, the Commission strongly encourages DCOs to
collect customer initial margin from their clearing members on a gross
basis during any intraday settlement cycle in which the DCOs collect
customer initial margin, if they are able to calculate the margin
accurately. The Commission requests comment as to whether this is the
correct approach or whether there are other alternatives that would
address the collection of intraday gross margin.
Currently, Sec. 39.13(g)(8)(i)(B) provides that for purposes of
calculating the gross initial margin requirement for clearing members'
customer accounts, to the extent not inconsistent with other Commission
regulations, a DCO may require its clearing members to report the gross
positions of each individual customer to the DCO, or it may permit each
clearing member to report the sum of the gross positions of its
customers to the DCO. Regulation 39.13(g)(8)(i)(C) further provides
that for purposes of paragraph (g)(8), a DCO may rely, and may permit
its clearing members to rely, upon the sum of the gross positions
reported to the clearing members by each domestic or foreign omnibus
account that they carry, without obtaining information identifying the
positions of each individual customer underlying such omnibus accounts.
In addition, Sec. 39.19(c)(5)(iii) currently requires a DCO to file
with the Commission, for each customer origin of each clearing member,
the end-of-day gross positions of each beneficial owner, upon
Commission request.
The Commission believes the ability to analyze positions at the
customer level is a crucial element of an effective risk surveillance
program. For example, a clearing member account that is composed of
1,000 customers each holding one contract poses substantially less
financial risk to the clearing member and to the DCO than a clearing
member account composed of one customer holding 1,000 contracts. The
ability to identify those customers whose positions create the most
risk to a DCO's clearing members would assist the Commission in
determining whether adequate measures are in place to address those
risks and whether the Commission needs to take proactive steps to see
that those risks are mitigated.
When the part 39 regulations were adopted, the Commission
determined to allow a DCO to permit its clearing members to report the
sum of the gross positions of their customers to the DCO without
obtaining information identifying the positions of each individual
customer underlying such clearing members' omnibus accounts. The
Commission also determined not to require routine reporting of end-of-
day gross positions of each beneficial owner to the Commission, in part
because of concerns about the difficulty that DCOs would have in
obtaining this information.\43\ Subsequently, however, the Commission
adopted Sec. 22.11(c), which requires FCMs to report customer
information about swaps to DCOs.\44\ Thus, for swaps, DCOs now have
data that they did not have fully available to them at the time part 39
was adopted. Moreover, the Commission has established a reporting
protocol for this data, which can be used for submitting futures data
as well.
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\43\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR at 69375, 69400.
\44\ Protection of Cleared Swaps Customer Contracts and
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy
Provisions, 77 FR 6336, 6376 (Feb. 7, 2012) (codified at 17 CFR 22).
---------------------------------------------------------------------------
To avoid a potential regulatory gap, the Commission is proposing to
require a DCO to have rules requiring its clearing members to report
customer information about futures (as well as swaps) to DCOs. This
will enable DCOs, in turn, to report this information to the
Commission, as discussed further below with respect to the proposed
amendment to Sec. 39.19(c)(1)(i)(D). Specifically, the proposed
amendments to Sec. 39.13(g)(8)(i)(B) would require a DCO to have rules
that require its clearing members to provide reports to the DCO each
day setting forth end-of-day gross positions of each beneficial owner
within each customer origin of the clearing member.\45\
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\45\ In this regard, the Commission is also proposing to amend
Sec. 39.13(g)(8)(i)(B) by changing ``may'' to ``shall,'' deleting
``to the extent not inconsistent with other Commission regulations''
and ``or it may permit each clearing member to report the sum of the
gross positions of its customers to the derivatives clearing
organization,'' deleting paragraph (C), and renumbering paragraphs
(D) and (E).
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f. Customer Initial Margin Requirements--Sec. 39.13(g)(8)(ii)
Regulation 39.13(g)(8)(ii) provides that a DCO must require its
clearing members to collect customer initial margin from their
customers, ``for non-hedge positions, at a level that is greater than
100 percent of the [DCO]'s initial margin requirements with respect to
each product and swap portfolio.'' Historically, DCMs had set customer
initial margin requirements for their FCM members,\46\ and the
Commission stated that this provision simply shifts the responsibility
for establishing customer initial margin requirements from DCMs to
DCOs.\47\ The Commission also noted its belief that requiring an FCM to
collect higher customer initial margin for ``non-hedge positions''
provides a valuable cushion of readily available customer margin
collateral.\48\
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\46\ The Commission is proposing to amend Sec. 39.13(g)(8)(ii)
and (iii) to clarify that these provisions apply to FCM clearing
members only.
\47\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR at 69377.
\48\ Id. at 69378.
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After Sec. 39.13(g)(8)(ii) was adopted, the Division issued
interpretative guidance addressing several aspects of the regulation in
response to a request from Chicago Mercantile Exchange, Inc. (CME), a
registered DCO.\49\ The Commission is proposing to amend Sec.
39.13(g)(8)(ii) in a manner consistent
[[Page 22237]]
with the interpretative guidance provided in the Division's letter, as
discussed further below.
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\49\ CFTC Letter No. 12-08 (Sept. 14, 2012); see also Letter
from Lisa Dunsky, Executive Director and Associate General Counsel,
Chicago Mercantile Exchange Inc., to Ananda Radhakrishnan, Director,
Division of Clearing and Risk (Aug. 29, 2012).
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In its request, CME asked for clarification as to the meaning of
the term ``non-hedge positions.'' CME explained that DCM requirements
for collection of higher customer initial margin had been applied
historically on an account, rather than a position, basis. Under
existing rules or practices at various DCMs, exchange members, market
makers, market professionals, and certain other categories of customers
had been subject to the clearing initial margin requirement; i.e., such
exchange member accounts were designated as ``hedge'' or ``member,''
and by virtue of this designation, received the lower clearing initial
margin rate, even though there may have been speculative positions in
the accounts.
CME also inquired as to the applicability of Sec. 39.13(g)(8)(ii)
to non-clearing FCM customer omnibus accounts at clearing FCMs. CME
stated that a non-clearing FCM's customer omnibus account may be
comprised of both hedge accounts and speculative accounts, and the
clearing FCM typically did not know the identity of the underlying
customers in a non-clearing FCM's omnibus account. The non-clearing FCM
sets customer initial margin requirements based on whether a customer
account is designated as ``hedge'' or ``speculative.'' Thus, a
speculative account included within an omnibus account already would
have been assessed the higher customer initial margin requirement by
such customer's non-clearing FCM. If the clearing FCM were required to
apply the higher customer initial margin rate to the entire customer
omnibus account, this would require the non-clearing FCM to either (1)
post more collateral with the clearing FCM than the amount actually
collected from its hedge customers in the omnibus account, or (2)
collect the higher customer initial margin requirement from its hedge
customers so that it could post this collateral with the clearing FCM.
In its response to CME's request, the Division stated that it
interprets Sec. 39.13(g)(8)(ii) ``in a manner that preserves the
historical customer margining practices applicable to FCMs . . .
[noting that] FCMs are expected to continue the practice of collecting
customer initial margin at a level higher than the minimum required, if
such action is warranted based on the unique risk profile of an
individual customer.'' The Commission agrees with such interpretation
and accordingly, is proposing to revise Sec. 39.13(g)(8)(ii) to permit
DCOs to continue the practice of establishing customer initial margin
requirements based on the type of customer account and by applying
prudential standards that result in FCMs collecting customer initial
margin at levels commensurate with the risk presented by each customer
account.
The Commission therefore proposes to amend Sec. 39.13(g)(8)(ii) by
deleting the reference to ``non-hedge'' positions, changing the
reference to ``a level that is greater than 100 percent'' to ``a level
that is not less than 100 percent,'' clarifying that the customer
initial margin level is measured against ``clearing'' initial margin
requirements, and explicitly stating that customer initial margin
levels must be ``commensurate with the risk presented by each customer
account.''
The Commission believes that establishing a bright-line test to
determine the appropriate percentage by which customer initial margin
requirements must exceed clearing initial margin requirements with
respect to any particular types of customer accounts is inappropriate
because the circumstances for each DCO and the nature of its clearing
members and their customers vary. In adopting Sec. 39.13(g)(8)(ii),
the Commission noted that the percentage ``should be based on the
nature and volatility patterns of the particular product or swap
portfolio, and the DCO's related evaluation of the potential risks
posed by customers in general to their clearing members and, in turn,
the potential risks posed by such clearing members in general to the
DCO, rather than the creditworthiness of particular customers.'' \50\
The Commission requests comment as to whether it should add standards
or further direction in Sec. 39.13(g)(8)(ii), or provide guidance to
further clarify what would be considered ``commensurate with the risk
presented,'' similar to the Commission's statement in the adopting
release noted above.
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\50\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR at 69378.
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The Commission is proposing to amend the language in Sec.
39.13(g)(8)(ii) that gives the DCO reasonable discretion in determining
the percentage by which customer initial margin requirements must
exceed the DCO's clearing initial margin requirements with respect to
particular products or portfolios, by replacing ``the percentage by
which'' with ``whether and by how much.'' However, the proposed
amendments to Sec. 39.13(g)(8)(ii) would give the Commission the
ability to require different customer initial margin levels if the
Commission deems the levels insufficient to protect the financial
integrity of the DCO or its clearing members. Since the adoption of
Sec. 39.13(g)(8)(ii), DCOs have typically added a 10 percent increase
to the clearing initial margin requirement to set the higher customer
initial margin requirement. The Commission has generally found this to
be adequate in ordinary market conditions.
g. Haircuts--Sec. 39.13(g)(12)
Regulation 39.13(g)(12) requires a DCO to apply appropriate
reductions in value to reflect credit, market, and liquidity risks
(haircuts), to the assets that it accepts in satisfaction of initial
margin obligations. This provision also requires a DCO to evaluate the
appropriateness of the haircuts ``on at least a quarterly basis.''
Regulation 39.11(d)(1) requires that haircuts be evaluated on a monthly
basis for assets that are used to meet the DCO's financial resources
obligations set forth in Sec. 39.11(a). The Commission is proposing to
amend Sec. 39.13(g)(12) to align it with Sec. 39.11(d)(1) by
requiring that DCOs evaluate the appropriateness of the haircuts that
they apply to assets accepted in satisfaction of initial margin
obligations on a monthly basis. Given that initial margin is held for
risk management purposes, and the value of these assets change
frequently, the Commission believes it would be more appropriate to
assess haircuts more frequently.
4. Other Risk Control Mechanisms--Sec. 39.13(h)
a. Risk Limits--Sec. 39.13(h)(1)
Regulation 39.13(h)(1)(i) requires a DCO to impose risk limits on
each clearing member, by house origin and by each customer origin, in
order to prevent a clearing member from carrying positions for which
the risk exposure exceeds a specified threshold relative to the
clearing member's and/or the DCO's financial resources. The Commission
is proposing to clarify that such risk limits should also be imposed to
address positions that may be difficult to liquidate. This might be the
case, for example, in instances where a position in a particular
contract or swap is concentrated with a particular member, such that
there is reason to doubt whether, in the event that this member
defaults, other members would be willing and able to accept,
collectively, the entirety of that position or swap. As noted above, in
section IV.D.3.a, recent events highlight the importance of imposing
risk limits to address positions that may be difficult
[[Page 22238]]
to liquidate, particularly concentrated positions.
b. Clearing Members' Risk Management Policies and Procedures--Sec.
39.13(h)(5)
Regulation 39.13(h)(5)(ii) requires a DCO to, on a periodic basis,
review the risk management policies, procedures, and practices of each
of its clearing members, which address the risks that such clearing
members may pose to the DCO, and to document such reviews. The
Commission is proposing to clarify that DCOs should, having conducted
such reviews, ``take appropriate actions to address concerns identified
in such reviews,'' and that the documentation of the reviews should
include ``the basis for determining what action was appropriate to
take.'' The Commission notes that, where a DCO is required to conduct
any type of review under Commission regulations, similar remediation
and documentation is expected. Absent such follow-up, the reviews would
lack purpose.
5. Cross-Margining Arrangements--Sec. 39.13(i)
A cross-margining arrangement allows a DCO to provide offsets or
reductions in required margin between products that it and another DCO
(or other clearing organization) clear if the risk of one product is
significantly and reliably correlated with the risk of the other
product. The Commission approved the first cross-margining arrangement
in 1988, and it has approved many such arrangements since.\51\ Proposed
Sec. 39.13(i) would codify the Commission's existing practices for
evaluating cross-margining arrangements.\52\
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\51\ The Commission has issued a number of cross-margining
program orders, including, but not limited to: A June 1, 1988 order
approving a proprietary cross-margining system between the
Intermarket Clearing Corporation (ICC) and Options Clearing
Corporation (OCC), as expanded by a November 26, 1991 order
approving the addition of cross-margining of positions of market
professionals in non-proprietary accounts of participating clearing
members to the ICC/OCC cross-margining program, 56 FR 61406 (Comm.
F. T. Comm'n Dec. 3, 1991), and as further amended by a January 22,
1996 order to incorporate the provisions of appendix B, Framework 1
to the Commission's part 190 Regulations; a September 26, 1989 order
approving a proprietary cross-margining system between OCC and CME,
as expanded by a November 26, 1991 order approving the addition of
cross-margining of positions of market professionals in non-
proprietary accounts of participating clearing members to the OCC/
CME cross-margining program, 56 FR 61404 (Comm. F. T. Comm'n Dec. 3,
1991); a June 2, 1993 order approving the proposals of CME and ICC
to implement a tri-lateral cross-margining program with OCC, as
further amended by a January 22, 1996 amended order to reflect the
approval of proposed changes to the CME/ICC/OCC cross-margining
amendments for proprietary and market professional accounts to
incorporate the provisions of appendix B, Framework 1 to the
Commission's part 190 Regulations; a November 5, 2004 order
approving the establishment of an internal cross-margining program
that permits cross-margining of positions of market professionals in
internal non-proprietary accounts of OCC clearing members; and a
February 29, 2008 order approving the establishment of a non-
proprietary cross-margining agreement between the OCC and ICE Clear
US, Inc. The Commission has also allowed cross-margining programs
into effect without Commission approval including, but not limited
to, a proprietary cross-margining program between CME and the London
Clearing House (allowed into effect without approval on March 23,
2000).
\52\ In February 2015, CPMI-IOSCO issued a Level 2 assessment
report on implementation of the PFMIs by CCPs and trade repositories
in the U.S. (Implementation Report). See CPMI-IOSCO, Implementation
monitoring of PFMIs: Level 2 assessment report for central
counterparties and trade repositories--United States (Feb. 2015),
available at http://www.bis.org/cpmi/publ/d126.pdf. The
Implementation Report noted that Commission regulations do not
explicitly address cross-margining, and in particular, the risk
management requirements necessary where two or more CCPs participate
in cross-margining arrangements. The Commission notes that existing
DCO Core Principles and regulations regarding risk management,
treatment of customer funds, default and settlement procedures,
taken as a whole, address cross-margining arrangements.
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In evaluating cross-margining arrangements, the Commission reviews:
(1) The methodology to be used to calculate margin requirements for the
positions subject to the cross-margining arrangement; (2) the
correlation between the positions, including the stability of the
relationship among the eligible products and the potential impact a
change in the correlation could have on setting margin requirements;
(3) the impact on the settlement process; and (4) the application of
default procedures, including any loss-sharing arrangements, pursuant
to the proposed arrangement. If only one of the clearing organizations
participating in the arrangement is a registered DCO, the Commission
looks at additional factors, including the other clearing
organization's status with and oversight by other regulator(s). Also,
if one of the clearing organizations is organized outside of the United
States, the Commission evaluates the bankruptcy treatment in that
clearing organization's jurisdiction. Finally, the Commission considers
the impact of the cross-margining arrangement, if any, on the DCO's
ability to comply with the DCO Core Principles, particularly those
concerning financial resources and risk management. The Commission
requests comment as to whether there are other factors the Commission
should consider and, therefore, other information that it should
request. The Commission is proposing to require a DCO to provide the
relevant information needed to facilitate its review as part of a rule
filing submitted for Commission approval pursuant to Sec. 40.5. The
Commission requests comment as to whether this would be the appropriate
process or whether a more or less detailed review process is
appropriate given the factors and risks involved.
E. Treatment of Funds--Sec. 39.15
Regulation 39.15 implements Core Principle F, which requires a DCO
to establish standards and procedures designed to protect its clearing
members' funds, hold such funds in a manner that would minimize the
risk of loss or delay in the DCO's access, and invest such funds in
instruments with minimal credit, market, and liquidity risks. The
Commission is proposing to amend certain aspects of Sec. 39.15.
1. Segregation of Customer Funds--Sec. 39.15(b)(1)
Regulation 39.15(b)(1) requires a DCO to comply with the applicable
segregation requirements of section 4d of the CEA and Commission
regulations thereunder, or any other applicable Commission regulation
or order requiring that customer ``funds and assets'' be segregated,
set aside, or held in a separate account. Section 4d of the CEA refers
to customer ``money, securities and property.'' Therefore, the
Commission is proposing to amend Sec. 39.15(b) to clarify that ``funds
and assets'' are equivalent to ``money, securities, and property'' in
order to better align the language of the regulation with the language
in the statute.
2. Commingling in Cleared Swaps Customer Account--Sec. 39.15(b)(2)(i)
Regulation 39.15(b)(2)(i) requires a DCO to file rules for
Commission approval pursuant to Sec. 40.5 in order for the DCO and its
clearing members to commingle customer positions in futures, options,
and swaps, and any money, securities, or property received to margin,
guarantee or secure such positions, in an account subject to the
requirements of section 4d(f) of the CEA (i.e., the cleared swaps
customer account). The Commission is proposing to revise Sec.
39.15(b)(2)(i) to clarify that a DCO that wants to commingle foreign
futures and foreign options with swaps must meet the same requirements.
3. Commingling in Futures Customer Account--Sec. 39.15(b)(2)(ii)
Regulation 39.15(b)(2)(ii) requires a DCO to file a petition for an
order pursuant to section 4d(a) of the CEA in order for the DCO and its
clearing members to commingle customer positions in futures, options,
and swaps, and any money, securities, or property
[[Page 22239]]
received to margin, guarantee or secure such positions, in an account
subject to the requirements of section 4d(a) of the CEA. The Commission
is proposing to revise Sec. 39.15(b)(2)(ii) to clarify that a DCO that
wants to commingle foreign futures and foreign options with futures and
options must meet the same requirements as a DCO that wants to
commingle swaps with futures and options.
Further, when Sec. 39.15(b)(2)(ii) was first promulgated, the
Commission, in reference to its decision to require an order rather
than a rule approval to commingle cleared swaps with futures in a
futures account, stated ``at this time, it is appropriate to provide
these additional procedural protections before exposing futures
customers to the risks of swaps that may be commingled in a futures
account.'' \53\ The Commission, however, acknowledged that ``as the
Commission and the industry gain more experience with cleared swaps,
the Commission may revisit this issue in the future.'' \54\ The
Commission now believes that a request for a rule approval that
complies with Sec. 40.5 will provide the Commission with sufficient
means to determine whether customer funds held in a futures account
will be adequately protected if cleared swaps, foreign futures, or
foreign options are also held in the account.
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\53\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR at 69392.
\54\ Id.
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Therefore, the Commission is proposing to revise Sec.
39.15(b)(2)(ii) to require a DCO to file rules for Commission approval
pursuant to Sec. 40.5 in order for the DCO and its clearing members to
commingle swaps, foreign futures, or foreign options with futures and
options in an account subject to the requirements of section 4d(a) of
the CEA.
4. Commission Action--Sec. 39.15(b)(2)(iii)
Regulation 39.15(b)(2)(iii) provides that the Commission may
``grant approval of'' a rule submission filed under Sec.
39.15(b)(2)(i) in accordance with Sec. 40.5. The Commission is
proposing to replace the words ``grant approval of'' with ``approve''
in order to be consistent with the language used in Sec. 40.5(b).
Further, the Commission is proposing to amend Sec. 39.15(b)(2)(iii) to
reflect the proposed changes to Sec. 39.15(b)(2)(ii). Specifically,
the Commission is proposing to eliminate Sec. 39.15(b)(2)(iii)(A) and
(B) and include the content of both paragraphs within Sec.
39.15(b)(2)(iii).
5. Transfer of Customer Positions--Sec. 39.15(d)
Regulation 39.15(d) requires a DCO to have rules providing for the
prompt transfer of all or a portion of a customer's portfolio of
positions and related funds at the same time from the carrying clearing
member to another clearing member, without requiring the close-out and
re-booking of the positions prior to the requested transfer.
Some DCOs have noted that, although a DCO may transfer positions
from one clearing member to another, the DCO does not generally
transfer funds. The DCO simply adjusts the amount of margin due from,
or owed to, each clearing member during the next collection cycle.
Moreover, the receiving clearing member may not owe additional funds if
it has sufficient excess margin funds on deposit at the DCO. The DCO
may only transfer funds if it has already collected variation margin
from the transferring clearing member and positions were transferred at
the trade price. In addition, any excess margin held by the
transferring clearing member would be transferred to the receiving
clearing member.
Accordingly, the Commission is proposing to amend Sec. 39.15(d) to
delete the words ``at the same time,'' thus requiring the ``prompt,''
but not necessarily simultaneous, transfer of a customer's positions
and related funds. The Commission is further amending the provision to
require the transfer of related funds ``as necessary,'' recognizing
that the transfer of customer positions will not always require the
transfer of funds.
6. Permitted Investments--Sec. 39.15(e)
Regulation 39.15(e) requires any investment of customer funds or
assets by a DCO to comply with Sec. 1.25, as if all such funds and
assets comprise customer funds subject to segregation pursuant to
section 4d(a) of the CEA and Commission regulations thereunder. At the
time Sec. 39.15(e) was adopted, the Commission had not yet adopted
regulations concerning cleared swaps customer funds but intended for
Sec. 39.15(e) to also apply to those funds. The Commission has since
adopted the part 22 regulations and therefore is proposing to amend
Sec. 39.15(e) to clarify that the requirement applies to any
investment of customer funds or assets, including cleared swaps
customer collateral as defined in Sec. 22.1.
F. Default Rules and Procedures--Sec. 39.16
Regulation 39.16 codifies Core Principle G, which requires a DCO to
have rules and procedures designed to allow for the efficient, fair,
and safe management of events during which a clearing member becomes
insolvent or otherwise defaults on its obligations to the DCO. Core
Principle G also requires a DCO to clearly state its default
procedures, make its default rules publicly available, and ensure that
it may take timely action to contain losses and liquidity pressures
while continuing to meet its obligations. The Commission is proposing
to amend certain aspects of Sec. 39.16.\55\
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\55\ The proposed amendments to Sec. 39.16 include replacing
``adopt'' with ``have'' where a DCO is required to adopt rules,
consistent with the proposed changes to Sec. 39.12 previously
discussed.
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1. Default Management Plan--Sec. 39.16(b)
Regulation 39.16(b) requires a DCO to have a default management
plan and, among other things, test the plan at least on an annual
basis. A DCO's default management plan involves its clearing members,
so the Commission believes the plan cannot be tested effectively
without the clearing members' participation. Accordingly, the
Commission is proposing to amend Sec. 39.16(b) to add a requirement
that the DCO include clearing members in a test of its default
management plan on at least an annual basis. A DCO should ensure that a
sufficient portion of its clearing membership participates in such
testing and is therefore prepared to support the DCO's default
management efforts.
2. Default Procedures--Sec. 39.16(c)
Regulation 39.16(c) requires a DCO to adopt procedures that would
permit the DCO to take timely action to contain losses and liquidity
pressures and to continue meeting its obligations in the event of a
default by one if its clearing members. The Commission is proposing to
amend Sec. 39.16(c)(1) to require a DCO to have a default committee
that would be convened in the event of a default involving substantial
or complex positions to help identify market issues with any action the
DCO is considering. The default committee would be required to include
clearing members and could include other participants to help the DCO
efficiently manage the house or customer positions of the defaulting
clearing member.
The Commission also is proposing to amend Sec. 39.16(c)(2)(ii) to
require that a DCO have default procedures that include immediate
public notice on the DCO's website of a declaration of default. The
Commission believes it is important to the integrity and stability of
the financial markets that clearing members, other CCPs, and the public
[[Page 22240]]
become aware as soon as possible when a default has occurred. The
Commission requests comment, however, as to whether the timing of the
announcement would potentially impact the market or the DCO's ability
to manage the default.
Finally, Sec. 39.16(c)(2)(iii)(C) requires any allocation of a
defaulting clearing member's positions to be proportional to the size
of the participating or accepting clearing member's positions in the
same product class at the DCO. The Commission is proposing to amend
this provision to clarify that the DCO shall not require a clearing
member to bid for a portion of, or accept an allocation of, the
defaulting clearing member's positions that is not proportional to the
size of the bidding or accepting clearing member's positions in the
same product class at the DCO. This is intended to clarify that a
clearing member that wishes to voluntarily bid for or accept more than
its proportional share should be allowed to do so, provided that the
clearing member has the ability to manage the risk of the new
positions.
The Commission is proposing to further amend Sec.
39.16(c)(2)(iii)(C) in order to clarify that the provision applies to
both auctions and allocations and to provide that the size of the
participating or accepting clearing member's positions in the same
product class at the DCO should be measured by the clearing initial
margin requirement for those positions. The Commission requests comment
as to whether the Commission should require DCOs to take into
consideration other indicators of active participation in a market,
such as open interest, volume, and/or other criteria.
G. Rule Enforcement--Sec. 39.17
Regulation 39.17(a) codifies Core Principle H, which requires a DCO
to maintain adequate arrangements and resources for the effective
monitoring and enforcement of compliance with its rules and dispute
resolution. Core Principle H also requires a DCO to have the authority
and ability to discipline, limit, suspend, or terminate the activities
of a member or participant if it violates the DCO's rules. Finally,
Core Principle H requires a DCO to report its rule enforcement
activities and sanctions imposed on members and participants to the
Commission. The Commission is proposing to amend Sec. 39.17(a)(1) to
clarify the Commission's expectation that DCOs currently do, and will
continue to, ensure that both the DCO and its members comply with the
DCO's rules.
Regulation 39.17(b) permits a DCO's board of directors to delegate
its responsibility for compliance with the requirements of Sec.
39.17(a) to the DCO's risk management committee. The Commission
recognizes that some DCOs delegate such responsibility to a committee
other than the risk management committee. Therefore, the Commission is
proposing to amend Sec. 39.17(b) to replace ``risk management
committee'' with ``an appropriate committee.''
H. Reporting--Sec. 39.19
Regulation 39.19 implements Core Principle J, which requires that
each DCO provide to the Commission all information that the Commission
determines to be necessary to conduct oversight of the DCO. In addition
to clarifying existing requirements, the Commission is proposing to
adopt additional reporting requirements that would allow the Commission
to conduct more effective oversight of DCO compliance with the DCO Core
Principles and Commission regulations.
1. General--Sec. 39.19(a)
The Commission is proposing to revise the text of Sec. 39.19(a) to
match the text of Core Principle J. The proposed revisions are not
meant to alter the meaning of the provision.
2. Submission of Reports--Sec. 39.19(b)
Regulation 39.19(b)(1) requires a DCO to submit the information
required by the section to be submitted to the Commission
electronically and in a format and manner specified by the Commission,
unless otherwise specified by the Commission or its designee. The
Commission is proposing to delete ``[u]nless otherwise specified by the
Commission or its designee'' and ``electronically,'' requiring a DCO to
submit the information in a format and manner specified by the
Commission. This would simplify the text while retaining the
flexibility the Commission originally intended. The Commission is
proposing new Sec. 39.19(b)(2) to require that when making a
submission pursuant to the section, an employee of a DCO must certify
that he or she is duly authorized to make such a submission on behalf
of the DCO. This provision would codify existing practices with respect
to the use of the CFTC Portal for submissions pursuant to Sec. 39.19.
Finally, the Commission is proposing to remove existing Sec.
39.19(b)(3) and move the definition of ``business day'' to Sec. 39.2,
as previously discussed. Existing Sec. 39.19(b)(2) would be renumbered
as Sec. 39.19(b)(3).
3. Daily Reporting of Information--Sec. 39.19(c)(1)(i)
Regulation 39.19(c)(1)(i) requires a DCO to report to the
Commission on a daily basis margin, cash flow, and position information
for each clearing member, by house origin and by each customer origin.
The Commission is proposing to amend Sec. 39.19(c)(1)(i) to require a
DCO to additionally report margin, cash flow, and position information
by individual customer account, which is information the DCOs currently
provide. The Commission is specifying ``individual customer account,''
as individual customers may have multiple accounts, which should be
reported separately. The Commission is also proposing to have DCOs
provide any legal entity identifiers and internally-generated
identifiers within each customer origin for each clearing member. The
Commission is also proposing to amend Sec. 39.19(c)(1)(i)(D) to
specify that, with respect to end-of-day positions, DCOs must report
the positions themselves (i.e., the long and short positions) as well
as risk sensitivities and valuation data for these positions.
Risk-sensitivities are different measures of the impact of changes
in underlying factors on the value of the positions. For example, an
interest rate delta describes the theoretical profit or loss (``P&L'')
that results from a one basis point increase in a currency's interest
rate curve. A delta ladder describes a series of sensitivities for
different maturity points (tenors) where each ``rung'' represents an
increasing maturity point or tenor along the zero rate curve term
structure. Each value on the rung represents the P&L that the portfolio
would experience if the interest rate for that tenor were to increase
by one basis point, all else being equal. Thus, if the entire curve
were to shift up by one basis point, the portfolio's theoretical P&L
would be equal to the sum of all the individual sensitivities. In the
context of options, examples of risk sensitivities would be the
different Greeks--delta measures an option's price sensitivity relative
to changes in the price of the underlying asset, gamma measures the
sensitivity of delta in response to price changes in the underlying
instrument, vega measures an option's sensitivity to changes in the
volatility of the underlying, theta measures the time decay of an
option.
Valuation data refer to variables and inputs that reflect current
market conditions, as well as expectations for the future. In the case
of credit default swaps, valuation models rely on for example, risk
neutral default
[[Page 22241]]
probabilities of swaps, forward credit spreads for different
maturities. For interest rate swaps, valuation models require discount
factors.
The Commission intends to implement a range of different
methodologies to conduct risk surveillance of cleared derivatives
exposures, some involving full revaluation of portfolios and others
relying on delta ladders and other risk sensitivities. Collectively,
the enhanced information sets will enable Commission staff to run
stress tests; identify concentration and risk in currencies and in
maturity buckets; perform back testing; validate guaranty funds; and
validate variation margin.
4. Daily Reporting on Securities Positions--Sec. 39.19(c)(1)(ii)(C)
Regulation 39.19(c)(1)(i) requires DCOs to submit certain
information to the Commission on a daily basis, e.g., initial margin
requirements, initial margin on deposit, daily variation margin, other
daily cash flows such as option premiums, and end-of day positions.
Paragraph (c)(1)(ii)(C) further instructs DCOs to provide the required
information for all securities positions that are held in a customer
account subject to section 4d of the CEA or are subject to a cross-
margining agreement. Paragraph (c)(1)(ii)(C) was added to clarify the
applicability of daily reporting requirements to securities positions
carried by FCMs that are also registered broker-dealers.
Since the adoption of Sec. 39.19(c)(1), the Commission has become
aware of a potential ambiguity in the wording of paragraph
(c)(1)(ii)(C), which requires the reporting of all securities positions
``that are held in a customer account subject to section 4d of the Act
or are subject to a cross-margining agreement.'' The ambiguity concerns
whether the reporting requirement for securities positions subject to a
cross-margining agreement applies to customer positions only or to any
position subject to a cross-margining agreement, whether house or
customer.
Reporting of securities positions is designed to capture positions
that could have an impact on the risks a DCO must manage. Because risks
associated with securities positions subject to a cross-margining
agreement would be relevant to the DCO's risk management function and
therefore the Commission's risk surveillance program, all such
securities positions, whether house or customer, were intended to be
included in daily reporting. In order to avoid ambiguity and more
precisely articulate the scope of paragraph (c)(1)(ii)(C), the
Commission is proposing to insert subordinate paragraph numbering
between the clauses in paragraph (c)(1)(ii)(C) which relate to
securities positions held in a customer account or subject to a cross-
margining agreement.
5. Quarterly Reporting--Sec. 39.19(c)(2)
Regulation 39.19(c)(2) requires a DCO to provide the financial
resources report required by Sec. 39.11(f). The Commission adopted
Sec. 39.19(c)(2) so that each DCO reporting requirement would be
included in Sec. 39.19. The Commission is proposing to revise the text
of Sec. 39.19(c)(2) to be more consistent with the text of Sec.
