[Federal Register Volume 88, Number 103 (Tuesday, May 30, 2023)]
[Proposed Rules]
[Pages 34708-34743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-10889]



[[Page 34707]]

Vol. 88

Tuesday,

No. 103

May 30, 2023

Part IV





Securities and Exchange Commission





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17 CFR Part 240





Covered Clearing Agency Resilience and Recovery and Wind-Down Plans; 
Proposed Rule

  Federal Register / Vol. 88 , No. 103 / Tuesday, May 30, 2023 / 
Proposed Rules  

[[Page 34708]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-97516; File No. S7-10-23]
RIN 3235-AN19


Covered Clearing Agency Resilience and Recovery and Wind-Down 
Plans

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing to amend certain portions of the Covered Clearing Agency 
Standards under the Securities Exchange Act of 1934 (``Exchange Act'') 
to strengthen the existing rules regarding margin with respect to 
intraday margin and the use of substantive inputs to a covered clearing 
agency's risk-based margin system. The Commission is also proposing a 
new rule to establish requirements for the contents of a covered 
clearing agency's recovery and wind-down plan.

DATES: Comments should be received on or before July 17, 2023.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File Number S7-10-23 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-10-23. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's website (https://www.sec.gov/rules/proposed.shtml). 
Comments are also available for website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Operating conditions may limit access to the Commission's Public 
Reference Room. Do not include personal identifiable information in 
submissions; you should submit only information that you wish to make 
available publicly. We may redact in part or withhold entirely from 
publication submitted material that is obscene or subject to copyright 
protection.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on our website. To ensure direct electronic 
receipt of such notifications, sign up through the ``Stay Connected'' 
option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Elizabeth L. Fitzgerald, Assistant 
Director, Jesse Capelle, Special Counsel, Office of Clearance and 
Settlement at (202) 551-5710, Division of Trading and Markets, U.S. 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-7010.

Table of Contents

I. Introduction
II. Regulatory Framework
    A. The Covered Clearing Agency Standards
    B. Statutory Requirements for Covered Clearing Agencies as Self-
Regulatory Organizations
    C. Title II of the Dodd-Frank Act
III. Proposal
    A. Amendments Regarding Risk Management
    1. Proposed Changes to Rule 17Ad-22(e)(6)
    2. Discussion
    3. Request for Comment
    D. Contents of Recovery and Wind-Down Plans
    1. Proposed Rule 17Ad-26
    2. Discussion
    4. Request for Comment
IV. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Description of Market
    2. Overview of the Existing Regulatory Framework
    3. Current Recovery and Wind-Down Plans
    4. Current Risk-Based Margin
    E. Consideration of Benefits and Costs as well as the Effects on 
Efficiency, Competition, and Capital Formation
    1. Proposed Rule 17Ad-26
    2. Amendments to Rule 17Ad-22(e)(6)
    3. Efficiency, Competition, and Capital Formation
    F. Reasonable Alternatives to the Proposed Rule and Amendments
    1. Establish Precise Triggers for Implementation of RWPs Across 
Covered Clearing Agencies
    2. Establish Specific Scenarios and Analyses
    3. Establish Specific Rules, Policies, Procedures, Tools, and 
Resources
    4. Require the Identification of Interconnections and 
Interdependencies
    5. Establish a Specific Monitoring Frequency for Intraday Margin 
Calls
    6. Adopt Only Certain Elements of Proposed Rule 17Ad-26
    7. Focus Intraday Margin Requirements on a Subset of Covered 
Clearing Agencies
    G. Request for Comment
V. Paperwork Reduction Act
    A. Proposed Amendment to Rule 17Ad-22(e)(6)
    B. Proposed Rule 17Ad-26
    H. Request for Comment
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority

I. Introduction

    Section 17A of the Exchange Act directs the Commission to 
facilitate the establishment of a national system for the prompt and 
accurate clearance and settlement of securities transactions and 
provides the Commission with the authority to regulate those entities 
critical to the clearance and settlement process.\1\ The enactment of 
the Payment, Clearing, and Settlement Supervision Act (``Clearing 
Supervision Act'') in Title VIII of the Wall Street Reform and Consumer 
Protection Act of 2010 (``Dodd-Frank Act'') reaffirmed the importance 
of the national system for clearance and settlement.\2\ Specifically, 
Congress found that the ``proper functioning of the financial markets 
is dependent upon safe and efficient arrangements for the clearing and 
settlement of payments, securities, and other financial transactions.'' 
\3\
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    \1\ See 15 U.S.C. 78q-1(a)(2)(A).
    \2\ See 12 U.S.C. 5461-5472.
    \3\ See 12 U.S.C. 5461(a)(1).
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    In recognition of the importance of clearance and settlement to the 
securities markets, the Commission adopted 17 CFR 240.17Ad-22(e) 
(``Rule 17Ad-22(e)''), which sets forth standards for covered clearing 
agencies registered with the Commission.\4\ These standards address all 
aspects of a covered clearing agency's operations, including financial 
risk management, operational risk, default management, governance, and 
participation requirements.\5\ In this release, the Commission is 
proposing changes to augment and strengthen the requirements of these 
rules, referred to as the Covered Clearing Agency Standards, in three 
ways.\6\
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    \4\ A covered clearing agency is a registered clearing agency 
that provides the services of a central counterparty or a central 
securities depository. 17 CFR 240.17Ad-22(a)(5).
    \5\ See section II.A infra (providing more information on the 
Covered Clearing Agency Standards).
    \6\ In addition, the Commission is proposing to amend the CFR 
section designation for 17 CFR 240.17Ad-22 to replace the uppercase 
letter with the corresponding lowercase letter. Accordingly, 17 CFR 
240.17Ad-22 is proposed to be redesignated as 17 CFR 240.17ad-22.

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[[Page 34709]]

    First, the Commission is proposing changes with respect to the 
Covered Clearing Agency Standards regarding the intraday collection of 
margin set forth in 17 CFR 240.17Ad-22(e)(6)(ii) (``Rule 17Ad-
22(e)(6)(ii)''). This proposal would build upon and strengthen the 
existing requirement that a covered clearing agency have policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, among 
other things, includes the authority and operational capacity to make 
intraday margin calls in defined circumstances. Specifically, the 
proposed amendments to this rule would require that the covered 
clearing agency have policies and procedures to establish a risk-based 
margin system that includes the authority and operational capacity to 
monitor intraday exposure on an ongoing basis and to make intraday 
margin calls as frequently as circumstances warrant, including when 
risk thresholds specified by the covered clearing agency are breached 
or when the products cleared or markets served display elevated 
volatility.
    Second, the proposal would amend and expand the requirements of 17 
CFR 240.17Ad-22(e)(6)(iv) (``Rule 17Ad-22(e)(6)(iv)'') to provide that 
a covered clearing agency have policies and procedures that would apply 
in the event that the covered clearing agency relies on substantive 
inputs from third parties to calculate margin using a risk-based margin 
system and, specifically, when such inputs are not readily available or 
reliable. This proposal would require that the procedures used in such 
circumstances must include substantive inputs from an alternate source 
or, if it does not use an alternate source, the use of an alternate 
risk-based margin system that does not similarly rely on the 
unavailable or unreliable substantive inputs.
    Finally, the Commission is proposing to prescribe requirements for 
the contents of a covered clearing agency's recovery and orderly wind-
down plan (``RWP''). At the time that it adopted the Covered Clearing 
Agency Standards in 2016, the Commission required in 17 CFR 240.17Ad-
22(e)(3)(ii) (``Rule 17Ad-27(e)(3)(ii)'') that a covered clearing 
agency's policies and procedures include an RWP, but the Commission 
declined to include requirements for the content of the RWP, stating 
that, given the nature of recovery and resolution planning, such plans 
are likely to closely reflect the specific characteristics of the 
covered clearing agency, including its ownership, organizational, and 
operational structures, as well as the size, systemic importance, 
global reach, and/or the risks inherent in the products it clears.\7\ 
The Commission continues to believe that an RWP should closely reflect 
the specific characteristics of the covered clearing agency. However, 
at this time, based on its supervisory experience considering the RWPs 
of the covered clearing agencies, the Commission believes that there 
are certain elements that must be included in each covered clearing 
agency's plan, to ensure that the plan is fit for purpose and provides 
sufficient identification of how a covered clearing agency would 
operate in a recovery and how it would achieve an orderly wind-down. 
Accordingly, the Commission is proposing a new rule at 17 CFR 240.17ad-
26 (``Rule 17ad-26''), which would identify certain elements that a 
covered clearing agency would be required to include in an RWP and 
would also include definitions of recovery and orderly wind-down, which 
would identify the objective that these plans are designed to meet. As 
discussed further in sections III.B and IV.B infra, many of these 
elements are already contained in existing covered clearing agencies' 
RWPs, while other elements would be new to all or most of the existing 
RWPs. The Commission believes that the elements identified in new Rule 
17ad-26 would accomplish three objectives. First, the rule would 
bolster existing plans by requiring certain new elements be included. 
Second, for the elements that are already contained in existing RWPs, 
the rule would codify these elements and ensure that the plans are 
required to continue to include these elements in their RWPs. Finally, 
the rule would ensure that the RWPs of any new covered clearing 
agencies would contain all of these elements.
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    \7\ Standards for Covered Clearing Agencies Adopting Release, 
Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR 70786, 70808-
09 (Oct. 13, 2016) (``CCA Standards Adopting Release'').
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    However, with respect to changes to RWPs and to risk management 
rules more generally, the Commission would need to approve any proposed 
rule changes and, in filings for which an advance notice is required, 
not object to any such notice, as discussed further in section II.B 
infra. The Commission believes that this process should ensure that it 
is able to consider such changes and their consistency with the 
Exchange Act and the rules and regulations thereunder.

II. Regulatory Framework

A. The Covered Clearing Agency Standards

    In 1975, Congress added section 17A to the Exchange Act as part of 
the Securities Acts Amendments of 1975, which, as noted in section I 
supra, directed the Commission to facilitate the establishment of: (i) 
a national system for the prompt and accurate clearance and settlement 
of securities transactions (other than exempt securities which 
typically includes U.S. Treasury securities, except as discussed 
further below), and (ii) linked or coordinated facilities for clearance 
and settlement of securities transactions.\8\ In so doing, Congress 
made several findings related to the importance of the clearance and 
settlement of securities transactions and the relationship of clearance 
and settlement of securities transactions to the protection of 
investors. Specifically, Congress found that the prompt and accurate 
clearance and settlement of securities transactions are necessary for 
the protection of investors and persons facilitating transactions by 
and acting on behalf of investors.\9\ In facilitating the establishment 
of the national clearance and settlement system, the Commission must 
have due regard for the public interest, the protection of investors, 
the safeguarding of securities and funds, and maintenance of fair 
competition among brokers and dealers, clearing agencies, and transfer 
agents.\10\
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    \8\ See 15 U.S.C. 78q-1; Report of the Senate Committee on 
Banking, Housing & Urban Affairs, S. Rep. No. 94-75, at 4 (1975) 
(stating the Committee's belief that ``the banking and security 
industries must move quickly toward the establishment of a fully 
integrated national system for the prompt and accurate processing 
and settlement of securities transactions'').
    \9\ See 15 U.S.C. 78q-1(a)(1)(A); see also 15 U.S.C. 78q-1(B), 
(C), and (D) (setting forth additional findings related to the 
national system of clearance and settlement).
    \10\ See 15 U.S.C. 78q-1(a)(2)(A).
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    The Commission's ability to achieve these goals is based upon the 
regulation of clearing agencies registered with the Commission.\11\ 
Specifically, section 17A of the Exchange Act provides the Commission 
with authority to adopt rules as necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Exchange Act (including for the prompt and 
accurate clearance and settlement of securities transactions) and 
prohibits a clearing agency from engaging in any activity in

[[Page 34710]]

contravention of such rules and regulations.\12\
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    \11\ Under the Exchange Act and the regulations thereunder, any 
entity performing the functions of a clearing agency must register 
with the Commission or seek an exemption from registration. 15 
U.S.C. 78q-1(b)(1); see also 17 CFR 240.17Ad-22(a)(5) (defining 
covered clearing agency).
    \12\ See 15 U.S.C. 78q-1(d)(1); see also 15 U.S.C. 78q-1(b)(2) 
(referring to the Commission's ability to adopt rules with respect 
to the application of section 17A).
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    The Commission has exercised its broad authority to prescribe 
requirements for the prompt and accurate clearance and settlement of 
securities transactions and the safeguarding of securities and funds. 
Most recently, the Commission promulgated the Covered Clearing Agency 
Standards.\13\ These standards require covered clearing agencies to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to, as applicable, meet certain minimum 
standards regarding, among other things, operations, governance, and 
risk management.\14\
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    \13\ CCA Standards Adopting Release, supra note 7, 81 FR at 
70839.
    \14\ See generally 17 CFR 240.17Ad-22(e). A covered clearing 
agency is a registered clearing agency that provides the services of 
a central counterparty or a central securities depository. 17 CFR 
240.17Ad-22(a)(5).
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    One of the Covered Clearing Agency Standards concerns the 
maintaining of a sound risk management framework for comprehensively 
managing legal, credit, liquidity, operational, general business, 
investment, custody, and other risks that arise in or are borne by the 
covered clearing agency.\15\ As part of maintaining a sound risk 
management framework, a covered clearing agency is required to include 
plans for the recovery and orderly wind-down of the covered clearing 
agency necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.\16\ At that time, the 
Commission stated that it understands that when a financial company 
becomes non-viable as a going concern or insolvent, recovery refers to 
actions taken that allow the financial company to sustain its critical 
operations and services; by contrast, resolution, or wind-down, refers 
to the transferring of a financial company's critical operations and 
services to an alternate entity.\17\
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    \15\ See 17 CFR 240.17Ad-22(e)(3).
    \16\ See 17 CFR 240.17Ad-22(e)(3)(ii).
    \17\ CCA Standards Adopting Release, supra note 7, 81 FR at 
70808 n.251. In this release, the Commission is proposing 
definitions of ``recovery'' and ``orderly wind-down'' that would 
apply to the RWPs addressed by this release. See infra section 
III.B.2.a.
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    At the time of adoption of the Covered Clearing Agency Standards, 
the Commission declined to articulate requirements for all RWPs.\18\ 
Rather, the Commission stated that, given the nature of recovery and 
resolution planning, such plans are likely to closely reflect the 
specific characteristics of the covered clearing agency, including its 
ownership, organizational, and operational structures, as well as the 
size, systemic importance, global reach, and/or the risks inherent in 
the products it clears. While the Commission declined to articulate 
requirements, it did provide guidance for covered clearing agencies in 
developing RWPs. In the Covered Clearing Agency Standards Adopting 
Release, the Commission stated that a covered clearing agency generally 
should consider whether: (i) it can identify scenarios that may 
potentially prevent it from being able to provide its critical services 
as a going concern and assess the effectiveness of a full range of 
options for recovery or orderly wind-down; (ii) it has prepared 
appropriate plans for its recovery or orderly wind-down based on the 
results of that assessment; and (iii) it has provided relevant 
authorities with the information needed for purposes of recovery and 
resolution planning.\19\ The Commission also stated in the CCA 
Standards Adopting Release that, with respect to recovery tools, a 
covered clearing agency generally should consider the following when 
developing its recovery tools: (i) whether the set of recovery tools 
comprehensively addresses how the covered clearing agency would 
continue to provide critical services in all relevant scenarios; (ii) 
the extent to which each tool is reliable, timely, and has a strong 
legal basis; (iii) whether the tools are transparent and designed to 
allow those who would bear losses and liquidity shortfalls to measure, 
manage, and control their potential losses and liquidity shortfalls; 
(iv) whether the tools create appropriate incentives for the covered 
clearing agency's owners, direct and indirect participants, and other 
relevant stakeholders; and (v) whether the tools are designed to 
minimize the negative impact on direct and indirect participants and 
the financial system more broadly.\20\
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    \18\ Id. at 70808.
    \19\ Id. at 70810. As discussed in section III.B infra, the 
Commission is proposing to codify elements in proposed Rule 17ad-26 
that are consistent with this guidance, with the exception of the 
guidance related to ``resolution planning.'' With respect to the 
guidance related to providing relevant authorities with the 
information needed for purposes of recovery and resolution planning, 
the Commission continues to support and reiterates this prior 
guidance. See infra section III.B.2.
    \20\ Id. The Commission is also proposing to codify the first 
section of this guidance in proposed Rule 17ad-26(a)(5). See section 
III.B.2.c infra. With respect to the remaining items of this 
guidance, the Commission continues to support and reiterates this 
prior guidance in section III.B.2.d infra.
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    Relatedly, the Covered Clearing Agency Standards also address the 
financial resources necessary for a covered clearing agency's recovery 
or orderly wind-down. Specifically, 17 CFR 240.17Ad-22(e)(15) requires 
written policies and procedures reasonably designed to, among other 
things, hold sufficient liquid net assets funded by equity to cover 
potential general business losses so that the covered clearing agency 
can continue operations and services as a going concern if those losses 
materialize.\21\ This requirement encompasses: (i) determining the 
amount of liquid net assets funded by equity based upon the covered 
clearing agency's general business risk profile and the length of time 
required to achieve a recovery or orderly wind-down, as appropriate, of 
its critical operations and services if such action is taken; (ii) 
holding liquid net assets funded by equity equal to the greater of 
either (x) six months of the covered clearing agency's current 
operating expenses, or (y) the amount determined by the board of 
directors to be sufficient to ensure a recovery or orderly wind-down of 
critical operations and services of the covered clearing agency, as 
contemplated by the RWPs established under current Rule 17Ad-
22(e)(3)(ii),\22\ and (iii) maintaining a viable plan, approved by the 
board of directors and updated at least annually, for raising 
additional equity should its equity fall close to or below the amount 
required under paragraph (ii).\23\ With respect to the policies and 
procedures related to maintaining a viable plan for raising additional 
equity, the Commission stated that a viable plan generally should 
enable the covered clearing agency to hold sufficient liquid net assets 
to achieve recovery or orderly wind-down.\24\
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    \21\ 17 CFR 240.17Ad-22(e)(15).
    \22\ This amount shall be in addition to resources held to cover 
participant defaults or other risks covered under the credit risk 
standard in 17 CFR 240.17Ad-22(b)(3) or 17Ad-22(e)(4)(i) through 
(iii), as applicable, and the liquidity risk standard in 17 CFR 
240.17Ad-22(e)(7)(i) and (ii), and it shall be of high quality and 
sufficiently liquid to allow the covered clearing agency to meet its 
current and projected operating expenses under a range of scenarios, 
including in adverse market conditions. 17 CFR 240.17Ad-
22(e)(15)(ii)(A) and (B).
    \23\ 17 CFR 240.17Ad-22(e)(15)(i), (ii), and (iii).
    \24\ CCA Standards Adopting Release, supra note 7, 81 FR at 
70836.
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    Another of the Covered Clearing Agency Standards sets forth 
requirements for written policies and procedures reasonably designed 
to, among other things, establish a risk-based margin system to cover 
the covered clearing agency's credit