39.11(f); i.e., a DCO would be required to provide to the Commission
each fiscal quarter, or at any time upon Commission request, a report
of the DCO's financial resources as required by Sec. 39.11(f)(1).
6. Audited Year-End Financial Statements--Sec. 39.19(c)(3)(ii)
Regulation 39.19(c)(3)(ii) requires a DCO to file with the
Commission its audited year-end financial statements or, if there are
no financial statements available for the DCO, the consolidated audited
year-end financial statements of the DCO's parent company. As with the
quarterly filing requirements of Sec. 39.11(f)(1)(ii), the purpose of
requiring a DCO to submit year-end financial statements is to enable
the Commission to assess the financial strength of the DCO. However, if
a DCO is part of a large and complex corporate structure and files its
parent company's financial statements, it can be difficult for the
Commission to assess the financial strength of the DCO itself.
Therefore, the Commission is proposing to amend Sec. 39.19(c)(3)(ii)
to require the audited year-end financial statements of the DCO.
7. Time of Report--Sec. 39.19(c)(3)(iv)
Regulation 39.19(c)(3)(iv) requires a DCO to submit concurrently to
the Commission all reports required by paragraph (c)(3) not more than
90 days after the end of the DCO's fiscal year. The Commission may
provide an extension of time only if it determines that a DCO's failure
to submit the report in a timely manner ``could not be avoided without
unreasonable effort or expense.'' \56\ The Commission is proposing to
eliminate this requirement to provide it with the flexibility to grant
extensions under additional circumstances when appropriate.
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\56\ The Commission delegated this authority to the Director of
the Division of Clearing and Risk under Sec. 140.94(c)(9).
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Additionally, the Commission is proposing to remove the requirement
that reports be submitted concurrently in order to provide DCOs with
the flexibility to submit reports required under Sec. 39.19(c)(3) as
they are completed. The Commission recognizes that one report may be
completed sooner than the other and believes it would benefit the
Commission's oversight of the DCO if the Commission could begin
reviewing the report as soon as it is ready.
8. Decrease in Financial Resources--Sec. 39.19(c)(4)(i)
The Commission is proposing a technical amendment to Sec.
39.19(c)(4)(i), which concerns reporting of a decrease in a DCO's
financial resources. The amendment would add a reference to the
financial resources requirements of Sec. 39.33, which applies to
SIDCOs and subpart C DCOs. The Commission also is proposing to renumber
the subordinate paragraphs for the sake of clarity.
9. Decrease in Liquidity Resources--Sec. 39.19(c)(4)(ii)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(ii),\57\
which would require the same reporting for a decrease in liquidity
resources as that required by Sec. 39.19(c)(4)(i) for a decrease in
overall financial resources. The reporting required in Sec.
39.11(f)(1)(ii) provides the Commission with notice of any change in a
DCO's liquidity resources over the course of a fiscal quarter. This new
provision would provide the Commission with notice if a DCO has a
significant decrease in liquidity resources over a short period of
time, which could indicate there is a greater issue of which the
Commission should be aware.
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\57\ The Commission is proposing to renumber existing Sec.
39.19(c)(4)(ii) and all subsequent paragraphs of Sec. 39.19(c)(4).
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10. Request to Clearing Member To Reduce Positions--Sec.
39.19(c)(4)(vi)
The Commission is proposing to amend current Sec. 39.19(c)(4)(v),
proposed to be renumbered as Sec. 39.19(c)(4)(vi), which requires a
DCO to notify the Commission immediately of a request by the DCO to one
of its clearing members to reduce the clearing member's positions, by
deleting the words ``because the [DCO] has determined that the clearing
member has exceeded its exposure limit, has failed to meet an initial
or variation margin call, or has failed to fulfill any other financial
obligation to the [DCO].'' The Commission believes it should be
[[Page 22242]]
notified of such a request regardless of the reason for the request.
11. Change in Key Personnel--Sec. 39.19(c)(4)(x)
The Commission is proposing to amend current Sec. 39.19(c)(4)(ix),
proposed to be renumbered as Sec. 39.19(c)(4)(x), which requires a DCO
to report to the Commission no later than two business days following
the departure or addition of persons who are key personnel as defined
in Sec. 39.2. The Commission proposes to clarify that the notification
requirement applies to both temporary and permanent replacements, and
that the report must include contact information.
12. Change in Legal Name--Sec. 39.19(c)(4)(xi)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xi),
which would require a DCO to report a change to the legal name under
which it operates. This requirement would help to ensure that DCO-
specific information reflected on the Commission's website, as well as
in the Commission's internal records, is accurate and up-to-date. The
Commission notes, however, that the DCO's registration order (and other
existing orders issued by the Commission) would not need to be changed
to reflect the legal name change.
13. Change in Liquidity Funding Arrangement--Sec. 39.19(c)(4)(xiii)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xiii),
which would require a DCO to report a change in any liquidity funding
arrangement it has in place. This requirement would be similar to that
of Sec. 39.19(c)(4)(x) (proposed to be renumbered as Sec.
39.19(c)(4)(xii)), which requires a DCO to report any change in a
credit facility funding arrangement it has in place. This will assist
the Commission in overseeing the liquidity risk management of DCOs.
14. Change in Settlement Bank Arrangements--Sec. 39.19(c)(4)(xiv)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xiv),
which would require a DCO to report a change in its arrangements with
any settlement bank used by the DCO or approved for use by the DCO's
clearing members. Receiving such reporting will aid the Commission in
monitoring a DCO's compliance with Sec. 39.14(c), which sets forth
specific requirements for settlement arrangements.
15. Settlement Bank Issues--Sec. 39.19(c)(4)(xv)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xv),
which would require a DCO to report to the Commission no later than one
business day after learning of any material issues or concerns
regarding the performance, stability, liquidity, or financial resources
of any settlement bank used by the DCO or approved for use by the DCO's
clearing members.
16. Change in Depositories for Customer Funds--Sec. 39.19(c)(4)(xvi)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xvi),
which would require a DCO to report any change in its arrangements with
any depositories at which the DCO holds customer funds. Receiving such
reporting will aid the Commission in monitoring a DCO's compliance with
section 4d of the CEA and related Commission regulations regarding the
treatment of customer funds, including Sec. 39.15(b).
17. Change in Fiscal Year--Sec. 39.19(c)(4)(xx)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xx),
which would require a DCO to immediately notify the Commission of any
change to the start and end dates for its fiscal year. Because several
other required reports are tied to a DCO's fiscal year (e.g., quarterly
financial reports, annual report of the chief compliance officer), a
change in the DCO's fiscal year would change the reporting periods and
deadlines for those reports, and the Commission would need to know when
those reports are to be submitted by the DCO.
18. Change in Independent Accounting Firm--Sec. 39.19(c)(4)(xxi)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xxi),
which would require a DCO to report to the Commission no later than one
business day after any change in the DCO's independent public
accounting firm. The report would include the date of such change, the
name and contact information of the new firm, and the reason for the
change.
19. Major Decision of the Board of Directors--Sec. 39.19(c)(4)(xxii)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xxii) to
codify in Sec. 39.19 the requirement (currently in Sec.
39.32(a)(3)(i) and proposed in Sec. 39.24(a)(3)(i), as discussed
further below) that a DCO report to the Commission any major decision
of the DCO's board of directors.
20. Margin Model Issues--Sec. 39.19(c)(4)(xxiv)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xxiv),
which would require a DCO to report to the Commission no later than one
business day after any issue occurs with a DCO's margin model,
including margin models for cross-margined portfolios, that affects the
DCO's ability to calculate or collect initial margin or variation
margin. The Commission is proposing this change because some DCOs have
had unanticipated issues arise with the functioning of their margin
models as a result of, among other things, the introduction of new
products or significant increases in volatility.
21. Recovery and Wind-Down Plans--Sec. 39.19(c)(4)(xxv)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xxv),
which would require a DCO that is required to maintain recovery and
wind-down plans pursuant to Sec. 39.39(b) to submit its plans to the
Commission no later than the date on which it is required to have the
plans. The Commission is also proposing to permit a DCO that is not
required to maintain recovery and wind-down plans pursuant to Sec.
39.39(b), but which nonetheless maintains such plans, to submit the
plans to the Commission. If a DCO subsequently revises its plans, the
DCO would be required to submit the revised plans to the Commission
along with a description of the changes and the reason for those
changes. The Commission is proposing this requirement because Sec.
39.39(b) requires certain DCOs to maintain recovery and wind-down
plans, but there is currently no explicit requirement that the DCOs
submit the plans to the Commission.
22. New Product Accepted for Clearing--Sec. 39.19(c)(4)(xxvi)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xxvi),
which would require a DCO to provide notice to the Commission no later
than 30 calendar days prior to accepting a new product for clearing.
The Commission is proposing this change because Sec. 40.2 requires a
DCM or SEF to make a submission to the Commission prior to listing a
product for trading that has not been approved under Sec. 40.3, but
there is currently no comparable requirement applicable to DCOs.
The proposed notice would include: (1) A brief description of the
new product; (2) the date on which the DCO intends to begin accepting
the new product for clearing; (3) a statement as to whether the new
product will require
[[Page 22243]]
the DCO to submit any rule changes pursuant to Sec. Sec. 40.5 or 40.6;
(4) a statement as to whether the DCO has informed, or intends to
inform, its clearing members and/or the general public of the new
product and, if written notice was given, a web address for or copy of
such notice; and (5) an explanation of any substantive opposing views
received from such outreach and how the DCO addressed such views or
objections. The Commission believes receiving the notice 30 days before
the DCO will begin accepting the product for clearing will allow
Commission staff enough time to ask further questions of the DCO as
necessary.
The Commission has not defined ``product'' for purposes of Sec.
40.2 or Sec. 40.3. The Commission requests comment on whether defining
this term would be helpful in clarifying what products must be reported
to the Commission under proposed new Sec. 39.19(c)(4)(xxvi). If so,
the Commission further requests comment regarding how the term should
be defined.
23. Requested Reporting--Sec. 39.19(c)(5)
Regulation 39.19(c)(5)(i) through (iii) requires a DCO to provide
to the Commission, upon request by the Commission, specific types of
information. Paragraphs (c)(5)(i) through (iii) states that the
information must be provided to the Commission ``in the format and
manner specified, and within the time provided, by the Commission in
the request.'' The Commission is proposing to amend Sec.
39.19(c)(5)(i) through (iii) by deleting this language from each of the
subparagraphs and adding introductory language to the paragraph that
would require a DCO to provide the information specified in the
paragraphs upon request by the Commission ``and within the time
specified in the request.'' Regulation 39.19(b) already requires a DCO
to provide the information in the format and manner specified by the
Commission, so it is unnecessary to repeat that requirement in Sec.
39.19(c)(5).
The Commission is proposing to remove current Sec.
39.19(c)(5)(iii), which requires a DCO to report to the Commission upon
request end of day gross positions by each beneficial owner. This
provision is no longer necessary given the proposed amendment to Sec.
39.19(c)(1)(i), which requires a DCO to report margin, cash flow, and
position information by individual customer account.
I. Public Information--Sec. 39.21
Regulation 39.21 implements Core Principle L, which generally
requires that a DCO provide to market participants sufficient
information to enable the market participants to identify and evaluate
accurately the risks and costs associated with using the services of
the DCO. The Commission is proposing some minor changes to clarify the
requirements of Sec. 39.21.
1. Public Disclosure and Publication of Information--Sec. 39.21(c) and
(d)
Regulation 39.21(c) requires a DCO to disclose publicly and to the
Commission information concerning: (1) The terms and conditions of each
contract, agreement, and transaction cleared and settled by the DCO;
(2) each clearing and other fee that the DCO charges its clearing
members; (3) the margin-setting methodology; (4) the size and
composition of the financial resource package available in the event of
a clearing member default; (5) daily settlement prices, volume, and
open interest for each contract, agreement, or transaction cleared or
settled by the DCO; (6) the DCO's rules and procedures for defaults in
accordance with Sec. 39.16; and (7) any other matter that is relevant
to participation in the clearing and settlement activities of the DCO.
Regulation 39.21(d) requires the DCO to post all of this information,
as well as the DCO's rulebook and a list of its current clearing
members, on the DCO's website, unless otherwise permitted by the
Commission.
The Commission is proposing to remove Sec. 39.21(d) and
incorporate its requirements into Sec. 39.21(c). The Commission
believes that this will help clarify for DCOs what information must be
made publicly available on their websites. The Commission has noted
that some DCOs have made available certain items of information listed
in current Sec. 39.21(c) only by posting their rulebooks on their
websites. The Commission wishes to clarify that a DCO must make each of
the items of information listed in proposed Sec. 39.21(c) available
separately on the DCO's website and not just in the DCO's rulebook.
This will assist members of the public in locating the relevant
information and may facilitate greater uniformity across DCO websites.
2. Financial Resources--Sec. 39.21(c)(4)
Regulation 39.21(c)(4) requires a DCO to disclose publicly the size
and composition of its financial resource package available in the
event of a clearing member default. The Commission has received
questions concerning how often this information must be updated.
Regulation 39.11(f)(1)(i)(A) requires a DCO to report this information
to the Commission each fiscal quarter or at any time upon Commission
request. The Commission believes it is reasonable to expect a DCO to
update this information publicly with the same frequency. Therefore,
the Commission is proposing to amend Sec. 39.21(c)(4) by adding the
words ``updated as of the end of the most recent fiscal quarter or upon
Commission request and posted concurrently with submission of the
report to the Commission under Sec. 39.11(f)(1)(i)(A).''
3. Daily Settlement Prices, Volume, and Open Interest--Sec.
39.21(c)(5)
Regulation 39.21(c)(5) requires a DCO to disclose publicly daily
settlement prices, volume, and open interest for each contract,
agreement, or transaction cleared or settled by the DCO. Pursuant to
current Sec. 39.21(d), this information must be made available to the
public on the DCO's website no later than the business day following
the day to which the information pertains.
The Commission has received questions from DCOs about the
appropriate scope and time period for disclosure of daily settlement
prices. With respect to scope, Sec. 39.21(c)(5) clearly refers to
daily settlement prices, volume, and open interest ``for each contract,
agreement, or transaction cleared or settled'' by the DCO. The
Commission therefore expects comprehensive disclosure of daily
settlement prices, volume, and open interest for all contracts cleared
or settled by the DCO, acting in its capacity as a DCO.\58\ However,
the Commission is aware that certain DCOs may not be posting all of the
required information on their websites. The Commission notes that
current Sec. 39.21(d) requires posting of this information ``unless
otherwise permitted by the Commission.'' Accordingly, any DCO that does
not post all of the required information must seek relief from the
Commission. In addition, although the plain language of Sec.
39.21(c)(5) indicates that ``daily'' is intended to apply not only to
settlement prices, but also to volume and open interest, the Commission
hereby confirms that DCOs are expected to publicly disclose
[[Page 22244]]
volume and open interest, as well as settlement prices, on a daily
basis in order to comply with Sec. 39.21(c)(5).
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\58\ Regulation 39.21(c)(5) does not require a DCO to post
information concerning contracts, agreements, or transactions it
clears outside of its capacity as a DCO. For example, a DCO that is
also registered with the SEC as a securities clearing agency would
not have to post information concerning security-based swaps in
order to comply with this provision.
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Regulation 39.21(c)(5) does not specify a period of time the
information must remain on the website. However, the Commission notes
that certain DCOs make several days' worth of information available on
their websites, and the Commission encourages others to do the same.
4. Swaps Required To Be Cleared--Sec. 39.21(c)(8)
Regulation 50.3(a) requires that a DCO make publicly available on
its website a list of all swaps that it will accept for clearing and
identify which swaps on the list are required to be cleared under
section 2(h)(1) of the CEA and part 50 of the Commission's regulations.
The Commission is proposing to adopt Sec. 39.21(c)(8) to add a cross-
reference to Sec. 50.3(a).
J. Governance Fitness Standards, Conflicts of Interest, and Composition
of Governing Boards--Sec. Sec. 39.24, 39.25, and 39.26
The Dodd-Frank Act added three new core principles to the CEA
relating to the governance of a DCO and the mitigation of potential
conflicts of interest within a DCO. Core Principle O requires a DCO to
establish governance arrangements that are transparent to fulfill
public interest requirements and to permit the consideration of the
views of owners and participants. Core Principle O also requires a DCO
to establish and enforce appropriate fitness standards for directors,
members of any disciplinary committee, members of the DCO, any other
individual or entity with direct access to the settlement or clearing
activities of the DCO, and any other party affiliated with any of the
foregoing individuals or entities.
Core Principle P requires a DCO to establish and enforce rules to
minimize conflicts of interest in the decision-making process of the
DCO and establish a process for resolving such conflicts of interest.
Core Principle Q requires a DCO to ensure that the composition of its
governing board or committee includes market participants.
After the Dodd-Frank Act was enacted, the Commission proposed
regulations that would have implemented Core Principles O, P, and
Q.\59\ Those regulations have not been finalized, but the Commission
did adopt other regulations that address some of the same issues that
the proposed regulations would have addressed. For example, Sec.
39.12(a)(1) requires a DCO to have participant eligibility criteria
that permit fair and open access to the DCO; this addresses the concern
that a DCO's existing clearing members might try to block potential
members' access to the DCO for reasons that are not risk-based.\60\
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\59\ See Requirements for Derivatives Clearing Organizations,
Designated Contract Markets, and Swap Execution Facilities Regarding
the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18,
2010); Governance Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities; Additional Requirements Regarding the Mitigation of
Conflicts of Interest, 76 FR 722 (Jan. 6, 2011). The Commission is
withdrawing these proposals as they relate to DCOs.
\60\ Requirements for Derivatives Clearing Organizations,
Designated Contract Markets, and Swap Execution Facilities Regarding
the Mitigation of Conflicts of Interest, 75 FR at 63735-36.
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As previously noted, the Commission also adopted subpart C of part
39 of the Commission's regulations.\61\ Included in subpart C is Sec.
39.32, which sets forth the requirements for governance arrangements
for SIDCOs and subpart C DCOs. In promulgating Sec. 39.32, the
Commission noted that its requirements are consistent with Core
Principles O, P, and Q.\62\
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\61\ See Derivatives Clearing Organizations and International
Standards, 78 FR 72476 (Dec. 2, 2013).
\62\ See id. at 72485-86.
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The Commission is proposing to remove Sec. 39.32 and adopt new
Sec. Sec. 39.24, 39.25, and 39.26, which would incorporate all of the
requirements of Sec. 39.32 and move them to subpart B, making them
applicable to all DCOs, not just SIDCOs and subpart C DCOs. These
governance requirements are designed to enhance risk management and
controls by promoting transparency of governance arrangements and
making sure that the interests of a DCO's clearing members and, where
relevant, their customers are taken into account. The Commission
believes these standards are appropriate for all DCOs, as most DCOs
already meet such standards in order to be considered a QCCP, and
incorporate best practices within the clearing industry. The Commission
notes, however, that while the language that is proposed to be adopted
in these sections is essentially the same as that which is included in
Sec. 39.32, the provisions have been rearranged to correspond with the
relevant core principle--Sec. 39.24 implements Core Principle O; Sec.
39.25 implements Core Principle P; and Sec. 39.26 implements Core
Principle Q.
As noted above, Core Principle Q requires a DCO to ensure that the
composition of its governing board or committee includes market
participants. The Commission has become aware of issues in interpreting
this requirement. In order to avoid ambiguity and provide greater
clarity, the Commission is proposing to clarify certain aspects of this
requirement. First, Commission staff has received questions as to
whether the term ``governing'' should be read to apply only to the term
``board,'' or if it should be read to apply to the term ``committee''
as well. Consistent with the title of Core Principle Q, ``Composition
of Governing Boards,'' the Commission interprets this clause to refer
to the governing body, whether a ``board'' or a ``committee,'' and does
not interpret this clause to refer to the ``governing board'' or a
``committee,'' which could be any type of committee. Therefore, the
Commission is proposing to require market participation on the DCO's
governing board or board-level committee, i.e., the group with the
ultimate decision-making authority.
Second, the Commission is proposing to define ``market
participant'' in part 39 to mean any clearing member of the DCO or
customer of such clearing member, or an employee, officer, or director
of such an entity. A DCO's clearing members and their customers have a
unique perspective that complements that of the other decision makers
on the governing board. Customers clearing trades through an FCM in a
particular market are exposed to the risks of that market, just as
clearing members are, and therefore have similar interests in the
decisions that govern the operations of the DCO. In general, clearing
members and their customers understand risk, have market experience and
perspective, and have knowledge of clearing and the markets for which
the DCO clears. The Commission notes that an employee, officer, or
director of a market participant serving on a DCO's governing board or
committee is not necessarily required to have voting power, as such
participation may impose duties that are in conflict with the employee,
officer, or director's duties to the market participant. However, a
non-voting market participant must otherwise be enabled by the DCO to
participate fully in board meetings in terms of receiving information,
providing input, and representing market participant views.
K. Legal Risk--Sec. 39.27
Regulation 39.27(c) requires a DCO that provides clearing services
outside the United States to identify and address conflict of law
issues, specify a choice of law, be able to demonstrate the
enforceability of its choice of law in relevant jurisdictions, and be
able to demonstrate that its rules, procedures, and contracts are
enforceable in all
[[Page 22245]]
relevant jurisdictions. In addition, Form DCO requires each applicant
for DCO registration that provides or will provide clearing services
outside the United States to provide a memorandum to the Commission
that would, among other things, analyze the insolvency issues in the
jurisdiction where the applicant is based.
The Commission is proposing to amend Sec. 39.27(c) by adding
paragraph (c)(3). Proposed Sec. 39.27(c)(3) would require a DCO that
provides clearing services outside the United States to ensure on an
ongoing basis that the memorandum required in Exhibit R of Form DCO is
accurate and up to date and to submit an updated memorandum to the
Commission promptly following all material changes to the analysis or
content contained in the memorandum.
L. Fully-Collateralized Positions
The Commission has oversight of a few registered DCOs that clear
fully-collateralized positions. Fully-collateralized positions are
designed to have on deposit a sufficient amount of funds, at all times,
to cover the maximum potential loss that could be incurred in
connection with a position. In the case of binary options, for example,
the maximum risk is limited to the amount invested in the option.
Because counterparties do not take a position in the underlying asset,
movements in the underlying asset would not affect the payout received
or loss incurred. Full collateralization prevents a DCO from being
exposed to credit risk stemming from the inability of a clearing member
or customer of a clearing member to meet a margin call or a call for
additional capital. This limited exposure and full collateralization of
that exposure renders certain provisions of part 39 inapplicable or
unnecessary. As a result, the Division has granted relief from certain
provisions of part 39 to DCOs that clear fully-collateralized
positions.\63\ With this release, the Commission is proposing to codify
this relief and to provide clarity to DCOs and future applicants for
DCO registration regarding how the regulations in part 39 apply to DCOs
that clear fully-collateralized positions.\64\
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\63\ See CFTC Letter No. 14-04 (January 16, 2014) (granting
exemptive relief to the North American Derivatives Exchange, Inc.
(Nadex)); CFTC Letter No. 17-35 (July 24, 2017) (granting exemptive
relief to LedgerX).
\64\ The Division also issued interpretive guidance to Nadex for
other provisions in part 39. CFTC Letter No. 14-05 (January 16,
2014). The interpretive guidance may be relied on by third parties,
and is not impacted by this proposed rulemaking.
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Fully-collateralized positions do not expose DCOs to many of the
risks that traditionally margined products do. Therefore, the
Commission is proposing to amend certain part 39 regulations to better
accommodate fully-collateralized positions, where full-
collateralization addresses the risks that the regulations are meant to
address.
The proposed amendments are based on an assessment of how the DCO
Core Principles and part 39 apply to fully-collateralized positions, as
well as the relief previously granted to DCOs that clear such
positions. The Commission believes the proposed amendments would not
negatively impact prudent risk management at any DCO, regardless of the
types of products cleared.
1. Definition of ``Fully-Collateralized Positions''--Sec. 39.2
The Commission is proposing to define a ``fully-collateralized
position'' as a contract cleared by a derivatives clearing organization
that requires the derivatives clearing organization to hold, at all
times, funds in the form of the required payment sufficient to cover
the maximum possible loss that a counterparty could incur upon
liquidation or expiration of the contract.
2. Computation of Financial Resources Requirement--Sec. 39.11(c)(1)
Regulation 39.11(a)(1) requires a DCO to maintain financial
resources sufficient to meet its financial obligations to its clearing
members notwithstanding a default by the clearing member creating the
largest financial exposure for the DCO in extreme but plausible market
conditions. Regulation 39.11(c)(1) \65\ requires a DCO to perform
monthly stress testing in order to make a reasonable calculation of the
financial resources it would need in the event of such a default.
Division staff has expressed the view that a DCO can satisfy the
requirements of Sec. 39.11(a)(1) by clearing fully-collateralized
positions.\66\ For fully-collateralized positions, a DCO holds its
maximum possible loss on each contract at all times and does not face
the risk of a clearing member default. The monthly stress tests
required by Sec. 39.11(c)(1)(i) are therefore unnecessary for fully-
collateralized positions. Accordingly, the Commission is proposing to
amend Sec. 39.11(c)(1)(i) to clarify that a DCO does not have to
perform monthly stress tests on fully-collateralized positions.
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\65\ Revisions contained elsewhere in this proposed rulemaking
would renumber this paragraph as Sec. 39.11(c)(1)(i).
\66\ See CFTC Letter No. 14-05 (January 16, 2014) (providing
interpretive guidance to Nadex).
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3. Liquidity of Financial Resources--Sec. 39.11(e)(1)(ii)
Regulation 39.11(e)(1)(ii) requires a DCO to have enough financial
resources to meet the requirements of Sec. 39.11(a)(1) that are
sufficiently liquid to enable the DCO to fulfill its obligations during
a one-day settlement cycle. The specific amount of liquid resources a
DCO must hold is based on the historical settlement pays of its
clearing members. A DCO maintains sufficient liquidity for fully-
collateralized positions by requiring clearing members to post the full
potential loss of a position in the form of the potential obligation.
Requiring collateral to be in the form of the potential obligation
eliminates the risk that the DCO will not have sufficient liquidity to
meet its obligations and the need for daily mark-to-market settlements.
Further, if a DCO were to complete the calculation required by Sec.
39.11(e)(1)(ii), the amount would not change from day to day as the DCO
operates a fully-collateralized model. As a result, the calculation
required in Sec. 39.11(e)(1)(ii) is neither necessary or applicable
for fully-collateralized positions. The Commission is therefore
proposing to amend Sec. 39.11(e)(1)(iv) to clarify that DCOs do not
need to include fully-collateralized positions in the calculation
required thereunder.
4. Periodic Reporting of Participant Eligibility--Sec. 39.12(a)(5)(i)
and (a)(5)(i)(B)
Regulation 39.12(a)(5)(i) requires a DCO to require its clearing
members to provide the DCO with periodic financial reports that allow
the DCO to assess whether participation requirements are being met on
an ongoing basis. Regulation 39.12(a)(5)(i)(B) \67\ requires a DCO to
make these reports available to the Commission at the Commission's
request.\68\ The Commission's participant eligibility requirements in
Sec. 39.12(a) are intended to ensure that DCO participants maintain
sufficient financial resources and operational capacity to meet the
obligations arising from clearing at a DCO.\69\ Clearing members that
only clear fully-collateralized positions present no
[[Page 22246]]
credit or default risk to the DCO because their full potential loss is
already held by the DCO. Thus, periodic financial reports from non-FCM
clearing members that only clear fully-collateralized positions do not
provide any risk management benefit to DCOs. The Commission therefore
is proposing to add new Sec. 39.12(a)(5)(v) to exclude non-FCM
clearing members that only clear fully-collateralized positions from
the financial reporting requirements in Sec. 39.12(a)(5)(i) and
(a)(5)(i)(B).
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\67\ Revisions contained elsewhere in this proposed rulemaking
would renumber Sec. 39.12(a)(5)(i)(B) as Sec. 39.12(a)(5)(iii).
\68\ Regulation 39.12(a)(5)(i)(B) allows DCOs to either require
clearing members to make the reports available to the Commission or
to provide the reports to the Commission directly.
\69\ See Derivatives Clearing Organization General Provisions
and Core Principles, 76 FR at 69352.
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5. Large Trader Stress Tests--Sec. 39.13(h)(3)
Regulation 39.13(h)(3) requires a DCO to conduct stress testing on
a daily basis with respect to each large trader who poses significant
risk to a clearing member or the DCO, and at least on a weekly basis
with respect to each clearing member account, by house origin and by
each customer origin. As discussed above, DCOs hold, at all times, the
full potential loss of fully-collateralized positions cleared by the
DCO, and a DCO does not face the risk of default from accounts that
only hold fully-collateralized positions. As a result, such stress
tests would not provide DCOs new information on accounts that only
clear fully-collateralized positions. The Commission is therefore
proposing to add new Sec. 39.13(h)(3)(iii) to exclude clearing member
accounts that hold only fully-collateralized positions from the stress
testing requirements in Sec. 39.13(h)(3)(i) and (ii).
6. Daily Reporting--Sec. 39.19(c)(1)(i)
Regulation 39.19(c)(1)(i) requires a DCO to submit to the
Commission a daily report containing information on initial margin,
daily variation margin payments, other daily cash flows, and end-of-day
positions. Because fully-collateralized positions do not pose a credit
risk to the DCO or other participants, the Commission does not need
daily reporting of this information with respect to fully-
collateralized positions. Therefore, the Commission is proposing to
amend Sec. 39.19(c)(1)(i) such that the enumerated daily reporting is
not required with respect to fully-collateralized positions.
V. Amendments to Part 39--Subpart C--Provisions Applicable to SIDCOs
and DCOs That Elect To Be Subject to the Provisions
A. Financial Resources for SIDCOs and Subpart C DCOs--Sec. 39.33
Regulation 39.33(a)(1) requires a SIDCO or a subpart C DCO that is
systemically important in multiple jurisdictions, or that is involved
in activities with a more complex risk profile, to maintain financial
resources sufficient to enable it to meet its financial obligations to
its clearing members notwithstanding a default by the two clearing
members creating the largest combined loss in extreme but plausible
market conditions. The Commission is proposing to amend Sec.
39.33(a)(1) by replacing the phrase ``largest combined loss'' with
``largest combined financial exposure'' in order to achieve consistency
with the relevant provisions of Commission regulations and the CEA--
specifically, Sec. 39.11(a)(1) and section 5b(c)(2)(B) of the CEA
regarding DCO financial resources requirements.
Regulation 39.33(c)(1) requires a SIDCO or subpart C DCO to
maintain eligible liquid resources sufficient to meet its obligations
to perform settlements with a high degree of confidence under a wide
range of stress scenarios that should include the default of the
clearing member creating the largest aggregate liquidity obligation for
the SIDCO or subpart C DCO. The Commission is proposing to amend Sec.
39.33(c)(1) by adding the phrase ``in all relevant currencies'' to
clarify that the ``largest aggregate liquidity obligation'' means the
total amount of cash, in each relevant currency, that the defaulted
clearing member would be required to pay to the DCO during the time it
would take to liquidate or auction the defaulted clearing member's
positions, as reasonably modeled by the DCO. When evaluating its
largest aggregate liquidity obligation on a day-to-day basis over a
multi-day period, a SIDCO or subpart C DCO may use its liquidity risk
management model.
Regulation 39.33(d) requires a SIDCO or a subpart C DCO to
undertake due diligence to confirm that each of its liquidity providers
has the capacity to perform its commitments to provide liquidity, and
to regularly test its own procedures for accessing its liquidity
resources. The Commission is proposing to additionally require a SIDCO
with access to deposit accounts and related services at a Federal
Reserve Bank to use such services where practical. This requirement
would further enhance a SIDCO's financial integrity and management of
liquidity risk.\70\
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\70\ Under section 806(a) of the Dodd-Frank Act, 12 U.S.C.
5465(a), the Board of Governors of the Federal Reserve System may
authorize a Federal Reserve Bank to establish and maintain an
account for a financial market utility (FMU), which includes a
SIDCO. A SIDCO with access to accounts and services at a Federal
Reserve Bank is required to comply with related rules published by
the Board of Governors of the Federal Reserve System. See generally
Financial Market Utilities, 78 FR 76973 (Dec. 20, 2013) (final rules
adopted by the Board of Governors to govern accounts held by
designated FMUs).
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B. Risk Management for SIDCOs and Subpart C DCOs--Sec. 39.36
Regulation 39.36 requires a SIDCO or a subpart C DCO to conduct
stress tests of its financial and liquidity resources and to regularly
conduct sensitivity analyses of its margin models. The Commission is
proposing to amend Sec. 39.36(a)(6) to clarify that a SIDCO or subpart
C DCO that is subject to the minimum financial resources requirement
set forth in Sec. 39.11(a)(1), rather than Sec. 39.33(a), should use
the results of its stress tests to support compliance with that
requirement.
The Commission is also proposing to amend Sec. 39.36(b)(2)(ii) to
replace the words ``produce accurate results'' with ``react
appropriately'' to more accurately reflect that the purpose of a
sensitivity analysis is to assess whether the margin model will react
appropriately to changes of inputs, parameters, and assumptions. The
Commission is also proposing to amend Sec. 39.36(d), which requires
each SIDCO and subpart C DCO to ``regularly'' conduct an assessment of
the theoretical and empirical properties of its margin model for all
products it clears, to clarify that the assessment should be conducted
``on at least an annual basis (or more frequently if there are material
relevant market developments).''
The Commission is also proposing to amend Sec. 39.36(e) by adding
the heading ``[i]ndependent validation'' to the provision.
C. Additional Disclosure for SIDCOs and Subpart C DCOs--Sec. 39.37
Regulation 39.37(a) and (b) requires a SIDCO or a subpart C DCO to
publicly disclose its responses to the CPMI-IOSCO Disclosure Framework
\71\ and, in order to ensure the continued accuracy and usefulness of
its responses, to review and update them at least every two years and
following material changes to the SIDCO's or subpart C DCO's system or
environment in which it operates. The Commission is proposing to amend
Sec. 39.37(b) to additionally require that a SIDCO or a subpart C DCO
provide notice to the Commission of any such updates to its responses
following material changes to its system or environment no later than
ten business days after the updates are made. Further, such notice
would have
[[Page 22247]]
to be accompanied by a copy of the text of the responses, specifying
the changes that were made to the latest version of the responses.
Providing this notice would ensure that the Commission has access to
the most current information available and would enable the Commission
to identify changes since the last update to the disclosure responses.
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\71\ See CMPI-IOSCO, Principles for Financial Market
Infrastructures: Disclosure Framework and Assessment Methodology
(Dec. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
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Regulation 39.37(c) requires a SIDCO or a subpart C DCO to
disclose, to the public and to the Commission, relevant basic data on
transaction volume and values. In adopting this provision, the
Commission noted that this requirement was intended to be consistent
with the then-forthcoming quantitative disclosure standards being
developed by CPMI-IOSCO.\72\ On February 26, 2015, CPMI-IOSCO published
the Public Quantitative Disclosure Standards for Central
Counterparties.\73\ The Commission is proposing to amend Sec. 39.37(c)
to explicitly state that a SIDCO or a subpart C DCO must disclose
relevant basic data on transaction volume and values that are
consistent with the standards set forth in the CPMI-IOSCO Public
Quantitative Disclosure Standards for Central Counterparties.
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\72\ Derivatives Clearing Organizations and International
Standards, 78 FR at 72493.
\73\ See CPMI-IOSCO, Public Quantitative Disclosure Standards
for Central Counterparties (Feb. 2015), available at https://www.bis.org/cpmi/publ/d125.pdf.
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D. Corrections to Subpart C Regulations
The Commission is proposing to amend Sec. 39.39(a)(2) to change
the word ``or'' to ``of.''
VI. Amendments to Appendix A to Part 39--Form DCO
To request registration as a DCO, Sec. 39.3(a)(2) requires an
applicant to file a complete Form DCO, which includes a cover sheet,
all applicable exhibits, and any supplemental materials, as provided in
appendix A to part 39. The Commission uses Form DCO, which is comprised
of a series of different exhibits that require the applicant to provide
details of its operations, to determine whether the applicant
demonstrates compliance with the Act and applicable Commission
regulations. Applicants must also use Form DCO to amend a pending
application or request an amended order of registration.
The Commission is proposing to amend Form DCO to better describe
the required exhibits in a manner that is consistent with the proposed
amendments to the relevant regulations as described herein. For
example, the Commission proposes to amend Exhibit A-11 to incorporate
the more flexible CCO reporting structure that the Commission is
proposing in Sec. 39.10(c)(1)(ii); add proposed Exhibit A-12 to
describe a DCO's enterprise risk management program as consistent with
newly proposed Sec. 39.10(d); amend Exhibit B-1 to incorporate
proposed amendments to the Commission's financial resources
requirements in proposed Sec. 39.11; and amend Exhibits O, P and Q to
reflect the Commission's proposed amendments to Sec. Sec. 39.24,
39.25, and 39.26 which would incorporate the specific governance
arrangement, conflict of interest, and board composition requirement,
which are currently only detailed in Sec. 39.32 for SIDCOs and subpart
C DCOs.
The Commission is also proposing to amend Form DCO to update the
form to reflect the Commission's other rulemaking efforts. For example,
the Commission proposes to amend Exhibit A-6 to update the reference
from public director to independent director to remove terminology that
was proposed but not ultimately adopted by the Commission for certain
governance requirements, and amend Exhibit F-2 to include cross-
references to Commission regulations in part 22 which was adopted after
the Commission adopted part 39.
The Commission also proposes to amend Form DCO to eliminate
information that has proven to be unnecessary to determine an
applicant's compliance with the Act and applicable Commission
regulations. For example, the Commission proposes to eliminate the
requirement within Exhibit A-6 that an applicant provide contact
information for each officer, director, governor, general partners, LLC
managers, and all standing committee members. Lastly, the Commission
also proposes to remove references within the Form DCO instructions to
use the form to request an amended order of registration. The
Commission intends for these proposed Form DCO changes to establish a
clearer application process for applicants that also provides the
Commission with improved information to determine compliance with the
Act and Commission regulations.
VII. Amendments to Appendix B to Part 39--Subpart C Election Form
The Commission is proposing to amend the subpart C Election Form to
better reflect the requirements in subpart C of part 39 and to more
closely align the format of the subpart C Election Form with Form DCO
by specifying the information and/or documentation that must be
provided by a DCO as part of its petition for subpart C election.
Currently, unlike Form DCO, the subpart C Election Form references
the corresponding regulations in subpart C, but does not specify the
type or level of information that must be filed as an exhibit. In order
to more closely align the format of the subpart C Election Form with
Form DCO, the Commission is proposing to amend the subpart C Election
Form to reflect the requirements of subpart C.
VIII. Amendments to Part 140--Organization, Functions, and Procedures
of the Commission
Regulation 140.94 includes delegation of authority from the
Commission to the Director of the Division of Clearing and Risk. The
Commission is proposing to revise Sec. 140.94 to conform to the
changes to part 39 it is proposing in this release.
IX. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis on the impact.\74\ The
regulations proposed by the Commission will affect only DCOs. The
Commission has previously established certain definitions of ``small
entities'' to be used by the Commission in evaluating the impact of its
regulations on small entities in accordance with the RFA.\75\ The
Commission has previously determined that DCOs are not small entities
for the purpose of the RFA.\76\ Accordingly, the Chairman, on behalf of
the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the
proposed regulations will not have a significant economic impact on a
substantial number of small entities.
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\74\ 5 U.S.C. 601 et seq.
\75\ 47 FR 18618 (Apr. 30, 1982).
\76\ See 66 FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) \77\ provides that Federal
agencies, including the Commission, may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a valid control number from the Office of Management
and Budget (OMB). This proposed rulemaking contains reporting and
recordkeeping requirements that are collections of information within
the meaning of the PRA. If adopted,
[[Page 22248]]
responses to the collections of information would be required to obtain
a benefit. This section addresses the impact that the proposal will
have on existing information collection requirements associated with
part 39.
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\77\ 44 U.S.C. 3501 et seq.
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Additionally, the Commission is consolidating four collections of
information relating to requirements under part 39.\78\ The
requirements covered by all four existing collections will be combined
in OMB control number 3038-0076, which will be renamed as
``Requirements for Derivatives Clearing Organizations,'' and OMB
control numbers 3038-0066, 3038-0069, and 3038-0081 will be cancelled.
Changes to the existing information collection requirements as a result
of this proposal are set forth below.
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\78\ The four collections are: OMB Control No. 3038-0066,
Financial Resources Requirements for Derivatives Clearing
Organizations; OMB Control No. 3038-0081, General Regulations and
Derivatives Clearing Organizations; OMB Control No. 3038-0069,
Information Management Requirements for Derivatives Clearing
Organizations; and OMB Control No. 3038-0076, Risk Management
Requirements for Derivatives Clearing Organizations.
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1. Subpart A--General Requirements Applicable to DCOs
Subpart A establishes the procedures and information required for
applications for registration as a DCO, including submission of a
completed Form DCO accompanied by all applicable exhibits. Form DCO is
covered by OMB control number 3038-0076. Currently, collection 3038-
0076 reflects that there are 3 applicants for DCO registration annually
and that it takes 400 hours to complete and submit the form, including
all exhibits. The Commission is reducing the number of potential
applicants for DCO registration to two annually, based on recent
numbers of applications filed. The Commission is proposing to modify
and update Form DCO to conform it to the proposed revisions to part 39.
Additionally, the Commission is proposing to apply certain
governance requirements applicable to SIDCOs and subpart C DCOs to all
DCOs. This necessitates moving the corresponding burden hours from the
subpart C Election Form to Form DCO. Specifically, 22 burden hours per
respondent for the subpart C Election Form--Exhibits A through G,
currently under OMB control number 3038-0081, would transfer to the
Form DCO burden per respondent in OMB control number 3038-0076.
The proposal would eliminate the requirement for DCOs to use Form
DCO to request an amended order of DCO registration. The Commission
estimates the burden hours per respondent would decrease by one hour
due to the proposed change to Sec. 39.3(a)(2) that would no longer
require a DCO seeking to amend its order of registration to submit Form
DCO. The new aggregate proposed estimate for Form DCO is as follows:
Form DCO--Sec. 39.3(a)(2)
Estimated number of respondents: 2.
Estimated number of reports per respondent: 1.
Average number of hours per report: 421.
Estimated gross annual reporting burden: 842.
The Commission also is proposing to amend certain existing
provisions of Sec. 39.3 regarding requests for extension of the review
of a DCO application, vacation of a DCO's registration, and transfer of
positions. The Commission is proposing to adopt new Sec. 39.3(a)(6),
which would permit the Commission to extend the 180-day review period
for DCO applications specified in Sec. 39.3(a)(1) for any period of
time to which the applicant agrees in writing. Although this is not a
new practice, it was not previously accounted for separately in this
information collection. The Commission is estimating that there would
be two requests for extension of the DCO application per year, one per
respondent, and that it will take one hour per report. The new
aggregate proposed estimate for the agreement in writing to extend the
application review period pursuant to Sec. 39.3(a)(6) is as follows:
Estimated number of respondents: 2.
Estimated number of reports per respondent: 1.
Average number of hours per report: 1.
Estimated gross annual reporting burden: 2.
The Commission is proposing to amend Sec. 39.3(e) to codify
statutory requirements regarding vacation of registration. The proposed
changes would specify information that a DCO must include in its
request to vacate, and require a DCO to continue to maintain its books
and records after its registration has been vacated for the requisite
statutory and regulatory retention periods. The Commission estimates
that there would be one request to vacate every three years and that it
would take three hours per report. The annual aggregate burden for the
request to vacate requirement has been divided to reflect the estimate
of one request to vacate a DCO registration pursuant to Sec.
39.3(e)(1) every three years as follows:
Estimated number of respondents: 1.
Estimated number of reports per respondent: 0.33.
Average number of hours per report: 1.
Estimated gross annual reporting burden: 1.
For recordkeeping by a DCO that has requested to vacate its
registration, the Commission is adding this recordkeeping burden to OMB
control number 3038-0076, which currently includes 16 responses and 50
burden hours for the recordkeeping requirement of registered DCOs. The
Commission is also transferring the 100 recordkeeping burden hours
currently contained in OMB control number 3038-0069 to OMB control
number 3038-0076. The burden for the request to vacate requirement has
been divided to reflect the estimate of one record of the request to
vacate a DCO registration pursuant to Sec. 39.3(e)(1) every three
years. The combined annual aggregate recordkeeping burden estimate for
subparts A and B of part 39 under OMB control number 3038-0076 is as
follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 1.
Average number of hours per report: 150.
Estimated number of respondents-request to vacate: 1.
Estimated number of reports per respondent-request to vacate: 0.33.
Average number of hours per report-request to vacate: 1.
Estimated gross annual recordkeeping burden: 2,401.\79\
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\79\ The total annual recordkeeping burden estimate reflects the
combined figures for 16 registered DCOs with an annual burden of one
response and 150 hours per response (16 x 1 x 150 = 2,400), and one
vacated DCO registration every three years with an annual burden of
one hour.
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The Commission is proposing changes to Sec. 39.3(f), to be
renumbered as Sec. 39.3(g), to simplify the requirements for
requesting a transfer of open interest. The rule submission filing is
covered by OMB control number 3038-0093, which reflects that there are
50 reports annually and that it takes two hours per response. The
Commission is of the view that to the extent that the transfer of open
interest request would be submitted as part of a new rule or rule
amendment filing pursuant to Sec. 40.5, the proposed change is already
covered by OMB control number 3038-0093 and there is no change in the
burden estimates.
[[Page 22249]]
2. Subpart B--Requirements for Compliance With Core Principles
a. CCO Annual Reporting Requirements--Sec. 39.10(c)
Currently, Sec. 39.10(c)(3) requires the CCO of a DCO to prepare,
and to submit to the Commission and the DCO's board of directors, an
annual compliance report containing specified information regarding the
DCO's compliance with the core principles and Commission regulations.
The burden for CCO annual reports, which is currently covered by OMB
control number 3038-0081, is being moved to OMB control number 3038-
0076. OMB control number 3038-0081 reflects that there are 12
respondents that submit CCO annual reports annually and that it takes
80 hours to complete and submit the report, and 960 hours in the
aggregate. The number of respondents is being updated to 16 to reflect
the current number of registered DCOs. The Commission is proposing to
allow a DCO to incorporate by reference certain sections of prior
annual compliance reports. Specifically, if the sections of the CCO
annual report that describe the DCO's compliance policies and
procedures have not materially changed, the current report may
reference a prior year's report, provided that the referenced report
was filed within the prior five years. The Commission estimates that
this change should decrease the burden of preparing the CCO annual
report by ten hours per respondent, and 160 hours in aggregate, by not
requiring the report to repeat potentially lengthy descriptions of
policies and procedures that have already been adequately described in
a CCO annual report previously submitted to the Commission.
The Commission is proposing to specify that the CCO annual report
must identify, by name, rule number, or other identifier, the policies
and procedures intended to comply with each core principle and
applicable regulation. The Commission estimates the proposed change
would add two hours to the burden of preparing each report, and 32
hours in the aggregate. Lastly, the Commission is proposing to amend
Sec. 39.10(c)(4) to require that the CCO annual report describe the
process by which the report is submitted to the DCO's board or senior
officer. This requirement would require DCOs to memorialize in the
report a process they are already required to follow. Nonetheless, the
Commission anticipates an increase of one hour in the burden for each
report, and 16 hours in the aggregate due to this proposed change.
Overall, the Commission estimates that the net impact of these
increases and reductions to the CCO annual report burden due to the
proposed changes is expected to be a decrease of seven hours per
respondent in the existing information collection burden associated
with the CCO annual report.\80\ The aggregate proposed estimate for the
CCO annual report is as follows:
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\80\ The existing burden estimate for the CCO annual report is
80 hours per response. For the new estimate, the Commission is
subtracting ten hours for the proposal not to require restatement of
information that has not changed from the prior report, adding two
hours for the proposal to require references to rules and policies,
and one hour for the proposal to require that the report include
documentation of the process of providing the report to the board,
for a net burden per respondent of 73 hours. The recordkeeping
burden is covered by OMB Control No. 3038-0076 and it is not
affected by the proposal.
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Estimated number of respondents: 16.
Estimated number of reports per respondent: 1.
Average number of hours per report: 73.
Estimated gross annual reporting burden: 1,168.
b. Cross-Margining Programs
The Commission is proposing to add Sec. 39.13(i), which would set
forth the procedure for DCOs to submit information related to their
proposed cross-margining programs with other DCOs (or other clearing
organizations). Proposed Sec. 39.13(i) would specify the information
that a DCO would need to provide to the Commission regarding its cross-
margining program and require that the DCO submit this information as
part of a rule filing submitted for Commission approval pursuant to
Sec. 40.5. The rule submission filing is covered by OMB control number
3038-0093, which reflects that there are 50 reports annually and that
it takes 2 hours per response. The Commission is of the view that to
the extent that the cross-margining program would be submitted as part
of a new rule or rule amendment filing pursuant to Sec. 40.5, the
proposed changes is already covered by OMB control number 3038-0093 and
there is no change in the burden estimates.
c. Financial Resources Reporting
i. Annual Financial Reports
Existing Sec. 39.11(f) requires DCOs to provide to the Commission
quarterly reports of their financial resources, and Sec. 39.19(c)(3)
requires DCOs to prepare and submit audited annual financial
statements. The Commission is proposing to add Sec. 39.11(f)(2), which
would incorporate in Sec. 39.11 the annual reporting requirement that
currently exists in Sec. 39.19(c)(3). This change simply moves the
existing requirement to a different location, and does not alter the
existing information collection burden associated with this
requirement. Accordingly, the burden for annual financial reports is
being moved from OMB control number 3038-0069 to OMB control number
3038-0076, and the burden for quarterly financial reports is being
moved from OMB control number 3038-0066 to OMB control number 3038-
0076. The Commission is cancelling OMB control numbers 3038-0069 and
3038-0066.
The Commission also is proposing to require in Sec. 39.11(f)(2)
that, concurrently with filing the required annual financial report, a
DCO also provide: (1) A reconciliation, including appropriate
explanations, of its balance sheet in the certified annual financial
statements with the DCO's most recent quarterly report when material
differences exist or, if no material differences exist, a statement so
indicating, and (2) such further information as may be necessary to
make the required statements not misleading. The Commission estimates
that the proposed change would add an additional 20 hours per report,
and 320 hours in the aggregate, to the current burden of 2,606 hours
per respondent, and 41,696 hours, in OMB control number 3038-0069,
which as noted above, is being moved to OMB control number 3038-0076.
Finally, the Commission is proposing in Sec. 39.11(f)(2)(i) that
the annual report be required to identify the DCO's own capital
allocated to the DCO's compliance with Sec. 39.11(a)(1), and also
identify each of the DCO's financial resources allocated to the DCO's
compliance with Sec. 39.11(a)(2). The Commission estimates that the
proposed change would add an additional 14 hours per report and 224
hours in the aggregate to the current burden of 2,606 hours per
respondent, and 41,696 hours, in OMB control number 3038-0069, which as
noted above, is being moved to OMB control number 3038-0076.
The Commission estimates that the aggregate result of these changes
will be to increase the information collection burden associated with
annual financial reports from 2,606 hours to 2,640 hours for each DCO.
The revised estimated aggregate burden for the audited annual financial
statements is as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 1.
Average number of hours per report: 2,640.
Estimated gross annual reporting burden: 42,240.
[[Page 22250]]
ii. Quarterly Financial Reports
The Commission is proposing to remove from Sec. 39.11(f)(3) the
requirement that certain documentation be filed quarterly; instead,
DCOs would only need to include the information in their first
quarterly report submission and upon any subsequent change, for an
expected reduction of three hours per report. Proposed Sec.
39.11(f)(1)(v) would require a DCO to identify in its quarterly report
the financial resources allocated to meeting its obligations under
Sec. 39.11(a)(1) and (2), with an expected increase of one hour per
report. The Commission has adjusted the existing burden hours for
quarterly reporting to reflect these proposed changes, which result in
an overall reduction in burden of two hours per report from the total
estimated burden reflected in OMB control number 3038-0066. The
estimated aggregate burden for the quarterly reports, as amended by the
proposal is as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 4.
Average number of hours per report: 8.
Estimated gross annual reporting burden: 512.
The Commission is also proposing to amend Sec. 39.11(f)(1)(ii),
which requires a DCO to file with the Commission a financial statement
of the DCO or of its parent company. The Commission is proposing to
amend Sec. 39.11(f)(1)(ii) to require that the financial statement
provided be that of the DCO and not the parent company. The Commission
is further proposing to amend the periodic financial reporting
requirements in Sec. 39.11(f)(1)(ii) and (f)(2)(i) to permit quarterly
and annual financial statements to be prepared in accordance with U.S.
GAAP for DCOs incorporated or organized under U.S. law and in
accordance with either U.S. GAAP or IFRS for DCOs incorporated or
organized under the laws of any foreign country. These changes are not
expected to affect the burden.
d. Daily Reporting
The Commission is proposing to amend Sec. 39.19(c)(1)(i)(A)-(C),
which requires a DCO to report margin, cash flow, and position
information by house origin and separately by customer origin, to
report this information by individual customer account as well. The
Commission is also proposing to amend Sec. 39.19(c)(1)(i)(D) to
specify that, with respect to end-of-day position information, DCOs
must report both unadjusted and risk-adjusted position information. The
burden associated with these proposed changes is anticipated to result
in an increase from 0.1 to 0.5 hours per report, and 2,000 in the
aggregate. The burden increase for daily financial reports is being
moved from OMB control number 3038-0069 to OMB control number 3038-
0076.
Separately, the Commission is proposing changes to Sec.
39.19(c)(1)(i) that would codify relief previously granted to fully-
collateralized DCOs that would reduce their daily reporting burden by
not requiring information on initial margin, daily variation margin
payments, other daily cash flows, and end-of-day positions. The
proposed change would reduce the burden for fully-collateralized DCOs,
but would not affect the burden for the majority of DCOs that are
subject to daily reporting requirements. The revised aggregate burden
estimate for daily reporting being transferred to OMB control number
3038-0076 is as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 250.
Average number of hours per report: 0.5.
Estimated gross annual reporting burden: 2,000.
The Commission is proposing amendments to Sec. 39.13(g)(8)(i)(B)
to require a DCO to have rules requiring its clearing members to report
customer information about futures (as well as swaps) to DCOs. This is
a new information collection that is not covered by an existing OMB
control number. The burden applicable to clearing members is estimated
as follows:
Estimated number of respondents: 64.
Estimated number of reports per respondent: 250.
Average number of hours per report: 0.2.
Estimated gross annual reporting burden: 3,200.
e. Event-Specific Reporting
Regulations 39.18(g) and (h) require a DCO to provide notice
regarding certain exceptional events or planned changes related to a
DCO's automated systems. These notice requirements are incorporated by
reference in Sec. 39.19(c)(4). Regulation 39.19(c)(4) also requires a
DCO to notify the Commission of the occurrence of other specified
events; for example, a decrease in financial resources or the default
of a clearing member. The information collection burden associated with
these notices required under Sec. 39.19(c)(4) is currently addressed
by OMB Control No. 3038-0069, but is being moved to OMB control number
3038-0076 and consolidated with the burden in OMB control number 3038-
0076 that is currently associated with Sec. 39.18(g) and (h). In
addition, the Commission is proposing to add to Sec. 39.19(c)(4)
several events for which DCOs will be required to provide notification
if such events occur.
The Commission is also proposing to amend Sec. 39.16(c)(2)(ii) to
require that a DCO provide immediate public notice of a declaration of
default on its website. The estimated burden of proposed Sec.
39.16(c)(2)(ii) is included in the estimate for event-specific
reporting because it would occur concurrently with the requirement
under Sec. 39.19(c)(4)(vii) that a DCO provide immediate notice to the
Commission regarding the default of a clearing member.
The burden associated with these proposed changes pursuant to Sec.
39.19(c)(4) is anticipated to result in an increase in the number of
reports by DCO per year on average, from four to 20, and a reduction in
the hour burden per response, which was previously overstated, from six
to 0.5 hours, because a DCO is required to provide a brief notice with
only the pertinent details of the incident. The aggregate revised
burden estimate of Sec. 39.19(c)(4) being transferred to OMB control
number 3038-0076 is as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 20.
Average number of hours per report: 0.5.
Estimated gross annual reporting burden: 160.
f. Public Information
The Commission is proposing to revise Sec. 39.21 to clarify that
information regarding the financial resource package available in the
event of a clearing member default, which a DCO is required to post on
its website pursuant to Sec. 39.21, should be updated at least
quarterly, consistent with the requirement in Sec. 39.11(f)(1)(i)(A)
to report this information to the Commission each fiscal quarter or at
any time upon Commission request. The Commission is also clarifying
that other information specified in Sec. 39.21 must be disclosed
separately on the DCO's website, and not provided solely in the DCO's
posted rulebook. This is a new information collection that is not
covered by an existing OMB control number. The proposed changes are
estimated to add an average of two hours per response, and eight hours
per respondent annually (4 quarterly reports x 2 hours per report) to
OMB control number 3038-0076, for an aggregate estimated burden as
follows:
[[Page 22251]]
Estimated number of respondents: 16.
Estimated number of reports per respondent: 4.
Average number of hours per report: 2.
Estimated gross annual reporting burden: 128.
g. Governance
As noted above, the Commission is proposing to incorporate
governance provisions from subpart C, which only applies to a limited
subset of DCOs, into subpart B, which is applicable to all DCOs.
Therefore, the information collection burden currently associated with
the governance standards of Sec. 39.32, which results from required
disclosure of major board decisions and governance arrangements, has
been reallocated to Sec. 39.24. The burden associated with subpart C
governance provisions, which is currently covered by OMB control number
3038-0081, is being moved to OMB control number 3038-0076. The
aggregate burden of these requirements would increase because they will
be applicable to all registered DCOs. The new aggregate burden estimate
for proposed Sec. 39.24 that is associated with the required ongoing
disclosure of major board decisions and governance arrangements by
registered DCOs, including DCOs that are not currently subject to
subpart C, is estimated as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 6.
Average number of hours per report: 3.
Estimated gross annual reporting burden: 288.
h. Legal Risk
Proposed changes to Sec. 39.27 would require a DCO that provides
clearing services outside the United States to ensure that the legal
opinion that a DCO must obtain to provide those services is accurate
and up to date. The new subsection also requires the DCO to submit an
updated legal memorandum to the Commission following all material
changes to the analysis or content contained in the memorandum. This
requirement would apply only to DCOs offering clearing services outside
the U.S. This is a new information collection that is not covered by an
existing OMB control number. The Commission expects that circumstances
necessitating submission of an updated legal memorandum will occur
infrequently, not more than once every three years, and has estimated
the aggregate burden as follows:
Estimated number of respondents: 1.
Estimated number of reports per respondent: 0.33.
Average number of hours per report: 20.
Estimated gross annual reporting burden: 6.6.
3. Subpart C--Provisions Applicable to SIDCOs and DCOs That Elect
To Be Subject to the Provisions of Subpart C
Because the Commission is proposing to remove and reserve Sec.
39.32 and Exhibit B of the subpart C Election Form and to move the
governance requirements to Form DCO and Sec. 39.24, the corresponding
information collection burden under Sec. 39.32, currently covered by
OMB control number 3038-0081 would be eliminated and the burden under
the subpart C Election Form would be reduced. Further, in consolidating
the burden for subpart C, currently in OMB control number 3038-0081,
with OMB control number 3038-0076, the Commission has reassessed the
burden for the subpart C Election Form, and is adjusting certain burden
hour estimates and numbers of respondents. Specifically, the Commission
is reducing the number of burden hours estimated for the certification
portion of the subpart C Election Form from 25 hours to 2 hours,
because the prior estimate overstated the burden necessary to prepare
the one-page certification. The burden that is currently estimated
separately for the certifications, exhibits, and supplements/amendments
to the subpart C Election Form have been combined because a DCO must
provide all the required information in order to submit a complete
subpart C Election Form.\81\
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\81\ The current burden for the subpart C Election Form exhibits
is 155 hours per response; 22 of these hours are being moved to the
Form DCO burden as discussed in the Form DCO section above, leaving
133 hours. Also, the Commission is reducing the burden currently
attributed to amendments to the subpart C Election Form and
consolidating it with the burden for supplemental information
because in practice, DCOs have not frequently filed amendments.
Consolidating the certification (2 hours), exhibits (133 hours), and
supplemental or amended information (45 hours) results in a burden
of 180 hours.
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Additionally, the Commission is proposing to update the estimated
numbers of respondents for subpart C to reflect the current number of
SIDCOs and subpart C DCOs, and a reduction, from five to one, in the
anticipated number of DCOs newly electing to be subject to subpart C.
The Commission is also updating the number of responses for the
rescission notices that must be provided to clearing members based on
an average of the current number of clearing members at subpart C DCOs.
The Commission also is combining burden estimates that previously were
estimated separately for SIDCOs only and for all subpart C DCOs; that
distinction was made in the initial implementation of subpart C but is
no longer necessary since the subpart C rules have been in place for
several years. The revised estimated aggregate reporting burden related
to the subpart C Election Form, notices and disclosure being
transferred to OMB control number 3038-0076 is as follows:
Subpart C Election Form
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 180.
Estimated gross annual reporting burden: 180.
Subpart C Withdrawal Notice
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 2.
Estimated gross annual reporting burden: 2.
Subpart C Rescission Notice
Estimated number of respondents: 1.
Estimated number of reports per respondent: 16.
Average number of hours per report: 3.
Estimated gross annual reporting burden: 48.
PFMI Disclosures
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 200.
Estimated gross annual reporting burden: 200.
Quantitative Disclosures
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 80.
Estimated gross annual reporting burden: 80.
Additionally, the Commission is proposing to add to Sec. 39.37 a
notification requirement regarding changes to the PFMI disclosure
framework for SIDCOs and subpart C DCOs, which is expected to increase,
by one hour, the existing information collection burden of 80 hours per
response. The aggregate estimated burden for Sec. 39.37 is stated
below:
Subpart C Disclosure Framework Requirements--Sec. 39.37
Estimated number of respondents: 9.
[[Page 22252]]
Estimated number of reports per respondent: 1.
Average number of hours per report: 81.
Estimated gross annual reporting burden: 729.
Because the Commission is moving all of the burden estimates for
subpart C from OMB control number 3038-0081 to OMB control number 3038-
0076 and cancelling information collection 3038-0081, the existing
burden estimates for Sec. Sec. 39.33, 39.36, 39.38, and 39.39, and
certain disclosures under Sec. 39.37, as updated to reflect the
current number of SIDCOs and subpart C DCOs, are restated below. In
addition, for the quantitative disclosures required under Sec. 39.37,
which may be updated as frequently as quarterly, the Commission has
updated the number of reports per respondent from one to four annually,
and has distributed the existing 35 burden hours among the four reports
(35/4 = 8.75, rounded to 9). The updated subpart C reporting burden
estimates for the changes to subpart C--Provisions is as follows:
Subpart C Financial and Liquidity Resource Documentation--Sec. 39.33
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 120.
Estimated gross annual reporting burden: 1080.
Subpart C Stress Test Results--Sec. 39.36
Estimated number of respondents: 9.
Estimated number of reports per respondent: 16.
Average number of hours per report: 14.
Estimated gross annual reporting burden: 2016.
Subpart C Quantitative Disclosures--Sec. 39.37
Estimated number of respondents: 9.
Estimated number of reports per respondent: 4.
Average number of hours per report: 9.
Estimated gross annual reporting burden: 324.
Subpart C Transaction, Segregation and Portability Disclosures--Sec.
39.37
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 35.
Estimated gross annual reporting burden: 315.
Subpart C Efficiency and Effectiveness Review--Sec. 39.38
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 3.
Estimated gross annual reporting burden: 27.
Subpart C Recovery and Wind-down Plan--Sec. 39.39
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 480.
Estimated gross annual reporting burden: 4,320.
With respect to the subpart C recordkeeping burden that the
Commission is moving from OMB control number 3038-0081 to OMB control
number 3038-0076, the Commission also has combined the burden estimates
for financial and liquidity resources, and liquidity resource due
diligence and testing because these requirements apply to the same set
of respondents. As noted above, the general recordkeeping requirements
that were previously estimated separately for SIDCOs and all subpart C
DCOs also have been combined. The updated subpart C recordkeeping
burden estimates are restated below:
Subpart C Recordkeeping--General
Estimated number of respondents: 9.
Estimated number of reports per respondent: 110.
Average number of hours per report: 10.
Estimated gross annual recordkeeping burden: 9,900.
Subpart C Recordkeeping--Financial and Liquidity Resources, Liquidity
Resource Due Diligence and Testing
Estimated number of respondents: 9.