[[Page 34711]]

exposures to its participants if the covered clearing agency provides 
central counterparty services.\25\ At a minimum, such a system, among 
other things, must mark participant positions to market and collect 
margin, including variation margin or equivalent charges if relevant, 
at least daily and include the authority and operational capacity to 
make intraday margin calls in defined circumstances.\26\ The Commission 
stated that defined circumstances would generally include margin calls 
on both a scheduled and unscheduled basis.\27\
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    \25\ See 17 CFR 240.17Ad-22(e)(6).
    \26\ See 17 CFR 240.17Ad-22(e)(6)(ii).
    \27\ CCA Standards Adopting Release, supra note 7, 81 FR at 
70818.
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    In addition, a covered clearing agency's risk-based margin system 
has to use reliable sources of timely price data and use procedures and 
sound valuation models for addressing circumstances in which pricing 
data are not readily available or reliable.\28\ The Commission stated 
that in selecting price data sources, a covered clearing agency 
generally should consider the ability of the provider to provide data 
in a variety of market conditions, including periods of market stress, 
and not select data sources based on their cost alone to ensure that 
such price data sources are reliable.\29\
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    \28\ See 17 CFR 240.17Ad-22(e)(6)(iv).
    \29\ CCA Standards Adopting Release, supra note 7, 81 FR at 
70819.
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B. Statutory Requirements for Covered Clearing Agencies as Self-
Regulatory Organizations

    A covered clearing agency is, by definition, a registered clearing 
agency, meaning that it is a self-regulatory organization (``SRO'') for 
purposes of the Exchange Act.\30\ Therefore, as a SRO, a covered 
clearing agency is required to file with the Commission any proposed 
rule or proposed change in its rules, including additions or deletions 
from its rules.\31\ The Commission has specified the format and process 
for filing such proposed rule changes in Form 19b-4, which is intended 
to elicit information necessary for the public to provide meaningful 
comment on the proposed rule change and for the Commission to determine 
whether the proposed rule change is consistent with the requirements of 
the Exchange Act and the rules and regulations thereunder.\32\
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    \30\ 17 CFR 240.17Ad-22(a)(5) (defining a covered clearing 
agency); 15 U.S.C. 78c(a)(26) (defining an SRO to include a 
registered clearing agency).
    \31\ An SRO must submit proposed rule changes to the Commission 
for review and approval pursuant to Rule 19b-4 under the Exchange 
Act. A stated policy, practice, or interpretation of an SRO, such as 
its written policies and procedures, would generally be deemed to be 
a proposed rule change. See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
    \32\ See Form 19b-4, General Instruction B. The Form 19b-4 
specifies the contents that must be included in a proposed rule 
change filing, including, among other items, a statement of purpose 
for the proposed rule change, which describes the reasons for 
adopting the proposed rule change, any problems the proposed rule 
change is intended to address, the manner in which the proposed rule 
change will operate to resolve those problems, the manner in which 
the proposed rule change will affect various persons (e.g., brokers, 
dealers, issuers, and investors), and any significant problems known 
to the SRO that persons affected are likely to have in complying 
with the proposed rule change. Id. at Form 19b-4 Information section 
3. The SRO must also include in its proposed rule change the 
complete text of the proposed rule. Id. at Form 19b-4 Information 
section 1. The SRO may request confidential treatment of any portion 
of its filing, see 17 CFR 240.24b-2, but it would still have to 
comply with the requirements of Form 19b-4 with respect to 
describing the contents of the proposed rule change for public 
comment.
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    The Commission publishes all proposed rule changes for comment.\33\ 
Proposed rule changes are generally required to be approved by the 
Commission prior to going into effect; however, certain types of 
proposed rule changes take effect upon filing with the Commission.\34\ 
When considering whether to approve or disapprove a proposed rule 
change, the Commission shall approve the proposed rule change if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to the particular type of SRO.\35\ The rule 
filing process provides transparency to market participants and the 
public about new initiatives and changes to governance, operations, and 
risk management at the clearing agency.
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    \33\ See 15 U.S.C. 78s(b)(1).
    \34\ See 15 U.S.C. 78s(b)(3)(A) (setting forth the types of 
proposed rule changes that take effect upon filing with the 
Commission). The Commission may temporarily suspend those rule 
changes within 60 days of filing and institute proceedings to 
determine whether to approve or disapprove the rule changes. 15 
U.S.C. 78s(b)(3)(C).
    \35\ 15 U.S.C. 78s(b)(1)(C)(i). On the other hand, the 
Commission shall disapprove a proposed rule change if it cannot make 
such a finding. 15 U.S.C. 78s(b)(1)(C)(ii).
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    In addition, clearing agencies registered with the Commission are 
financial market utilities, as defined in section 803(6) of the Dodd-
Frank Act.\36\ A clearing agency that has been designated by the 
Financial Stability Oversight Council as systemically important or 
likely to become systemically important, and for which the Commission 
is the Supervisory Authority (``designated clearing agency''), is 
required to file 60-days advance notice with the Commission of changes 
to rules, procedures, and operations that could materially affect the 
nature or level of risk presented by the designated clearing agency 
(``advance notice'').\37\ Such an advance notice also requires 
consultation with the Board of Governors of the Federal Reserve System 
(``Board of Governors'').\38\ The Clearing Supervision Act authorizes 
the Commission to object to changes proposed in such an advance notice, 
which would prevent the clearing agency from implementing its proposed 
change(s).\39\
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    \36\ See 12 U.S.C. 5462(6).
    \37\ The Dodd-Frank Act defines a ``designated clearing entity'' 
as a designated financial market utility that is either a 
derivatives clearing organization registered under section 5b of the 
Commodity Exchange Act (7 U.S.C. 7a-1) or a clearing agency 
registered with the Securities and Exchange Commission under section 
17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1). See 12 
U.S.C. 5462(3). The Commission is the Supervisory Agency, as defined 
in 12 U.S.C. 5462(8), for four designated clearing agencies (the 
Depository Trust Company, the National Securities Clearing 
Corporation, the Fixed Income Clearing Corporation, and the Options 
Clearing Corporation). See 12 U.S.C. 5465(e)(1)(A). The Commission 
published a final rule concerning the filing of advance notices for 
designated clearing agencies in 2012. See 17 CFR 240.19b-4(n); 
Exchange Act Release No. 34-67286 (June 28, 2012), 77 FR 41602 (July 
13, 2012).
    \38\ See 12 U.S.C. 5465(e)(1)(B).
    \39\ See 12 U.S.C. 5465(e)(1)(E) and (F).
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    The covered clearing agencies' obligations as SROs and, as 
applicable, designated clearing agencies, are important when 
considering the types of changes that the Commission is proposing. If 
the covered clearing agency has to make changes to its rules to align 
with any of the proposed rules, if adopted, the covered clearing agency 
would be obligated to consider whether any proposed rule change and/or 
advance notice is necessary. For example, the Commission previously has 
stated that recovery and wind-down plans, and material changes thereto, 
would constitute a proposed rule change under section 19(b) of the 
Exchange Act and, for designated clearing agencies, an advance notice 
under the Clearing Supervision Act because such plans and material 
changes thereto would constitute changes to a stated policy, practice, 
or interpretation of the covered clearing agency and, for designated 
clearing agencies, a proposed change to its operations that could 
materially affect the nature or level of risk presented by the 
designated clearing agency.\40\
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    \40\ CCA Standards Adopting Release, supra note 7, 81 FR at 
70809.
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    Indeed, covered clearing agencies have submitted RWPs, and material 
changes thereto, for public comment and Commission review pursuant to 
the proposed rule change and advance

[[Page 34712]]

notice processes, as appropriate.\41\ The Commission continues to 
believe that such RWPs, and material changes thereto, would constitute 
a proposed rule change under section 19(b) of the Exchange Act and, for 
designated clearing agencies, an advance notice under the Clearing 
Supervision Act because such plans and material changes thereto would 
constitute changes to a stated policy, practice, or interpretation of 
the covered clearing agency and, for designated clearing agencies, a 
proposed change to its operations that could materially affect the 
nature or level of risk presented by the designated clearing agency.
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    \41\ See, e.g., Securities Exchange Act Release Nos. 91429 (Mar. 
29, 2021), 86 FR 17421 (Apr. 2, 2021) (SR-DTC-2021-004); 83972 (Aug. 
28, 2018), 83 FR 44964 (Sept. 4, 2018) (SR-DTC-2017-021); 83953 
(Aug. 27, 2018), 83 FR 44381 (Aug. 30, 2018) (SR-DTC-2017-803); 
91430 (Mar. 29, 2021), 86 FR 17432 (Apr. 2, 2021) (SR-FICC-2021-
002); 83973 (Aug. 28, 2018), 83 FR 44942 (Sept. 4, 2018) (SR-FICC-
2017-021); 83954 (Aug. 27, 2018), 83 FR 44361 (Aug. 30, 2018) (SR-
FICC-2017-805); 94983 (May 25, 2022), 87 FR 33223 (June 1, 2022) 
(SR-ICC-2022-004); 91806 (May 10, 2021), 86 FR 26561 (May 14, 2021) 
(SR-ICC-2021-005) (``ICC 2021 Order''); 79750 (Jan. 6, 2017), 82 FR 
3831 (Jan. 12, 2017) (SR-ICC-2016-013) (``ICC 2017 Notice and 
Order''); 86364 (July 12, 2019), 84 FR 34455 (July 18, 2019) (SR-
ICEEU-2019-013) (``ICEEU 2019 Order''; 84498 (Oct. 29, 2018), 83 FR 
55219 (Nov. 2, 2018) (SR-ICEEU-2018-014); 83651 (July 17, 2018), 83 
FR 34891 (July 23, 2018) (SR-ICEEU-2017-016 and SR-ICEEU-2017-017); 
88578 (Apr. 7, 2020), 85 FR 20561 (Apr. 13, 2020) (SR-LCH SA-2020-
001); 87720 (Dec. 11, 2019), 84 FR 68989 (Dec. 11, 2019) (SR-LCH SA-
2019-008); 83451 (June 15, 2018), 83 FR 28886 (June 21, 2018) (SR-
LCH SA-2017-012 and SR-LCH SA-2017-013); 91428 (Mar. 29, 2021), 86 
FR 17440 (Apr. 2, 2021) (SR-NSCC-2021-004); 83974 (Aug. 28, 2018), 
83 FR 44988 (Sept. 4, 2018), (SR-NSCC-2017-017); 83955 (Aug. 27, 
2018), 83 FR 44340 (Aug. 30, 2018) (SR-NSCC-2017-805); 90712 (Dec. 
17, 2020), 85 FR 84050 (Dec. 23, 2020) (SR-OCC-2020-013); 90701 
(Dec. 17, 2020), 85 FR 83662 (Dec. 22, 2020) (SR-OCC-2020-806); 
83918 (Aug. 23, 2018), 83 FR 44091 (Aug. 29, 2018) (SR-OCC-2017-
021); 83928 (Aug. 23, 2018), 83 FR 44109 (Aug. 29, 2018) (SR-OCC-
2017-810).
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C. Title II of the Dodd-Frank Act

    Title II of the Dodd-Frank Act establishes a process for the 
appointment of the Federal Deposit Insurance Corporation (``FDIC'') as 
receiver of a failing financial company if, among other things, its 
failure would otherwise have serious adverse effects on financial 
stability in the United States.\42\ This Title II authority would 
relate to covered clearing agencies, to the extent that they are 
determined, pursuant to the process described in this section, to be 
covered financial companies for purposes of the statute, meaning that 
the FDIC could be appointed as a receiver for a covered clearing 
agency.
---------------------------------------------------------------------------

    \42\ See 12 U.S.C. 5383.
---------------------------------------------------------------------------

    Under this process, certain specified Federal regulatory 
authorities must recommend to the Secretary of the Treasury (the 
``Secretary'') that the Secretary appoint the FDIC as receiver of the 
company. For most entities, including covered clearing agencies, the 
recommending agencies would be the Board of Governors and the FDIC.\43\ 
Upon receipt of such recommendations, the Secretary must make certain 
determinations to implement Title II's orderly liquidation authority. 
Specifically, the Secretary shall take action to appoint the FDIC as 
receiver, if the Secretary (in consultation with the President) 
determines generally that, inter alia, the company is a financial 
company in default or in danger of default; the failure of the company 
and its resolution under otherwise applicable Federal or State law 
would have serious adverse effects on financial stability in the United 
States; and no viable private sector alternative is available to 
prevent the default.\44\
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    \43\ See 12 U.S.C. 5383(a)(1)(A). By contrast, if the entity is 
a broker or dealer, the recommending agencies would be the Board of 
Governors and the Commission. See 12 U.S.C. 5383(a)(1)(B).
    \44\ See 12 U.S.C. 5383(b).
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    Notably for this proposal, a covered clearing agency would be 
subject to this sort of orderly liquidation if two conditions are met. 
First, it must be considered to be a financial company, which includes 
any company that is incorporated or organized under any provision of 
Federal law or the laws of any State and is predominately engaged in 
activities that the Board of Governors has determined are financial in 
nature or incidental thereto.\45\ Second, pursuant to the process 
described above, the Secretary would have to determine to implement an 
orderly liquidation authority.\46\ If both those conditions occur, then 
the covered clearing agency would be considered a ``covered financial 
company.'' \47\ In that case, the FDIC would serve as the receiver for 
the covered clearing agency.\48\
---------------------------------------------------------------------------

    \45\ See 12 U.S.C. 5381(11)(A) and (B)(iii). Activities that are 
financial in nature include, but are not limited to, lending, 
exchanging, transferring, investing for others, or safeguarding 
money or securities. 12 U.S.C. 1843(k)(4).
    \46\ See 12 U.S.C. 5383(b).
    \47\ See 12 U.S.C. 5381(a)(8).
    \48\ Title II refers to the FDIC as the receiver in an orderly 
liquidation. More generally, the orderly liquidation process is 
often referred to as resolution. See Resolution of Systemically 
Important Financial Institutions: The Single Point of Entry 
Strategy, 78 FR 76614, 76615 (Dec. 18, 2013) (referring generally to 
the orderly liquidation process as resolution). Existing guidance by 
standard-setting bodies generally refers to the governmental entity 
conducting a resolution as the resolution authority. See, e.g., 
Financial Stability Board, Key Attributes of Effective Resolution 
Regimes, section 2.1 (2014). For purposes of this release, the 
Commission uses the more general term ``resolution authority'' to 
encompass the role of the FDIC as a receiver in an orderly 
liquidation.
---------------------------------------------------------------------------

    Once appointed as the resolution authority, the FDIC essentially 
``steps into the shoes'' of the financial company and is able to use 
any powers and resources available to the financial company.\49\ The 
FDIC as the resolution authority is responsible for the operations of 
the financial company, including, among other things, taking over the 
assets of and operating the financial company, collecting all 
obligations and money owed to the financial company, and performing all 
functions of the financial company in the financial company's name.\50\ 
In addition, the FDIC shall liquidate and wind-up the financial 
company's affairs, including taking steps to realize upon the company's 
assets, as appropriate (e.g., through the sale of assets or the 
transfer of assets to a bridge company).\51\ A covered clearing 
agency's RWP would be helpful to the FDIC if it were to serve as the 
resolution authority for a covered clearing agency. Such a plan could 
provide insights, allowing the resolution authority (i.e., the FDIC) to 
obtain an understanding of the covered clearing agency's critical 
services, how it provides such services, and how it would be able to 
continue providing such services in the event of a recovery or an 
orderly wind-down.
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    \49\ Specifically, the FDIC as receiver serves as the successor 
to the financial company, holding all rights, titles, powers, and 
privileges of the financial company and its assets, and of any 
stockholder, member, officer, or director of such company, and it 
takes title to the books, records, and assets of any previous 
receiver or other legal custodian of such covered financial company. 
See 12 U.S.C. 5390(a)(1)(A).
    \50\ 12 U.S.C. 5390(a)(1)(B).
    \51\ 12 U.S.C. 5390(a)(1)(D).
---------------------------------------------------------------------------

III. Proposal

    The Commission is proposing amendments to existing rules and an 
additional rule under section 17A of the Exchange Act. Specifically, 
the Commission is proposing to amend Rule 17Ad-22(e)(6)(ii) with 
respect to intraday margin, to require that a covered clearing agency's 
risk-based margin system monitors intraday exposures on an ongoing 
basis and includes the authority and operational capacity to make 
intraday margin calls as frequently as circumstances warrant, including 
when risk thresholds specified by the covered clearing agency are 
breached or when the products cleared or markets served display 
elevated volatility. Second, the Commission is proposing to amend Rule 
17Ad-22(e)(6)(iv) with respect to the use of sources of information in 
a covered clearing agency's risk-based margin system, to require 
policies and procedures reasonably designed to have

[[Page 34713]]

a covered clearing agency use reliable sources for both price data, as 
the current rule requires, and other substantive inputs to its risk-
based margin system and to require that the covered clearing agency use 
procedures for when such inputs and price data are not available or 
reliable. Finally, the Commission is proposing new Rule 17ad-26 that 
would require a covered clearing agency to include nine specific 
elements in its RWP. Each of these proposed rules is discussed further 
below.