Estimated number of reports per respondent: 8.
Average number of hours per report: 10.
Estimated gross annual recordkeeping burden: 720.
Request for Comment
The Commission invites the public and other Federal agencies to
comment on any aspect of the proposed information collection
requirements discussed above. The Commission will consider public
comments on this proposed collection of information in:
(1) Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
(2) Evaluating the accuracy of the estimated burden of the proposed
collection of information, including the degree to which the
methodology and the assumptions that the Commission employed were
valid;
(3) Enhancing the quality, utility, and clarity of the information
proposed to be collected; and
(4) Minimizing the burden of the proposed information collection
requirements on registered entities, including through the use of
appropriate automated, electronic, mechanical, or other technological
information collection techniques, e.g., permitting electronic
submission of responses.
Copies of the submission from the Commission to OMB are available
from the CFTC Clearance Officer, 1155 21st Street, NW, Washington, DC
20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and
individuals desiring to submit comments on the proposed information
collection requirements should send those comments to:
The Office of Information and Regulatory Affairs, Office
of Management and Budget, Room 10235, New Executive Office Building,
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures
Trading Commission;
(202) 395-6566 (fax); or
[email protected] (email).
Please provide the Commission with a copy of submitted comments so
that all comments can be summarized and addressed in the final
rulemaking, and please refer to the ADDRESSES section of this
rulemaking for instructions on submitting comments to the Commission.
OMB is required to make a decision concerning the proposed information
collection requirements between 30 and 60 days after publication of
this release in the Federal Register. Therefore, a comment to OMB is
best assured of receiving full consideration if OMB receives it within
30 calendar days of publication of this release. Nothing in the
foregoing affects the deadline enumerated above for public comment to
the Commission on the proposed rules.
C. Cost-Benefit Considerations
1. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the
[[Page 22253]]
CEA or issuing certain orders.\82\ Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of the following
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors (collectively referred to herein as section 15(a)
factors). The Commission has not identified any impact that the
proposed changes to part 39 would have on price discovery. The impact
the proposed changes to part 39 would have on the other section 15(a)
factors is considered below.
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\82\ 7 U.S.C. 19(a).
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The Commission recognizes that the proposed rules may impose costs.
The Commission has endeavored to assess the expected costs and benefits
of the proposed rulemaking in quantitative terms, including PRA-related
costs, where possible. In situations where the Commission is unable to
quantify the costs and benefits, the Commission identifies and
considers the costs and benefits of the applicable proposed rules in
qualitative terms. The lack of data and information to estimate those
costs is attributable in part to the nature of the proposed rules.
Additionally, the initial and recurring compliance costs for any
particular DCO will depend on the size, existing infrastructure, level
of clearing activity, practices, and cost structure of the DCO.
The Commission notes that this consideration is based on its
understanding that centralized clearing activity functions
internationally with (i) clearing activity that involves U.S. firms
occurring across different international jurisdictions; (ii) some
entities organized outside the U.S. that are prospective or current
Commission registrants; and (iii) some entities typically operating
both within and outside of the U.S. who follow substantially similar
business practices wherever located. Where the Commission does not
specifically refer to matters of location, its discussion of costs and
benefits refers to the effects of the proposed rules on all activity
subject to it, whether by virtue of the activity's physical location in
the United States or by virtue of the activity's connection with or
effect on U.S. commerce under section 2(i) of the CEA. In particular,
the Commission notes that some DCOs subject to the proposed rules are
located outside of the United States.
The Commission generally requests comment on all aspects of its
cost-benefit considerations, including the identification and
assessment of any costs and benefits not discussed herein; the
potential costs and benefits of the alternatives discussed herein; data
and any other information to assist or otherwise inform the
Commission's ability to quantify or qualitatively describe the costs
and benefits of the proposed rules; and substantiating data,
statistics, and any other information to support positions posited by
commenters with respect to the Commission's discussion. The Commission
welcomes comment on such costs, particularly from existing DCOs that
can provide quantitative cost data based on their respective
experiences. Commenters may also suggest other alternatives to the
proposed approach.
2. Baseline
The baseline for the Commission's consideration of the costs and
benefits of this proposed rulemaking are: (1) The DCO Core Principles
set forth in section 5b(c)(2) of the CEA; (2) the general provisions
applicable to DCOs under subparts A and B of part 39 of the
Commission's regulations; (3) the Commission's regulations in subpart C
of part 39, which establish additional standards for compliance with
the core principles for those DCOs that are designated as SIDCOs or
have elected to opt-in to the subpart C requirements in order to
achieve status as a QCCP; (4) Form DCO in appendix A to part 39; (5)
subpart C Election Form in appendix B to part 39; and (6) Sec. Sec.
1.20(d) and 140.94.
The Commission notes that some of the proposed rules would codify
existing no-action relief and other guidance issued by Commission
staff. To the extent that market participants have relied upon such
relief or staff guidance, the actual costs and benefits of the proposed
rules, as discussed in this section of the proposal, may not be as
significant.
3. Written Acknowledgment From Depositories--Sec. 1.20
a. Benefits
Regulation 1.20(d)(1) requires an FCM to obtain a written
acknowledgment from each depository with which the FCM deposits futures
customer funds. The regulation provides that an FCM is not required to
obtain a written acknowledgment from a DCO that has adopted rules
providing for the segregation of customer funds, but other provisions
of Sec. 1.20(d) seem to suggest that a DCO must provide the written
acknowledgment regardless. The Commission is proposing to amend Sec.
1.20(d) to clarify the Commission's intent that the requirements listed
in Sec. 1.20(d)(3) through (6) do not apply to a DCO, or to an FCM
that clears through that DCO, if the DCO has adopted rules that provide
for the segregation of customer funds. The Commission believes this
will benefit FCMs and DCOs by reducing uncertainty as to when an FCM
must obtain a written acknowledgment from a DCO.
b. Costs
The Commission does not believe the proposed amendment would impose
any additional costs on DCOs or FCMs, as it is clarifying the
circumstances under which an acknowledgment letter would not be
required.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(B) of the CEA, the Commission believes that the proposed
amendments to Sec. 1.20(d) would not negatively impact the protection
of market participants and the public, including DCOs' clearing members
and their customers, as the proposed amendment merely clarifies the
instances in which a DCO, or an FCM that clears through that DCO, would
not need to file an acknowledgment letter because the DCO has adopted
rules that provide for the segregation of customer funds. The
Commission believes that the proposed amendment to Sec. 1.20(d) will
result in an incremental increase in efficiency for FCMs that follows
from reducing any previous uncertainty regarding when they must obtain
an acknowledgement letter. The Commission has considered the other
section 15(a) factors and believes that they are not implicated by the
proposed amendment.
4. Definitions--Sec. 39.2
Regulation 39.2 sets forth definitions applicable to terms used in
part 39 of the Commission's regulations. The Commission is proposing
amendments to the definition of ``business day,'' ``customer,''
``customer account or customer origin,'' and ``key personnel'' in Sec.
39.2 to maintain consistency with terms defined elsewhere in Commission
regulations and to provide clarity with respect to the use of these
terms. The Commission is also adding new definitions for ``enterprise
risk
[[Page 22254]]
management'' and ``fully-collateralized position'' to correspond with
amendments that the Commission is proposing elsewhere in part 39.
a. Benefits
The Commission believes the proposed amendments to Sec. 39.2 would
benefit DCOs by clarifying existing part 39 requirements, such as what
constitutes a Federal holiday for purposes of applying the definition
of ``business day.'' The Commission believes the newly proposed
definitions in Sec. 39.2 for ``enterprise risk management'' and
``fully-collateralized positions'' are necessary to understanding the
proposed rules for an enterprise risk management framework in proposed
Sec. 39.10(d) and proposed exceptions from several requirements for
fully-collateralized positions throughout part 39. The proposed
amendments to the definitions of ``customer'' and ``customer account or
customer origin'' would also help to avoid conflicts with similar terms
defined in Sec. 1.3.
b. Costs
The Commission does not believe the proposed new and amended
definitions would impose additional costs on DCOs, as they are not
imposing additional requirements, but rather defining terms that are
used in other provisions.
c. Section 15(a) Factors
In addition to the discussion above, the Commission evaluated the
costs and benefits in light of the specific considerations identified
in section 15(a) of the CEA. The Commission believes that DCOs may
experience a modest increase in efficiency as a result of the proposed
amendments. In consideration of section 15(a)(2)(B) of the CEA, the
Commission believes that, to the extent that the amended definitions
provide clarity, reduce any previous uncertainty, or help to avoid
conflicts with similar terms that are defined in different sections,
these effects, individually and in aggregate, may yield increased
efficiency. For example, the Commission believes the proposed
amendments to the definition of ``business day'' in Sec. 39.2 will
better enable DCOs, particularly those located outside of the United
States, to easily identify Federal holidays as it relates to their
compliance with applicable reporting requirements under part 39. The
proposed amendments to Sec. 39.2 would also provide foreign DCOs with
greater clarity by excluding ``foreign holidays'' from the definition
of ``business day,'' thereby eliminating the requirement to report to
the Commission on a non-trading day. After considering the other
section 15(a) factors, the Commission believes they are not implicated
by the proposed amendments.
5. Procedures for Registration--Sec. 39.3 and Form DCO
The Commission is proposing several changes to its procedures for
DCO registration, including: The manner by which a DCO applicant would
file supplemental information in proposed Sec. 39.3(a)(3); procedures
in proposed Sec. 39.3(a)(4) to amend a pending application; the
potential for an extension of the application review period in proposed
Sec. 39.3(a)(6); and the procedures for filing a request for an
amended order of registration in proposed Sec. 39.3(d). The Commission
is also proposing to codify the statutory requirements in section 7 of
the CEA to vacate an order of registration as well as specify the types
of information that a DCO must provide to the Commission in this regard
in proposed Sec. 39.3(f); and clarify the types of information that a
DCO must provide to request a transfer of open interest in proposed
Sec. 39.3(g). In addition, the Commission is proposing to revise Form
DCO to correspond with proposed amendments to part 39 and to reflect
Commission staff's experience with DCO applications.
a. Benefits
The Commission believes the proposed amendments to the DCO
registration procedures in Sec. 39.3 and Form DCO will make the
procedures more transparent to applicants. This should allow
prospective DCO applicants to more efficiently prepare complete
applications, which should reduce the need for Commission staff to
request additional information after receiving the application and
therefore reduce the overall time needed to review an application. For
example, the Commission is modifying Form DCO to clarify the types of
information that are required and align the exhibits with the
amendments proposed under part 39. These proposed amendments may reduce
an applicant's time and resources used in responding to staff inquiries
during the application review process, as DCO applicants would be
better able to provide more complete, accurate, and nuanced application
materials. The proposed amendments to Sec. 39.3 would also adapt
certain language to better reflect terminology applicable to DCOs in
proposed Sec. 39.3(a)(1) and (2) and (b), which could help to avoid
confusion for potential DCO applicants and existing DCOs. Furthermore,
the Commission is proposing to codify its long-standing procedures for
staying an application in proposed Sec. 39.3(a)(6) to provide DCO
applicants with greater transparency of the registration process.
The Commission is proposing to amend Sec. 39.3(a)(2) and Form DCO
to eliminate the required use of Form DCO to request an amended order
of registration from the Commission. This change would better reflect
current practice, where a DCO is permitted to file a request for an
amended order with the Commission rather than submitting Form DCO.
Similarly, the Commission is proposing to specify in proposed Sec.
39.3(f) the types of information that the Commission currently requests
to determine whether to vacate an order of registration, which would
provide DCOs with more transparency as to the types of information that
are required as part of a request to vacate an order of registration.
The proposed recordkeeping requirements in Sec. 39.3(f)(1)(iii) and
(iv), which would require a vacated DCO to continue to maintain the
books and records that it would otherwise be required to maintain as a
registered DCO, would provide the benefit of ensuring that a DCO does
not vacate its registration and destroy its books and records in order
to hinder or avoid Commission action.
The Commission also proposes to streamline the procedures for
requesting a transfer of open interest by separating those procedures
in existing Sec. 39.3(g) from the procedures to notify the Commission
of a DCO corporate structure or ownership change. Under the proposed
amendments to Sec. 39.3(g), a DCO seeking to transfer its open
interest would be required to submit rules for Commission approval
pursuant to Sec. 40.5, rather than submitting a request for an order
at least three months prior to the anticipated transfer. This would
simplify the existing requirements and permit the transfer to take
effect after a 45-day Commission review period. The Commission believes
the 45-day period would ensure that clearing members are made aware of
the intended transfer and allow the Commission to determine whether the
transferee DCO is suitable to accept the transfer.
b. Costs
The Commission believes DCOs would not incur any additional costs
associated with the proposed procedures to request an amended order of
registration in Sec. 39.3(d), as a DCO would incur the same costs if
requesting to amend its order of registration by
[[Page 22255]]
using the current Form DCO.\83\ As to the procedures to vacate a DCO's
registration in proposed Sec. 39.3(f), the Commission believes the
costs would not be substantial. Any costs incurred by DCOs would more
likely be due to the proposed recordkeeping requirements in Sec.
39.3(f)(1)(iii) and (iv), which would require a vacated DCO to continue
to maintain the books and records that it would otherwise be required
to maintain as a registered DCO pursuant to Sec. 1.31(b).
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\83\ The Commission estimates for PRA purposes that there would
be a reduction in the burden incurred by DCOs, as discussed in
section IX.B.1 above.
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Finally, the Commission is proposing to amend Sec. 39.3(g) to
permit a DCO seeking to transfer its open interest to submit rules for
Commission approval pursuant to Sec. 40.5, rather than submitting a
request for an order at least three months prior to the anticipated
transfer. The Commission does not anticipate that DCOs would incur any
additional costs as a result of these procedural changes beyond the
costs to prepare a Sec. 40.5 rule submission, which are likely to be
similar to the costs of requesting an order approving the transfer.
Additionally, the information requested in proposed Sec. 39.3(g)
reflects information that DCOs are already required to provide in order
to transfer their open interest. The Commission does not believe DCOs
would incur additional costs from any of the other proposed amendments
to the DCO registration procedures in Sec. 39.3.
c. Section 15(a) Factors
In addition to the discussion above, the Commission evaluated the
costs and benefits in light of the specific considerations identified
in section 15(a) of the CEA. The Commission believes that the proposed
changes to the registration procedures will maintain the protection of
market participants and the public by ensuring that DCOs are in
compliance with the DCO Core Principles and Commission regulations. The
proposed changes would also increase efficiency by making the
registration process more transparent. This would enable DCOs and DCO
applicants to provide more complete documentation in a more concise
manner, thereby reducing the time and resources needed to comply with
such procedures. To the extent that the proposed changes to the
registration procedures act to streamline the application process, as
well as to establish the process for vacating a DCO's registration, the
net result of those changes would be a more efficient process for
registering as a DCO and for vacating that registration.
Additionally, the Commission believes that the proposed amendments
to Sec. 39.3(g), which addresses a request to transfer a DCO's open
interest, will result in increased efficiency because the proposed
amendments streamline and improve the existing process, as DCOs would
be able to use the existing process under Sec. 40.5, with which DCOs
are already familiar and which requires a shorter review period. As a
result, DCOs may obtain approval to transfer their open interest in a
timelier manner, which may benefit their operational and business
needs. To that end, the Commission believes that these changes will
have a beneficial effect on the risk management practices of DCOs,
inasmuch as the proposed changes may modestly reduce the risks that may
accompany the transfer of open interest to another DCO. Moreover, the
proposed recordkeeping requirements for vacated DCOs will protect
market participants and the public by ensuring that a DCO does not
vacate its registration and destroy its books and records in order to
hinder or avoid Commission action. The Commission has considered the
other section 15(a) factors and believes that they are not implicated
by the proposed amendments.
6. DCO Chief Compliance Officer--Sec. 39.10(c)
a. Benefits
The Commission is proposing to amend Sec. 39.10(c) to allow a DCO
to have its CCO report to the senior officer responsible for the DCO's
clearing activities. This would provide DCOs with flexibility to
structure the management and oversight of the CCO based on the DCO's
particular corporate structure, size, and complexity. This may increase
efficiency, reduce costs, and improve the quality of the oversight of
the CCO, as the senior officer overseeing the DCO's clearing activities
would be better positioned to provide day-to-day oversight of the CCO.
The Commission is proposing to amend certain requirements in Sec.
39.10(c) relating to the CCO annual report to permit DCOs to
incorporate by reference, for up to five years, any descriptions of
written policies and procedures that have not materially changed since
they were described within the most recent CCO annual report. The
ability to incorporate by reference the description of written policies
and procedures in the CCO annual report could reduce the time and costs
needed to prepare the CCO annual report.\84\ The Commission is also
proposing to remove the requirement that the DCO submit the CCO annual
report at the same time as the DCO's fiscal year-end audited financial
statement. This is consistent with the proposed change to Sec.
39.19(c)(3)(iv), which would allow DCOs the flexibility to submit
required annual reports and audited year-end financial statements when
ready but not later than 90 days after the end of the DCO's fiscal
year. The proposed changes recognize that the DCO's year-end audited
financial statements are prepared separately from the CCO annual report
and therefore would not need to be prepared and submitted together.
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\84\ The Commission estimates for PRA purposes that there would
be a reduction in the burden incurred by DCOs, as discussed in
section IX.B.2.a above.
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b. Costs
The Commission is proposing to amend Sec. 39.10(c) to require that
a DCO identify its compliance policies and procedures by name, rule
number, or other identifier; describe the process by which the annual
report was submitted to the board of directors or senior officer; and
allow incorporation by reference in limited circumstances. The
Commission notes that a number of DCOs already provide this
information. Therefore, the Commission expects that the proposed
changes to Sec. 39.10(c) would not impose additional costs on those
DCOs.\85\
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\85\ The Commission estimates for PRA purposes that there would
be a reduction in the burden incurred by DCOs, as discussed in
section IX.B.2.a above.
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c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) of the CEA, the Commission believes that certain of the
proposed changes to Sec. 39.10(c) will enhance the protection of
market participants and the public. Specifically, the proposed changes
to a CCO's reporting lines, along with the added clarity regarding
proper identification of the compliance policies and procedures in the
CCO annual report, is anticipated to enhance the compliance function at
DCOs, which may have the corresponding effect of improving the
protections for market participants and the public. Additionally, in
consideration of section 15(a)(2)(B) of the CEA, the proposed amendment
to permit incorporation by reference in the CCO annual report will
[[Page 22256]]
increase efficiency in preparing that report. The Commission has
considered the other section 15(a) factors and believes that they are
not implicated by the proposed amendments.
7. Enterprise Risk Management--Sec. 39.10(d)
a. Benefits
The Commission is proposing Sec. 39.10(d) to require a DCO to have
a program of enterprise risk management that identifies and assesses
sources of risk and their potential impact on the operations and
services of the DCO and identify an enterprise risk officer. The
Commission believes that requiring DCOs to establish and maintain an
enterprise risk management program in proposed Sec. 39.10(d) may
encourage DCOs to strengthen their existing programs, especially if a
DCO lacks an enterprise risk management program that is commensurate
with industry best practices. This may benefit the resiliency of
individual DCOs' operations by requiring DCOs to proactively identify
potential risks on an enterprise-wide basis beyond those that a DCO
might otherwise identify pursuant to its compliance with specific
requirements in part 39. Compliance with proposed Sec. 39.10(d) by
DCOs who are affiliated with other registered entities such as DCMs,
SEFs, and SDRs could also benefit the financial markets more broadly,
as risks identified and addressed by the DCO may also apply to their
affiliates within the derivatives markets.
Consistent with Sec. 39.10(b), the Commission does not intend to
be overly prescriptive by requiring specific standards and
methodologies. Proposed Sec. 39.10(d)(3) would require a DCO to follow
generally accepted standards and industry best practices with respect
to the development and ongoing monitoring of its enterprise risk
management framework, assessment of the performance of the enterprise
risk management program, and the management and mitigation of risk to
the DCO. The Commission is mindful that best practices evolve and
change over time and does not, therefore, wish to prescribe specific
standards in its regulations. This flexibility would allow DCOs to
continue to develop enterprise risk management programs in a manner
best suited for their specific risk exposures, product types, customer
bases, market segments, and organizational structures, among other
things, as long as their programs meet the proposed minimum standards
and any other legal and regulatory requirements.
b. Costs
The Commission has found that DCOs that proactively identify and
manage foreseeable risks have generally implemented enterprise risk
management frameworks, in whole or in part, to identify, assesses, and
manage sources of risk in a manner similar to the requirements proposed
in Sec. 39.10(d)(1)-(4). Therefore, the Commission believes that any
additional costs associated with these requirements should be minimal
relative to existing industry practice for those DCOs whose enterprise
risk management programs are commensurate with industry best practices.
Additionally, as DCOs would be able to comply with this requirement by
including the DCO in the enterprise risk management program
administered by the DCO's parent company or affiliate, the Commission
believes any additional costs to comply with proposed Sec. 39.10(d)
could be reduced if the DCO is able to share the costs of compliance
with its parent or affiliates. DCOs that do not have an enterprise risk
management program in line with proposed Sec. 39.10(d) or could not
otherwise rely on its parent's or affiliate's enterprise risk
management program would incur costs to implement such a program.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(D) of the CEA, the Commission believes that the proposal to
require a DCO to have a formal enterprise risk management program will
improve DCO risk management practices by ensuring that DCOs have a
process for identifying and assessing potential risks to the DCO on an
enterprise-wide basis, thereby enhancing protection of market
participants and the public and the financial integrity of the
derivatives markets. The Commission has considered the other section
15(a) factors and believes that they are not implicated by the proposed
amendments.
8. Financial Resources--Sec. 39.11
a. Benefits
The Commission is proposing certain changes to Sec. 39.11,
including: Clarifying how a DCO's largest financial exposure should be
calculated in proposed Sec. 39.11(c)(2); requiring a DCO to use the
same stress test scenario to combine the customer and house stress test
losses of each clearing member in proposed Sec. 39.11(c)(2)(ii); and
requiring a DCO to adopt rules to specifically permit the netting of
any gains in the house account with customer losses in the event of a
member default (and prohibiting a DCO from netting losses in the house
account with gains in the customer account consistent with section 4d
of the CEA, which requires the segregation of customer funds) in
proposed Sec. 39.11(c)(2)(iii).
The Commission believes these proposed adjustments to the
methodology used to calculate a DCO's financial resources requirement
in Sec. 39.11(c) would focus a DCO's analysis on the resources that
would actually be available to it during times of stress. This approach
is consistent with recent guidance issued by CPMI-IOSCO suggesting
that, when assessing the adequacy of their financial resources, CCPs
should take into account only prefunded financial resources and ignore
voluntary excess contributions. CCPs that wish to be considered QCCPs
are expected to follow this guidance, so having Commission requirements
that are consistent with the guidance would benefit DCOs.
Regulation 39.11(d)(2) sets out certain conditions that apply to a
DCO's use of assessments for additional guaranty fund contributions in
calculating the financial resources available to meet its obligations
under Sec. 39.11(a)(1). Regulation 39.11(d)(2)(iv) provides that a DCO
shall only count the value of assessments, after a 30 percent haircut,
``to meet up to 20 percent of those obligations.'' The Commission
proposes to amend Sec. 39.11(d)(2) to replace the phrase ``those
obligations'' with ``the total amount required under paragraph (a)(1)
of this section,'' to provide DCOs with more clarity as to how to
comply with this requirement.
Furthermore, the Commission is proposing amendments to Sec.
39.11(e)(1)(iii) and (e)(3) to clarify that a DCO may use a committed
line of credit or similar facility, in whole or in part, to satisfy
Sec. 39.11(e)(1)(ii) or (e)(2), as long as the committed line of
credit or similar facility is not counted twice to meet the
requirements of Sec. 39.11(e)(1)(ii) and (e)(2). This is a
clarification of the existing requirement, which provides a DCO with
additional flexibility to optimize the liquidity resources it holds,
which would potentially reduce certain opportunity costs associated
with holding more expensive types of liquid resources, such as cash.
Regulation 39.11(f)(1)(ii) requires a DCO to file with the
Commission a financial statement of the DCO or of its
[[Page 22257]]
parent company. The Commission is proposing to amend Sec.
39.11(f)(1)(ii) to require that the financial statement provided be
that of the DCO and not the parent company in order to better and more
accurately assess the financial strength of the DCO. The Commission
believes it would also benefit the DCO to be able to assess its
compliance with Core Principle B and Sec. 39.11 and its financial
health separately from that of its parent.
The Commission is proposing to amend the periodic financial
reporting requirements in Sec. 39.11(f)(1)(ii) and (f)(2)(i) to permit
quarterly and annual financial statements to be prepared in accordance
with U.S. GAAP for DCOs incorporated or organized under U.S. law and in
accordance with either U.S. GAAP or IFRS for DCOs incorporated or
organized under the laws of any foreign country. Although Commission
regulations generally require financial statements to be prepared in
accordance with U.S. GAAP, the Commission has permitted the use of IFRS
by non-U.S. DCOs as a condition of each DCO's registration order. The
proposed rule would retain this flexibility for non-U.S. DCOs and
provide greater transparency to DCOs and DCO applicants of the
financial reporting requirements.
In reviewing DCOs' financial statements, Commission staff has noted
that the DCO's own capital allocated to meet the requirements of Sec.
39.11(a)(1) or (2) often are not identified accordingly. The Commission
therefore is proposing in Sec. 39.11(f)(1)(ii) and (f)(2)(i) to
require that assets allocated by the DCO for such purpose must be
clearly identified on the DCO's balance sheet as held for that purpose.
As a result, DCOs would have the opportunity to more clearly
demonstrate that they have satisfied the requirements of Sec.
39.11(a)(1) or (2) and, in doing so, may avoid unnecessary follow-up
questions from Commission staff.
The Commission also is proposing to require in Sec. 39.11(f)(2)
that, in addition to its audited year-end financial statement, a DCO
would be required to submit: (1) A reconciliation, including
appropriate explanations, of its balance sheet when material
differences exist between it and the balance sheet in the DCO's
financial statement for the last quarter of the fiscal year or, if no
material differences exist, a statement so indicating, and (2) such
further information as may be necessary to make the statements not
misleading. Without such an explanation, Commission staff may be under
the impression that the representations are false or incorrect. This
requirement gives DCOs the opportunity to correct any discrepancies and
avoid unnecessary follow-up questions from Commission staff.
Regulation 39.11(f)(3) requires a DCO to provide to the Commission
documentation of the DCO's financial resources methodology and basis
for valuation and liquidity determinations as part of its quarterly
financial reporting. The Commission is proposing to revise Sec.
39.11(f)(3) to provide that a DCO must send this documentation to the
Commission only upon the DCO's first submission under Sec. 39.11(f)(1)
and in the event of any change thereafter. Not requiring this
documentation to be provided each quarter could reduce a DCO's
reporting costs.\86\
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\86\ The Commission estimates for PRA purposes that there would
be a reduction in the burden incurred by DCOs, as discussed in
section IX.B.2.c.ii above.
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The Commission is proposing to amend Sec. 39.11(f)(4) to require
that DCOs provide a certification as to the accuracy and completeness
of the DCO's quarterly financial report filed pursuant to proposed
Sec. 39.11(f)(1), annual report filed pursuant to proposed Sec.
39.11(f)(2), and any other reports filed pursuant to proposed Sec.
39.11(f)(3). The Commission believes a certification requirement will
provide greater transparency with regard to the submission process and
may increase the level of accountability at the DCO, which may lead to
greater accuracy in reporting.
b. Costs
DCOs could incur initial costs to recalibrate the method by which
they compute their financial resources to comply with proposed Sec.
39.11(c). If a DCO does not have financial resources sufficient to
comply with Sec. 39.11(a)(1) based on its computation pursuant to
proposed Sec. 39.11(c), the DCO would have to procure additional
financial resources. Because DCOs vary in terms of their size and level
of clearing activity, the Commission believes they are better
positioned to provide cost estimates in this regard.
DCOs may incur costs to prepare their own financial statements (as
opposed to financial statements of the parent company) in accordance
with proposed Sec. 39.11(f)(1)(ii). For DCOs that already prepare
their own financial statements, incremental costs will not be as large
as suggested by the regulatory baseline. DCOs may incur minimal costs
in identifying in their balance sheet assets allocated to meet the
requirements of Sec. 39.11(a)(1) or (2). DCOs may also incur minimal
costs to prepare a reconciliation of their balance sheet when material
differences exist as compared to the DCO's financial statement for the
last quarter of the fiscal year.
The Commission believes DCOs may incur additional costs associated
with complying with the proposed certification requirements in Sec.
39.11(f)(4). These costs may be reduced for DCOs that already provide
them. The Commission recognizes that a DCO may have to develop a
process in certifying its financial reports; however, the Commission
believes that these costs may be reduced for DCOs to the extent that
they already have this process in place.\87\
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\87\ See 17 CFR 228, 229, 232, 240, 249, 270 and 274.
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c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) of the CEA, the Commission believes that the proposed
amendments to Sec. 39.11 will result in improved protections for
market participants and the public. Specifically, the proposed
adjustments to the methodology used to calculate a DCO's financial
resources requirement in Sec. 39.11(c) and the corresponding
improvements to a DCO's stress testing results are expected to enhance
the safety and soundness of DCOs and their ability to manage their
risks, thereby better protecting DCOs' clearing members and their
customers, market participants, and the public. Additionally, in
further consideration of section 15(a)(2)(A) of the CEA, the proposal
to require in Sec. 39.11(f)(1)(ii) the financial statement of the DCO
and not that of its parent company, is expected to better and more
accurately assess the financial strength of the DCO, which will
ultimately serve to protect market participants and the public and
further the financial integrity of derivatives markets. In
consideration of section 15(a)(2)(B) of the CEA, the Commission
believes that, to the extent that the proposed amendments to Sec.
39.11 will result in increased clarity or transparency, as explained
above, those changes are anticipated to result in an incremental
increase in efficiency. In consideration of section 15(a)(2)(D) of the
CEA, the Commission believes the proposed adjustments to the
methodology used to calculate a DCO's financial resources requirement
in Sec. 39.11(c) would focus a DCO's analysis on the resources that
would actually be available to it during times of stress, thereby
improving the DCO's risk
[[Page 22258]]
management practices. The Commission has considered the other section
15(a) factors and believes that they are not implicated by the proposed
amendments.
9. Participant and Product Eligibility--Sec. 39.12
Regulation 39.12(b)(2) provides that a DCO shall adopt rules
providing that all swaps with the same terms and conditions are
economically equivalent within the DCO. As it was not the intention of
the Commission to require DCOs that do not clear swaps to adopt the
rules required under this provision, the Commission is proposing to
revise Sec. 39.12(b)(2) so that it explicitly applies only to DCOs
that clear swaps. This could reduce rulebook drafting costs for future
DCO applicants that do not intend to accept swaps for clearing. The
Commission believes the proposed amendments to Sec. 39.12 would not
impose costs on DCOs or swaps market participants, as they would not be
clearing swaps through a DCO that does not accept swaps for clearing.
The Commission has considered the section 15(a) factors and believes
that they are not implicated by these proposed amendments.
10. Risk Management--Sec. 39.13
a. Benefits
Regulation 39.13(g)(2)(i) requires that a DCO have initial margin
requirements that are commensurate with the risks of each product and
portfolio, including any unusual characteristics of, or risks
associated with, particular products or portfolios. The regulation
currently notes that such risks include but are not limited to jump-to-
default risk or similar jump risk. The Commission is proposing to amend
Sec. 39.13(g)(2)(i) to note that such risks also include
``concentration of positions.'' Recent events, including a significant
loss from a default at a central counterparty outside of the
Commission's jurisdiction, highlight the importance of addressing those
risks. This change would serve to benefit DCOs and their clearing
members by making the rule more explicit.
Regulation 39.13(g)(3) requires a DCO to have its systems for
initial margin requirements reviewed and validated by a qualified and
independent party on a regular basis. The Commission is proposing to
specify that ``on a regular basis'' means annually. Additionally, Sec.
39.13(g)(3) provides that an employee of the DCO may conduct such
independent validations as long as they are not responsible for the
development or operation of the systems and models being tested.
Proposed Sec. 39.13(g)(3) would expand the pool of eligible employees
to include employees of an affiliate of the DCO, which would provide
DCOs with greater flexibility in selecting appropriate staff to conduct
the validations.
Furthermore, the Commission is proposing new Sec. 39.13(g)(7)(iii)
to clarify that, in conducting back tests of initial margin
requirements, a DCO should compare portfolio losses only to those
components of initial margin that capture changes in market risk
factors. This proposal would ensure that back testing of a DCO's
initial margin model is more appropriately calibrated.
Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin
on a gross basis for each clearing member's customer account(s). Based
on feedback received from DCOs, the Commission understands that there
are significant operational issues that may affect the ability of
clearing members to accurately determine the positions of individual
customers on an intraday basis with respect to certain types of
transactions (e.g., transfers, give-ups, and allocations of block
orders) and with respect to certain types of market participants (e.g.,
locals and high frequency traders). Therefore, intraday gross margin
calculations may result in some clearing members being charged too much
margin and others being charged too little margin, which could
necessitate significant end-of-day adjustments. Accordingly, the
Commission proposes to amend Sec. 39.13(g)(8)(i) to permit a DCO to
collect customer initial margin from its clearing members on a gross
basis only during its end-of-day settlement cycle. Proposed Sec.
39.13(g)(8)(i) is consistent with market feedback and attempts to
provide DCOs with more flexibility in meeting the requirements in light
of the operational issues that may arise intraday.
Regulation 39.13(g)(8)(ii) provides that a DCO must require its
clearing members to collect customer initial margin from their
customers, ``for non-hedge positions, at a level that is greater than
100 percent of the [DCO]'s initial margin requirements with respect to
each product and swap portfolio.'' Consistent with interpretative
guidance issued by the Division, the Commission is proposing to amend
Sec. 39.13(g)(8)(ii) to permit DCOs to establish customer initial
margin requirements based on the type of customer account and to apply
prudential standards that result in FCMs collecting customer initial
margin at levels commensurate with the risk presented by each customer
account. The proposed amendments to Sec. 39.13(g)(8)(ii) would give
DCOs reasonable discretion in determining the percentage by which
customer initial margin requirements must exceed the DCO's clearing
initial margin requirements with respect to particular products or
portfolios. This approach acknowledges that the existing standard does
not appropriately take into account each DCO's particular circumstances
and the nature of its clearing members and their customers.
Regulation 39.13(h)(1)(i) requires a DCO to impose risk limits on
each clearing member, by house origin and by each customer origin, in
order to prevent a clearing member from carrying positions for which
the risk exposure exceeds a specified threshold relative to the
clearing member's and/or the DCO's financial resources. The Commission
is proposing to note that such risk limits should also be imposed to
address positions that may be difficult to liquidate. As noted above,
recent events highlight the importance of imposing risk limits to
address positions that may be difficult to liquidate, particularly
concentrated positions. The proposed change would help to ensure that a
DCO can properly manage its risks in instances where, for example, a
position in a particular contract or swap is concentrated with a
particular member, such that there is reason to doubt whether, in the
event that this member defaults, other members would be willing and
able to accept, collectively, the entirety of that position or swap.
Regulation 39.13(h)(5)(ii) requires a DCO to, on a periodic basis,
review the risk management policies, procedures, and practices of each
of its clearing members, which address the risks that such clearing
members may pose to the DCO, and to document such reviews. The
Commission is proposing to clarify that DCOs should, having conducted
such reviews, take appropriate actions to address concerns identified
in such reviews, and require that the documentation of the reviews
should include the basis for determining what action was appropriate to
take. Absent such follow-up, the reviews would lack purpose. The
proposed change would help to ensure that DCOs are taking steps to
manage any risks posed by their members, thereby enhancing the DCO's
risk management functions.
b. Costs
The Commission is proposing to amend Sec. 39.13(g)(2)(i) to
clarify that a DCO shall have initial margin requirements that are
commensurate with the risks of each product and portfolio, including,
but not limited to, concentration of positions. The Commission is
merely clarifying that
[[Page 22259]]
concentrated positions are one of the risks that DCOs should be
incorporating in their initial margin requirements. The Commission does
not believe that DCOs, or their clearing members, would incur any
additional costs with this clarification.
In addition, Sec. 39.13(g)(3) requires that a DCO's systems for
generating initial margin requirements, including its theoretical
models, be reviewed and validated by a qualified and independent party
on a regular basis. The provision further provides that employees of
the DCO may conduct the validations as long as they are not responsible
for the development or operation of the systems and models being
tested. The Commission is proposing to amend Sec. 39.13(g)(3) to
specify that ``on a regular basis'' means annually and to also permit
employees of an affiliate of the DCO to conduct such independent
validations. The Commission believes these amendments would not impose
additional costs on DCOs insofar as DCOs were already interpreting
``regular'' to mean annual, but rather may reduce costs by permitting
the use of employees of a DCO's affiliate when conducting the
independent validations.
The Commission is proposing new Sec. 39.13(g)(7)(iii) to specify
that, in conducting back tests of initial margin requirements, a DCO
shall compare portfolio losses only to those components of initial
margin that capture changes in market risk factors. This change is
intended to reflect existing practices; therefore, any costs associated
with this change would be reduced for DCOs that already follow this
approach.
Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin
on a gross basis for each clearing member's customer account(s). As
noted above, after the regulation was adopted, Division staff learned
of operational issues that DCOs would face if the provision applied to
intraday settlements as well as end-of-day settlements. As a result,
the Commission proposes to amend Sec. 39.13(g)(8)(i) to permit a DCO
to collect customer initial margin from its clearing members on a gross
basis only during its end-of-day settlement cycle. Because this change
is intended to reflect existing practice, any costs associated with
this change would be reduced for those DCOs that already follow this
approach.
Regulation 39.13(g)(8)(i)(B) provides that, for purposes of
calculating the gross initial margin requirement for clearing members'
customer accounts, a DCO may require its clearing members to report to
the DCO the gross positions of each individual customer or the sum of
the gross positions of its customers. The Commission is proposing
amendments to Sec. 39.13(g)(8)(i)(B) to require a DCO to have rules
requiring its clearing members to report customer information about
futures (as well as swaps) to DCOs. This will enable DCOs, in turn, to
report this information to the Commission under Sec.
39.19(c)(1)(i)(D), which, as proposed, would require DCOs to report the
positions themselves (i.e., the long and short positions) as well as
risk sensitivities and valuation data for end-of-day positions. The
Commission believes adopting and implementing such rules could impose
nominal cost on DCOs. In addition, clearing members may incur costs
associated with reporting this data to the extent they are not already
doing so.
The Commission is proposing to amend Sec. 39.13(g)(12) by
requiring DCOs to increase the frequency by which they evaluate the
appropriateness of haircuts that they apply to initial margin
collateral from a quarterly basis to a monthly basis. Because Sec.
39.11(d)(1) already requires that haircuts be evaluated on a monthly
basis for assets that are used to meet the DCO's financial resources
obligations set forth in Sec. 39.11(a), and those resources include
initial margin, the Commission does not believe this change will result
in any increase in costs.
In Sec. 39.13(h)(1)(i), the Commission is proposing to require
that, in determining a clearing member's risk limits under existing
Sec. 39.13(h)(1)(i), the factors that a DCO considers must include the
difficulty of liquidating the clearing member's positions. The
Commission believes that this change may impose minimal costs.
In Sec. 39.13(h)(5)(ii), the Commission is proposing to clarify
that a DCO should take appropriate actions to address concerns
identified in its review of the risk management policies of its
clearing members. The Commission believes that DCOs already do this as
part of their compliance with existing Sec. 39.13(h)(5)(ii).
In Sec. 39.13(i), the Commission is proposing to require a DCO to
provide certain information as part of a rule filing submitted for
Commission approval pursuant to Sec. 40.5 to facilitate the
Commission's review of a DCO's cross-margining program. This
information includes: Identification of the products that would be
eligible for cross-margining; analysis of the risk characteristics, the
liquidity of the respective markets, and availability of reliable
prices; financial and operational requirements that would apply to
clearing members participating in the program; a description and
analysis of the margin methodology that would be used to calculate
initial margin requirements; procedures the DCO would follow in the
event of a clearing member default; a description of the arrangements
for obtaining daily position data with respect to products in the
account; whether funds to support the cross-margined positions will be
maintained together in one account or in separate accounts at each
participating clearing organization; and a copy of the agreement
between the clearing organizations participating in the cross-margining
program. A DCO may incur costs to prepare and provide this information.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) and (D) of the CEA, the Commission believes that the
proposed amendments to Sec. 39.13 will aid in the protection of market
participants and the public by enhancing certain risk management
requirements of DCOs. For example, proposed Sec. 39.13(g)(12) would
require DCOs to increase the frequency by which they evaluate the
appropriateness of haircuts that they apply to initial margin
collateral. Given that initial margin is held for risk management
purposes, assessing haircuts more frequently would enhance a DCO's
ability to manage its risks. In addition, the proposed amendments to
Sec. 39.13 will help preserve the efficiency and financial integrity
of the derivatives markets by enhancing certain risk management
requirements of DCOs. For example, in consideration of section
15(a)(2)(B) of the CEA, the Commission believes the proposed amendments
to Sec. 39.13(h)(1)(i), which would specify that a DCO's risk limits
should address positions that may be difficult to liquidate, would help
to ensure that a DCO can properly manage its risks in the event of a
default, thereby promoting the financial integrity of the derivatives
markets. The Commission also believes that the amendments to Sec.
39.13 will strengthen and promote sound risk management practices
across DCOs, their clearing members, and clearing members' customers.
Specifically, the amendments enhance, clarify, and provide flexibility
in complying with several DCO risk management requirements, which will
aid DCOs in efficiently allocating their risk management attention and
resources. Finally, in consideration of
[[Page 22260]]
section 15(a)(2)(E) of the CEA, the Commission notes the public
interest in promoting and protecting public confidence in the safety
and security of the financial markets. DCOs are essential to risk
management in the financial markets, both systemically and on an
individual firm level. The proposed amendments, by enhancing,
clarifying, and providing flexibility beyond current requirements,
promote the ability of DCOs to perform these risk management functions.
The Commission has considered the other section 15(a) factors and
believes that they are not implicated by the proposed amendments.
11. Treatment of Funds--Sec. 39.15
a. Benefits
The Commission is proposing to amend Sec. 39.15(b)(1) to clarify
that ``funds and assets'' are equivalent to ``money, securities, and
property,'' which would better align the language of Sec. 39.15(b)(1)
with the language in the CEA. Furthermore, Sec. 39.15(b)(2)(ii)
requires a DCO to file a petition for an order pursuant to section
4d(a) of the CEA in order for the DCO and its clearing members to
commingle customer positions in futures, options, and swaps in a
futures customer account subject to section 4d(a) of the CEA The
Commission is proposing to amend Sec. 39.15(b)(2)(ii) to permit a DCO
to file rules for Commission approval pursuant to Sec. 40.5 in order
for the DCO and its clearing members to commingle such positions. This
would better align the requirements of Sec. 39.15(b)(2)(ii) with Sec.
39.15(b)(2)(i), which requires a DCO that wants to commingle futures,
options, and swaps in a cleared swaps customer account to file rules
for Commission approval. This approach would reduce the burden on DCOs
while providing the Commission with sufficient means to determine
whether the customer funds will be adequately protected.
Regulation 39.15(d) requires a DCO to have rules providing for the
prompt transfer of all or a portion of a customer's portfolio of
positions and related funds at the same time from the carrying clearing
member to another clearing member, without requiring the close-out and
re-booking of the positions prior to the requested transfer. Based on
feedback received from DCOs, the Commission is proposing to amend Sec.
39.15(d) to delete the words ``at the same time,'' thus requiring the
``prompt,'' but not necessarily simultaneous, transfer of a customer's
positions and related funds. The Commission is further amending the
provision to require the transfer of related funds ``as necessary,''
recognizing that the transfer of customer positions will not always
require the transfer of funds. These changes are meant to reflect
common practice and provide greater flexibility to DCOs in transferring
positions and funds. The Commission is also proposing to amend Sec.
39.15(e), which relates to permitted investments of customer funds, to
clarify that the regulation applies to any investment of customer funds
or assets, including cleared swaps customer collateral, as defined in
Sec. 22.1. At the time Sec. 39.15(e) was adopted, the Commission had
not yet adopted regulations concerning cleared swaps customer funds but
intended for Sec. 39.15(e) to also apply to those funds. This change
would ensure that cleared swaps customer collateral receives the same
safekeeping as other funds and assets invested by DCOs and would
reflect the Commission's intent.
b. Costs
The Commission believes proposed amendments to Sec.
39.15(b)(2)(ii) to permit a DCO to file rules for Commission approval
pursuant to Sec. 40.5 in order for the DCO and its clearing members to
commingle certain customer positions would streamline the procedures
for a request to commingle customer funds and would not increase costs
to DCOs. As discussed above, the proposal would potentially reduce
costs for DCOs that would otherwise have to petition the Commission for
an order providing relief from section 4d of the CEA in order to
commingle such customer funds. The Commission has not identified any
other costs associated with the proposed amendments to Sec. 39.15,
including costs to customers in this regard.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) of the CEA, the Commission believes that the proposed
amendments to Sec. 39.15 will aid in the protection of market
participants and the public, specifically customers of clearing
members, by providing clarity on several requirements related to the
treatment of customer funds, including with respect to the transfer of
customer positions and funds under Sec. 39.15(d). Moreover, the
proposed amendments will promote efficiency in the derivatives markets
by streamlining the procedures for a request to commingle customer
funds, as DCOs would be permitted to file rules for Commission approval
whether requesting to commingle customer funds in a futures or cleared
swaps customer account. The Commission has considered the other section
15(a) factors and believes that they are not implicated by the proposed
amendments.
12. Default Rules and Procedures--Sec. 39.16
a. Benefits
The Commission is proposing to amend Sec. 39.16 to improve DCOs'
default management processes by, among other things: Requiring a DCO to
include its clearing members in an annual test of its default
management plan in proposed Sec. 39.16(b); requiring the DCO to
establish a default committee, which must include clearing members and
other participants, that would convene in the event of a default
involving substantial or complex positions to help identify any market
issues that the DCO is considering in proposed Sec. 39.16(c)(1); and
requiring a DCO's default management procedures to include immediately
posting a declaration of a default on the DCO's website in proposed
Sec. 39.16(c)(2)(ii). The proposed amendments are intended to ensure
that clearing members are prepared in the event of a default.
The Commission is also proposing to amend Sec. 39.16(c)(2)(iii)(C)
to require any allocation of a defaulting clearing member's positions
to be proportional to the size of the participating or accepting
clearing member's positions in the same product class at the DCO. This
proposed amendment would ensure that clearing members have the
flexibility, but not the requirement, to participate in auctions and
allocations beyond the proportional size of their respective positions
as measured by the initial margin requirement for those positions. This
ensures that clearing members cannot be forced to involuntarily absorb
positions of a defaulting member which incentivizes the DCO to
calibrate its risk management mechanisms in a manner to avoid a
scenario in which clearing members' participation in an auction or
allocation falls short of the size of the defaulting clearing member's
positions in that product class.
b. Costs
To comply with the proposal to require the participation of
clearing members in a test of a DCO's default management plan and in a
DCO's default committee, a DCO may incur costs to coordinate clearing
members' participation and to establish a default committee. However,
the Commission
[[Page 22261]]
believes that many DCOs already involve clearing members in their tests
as a matter of best practice. The Commission is not aware of a less
costly alternative that would provide clearing members with an
opportunity to participate in key aspects of a DCO's default
management.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) of the CEA, the Commission believes that the proposed
amendments to Sec. 39.16(c)(2)(ii) to require that a DCO have default
procedures that include immediate public notice on the DCO's website of
a declaration of default will aid in the protection of market
participants and the public by ensuring more timely notice of a
default. In further consideration of section 15(a)(2)(A) of the CEA,
the Commission believes the proposed amendments to Sec.
39.16(c)(2)(iii)(C) regarding the allocation of a defaulting clearing
member's positions would protect clearing members from involuntarily
having to bid on or accept defaulting positions that are not in
proportion to the size of their positions in that product class, while
also providing clearing members with the flexibility to voluntarily bid
on or accept more than a proportional share of the defaulting positions
if that clearing member has the ability to manage the risk of those new
positions. In consideration of section 15(a)(2)(B) and (D) of the CEA,
the Commission believes the additional amendments to Sec. 39.16(b) and
(c)(1) support the financial integrity of the derivatives markets and
promote sound risk management practices by requiring DCOs to have
greater clearing member participation in their default management
processes and procedures. The Commission has considered the other
section 15(a) factors and believes that they are not implicated by the
proposed amendments.
13. Rule Enforcement--Sec. 39.17
a. Benefits
Regulation 39.17(a) codifies Core Principle H, which requires a DCO
to maintain adequate arrangements and resources for the effective
monitoring and enforcement of compliance with its rules and dispute
resolution. The Commission is proposing a technical change to Sec.
39.17(a)(1) to emphasize that a DCO is required to monitor and enforce
compliance by both itself and its members with the DCO's rules. The
Commission is also proposing to amend Sec. 39.17(b), which permits a
DCO's board of directors to delegate its responsibility for compliance
with the requirements of Sec. 39.17(a) to the DCO's risk management
committee, to allow a DCO to delegate such responsibility to a
committee other than the risk management committee. This would allow
DCOs more discretion in delegating this function to the most
appropriate committee.
b. Costs
The Commission does not believe the proposed amendments to Sec.
39.17(a)(1) or (b) will impose any additional costs on DCOs or their
members because the changes are technical in nature.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(D) of the CEA, the Commission believes that the proposed
amendments to Sec. 39.17 will promote sound risk management practices
by emphasizing the importance of compliance with DCO rules and by
providing DCOs with additional flexibility in structuring their
governance arrangements. The Commission has considered the other
section 15(a) factors and believes that they are not implicated by the
proposed amendments.
14. Reporting--Sec. 39.19
a. Benefits
The Commission is proposing several amendments to Sec. 39.19 to
add new requirements, clarify certain existing requirements, and
incorporate other proposed amendments to part 39. The proposed
amendments to Sec. 39.19 would assist DCOs by codifying the bulk of
DCOs' ongoing reporting requirements in one section of part 39 and
providing additional detail with respect to certain requirements. In
some cases, the Commission is proposing to adopt additional reporting
requirements that would allow the Commission to conduct more effective
oversight of DCOs' compliance with the DCO Core Principles and
Commission regulations.
As part of the daily reporting requirements, the Commission is
proposing to amend Sec. 39.19(c)(1)(i)(A)-(C) to specify that a DCO is
required to report margin, cash flow, and position information by
individual customer account. The Commission believes the ability to
analyze positions at the customer level is a crucial element of an
effective risk surveillance program. The ability to identify those
customers whose positions create the most risk to a DCO's clearing
members would assist the Commission in determining whether adequate
measures are in place to address those risks and whether the Commission
needs to take proactive steps to see that those risks are mitigated,
thereby enhancing the protections afforded to the markets generally.
The Commission is also proposing to amend Sec. 39.19(c)(1)(i)(D) to
specify that, with respect to end-of-day position information, DCOs
must report the positions themselves (i.e., the long and short
positions) as well as risk sensitivities and valuation data for these
positions.\88\ This information will better inform staff of the
assumptions incorporated into the position information. The Commission
is also proposing to amend Sec. 39.19(c)(1)(i)(D) to have DCOs provide
any legal entity identifiers and internally-generated identifiers
within each customer origin for each clearing member, which would help
identify customers across clearing members and DCOs.
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\88\ The Commission estimates for PRA purposes that there would
be an increase in the burden incurred by DCOs, as discussed in
section IX.B.2.d above.
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The Commission is proposing to add certain event-specific reporting
requirements, including: A decrease in liquidity resources in proposed
Sec. 39.19(c)(4)(ii); a legal name change in proposed Sec.
39.19(c)(4)(xi); a change in any liquidity funding arrangement in
proposed Sec. 39.19(c)(4)(xiii); a change in settlement bank
arrangements in proposed Sec. 39.19(c)(4)(xiv); a change in a DCO's
arrangements with its depositories that hold customer funds in proposed
Sec. 39.19(c)(4)(xvi); a change in the DCO's fiscal year end in
proposed Sec. 39.19(c)(4)(xx); a change in the DCO's accounting firm
in proposed Sec. 39.19(c)(4)(xxi); major decisions of the DCO's board
in proposed Sec. 39.19(c)(4)(xxii); issues with a DCO's margin model
in proposed Sec. 39.19(c)(4)(xxiv) or settlement bank in proposed
Sec. 39.19(c)(4)(xv); and new futures or option products accepted for
clearing by the DCO in proposed Sec. 39.19(c)(4)(xxvi). The Commission
believes it is important for it to be aware of these changes due to
their potential impact on a DCO's operations.
b. Costs
The Commission expects a minimal cost burden with respect to the
proposed changes to the event-specific reporting requirements under
Sec. 39.19(c)(4), in part because the incidents that would trigger
such
[[Page 22262]]
reporting do not occur very often. Furthermore, where reporting is
required under Sec. 39.19(c)(4), a DCO is required to provide a brief
notice with only the pertinent details of the incident. Therefore, the
Commission believes any costs imposed by these changes would be
nominal.
With respect to daily reporting requirements, the Commission
understands that most DCOs already report the information that would be
required. Because staff guidance regarding the format and manner of
this reporting is periodically updated, the Commission understands that
there may be costs associated with making technical changes to
accommodate these updates. The Commission requests an estimate of any
such costs from DCOs that currently report this information.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) and (D) of the CEA, the Commission believes that the
proposed amendments to Sec. 39.19 will promote the protection of
market participants and the public and contribute to sound risk
management practices by providing the Commission with timely
information that is critical to its risk surveillance efforts. Also, in
consideration of section 15(a)(2)(D) of the CEA, the Commission
believes that requiring DCOs to provide notice to the Commission of
certain additional events under Sec. 39.19, such as a decrease in
liquidity resources, settlement bank issues, and margin model issues,
could further incentivize DCOs to avoid those risks, or to mitigate
them more effectively if they do occur. The Commission has considered
the other section 15(a) factors and believes that they are not
implicated by the proposed amendments.
15. Public Information--Sec. 39.21
a. Benefits
The Commission is proposing to amend the public reporting
requirements of Sec. 39.21 to require that DCOs make each of the items
of information listed in proposed Sec. 39.21(c) \89\ available
separately on the DCO's website instead of merely including them in the
DCO's rulebook. This would assist DCOs' current and prospective
clearing members and the general public in locating the relevant
information. Furthermore, Sec. 39.21(c)(4) requires a DCO to publicly
disclose the size and composition of its financial resource package
available in the event of a clearing member default. To address
questions concerning how often this information must be updated, the
Commission is proposing to amend Sec. 39.21(c)(4) to clarify that it
should be updated quarterly, consistent with Sec. 39.11(f)(1)(i)(A),
which requires a DCO to report this information to the Commission each
fiscal quarter. The proposed change would assist DCOs in complying with
this requirement, while ensuring consistent and timely disclosure to
the public.
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\89\ Regulation 39.21(c) requires a DCO to disclose publicly and
to the Commission information concerning: (1) The terms and
conditions of each contract, agreement, and transaction cleared and
settled by the DCO; (2) each clearing and other fee that the DCO
charges its clearing members; (3) the margin-setting methodology;
(4) the size and composition of the financial resource package
available in the event of a clearing member default; (5) daily
settlement prices, volume, and open interest for each contract,
agreement, or transaction cleared or settled by the DCO; (6) the
DCO's rules and procedures for defaults in accordance with Sec.
39.16; and (7) any other matter that is relevant to participation in
the clearing and settlement activities of the DCO.
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b. Costs
Because the proposed amendments to Sec. 39.21 merely require a DCO
to separately make public information that would otherwise be made
public in its rulebook, the Commission anticipates any additional costs
to DCOs would be minimal.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A), (B), and (D) of the CEA, the Commission believes that the
proposed amendments to Sec. 39.21 would enhance existing protection of
market participants and the public; promote the efficiency and
financial integrity of the derivatives markets; and aid in sound risk
management practices by ensuring that key public information about the
DCO's operations is readily accessible, complete, and current. The
Commission has considered the other section 15(a) factors and believes
that they are not implicated by the proposed amendments.
16. Governance Fitness Standards, Conflicts of Interest, and
Composition of Governing Boards--Sec. Sec. 39.24, 39.25, and 39.26
a. Benefits
The Commission is proposing to remove Sec. 39.32, which sets forth
requirements for governance arrangements for SIDCOs and subpart C DCOs,
and adopt new Sec. Sec. 39.24, 39.25, and 39.26, which would
incorporate all of the requirements of Sec. 39.32. All DCOs, including
SIDCOs and subpart C DCOs, would be subject to the same governance
fitness standards, conflict of interest requirements, and board
composition requirements, which most DCOs already meet in order to be
considered a QCCP. This would give DCOs clear direction on how to
comply with Core Principles O, P, and Q,\90\ the only DCO Core
Principles for which the Commission has yet to adopt implementing
regulations. Further, consistent with Core Principle Q, proposed Sec.
39.26 would require that a DCO's governing board or committee includes
market participants. Because the Commission has become aware of issues
in interpreting this requirement, the Commission proposes to define
``market participant,'' as well as specify that market participation is
required on the DCO's governing board or governing committee, i.e., the
group with the ultimate decision-making authority. This would avoid
ambiguity and provide DCOs with greater clarity.
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\90\ Core Principles O, P, and Q respectively address governance
arrangements, conflicts of interest, and composition of governing
boards.
---------------------------------------------------------------------------
b. Costs
DCOs may incur costs to comply with the proposed requirements in
Sec. Sec. 39.24, 39.25, and 39.26.\91\ Some DCOs must already comply
with these standards and will not face incremental costs. The language
that is proposed to be adopted in Sec. Sec. 39.24, 39.25, and 39.26 is
essentially the same as that which is included in Sec. 39.32.
Regulation 39.32 is applicable to SIDCOs and subpart C DCOs and
implements guidance from the PFMIs with which a CCP must comply in
order to be considered a QCCP. Non-U.S. DCOs that are neither SIDCOs
nor subpart C DCOs are generally held to these requirements by their
home country regulators for the same reason. The Commission believes
these standards are appropriate for all DCOs and incorporate best
practices within the clearing industry.
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\91\ The Commission estimates for PRA purposes that there would
be an increase in the burden incurred by DCOs, as discussed in
section IX.B.2.g above.
---------------------------------------------------------------------------
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. Although the Commission
believes that most, if not all, DCOs already comply with these
[[Page 22263]]
requirements, to the extent they do not, the Commission believes the
adoption of Sec. Sec. 39.24, 39.25, and 39.26 would improve DCO risk
management practices by promoting transparency of governance
arrangements and making sure that the interests of a DCO's clearing
members and, where relevant, their customers are taken into account.
This would further enhance the protection of market participants and
the public and the financial integrity of the derivatives markets.
17. Legal Risk--Sec. 39.27
The Commission is proposing to amend Sec. 39.27(c) to require a
DCO that provides clearing services outside the United States to ensure
that the memorandum required in Exhibit R of Form DCO remains accurate
and up-to-date. This would ensure that the DCO remains aware of any
potential choice of law issues that may impact the enforceability of
the DCO's rules, procedures, and contracts in all relevant
jurisdictions. The Commission believes this requirement would not
impose additional costs on DCOs that already maintain compliance with
Sec. 39.27(c), as DCOs with prudent risk management practices should
continuously assess their rules, procedures, and policies against the
laws and regulations of the jurisdictions in which they operate. For
the same reason, the Commission does not anticipate that this
requirement will have a direct impact on any of the section 15(a)
factors.
18. Fully-Collateralized Positions--Sec. Sec. 39.2, 39.11, 39.12,
39.13, and 39.19
a. Benefits
As discussed above, fully-collateralized positions do not expose
DCOs to many of the risks that traditionally margined products do. Full
collateralization prevents a DCO from being exposed to credit risk
stemming from the inability of a clearing member or customer of a
clearing member to meet a margin call or a call for additional capital.
This limited exposure and full collateralization of that exposure
renders certain provisions of part 39 inapplicable or unnecessary. As a
result, the Division has granted relief from certain provisions of part
39 to DCOs that clear fully-collateralized positions. The Commission is
proposing to codify this relief in order to provide greater clarity to
DCOs and future applicants for DCO registration regarding how the
regulations in part 39 apply to DCOs that clear fully-collateralized
positions. DCOs that clear fully-collateralized positions would no
longer need to request relief from certain part 39 requirements nor
attempt to comply with those requirements, thereby conserving such
DCOs' time and resources.
b. Costs
The Commission does not anticipate any costs associated with these
amendments, as the proposed rules remove requirements that need not
apply to fully-collateralized positions.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(B) of the CEA, the Commission believes that the proposal to
codify relief that the Commission has granted to DCOs that clear fully-
collateralized positions from requirements that do not apply to these
positions, may increase operational efficiency for such DCOs. The
proposed amendments should not impact the protection of market
participants and the public, the financial integrity of markets, or
sound risk management practices, as the requirements that the
Commission is proposing to exclude for fully-collateralized positions
do not further these factors when applied to such positions. The
Commission has considered the other section 15(a) factors and believes
that they are not implicated by the proposed amendments.
19. Provisions Applicable to SIDCOs and DCOs That Elect To Be Subject
to the Provisions--Sec. Sec. 39.33, 39.36, 39.37, and Subpart C
Election Form
a. Benefits
Regulation 39.33(a)(1) requires a SIDCO or a subpart C DCO that is
systemically important in multiple jurisdictions, or that is involved
in activities with a more complex risk profile, to maintain financial
resources sufficient to enable it to meet its financial obligations to
its clearing members notwithstanding a default by the two clearing
members creating the largest combined loss in extreme but plausible
market conditions. The Commission is proposing to amend Sec.
39.33(a)(1) by replacing the phrase ``largest combined loss'' with
``largest combined financial exposure'' in order to be consistent with
Core Principle B and Sec. 39.11(a)(1) regarding DCO financial
resources requirements. The Commission is also proposing to amend Sec.
39.33(c)(1) to clarify that the ``largest aggregate liquidity
obligation'' means the total amount of cash, in each relevant currency,
that the defaulted clearing member would be required to pay to the DCO.
Proposed Sec. 39.33(c)(1) would reduce currency risk for SIDCOs and
subpart C DCOs by ensuring that these DCOs have sufficient liquidity in
the relevant currency of corresponding obligations during the time it
would take to liquidate or auction a defaulted clearing member's
positions. The Commission is also proposing to amend Sec. 39.33(d) to
require that a SIDCO use available Federal Reserve Bank accounts and
services where practical. This requirement would further enhance a
SIDCO's financial integrity and management of liquidity risk, thereby
promoting the financial integrity of the derivatives markets, while
permitting SIDCOs to consider lower cost alternatives where
appropriate.
Furthermore, the Commission is proposing to amend Sec.
39.36(b)(2)(ii) to replace the words ``produce accurate results'' with
``react appropriately'' to better reflect that the purpose of a
sensitivity analysis is to assess whether the margin model will react
appropriately to changes of inputs, parameters, and assumptions,
thereby enhancing the overall margin coverage. The Commission is also
proposing to amend Sec. 39.36(d), which requires each SIDCO and
subpart C DCO to ``regularly'' conduct an assessment of the theoretical
and empirical properties of its margin model for all products it
clears, to clarify that the assessment should be conducted on at least
an annual basis or more frequently if there are material relevant
market developments. This would ensure that SIDCOs and subpart C DCOs
continue to test their margin model with sufficient frequency.
Under Sec. 39.37, a SIDCO or a subpart C DCO is required to
publicly disclose its responses to the CPMI-IOSCO Disclosure Framework
\92\ and, in order to ensure the continued accuracy and usefulness of
its responses, to review and update them at least every two years and
following material changes to the SIDCO's or subpart C DCO's system or
environment in which it operates. The Commission is proposing to amend
Sec. 39.37(b) to additionally require that a SIDCO or a subpart C DCO
notify the Commission no later than ten business days after any updates
to its responses to the CPMI-IOSCO Disclosure Framework to reflect
material changes to the DCO's system or environment. The notice would
need to identify changes made since the latest version of
[[Page 22264]]
the responses. The Commission is also proposing to amend Sec. 39.37(c)
to explicitly state that a SIDCO or a subpart C DCO must disclose
relevant basic data on transaction volume and values that are
consistent with the standards set forth in the CPMI-IOSCO Public
Quantitative Disclosure Standards for Central Counterparties. These
proposed amendments would be consistent with SIDCOs' and subpart C
DCOs' existing CPMI-IOSCO obligations.