A. Amendments Regarding Risk Management

1. Proposed Changes to Rule 17Ad-22(e)(6)
    The Commission is proposing to amend Rule 17Ad-22(e)(6)(ii) to 
strengthen its requirements: first, by further requiring that a covered 
clearing agency have policies and procedures reasonably designed to 
monitor intraday exposures on an ongoing basis; and second, by 
providing additional specificity to the circumstances in which a 
covered clearing agency should have policies and procedures to collect 
intraday margin. Specifically, as proposed, Rule 17ad-22(e)(6)(ii) 
would require a covered clearing agency that provides central 
counterparty services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to cover its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, marks participant positions to market and 
collects margin, including variation margin or equivalent charges if 
relevant, at least daily, monitors intraday exposures on an ongoing 
basis, and includes the authority and operational capacity to make 
intraday margin calls as frequently as circumstances warrant, including 
when risk thresholds specified by the covered clearing agency are 
breached or when the products cleared or markets served display 
elevated volatility.
    The Commission is also proposing to amend Rule 17Ad-22(e)(6)(iv) to 
strengthen its requirements: first, by expanding the scope of the rule 
to apply to both price data and other substantive inputs to a covered 
clearing agency's risk-based margin system; second, by further 
specifying the level to which the covered clearing agency's procedures 
must perform when price data or other substantive inputs are not 
available or reliable; and third, by providing that the procedures used 
when price data or other inputs are not available or reliable should 
include alternate sources or an alternate risk-based margin system.
2. Discussion
a. Amendments to Rule 17Ad-22(e)(6)(ii)
    As discussed above, when considering the adoption of Rule 17Ad-
22(e)(6)(ii) in 2014, the Commission stated that requiring covered 
clearing agencies to have the authority and operational capacity to 
make intraday margin calls in defined circumstances would ``benefit 
covered clearing agencies by covering settlement risk created by 
intraday price movements.'' \52\ Thus, the current rule requires that 
covered clearing agencies have the authority and operational capacity 
to make intraday margin calls. Importantly, the Commission understands 
that the ``operational capacity'' to make intraday margin calls 
includes the ability to monitor intraday exposure; otherwise, it would 
be impossible for a covered clearing agency to make appropriate 
intraday margin calls if it were not monitoring its intraday exposure. 
Therefore, under the current rule, covered clearing agencies have some 
ability to monitor for intraday exposure and make intraday margin 
calls,\53\ but there currently are no requirements to monitor for 
intraday exposure or regarding what frequency at which to monitor 
intraday exposures.
---------------------------------------------------------------------------

    \52\ Standards for Covered Clearing Agencies Standards Proposing 
Release, Exchange Act Release No. 71699 (Mar. 12, 2014), 79 FR 
29507, 29529 (May 22, 2014) (``CCA Standards Proposing Release''). 
The Commission adopted Rule 17Ad-22(e)(6)(ii) in substantially the 
form it was proposed. See CCA Standards Adopting Release, supra note 
7, 81 FR at 70786.
    \53\ See section IV.B.4.a infra.
---------------------------------------------------------------------------

    The Commission is now proposing to amend Rule 17Ad-22(e)(6)(ii) to 
incorporate a requirement of intraday monitoring and to require that 
such monitoring is done on an ongoing basis. The Commission continues 
to believe that it is essential that a covered clearing agency monitor 
its intraday exposure because the covered clearing agency faces a risk 
that its exposure to its participants can change rapidly as a result of 
intraday changes in prices, positions, or both. Moreover, the 
Commission believes that requiring that such monitoring occur on an 
ongoing basis will contribute to ensuring that the covered clearing 
agency is sufficiently informed and situated to take appropriate 
actions to manage any intraday exposure that arises.\54\ Therefore, the 
Commission is proposing to amend Rule 17Ad-22(e)(6)(ii) to require that 
a covered clearing agency's written policies and procedures be 
reasonably designed to ensure that such monitoring occurs on an ongoing 
basis.
---------------------------------------------------------------------------

    \54\ See CPMI-IOSCO, Resilience of central counterparties 
(CCPs): Further guidance on the PFMI, paragraph 5.2.2 (July 2017), 
available at (discussing how a CCP addresses intraday exposure in 
its margin system and stating that ``a CCP faces the risk that its 
exposure to its participants can change rapidly as a result of 
intraday changes in prices, positions, or both; ie adverse price 
movements, as well as participants building larger positions through 
new trading (and settlement of maturing trades). For the purposes of 
addressing these and other forms of risk that may arise intraday, a 
CCP should address and monitor on an ongoing basis how such risks 
affect all components of its margin system, including initial 
margin, variation margin and add-on charges.'').
---------------------------------------------------------------------------

    The Commission is not prescribing a particular time period or 
frequency that would constitute an ongoing basis because the Commission 
believes that the covered clearing agency should be able to tailor its 
monitoring to the particular products cleared and markets served. The 
Commission believes that this requirement to monitor intraday exposure 
on an ongoing basis should allow flexibility to determine what 
monitoring frequency is appropriate to the particular market. For 
example, more frequent monitoring may be necessary for a covered 
clearing agency that operates in markets where intraday trading may be 
more prevalent or where intraday exposures may tend to be larger 
because of specific features, such as the settlement process. Being 
able to monitor, on an ongoing basis, any decrease in the margin 
coverage as compared to the changes in intraday credit exposures in its 
participants' portfolios should help the covered clearing agency ensure 
that it is able to collect margin sufficient to cover its participants' 
exposures. A covered clearing agency generally should consider whether 
its intraday monitoring considers how participants' exposures would 
affect all risks faced by the covered clearing agency, including those 
that may already be contemplated by variation margin, initial margin, 
or add-on charges.
    Currently, Rule 17ad-22(e)(6)(ii) refers only to the covered 
clearing agency's ability to collect intraday margin ``in defined 
circumstances.'' The proposed amendment to Rule 17Ad-22(e)(6)(ii) would 
amend this to require covered clearing agencies to have policies and 
procedures to establish a risk-based margin system with the ability to 
make intraday margin calls as frequently as circumstances warrant, 
including when risk thresholds specified by the covered clearing agency 
are breached or when the products cleared or markets served display 
elevated volatility. The Commission believes that this proposed 
requirement would build upon and expand the current rule's requirement 
that provides

[[Page 34714]]

for the authority and operational capacity to make intraday margin 
calls in defined circumstances \55\ by identifying particular instances 
in which a covered clearing agency needs to have policies and 
procedures to collect margin, such as the breach of specific risk 
thresholds or in times of elevated volatility, while continuing to 
provide flexibility to covered clearing agencies to make intraday 
margin calls as frequently as circumstances warrant. Moreover, as the 
Commission stated when adopting the Covered Clearing Agency Standards, 
this proposed amendment would continue to reflect that intraday margin 
calls should be able to be made on both a scheduled and unscheduled 
basis,\56\ but would also provide more specificity as to what 
constitutes the appropriate scheduled and unscheduled bases.
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    \55\ Currently, Rule 17Ad-22(e)(6)(ii) does not define what 
constitutes ``defined circumstances.''
    \56\ CCA Standards Adopting Release, supra note 7, 81 FR at 
70818.
---------------------------------------------------------------------------

    The Commission believes that the proposed requirement for a covered 
clearing agency to have the authority and operational capacity to make 
intraday margin calls when the markets served display elevated 
volatility should ensure that the covered clearing agency develops 
policies and procedures to determine when it considers volatility to be 
elevated above typical levels, and potentially necessitating the 
collection of additional margin, in a manner specific to the products 
cleared and markets served. The Commission also believes that the 
proposed requirement for a covered clearing agency to have the 
authority and operational capacity to make intraday margin calls when 
specific risk thresholds are breached should ensure that the covered 
clearing agency considers ex ante the degree of exposure that 
necessitates additional margin to take into account new cleared 
positions and current market prices, in a manner specific to the 
products cleared and market served. Further, the Commission also 
believes that the requirement to specify thresholds that would trigger 
intraday margin calls, if breached, could improve participants' ability 
to understand when they may be subject to additional margin calls and, 
therefore, to be able to prepare accordingly to provide additional 
financial resources in anticipation of additional margin calls. In 
addition, specifying that a covered clearing agency should have the 
authority and operational capacity to make intraday margin calls in 
times of elevated volatility also makes clear to participants when they 
may be subject to additional margin calls and recognizes that intraday 
exposures may occur more frequently in volatile markets.
b. Amendments to Rule 17Ad-22(e)(6)(iv)
    Currently, Rule 17Ad-22(e)(6)(iv) requires the establishment of a 
risk-based margin system that uses reliable sources of timely price 
data and uses procedures and sound valuation models for addressing 
circumstances in which pricing data are not readily available or 
reliable. When it proposed Rule 17Ad-22(e)(6)(iv), the Commission 
stated that a covered clearing agency should use reliable sources of 
timely price data because its margin system needs such data to operate 
with a high degree of accuracy and reliability, given the risks that 
the covered clearing agency's size, operation, and importance pose to 
the U.S. securities markets.\57\ The Commission also recognized that, 
in some situations, price data may not be available or reliable, such 
as in instances where third party data providers experience lapses in 
service or where limited liquidity otherwise makes price discovery 
difficult, and that establishing appropriate procedures and sound 
valuation models is a useful step a covered clearing agency can take to 
help protect itself in such situations.\58\
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    \57\ CCA Standards Proposing Release, supra note 52, 79 FR at 
29529.
    \58\ Id.
---------------------------------------------------------------------------

    Based on its experience with the Covered Clearing Agency Standards 
since their adoption in 2016, including its review and understanding of 
the covered clearing agencies' margin methodologies and, specifically, 
whether the methodologies rely on substantive inputs other than price 
data, the Commission believes that it is appropriate to expand the 
scope of this rule beyond price data to encompass other substantive 
inputs to a covered clearing agency's risk-based margin system.\59\ As 
discussed in more detail in section IV.B.4.b infra, covered clearing 
agencies generally use risk-based margin systems to calculate margin. 
Covered clearing agencies' use of other substantive inputs, beyond 
price data (which is already addressed in current Rule 17Ad-
22(e)(6)(iv)), from other entities as part of the risk-based margin 
system varies, and some do not rely on such substantive inputs. These 
types of inputs could include, for example, portfolio size, volatility, 
and sensitivity to various risk factors that are likely to influence 
security prices; \60\ other examples of substantive inputs include 
duration and convexity, as well as the results of margin models run by 
third parties. Similarly, the procedures used when such substantive 
inputs are not available vary. The Commission believes that certain 
covered clearing agencies would need to develop additional procedures, 
or refine existing procedures, that would apply when the specific 
substantive inputs used by a covered clearing agency are not readily 
available or reliable, in order to ensure that the covered clearing 
agency can continue to meet its requirements under Rule 17Ad-22(e)(6).
---------------------------------------------------------------------------

    \59\ Despite some organizational changes to the rule to 
accommodate the proposal, Rule 17Ad-22(e)(6)(iv), as it relates to 
pricing data, is not being amended in this proposal, except with 
respect to the proposed new requirement to ensure that any 
procedures used when pricing data is not readily available or 
reliable must ensure that the covered clearing agency continues to 
meet its requirements under Rule 17Ad-22(e)(6). However, the 
Commission is proposing to standardize references to such data in 
the rule, which currently refers to both price and pricing data, to 
refer only to price data. The Commission previously used the two 
words interchangeably in Rule 17Ad-22(e)(6)(ii).
    \60\ See CCA Standards Adopting Release, supra note 7, 81 FR at 
70855. Other portions of the Covered Clearing Agency Standards 
reference a model's inputs, along with parameters and assumptions, 
as part of a covered clearing agency's sensitivity analysis, which 
is required by current Rule 17Ad-22(e)(6)(vi).
---------------------------------------------------------------------------

    In some instances, a covered clearing agency relies on third 
parties for these inputs. For similar reasons as the Commission 
discussed when proposing Rule 17Ad-22(e)(6)(iv), there is a need to use 
reliable sources for such inputs. The unavailability or unreliability 
of an input to a margin system, for example, if a third party provider 
does not perform, could potentially affect the covered clearing 
agency's ability to calculate margin. Currently, the Commission's rules 
do not address how a covered clearing agency plans for circumstances in 
which a substantive input to its risk-based margin system is not 
readily available or reliable. This proposed amendment to Rule 17ad-
22(e)(6)(iv) would require that the covered clearing agency addresses 
such circumstances and develops appropriate procedures, for those 
covered clearing agencies that use such substantive inputs. 
Establishing procedures for when such substantive inputs from third 
parties are not available or reliable should, in turn, help ensure that 
the covered clearing agency can continue to calculate and collect 
margin commensurate with, the risks and particular attributes of each 
relevant product, portfolio, and market, as required under Rule 17Ad-
22(e)(6)(i), in such circumstances.
    The Commission is therefore proposing to amend Rule 17Ad-
22(e)(6)(iv) to expand its scope beyond

[[Page 34715]]

price data to encompass other substantive inputs to its risk-based 
margin system and to impose requirements on a covered clearing agency 
to have procedures when such substantive inputs are not readily 
available or reliable. For purposes of this rule, the Commission 
believes that ``substantive'' refers to any inputs used by the covered 
clearing agency that are necessary for the risk-based margin system to 
calculate margin, and it is meant to distinguish from other potential 
inputs that may not be consequential to the calculation of margin, 
which would not be encompassed by this proposed rule. The Commission is 
not requiring that covered clearing agencies use such substantive 
inputs, but establishing requirements in the event that they do use 
such substantive inputs.
    Further, the Commission is proposing to impose a new requirement 
that would further elaborate on the procedures necessary when price 
data is not available and that would also apply to substantive inputs 
to a covered clearing agency's risk-based margin system. Currently, the 
rule requires that the covered clearing agency use procedures and sound 
valuation models only when price data is not readily available or 
reliable. The proposed amendment would, with respect to both price data 
and other substantive inputs, require that such procedures should 
address circumstances in which price data or substantive inputs are not 
readily available or reliable, in order to ensure that the covered 
clearing agency be able to meet its requirements under Rule 17Ad-
22(e)(6) and cover its credit exposures to its participants. The 
Commission believes that specifying the level to which these backup 
procedures should perform, that is, that the procedures should ensure 
that the covered clearing agency can continue to meet its requirements 
under Rule 17Ad-22(e)(6), should help ensure that covered clearing 
agencies adopt sufficiently robust procedures.
    The Commission also proposes to further specify that the procedures 
for when the price data or substantive inputs are not readily available 
or reliable shall include the use of price data or substantive inputs 
from an alternate source or the use of an alternate risk-based margin 
system that does not similarly rely on the same unavailable or 
unreliable substantive input. With respect to the use of an alternate 
source, such an alternate source generally should meet the same level 
of reliability of the primary source, whether that alternate is sourced 
from an external provider or created internally. With respect to 
policies and procedures for the use of an alternate risk-based margin 
system if the covered clearing agency does not use an alternate source, 
this potential alternate risk-based margin system needs to be an 
alternate margin model that does not rely on the same data source that 
is unavailable or unreliable, to ensure that the covered clearing 
agency can continue to meet its requirements under Rule 17Ad-22(e)(6). 
Any alternative risk-based margin system would be subject to the 
requirements of 17 CFR 240.17Ad-22(e)(6)(vi) and (vii), with respect to 
monitoring, review, testing, and verification, and model validation.
    With respect to both, a covered clearing agency generally should 
consider its reliance on any third party sources for purposes of its 
risk-based margin system and consider whether an alternate system or 
source of data or other inputs that is internal to the covered clearing 
agency, and does not rely upon any third party provider, would be 
appropriate, given the importance of calculating margin for a covered 
clearing agency to cover its exposure to its participants.\61\
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    \61\ 17 CFR 240.17Ad-22(e)(6).
---------------------------------------------------------------------------

3. Request for Comment
    The Commission is requesting comment on all aspects of the proposed 
amendments to Rule 17Ad-22(e)(6). The Commission also solicits comment 
on the particular questions set forth below, and encourages commenters 
to submit any relevant data or analysis in connection with their 
answers.
    1. Should Rule 17Ad-22(e)(6) be amended to require that covered 
clearing agencies have policies and procedures reasonably designed to 
monitor intraday exposures and to require that monitoring to occur on 
an ongoing basis? Do commenters have views on what constitutes an 
ongoing basis, and does it differ for products cleared or markets 
served by a covered clearing agency? For example, would an ongoing 
basis in the equity market be different than in the security-based 
swaps market?
    2. Should Rule 17Ad-22(e)(6) be amended to require that covered 
clearing agencies have policies and procedures reasonably designed to 
make intraday margin calls as frequently as circumstances warrant, 
including when risk thresholds specified by the covered clearing agency 
are breached or when the products cleared or markets served display 
elevated volatility?
    3. Should the Commission prescribe particular risk thresholds for 
intraday margin calls? If so, what should those thresholds be and what 
is the basis for those thresholds, and should the threshold applicable 
to particular asset classes (e.g., equities, fixed income, options, 
etc.) be determined jointly or separately?
    4. Should the Commission identify additional circumstances that may 
warrant intraday margin calls beyond when the products cleared or 
markets served display elevated volatility? If so, what should those 
circumstances be?
    5. Do commenters believe that certain participants of covered 
clearing agencies, including, for example, participants with less 
capital or using smaller settlement banks, could face operational 
challenges or pricing disadvantages, if proposed Rule 17Ad-22(e)(6)(ii) 
were to result in more frequent margin calls?
    6. Should Rule 17Ad-22(e)(6)(iv) be amended to expand its scope to 
encompass other substantive inputs to a covered clearing agency's risk-
based margin system? Should the Commission identify any particular 
types of substantive inputs or further specify what types of inputs 
should be included within the scope of the rule?
    7. Should Rule 17Ad-22(e)(6)(iv) be amended to state that the 
procedures used when price data or other substantive inputs are not 
readily available or reliable should ensure that the covered clearing 
agency can continue to meet its obligations under Rule 17Ad-22(e)(6)?
    8. Should Rule 17Ad-22(e)(6)(iv) be amended to further describe 
that the procedures used by a covered clearing agency when price data 
or other substantive inputs are not readily available or reliable shall 
include the use of price data or substantive inputs from an alternate 
source or the use of an alternate risk-based margin system?
    9. Do commenters have views on whether the Commission should 
require that any alternate source should be independent of third party 
providers, that is, within the sole control of the covered clearing 
agency?

B. Contents of Recovery and Wind-Down Plans

1. Proposed Rule 17ad-26
    Proposed Rule 17ad-26(a) would require that a covered clearing 
agency's recovery and wind-down plan, the existence of which is 
required in current Rule 17Ad-22(e)(3)(ii), shall: (1) identify and 
describe the covered clearing agency's critical payment, clearing, and 
settlement services and address how the covered clearing agency would 
continue to provide such critical services in the event of recovery

[[Page 34716]]

and during an orderly wind-down, including the identification of the 
staffing necessary to support such critical services and analysis of 
how such staffing would continue in the event of a recovery and during 
an orderly wind-down; (2) identify and describe any service providers 
upon which the covered clearing agency relies to provide its critical 
payment, clearing, and settlement services identified in paragraph (1), 
specify to what critical services such service providers are relevant, 
and address how the covered clearing agency would ensure that service 
providers would continue to provide such critical services in the event 
of a recovery and during an orderly wind-down, including consideration 
of contractual obligations with such service providers and whether 
those obligations are subject to alteration or termination as a result 
of initiation of the recovery and orderly wind-down plan; (3) identify 
and describe scenarios that may potentially prevent the covered 
clearing agency from being able to provide its critical payment, 
clearing, and settlement services as a going concern, including 
scenarios arising from uncovered credit losses, uncovered liquidity 
shortfalls, or general business losses; (4) identify and describe 
criteria that could trigger the implementation of the recovery and 
orderly wind-down plan and the process that the covered clearing agency 
uses to monitor and determine whether the criteria have been met, 
including the governance arrangements applicable to such process; (5) 
identify and describe the rules, policies, procedures, and any other 
tools the covered clearing agency would use in a recovery or orderly 
wind-down; (6) address how the rules, policies, procedures, and any 
other tools or resources identified in paragraph (5) would ensure 
timely implementation of the recovery and orderly wind-down plans; (7) 
include procedures for informing the Commission as soon as practicable 
when the covered clearing agency is considering initiating a recovery 
or orderly wind-down; (8) include procedures for testing the covered 
clearing agency's ability to implement the recovery and wind-down plans 
at least every twelve months, including by requiring the covered 
clearing agency's participants and, when practicable, other 
stakeholders to participate in the testing of its plans, providing for 
reporting the results of the testing to the covered clearing agency's 
board of directors and senior management, and specifying the procedures 
for, as appropriate, amending the plans to address the results of the 
testing; and (9) include procedures for review of the plans by the 
board of directors at least every twelve months or following material 
changes to the system or environment in which the covered clearing 
agency operates that would significantly affect the viability or 
execution of the plans, with such review informed, as appropriate by 
the covered clearing agency's testing of the plans as required in the 
prior section of the proposed rule. Proposed Rule 17ad-26(b) would 
provide definitions of ``affiliate,'' ``recovery,'' ``orderly wind-
down,'' and ``service provider'' for purposes of this rule.
2. Discussion
    As discussed in section II.A supra, when the Commission adopted 
Rule 17Ad-22(e)(3)(ii), it did not establish requirements for specific 
elements to include in such RWPs. Since that time, however, the 
Commission has reviewed and approved RWPs for each of the seven covered 
clearing agencies, as well as periodic updates to those plans.\62\ In 
so doing, the Commission has continued to develop its understanding of 
what are the essential elements of RWPs.\63\
---------------------------------------------------------------------------

    \62\ See infra note 41.
    \63\ CCA Standards Adopting Release, supra note 7, 81 FR at 
70809.
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    In addition, the Commission has continued to participate in the 
development of guidance by international standard setting bodies in the 
areas of recovery and resolution of financial market infrastructures, 
which would include covered clearing agencies. The Committee on 
Payments and Market Infrastructure and the International Organization 
of Securities Commissions (together, ``CPMI-IOSCO'') published a report 
entitled Recovery of financial market infrastructures, which sets forth 
a policy statement on both the recovery planning process and the 
content of recovery plans.\64\ With respect to resolution planning, the 
Financial Stability Board (``FSB'') published a policy statement 
regarding resolution and resolution planning for central 
counterparties.\65\ To accommodate the development of effective RWPs 
while this guidance was being developed, and in recognition of the need 
to further develop an understanding of effective recovery and 
resolution strategies for different types of market infrastructure, the 
Commission extended the compliance date for Rule 17Ad-22(e)(3)(ii) to 
allow the affected clearing agencies to consider this emerging guidance 
before submitting their RWPs for review and approval.\66\ Additional 
guidance has since followed, and work on the recovery and resolution of 
clearing agencies continues.\67\
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    \64\ See CPMI-IOSCO, Recovery of financial market 
infrastructures (July 2017), https://www.bis.org/cpmi/publ/d162.pdf 
(``CPMI-IOSCO Recovery Guidance''). The guidance covers a number of 
topics: first, recovery planning, including the importance of 
recovery planning, the relationship between risk management, 
recovery, and resolution, the process of recovery planning, the 
content of recovery plans, and the role of the authorities in 
recovery; second, general considerations with respect to recovery 
tools, including risk categories and failure scenarios that may 
require the use of recovery tools, characteristics of recovery 
tools, and considerations for allocating losses and liquidity 
shortfalls; and third, specific recovery tools, including tools to 
allocate uncovered losses caused by participant default, tools to 
address uncovered liquidity shortfalls, tools to replenish financial 
resources, tools to re-establish a matched book following 
participant default, and tools to address losses not caused by 
participant default.
    \65\ See Guidance on CCP Resolution and Resolution Planning 
(July 5, 2017), https://www.fsb.org/wp-content/uploads/P050717-1.pdf; Guidance on Central Counterparty Resolution and Resolution 
Planning: Consultative Document (Feb. 1, 2017), https://www.fsb.org/wp-content/uploads/Guidance-on-Central-Counterparty-Resolution-and-Resolution-Planning.pdf.
    \66\ See Securities Exchange Act Release No. 80978 (Apr. 5, 
2017), 82 FR 17300 (Apr. 10, 2017) (granting a temporary exemption 
to covered clearing agencies from compliance with Rule 17Ad-
22(e)(3)(ii) among other requirements); see also Letter from Michael 
C. Bodson, President and Chief Executive Officer, DTCC (Feb. 15, 
2017), https://www.sec.gov/comments/s7-03-14/s70314-1594398-132354.pdf.
    \67\ See, e.g., FSB, CPMI-IOSCO, Central Counterparty Financial 
Resources for Recovery and Resolution (Mar. 10, 2022), https://www.fsb.org/wp-content/uploads/P090322.pdf.
---------------------------------------------------------------------------

    Other U.S. authorities have established and had the opportunity to 
administer requirements for certain specific elements to be included in 
the RWPs of the financial market utilities they supervise. For example, 
Regulation HH, issued by the Board of Governors, was amended in 2014 to 
identify seven elements that must be addressed or be included in 
recovery and wind-down plans.\68\ These elements are substantially 
similar to those proposed in Rule 17ad-26. Similarly, the CFTC's 
regulatory framework includes specific requirements for RWPs as applied 
to clearing entities within its authority.\69\
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    \68\ 12 CFR 234.3(a)(3)(iii); see also Final Rule, Financial 
Market Utilities, Docket No. R-1477 (Oct. 28, 2014), 79 FR 65543 
(Nov. 5, 2014).
    \69\ See Derivatives Clearing Organizations and International 
Standards, 78 FR 72476 (Dec. 2, 2013) (adopting 17 CFR 39.39(b) and 
(c)). For example, 17 CFR 39.39(c)(1) states that the plans shall 
identify scenarios that may potentially prevent a derivatives 
clearing organization from being able to meet its obligations, 
provide its critical operations and services as a going concern, and 
assess the effectiveness of a full range of options for recovery or 
orderly wind-down. CFTC staff also released a memorandum with 
additional guidance for affected entities on the subjects and 
analysis that should be included in a viable RWP, as well as 
questions that affected entities should consider in evaluation tools 
for inclusion and designing proposed rule changes to support the 
inclusion of particular tools in such plans. See Memorandum from 
Jeffrey M. Bandman, Acting Director, Division of Clearing and Risk, 
CFTC Letter No. 16-61 (July 21, 2016), https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/16-61.pdf.

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[[Page 34717]]

    Based on this supervisory experience, including its review and 
approval of the RWPs for the covered clearing agencies, the Commission 
believes it is now appropriate to specify elements for inclusion in a 
covered clearing agency's RWP by proposing Rule 17ad-26. The Commission 
has observed that the covered clearing agencies have, to a great 
degree, converged in terms of the types of elements that are included 
in each plan. As discussed in more detail in section IV.B.3 infra and 
in the discussion of each particular element below, the current RWPs 
contain or address many of the elements being proposed for inclusion, 
but the current plans do not contain all the elements that would be 
required under the proposed rule. Therefore, the Commission believes 
that codifying these nine elements, and the related definitions, will 
help ensure that RWPs continue to be effective at planning for and 
managing a range of recovery and orderly wind-down scenarios that could 
risk transmitting systemic risk through the U.S. securities markets and 
the broader financial system, by accomplishing three objectives. First, 
the rule would bolster existing plans by requiring certain new elements 
be included. Second, for the elements that are already contained in 
existing RWPs, the rule would codify these elements and ensure that the 
plans are required to continue to include these elements in their RWPs, 
and any future changes to the RWPs would be subject to Commission 
review for consistency with these requirements, as discussed in section 
II.B supra. Finally, the rule would ensure that the RWPs of any new 
covered clearing agencies would contain all of these elements.
    When adopting the Covered Clearing Agency Standards, the Commission 
stated that a covered clearing agency generally should have policies 
and procedures to provide the relevant resolution authorities with 
information needed for the purposes of resolution planning, including 
its recovery and wind-down plan.\70\ The Commission also explained that 
it works with the FDIC and other resolution authorities, as 
appropriate, to help ensure the development of effective resolution 
strategies for covered clearing agencies, and that providing the 
Commission and the FDIC information for resolution planning would 
promote the ongoing development of these resolution strategies.\71\ The 
Commission continues to believe that this is the case, and that the 
ongoing development of these strategies will be further promoted by 
specifically requiring that RWPs contain certain elements and ensuring 
that RWPs address these specified elements.
---------------------------------------------------------------------------

    \70\ See CCA Standards Adopting Release, supra note 7, 81 FR at 
70810.
    \71\ Id.
---------------------------------------------------------------------------

    The Commission believes that codifying these items as part of 
recovery and wind-down plans would help assist relevant resolution 
authorities develop and improve resolution plans for covered clearing 
agencies in resolution. For example, by ensuring that these items are 
included in RWPs, a resolution authority will have a more comprehensive 
understanding of what the covered clearing agencies' critical payment, 
clearing, and settlement services are, as well as what providers 
support such services, thereby allowing a resolution authority to 
connect, or ``map,'' the various providers to the critical services to 
ensure continuity of clearance and settlement by a covered clearing 
agency in resolution.
a. Proposed Definitions
    The Commission believes that definitions of the terms ``recovery'' 
and ``orderly wind-down'' would provide covered clearing agencies, as 
well as market participants, a precise description of the meaning of 
these terms, which are not currently defined in the Commission's rules 
and are often used together, and somewhat interchangeably, by market 
participants. Further, these definitions would help covered clearing 
agencies understand the precise goal for which their RWPs should be 
reasonably designed to meet. The Commission believes that the RWPs 
generally should set forth the covered clearing agency's viable 
strategy for ensuring that they address how a covered clearing agency 
would achieve a recovery or orderly wind-down, using the tools and 
resources available under its rules and procedures.
    Current Rule 17Ad-22(e)(3)(ii) and proposed Rule 17ad-26 both refer 
to plans for recovery and orderly wind-down, and, therefore, a covered 
clearing agency should prepare plans for both recovery and orderly 
wind-down. Providing separate definitions specifies that these are two 
distinct events, both of which a covered clearing agency should include 
in its recovery and wind-down planning. Simply including a plan for 
what a covered clearing agency would do in recovery is not sufficient, 
and a plan for one event does not serve as a substitute for the other. 
For example, there may be circumstances in which a covered clearing 
agency attempts to recover but the recovery effort eventually fails. As 
part of its planning, a covered clearing agency generally should 
identify and maintain the relevant supporting information necessary to 
support its RWP.
    Moreover, because these definitions refer to actions of a covered 
clearing agency only, as opposed to any other entity, neither a 
recovery plan nor an orderly wind-down plan should be based on 
assumptions of government intervention or support.
    Proposed Rule 17ad-26(b) would define ``recovery'' to mean the 
actions of a covered clearing agency, consistent with its rules, 
procedures, and other ex ante contractual arrangements, to address any 
uncovered loss, liquidity shortfall, or capital inadequacy, whether 
arising from participant default or other causes (such as business, 
operational, or other structural weaknesses), including actions to 
replenish any depleted prefunded financial resources and liquidity 
arrangements, as necessary to maintain the covered clearing agency's 
viability as a going concern and to continue its provision of critical 
services. The Commission believes that this proposed definition is 
generally consistent with its previous understanding of recovery, as 
set forth in the CCA Standards Adopting Release, in that this proposed 
definition also focuses on the actions of the covered clearing agency 
that are beyond its typical business operations and refers to 
situations in which the covered clearing agency's ability to serve as a 
going concern is in question, that is, it goes beyond the covered 
clearing agency's ``business as usual'' operations.\72\
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    \72\ See CCA Standards Adopting Release, supra note 7, 81 FR at 
70808, n. 251 (when addressing comments regarding recovery and wind-
down plans, stating the Commission's general understanding that: (i) 
when a financial company becomes non-viable as a going concern or 
insolvent, recovery refers to actions taken that allow the financial 
company to sustain its critical operations and services; (ii) 
resolution (or wind-down), by contrast, refers to the transferring 
of the financial company's critical operations and services to an 
alternate entity.).
---------------------------------------------------------------------------

    Proposed Rule 17ad-26(b) would define ``orderly wind-down'' to mean 
the actions of a covered clearing agency to effect the permanent 
cessation, sale, or transfer of one or more of its critical services in 
a manner that would not increase the risk of significant liquidity, 
credit, or operational problems spreading among financial institutions 
or markets and thereby threaten the stability of the U.S. financial 
system. The Commission believes that this

[[Page 34718]]

definition would clarify that an orderly wind-down is distinct from a 
resolution in that orderly wind-down continues to rest within the 
control of the covered clearing agency while resolution would involve a 
governmental entity as the resolution authority, such as the FDIC as a 
receiver. The Commission further believes that this proposed definition 
would identify the specific goals of an orderly wind-down, in that the 
actions of a covered clearing agency should not increase the risk of 
significant liquidity, credit, or operational problems spreading among 
financial institutions or markets and thereby threaten the stability of 
the U.S. financial system, and that it would serve as a final and 
binding solution to whatever circumstance necessitated the wind-down, 
that is, not a temporary stopgap measure. This distinguishes an orderly 
wind-down from winding down the covered clearing agency as quickly as 
possible.
    To be orderly, a wind-down generally should include a covered 
clearing agency providing notice to allow participants to transition to 
alternative arrangements in an orderly manner, as well as maintaining 
the operation of critical services. Moreover, for a wind-down involving 
the sale or transfer of all or a portion of the covered clearing agency 
to be orderly, the covered clearing agency generally should consider 
the separability of the parts of the covered clearing agency and 
whether there are certain portions of the covered clearing agency's 
business that could be sold or transferred as separate businesses.
b. Critical Services
    Proposed Rule 17ad-26(a)(1) would require each covered clearing 
agency's RWP to identify and describe the covered clearing agency's 
critical payment, clearing, and settlement services and address how the 
covered clearing agency would continue to provide such critical 
services in the event of recovery and during an orderly wind-down, 
including the identification of the staffing necessary to support such 
critical services and analysis of how such staffing would continue in 
the event of a recovery and during an orderly wind-down.
    The Commission believes that, regardless of the products cleared or 
markets served, the necessary first step in effective recovery and 
wind-down planning must be identifying and describing the critical 
services that are provided to market participants, as required under 
this proposed rule. As stated above, market participants rely on the 
services of covered clearing agencies to facilitate payment, clearing, 
and settlement for the U.S. securities markets. The Commission believes 
that identifying and describing the critical services in an RWP should 
ensure that the covered clearing agency focuses its recovery and wind-
down plans on its ability to continue to provide those services on an 
ongoing basis, even under stress. Covered clearing agencies already 
identify and describe their critical services in the existing RWPs, as 
well as the criteria used to determine what services are critical. 
However, covered clearing agencies generally do not provide specific 
information as to the staffing necessary to support a recovery or 
orderly wind-down.
    When identifying what is a critical payment, clearing, or 
settlement service, the Commission believes that the covered clearing 
agency generally should consider the impact that any interruption to 
particular services would have on the covered clearing agency's 
participants and the smooth functioning of the markets that it serves, 
as well as whether the service is available from any substitute 
provider. In this proposed rule, the Commission believes that 
``critical'' would refer to the importance of the service to the 
covered clearing agency's participants, and to the proper functioning 
of the markets that the covered clearing agency services. The inability 
of a covered clearing agency to provide these services would have 
implications with respect to financial stability. The failure to 
provide these critical services would likely have a material negative 
impact on participants or third parties, give rise to contagion, and 
undermine general confidence in the markets served.
    The Commission believes that, after identifying the critical 
services, the next step of effective recovery and wind-down planning is 
to address how the covered clearing agency would continue to provide 
such critical services in the event of recovery and during an orderly 
wind-down, as required under proposed Rule 17ad-26(a)(1). This 
requirement should continue to ensure that a covered clearing agency 
has developed policies and procedures to continue providing its 
critical services in the event of a recovery or orderly wind-down. 
Further, by addressing how to continue providing such services, the 
recovery plan should also allow the covered clearing agency to evaluate 
how to ensure the orderly transfer of those services to a new or an 
existing entity as part of a wind-down, in the event that recovery is 
unsuccessful.
    In addition, the Commission believes that the consideration of how 
the covered clearing agency would continue to provide its identified 
critical services must include the identification of the staffing 
necessary to support such critical services and analysis of how such 
staffing would continue in the event of a recovery and during an 
orderly wind-down, in order to ensure that the necessary personnel are 
available to continue operating the covered clearing agency. The 
Commission believes that this aspect of the proposal generally should 
include identification of key business units and/or employees who may 
be necessary to implement and execute the critical services identified 
in the RWP. As part of this process, the covered clearing agency 
generally should consider how it would retain the services of any 
personnel who are essential to the execution of the plans, including 
whether they are or should be subject to employment agreements and an 
analysis of the terms of employment agreements (e.g., whether such 
agreements would allow the employee to continue working in the event 
that ownership of the covered clearing agency were to transfer in the 
event of a recovery or orderly wind-down). In addition, the covered 
clearing agency generally may consider, as part of this process, any 
``key person risk'' that exists within its organization and how it 
would address such risk in its RWP.
    Finally, the Commission believes that this proposed requirement 
regarding the identification and description of critical services 
should also assist a resolution authority, as discussed in section II.C 
supra, with resolution planning. A key obligation of a resolution 
authority is to ensure the continued provision of an entity's critical 
services, to avoid harm to the broader market.\73\ Understanding what 
those critical services are, and the covered clearing agency's strategy 
for ensuring that such critical services

[[Page 34719]]

continue to be provided, therefore is essential for resolution 
planning.
---------------------------------------------------------------------------