---------------------------------------------------------------------------
\92\ See CMPI-IOSCO, Principles for Financial Market
Infrastructures: Disclosure Framework and Assessment Methodology
(Dec. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
---------------------------------------------------------------------------
The Commission is proposing to amend the subpart C Election Form to
better reflect the requirements in subpart C of part 39 and to more
closely align the format of the subpart C Election Form with Form DCO
by specifying the information and/or documentation that must be
provided by a DCO as part of its petition for subpart C election.
Currently, unlike Form DCO, the subpart C Election Form references the
corresponding regulations in subpart C but does not specify the type or
level of information that must be filed as an exhibit. The proposed
amendments are intended to provide greater transparency and clarity as
to the type of information required.
b. Costs
Because most of the proposed changes to subpart C of part 39 are
meant to clarify existing requirements, the Commission does not expect
that SIDCOs and subpart C DCOs would incur additional costs. Where
reporting is required under proposed Sec. 39.37(b), the Commission
believes any cost associated with such notice would be nominal for
SIDCOs and subpart C DCOs, as they would already be required to
periodically update the information publicly.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) and (B) of the CEA, respectively, the Commission believes
that the proposed amendments would protect market participants and the
public, and promote the financial integrity of SIDCOs and the
derivatives markets by, for example, clarifying SIDCO financial
resources requirements, requiring the use of central bank accounts,
where practical, and ensuring that SIDCOs continue to test their margin
models with sufficient frequency. Moreover, in consideration of section
15(a)(2)(D) of the CEA, the Commission believes the proposed amendments
to Sec. 39.33(c)(1) would promote sound risk management policies by
reducing currency risk for SIDCOs and subpart C DCOs by ensuring that
these DCOs have sufficient liquidity in the relevant currency of
corresponding obligations during the time it would take to liquidate or
auction a defaulted clearing member's positions. The Commission has
considered the other section 15(a) factors and believes that they are
not implicated by the proposed amendments.
20. Part 140--Organization, Functions, and Procedures of the Commission
a. Benefits
The Commission is proposing to amend Sec. 140.94 to provide the
Director of the Division with delegated authority to review DCO
registration applications, determine whether an application is
materially complete, request additional information in support of an
application, stay the running of the 180-day review period for an
application, and request additional information in support of a rule
submission. The Commission believes that DCOs would benefit from the
proposed delegation of authority, as it would promote a more efficient
process to address these aspects of registration and rule
certification.
b. Costs
The Commission has not identified any costs on DCOs or their
members associated with the proposed amendments to Sec. 140.94.
c. Section 15(a) Factors
The Commission has considered the section 15(a) factors and
believes that they are not implicated by this proposed amendment.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation.\93\
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\93\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission believes that the public interest to be protected by
the antitrust laws is generally the promotion of competition. The
Commission requests comment on whether the proposed rulemaking
implicates any other specific public interest to be protected by the
antitrust laws. The Commission has considered the proposed rulemaking
to determine whether it is anticompetitive and has identified no
anticompetitive effects. The Commission requests comment on whether the
proposed rulemaking is anticompetitive and, if it is, what the
anticompetitive effects are.
Because the Commission has determined that the proposed rules are
not anticompetitive and have no anticompetitive effects, the Commission
has not identified any less anticompetitive means of achieving the
purposes of the CEA. The Commission requests comment on whether there
are less anticompetitive means of achieving the relevant purposes of
the CEA that would otherwise be served by adopting the proposed rules.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Definitions,
Reporting and recordkeeping requirements, Swaps.
17 CFR Part 39
Application form, Business and industry, Commodity futures,
Consumer protection, Default rules and procedures, Definitions,
Enforcement authority, Participant and product eligibility, Reporting
and recordkeeping requirements, Risk management, Settlement procedures,
Swaps, Treatment of funds.
17 CFR Part 140
Authority delegations (Government agencies), Conflict of interests,
Organization and functions (Government agencies).
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR chapter I as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9,
10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).
0
2. In Sec. 1.20, revise paragraphs (d)(1), (7), and (8) introductory
text to read as follows:
Sec. 1.20 Futures customer funds to be segregated and separately
accounted for.
* * * * *
(d) * * *
(1) A futures commission merchant must obtain a written
acknowledgment from each bank, trust company, derivatives clearing
organization, or
[[Page 22265]]
futures commission merchant prior to or contemporaneously with the
opening of an account by the futures commission merchant with such
depositories; provided, however, that a written acknowledgment need not
be obtained from a derivatives clearing organization that has adopted
and submitted to the Commission rules that provide for the segregation
of futures customer funds in accordance with all relevant provisions of
the Act and the rules in this chapter, and orders promulgated
thereunder, and in such cases, the requirements set forth in paragraphs
(d)(3) through (6) of this section shall not apply to the futures
commission merchant.
* * * * *
(7) Where a written acknowledgment is required, the futures
commission merchant shall promptly file a copy of the written
acknowledgment with the Commission in the format and manner specified
by the Commission no later than three business days after the opening
of the account or the execution of a new written acknowledgment for an
existing account, as applicable.
(8) Where a written acknowledgment is required, a futures
commission merchant shall obtain a new written acknowledgment within
120 days of any changes in the following:
* * * * *
0
3. In Sec. 1.59, revise paragraph (a)(1) to read as follows:
Sec. 1.59 Activities of self-regulatory organization employees,
governing board members, committee members, and consultants.
(a) * * *
(1) Self-regulatory organization means a ``self-regulatory
organization,'' as defined in Sec. 1.3.
* * * * *
0
4. In Sec. 1.63, revise paragraph (a)(1) to read as follows:
Sec. 1.63 Service on self-regulatory organization governing boards or
committees by persons with disciplinary histories.
(a) * * *
(1) Self-regulatory organization means a ``self-regulatory
organization,'' as defined in Sec. 1.3, except as defined in paragraph
(b)(6) of this section.
* * * * *
0
5. In Sec. 1.64, revise paragraph (a)(1) to read as follows:
Sec. 1.64 Composition of various self-regulatory organization
governing boards and major disciplinary committees.
(a) * * *
(1) Self-regulatory organization means ``self-regulatory
organization,'' as defined in Sec. 1.3.
* * * * *
0
6. In Sec. 1.69, revise paragraph (a)(7) to read as follows:
Sec. 1.69 Voting by interested members of self-regulatory
organization governing boards and various committees.
(a) * * *
(7) Self-regulatory organization means a ``self-regulatory
organization,'' as defined in Sec. 1.3, but excludes registered
futures associations for the purposes of paragraph (b)(2) of this
section.
* * * * *
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
0
7. The authority citation for part 39 continues to read as follows:
Authority: 7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C.
8325.
0
8. Revise Sec. 39.2 to read as follows:
Sec. 39.2 Definitions.
For the purposes of this part:
Activity with a more complex risk profile includes:
(1) Clearing credit default swaps, credit default futures, or
derivatives that reference either credit default swaps or credit
default futures and
(2) Any other activity designated as such by the Commission
pursuant to Sec. 39.33(a)(3).
Back test means a test that compares a derivatives clearing
organization's initial margin requirements with historical price
changes to determine the extent of actual margin coverage.
Business day means the intraday period of time starting at the
business hour of 8:15 a.m. and ending at the business hour of 4:45
p.m., on all days except Saturdays, Sundays, Federal holidays
established under 5 U.S.C. 6103, and foreign holidays. For purposes of
this provision, a foreign holiday is a day on which a derivatives
clearing organization and its domestic financial markets are closed for
a holiday that is not a Federal holiday in the United States.
Customer account or customer origin means ``customer account'' as
defined in Sec. 1.3 of this chapter.
Depository institution has the meaning set forth in section
19(b)(1)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)).
Enterprise risk management means an enterprise-wide strategic
business process intended to identify potential events that may affect
the enterprise and to manage the probability or impact of those events
on the enterprise as a whole, such that the overall risk remains within
the enterprise's risk appetite and provides reasonable assurance that
the derivatives clearing organization can continue to achieve its
objectives.
Fully-collateralized position means a contract cleared by a
derivatives clearing organization that requires the derivatives
clearing organization to hold, at all times, funds in the form of the
required payment sufficient to cover the maximum possible loss that a
counterparty could incur upon liquidation or expiration of the
contract.
House account or house origin means a clearing member account which
is not subject to section 4d(a) or 4d(f) of the Act.
Key personnel means derivatives clearing organization personnel who
play a significant role in the operations of the derivatives clearing
organization, the provision of clearing and settlement services, risk
management, or oversight of compliance with the Act and Commission
regulations in this chapter, and orders promulgated thereunder. Key
personnel include, but are not limited to, those persons who are or
perform the functions of any of the following: Chief executive officer;
president; chief compliance officer; chief operating officer; chief
risk officer; chief financial officer; chief technology officer; chief
information security officer; and emergency contacts or persons who are
responsible for business continuity or disaster recovery planning or
program execution.
Stress test means a test that compares the impact of potential
extreme price moves, changes in option volatility, and/or changes in
other inputs that affect the value of a position, to the financial
resources of a derivatives clearing organization, clearing member, or
large trader, to determine the adequacy of the financial resources of
such entities.
Subpart C derivatives clearing organization means any derivatives
clearing organization, as defined in section 1a(15) of the Act and
Sec. 1.3 of this chapter, which:
(1) Is registered as a derivatives clearing organization under
section 5b of the Act;
(2) Is not a systemically important derivatives clearing
organization; and
(3) Has become subject to the provisions of subpart C of this part,
pursuant to Sec. 39.31.
Systemically important derivatives clearing organization means a
financial market utility that is a derivatives clearing organization
registered under section 5b of the Act, which is currently designated
by the Financial Stability Oversight Council to be systemically
important and for which the Commission acts as the Supervisory Agency
pursuant to 12 U.S.C. 5462(8).
[[Page 22266]]
Trust company means a trust company that is a member of the Federal
Reserve System, under section 1 of the Federal Reserve Act (12 U.S.C.
221), but that does not meet the definition of depository institution
as set out in this section.
U.S. branch or agency of a foreign banking organization means the
U.S. branch or agency of a foreign banking organization as defined in
section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
0
9. Revise Sec. 39.3 to read as follows:
Sec. 39.3 Procedures for registration.
(a) Application for registration--(1) General procedure. An entity
seeking to register as a derivatives clearing organization shall file
an application for registration with the Secretary of the Commission in
the format and manner specified by the Commission. The Commission will
review the application for registration as a derivatives clearing
organization pursuant to the 180-day timeframe and procedures specified
in section 6(a) of the Act, and may approve or deny the application. If
the Commission approves the application, the Commission will register
the applicant as a derivatives clearing organization subject to
conditions as appropriate.
(2) Application. Any entity seeking to register as a derivatives
clearing organization shall submit to the Commission a completed Form
DCO, which shall include a cover sheet, all applicable exhibits, and
any supplemental materials, as provided in appendix A to this part
(application). The Commission will not commence processing an
application unless the applicant has filed the application as required
by this section. Failure to file a completed application will preclude
the Commission from determining that an application is materially
complete, as provided in section 6(a) of the Act. Upon its own
initiative, an applicant may file with its completed application
additional information that may be necessary or helpful to the
Commission in processing the application.
(3) Submission of supplemental information. The filing of a
completed application is a minimum requirement and does not create a
presumption that the application is materially complete or that
supplemental information will not be required. At any time during the
application review process, the Commission may request that the
applicant provide supplemental information in order for the Commission
to process the application. The applicant shall provide supplemental
information in the format and manner specified by the Commission.
(4) Application amendments. An applicant shall promptly amend its
application if it discovers a material omission or error, or if there
is a material change in the information provided to the Commission in
the application or other information provided in connection with the
application. An applicant is only required to submit exhibits and other
information that are relevant to the application amendment when filing
a Form DCO for the purpose of amending its pending application.
(5) Public information. The following sections of all applications
to become a registered derivatives clearing organization will be
public: First page of the Form DCO cover sheet (up to and including the
General Information section), Exhibit A-1 (regulatory compliance
chart), Exhibit A-2 (proposed rulebook), Exhibit A-3 (narrative summary
of proposed clearing activities), Exhibit A-7 (documents setting forth
the applicant's corporate organizational structure), Exhibit A-8
(documents establishing the applicant's legal status and certificate(s)
of good standing or its equivalent), and any other part of the
application not covered by a request for confidential treatment,
subject to Sec. 145.9 of this chapter.
(6) Extension of time for review. The Commission may further extend
the review period in paragraph (a)(1) of this section for any period of
time to which the applicant agrees in writing.
(b) Stay of application review--(1) By the Commission. The
Commission may stay the running of the 180-day review period if an
application is materially incomplete, in accordance with section 6(a)
of the Act.
(2) Delegation of authority. (i) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Clearing
and Risk or the Director's designee, with the concurrence of the
General Counsel or the General Counsel's designee, the authority to
notify an applicant seeking registration as a derivatives clearing
organization that the application is materially incomplete and the
running of the 180-day period under section 6(a) of the Act is stayed.
(ii) The Director of the Division of Clearing and Risk may submit
to the Commission for its consideration any matter which has been
delegated in this paragraph (b)(2).
(iii) Nothing in this paragraph (b)(2) prohibits the Commission, at
its election, from exercising the authority delegated in paragraph
(b)(2)(i) of this section.
(c) Withdrawal of application for registration. An applicant for
registration may withdraw its application submitted pursuant to
paragraph (a) of this section by filing such a request with the
Secretary of the Commission in the format and manner specified by the
Commission. Withdrawal of an application for registration shall not
affect any action taken or to be taken by the Commission based upon
actions, activities, or events occurring during the time that the
application for registration was pending with the Commission.
(d) Amendment of an order of registration. (1) A derivatives
clearing organization requesting an amendment to an order of
registration shall file the request with the Secretary of the
Commission in the form and manner specified by the Commission.
(2) A derivatives clearing organization shall provide to the
Commission, upon the Commission's request, any additional information
and documentation necessary to review a request to amend an order of
registration.
(3) The Commission shall issue an amended order of registration
upon a Commission determination, in its own discretion, that the
derivatives clearing organization would maintain compliance with the
Act and the Commission's regulations in this chapter upon amendment to
the order. If deemed appropriate, the Commission may issue an amended
order of registration subject to conditions.
(4) The Commission may decline to issue an amended order based upon
a Commission determination, in its own discretion, that the derivatives
clearing organization would not continue to maintain compliance with
the Act and the Commission's regulations in this chapter upon amendment
to the order.
(e) Reinstatement of dormant registration. Before accepting
products for clearing, a dormant derivatives clearing organization as
defined in Sec. 40.1 of this chapter must reinstate its registration
under the procedures of paragraph (a) of this section; provided,
however, that an application for reinstatement may rely upon previously
submitted materials that still pertain to, and accurately describe,
current conditions.
(f) Vacation of registration--(1) Request. A registered derivatives
clearing organization may have its registration vacated pursuant to
section 7 of the Act by submitting a request to the Secretary of the
Commission in the format and manner specified by the Commission. A
vacation of registration shall not affect any action taken or to be
[[Page 22267]]
taken by the Commission based upon actions, activities or events
occurring during the time that the derivatives clearing organization
was registered with the Commission. The request shall include:
(i) The date that the vacation should take effect, which must be at
least ninety days after the request was submitted;
(ii) A description of how the derivatives clearing organization
intends to transfer or otherwise unwind all open positions at the
derivatives clearing organization and how such actions reflect the
interests of affected clearing members and their customers;
(iii) A statement that the derivatives clearing organization will
continue to maintain its books and records for the requisite statutory
and regulatory retention periods after its registration has been
vacated; and
(iv) A statement that the derivatives clearing organization will
continue to make its books and records available for inspection by any
representative of the Commission or the United States Department of
Justice after its registration has been vacated, as required by Sec.
1.31 of this chapter.
(2) Notice to registered entities. The Commission shall fulfill its
obligation to send a copy of the request and the order of vacation to
all other registered entities by posting the documents on the
Commission website.
(g) Request for transfer of open interest--(1) Submission. A
derivatives clearing organization seeking to transfer its positions
comprising open interest for clearing and settlement to another
derivatives clearing organization shall submit rules for Commission
approval pursuant to Sec. 40.5 of this chapter.
(2) Required information. The rule submission shall include, at a
minimum, the following:
(i) The underlying agreement that governs the transfer;
(ii) A description of the transfer, including the reason for the
transfer and the impact of the transfer on the rights and obligations
of clearing members and market participants holding the positions that
comprise the derivatives clearing organization's open interest;
(iii) A discussion of the transferee's ability to comply with the
Act, including the core principles applicable to derivatives clearing
organizations, and the Commission's regulations in this chapter;
(iv) The transferee's rules marked to show changes that would
result from acceptance of the transferred positions;
(v) A list of products for which the derivatives clearing
organization requests transfer of open interest; and
(vi) A representation by the transferee that it is in and will
maintain compliance with the Act, including the core principles
applicable to derivatives clearing organizations, and the Commission's
regulations in this chapter upon the transfer of the open interest.
(3) Commission action. The Commission may request additional
information in support of a rule submission filed under paragraph
(g)(1) of this section, and may grant approval of the rules in
accordance with Sec. 40.5 of this chapter.
0
10. In Sec. 39.4, revise paragraphs (a) and (e) to read as follows:
Sec. 39.4 Procedures for implementing derivatives clearing
organization rules and clearing new products.
(a) Request for approval of rules. A registered derivatives
clearing organization may request, pursuant to the procedures of Sec.
40.5 of this chapter, that the Commission approve any or all of its
rules and subsequent amendments thereto, including operational rules,
prior to their implementation or, notwithstanding the provisions of
section 5c(c)(2) of the Act, at any time thereafter, under the
procedures of Sec. 40.5 of this chapter. A derivatives clearing
organization may label as ``approved by the Commission'' only those
rules that have been so approved.
* * * * *
(e) Holding securities in a futures portfolio margining account. A
derivatives clearing organization seeking to provide a portfolio
margining program under which securities would be held in a futures
account as defined in Sec. 1.3 of this chapter, shall submit rules to
implement such portfolio margining program for Commission approval in
accordance with Sec. 40.5 of this chapter. Concurrent with the
submission of such rules for Commission approval, the derivatives
clearing organization shall petition the Commission for an order under
section 4d(a) of the Act.
0
11. In Sec. 39.10, revise paragraphs (c)(1), (3) and (4) and add
paragraph (d) to read as follows:
Sec. 39.10 Compliance with core principles.
* * * * *
(c) * * *
(1) Designation. Each derivatives clearing organization shall
establish the position of chief compliance officer, designate an
individual to serve as the chief compliance officer, and provide the
chief compliance officer with full responsibility and authority to
develop and enforce, in consultation with the board of directors or the
senior officer, appropriate compliance policies and procedures, to
fulfill the duties set forth in the Act and Commission regulations in
this chapter.
(i) The individual designated to serve as chief compliance officer
shall have the background and skills appropriate for fulfilling the
responsibilities of the position. No individual who would be
disqualified from registration under sections 8a(2) or 8a(3) of the Act
may serve as the chief compliance officer.
(ii) The chief compliance officer shall report to the board of
directors or the senior officer of the derivatives clearing
organization or, if the derivatives clearing organization engages in
substantial activities not related to clearing, the senior officer
responsible for the derivatives clearing organization's clearing
activities. The board of directors or the senior officer shall approve
the compensation of the chief compliance officer.
(iii) The chief compliance officer shall meet with the board of
directors or the senior officer at least once a year.
(iv) A change in the designation of the individual serving as the
chief compliance officer of the derivatives clearing organization shall
be reported to the Commission in accordance with the requirements of
Sec. 39.19(c)(4)(x).
* * * * *
(3) Annual report. The chief compliance officer shall, not less
than annually, prepare and sign a written report that covers the most
recently completed fiscal year of the derivatives clearing
organization. The annual report shall, at a minimum:
(i) Contain a description of the derivatives clearing
organization's written policies and procedures, including the code of
ethics and conflict of interest policies; provided that, to the extent
that the derivatives clearing organization's written policies and
procedures have not materially changed since they were most recently
described in an annual report to the Commission, and if the annual
report containing the most recent description was submitted within the
last five years, the annual report may instead incorporate by reference
the relevant descriptions from the most recent annual report containing
the description;
(ii) Review each core principle and applicable Commission
regulation in this chapter including, in the case of systemically
important derivatives clearing organizations and subpart C derivatives
clearing organizations, regulations in subpart C of this part, and with
respect to each:
(A) Identify, by name, rule number, or other identifier, the
compliance policies
[[Page 22268]]
and procedures that are designed to ensure compliance with each core
principle and applicable regulation in this chapter;
(B) Provide an assessment as to the effectiveness of these policies
and procedures;
(C) Discuss areas for improvement, and recommend potential or
prospective changes or improvements to the derivatives clearing
organization's compliance program and resources allocated to
compliance;
(iii) List any material changes to compliance policies and
procedures since the last annual report;
(iv) Describe the financial, managerial, and operational resources
set aside for compliance with the Act and Commission regulations in
this chapter; and
(v) Describe any material compliance matters, including incidents
of noncompliance, since the date of the last annual report, and
describe the corresponding action taken.
(4) Submission of annual report to the Commission. (i) Prior to
submitting the annual report to the Commission, the chief compliance
officer shall provide the annual report to the board of directors or
the senior officer of the derivatives clearing organization or, if the
derivatives clearing organization engages in substantial activities not
related to clearing, the senior officer responsible for the derivatives
clearing organization's clearing activities, for review. Submission of
the report to the board of directors or the senior officer shall be
recorded in the board minutes or otherwise, as evidence of compliance
with the requirement in this paragraph (c)(4)(i). The annual report
shall describe the process by which it was submitted to the board of
directors or the senior officer, including the date of submission.
(ii) The annual report shall be submitted to the Secretary of the
Commission in the format and manner specified by the Commission not
more than 90 days after the end of the derivatives clearing
organization's fiscal year. The report shall include a certification by
the chief compliance officer that, to the best of his or her knowledge
and reasonable belief, and under penalty of law, the annual report is
accurate and complete.
(iii) The derivatives clearing organization shall promptly submit
an amended annual report if material errors or omissions in the report
are identified after submission. An amendment must contain the
certification required under paragraph(c)(4)(ii) of this section.
(iv) A derivatives clearing organization may request from the
Commission an extension of time to submit its annual report in
accordance with Sec. 39.19(c)(3).
* * * * *
(d) Enterprise risk management--(1) General. A derivatives clearing
organization shall have an enterprise risk management program that
identifies and assesses sources of risk and their potential impact on
the operations and services of the derivatives clearing organization.
The derivatives clearing organization shall measure, monitor, and
manage identified sources of risk on an ongoing basis, including
through the development and use of appropriate information systems. The
derivatives clearing organization shall test the effectiveness of any
mitigating controls employed to reduce identified sources of risk to
ensure that the risks are properly mitigated.
(2) Enterprise risk management framework. A derivatives clearing
organization shall establish and maintain written policies and
procedures, approved by its board of directors or a committee of the
board of directors that establish an appropriate enterprise risk
management framework. The framework shall be reviewed at least annually
by the board of directors or committee of the board of directors and
updated as necessary.
(3) Standards for enterprise risk management framework. A
derivatives clearing organization shall follow generally accepted
standards and industry best practices in the development and review of
its enterprise risk management framework, assessment of the performance
of its enterprise risk management program, and management and
mitigation of risk to the derivatives clearing organization.
(4) Enterprise risk officer. A derivatives clearing organization
shall identify as its enterprise risk officer an appropriate individual
that exercises the full responsibility and authority to manage the
enterprise risk management program of the derivatives clearing
organization. The enterprise risk officer shall have the authority,
independence, resources, expertise, and access to relevant information
necessary to fulfil the responsibilities of the position consistent
with the requirements of this section.
0
12. Revise Sec. 39.11 to read as follows:
Sec. 39.11 Financial resources.
(a) General. A derivatives clearing organization shall have
adequate financial, operational, and managerial resources, as
determined by the Commission, to discharge each responsibility of the
derivatives clearing organization. A derivatives clearing organization
shall maintain sufficient financial resources to cover its exposures
with a high degree of confidence. At a minimum, each derivatives
clearing organization shall possess financial resources that exceed the
total amount that would:
(1) Enable the derivatives clearing organization to meet its
financial obligations to its clearing members notwithstanding a default
by the clearing member creating the largest financial exposure for the
derivatives clearing organization in extreme but plausible market
conditions; Provided that if a clearing member controls another
clearing member or is under common control with another clearing
member, the affiliated clearing members shall be deemed to be a single
clearing member for purposes of the provision in this paragraph (a)(1);
and
(2) Enable the derivatives clearing organization to cover its
operating costs for a period of at least one year, calculated on a
rolling basis. A derivatives clearing organization shall identify and
adequately manage its general business risks and hold sufficient liquid
resources to cover potential business losses that are not related to
clearing members' defaults, so that the derivatives clearing
organization can continue to provide services as a going concern.
(b) Types of financial resources. (1) Financial resources available
to satisfy the requirements of paragraph (a)(1) of this section may
include:
(i) The derivatives clearing organization's own capital;
(ii) Guaranty fund deposits;
(iii) Default insurance;
(iv) Potential assessments for additional guaranty fund
contributions, if permitted by the derivatives clearing organization's
rules; and
(v) Any other financial resource deemed acceptable by the
Commission.
(2) Financial resources available to satisfy the requirements of
paragraph (a)(2) of this section shall include:
(i) The derivatives clearing organization's own capital; and
(ii) Any other financial resource deemed acceptable to the
Commission.
(3) A financial resource may be allocated, in whole or in part, to
satisfy the requirements of either paragraph (a)(1) or (2) of this
section, but not both paragraphs, and only to the extent the use of
such financial resource is not otherwise limited by the Act, Commission
regulations in this chapter, the derivatives clearing organization's
rules, or any other contractual arrangements to which the derivatives
clearing organization is a party.
[[Page 22269]]
(c) Calculation of financial resources requirements. (1) A
derivatives clearing organization shall, on a monthly basis, perform
stress tests that will allow it to make a reasonable calculation of the
financial resources needed to meet the requirements of paragraph (a)(1)
of this section. The derivatives clearing organization shall have
reasonable discretion in determining the methodology used to calculate
the requirements, subject to the limitations identified in paragraph
(c)(2) of this section, and provided that the methodology must take
into account both historical data and hypothetical scenarios. The
Commission may review the methodology and require changes as
appropriate. The requirements of this paragraph (c) do not apply to
fully-collateralized positions.
(2) When calculating its largest financial exposure, a derivatives
clearing organization:
(i) In netting its exposure against the clearing member's initial
margin, shall:
(A) Use that portion of the margin amount on deposit that is
required; and
(B) Use customer initial margin only to the extent permitted by
parts 1 and 22 of this chapter, as applicable;
(ii) Shall combine the customer and house stress test losses of
each clearing member using the same stress test scenarios;
(iii) May net any gains in the house account with losses in the
customer account, if permitted by the derivatives clearing
organization's rules, but shall not net losses in the house account
with gains in the customer account; and
(iv) With respect to a clearing member's cleared swaps customer
account, may net gains for one customer against losses for another
customer only to the extent permitted by the derivatives clearing
organization's rules.
(3) A derivatives clearing organization shall, on a monthly basis,
make a reasonable calculation of its projected operating costs over a
12-month period in order to determine the amount needed to meet the
requirements of paragraph (a)(2) of this section. The derivatives
clearing organization shall have reasonable discretion in determining
the methodology used to compute such projected operating costs. The
Commission may review the methodology and require changes as
appropriate.
(d) Valuation of financial resources. (1) At appropriate intervals,
but not less than monthly, a derivatives clearing organization shall
compute the current market value of each financial resource used to
meet its obligations under paragraph (a) of this section. Reductions in
value to reflect credit, market, and liquidity risks (haircuts) shall
be applied as appropriate and evaluated on a monthly basis.
(2) If assessments for additional guaranty fund contributions are
permitted by the derivatives clearing organization's rules, in
calculating the financial resources available to meet its obligations
under paragraph (a)(1) of this section:
(i) The derivatives clearing organization shall have rules
requiring that its clearing members have the ability to meet an
assessment within the time frame of a normal end-of-day variation
settlement cycle;
(ii) The derivatives clearing organization shall monitor the
financial and operational capacity of its clearing members to meet
potential assessments;
(iii) The derivatives clearing organization shall apply a 30
percent haircut to the value of potential assessments; and
(iv) The derivatives clearing organization shall only count the
value of assessments, after the haircut, to meet up to 20 percent of
the total amount required under paragraph (a)(1) of this section.
(e) Liquidity of financial resources. (1)(i) The derivatives
clearing organization shall effectively measure, monitor, and manage
its liquidity risks, maintaining sufficient liquid resources such that
it can, at a minimum, fulfill its cash obligations when due. The
derivatives clearing organization shall hold assets in a manner where
the risk of loss or of delay in its access to them is minimized.
(ii) The financial resources allocated by the derivatives clearing
organization to meet the requirements of paragraph (a)(1) of this
section shall be sufficiently liquid to enable the derivatives clearing
organization to fulfill its obligations as a central counterparty
during a one-day settlement cycle. The derivatives clearing
organization shall maintain cash, U.S. Treasury obligations, or high
quality, liquid, general obligations of a sovereign nation, in an
amount greater than or equal to an amount calculated as follows:
(A) Calculate the average daily settlement variation pay for each
clearing member over the last fiscal quarter;
(B) Calculate the sum of those average daily settlement variation
pays; and
(C) Using that sum, calculate the average of its clearing members'
average daily settlement variation pays.
(iii) If the total amount of the financial resources required
pursuant to the calculation set forth in paragraph (e)(1)(ii) of this
section is insufficient to enable the derivatives clearing organization
to fulfill its obligations during a one-day settlement cycle, the
derivatives clearing organization may take into account a committed
line of credit or similar facility for the purpose of meeting the
remainder of the requirement of this paragraph (e) (subject to the
limitation in paragraph (e)(3) of this section).
(iv) A derivatives clearing organization is not subject to
paragraph (e)(1)(ii) of this section for fully-collateralized
positions.
(2) The financial resources allocated by the derivatives clearing
organization to meet the requirements of paragraph (a)(2) of this
section must include unencumbered, liquid financial assets (i.e., cash
and/or highly liquid securities) sufficient to enable the derivatives
clearing organization to cover its operating costs for a period of at
least six months. If the financial resources allocated to meet the
requirements of paragraph (a)(2) of this section do not include such
assets in a sufficient amount, the derivatives clearing organization
may take into account a committed line of credit or similar facility
for the purpose of meeting the requirements of this paragraph (subject
to the limitation in paragraph (e)(3) of this section).
(3) A committed line of credit or similar facility may be
allocated, in whole or in part, to satisfy the requirements of either
paragraph (e)(1)(ii) or (e)(2) of this section, but not both
paragraphs.
(4)(i) Assets in a guaranty fund shall have minimal credit, market,
and liquidity risks and shall be readily accessible on a same-day
basis;
(ii) Cash balances shall be invested or placed in safekeeping in a
manner that bears little or no principal risk; and
(iii) Letters of credit shall not be a permissible asset for a
guaranty fund.
(f) Reporting requirements--(1) Quarterly reporting. Each fiscal
quarter, or at any time upon Commission request, a derivatives clearing
organization shall:
(i) Report to the Commission:
(A) The amount of financial resources necessary to meet the
requirements of paragraph (a) of this section and Sec. Sec. 39.33(a)
and 39.39(d), if applicable;
(B) The value of each financial resource available, computed in
accordance with the requirements of paragraph (d) of this section; and
(C) The manner in which the derivatives clearing organization meets
the liquidity requirements of paragraph (e) of this section.
(ii) Provide the Commission with a financial statement, including
the balance sheet, income statement, and
[[Page 22270]]
statement of cash flows, prepared in accordance with U.S. generally
accepted accounting principles, of the derivatives clearing
organization; provided, however, that for a derivatives clearing
organization that is incorporated or organized under the laws of any
foreign country, the financial statement may be prepared in accordance
with either U.S. generally accepted accounting principles or the
International Financial Reporting Standards issued by the International
Accounting Standards Board. The balance sheet must identify any assets
allocated to satisfy the requirements of paragraph (a)(1) or (2) of
this section as held for that purpose; and
(iii) Report to the Commission the value of each individual
clearing member's guaranty fund deposit, if the derivatives clearing
organization reports having guaranty fund deposits as a financial
resource available to satisfy the requirements of paragraph (a)(1) of
this section and Sec. Sec. 39.33(a) and 39.39(d), if applicable.
(iv) The calculations required by this paragraph (f) shall be made
as of the last business day of the derivatives clearing organization's
fiscal quarter. The report shall be submitted not later than 17
business days after the end of the derivatives clearing organization's
fiscal quarter, or at such later time as the Commission may permit, in
its discretion, upon request by the derivatives clearing organization.
(2) Annual reporting. (i) A derivatives clearing organization shall
submit to the Commission an audited year-end financial statement of the
derivatives clearing organization calculated in accordance with U.S.
generally accepted accounting principles; provided, however, that for a
derivatives clearing organization that is incorporated or organized
under the laws of any foreign country, the financial statement may be
prepared in accordance with either U.S. generally accepted accounting
principles or the International Financial Reporting Standards issued by
the International Accounting Standards Board. The balance sheet must
identify any assets allocated to satisfy the requirements of paragraph
(a)(1) or (2) of this section as held for that purpose.
(ii) The report required by paragraph (f)(2)(i) of this section
shall be submitted not later than 90 days after the end of the
derivatives clearing organization's fiscal year, or at such later time
as the Commission may permit, in its discretion, upon request by the
derivatives clearing organization.
(iii) A derivatives clearing organization shall submit concurrently
with the audited year-end financial statement required by paragraph
(f)(2)(i) of this section:
(A) A reconciliation, including appropriate explanations, of its
balance sheet in the audited year-end financial statement with the
balance sheet in the derivatives clearing organization's financial
statement for the last quarter of the fiscal year when material
differences exist or, if no material differences exist, a statement so
indicating; and
(B) Such further information as may be necessary to make the
statements not misleading.
(3) Other reporting. (i) A derivatives clearing organization shall
provide to the Commission as part of its first report under paragraph
(f)(1) of this section, and in the event of any change thereafter:
(A) Sufficient documentation explaining the methodology used to
compute its financial resources requirements under paragraph (a) of
this section and Sec. Sec. 39.33(a) and 39.39(d), if applicable; and
(B) Sufficient documentation explaining the basis for its
determinations regarding the valuation and liquidity requirements set
forth in paragraphs (d) and (e) of this section.
(ii) A derivatives clearing organization shall provide to the
Commission copies of any agreements establishing or amending a credit
facility, insurance coverage, or other arrangement evidencing or
otherwise supporting the derivatives clearing organization's
conclusions regarding its:
(A) Financial resources available to satisfy the requirements of
paragraph (a) of this section and Sec. Sec. 39.33(a) and 39.39(d), if
applicable; and
(B) Liquidity resources available to satisfy the requirements of
paragraph (e) of this section and Sec. 39.33(c), if applicable.
(4) Certification. A derivatives clearing organization shall
provide with each report submitted pursuant to this section a
certification by the person responsible for the accuracy and
completeness of the report that, to the best of his or her knowledge
and reasonable belief, and under penalty of law, the information
contained in the report is accurate and complete.
0
13. In Sec. 39.12, revise paragraphs (a) introductory text, (a)(1)
introductory text, (a)(1)(i), (a)(4), (5) and (6), (b)(1) introductory
text, and (b)(2) to read as follows:
Sec. 39.12 Participant and product eligibility.
(a) Participant eligibility. A derivatives clearing organization
shall have appropriate admission and continuing participation
requirements for clearing members of the derivatives clearing
organization that are objective, publicly disclosed, and risk-based.
(1) Fair and open access for participation. The participation
requirements shall permit fair and open access.
(i) A derivatives clearing organization shall not have restrictive
clearing member standards if less restrictive requirements that achieve
the same objective and that would not materially increase risk to the
derivatives clearing organization or clearing members could be adopted;
* * * * *
(4) Monitoring. A derivatives clearing organization shall have
procedures to verify, on an ongoing basis, the compliance of each
clearing member with each participation requirement of the derivatives
clearing organization.
(5) Reporting. (i) A derivatives clearing organization shall
require all clearing members, including non-futures commission
merchants, to provide to the derivatives clearing organization periodic
financial reports that contain any financial information that the
derivatives clearing organization determines is necessary to assess
whether participation requirements are being met on an ongoing basis.
(ii) A derivatives clearing organization shall require clearing
members that are futures commission merchants to provide the financial
reports that are specified in Sec. 1.10 of this chapter to the
derivatives clearing organization.
(iii) A derivatives clearing organization shall require clearing
members that are not futures commission merchants to make the periodic
financial reports provided pursuant to paragraph (a)(5)(i) of this
section available to the Commission upon the Commission's request or,
in lieu of imposing the requirement in this paragraph (a)(5)(iii), a
derivatives clearing organization may provide such financial reports
directly to the Commission upon the Commission's request.
(iv) A derivatives clearing organization shall have rules that
require clearing members to provide to the derivatives clearing
organization, in a timely manner, information that concerns any
financial or business developments that may materially affect the
clearing members' ability to continue to comply with participation
requirements under this section.
(v) The requirements in paragraphs (a)(5)(i) and (iii) of this
section shall not apply with respect to non-futures commission merchant
clearing members of a derivatives clearing organization
[[Page 22271]]
that only clear fully-collateralized positions.
(6) Enforcement. A derivatives clearing organization shall have the
ability to enforce compliance with its participation requirements and
shall have procedures for the suspension and orderly removal of
clearing members that no longer meet the requirements.
(b) * * *
(1) A derivatives clearing organization shall have appropriate
requirements for determining the eligibility of agreements, contracts,
or transactions submitted to the derivatives clearing organization for
clearing, taking into account the derivatives clearing organization's
ability to manage the risks associated with such agreements, contracts,
or transactions. Factors to be considered in determining product
eligibility include, but are not limited to:
* * * * *
(2) A derivatives clearing organization that clears swaps shall
have rules providing that all swaps with the same terms and conditions,
as defined by product specifications established under derivatives
clearing organization rules, submitted to the derivatives clearing
organization for clearing are economically equivalent within the
derivatives clearing organization and may be offset with each other
within the derivatives clearing organization.
* * * * *
0
14. In Sec. 39.13, revise paragraphs (b), (f), (g)(2)(i), (g)(3),
(g)(4)(i) introductory text, (g)(7), (8) and (12), (h)(1)(i)
introductory text, and (h)(3) and (5) and add paragraph (i) to read as
follows:
Sec. 39.13 Risk management.
* * * * *
(b) Risk management framework. A derivatives clearing organization
shall have and implement written policies, procedures, and controls,
approved by its board of directors, that establish an appropriate risk
management framework that, at a minimum, clearly identifies and
documents the range of risks to which the derivatives clearing
organization is exposed, addresses the monitoring and management of the
entirety of those risks, and provides a mechanism for internal audit.
The risk management framework shall be regularly reviewed and updated
as necessary.
* * * * *
(f) Limitation of exposure to potential losses from defaults. A
derivatives clearing organization, through margin requirements and
other risk control mechanisms, shall limit its exposure to potential
losses from defaults by its clearing members to minimize the risk that:
(1) The operations of the derivatives clearing organization would
be disrupted; and
(2) Non-defaulting clearing members would be exposed to losses that
non-defaulting clearing members cannot anticipate or control.
(g) * * *
(2) * * *
(i) A derivatives clearing organization shall have initial margin
requirements that are commensurate with the risks of each product and
portfolio, including any unusual characteristics of, or risks
associated with, particular products or portfolios, including but not
limited to jump-to-default risk or similar jump risk, and concentration
of positions.
* * * * *
(3) Independent validation. A derivatives clearing organization
shall have its systems for generating initial margin requirements,
including its theoretical models, reviewed and validated by a qualified
and independent party on an annual basis. Such qualified and
independent parties may be independent contractors or employees of the
derivatives clearing organization, or of an affiliate of the
derivatives clearing organization, but shall not be persons responsible
for development or operation of the systems and models being tested.
(4) * * *
(i) A derivatives clearing organization may allow reductions in
initial margin requirements for related positions if the price risks
with respect to such positions are significantly and reliably
correlated. The price risks of different positions will only be
considered to be reliably correlated if there is a conceptual basis for
the correlation in addition to an exhibited statistical correlation.
That conceptual basis may include, but is not limited to, the
following:
* * * * *
(7) Back tests. A derivatives clearing organization shall conduct
back tests, as defined in Sec. 39.2, using an appropriate time period
but not less than the previous 30 days, as follows:
(i) On a daily basis, a derivatives clearing organization shall
conduct back tests with respect to products or swap portfolios that are
experiencing significant market volatility, to test the adequacy of its
initial margin requirements, as follows:
(A) For that product if the derivatives clearing organization uses
a product-based margin methodology;
(B) For each spread involving that product if there is a defined
spread margin rate;
(C) For each account held by a clearing member at the derivatives
clearing organization that contains a significant position in that
product, by house origin and by each customer origin; and
(D) For each such swap portfolio, including any portfolio
containing futures and/or options and held in a commingled account
pursuant to Sec. 39.15(b)(2), by beneficial owner.
(ii) On at least a monthly basis, a derivatives clearing
organization shall conduct back tests to test the adequacy of its
initial margin requirements, as follows:
(A) For each product for which the derivatives clearing
organization uses a product-based margin methodology;
(B) For each spread for which there is a defined spread margin
rate;
(C) For each account held by a clearing member at the derivatives
clearing organization, by house origin and by each customer origin; and
(D) For each swap portfolio, including any portfolio containing
futures and/or options and held in a commingled account pursuant to
Sec. 39.15(b)(2), by beneficial owner.
(iii) In conducting back tests of initial margin requirements, a
derivatives clearing organization shall compare portfolio losses only
to those components of initial margin that capture changes in market
risk factors.
(8) Customer margin--(i) Gross margin. (A) During the end-of-day
settlement cycle, a derivatives clearing organization shall collect
initial margin on a gross basis for each clearing member's customer
account(s) equal to the sum of the initial margin amounts that would be
required by the derivatives clearing organization for each individual
customer within that account if each individual customer were a
clearing member.
(B) For purposes of calculating the gross initial margin
requirement for each clearing member's customer account(s), a
derivatives clearing organization shall have rules that require its
clearing members to provide to the derivatives clearing organization
reports each day setting forth end-of-day gross positions of each
beneficial owner within each customer origin of the clearing member.
(C) A derivatives clearing organization may not, and may not permit
its clearing members to, net positions of different customers against
one another.
(D) A derivatives clearing organization may collect initial margin
for its clearing members' house accounts on a net basis.
(ii) Customer initial margin requirements. A derivatives clearing
[[Page 22272]]
organization shall require its clearing members to collect customer
initial margin at a level that is not less than 100 percent of the
derivatives clearing organization's clearing initial margin
requirements with respect to each product and portfolio and
commensurate with the risk presented by each customer account. The
derivatives clearing organization shall have reasonable discretion in
determining whether and by how much such customer initial margin
requirements must exceed the derivatives clearing organization's
clearing initial margin requirements with respect to particular
products or portfolios. The Commission may review such customer initial
margin levels and require different levels if the Commission deems the
levels insufficient to protect the financial integrity of the
derivatives clearing organization or its clearing members.
(iii) Withdrawal of customer initial margin. A derivatives clearing
organization shall require its clearing members to ensure that their
customers do not withdraw funds from their accounts with such clearing
members unless the net liquidating value plus the margin deposits
remaining in a customer's account after such withdrawal are sufficient
to meet the customer initial margin requirements with respect to all
products and swap portfolios held in such customer's account which are
cleared by the derivatives clearing organization.
* * * * *
(12) Haircuts. A derivatives clearing organization shall apply
appropriate reductions in value to reflect credit, market, and
liquidity risks (haircuts), to the assets that it accepts in
satisfaction of initial margin obligations, taking into consideration
stressed market conditions, and shall evaluate the appropriateness of
the haircuts on at least a monthly basis.
* * * * *
(h) * * *
(1) * * *
(i) A derivatives clearing organization shall impose risk limits on
each clearing member, by house origin and by each customer origin, in
order to prevent a clearing member from carrying positions for which
the risk exposure exceeds a specified threshold relative to the
clearing member's and/or the derivatives clearing organization's
financial resources, and to address positions that may be difficult to
liquidate. The derivatives clearing organization shall have reasonable
discretion in determining:
* * * * *
(3) Stress tests. A derivatives clearing organization shall conduct
stress tests, as defined in Sec. 39.2, as follows:
(i) On a daily basis, a derivatives clearing organization shall
conduct stress tests with respect to each large trader who poses
significant risk to a clearing member or the derivatives clearing
organization, including futures, options, and swaps cleared by the
derivatives clearing organization, which are held by all clearing
members carrying accounts for each such large trader. The derivatives
clearing organization shall have reasonable discretion in determining
which traders to test and the methodology used to conduct such stress
tests. The Commission may review the selection of accounts and the
methodology and require changes, as appropriate.
(ii) On at least a weekly basis, a derivatives clearing
organization shall conduct stress tests with respect to each clearing
member account, by house origin and by each customer origin, and each
swap portfolio, including any portfolio containing futures and/or
options and held in a commingled account pursuant to Sec. 39.15(b)(2),
by beneficial owner, under extreme but plausible market conditions. The
derivatives clearing organization shall have reasonable discretion in
determining the methodology used to conduct such stress tests. The
Commission may review the methodology and require changes, as
appropriate.
(iii) The requirements in paragraphs (h)(3)(i) and (ii) of this
section do not apply with respect to clearing member accounts that hold
only fully-collateralized positions.
* * * * *
(5) Clearing members' risk management policies and procedures. (i)
A derivatives clearing organization shall have rules that:
(A) Require its clearing members to maintain current written risk
management policies and procedures, which address the risks that such
clearing members may pose to the derivatives clearing organization;
(B) Ensure that it has the authority to request and obtain
information and documents from its clearing members regarding their
risk management policies, procedures, and practices, including, but not
limited to, information and documents relating to the liquidity of
their financial resources and their settlement procedures; and
(C) Require its clearing members to make information and documents
regarding their risk management policies, procedures, and practices
available to the Commission upon the Commission's request.
(ii) A derivatives clearing organization shall review the risk
management policies, procedures, and practices of each of its clearing
members, which address the risks that such clearing members may pose to
the derivatives clearing organization, on a periodic basis, take
appropriate action to address concerns identified in such reviews, and
document such reviews and the basis for determining what action was
appropriate to take.
* * * * *
(i) Cross-margining. (1) A derivatives clearing organization that
seeks to implement a cross-margining program with one or more clearing
organizations shall file rules for Commission approval pursuant to
Sec. 40.5 of this chapter that contain, at a minimum, the following
information:
(i) Identification of the products that would be eligible for
cross-margining, including product specifications or criteria that
would be used to define eligible products;
(ii) Analysis of the risk characteristics of the eligible products;
(iii) Analysis of the liquidity of the respective markets for the
eligible products, including the ability of clearing members and the
derivatives clearing organization to offset or mitigate the risk of
such products in a timely manner and proposed means for addressing
insufficient liquidity;
(iv) Analysis of the availability of reliable prices for each of
the eligible products;
(v) Financial and operational requirements that would apply to
clearing members participating in the program;
(vi) A description and analysis of the margin methodology that
would be used to calculate initial margin requirements, including:
(A) Any margin reduction applied to correlated positions; and
(B) Information regarding the correlations between eligible
products, including the stability of the relationship among the
eligible products and the potential impact a change in the correlations
could have on setting initial margin requirements;
(vii) Procedures the derivatives clearing organization would follow
in the event of a clearing member default, including any loss-sharing
arrangements;
(viii) A description of the arrangements for obtaining daily
position data with respect to products in the account;
(ix) Whether funds to support the cross-margined positions will be
[[Page 22273]]
maintained together in one account or in separate accounts at each
participating clearing organization; and
(x) A copy of the agreement between the clearing organizations
participating in the cross-margining program.
(2) The Commission may request additional information in support of
a rule submission filed under this paragraph (i), and may approve such
rules in accordance with Sec. 40.5 of this chapter.
0
15. Revise Sec. 39.15 to read as follows:
Sec. 39.15 Treatment of funds.
(a) Required standards and procedures. A derivatives clearing
organization shall establish standards and procedures that are designed
to protect and ensure the safety of funds and assets belonging to
clearing members and their customers.
(b) Customer funds--(1) Segregation. A derivatives clearing
organization shall comply with the applicable segregation requirements
of section 4d of the Act and Commission regulations in this part, or
any other applicable Commission regulation in this chapter or order
requiring that customer funds and assets, including money, securities,
and property, be segregated, set aside, or held in a separate account.
(2) Commingling--(i) Cleared swaps account. In order for a
derivatives clearing organization and its clearing members to commingle
customer positions in futures, options, foreign futures, foreign
options, and swaps, or any combination thereof, and any money,
securities, or property received to margin, guarantee or secure such
positions, in an account subject to the requirements of section 4d(f)
of the Act, the derivatives clearing organization shall file rules for
Commission approval pursuant to Sec. 40.5 of this chapter. Such rule
submission shall include, at a minimum, the following:
(A) Identification of the products that would be commingled,
including product specifications or the criteria that would be used to
define eligible products;
(B) Analysis of the risk characteristics of the eligible products;
(C) Identification of whether the swaps would be executed
bilaterally and/or executed on a designated contract market and/or a
swap execution facility;
(D) Analysis of the liquidity of the respective markets for the
eligible products, the ability of clearing members and the derivatives
clearing organization to offset or mitigate the risk of such eligible
products in a timely manner, without compromising the financial
integrity of the account, and, as appropriate, proposed means for
addressing insufficient liquidity;
(E) Analysis of availability of reliable prices for each of the
eligible products;
(F) A description of the financial, operational, and managerial
standards or requirements for clearing members that would be permitted
to commingle eligible products;
(G) A description of the systems and procedures that would be used
by the derivatives clearing organization to oversee such clearing
members' risk management of any such commingled positions;
(H) A description of the financial resources of the derivatives
clearing organization, including the composition and availability of a
guaranty fund with respect to the eligible products that would be
commingled;
(I) A description and analysis of the margin methodology that would
be applied to the commingled eligible products, including any margin
reduction applied to correlated positions, and any applicable margin
rules with respect to both clearing members and customers;
(J) An analysis of the ability of the derivatives clearing
organization to manage a potential default with respect to any of the
eligible products that would be commingled;
(K) A discussion of the procedures that the derivatives clearing
organization would follow if a clearing member defaulted, and the
procedures that a clearing member would follow if a customer defaulted,
with respect to any of the commingled eligible products in the account;
and
(L) A description of the arrangements for obtaining daily position
data with respect to eligible products in the account.
(ii) Futures account. In order for a derivatives clearing
organization and its clearing members to commingle customer positions
in futures, options, foreign futures, foreign options, and swaps, or
any combination thereof, and any money, securities, or property
received to margin, guarantee or secure such positions, in an account
subject to the requirements of section 4d(a) of the Act, the
derivatives clearing organization shall file rules for Commission
approval pursuant to Sec. 40.5 of this chapter. Such rule submission
shall include, at a minimum, the information required under paragraph
(b)(2)(i) of this section.
(iii) Commission action. The Commission may request additional
information in support of a rule submission filed under paragraph
(b)(2)(i) or (ii) of this section, and may approve such rules in
accordance with Sec. 40.5 of this chapter.
(c) Holding of funds and assets. A derivatives clearing
organization shall hold funds and assets belonging to clearing members
and their customers in a manner which minimizes the risk of loss or of
delay in the access by the derivatives clearing organization to such
funds and assets.
(d) Transfer of customer positions. A derivatives clearing
organization shall have rules providing that the derivatives clearing
organization will promptly transfer all or a portion of a customer's
portfolio of positions, and related funds as necessary, from the
carrying clearing member of the derivatives clearing organization to
another clearing member of the derivatives clearing organization,
without requiring the close-out and re-booking of the positions prior
to the requested transfer, subject to the following conditions:
(1) The customer has instructed the carrying clearing member to
make the transfer;
(2) The customer is not currently in default to the carrying
clearing member;
(3) The transferred positions will have appropriate margin at the
receiving clearing member;
(4) Any remaining positions will have appropriate margin at the
carrying clearing member; and
(5) The receiving clearing member has consented to the transfer.
(e) Permitted investments. Funds and assets belonging to clearing
members and their customers that are invested by a derivatives clearing
organization shall be held in instruments with minimal credit, market,
and liquidity risks. Any investment of customer funds or assets,
including cleared swaps customer collateral, as defined in Sec. 22.1
of this chapter, by a derivatives clearing organization shall comply
with Sec. 1.25 of this chapter.
0
16. Revise Sec. 39.16 to read as follows:
Sec. 39.16 Default rules and procedures.
(a) General. A derivatives clearing organization shall have rules
and procedures designed to allow for the efficient, fair, and safe
management of events during which clearing members become insolvent or
default on the obligations of such clearing members to the derivatives
clearing organization.
(b) Default management plan. A derivatives clearing organization
shall maintain a current written default management plan that
delineates the roles and responsibilities of its board of directors,
its risk management committee, any other committee that a derivatives
clearing organization may have that has responsibilities for default
[[Page 22274]]
management, and the derivatives clearing organization's management, in
addressing a default, including any necessary coordination with, or
notification of, other entities and regulators. Such plan shall address
any differences in procedures with respect to highly liquid products
and less liquid products. A derivatives clearing organization shall
conduct and document a test of its default management plan at least on
an annual basis. The derivatives clearing organization shall include
clearing members in a test of its default management plan at least on
an annual basis.
(c) Default procedures. (1) A derivatives clearing organization
shall have procedures that would permit the derivatives clearing
organization to take timely action to contain losses and liquidity
pressures and to continue meeting its obligations in the event of a
default on the obligations of a clearing member to the derivatives
clearing organization. The derivatives clearing organization shall have
a default committee that would be convened in the event of a default
involving substantial or complex positions to help identify market
issues with any action the derivatives clearing organization is
considering. The default committee shall include clearing members and
may include other participants to help the derivatives clearing
organization efficiently manage the house or customer positions of the
defaulting clearing member.
(2) A derivatives clearing organization shall have rules that set
forth its default procedures, including:
(i) The derivatives clearing organization's definition of a
default;
(ii) The actions that the derivatives clearing organization may
take upon a default, which shall include immediate public notice of a
declaration of default on its website and the prompt transfer,
liquidation, or hedging of the customer or house positions of the
defaulting clearing member, as applicable, and which may include, in
the discretion of the derivatives clearing organization, the auctioning
or allocation of such positions to other clearing members;
(iii) Any obligations that the derivatives clearing organization
imposes on its clearing members to participate in auctions, or to
accept allocations, of the customer or house positions of the
defaulting clearing member, provided that:
(A) The derivatives clearing organization shall permit a clearing
member to outsource to a qualified third party, authority to act in the
clearing member's place in any auction, subject to appropriate
safeguards imposed by the derivatives clearing organization;
(B) The derivatives clearing organization shall permit a clearing
member to outsource to a qualified third party, authority to act in the
clearing member's place in any allocations, subject to appropriate
safeguards imposed by the derivatives clearing organization; and
(C) The derivatives clearing organization shall not require a
clearing member to bid for a portion of, or accept an allocation of,
the defaulting clearing member's positions that is not proportional to
the size of the bidding or accepting clearing member's positions in the
same product class at the derivatives clearing organization, as
measured by the clearing initial margin requirement for those
positions;
(iv) The sequence in which the funds and assets of the defaulting
clearing member and its customers and the financial resources
maintained by the derivatives clearing organization would be applied in
the event of a default;
(v) A provision that the funds and assets of a defaulting clearing
member's customers shall not be applied to cover losses with respect to
a house default; and
(vi) A provision that the excess house funds and assets of a
defaulting clearing member shall be applied to cover losses with
respect to a customer default, if the relevant customer funds and
assets are insufficient to cover the shortfall.
(3) A derivatives clearing organization shall make its default
rules publicly available as provided in Sec. 39.21.
(d) Insolvency of a clearing member. (1) A derivatives clearing
organization shall have rules that require a clearing member to provide
prompt notice to the derivatives clearing organization if it becomes
the subject of a bankruptcy petition, receivership proceeding, or the
equivalent;
(2) No later than upon receipt of such notice, a derivatives
clearing organization shall review the continuing eligibility of the
clearing member for clearing membership; and
(3) No later than upon receipt of such notice, a derivatives
clearing organization shall take any appropriate action, in its
discretion, with respect to such clearing member or its house or
customer positions, including but not limited to liquidation or
transfer of positions, suspension, or revocation of clearing
membership.
0
17. Revise Sec. 39.17 to read as follows:
Sec. 39.17 Rule enforcement.
(a) General. A derivatives clearing organization shall:
(1) Maintain adequate arrangements and resources for the effective
monitoring and enforcement of compliance (by itself and its clearing
members) with the rules of the derivatives clearing organization and
the resolution of disputes;
(2) Have the authority and ability to discipline, limit, suspend,
or terminate the activities of a clearing member due to a violation by
the clearing member of any rule of the derivatives clearing
organization; and
(3) Report to the Commission regarding rule enforcement activities
and sanctions imposed against clearing members as provided in paragraph
(a)(2) of this section, in accordance with Sec. 39.19(c)(4)(xvii).
(b) Authority to enforce rules. The board of directors of the
derivatives clearing organization may delegate responsibility for
compliance with the requirements of paragraph (a) of this section to an
appropriate committee, unless the responsibilities are otherwise
required to be carried out by the chief compliance officer pursuant to
the Act or this part.
0
18. Revise Sec. 39.19 to read as follows:
Sec. 39.19 Reporting.
(a) General. A derivatives clearing organization shall provide to
the Commission the information specified in this section and any other
information that the Commission determines to be necessary to conduct
oversight of the derivatives clearing organization.
(b) Submission of reports--(1) General requirement. A derivatives
clearing organization shall submit the information required by this
section to the Commission in a format and manner specified by the
Commission.
(2) Certification. When making a submission pursuant to this
section, an employee of the derivatives clearing organization must
certify that he or she is duly authorized to make such a submission on
behalf of the derivatives clearing organization.
(3) Time zones. Unless otherwise specified by the Commission or its
designee, any stated time in this section is Central time for
information concerning derivatives clearing organizations located in
that time zone, and Eastern time for information concerning all other
derivatives clearing organizations.
(c) Reporting requirements. Each registered derivatives clearing
organization shall provide to the Commission or other person as may be
required or permitted by this paragraph (c) the information specified
as follows:
[[Page 22275]]
(1) Daily reporting. (i) A derivatives clearing organization shall
compile as of the end of each trading day, and submit to the Commission
by 10:00 a.m. on the next business day, a report containing the
following information related to all positions other than fully-
collateralized positions:
(A) Initial margin requirements and initial margin on deposit for
each clearing member, by house origin and by each customer origin, and
by each individual customer account;
(B) Daily variation margin, separately listing the mark-to-market
amount collected from or paid to each clearing member, by house origin
and by each customer origin, and by each individual customer account;
(C) All other daily cash flows relating to clearing and settlement
including, but not limited to, option premiums and payments related to
swaps such as coupon amounts, collected from or paid to each clearing
member, by house origin and by each customer origin, and by each
individual customer account; and
(D) End-of-day positions, including as appropriate the risk
sensitivities and valuation data for such positions, for each clearing
member, by house origin and by each customer origin, and by each
individual customer account. The derivatives clearing organization
shall identify each individual customer account using both a legal
entity identifier and any internally-generated identifier, where
applicable, within each customer origin for each clearing member.
(ii) The report shall contain the information required by
paragraphs (c)(1)(i)(A) through (D) of this section for:
(A) All futures positions, and options positions, as applicable;
(B) All swaps positions; and
(C) All securities positions that are:
(1) Held in a customer account subject to section 4d of the Act; or
(2) Subject to a cross-margining agreement.
(2) Quarterly reporting. A derivatives clearing organization shall
provide to the Commission each fiscal quarter, or at any time upon
Commission request, a report of the derivatives clearing organization's
financial resources as required by Sec. 39.11(f)(1).
(3) Annual reporting. A derivatives clearing organization shall
provide to the Commission each year:
(i) The annual report of the chief compliance officer required by
Sec. 39.10; and
(ii) Audited year-end financial statements of the derivatives
clearing organization as required by Sec. 39.11(f)(2).
(iii) [Reserved]
(iv) The reports required by this paragraph (c)(3) shall be filed
not later than 90 days after the end of the derivatives clearing
organization's fiscal year, or at such later time as the Commission may
permit, in its discretion, upon request by the derivatives clearing
organization.
(4) Event specific reporting--(i) Decrease in financial resources.
If there is a decrease of 25 percent or more in the total value of the
financial resources available to satisfy the requirements under Sec.
39.11(a)(1) or Sec. 39.33(a), as applicable, either from the last
quarterly report submitted under Sec. 39.11(f) or from the value as of
the close of the previous business day, a derivatives clearing
organization shall report such decrease to the Commission no later than
one business day following the day the 25 percent threshold was
reached. The report shall include:
(A) The total value of the financial resources as of the close of
business the day the 25 percent threshold was reached;
(B) If reporting a decrease in value from the previous business
day, the total value of the financial resources immediately prior to
the 25 percent decline;
(C) A breakdown of the value of each financial resource reported in
each of paragraphs (c)(4)(i)(A) and (B) of this section, calculated in
accordance with the requirements of Sec. 39.11(d) or Sec. 39.33(b),
as applicable, including the value of each individual clearing member's
guaranty fund deposit if the derivatives clearing organization reports
guaranty fund deposits as a financial resource; and
(D) A detailed explanation for the decrease.
(ii) Decrease in liquidity resources. If there is a decrease of 25
percent or more in the total value of the liquidity resources available
to satisfy the requirements under Sec. 39.11(e) or Sec. 39.33(c), as
applicable, either from the last quarterly report submitted under Sec.
39.11(f) or from the value as of the close of the previous business
day, a derivatives clearing organization shall report such decrease to
the Commission no later than one business day following the day the 25
percent threshold was reached. The report shall include:
(A) The total value of the liquidity resources as of the close of
business the day the 25 percent threshold was reached;
(B) If reporting a decrease in value from the previous business
day, the total value of the liquidity resources immediately prior to
the 25 percent decline;
(C) A breakdown of the value of each liquidity resource reported in
each of paragraphs (c)(4)(ii)(A) and (B) of this section, calculated in
accordance with the requirements of Sec. 39.11(e) or Sec. 39.33(c),
as applicable, including the value of each individual clearing member's
guaranty fund deposit if the derivatives clearing organization reports
guaranty fund deposits as a liquidity resource; and
(D) A detailed explanation for the decrease.
(iii) Decrease in ownership equity. A derivatives clearing
organization shall report to the Commission no later than two business
days prior to an event which the derivatives clearing organization
knows or reasonably should know will cause a decrease of 20 percent or
more in ownership equity from the last reported ownership equity
balance as reported on a quarterly or audited financial statement
required to be submitted by paragraph (c)(2) or (c)(3)(ii),
respectively, of this section; but in any event no later than two
business days after such decrease in ownership equity for events that
caused the decrease about which the derivatives clearing organization
did not know and reasonably could not have known prior to the event.
The report shall include:
(A) Pro forma financial statements reflecting the derivatives
clearing organization's estimated future financial condition following
the anticipated decrease for reports submitted prior to the anticipated
decrease and current financial statements for reports submitted after
such a decrease; and
(B) A detailed explanation for the decrease or anticipated decrease
in the balance.
(iv) Six-month liquid asset requirement. A derivatives clearing
organization shall notify the Commission immediately when the
derivatives clearing organization knows or reasonably should know of a
deficit in the six-month liquid asset requirement of Sec. 39.11(e)(2).
(v) Change in current assets. A derivatives clearing organization
shall notify the Commission no later than two business days after the
derivatives clearing organization's current liabilities exceed its
current assets. The notice shall include a balance sheet that reflects
the derivatives clearing organization's current assets and current
liabilities and an explanation as to the reason for the negative
balance.
(vi) Request to clearing member to reduce its positions. A
derivatives clearing organization shall notify the Commission
immediately of a request by the derivatives clearing organization
[[Page 22276]]
to one of its clearing members to reduce the clearing member's
positions. The notice shall include:
(A) The name of the clearing member;
(B) The time the clearing member was contacted;
(C) The number of positions for futures and options, and for swaps,
the number of outstanding trades and notional amount, by which the
derivatives clearing organization requested the reduction;
(D) All products that are the subject of the request; and
(E) The reason for the request.
(vii) Determination to transfer or liquidate positions. A
derivatives clearing organization shall notify the Commission
immediately of a determination by the derivatives clearing organization
that a position it carries for one of its clearing members must be
liquidated immediately or transferred immediately, or that the trading
of any account of a clearing member shall be only for the purpose of
liquidation because that clearing member has failed to meet an initial
or variation margin call or has failed to fulfill any other financial
obligation to the derivatives clearing organization. The notice shall
include:
(A) The name of the clearing member;
(B) The time the clearing member was contacted;
(C) The products that are subject to the determination;
(D) The number of positions for futures and options, and for swaps,
the number of outstanding trades and notional amount, that are subject
to the determination; and
(E) The reason for the determination.