    \73\ See, e.g., Resolution of Systemically Important Financial 
Institutions: The Single Point of Entry Strategy, 78 FR 76614, 76615 
(Dec. 18, 2013) (``In resolving a failed or failing SIFI . . . the 
FDIC seeks to preserve financial stability by maintaining the 
critical services, operations and funding mechanisms conducted 
throughout the company's operating subsidiaries.''); 12 U.S.C. 
5384(a) (stating that the purpose of the FDIC's orderly liquidation 
authority is to provide the necessary authority to liquidate failing 
financial companies that pose a significant risk to the financial 
stability of the United States in a manner that mitigates such risk 
and minimizes moral hazard). See also Financial Stability Board, Key 
Attributes of Effective Resolution Regimes, Annex 1.1 (2014) 
(identifying as the objective of CCP resolution the pursuit of 
financial stability and ensuring the continuity of critical CCP 
functions in all jurisdictions where those functions are critical); 
Financial Stability Board, Guidance on Central Counterparty 
Resolution and Resolution Planning, section 1.2 (July 2017).
---------------------------------------------------------------------------

i. Interaction With Other Commission Rules
    The Commission acknowledges that there likely will be some 
connection between what a covered clearing agency identifies as its 
critical services for purposes of inclusion in its recovery and wind-
down plan and what it identifies as Critical SCI systems for purposes 
of Regulation Systems Compliance Integrity (``Regulation SCI''). 
Regulation SCI is designed to strengthen the infrastructure of the U.S. 
securities markets, reduce the occurrence of systems issues in those 
markets, improve their resiliency when technological issues arise, and 
implement an updated and formalized regulatory framework, thereby 
helping to ensure more effective Commission oversight of such 
systems.\74\ However, inclusion in a covered clearing agency's recovery 
plan as a critical service would have no impact on a covered clearing 
agency's obligations under Regulation SCI. This proposed rule is 
designed to improve and strengthen a covered clearing agency's recovery 
and wind-down plan, whereas Regulation SCI is focused on, among other 
things, strengthening the infrastructure of the U.S. securities markets 
and improving its resilience when technological issues arise.
---------------------------------------------------------------------------

    \74\ Securities Exchange Act Release No. 73639 (Nov. 19, 2014), 
79 FR 72252, 72253, 72256 (Dec. 5, 2014) (``Regulation SCI Adopting 
Release'').
---------------------------------------------------------------------------

    The key market participants that are currently subject to 
Regulation SCI are called ``SCI entities'' and encompass certain SROs, 
including registered clearing agencies.\75\ Regulation SCI is designed 
to apply to the automated systems important to the functioning of the 
U.S. securities markets and requires SCI entities to, among other 
things, establish, maintain, and enforce written policies and 
procedures reasonably designed to ensure that their key automated 
systems have levels of capacity, integrity, resiliency, availability, 
and security adequate to maintain their operational capability and 
promote the maintenance of fair and orderly markets, and that such 
systems operate in accordance with the Exchange Act and the rules and 
regulations thereunder and the entities' rules and governing documents, 
as applicable.\76\
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    \75\ As stated above, see note 30, a covered clearing agency is 
a registered clearing agency and therefore is subject to Regulation 
SCI. See 17 CFR 242.1000 (defining SCI entity and SCI self-
regulatory organization).
    \76\ See 17 CFR 242.1001.
---------------------------------------------------------------------------

    Regulation SCI applies to the systems of, or operated by or on 
behalf of, SCI entities, that directly support any one of six core 
securities market functions--trading, clearance and settlement, order 
routing, market data, market regulation, and market surveillance (``SCI 
systems'').\77\ Regulation SCI also identifies a subset of SCI systems 
defined as ``Critical SCI systems,'' which are those systems whose 
functions are critical to the operation of the markets, including those 
that represent single points of failure, and are therefore subject to 
certain heightened requirements.\78\ Specifically, Critical SCI systems 
means, any SCI systems of, or operated by or on behalf of, an SCI 
entity that directly support functionality relating to, among other 
things, clearance and settlement systems of clearing agencies.\79\
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    \77\ See 17 CFR.242.1000 (defining SCI systems).
    \78\ See 17 CFR 242.1000 (defining Critical SCI systems) and 
1001(a)(2)(iv) (imposing heightened requirements); see also 
Regulation SCI Adopting Release, supra note 74, at 72277.
    \79\ 17 CFR 242.1000(a) (defining Critical SCI systems).
---------------------------------------------------------------------------

    When discussing the inclusion of clearance and settlement systems 
of clearing agencies as a Critical SCI system, the Commission stated 
that the clearance and settlement of securities is fundamental to 
securities market activity.\80\ The Commission identified a variety of 
services that clearing agencies perform to help ensure that trades 
settle on time and at the agreed upon terms, including comparing 
transaction information (or reporting to members the results of 
exchange comparison operations), calculating settlement obligations 
(including net settlement), collecting margin (such as initial and 
variation margin), and serving as a depository to hold securities as 
certificates or in dematerialized form to facilitate automated 
settlement.\81\
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    \80\ Regulation SCI Adopting Release, supra note 74, at 72278.
    \81\ Id.
---------------------------------------------------------------------------

    As stated above in section III.B.2.b, a covered clearing agency's 
critical services, for purposes of inclusion in an RWP, would encompass 
its critical payment, clearing, and settlement services. Thus, those 
services could be supported by the covered clearing agency's Critical 
SCI systems, as defined in Regulation SCI.
c. Identification of Service Providers
    Proposed Rule 17ad-26(a)(2) would require each covered clearing 
agency's RWP to identify and describe any service providers upon which 
the covered clearing agency relies to provide its critical payment, 
clearing, and settlement services, identifying to what critical 
services such third parties are relevant, and address how the covered 
clearing agency would ensure that such service providers would continue 
to provide such critical services in the event of recovery and during 
an orderly wind-down. In addition, the Commission is proposing to 
define in proposed Rule 17ad-26(b) the term ``service provider'' as any 
person, including an affiliate or a third party, that is contractually 
obligated to the covered clearing agency in any way related to the 
provision of critical services, as identified by the covered clearing 
agency in proposed Rule 17ad-26(a)(1), discussed in section III.B.2.b 
infra. This definition includes both ``external'' third-party service 
providers, such as technology or data providers, and those ``internal'' 
service providers that may be affiliated with the covered clearing 
agency, such as when a covered clearing agency is part of a holding 
company and receives certain services pursuant to agreements with that 
holding company. The Commission also proposes to define ``affiliate'' 
in proposed Rule 17ad-26(b) to mean a person that directly or 
indirectly controls, is controlled by, or is under common control with 
the covered clearing agency. It would include a holding company that 
owns the covered clearing agency.
    Based on its supervisory experience, the Commission has observed 
that covered clearing agencies have used services provided by service 
providers to help ensure the prompt and accurate clearance and 
settlement of securities transactions. Service providers may be 
affiliates or third party entities and can perform a wide variety of 
functions, such as providers of technology, data, or other services. 
For service providers that are necessary for the covered clearing 
agency to provide its core payment, clearing, and settlement services, 
the failure of the service provider to perform its obligations could 
pose significant operational risks and have substantial effects on the 
ability of the covered clearing agency to perform its risk management 
function and facilitate prompt and accurate clearance and settlement. 
In a recovery or orderly wind-down, the continued performance of a 
service provider of its function would remain essential.
    The Commission is therefore proposing to require that an RWP 
specifically identify and describe such service providers, to ensure 
that the RWP considers what providers are necessary for the covered 
clearing agency to continue providing its critical services. This 
requirement would

[[Page 34720]]

ensure that the covered clearing agency has identified which service 
providers relate to which critical services. This identification must 
include both affiliated service providers and non-affiliated service 
providers. The covered clearing agency also generally should consider 
whether there are any interdependencies or interconnections amongst its 
service providers, that is, whether a service provider supporting 
critical services also provides other, unrelated services to the 
covered clearing agency. Regardless of the nature of the service 
provider, it is essential that an RWP identify such providers to ensure 
that the covered clearing agency understands the relationships that it 
should maintain to continue providing its critical services.\82\
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    \82\ The Commission proposed Rule 17Ad-25(i), which would 
establish policy and procedure requirements for clearing agency 
boards of directors to oversee relationships with service providers 
for critical services to, among other things, confirm and document 
that risks related to relationships with service providers for 
critical services are managed in a manner consistent with its risk 
management framework, review senior management's monitoring of 
relationships with service providers for critical services, and 
review and approve plans for entering into third-party relationships 
where the engagement entails being a service provider for critical 
services to the registered clearing agency. See Clearing Agency 
Governance and Conflicts of Interest Proposing Release, Exchange Act 
Release No. 34-95431 (Aug. 8, 2022), 87 FR 51812, 51836 (Aug. 23, 
2022). In addition, the Commission proposed a new subparagraph (ix) 
under Rule 1001(a)(2) of Regulation SCI regarding third party 
provider management, which would require that SCI entities have a 
third party provider management program that includes: initial and 
periodic review of contracts with such third party providers for 
consistency with the SCI entity's obligations under Regulation SCI; 
and a risk-based assessment of each third party provider's 
criticality to the SCI entity, including analyses of third party 
provider concentration, of key dependencies if the third party 
provider's functionality, support, or service were to become 
unavailable or materially impaired, and of any potential security, 
including cybersecurity, risks posed. Proposing Release, Regulation 
Systems Compliance and Integrity, Exchange Act Release No. 97143 
(Mar. 15, 2023), 88 FR 23146 (Apr. 14, 2023). Although this aspect 
of proposed rule 17ad-26 also relates to third party providers and/
or service providers, the Commission does not believe that these 
proposed rules have any substantive overlap. This proposed rule 
would require that a covered clearing agency identify certain 
service providers for purposes of its recovery and wind-down plan. 
The Commission encourages commenters to review the proposals with 
respect to clearing agency governance and Regulation SCI to 
determine whether they might affect their comments on this proposing 
release. Further, the Commission recognizes that the CA Governance 
Proposal includes a proposed defined term for ``service providers 
for critical services,'' which would mean any person that is 
contractually obligated to the registered clearing agency for the 
purpose of supporting clearance and settlement functionality or any 
other purposes material to the business of the registered clearing 
agency. In this release, the Commission is proposing to define 
``service provider'' as any person that is contractually obligated 
to the covered clearing agency in any way related to the provision 
of critical services, as identified by the covered clearing agency 
in proposed Rule 17ad-26(a)(1). See section III.B.a supra.
---------------------------------------------------------------------------

    In addition, the Commission is proposing to require that an RWP 
address how the covered clearing agency would ensure that service 
providers could continue to perform in the event of a recovery or 
during an orderly wind-down, including consideration of contractual 
obligations with such service providers and whether those obligations 
are subject to alteration or termination as a result of initiation of 
the recovery and orderly wind-down plan. This requirement would ensure 
that the covered clearing agency has considered the nature of its 
contractual obligations with the identified service providers (such as 
contracts, arrangements, agreements, and licenses) and whether the 
service providers could be contractually obligated to perform in a 
recovery or orderly wind-down. Generally, this should include 
consideration of whether a service provider's contractual relationship 
with the covered clearing agency would be affected by a recovery or 
orderly wind-down.\83\ Currently, the RWPs often identify some set of 
service providers, but the Commission believes that the identified sets 
may not, for all covered clearing agencies, be sufficient to align with 
this rule, if adopted, because the covered clearing agencies do not 
uniformly ensure that they have addressed all such service providers 
and instead identify some different subset thereof. Moreover, the RWPs 
generally do not address how the covered clearing agency would ensure 
that such service providers would continue to provide such critical 
services in the event of recovery and during an orderly wind-down, 
including consideration of the contractual obligations with such 
service providers.
---------------------------------------------------------------------------

    \83\ For example, the covered clearing agency should consider 
whether its contractual relationships with such providers would 
transfer to a new entity in the event of the creation of a new 
entity or the sale or transfer of the business in an orderly wind-
down.
---------------------------------------------------------------------------

    More generally, the Commission believes that the requirement to 
identify and describe any critical service providers and address how 
the covered clearing agency would ensure that such service providers 
would be legally obligated to perform in a recovery or during an 
orderly wind-down should help regulatory planning in the event of a 
resolution. To create an actionable resolution plan that would allow a 
resolution authority to ensure the continued provision of the covered 
clearing agency's critical services and, accordingly, to avoid market 
interruption or any potential financial instability, the resolution 
authority would need to be able to identify the critical services, as 
well as the scope and nature of underlying service providers. Further, 
the requirement that the plan address the continued provision of 
services in the event of a recovery or during an orderly wind-down 
should also help a resolution authority, in that it should enable a 
better understanding of the terms and conditions of the relationship 
between the covered clearing agency and the service provider.
d. Scenarios
    Having identified its critical services, proposed Rule 17ad-
26(a)(3) would then require an RWP to identify and describe scenarios 
that may potentially prevent a covered clearing agency from being able 
to provide its critical services as a going concern, including 
scenarios arising from uncovered credit losses (as described in Rule 
17Ad-22(e)(4)(viii)), uncovered liquidity shortfalls (as described in 
Rule 17Ad-22(e)(7)(viii)), and general business losses (as described in 
Rule 17Ad-22(e)(15)).\84\ These scenarios are consistent with the 
current requirement in Rule 17Ad-22(e)(3)(ii). Identification and 
description of scenarios is essential to evaluating what is necessary 
to achieve a recovery of the clearing agency and, in the event that 
recovery fails, ensuring the orderly wind-down of the clearing agency 
and transfer of critical services to a new entity. Identifying the 
scenarios enables a covered clearing agency to make the reasonable and 
appropriate preparations to achieve a recovery or, in the event that 
recovery fails, avoid a disorderly wind-down arising from those 
scenarios that could transmit risk through the U.S. securities markets 
and the broader financial system.
---------------------------------------------------------------------------

    \84\ Rule 17Ad-22(e)(3)(ii) refers to identifies several 
specific bases for recovery and orderly wind-down that should be 
covered by the plans: credit losses, liquidity shortfalls, and 
losses from general business risk. Proposed rule 17ad-26(a)(3) would 
reference those same bases and include cross-references to where 
those bases are addressed in the Covered Clearing Agency Standards.
---------------------------------------------------------------------------

    Because the covered clearing agencies should contemplate the 
inability to provide services as a going concern, these scenarios would 
necessarily go beyond those contemplated in business as usual 
circumstances, business continuity planning, crisis management, or 
failure management. That is, unlike those types of scenarios, recovery 
and wind-down planning scenarios would involve shocks that could 
potentially

[[Page 34721]]

cause the covered clearing agency to become insolvent and cease 
operations.
    When identifying scenarios, the covered clearing agency generally 
should consider the various risks to which it is exposed, which will 
vary across different covered clearing agencies serving different 
markets. The proposed rule would require that the covered clearing 
agency consider scenarios arising from uncovered credit losses, 
uncovered liquidity shortfalls, and general business losses. This set 
of scenarios would therefore include scenarios arising from the default 
of a participant and also those arising from events not related to a 
participant default, such as a general business loss. Other potential 
scenarios that are not related to a participant default could include 
the realization of investment or custody losses, the failure of a third 
party, such as a settlement bank, to perform a critical function for 
the covered clearing agency, or scenarios caused by an SCI event or 
other significant operational disruption, such as a significant 
cybersecurity incident. In addition, a covered clearing agency that is 
part of a larger organization may be exposed to risks arising from 
other entities within the organization. Put more generally, the 
identified scenarios take into account various risks to which the 
covered clearing agency is exposed that may potentially prevent the 
covered clearing agency from being able to provide its critical 
services, which will vary across different types of covered clearing 
agencies (i.e., a central counterparty versus a central securities 
depository) and even across covered clearing agencies of the same type.
    The Commission believes that the identified scenarios generally 
should be structured such that the underlying assumptions ensure that 
the scenarios are sufficiently severe, such that they would result in 
the need for a recovery or orderly wind-down. These scenarios generally 
should include both idiosyncratic and system-wide stress scenarios, 
taking into account the possibility of contagion in a stress event and 
of simultaneous crises in several significant markets. Although all 
covered clearing agencies generally consider at a high level what 
circumstances may cause them to enter recovery or wind-down (e.g., 
whether a recovery or wind-down would arise from the default of a 
participant or from issues unrelated to a participant default), the 
RWPs do not all identify particular scenarios the covered clearing 
agencies have considered when developing the RWP or contain detailed 
analyses of each particular scenario.
    Each scenario generally should be analyzed individually in the 
recovery plan, with the analysis including: a description of the 
scenario; the events that are likely to trigger the scenario; the 
covered clearing agency's process for monitoring such events; the 
market conditions, operational and financial issues, and other relevant 
circumstances that are likely to result from the scenario; the 
potential financial and operational impact of the scenario on the 
covered clearing agency and its participants, internal and external 
service providers, and relevant affiliated companies, both in an 
orderly and stressed market (e.g., where markets are unavailable or 
there are limited solvent counterparties); and the specific steps that 
the covered clearing agency would expect to take if the scenario occurs 
or appears likely to occur, including, without limitation, any 
governance or other procedures that may be necessary to implement the 
relevant tools or use the relevant resources and to ensure that such 
implementation occurs in sufficient time to achieve the intended 
effect.
e. Triggers
    Proposed Rule 17ad-26(a)(4) would require a covered clearing 
agency's RWP to identify and describe the criteria that would trigger 
the implementation of its RWP and the process that the covered clearing 
agency uses to monitor and determine whether the criteria have been 
met, including the governance arrangements applicable to such process. 
Given that the implementation of a covered clearing agency's RWPs would 
most likely occur during a period of significant stress at the covered 
clearing agency or in the market in general, the Commission believes 
that the covered clearing agency needs to identify in advance what 
criteria could trigger implementation of its RWP. Such ex ante 
identification of potential triggers can help ensure that a covered 
clearing agency not only implements its plan pursuant to the 
established RWP but that, before it implements such plans, it is aware 
of the triggering events that may necessitate use of the RWP. 
Thoughtful consideration of triggers can help ensure that the steps 
taken in anticipation of a potential recovery or wind-down have been 
planned for and coordinated to minimize the onward transmission of risk 
to the U.S. financial system. Currently, covered clearing agencies 
identify triggers in their RWPs but differ with respect to how much 
they identify the specific monitoring or governance processes for such 
triggers.
    The covered clearing agency generally should consider defining both 
quantitative and qualitative criteria that would trigger the 
implementation of part or all of the recovery plan or of an orderly 
wind-down plan. Moreover, the covered clearing agency generally should 
consider triggers that would be applicable in circumstances involving 
the default of its participant(s), as well as those that would be 
applicable in circumstances not related to the default of a participant 
or participants. When determining triggers, the covered clearing agency 
also generally should consider whether the likely timing of a 
triggering event in the identified scenarios would permit sufficient 
time for implementation of the RWP.
    There may be circumstances in which the trigger is obvious. For 
example, when a participant of a covered clearing agency defaults, the 
recovery plan likely would be triggered when the covered clearing 
agency has exhausted its pre-funded financial resources, its qualifying 
liquid resources,\85\ or any other liquidity arrangements that it has 
in place to deal with default-related shortfalls, or when it has become 
unlikely that the pre-funded financial resources and/or the liquidity 
arrangements will be sufficient. In other circumstances, the covered 
clearing agency may have to employ more judgment with respect to how to 
develop appropriate triggers. For example, a covered clearing agency 
may need to exercise judgment to determine an appropriate capital level 
to trigger activation of its RWP in the event of persistent or 
extraordinary capital losses from general business risks.
---------------------------------------------------------------------------

    \85\ See 17 CFR 240.17Ad-22(a)(14).
---------------------------------------------------------------------------

    The identification of triggers does not mean that such triggers 
should be self-executing. Instead, the importance of identifying 
triggers lies in ensuring that a covered clearing agency considers and 
identifies ex ante when it would initiate its RWP. Therefore, the 
Commission believes that the RWP also must identify and describe the 
process that the covered clearing agency uses to monitor and determine 
whether the criteria have been met, including the governance 
arrangements applicable to such process. Specifying the monitoring 
process would allow the covered clearing agency to ensure that it has 
reliable and appropriate processes to analyze the facts and 
circumstances related to the triggers identified in the RWP. Consistent 
with its obligations under Rule 17Ad-22(e)(3), the identification of 
the governance process generally should include clearly defining the 
responsibilities of board members, senior management, and business 
units, including with respect to

[[Page 34722]]

escalation within the covered clearing agency, and it also generally 
should specify whether and to what extent the covered clearing agency 
may exercise discretion in its monitoring and determination whether the 
triggering criteria have been met. The Commission believes that 
including the related governance in the RWP is important to allow the 
covered clearing agency to use the RWP in a crisis because the RWP 
would set forth clear and defined roles and avoid potential confusion 
at the time of the RWP's implementation.
f. Rules, Policies, Procedures, and Tools
    Proposed Rule 17ad-26(a)(5) would require a covered clearing 
agency's RWP to identify and describe the rules, policies, procedures, 
and any other tools or resources the covered clearing agency would rely 
upon in a recovery or orderly wind-down. The Commission believes that 
describing the rules, policies, procedures, and any other tools or 
resources is essential to a covered clearing agency's RWP. The 
requirement to describe rules, policies, procedures, and any other 
tools or resources that may be used in advance for certain situations 
would provide some level of predictability in such a situation and 
avoid unexpected actions because it would allow participants to 
understand the potential of tools or resources that could be used, 
including whether any of the tools would require participant 
involvement or resources (such as a cash call).
    Generally, the rules, policies, procedures, and any other tools or 
resources should address shortfalls arising in the stress scenarios 
identified by the covered clearing agency, whether caused by 
participant default or by some other event, that are not covered by 
pre-funded financial resources. They should also address situations 
where the covered clearing agency does not have sufficient qualifying 
liquid resources to meet its obligations on time. In addition, the 
tools should address other losses or liquidity shortfalls, including 
those arising from general business risks that may or may not develop 
more slowly than a sudden default or other event.
    However, the Commission is not prescribing particular tools, such 
as tear-up or margin haircutting, that a covered clearing agency would 
be required to include in its RWP. The Commission believes that this 
proposed requirement preserves discretion for each covered clearing 
agency to consider the full range of available recovery tools and 
select those most appropriate for the circumstances of the covered 
clearing agency, including the products cleared and the markets 
served.\86\ It would also allow a covered clearing agency to consider 
the ways in which its ownership structure (such as whether it is a 
subsidiary of a larger organization, owned by its participants, etc.) 
could impact its execution of its RWP or use of the tools set forth 
therein, including through the applicable governance arrangements or 
because of tools that rely on a parent or affiliated organization.
---------------------------------------------------------------------------

    \86\ See CCA Standards Adopting Release, supra note 7, 81 FR at 
70809.
---------------------------------------------------------------------------

    The current RWPs identify the tools and other resources that the 
covered clearing agency would use in a recovery or orderly wind-down. 
Certain of those tools, which may often be referred to as the covered 
clearing agency's default waterfall,\87\ may involve the allocation of 
losses to its members or, potentially, to other shareholders or 
creditors of the covered clearing agency, among others, and covered 
clearing agencies are required to address such loss allocation under 
the Covered Clearing Agency Standards.\88\ As part of their recovery 
and wind-down planning, the Commission believes that covered clearing 
agencies generally should consider their loss allocation policies in 
light of the scenarios identified in response to proposed Rule 17ad-
26(a)(3), including the need for any additional tools or loss 
allocation processes to address different scenarios.
---------------------------------------------------------------------------

    \87\ See note 150 infra.
    \88\ See 17 CFR 240.17Ad-22(e)(4)(viii) (requiring that a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to effectively 
identify, measure, monitor, and manage its credit exposures to 
participants and those arising from its payment, clearing, and 
settlement processes, including by addressing allocation of credit 
losses the covered clearing agency may face if its collateral and 
other resources are insufficient to fully cover its credit 
exposures).
---------------------------------------------------------------------------

    When identifying the tools and other resources that a covered 
clearing agency may include in a recovery or orderly wind-down plan, 
the Commission believes that the covered clearing agency generally 
should consider the following characteristics to evaluate the 
appropriateness of a tool or tools for a particular recovery scenario 
or an orderly wind-down, including the sequence in which the tools 
should be used. First, the set of tools should comprehensively address 
how the covered clearing agency would continue to provide critical 
services in all relevant scenarios. Second, the tools should be 
effective, meaning that they should be reliable, timely, and have a 
strong legal basis. Being effective generally should mean that the 
covered clearing agency has a high degree of confidence that it could 
employ the tool in all relevant circumstances, including a time of 
stress. Third, the tools generally should be transparent, so as to 
allow the covered clearing agency's participants and the broader market 
participants to understand how they would operate and allow those who 
would bear losses and liquidity shortfalls to measure, manage, and 
control their potential losses and liquidity shortfalls. Finally, the 
tools generally should take into account whether the tools create 
appropriate incentives for the covered clearing agency's owners, direct 
and indirect participants, and other relevant stakeholders, and they 
generally should seek to minimize the potential impact that the tools 
may have on participants and the financial system more broadly.
    When analyzing the tools to be included in its RWP, a covered 
clearing agency generally should consider: (i) a description of the 
tools that the covered clearing agency would expect to use in each 
scenario; (ii) the order in which each tool would be expected to be 
used; (iii) the time frame within which the tool would be used; (iv) 
the governance and approval processes and arrangements within the 
covered clearing agency for the use of each of the tools available, 
including the exercise of any available discretion; (v) the processes 
to obtain any approvals external to the covered clearing agency 
(including any regulatory approvals) that would be necessary to use 
each of the tools available, and the steps that might be taken if such 
approval is not obtained; (vi) the steps necessary to implement the 
tools; (vii) the roles and responsibilities of all parties, including 
non-defaulting participants; (viii) whether the tool is mandatory or 
voluntary; and (ix) an assessment of the associated risks from the use 
of each tool to non-defaulting clearing members and their customers, 
linked financial market infrastructures, and the financial system more 
broadly.
g. Timely Implementation
    Proposed Rule 17ad-26(a)(6) would require a covered clearing 
agency's RWP to address how the rules, policies, procedures, and any 
other tools or resources identified in paragraph (5) would ensure 
timely implementation of the recovery and orderly wind-down plan. The 
Commission believes that this is an important element of a covered 
clearing agency's RWP, that is, to provide, in advance, a level of 
predictability as to how such measures would be implemented, which is 
important to participants as discussed in section III.B.e infra, and to 
ensure that the covered clearing agency has a

[[Page 34723]]

strategy for use of the various tools set forth in the RWP recovery and 
orderly wind-down plans. As noted earlier, the implementation and use 
of a covered clearing agency's RWP will likely occur when the covered 
clearing agency itself, as well as the wider financial markets, are 
experiencing heightened levels of stress. Requiring that the covered 
clearing agency address in its RWP how its procedures to ensure timely 
implementation of an RWP increases the likelihood that actions taken 
will be predictable and orderly and will occur at an appropriate time 
to address the circumstances at hand. Currently, the Commission 
believes that the covered clearing agencies' RWPs address how the 
covered clearing agencies' procedures would be timely implemented, 
including by identifying the applicable governance and steps that would 
need to be taken to use particular tools and/or by discussing the order 
in which tools would be deployed. A covered clearing agency generally 
should consider whether its RWP provides for pre-determined escalation 
processes within the covered clearing agency's senior management and 
with its board of directors, to ensure careful and timely consideration 
of the appropriate next steps.
    Timely implementation generally should mean that a covered clearing 
agency is able to deploy the tools identified in its plan as needed and 
when appropriate, for example, that it has identified the appropriate 
escalation and approval processes to use a particular tool or resource. 
In this sense, implementation does not refer to completion of the plan, 
but merely to putting the plan into practice.
h. Notification to the Commission
    Proposed Rule 17ad-26(a)(7) would require a covered clearing 
agency's RWP to include procedures for informing the Commission as soon 
as practicable when the covered clearing agency is considering 
initiating a recovery or orderly wind-down. The systemic risk concerns 
raised by a recovery or orderly wind-down of a covered clearing agency 
are significant, and while the Commission already maintains regular 
contact with each of the covered clearing agencies through its 
supervisory program, the Commission believes it is critical that notice 
of potential recovery and wind-down events be provided as soon as 
practicable.
    Providing notice to the Commission can help ensure that the 
Commission has the opportunity to consider whether a covered clearing 
agency engages the recovery or wind-down event consistent with its 
established RWP and the requirements of Commission rules to help 
mitigate the potential onward transmission of systemic risk and ensure 
that a wind-down, if necessary, is orderly. This is particularly 
important with respect to covered clearing agencies which often serve 
as the sole provider of clearance and settlement services in a 
particular market and of which several are designated clearing 
agencies. Currently, many of the covered clearing agencies' RWPs 
reference notification to the Commission, but often lack detail on the 
procedures to ensure such notification.
    Moreover, providing notice to the Commission would, in turn, help 
the Commission ensure that it has information that it can share with 
other relevant authorities, such as the resolution authority, regarding 
the potential need for resolution. This communication between the 
Commission and other regulators would be essential in the potential 
event of a recovery or wind-down so that the other regulators can 
consider appropriate actions that they may wish to take, such as if the 
FDIC is appointed as the resolution authority for a covered clearing 
agency, as discussed in section II.C supra. Given its supervisory role 
with respect to the covered clearing agencies, the Commission is 
uniquely situated both to obtain and effectively share and communicate 
this information to other regulatory authorities.
i. Testing
    Proposed Rule 17aAd-26(a)(8) would also require that an RWP include 
procedures for testing the covered clearing agency's ability to 
implement the recovery and wind-down plans at least every twelve 
months, including by requiring the covered clearing agency's 
participants and, when practicable, other stakeholders to participate 
in the testing of its plans, providing for reporting the results of the 
testing to the covered clearing agency's board of directors and senior 
management, and specifying the procedures for, as appropriate, amending 
the plans to address the results of the testing. The Commission 
believes that it is important to require testing because including 
testing should help to ensure that the RWP will be effective in the 
event of an actual recovery or orderly wind-down. Currently, some 
covered clearing agencies do not provide for testing their RWPs or test 
them separately from any testing required under 17 CFR 240.17Ad-
22(e)(13) (``Rule 17Ad-22(e)(13)''), while others do incorporate some 
testing requirements, with varying degrees of specificity about the 
frequency of and participants in such testing and how to incorporate 
the results of such testing into the RWPs.
    The Commission believes that the testing under this proposed rule 
likely would be similar in nature to that required under Rule 17Ad-
22(e)(13), in that it would simulate how the RWP would perform in 
crisis situations, including the participation of senior management and 
the board of directors. Such testing could involve examining how a 
covered clearing agency's procedures would work in practice, by 
applying them to a hypothetical scenario that would cause the covered 
clearing agency to use its RWP. Testing must involve the covered 
clearing agency's participants and, where practicable, other 
stakeholders. Such other stakeholders could include, for example, 
liquidity providers or settlement banks. By specifying that the 
participation of other stakeholders must occur where practicable, the 
Commission recognizes that a covered clearing agency may have limited 
ability to require said participation by all such stakeholders in all 
circumstances.
    Including participants and other stakeholders in such testing 
should help to ensure that procedures will be practical and effective 
in the face of a recovery or orderly wind-down. In addition to the 
relevant employees, participants, and other stakeholders that would be 
involved in testing RWPs, a covered clearing agency may determine, as 
appropriate, to include members of its board of directors or similar 
governing body, and to invite linked clearing agencies, significant 
indirect participants, providers of credit facilities, and other 
service providers to participate. The Commission believes including 
participants and, where practicable, stakeholders in periodic testing 
is appropriate because a successful recovery or orderly wind-down will 
require coordination among these parties, particularly during periods 
of market stress.
    The Commission believes that at least every twelve months is an 
appropriate time period for testing RWPs. Given that many other aspects 
of a covered clearing agency's risk management are required to be 
tested at least annually, many of which are likely to be related to or 
referenced in the covered clearing agency's RWP,\89\ the Commission 
believes that this time period strikes an appropriate balance between 
the need to test RWPs and the desire to avoid imposing duplicative 
requirements. A covered clearing agency may choose to

[[Page 34724]]

conduct this testing and review of the RWP, to the extent practicable, 
as part of its annual testing and review of its participant default 
rules and procedures, in accordance with Rule 17Ad-22(e)(13), or as 
part of its business continuity testing.
---------------------------------------------------------------------------

    \89\ See, e.g., 17 CFR 240.17Ad-22(e)(13)(iii) and (e)(3)(i).
---------------------------------------------------------------------------

    The Commission believes that the RWPs should provide for reporting 
the results of the testing to the covered clearing agency's board of 
directors and senior management. This reporting would help ensure that 
the board of directors and senior management have an understanding of 
the testing. This understanding, in turn, would then inform senior 
management in considering whether the testing indicates the need for 
potential changes to an RWP. This understanding would also inform the 
board of directors in its review and approval of a covered clearing 
agency's RWP, which it would be required to do under proposed Rule 
17ad-26(a)(9). Finally, the Commission believes that the RWPs should 
specify the procedures for, as appropriate, amending the plans to 
address the results of the testing. Such procedures would ensure that 
the covered clearing agency takes into account the results of the 
testing and incorporates it into the plan, as appropriate.
j. Periodic Review
    Proposed Rule 17ad-26(a)(9) would require the board of directors of 
a covered clearing agency to review and approve its RWP at least every 
twelve months or following material changes to the covered clearing 
agency's operations that would significantly affect the viability or 
execution of the plans, with such review informed, as appropriate by 
the covered clearing agency's testing of the plans as required in the 
prior section of the proposal rule. Because the risks that a covered 
clearing agency faces and the markets it serves are ever evolving, it 
is important that a covered clearing agency's RWP accounts for the 
evolving nature of risks and markets. The Commission understands that 
covered clearing agencies with RWPs already engage in some level of 
ongoing review, and the Commission has reviewed changes to RWPs as 
proposed rule changes under section 19(b) of the Exchange Act.\90\ The 
Commission believes that a covered clearing agency should perform the 
board of directors level review under proposed Rule 17ad-26 at least 
once every twelve months. Moreover, the Commission believes that a 
required review every twelve months represents an appropriate frequency 
to address any changes in the markets served and products cleared by a 
covered clearing agency. The Commission further believes that it is 
also important to revisit an RWP if there is a material change to the 
covered clearing agency's operations, to ensure that the RWP continues 
to address the risks that the covered clearing agency faces. The 
Commission has proposed requiring review and approval of a covered 
clearing agency's RWP by its board of directors because such 
requirement is important to ensure that the RWP is considered and 
addressed at the most senior levels of the governance framework of the 
covered clearing agency, consistent with the importance of the RWP.
---------------------------------------------------------------------------

    \90\ See, e.g., Securities Exchange Act Releases No. 91429 (Mar. 
29, 2021), 86 FR 17421 (Apr. 2, 2021) (SR-DTC-2021-004); 91430 (Mar. 
29, 2021), 86 FR 17432 (Apr. 2, 2021) (SR-FICC-2021-002); 94983 (May 
25, 2022), 87 FR 33223 (June 1, 2022) (SR-ICC-2022-004); ICEEU 2019 
Order, supra note 41, 84 FR 34455; 88578 (Apr. 7, 2020), 85 FR 20561 
(Apr. 13, 2020) (SR-LCH SA-2020-001); 91428 (Mar. 29, 2021), 86 FR 
17440 (Apr. 2, 2021) (SR-NSCC-2021-004); 90712 (Dec. 17, 2020), 85 
FR 84050 (Dec. 23, 2020) (SR-OCC-2020-013).
---------------------------------------------------------------------------

    Currently, the existing RWPs generally provide for review and 
approval by a covered clearing agency's board of directors, but not all 
the plans provide for a review every twelve months and some do not 
specifically reference the need to review following material changes to 
the covered clearing agency's operations. Therefore, the Commission 
believes that this proposed rule would strengthen the RWPs by ensuring 
review and approval by the board of directors every twelve months and 
review following material changes. It would also help ensure that the 
review and approval by the board of directors is informed, as 
appropriate, by the results of the covered clearing agency's testing 
discussed in section III.B.2.j supra. The Commission believes that any 
procedures adopted with respect to the review and approval conducted by 
the board of directors generally should provide for substantive 
consideration of the plan and whether it appropriately takes into 
account the specific characteristics of the covered clearing agency, 
including its ownership, organizational, and operational structures, as 
well as the size, systemic importance, global reach, and/or the risks 
inherent in the products it clears.
    Moreover, in the event that a recovery or wind-down process is 
activated, the Commission believes that it likely would be appropriate 
to conduct an additional review by the board of directors immediately 
after the conclusion of the execution of the RWP, even if it is well 
before the next periodic review. In addition, a covered clearing agency 
generally should consider the extent to which any new policy statements 
from a standard setting body, such as CPMI-IOSCO, while not binding, 
might tend to support updating or revising existing RWPs to ensure that 
the clearing agency's approach to risk management, recovery, and wind-
down are effective at maintaining the core functions of the covered 
clearing agencies in a recovery or resolution scenario and mitigating 
the potential for transmitting systemic risk through the financial 
system.
3. Request for Comment
    The Commission requests comment on all aspects of proposed Rule 
17ad-26. In particular, the Commission requests comment on the 
following specific topics:
    10. Should the Commission adopt proposed Rule 17ad-26 to prescribe 
the contents of a covered clearing agency's recovery and wind-down 
plans?
    11. Does proposed Rule 17ad-26 adequately identify and describe the 
elements that a covered clearing agency would be required to include in 
its RWP? If other elements should be included, please identify such 
elements and explain why they should be included. If certain elements 
should not be included, please identify such elements and explain why 
they should not be included.
    12. Are there any other elements that should be included in a 
covered clearing agency's RWP to facilitate the planning processes of a 
resolution authority? If so, please identify such elements and explain 
how they should help facilitate resolution planning.
    13. Should the Commission set more prescriptive requirements with 
respect to any of the elements of a covered clearing agency's RWP? If 
so, what should the Commission require, and why?
    14. Are there other elements that a covered clearing agency should 
consider in its RWP that would better align the incentives of various 
stakeholders and hence facilitate a productive collaboration among them 
in a recovery and wind-down event?
    15. As discussed above, in 2016, CFTC staff issued guidance with 
respect to the contents of recovery and wind-down planning.\91\ Do 
commenters believe that there are any aspects of that guidance which 
should be codified in the Commission's proposed Rule 17ad-26? If so, 
please identify such aspects and explain why they should be included.
---------------------------------------------------------------------------