(viii) Default of a clearing member. A derivatives clearing
organization shall notify the Commission immediately of the default of
a clearing member. An event of default shall be determined in
accordance with the rules of the derivatives clearing organization. The
notice of default shall include:
(A) The name of the clearing member;
(B) The products the clearing member defaulted upon;
(C) The number of positions for futures and options, and for swaps,
the number of outstanding trades and notional amount, the clearing
member defaulted upon; and
(D) The amount of the financial obligation.
(ix) Change in ownership or corporate or organizational structure--
(A) Reporting requirement. A derivatives clearing organization shall
report to the Commission any anticipated change in the ownership or
corporate or organizational structure of the derivatives clearing
organization or its parent(s) that would:
(1) Result in at least a 10 percent change of ownership of the
derivatives clearing organization;
(2) Create a new subsidiary or eliminate a current subsidiary of
the derivatives clearing organization; or
(3) Result in the transfer of all or substantially all of the
assets of the derivatives clearing organization to another legal
entity.
(B) Required information. The report shall include: A chart
outlining the new ownership or corporate or organizational structure; a
brief description of the purpose and impact of the change; and any
relevant agreements effecting the change and corporate documents such
as articles of incorporation and bylaws.
(C) Time of report. The report shall be submitted to the Commission
no later than three months prior to the anticipated change, provided
that the derivatives clearing organization may report the anticipated
change to the Commission later than three months prior to the
anticipated change if the derivatives clearing organization does not
know and reasonably could not have known of the anticipated change
three months prior to the anticipated change. In such event, the
derivatives clearing organization shall immediately report such change
to the Commission as soon as it knows of such change.
(D) Confirmation of change report. The derivatives clearing
organization shall report to the Commission the consummation of the
change no later than two business days following the effective date of
the change.
(x) Change in key personnel. A derivatives clearing organization
shall report to the Commission no later than two business days
following the departure or addition of persons who are key personnel as
defined in Sec. 39.2. The report shall include, as applicable, the
name and contact information of the person who will assume the duties
of the position permanently or the person who will assume the duties on
a temporary basis until a permanent replacement fills the position.
(xi) Change in legal name. A derivatives clearing organization
shall report to the Commission no later than two business days
following a legal name change of the derivatives clearing organization.
(xii) Change in credit facility funding arrangement. A derivatives
clearing organization shall report to the Commission no later than one
business day after the derivatives clearing organization changes a
credit facility funding arrangement it has in place, or is notified
that such arrangement has changed, including but not limited to a
change in lender, change in the size of the facility, change in
expiration date, or any other material changes or conditions.
(xiii) Change in liquidity funding arrangement. A derivatives
clearing organization shall report to the Commission no later than one
business day after the derivatives clearing organization changes a
liquidity funding arrangement it has in place, or is notified that such
arrangement has changed, including but not limited to a change in
provider, change in the size of the facility, change in expiration
date, or any other material changes or conditions.
(xiv) Change in settlement bank arrangements. A derivatives
clearing organization shall report to the Commission no later than one
business day after any change in the derivatives clearing
organization's arrangements with any settlement bank used by the
derivatives clearing organization or approved for use by the
derivatives clearing organization's clearing members.
(xv) Settlement bank issues. A derivatives clearing organization
shall report to the Commission no later than one business day after any
material issues or concerns arise regarding the performance, stability,
liquidity, or financial resources of any settlement bank used by the
derivatives clearing organization or approved for use by the
derivatives clearing organization's clearing members.
(xvi) Change in depositories for customer funds. A derivatives
clearing organization shall report to the Commission no later than one
business day after any change in the derivatives clearing
organization's arrangements with any depository of customer funds.
(xvii) Sanctions against a clearing member. A derivatives clearing
organization shall provide notice to the Commission no later than two
business days after the derivatives clearing organization imposes
sanctions against a clearing member.
(xviii) Financial condition and events. A derivatives clearing
organization shall provide to the Commission immediate notice after the
derivatives clearing organization knows or reasonably should have known
of:
(A) The institution of any legal proceedings which may have a
material adverse financial impact on the derivatives clearing
organization;
(B) Any event, circumstance or situation that materially impedes
the derivatives clearing organization's ability to comply with this
part and is not otherwise required to be reported under this section;
or
[[Page 22277]]
(C) A material adverse change in the financial condition of any
clearing member that is not otherwise required to be reported under
this section.
(xix) Financial statements material inadequacies. A derivatives
clearing organization shall provide notice to the Commission within 24
hours if the derivatives clearing organization discovers or is notified
by an independent public accountant of the existence of any material
inadequacy in a financial statement, and within 48 hours after giving
such notice provide a written report stating what steps have been and
are being taken to correct the material inadequacy.
(xx) Change in fiscal year. A derivatives clearing organization
shall provide to the Commission immediate notice of any change to the
start and end dates of its fiscal year.
(xxi) Change in independent accounting firm. A derivatives clearing
organization shall report to the Commission no later than one business
day after any change in the derivatives clearing organization's
independent public accounting firm. The report shall include the date
of such change, the name and contact information of the new firm, and
the reason for the change.
(xxii) Major decision of the board of directors. A derivatives
clearing organization shall report to the Commission any major decision
of the derivatives clearing organization's board of directors as
required by Sec. 39.24(a)(3)(i).
(xxiii) System safeguards. A derivatives clearing organization
shall report to the Commission:
(A) Exceptional events as required by Sec. 39.18(g); or
(B) Planned changes as required by Sec. 39.18(h).
(xxiv) Margin model issues. A derivatives clearing organization
shall report to the Commission no later than one business day after any
issue occurs with a DCO's margin model, including margin models for
cross-margined portfolios, that affects the DCO's ability to calculate
or collect initial margin or variation margin.
(xxv) Recovery and wind-down plans. A derivatives clearing
organization that is required to maintain recovery and wind-down plans
pursuant to Sec. 39.39(b) shall submit its plans to the Commission no
later than the date on which the derivatives clearing organization is
required to have the plans. A derivatives clearing organization that is
not required to maintain recovery and wind-down plans pursuant to Sec.
39.39(b), but which nonetheless maintains such plans, may choose to
submit its plans to the Commission. A derivatives clearing organization
that has submitted its recovery and wind-down plans to the Commission
shall, upon making any revisions to the plans, submit the revised plans
to the Commission along with a description of the changes and the
reason for those changes.
(xxvi) New product accepted for clearing. A derivatives clearing
organization shall provide notice to the Commission no later than 30
calendar days prior to accepting a new product for clearing. The notice
shall include:
(A) A brief description of the new product;
(B) The date on which the derivatives clearing organization intends
to begin accepting the new product for clearing;
(C) A statement as to whether the new product will require the
derivatives clearing organization to submit any rule changes pursuant
to Sec. 40.5 or Sec. 40.6, and Sec. 40.10, as applicable, of this
chapter;
(D) A statement as to whether the derivatives clearing organization
has informed, or intends to inform, its clearing members and/or the
general public of the new product and, if written notice was given, a
web address for or copy of such notice; and
(E) An explanation of any substantive opposing views received and
how the derivatives clearing organization addressed such views or
objections.
(5) Requested reporting. A derivatives clearing organization shall
provide upon request by the Commission and within the time specified in
the request:
(i) Any information related to its business as a clearing
organization, including information relating to trade and clearing
details.
(ii) A written demonstration, containing supporting data,
information and documents, that the derivatives clearing organization
is in compliance with one or more core principles and relevant
provisions of this part.
0
19. In Sec. 39.20, revise paragraphs (a) introductory text and (b) to
read as follows:
Sec. 39.20 Recordkeeping.
(a) Requirement to maintain information. A derivatives clearing
organization shall maintain records of all activities related to its
business as a derivatives clearing organization. Such records shall
include, but are not limited to, records of:
* * * * *
(b) Form and manner of maintaining information--(1) General. The
records required to be maintained by this chapter shall be maintained
in accordance with the provisions of Sec. 1.31 of this chapter, for a
period of not less than 5 years, except as provided in paragraph (b)(2)
of this section.
(2) Exception for swap data. A derivatives clearing organization
that clears swaps must maintain swap data in accordance with the
requirements of part 45 of this chapter.
0
20. Revise Sec. 39.21 to read as follows:
Sec. 39.21 Public information.
(a) General. A derivatives clearing organization shall provide to
market participants sufficient information to enable the market
participants to identify and evaluate accurately the risks and costs
associated with using the services of the derivatives clearing
organization. In furtherance of the objective in this paragraph (a), a
derivatives clearing organization shall have clear and comprehensive
rules and procedures.
(b) Availability of information. A derivatives clearing
organization shall make information concerning the rules and the
operating and default procedures governing the clearing and settlement
systems of the derivatives clearing organization available to market
participants.
(c) Public disclosure. A derivatives clearing organization shall
make the following information readily available to the general public,
in a timely manner, by posting such information on the derivatives
clearing organization's website, unless otherwise permitted by the
Commission:
(1) The terms and conditions of each contract, agreement, and
transaction cleared and settled by the derivatives clearing
organization;
(2) Each clearing and other fee that the derivatives clearing
organization charges its clearing members;
(3) Information concerning its margin-setting methodology;
(4) The size and composition of the financial resource package
available in the event of a clearing member default, updated as of the
end of the most recent fiscal quarter or upon Commission request and
posted concurrently with submission of the report to the Commission
under Sec. 39.11(f)(1)(i)(A);
(5) Daily settlement prices, volume, and open interest for each
contract, agreement, or transaction cleared or settled by the
derivatives clearing organization, posted no later than the business
day following the day to which the information pertains;
(6) The derivatives clearing organization's rulebook, including
rules and procedures for defaults in accordance with Sec. 39.16;
(7) A current list of all clearing members;
(8) A list of all swaps that the derivatives clearing organization
will
[[Page 22278]]
accept for clearing that identifies which swaps on the list are
required to be cleared, in accordance with Sec. 50.3(a) of this
chapter; and
(9) Any other information that is relevant to participation in the
clearing and settlement activities of the derivatives clearing
organization.
0
21. Revise Sec. 39.22 to read as follows:
Sec. 39.22 Information sharing.
A derivatives clearing organization shall enter into, and abide by
the terms of, each appropriate and applicable domestic and
international information-sharing agreement, and shall use relevant
information obtained from each such agreement in carrying out the risk
management program of the derivatives clearing organization.
0
22. Add Sec. 39.24 to read as follows:
Sec. 39.24 Governance.
(a) General. (1) A derivatives clearing organization shall have
governance arrangements that:
(i) Are written;
(ii) Are clear and transparent;
(iii) Place a high priority on the safety and efficiency of the
derivatives clearing organization; and
(iv) Explicitly support the stability of the broader financial
system and other relevant public interest considerations of clearing
members, customers of clearing members, and other relevant
stakeholders.
(2) The board of directors shall make certain that the derivatives
clearing organization's design, rules, overall strategy, and major
decisions appropriately reflect the legitimate interests of clearing
members, customers of clearing members, and other relevant
stakeholders.
(3) To the extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure:
(i) Major decisions of the board of directors shall be clearly
disclosed to clearing members, other relevant stakeholders, and to the
Commission; and
(ii) Major decisions of the board of directors having a broad
market impact shall be clearly disclosed to the public.
(b) Governance arrangement requirements. A derivatives clearing
organization shall have governance arrangements that:
(1) Are clear and documented;
(2) To an extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure, are disclosed, as
appropriate, to the Commission, other relevant authorities, clearing
members, customers of clearing members, owners of the derivatives
clearing organization, and to the public;
(3) Describe the structure pursuant to which the board of
directors, committees, and management operate;
(4) Include clear and direct lines of responsibility and
accountability;
(5) Clearly specify the roles and responsibilities of the board of
directors and its committees, including the establishment of a clear
and documented risk management framework;
(6) Clearly specify the roles and responsibilities of management;
(7) Describe procedures pursuant to which the board of directors
oversees the chief risk officer, risk management committee, and
material risk decisions;
(8) Provide risk management and internal control personnel with
sufficient independence, authority, resources, and access to the board
of directors so that the operations of the derivatives clearing
organization are consistent with the risk management framework
established by the board of directors;
(9) Assign responsibility and accountability for risk decisions,
including in crises and emergencies; and
(10) Assign responsibility for implementing the:
(i) Default rules and procedures required by Sec. Sec. 39.16 and
39.35, as applicable;
(ii) System safeguard rules and procedures required by Sec. Sec.
39.18 and 39.34, as applicable; and
(iii) Recovery and wind-down plans required by Sec. 39.39, as
applicable.
(c) Fitness standards. (1) A derivatives clearing organization
shall establish and enforce appropriate fitness standards for:
(i) Directors;
(ii) Members of any disciplinary committee;
(iii) Members of the derivatives clearing organization;
(iv) Any other individual or entity with direct access to the
settlement or clearing activities of the derivatives clearing
organization; and
(v) Any other party affiliated with any individual or entity
described in this paragraph.
(2) A derivatives clearing organization shall maintain policies to
make certain that:
(i) The board of directors consists of suitable individuals having
appropriate skills and incentives;
(ii) The performance of the board of directors and the performance
of individual directors is reviewed on a regular basis; and
(iii) Managers have the appropriate experience, skills, and
integrity necessary to discharge operational and risk management
responsibilities.
0
23. Add Sec. 39.25 to read as follows:
Sec. 39.25 Conflicts of interest.
A derivatives clearing organization shall:
(a) Establish and enforce rules to minimize conflicts of interest
in the decision-making process of the derivatives clearing
organization;
(b) Establish a process for resolving such conflicts of interest;
and
(c) Describe procedures for identifying, addressing, and managing
conflicts of interest involving members of the board of directors.
0
24. Add Sec. 39.26 to read as follows:
Sec. 39.26 Composition of governing boards.
A derivatives clearing organization shall ensure that the
composition of the governing board or board-level committee of the
derivatives clearing organization includes market participants and
individuals who are not executives, officers, or employees of the
derivatives clearing organization or an affiliate thereof. For purposes
of this section, ``market participant'' means any clearing member of
the derivatives clearing organization or customer of a clearing member,
or an employee, officer, or director of such an entity.
0
25. In Sec. 39.27, revise paragraph (c) to read as follows:
Sec. 39.27 Legal risk considerations.
* * * * *
(c) Conflict of laws. If a derivatives clearing organization
provides clearing services outside the United States:
(1) The derivatives clearing organization shall identify and
address any material conflict of law issues. The derivatives clearing
organization's contractual agreements shall specify a choice of law.
(2) The derivatives clearing organization shall be able to
demonstrate the enforceability of its choice of law in relevant
jurisdictions and that its rules, procedures, and contracts are
enforceable in all relevant jurisdictions.
(3) The derivatives clearing organization shall ensure on an
ongoing basis that the memorandum required in paragraph (b) of Exhibit
R to appendix A to this part is accurate and up to date and shall
submit an updated memorandum to the Commission promptly following all
material changes to the analysis or content contained in the
memorandum.
Sec. 39.32 [Removed and Reserved]
0
26. Remove and reserve Sec. 39.32.
0
27. In Sec. 39.33, revise paragraphs (a)(1) and (c)(1)(i), and add
paragraph (d)(5) to read as follows:
[[Page 22279]]
Sec. 39.33 Financial resources requirements for systemically
important derivatives clearing organizations and subpart C derivatives
clearing organizations.
(a) * * *
(1) Notwithstanding the requirements of Sec. 39.11(a)(1), each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization that, in either case, is systemically
important in multiple jurisdictions or is involved in activities with a
more complex risk profile shall maintain financial resources sufficient
to enable it to meet its financial obligations to its clearing members
notwithstanding a default by the two clearing members creating the
largest combined financial exposure to the derivatives clearing
organization in extreme but plausible market conditions.
* * * * *
(c) * * *
(1) * * *
(i) Notwithstanding the provisions of Sec. 39.11(e)(1)(ii), each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall maintain eligible liquidity
resources, in all relevant currencies, that, at a minimum, will enable
it to meet its intraday, same-day, and multiday obligations to perform
settlements, as defined in Sec. 39.14(a)(1), with a high degree of
confidence under a wide range of stress scenarios that should include,
but not be limited to, a default by the clearing member creating the
largest aggregate liquidity obligation for the systemically important
derivatives clearing organization or subpart C derivatives clearing
organization in extreme but plausible market conditions.
* * * * *
(d) * * *
(5) A systemically important derivatives clearing organization with
access to accounts and services at a Federal Reserve Bank, pursuant to
section 806(a) of the Dodd-Frank Act, 12 U.S.C. 5465(a), shall use such
accounts and services where practical.
* * * * *
0
28. In Sec. 39.36, revise paragraphs (a)(5)(ii), (a)(6), (b)(2)(ii),
(d) and (e) to read as follows:
Sec. 39.36 Risk management for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
(a) * * *
(5) * * *
(ii) Using the results to assess the adequacy of, and to adjust,
its total amount of financial resources; and
(6) Use the results of stress tests to support compliance with the
minimum financial resources requirement set forth in Sec. 39.11(a)(1)
or Sec. 39.33(a), as applicable.
(b) * * *
(2) * * *
(ii) Testing of the ability of the models or model components to
react appropriately using actual or hypothetical datasets and assessing
the impact of different model parameter settings.
* * * * *
(d) Margin model assessment. Each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization shall conduct, on at least an annual basis (or more
frequently if there are material relevant market developments), an
assessment of the theoretical and empirical properties of its margin
model for all products it clears.
(e) Independent validation. Each systemically important derivatives
clearing organization and subpart C derivatives clearing organization
shall perform, on an annual basis, a full validation of its financial
risk management model and its liquidity risk management model.
* * * * *
0
29. In Sec. 39.37, revise paragraphs (b) and (c) to read as follows:
Sec. 39.37 Additional disclosure for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
* * * * *
(b)(1) Review and update its responses disclosed as required by
paragraph (a) of this section at least every two years and following
material changes to the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's system
or the environment in which it operates. A material change to the
systemically important derivatives clearing organization's or subpart C
derivatives clearing organization's system or the environment in which
it operates is a change that would significantly change the accuracy
and usefulness of the existing responses; and
(2) Provide notice to the Commission of updates to its responses
required by paragraph (b)(1) of this section following material changes
no later than ten business days after the updates are made. Such notice
shall be accompanied by a copy of the text of the responses that shows
all deletions and additions made to the immediately preceding version
of the responses;
(c) Disclose, publicly and to the Commission, relevant basic data
on transaction volume and values consistent with the standards set
forth in the Public Quantitative Disclosure Standards for Central
Counterparties published by the Committee on Payments and Market
Infrastructures and the International Organization of Securities
Commissions;
* * * * *
0
30. In Sec. 39.39, revise paragraph (a)(2) to read as follows:
Sec. 39.39 Recovery and wind-down for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
(a) * * *
(2) Wind-down means the actions of a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization to effect the permanent cessation or sale or transfer of
one or more services.
* * * * *
0
31. Revise appendix A to part 39 to read as follows:
Appendix A to Part 39--Form DCO Derivatives Clearing Organization
Application for Registration
BILLING CODE 6351-01-P
[[Page 22280]]
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0
32. Revise appendix B to part 39 to read as follows:
Appendix B to Part 39--Subpart C Election Form
[[Page 22308]]
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[[Page 22316]]
BILLING CODE 6351-01-C
PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION
0
33. The authority citation for part 140 continues to read as follows:
Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and
16(b).
0
34. In Sec. 140.94, revise paragraph (c) to read as follows:
Sec. 140.94 Delegation of authority to the Director of the Division
of Swap Dealer and Intermediary Oversight and the Director of the
Division of Clearing and Risk.
* * * * *
(c) The Commission hereby delegates, until such time as the
Commission orders otherwise, the following function to the Director of
the Division of Clearing and Risk and to such members of the
Commission's staff acting under his or her direction as he or she may
designate from time to time:
(1) The authority to review applications for registration as a
derivatives clearing organization filed with the Commission under Sec.
39.3(a)(1) of this chapter, to determine that an application is
materially complete pursuant to Sec. 39.3(a)(2) of this chapter, to
request additional information in support of an application pursuant to
Sec. 39.3(a)(3) of this chapter, to extend the review period for an
application pursuant to Sec. 39.3(a)(6) of this chapter, to stay the
running of the 180-day review period if an application is incomplete
pursuant to Sec. 39.3(b)(1) of this chapter, to review requests for
amendments to orders of registration filed with the Commission under
Sec. 39.3(d)(1) of this chapter, to request additional information in
support of a request for an amendment to an order of registration
pursuant to Sec. 39.3(d)(2) of this chapter, and to request additional
information in support of a rule submission pursuant to Sec.
39.3(g)(3) of this chapter;
(2) All functions reserved to the Commission in Sec. 39.4(a) of
this chapter;
(3) All functions reserved to the Commission in Sec. 39.5(b)(2),
(b)(3)(ix), (c)(1), and (d)(3) of this chapter;
(4) All functions reserved to the Commission in Sec.
39.10(c)(4)(iv) of this chapter;
(5) All functions reserved to the Commission in Sec.
39.11(b)(1)(v), (b)(2)(ii), (c)(1) and (3), and (f)(1), and (2) of this
chapter;
(6) All functions reserved to the Commission in Sec.
39.12(a)(5)(iii) of this chapter;
(7) All functions reserved to the Commission in Sec.
39.13(g)(8)(ii), (h)(1)(i)(C), (h)(1)(ii), (h)(3)(i) and (ii), and
(h)(5)(i)(C) of this chapter;
(8) The authority to request additional information in support of a
rule submission under Sec. Sec. 39.13(i)(2) and 39.15(b)(2)(iii) of
this chapter;
(9) All functions reserved to the Commission in Sec. 39.19(c)(2),
(c)(3)(iv), and (c)(5) of this chapter;
(10) All functions reserved to the Commission in Sec. 39.20(a)(5)
of this chapter;
(11) All functions reserved to the Commission in Sec. 39.21(c) of
this chapter;
(12) All functions reserved to the Commission in Sec. 39.31 of
this chapter; and
(13) The authority to approve the requests described in Sec. Sec.
39.34(d) and 39.39(f) of this chapter.
* * * * *
Issued in Washington, DC, on April 29, 2019, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Derivatives Clearing Organization General Provisions and
Core Principles--Commission Voting Summary, Chairman's Statement, and
Commissioner's Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman J. Christopher Giancarlo
Swaps clearing is among the most sweeping and significant of the
swaps reforms adopted by the Dodd-Frank Act. By any measure, the
CFTC's swaps clearing regime has been robust and highly successful.
In 2011 and 2013, the Commission adopted regulations in part 39
to implement the Dodd-Frank Act's Core Principles for Derivatives
Clearing Organizations (DCOs). Since the adoption of these rules,
Commission staff has worked with DCOs regarding questions concerning
the interpretation and implementation of the regulations, and issued
related staff relief or guidance.
As part of Project KISS, the Commission is proposing to revise
or delete certain provisions in part 39. These revisions will
improve the clarity of the text, codify staff relief and guidance,
and simplify processes for registration or reporting. There are also
a few new requirements with respect to default procedures and
reporting in response to more recent events, such as the launch of
bitcoin futures contracts and the Nasdaq Clearing default. For these
reasons, I support this proposal.
Appendix 3--Statement of Commissioner Dan M. Berkovitz
Introduction
I support issuing for public comment the notice of proposed
rulemaking (``NPRM'') to amend certain provisions of part 39 of the
Commission's regulations governing derivatives clearing
organizations (``DCOs''). Part 39 generally covers registration and
regulation of DCOs that centrally clear futures, options, and swaps
regulated by the Commission.
The NPRM includes a number of beneficial provisions. I commend
the staff of the Division of Clearing and Risk for this important
effort to clarify and clean up some issues in the rules and staff
guidance that have accumulated since part 39 was substantively
amended in 2011 and 2013. The NPRM also proposes several changes to
the regulations that merit scrutiny as outlined below. I
particularly look forward to comments on those provisions to help
guide the Commission's deliberations on the proposed amendments.
Background
Central clearing of futures positions has been a fundamental
risk mitigation measure for derivatives market participants in the
United States for well over a hundred years. In more recent times,
as futures and swap trading has grown dramatically,\1\ central
clearing of derivatives including swaps has become a critical
element in risk management of the financial system as a whole. In
response to the 2008 financial crisis, world leaders at the G20
summit in Pittsburgh established central clearing for derivatives as
a core objective in mitigating systemic risk.\2\ DCOs are a critical
component of the clearing infrastructure, and effective
clearinghouse registration and regulation is key to facilitating
efficient, sound derivatives markets and preventing another
financial crisis.
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\1\ A CFTC study published in 1998 noted that an estimated 272
million futures and options contracts were traded globally in 1986,
while recent Futures Industry Association data indicates that 30.28
billion futures and options contracts were traded globally in 2018.
See CFTC, Division of Economic Analysis, The Global Competitiveness
of U.S. Futures Markets Revisited (November 1999); available at
https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/plstudy_53_cftc.pdf; FIA Releases Annual Trading
Statistics showing Record [Exchange Traded Derivatives] Volume in
2018; available at https://fia.org/articles/fia-releases-annual-trading-statistics-showing-record-etd-volume-2018. Similarly, the
trading of over-the-counter derivatives expanded from about $72
trillion in notional amount in 1998 to about $595 trillion in 2018.
See Bank of International Settlements, OTC derivatives notional
amount outstanding by risk category; available at https://stats.bis.org/statx/srs/tseries/OTC_DERIV/H:A:A:A:5J:A:5J:A:TO1:TO1:A:A:3:C?t=D5.1&p=20172&x=DER_RISK.3.CL_MARKET_RISK.T:B:D:A&o=w:19981.,s:line.nn,t:Derivatives%20risk%20category.
\2\ See G20, Leaders' Statement: The Pittsburgh Summit (Sept.
24-25, 2009); available at https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
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As described in the NPRM, the Commission adopted regulations in
2011 and
[[Page 22317]]
2013 to further implement DCO core principles and Title VIII of the
Dodd-Frank Act. Based on experience in implementing these
regulations and subsequent developments, including the establishment
of international principles for clearing, the CFTC staff has
provided guidance on the new regulations. It is now appropriate for
the Commission to address this experience and these developments
through amendments to our regulations.
Codification and Clarification
The NPRM includes numerous amendments that clarify, further
define, or provide more explicit direction to market participants.
Governance requirements are more fully developed and applied across
all DCOs. The NPRM adds new regulations 39.24, 39.25, and 39.26 that
establish governance requirements for DCOs to better ensure that
DCOs are well managed.\3\ These amendments provide greater certainty
and uniform rules, and are important not only for fairness and
consistency, but to improve risk management across the clearing
space. The changes may help guard against risks from governance
failures.
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\3\ See NPRM section IV.J.
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While the new governance regulations are beneficial, many of the
provisions set out only general principles and do not provide
specific guidance or prescriptive standards. I look forward to
public comment on whether more explicit guidance or requirements
would be appropriate for any specific provisions. In particular, I
look forward to comments on whether members should play a larger
role in governance.
Under the NPRM, regulation 39.16 would be amended to improve
requirements around member default management.\4\ The recent member
default at NASDAQ Clearing reinforces the importance of default
management mechanisms and information sharing when a default
occurs.\5\ The amendments explicitly require DCOs to have a default
committee that must include clearing members. In addition, the
amendments would require a DCO to include members in tests of the
default management plan. I look forward to comments on how and when
DCO members should be included in default management.
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\4\ See NPRM section IV.F.
\5\ See Luke Clancy, Margin or membership? Regulators react to
Nasdaq default, Risk.net (Feb. 7, 2019) available at: https://www.risk.net/regulation/6366441/margin-or-membership-regulators-react-to-nasdaq-default.
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In addition to the above, the NPRM would provide a number of
more discrete improvements, such as an explicit requirement for
initial margin to cover concentration risk; a requirement for DCO
personnel to certify certain reports; and several new reporting
requirements around settlement bank arrangements, depositories, and
liquidity funding arrangements. Clarifying these types of issues
will help maintain consistent, objective, and transparent oversight
of registered DCOs.
Issues Warranting Further Comment and Consideration
The NPRM includes several proposed amendments that, while
beneficial in some respects, may also present additional issues for
the Commission to consider in developing the final rule. Comments in
these areas would be particularly helpful to inform the Commission
in its deliberations.
Changes to regulation 39.13(g)(8) regarding calculation of
initial margin and in particular, excess margin, attempt to
incorporate in the regulation, and to clarify, staff guidance.\6\
Getting initial margin calculations right is critical to providing
sufficient resources to cover variation margin shortfalls that may
occur when resolving a member's default. The proposed standard for
margin to be ``commensurate with the risk presented by each customer
account,'' as a principle, seems appropriate. However, little
guidance is provided on how that principle should be applied or the
appropriate parameters for consideration. Given the importance of
initial margin calculations, I look forward to comments on whether
the Commission should provide a more detailed standard in the
regulation or further guidance on the calculation.
---------------------------------------------------------------------------
\6\ See NPRM section IV.D.3.f.
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New regulation 39.13(i) provides explicit procedures and
requirements for filing DCO rules to implement a cross-margining
program with other clearing organizations.\7\ From a general policy
perspective, establishing explicit procedures in regulation for
evaluating such arrangements would facilitate consistent, objective
reviews by the Commission.
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\7\ See NPRM section IV.D.5.
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However, multi-entity cross-margining--which could cross borders
and involve multiple regulatory regimes of different regulators--
creates additional layers of legal, operational, and financial risk
that may be difficult to evaluate. The members of the DCO could be
affected in ways not previously contemplated and that may be more
obscure to the members and difficult for them to assess. The
information that the DCO would be required to provide to the
Commission under the NPRM is fashioned from less complex portfolio
margining evaluation requirements and is general in nature. Will a
bankruptcy involving a member of one of the clearing organizations,
the DCO, or the other clearing organization affect the other entity
and its members in ways that are not anticipated? Are there margin
model risks, such as greater concentration risk across both
entities, that are not properly accounted for in the proposed
regulations? Do members of the DCO have other concerns and do they
have appropriate mechanisms to voice those concerns through the DCO
rules, governance structures, and/or CFTC review procedures? I look
forward to reviewing the comments on these and other issues
regarding the proposed multi-entity cross margining regulations.
Finally, the NPRM would establish regulation 40.5 as the
mechanism for Commission review of certain DCO rule sets including:
(1) A request to transfer a DCO's open interest--in many cases its
entire open interest, (2) cross-margining programs among different
clearing organizations--including across borders and for entities
subject to different regulators, and (3) commingling of futures,
options, and swaps positions in a section 4d(a) futures account.
These rule reviews could involve consideration of novel issues,
customer protections, and other factors. Accordingly, I have some
concern that regulation 40.5 may not provide sufficiently robust
review procedures or the Commission with adequate authority to
require a DCO to mitigate risks arising from the proposed actions.
Section 40.5 was intended to address voluntary submission of DCO
rule changes pursuant to section 5c(c) of the Commodity Exchange
Act. While the process for submission and Commission review is more
detailed under regulation 40.5 than under regulation 40.6,
regulation 40.5 provides for automatic approval after 45 days if
that period is not extended by the Commission and a narrow standard
of review; namely, the Commission shall approve a DCO rule under
review unless it ``is inconsistent with the [Commodity Exchange] Act
or Commission's regulations.'' However, the DCO activities to which
this review procedure would be applied under the NPRM are
significant actions that likely will raise customer protection
concerns, entail a sophisticated risk management analysis, and call
for a more nuanced review and response than can be accomplished
under the blunt ``inconsistent with the CEA'' standard that governs
the Commission under regulation 40.5.
Accordingly, I encourage comments on whether regulation 40.5 is
the appropriate mechanism to review these proposed DCO actions or
whether a more balanced procedure should be employed that would
provide the Commission more flexibility to ensure the proposed
actions adequately address issues involving customer protection,
potential risks to FCMs, and market integrity.
Conclusion
In conclusion, I commend the staff of the Division of Clearing
and Risk for their efforts in preparing the NPRM to codify practices
that are currently addressed through staff guidance and to conform
our regulations to developments that have occurred since the
regulations were issued. The NPRM will help clarify and provide
explicit rules for clearing organizations that provide a vital
service to derivatives markets. Finally, I look forward to the
public comments on the NPRM, particularly on the proposed amendments
discussed above.
[FR Doc. 2019-09025 Filed 5-15-19; 8:45 am]
BILLING CODE 6351-01-P