    \91\ See note 69 supra.
---------------------------------------------------------------------------

    16. Should the Commission also require that a covered clearing 
agency's

[[Page 34725]]

RWP set forth a viable strategy for its recovery and/or orderly wind-
down, to ensure that a covered clearing agency take into account how 
the items included in the RWP fit together as a cohesive whole and that 
the RWP takes into account a covered clearing agency's unique 
characteristics and circumstances, including ownership and governance 
structures, effect on direct and indirect participants, membership 
base, markets served, the risks inherent in products cleared, and risk 
management needs. Would such a requirement be beneficial, or are these 
elements already captured by the proposed rule text?
    17. With the additional requirements in proposed Rule 17ad-26, 
would a covered clearing agency retain an appropriate amount of 
discretion to consider the specific characteristics of the covered 
clearing agency when creating its RWP?
    18. Do commenters agree with the proposed definition of ``service 
provider'', including the distinction between third parties and 
affiliates, and the proposed definition of ``affiliate''?
    19. Do commenters agree that the RWP should identify and describe 
the covered clearing agency's critical payment, clearing, and 
settlement services and address how the covered clearing agency would 
continue to provide such critical services in the event of a recovery 
and during an orderly wind-down, including the identification of the 
staffing necessary to support such critical services and analysis of 
how such staffing would continue in the event of a recovery and during 
an orderly wind-down? Should the Commission further define ``staffing'' 
to specify that it refers to particular positions or offices within the 
covered clearing agency?
    20. Do commenters agree that the RWP should identify and describe a 
covered clearing agency's critical service providers, specify to which 
services such service providers are relevant, and address how the 
covered clearing agency would ensure that such providers can be legally 
obligated to perform in the event of a recovery or orderly wind-down, 
including consideration of contractual obligations with such service 
providers and whether those obligations are subject to alteration or 
termination as a result of initiation of the recovery and orderly wind-
down plan?
    21. Do commenters agree that the proposed rule should require that 
the covered clearing agency identify the scenarios that may potentially 
prevent the covered clearing agency from being able to provide its 
critical payment, clearing, and settlement services as a going concern, 
including uncovered credit losses (as described in paragraph 
(e)(4)(viii) of 17 CFR 240.17Ad-22), uncovered liquidity shortfalls (as 
described in paragraph (e)(7)(viii) of 17 CFR 240.17Ad-22), and general 
business losses (as described in paragraph (e)(15) of 17 CFR 240.17Ad-
22)?
    22. Should the Commission instead identify particular scenarios 
that a covered clearing agency has to address in its RWP? If so, should 
the Commission include any or all of the following scenarios: (i) 
credit losses or liquidity shortfalls created by single and multiple 
clearing member defaults; (ii) liquidity shortfall created by a 
combination of clearing member default and a failure of a liquidity 
provider to perform; (iii) settlement bank failure; (iv) custodian or 
depository bank failure; (v) losses resulting from investment risk; 
(vi) losses from poor business results; (vii) financial effects from 
cybersecurity events; (viii) fraud (internal, external, and/or actions 
of criminals or of public enemies); (ix) legal liabilities, including 
those not specific to the covered clearing agency's business as a 
covered clearing agency; (x) losses resulting from interconnections and 
interdependencies among the covered clearing agency and its parent, 
affiliates, and/or internal or external service providers; (xi) losses 
resulting from interconnections and interdependencies with other 
covered clearing agencies; and (xii) losses resulting from issues 
relating to services that are ancillary to the covered clearing 
agency's critical services? Should the Commission require consideration 
of scenarios involving multiple failures (e.g., a member default 
occurring simultaneously, or nearly so, with a failure of a service 
provider) that, in the judgment of the covered clearing agency, are 
particularly relevant to its business? Does this set omit any potential 
additional scenarios?
    23. With respect to scenarios, should the Commission also require 
that the RWP include an analysis that includes: (i) a description of 
the scenario; (ii) the events that are likely to trigger the scenario; 
(iii) the covered clearing agency's process for monitoring for such 
events; (iv) the market conditions, operational and financial 
difficulties and other relevant circumstances that are likely to result 
from the scenario; (v) the potential financial and operational impact 
of the scenario on the covered clearing agency and on its clearing 
members, internal and external service providers and relevant 
affiliated companies, both in an orderly market and in a disorderly 
market; and (vi) the specific steps the covered clearing agency would 
expect to take when the scenario occurs, or appears likely to occur, 
including, without limitation, any governance or other procedures that 
may be necessary to implement the relevant recovery tools and to ensure 
that such implementation occurs in sufficient time for the recovery 
tools to achieve their intended effect?
    24. Do commenters believe that the Commission should prescribe any 
particular tools that a covered clearing agency must include in its 
RWP, such as a cash call, gains-based haircutting, or full or partial 
tear-up? If so, please identify such tools and explain why they should 
be required.
    25. Proposed Rule 17ad-26 would also require that the RWP identify 
triggers but does not prescribe a list of specific triggers. Should the 
Commission prescribe any particular triggers, whether qualitative or 
quantitative? For example, should the Commission require that a covered 
clearing agency should consider using the exhaustion of its prefunded 
resources as a trigger?
    26. Should the Commission prescribe that a covered clearing 
agency's RWP also identify criteria that could show when recovery is 
successful and the covered clearing agency would return to normal 
operations?
    27. With respect to the requirement to identify and describe the 
process that the covered clearing agency uses to monitor and determine 
whether the criteria that would trigger implementation of the RWP have 
been met, including the governance arrangements applicable to such 
process, should the Commission require that the description also 
include identification of any areas in which the covered clearing 
agency could exercise discretion?
    28. Proposed Rule 17ad-26(a)(5) would require the covered clearing 
agency to identify and describe the rules, policies, procedures, and 
any other tools or resources the covered clearing agency would rely 
upon in a recovery or orderly wind-down to address the scenarios 
identified in the recovery and wind-down plan. Should the Commission 
also require that a covered clearing agency's RWP include any or all of 
the following: (i) a description of the tools that the covered clearing 
agency would expect to use in each scenario; (ii) the order in which 
each tool would be expected to be used; (iii) the time frame within 
which the tool would be used; (iv) the governance and approval 
processes and arrangements within the covered

[[Page 34726]]

clearing agency for the use of each of the tools available, including 
the exercise of any available discretion; (v) the processes to obtain 
any approvals external to the covered clearing agency (including any 
regulatory approvals) that would be necessary to use each of the tools 
available, and the steps that might be taken if such approval is not 
obtained; (vi) the steps necessary to implement the tools; (vii) the 
roles and responsibilities of all parties, including non-defaulting 
participants; (viii) whether the tool is mandatory or voluntary; and 
(ix) an assessment of the associated risks from the use of each tool to 
non-defaulting clearing members and their customers, linked financial 
market infrastructures, and the financial system more broadly? Should 
the Commission require the covered clearing agency to estimate the 
potential size of the resources that the covered clearing agency would 
expect to receive from each tool?
    29. Proposed Rule 17d-26 would require that the RWP address how the 
identified tools, procedures, or other resources would ensure timely 
implementation of the RWP. Do commenters agree with the need to ensure 
timely implementation? Should the Commission specify that timely 
implementation means that a covered clearing agency is able to deploy 
the tools identified in its plan as needed and when appropriate, for 
example, that it has identified the appropriate escalation and approval 
processes to use a particular tool or resource?
    30. Proposed Rule 17ad-26(a)(7) would require procedures for 
informing the Commission as soon as practicable when the covered 
clearing agency is considering initiating a recovery or orderly wind-
down. Should the Commission instead or additionally require that the 
procedures provide for informing the Commission when the triggers set 
forth in proposed Rule 17ad-26(a)(5) have been met? Should the 
Commission also require notification to the covered clearing agency's 
participants and/or other stakeholders in the event of recovery or 
orderly wind-down, or initiation of the RWP?
    31. Should the Commission prescribe a particular form of notice for 
informing the Commission, consistent with the requirement in proposed 
Rule 17ad-26(a)(7)? For example, should the Commission require written 
notice, or would telephonic notice be sufficient?
    32. Proposed Rule 17ad-26(a)(8) would require procedures for 
testing the covered clearing agency's ability to implement the recovery 
and wind-down plans at least every twelve months, by requiring the 
covered clearing agency's participants and, when practicable, other 
stakeholders to participate in the testing of its plans and specifying 
the procedures for, as appropriate, amending the plans to address the 
results of the testing. Do commenters agree with this proposed 
requirement? Should the covered clearing agency be required to mandate 
that participants participate in testing? Similarly, should the covered 
clearing agency be required to mandate that other stakeholders 
participate in testing unless the covered clearing agency determines 
that it would be impracticable to do so? Should testing be less 
frequent? For example, should testing occur at least every 24 months?
    33. Proposed Rule 17ad-26(a)(9) would require procedures for 
reviewing and approving a covered clearing agency's RWP by the board of 
directors at least every twelve months. Should the Commission impose a 
more, or less, frequent review cycle? And if so, why? Should the 
Commission require review and approval by the board of directors of an 
RWP following material changes to the covered clearing agency's 
operations that would significantly affect the viability or execution 
of the plans?

IV. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic consequences and 
effects of the proposed rule and amendments, including their benefits 
and costs.\92\ The Commission acknowledges that, since many of these 
proposals could require a covered clearing agency to adopt new policies 
and procedures, the economic effects and consequences of these rules 
include those flowing from the substantive results of those new 
policies and procedures. Further, section 17A of the Exchange Act 
directs the Commission to have due regard for the public interest, the 
protection of investors, the safeguarding of securities and funds, and 
maintenance of fair competition among brokers and dealers, clearing 
agencies, and transfer agents when using its authority to facilitate 
the establishment of a national system for clearance and settlement of 
transactions in securities.\93\
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    \92\ Under section 3(f) of the Exchange Act, whenever the 
Commission engages in rulemaking under the Exchange Act and is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, it must consider, in addition to 
the protection of investors, whether the action will promote 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f). In addition, section 23(a)(2) of the Exchange Act prohibits 
the Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the 
purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
    \93\ See supra note 10.
---------------------------------------------------------------------------

    This section addresses the likely economic effects of the proposed 
rule and amendments, including their anticipated and estimated benefits 
and costs and their likely effects on efficiency, competition, and 
capital formation. It is not feasible to quantify many of the benefits 
and costs. For example, risk management is an area of key concern for 
all clearing agency stakeholders. Perceptions of risk affect how 
clearing agencies are operated, and those operations, in turn, affect 
perceptions of risk. Any change to the policies and procedures about 
how clearing agencies act in times of crisis affects the behavior of 
clearing agencies and participants in complex ways not only during a 
crisis but also before the crisis, and those behavioral changes may 
affect the likelihood and severity of a crisis. While the Commission 
has attempted to quantify economic effects where possible, much of the 
discussion of economic effects is qualitative in nature. The Commission 
also discusses the potential economic effects of certain alternatives 
to the approaches recommended in this proposal.

B. Economic Baseline

    To consider the effect of the proposed rule and amendments, the 
Commission first explains the current state of affairs in the market 
(i.e., the economic baseline). All of the potential benefits and costs 
from adopting the proposed rule and amendments are changes relative to 
the economic baseline. The economic baseline in this proposal 
considers: (1) the current market for covered clearing agency 
activities, including the number of covered clearing agencies, the 
distribution of participants across these clearing agencies, and the 
level of activity these clearing agencies process; (2) the current 
regulatory framework for covered clearing agencies; (3) the current 
recovery and wind-down plans of covered clearing agencies; and (4) the 
current risk-based margin systems of covered clearing agencies.

[[Page 34727]]

1. Description of Market
    Of the nine registered clearing agencies, seven are currently in 
operation.\94\ Six provide central counterparty (``CCP'') services \95\ 
and one provides central securities depository (``CSD'') services.\96\ 
National Securities Clearing Corporation (``NSCC''), Fixed Income 
Clearing Corporation (``FICC''), and Depository Trust Company (``DTC'') 
are all covered clearing agencies that are subsidiaries of Depository 
Trust & Clearing Corporation (``DTCC''). NSCC offers clearance and 
settlement services for equities, corporate and municipal debt, 
American depositary receipts, exchange traded funds, and unit 
investment trusts. FICC's Mortgage-Backed Securities Division 
(``MBSD'') provides clearing, netting, and risk management services for 
trades in the mortgage-backed securities market. FICC's Government 
Securities Division (``GSD'') provides clearing, netting, and risk 
management services for trades in U.S. Government debt, including buy-
sell transactions and repurchase agreement transactions. DTC provides 
end-of-day net settlement for clients, processes corporate actions, 
provides securities movements for NSCC's net settlements, and it 
provides settlement for institutional trades.
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    \94\ There are two registered but inactive clearing agencies: 
Boston Stock Exchange Clearing Corporation (``BSECC'') and Stock 
Clearing Corporation of Philadelphia (``SCCP''). Neither has 
provided clearing services in well over a decade. See Self-
Regulatory Organizations; The Boston Stock Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
To Amend the Articles of Organization and By-Laws, Exchange Act 
Release No. 63629 (Jan. 3, 2011), 76 FR 1473, 1474 (Jan. 3, 2011) 
(BSECC ``returned all clearing funds to its members by September 30, 
2010, and [] no longer maintains clearing members or has any other 
clearing operations as of that date. [ ] BSECC [ ] maintain[s] its 
registration as a clearing agency with the Commission for possible 
active operations in the future.''); Self-Regulatory Organizations; 
Stock Clearing Corporation of Philadelphia; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Relating to the 
Suspension of Certain Provisions Due to Inactivity, Exchange Act 
Release No. 63268 (Nov. 8, 2010), 75 FR 69730, 69731 (Nov. 15, 2010) 
(SCCP ``returned all clearing fund deposits by September 30, 2009; 
[and] as of that date SCCP no longer maintains clearing members or 
has any other clearing operations. [] SCCP [] maintain[s] its 
registration as a clearing agency for possible active operations in 
the future.''). Because they do not provide clearing services, BSECC 
and SCCP are not included in the economic baseline or the 
consideration of benefits and costs.
    \95\ A CCP is a type of registered clearing agency that acts as 
the buyer to every seller and the seller to every buyer, providing a 
trade guaranty with respect to transactions submitted for clearing 
by the CCP's participants. See 17 CFR 240.17Ad-22(a)(2); Definition 
of ``Covered Clearing Agency'', Exchange Act Release No. 88616 (Apr. 
9, 2020), 85 FR 28853, 28855 (May 14, 2020) (``CCA Definition 
Adopting Release''). A CCP may perform a variety of risk management 
functions to manage the market, credit, and liquidity risks 
associated with transactions submitted for clearing. For example, 
CCPs help manage the effects of a participant default by closing out 
the defaulting participant's open positions and using financial 
resources available to the CCP to absorb any losses. In this way, 
the CCP can prevent the onward transmission of financial risk. See, 
e.g., Shortening the Securities Transaction Settlement Cycle, 
Exchange Act Release No. 94196 (Feb. 9, 2022), 87 FR 10436, 10448 
(Feb. 24, 2022).
    \96\ A CSD is a type of registered clearing agency that acts as 
a depository for handling securities, whereby all securities of a 
particular class or series of any issuer deposited within the system 
are treated as fungible. Through use of a CSD, securities may be 
transferred, loaned, or pledged by bookkeeping entry without the 
physical delivery of certificates. A CSD also may permit or 
facilitate the settlement of securities transactions more generally. 
See 15 U.S.C. 78c(a)(23)(A); 17 CFR 240.17Ad-22(a)(3); CCA 
Definition Adopting Release, supra note 95, at 28856.
---------------------------------------------------------------------------

    ICE Clear Credit LLC (``ICC'') and ICE Clear Europe Limited 
(``ICEEU'') are both covered clearing agencies for credit default swaps 
(``CDS''), and they are both subsidiaries of Intercontinental Exchange, 
Inc. (``ICE''). LCH SA is another covered clearing agency that offers 
clearing for CDS, and it is a France-based subsidiary of LCH Group 
Holdings Ltd, which, in turn, is majority owned by the London Stock 
Exchange Group plc. The seventh covered clearing agency, Options 
Clearing Corporation (``OCC''), offers clearing services for exchange-
traded U.S. equity options.
    Covered clearing agencies operate under one of two broad ownership 
models. In one model, the covered clearing agency is member-owned,\97\ 
while in the other model, the covered clearing agency is publicly 
traded.\98\
---------------------------------------------------------------------------

    \97\ See, e.g., Exchange Act Release No. 52922 (Dec. 7, 2005), 
70 FR 74070 (Dec. 14, 2005) (explaining that participants of DTC, 
FICC, and NSCC that make full use of the services of one or more of 
these clearing agency subsidiaries of DTCC are required to purchase 
DTCC common shares).
    \98\ OCC is owned by certain options exchanges. ICC and ICEEU 
are both subsidiaries of ICE (a publicly traded company). LCH SA is 
a subsidiary of LCH Group Holdings, Ltd., which is majority-owned by 
London Stock Exchange Group plc (a publicly traded company).
---------------------------------------------------------------------------

    Covered clearing agencies currently operate specialized clearing 
services and face limited competition in their markets. For each of the 
following asset classes, for example, there is only one covered 
clearing agency serving as a central counterparty: exchange-traded 
equity options (OCC), government securities (FICC), mortgage-backed 
securities (FICC), and equity securities (NSCC). There is also only one 
covered clearing agency providing central securities depository 
services (DTC). Covered clearing agency activities exhibit high 
barriers to entry and economies of scale.\99\ These features of the 
existing markets, and the resulting concentration of clearing and 
settlement services within a handful of entities, inform the 
Commission's examination of the effects of the proposed rule and 
amendments on competition, efficiency, and capital formation, as 
discussed below. Table 1 summarizes the most recent data on the number 
of participants at each covered clearing agency.\100\
---------------------------------------------------------------------------

    \99\ See Alistair Milne, Central Securities Depositories and 
Securities Clearing and Settlement: Business Practice and Public 
Policy Concerns, in Analyzing the Economics of Financial Market 
Infrastructures 334, 335 (Martin Diehl, et al. eds., 2016) available 
at https://doi.org/10.4018/978-1-4666-8745-5.ch017 (``Clearing and 
settlement operations have evolved over time to become remarkably 
complex. This complexity creates business challenges, especially for 
management of liquidity, which could potentially have systemic 
consequences for the wider financial system. This complexity may 
also increase the barriers to entry that can discourage competition 
in trade settlement and securities services.'').
    \100\ Data Membership requirements vary across the covered 
clearing agencies. For example, the self-clearing minimum net-
capital requirement is $500 thousand for NSCC, while OCC's net 
capital requirement is $2.5 million. Multiple memberships by the 
same firm are much more common at NSCC than at the other covered 
clearing agencies.

[[Page 34728]]



 Table 1 a--Number of Participants at Covered Clearing Agencies in March
                                  2023
------------------------------------------------------------------------
                                                             Number of
                 Covered clearing agency                   participants
------------------------------------------------------------------------
Subsidiaries of The Depository Trust & Clearing
 Corporation:
    National Securities Clearing Corporation \b\........           3,931
    The Depository Trust Company \c\....................             844
    Fixed Income Clearing Corporation (Government                    213
     Securities Division) \d\...........................
    Fixed Income Clearing Corporation (Mortgage Backed               140
     Securities Division) \e\...........................
Subsidiaries of Intercontinental Exchange:                ..............
    ICE Clear Credit \f\................................              29
    ICE Clear Europe (CDS Participants Only) \g\........              29
Subsidiaries of LCH:                                      ..............
    LCH SA (CDSClear Participants Only) \h\.............              25
The Options Clearing Corporation \i\....................             188
------------------------------------------------------------------------
\a\ Participant statistics were taken from the websites of each of the
  listed clearing agencies in March 2023.
\b\ See DTCC, NSCC Member Directories, available at http://www.dtcc.com/client-center/nscc-directories.
\c\ DTCC, DTC Member Directories, available at http://www.dtcc.com/client-center/dtc-directories.
\d\ DTCC, FICC-GOV Member Directories, available at http://www.dtcc.com/client-center/ficc-gov-directories.
\e\ DTCC, FICC-MBS Member Directories, available at http://www.dtcc.com/client-center/ficc-mbs-directories.
\f\ ICE, ICE Clear Credit Participants, available at https://www.theice.com/clear-credit/participants.
\g\ ICE, ICE Clear Europe Membership, available at https://www.theice.com/clear-europe/membership.
\h\ LCH, LCH SA Membership, available at https://www.lch.com/membership/member-search.
\i\ OCC, Member Directory, available at http://www.theocc.com/Company-Information/Member-Directory.

    Covered clearing agencies have become an essential part of the 
infrastructure of the U.S. securities markets due to their role as 
intermediaries. For example, in 2021 approximately $1.1 trillion (65%) 
of the notional amount of all single-name CDS transactions in the 
United States were centrally cleared.\101\ The average daily value of 
equities trades cleared by NSCC in 2021 was $2.0 trillion; at FICC, the 
total net value of government securities transactions in 2021 was 
$1,419 trillion and the total net par value for mortgage backed 
securities in 2021 was $69 trillion; and DTC settled a total of $152 
trillion of securities in 2021.\102\ In addition, in 2022, OCC cleared 
10.32 billion options contracts.\103\
---------------------------------------------------------------------------

    \101\ Data from DTCC's Trade Information Warehouse, compiled by 
Commission staff.
    \102\ See DTCC, Annual Report 9 (2021), available at https://
www.dtcc.com/~/media/files/downloads/about/annual-reports/DTCC-2021-
Annual-Report.
    \103\ See OCC, Press Release ``OCC Clears Record-Setting 10.38 
Billion Total Contracts in 2022 (Jan. 4, 2023), available at https://www.theocc.com/newsroom/press-releases/2023/0103occclearsrecordsetting1038billiontotalcontractsin2022.
---------------------------------------------------------------------------

    Central clearing benefits the markets by significantly reducing 
participants' counterparty risk and through more efficient netting of 
margin requirements. Consequently, central clearing also benefits the 
financial system as a whole by increasing financial resilience and the 
ability to monitor and manage risk.\104\ The role of a clearing agency 
in promoting resilience highlights its central importance in the 
functioning of markets.\105\ If a CCP is unable to perform its risk 
management functions effectively, it can transmit risk throughout the 
financial system. Similarly, if a CSD is unable to perform its 
functions, market participants may be unable to settle their 
transactions, which may transmit risk throughout the financial system.
---------------------------------------------------------------------------

    \104\ See Darrell Duffie, Still the World's Safe Haven? 
Redesigning the U.S. Treasury Market After the COVID-19 Crisis 15 
(Hutchins Center Working Paper, Paper No. 62, 2020), available at 
https://www.brookings.edu/wp-content/uploads/2020/05/wp62_duffie_v2.pdf (``Central clearing increases the transparency of 
settlement risk to regulators and market participants, and in 
particular allows the CCP to identify concentrated positions and 
crowded trades, adjusting margin requirements accordingly. Central 
clearing also improves market safety by lowering exposure to 
settlement failures . . . . As depicted, settlement failures rose 
less in March [2020] for [U.S. Treasury] trades that were centrally 
cleared by FICC than for all trades involving primary dealers. A 
possible explanation is that central clearing reduces `daisy-chain' 
failures, which occur when firm A fails to deliver a security to 
firm B, causing firm B to fail to firm C, and so on.'').
    \105\ See generally Albert J. Menkveld & Guillaume Vuillemey, 
The Economics of Central Clearing, 13 Ann. Rev. Fin. Econ. 153 
(2021).
---------------------------------------------------------------------------

    Disruption to a clearing agency's operations, or failure on the 
part of a clearing agency to meet its obligations, could serve as a 
source of contagion, resulting in significant costs not only to the 
clearing agency itself and its participants but also to other market 
participants and the broader U.S. financial system.\106\ Absent proper 
risk management, a clearing agency failure could destabilize the 
financial system. As a result, proper management of the risks 
associated with central clearing helps ensure the stability of the U.S. 
securities markets and the broader U.S. financial system.\107\
---------------------------------------------------------------------------

    \106\ See generally Dietrich Domanski, Leonardo Gambacorta, & 
Cristina Picillo, Central Clearing: Trends and Current Issues, BIS 
Q. Rev. (Dec. 2015), https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf 
(describing links between CCP financial risk management and systemic 
risk); Darrell Duffie, Ada Li, & Theo Lubke, Policy Perspectives on 
OTC Derivatives Market Infrastructure 9 (Fed. Res. Bank N.Y. Staff 
Rep., Paper No. 424, 2010), available at http://www.newyorkfed.org/research/staff_reports/sr424.pdf (``If a CCP is successful in 
clearing a large quantity of derivatives trades, the CCP is itself a 
systemically important financial institution. The failure of a CCP 
could suddenly expose many major market participants to losses. Any 
such failure, moreover, is likely to have been triggered by the 
failure of one or more large clearing agency participants, and 
therefore to occur during a period of extreme market fragility.''); 
Craig Pirrong, The Inefficiency of Clearing Mandates 11-14, 16-17, 
24-26 (Policy Analysis Working Paper, Paper No. 655, 2010), 
available at http://www.cato.org/pubs/pas/PA665.pdf (stating, among 
other things, that ``CCPs are concentrated points of potential 
failure that can create their own systemic risks,'' that ``[a]t 
most, creation of CCPs changes the topology of the network of 
connections among firms, but it does not eliminate these 
connections,'' that clearing may lead speculators and hedgers to 
take larger positions, that a CCP's failure to effectively price 
counterparty risks may lead to moral hazard and adverse selection 
problems, that the main effect of clearing would be to 
``redistribute losses consequent to a bankruptcy or run,'' and that 
clearing entities have failed or come under stress in the past, 
including in connection with the 1987 market break); see Glenn 
Hubbard et al., Report of the Task Force on Financial Stability, 
Brookings Inst., 96 (June 2021), available at https://www.brookings.edu/wp-content/uploads/2021/06/financial-stability_report.pdf (``In short, the systemic consequences from a 
failure of a major CCP, or worse, multiple CCPs, would be severe. 
Pervasive reforms of derivatives markets following 2008 are, in 
effect, unfinished business; the systemic risk of CCPs has been 
exacerbated and left unaddressed.''); Froukelien Wendt, Central 
Counterparties: Addressing their Too Important to Fail Nature 
(working paper Jan. 2015), available at https://ssrn.com/abstract=2568596 (retrieved from SSRN Elsevier database) (assessing 
the potential channels for contagion arising from CCP 
interconnectedness); Manmohan Singh, Making OTC Derivatives Safe--A 
Fresh Look 5-11 (IMF Working Paper, Paper No. 11/66, 2011), 
available at http://www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf 
(addressing factors that could lead central counterparties to be 
``risk nodes'' that may threaten systemic disruption).
    \107\ See Paolo Saguato, Financial Regulation, Corporate 
Governance, and the Hidden Costs of Clearinghouses, 82 Ohio St. L.J. 
1071, 1074-75 (2021), available at https://moritzlaw.osu.edu/sites/default/files/2022-03/18.%20Saguato_v82-6_1071-1140.pdf (``[T]he 
decision to centralize risk in clearinghouses made them critical for 
the stability of the financial system, to the point that they are 
considered not only too-big-to-fail, but also too-important-to-fail 
institutions.'').

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[[Page 34729]]

2. Overview of the Existing Regulatory Framework
    The existing regulatory framework for clearing agencies registered 
with the Commission includes section 17A of the Exchange Act, the Dodd-
Frank Act, and the related rules adopted by the Commission.\108\
---------------------------------------------------------------------------

    \108\ See supra section II.
---------------------------------------------------------------------------

    Clearing agencies registered with the Commission may also be 
subject to other domestic or foreign regulation.\109\ Specifically, 
clearing agencies operating in the U.S. may also be subject to 
regulation by the CFTC (as clearing agencies for futures or swaps) and 
the Board of Governors (as systemically important financial market 
utilities or state member banks).\110\ Additionally, LCH SA is 
regulated by l'Autorit[eacute] des march[eacute]s financiers, 
l'Autorit[eacute] de Contr[ocirc]le Prudentiel et de R[eacute]solution, 
and the Banque de France, and it is subject to European Market 
Infrastructure Regulation (EMIR).\111\ ICEEU is regulated by the Bank 
of England, and it is subject to the UK's incorporation of EMIR into 
the UK framework.\112\
---------------------------------------------------------------------------

    \109\ See supra section III.D.2.
    \110\ See 12 U.S.C. 5472, 5469. Currently, ICC, ICEEU, LCH SA, 
and OCC are also regulated by the CFTC. DTC, FICC, NSCC, ICC, and 
OCC have been designated systemically important financial market 
utilities by the Financial Stability Oversight Council (see infra 
note 138 and the accompanying text). DTC is also a state member bank 
of the Federal Reserve System. The Board of Governors addresses 
certain recovery and wind-down plans in Regulation HH (see supra 
notes 68 and accompanying text), and the CFTC requires certain 
derivatives clearing organizations to maintain recovery and wind-
down plans through Regulation 39.39(b) and subsequent guidance (see 
supra notes 69 and accompanying text).
    \111\ See LCH, Company Structure, available at https://www.lch.com/about-us/structure-and-governance/company-structure.
    \112\ See ICE, ICEEU Regulation, available at https://www.theice.com/clear-europe/regulation; see also https://www.fca.org.uk/markets/uk-emir.
---------------------------------------------------------------------------

3. Current Recovery and Wind-Down Plans
    As discussed in section II supra, each covered clearing agency, as 
part of a sound risk-management framework, is currently required to 
include plans for the recovery and orderly wind-down of the covered 
clearing agency necessitated by credit losses, liquidity shortfalls, 
losses from general business risk, or any other losses (such plans are 
referred to as RWPs).\113\ The covered clearing agency may have one RWP 
or may maintain two separate documents, referring to one as the 
recovery plan and the other as the wind-down plan. Although the 
Commission did not include specific requirements for RWPs when the rule 
was adopted, the Commission did offer general guidance about what 
covered clearing agencies should consider when creating their 
RWPs.\114\ The RWPs are subject to the rule filing requirement of Rule 
19b-4, and all seven active covered clearing agencies have submitted 
their plans and subsequent revisions to the Commission for review, 
public comment, and approval.\115\ Additionally, all of the covered 
clearing agencies have submitted confidential treatment requests with 
their RWPs pursuant to 17 CFR 240.24b-2. The Commission has also 
reviewed these confidential treatment requests and concluded that the 
redacted material could be withheld from the public under the Freedom 
of Information Act.\116\ Due to the confidential treatment of the RWPs, 
the current release includes aggregated, anonymized analyses of the 
RWPs submitted to the Commission by the clearing agencies. 
Additionally, Form 19b-4, which is public, requires a description of 
the proposed rule change for public comment.\117\ To the extent that 
information in the baseline has been drawn from public sources, such as 
the covered clearing agencies' SRO rule filings, we have included 
attribution accordingly. All seven active covered clearing agencies 
have approved RWPs in place, and the plans differ in, for example, 
length, style, emphasis, and specificity.
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    \113\ See supra note 16 and accompanying text.
    \114\ CCA Standards Adopting Release, supra note 7, 81 FR at 
70810. See also supra section II.A (discussing the guidance).
    \115\ See supra section II generally, including note 32 on Form 
19b-4 and note 41 for proposed rule changes.
    \116\ See, e.g., https://www.sec.gov/rules/sro/nscc/2018/34-82430-ex5a.pdf (as an example of the redacted filing materials 
posted for SR-NSCC-2017-017). See also supra notes 32 and 41 and 
accompanying text.
    \117\ See supra note 32.
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a. Critical Clearing and Settlement Services
    Each RWP currently includes what the covered clearing agency has 
identified and described as its critical payment, clearing, and 
settlement services, as well as the criteria that the covered clearing 
agency employs to make such a determination as to what constitutes 
critical services.\118\ Depending on their operations and the structure 
of their RWPs, covered clearing agencies currently identify between one 
and a dozen or more critical services in those RWPs. Currently, no 
covered clearing agency has analyses in its RWP regarding the staffing 
levels necessary to support the critical services that they list or how 
such staffing would continue in the event of a recovery operation or 
during an orderly wind-down.
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    \118\ See, e.g., Exchange Act Release Nos. 82462 (Jan. 2, 2018), 
83 FR 884, 885 (Jan. 8, 2018) (SR-DTC-2017-021) (stating that the 
RWP provided a description of its services and the criteria to 
determine which services are considered critical) (``DTC 2017 
Notice''); 82431 (Jan. 2, 2018), 83 FR 871, 872 (Jan. 8, 2018) (SR-
FICC-2017-021) (stating that the RWP provided a description of its 
services and the criteria to determine which services are considered 
critical) (``FICC 2017 Notice''); ICC 2021 Order, supra note 41, 86 
FR at 26561 (stating that the ICC recovery plan explains that ICC's 
sole critical operation is provides credit default swap clearing 
services); ICEEU 2019 Order, supra note 41, 84 FR at 34455 (stating 
that ICEEU identified its futures and option and credit default swap 
product clearing services, as well as its treasury and banking 
services, as critical services); 82316 (Dec. 13, 2017), 82 FR 60246, 
60247 (Dec. 19, 2017) (SR-LCH SA-2017-012) (stating that LCH SA 
performed an assessment on identification of critical functions and 
shared services in accordance with Financial Stability Board 
guidance) (``LCH 2017 Notice''); 82430 (Jan. 2, 2018), 83 FR 841, 
842 (Jan. 8, 2018) (SR-NSCC-2017-017) (stating that the RWP provided 
a description of its services and the criteria to determine which 
services are considered critical) (``NSCC 2017 Notice''); 82352 
(Dec. 19, 2017), 82 FR 61072, 61074-75 (Dec. 26, 2017) (SR-OCC-2017-
021) (stating that OCC's RWP identifies critical services and 
critical support functions) (``OCC 2017 Notice'').
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b. Service Providers
    Each RWP identifies and describes, to varying degrees, certain 
service providers, including both affiliates and third parties, upon 
which the associated covered clearing agency relies to provide its 
critical payment, clearing, and settlement services. Most plans do not 
explicitly link the identified service providers to the covered 
clearing agencies' critical services. Some of the RWPs state that they 
assume critical service providers will continue to perform in the event 
of a wind-down; at least one RWP states that it analyzes its 
contractual arrangements with respect to continuing to provide services 
during a recovery; \119\ and at least one RWP

[[Page 34730]]

states that it is reducing dependencies on third parties.
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    \119\ For example, OCC's plan discusses the critical vendors for 
each of the identified critical services, as well as the Critical 
Support Functions, as well as the critical external interconnections 
that OCC maintains with other FMUs, exchanges (including designated 
contract markets), clearing and settlement banks, custodian banks, 
letter of credit banks, clearing members and credit facility 
lenders, and the appendices to the plan identifies key vendors and 
service providers, as well as key agreements to be maintained. OCC 
2017 Notice, supra note 118, 82 FR at 61075. ICC's plan categorizes 
its critical services by those that are provided to ICC by its 
parent company versus those that are provided by external third 
parties, and it also details the IT systems and applications 
critical to ICC's clearing operations, including those provided by 
ICE, those provided by external third parties, and those that ICC 
itself provides. Further, the plan analyzes ICC's contractual 
arrangements in the context of continuing services under those 
contracts during recovery. ICC 2017 Notice and Order, supra note 41, 
82 FR at 26561-62. In addition, NSCC's, FICC's, and DTC's plans 
identify external service providers for which the relationships are 
managed by a particular office within DTCC. See, e.g., Securities 
Exchange Act Release Nos. 91428 (Mar. 29, 2021), 86 FR 17440, 17442 
(Mar. 29, 2021) (SR-NSCC-2021-004) (``NSCC 2021 Notice''); 91430 
(Mar. 29, 2021), 86 FR 17432, 17433-34 (Apr. 2, 2021) (SR-FICC-2021-
002) (``FICC 2021 Notice''); 91429 (Mar. 29, 2021), 86 FR 17421, 
17422 (Mar. 29, 2021) (SR-DTC-2021-004) (``DTC 2021 Notice'').
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c. Scenarios
    Each RWP generally identifies and describes certain scenarios that 
may potentially prevent the covered clearing agency from being able to 
provide its critical payment, clearing, and settlement services as a 
going concern.\120\ The RWPs differ in the number of scenarios 
identified and described as well as the extent of the specificity with 
which each scenario is discussed. For example, some RWPs present short 
qualitative analyses of member defaults, while others present long, 
detailed quantitative analyses of member defaults.
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    \120\ For example, OCC's plan identifies and considers scenarios 
that may potentially prevent it from being able to provide its 
critical services as a going concern. See OCC 2017 Notice, supra 
note 118, 82 FR at 61073. ICC's plan describes potential stress 
scenarios that may prevent it from being able to meet obligations 
and provide services and the recovery tools available to it to 
address these stress scenarios. See Securities Exchange Act Release 
No. 91439 (Mar. 30, 2021), 86 FR 17649, 17650 (Apr. 5, 2021) (SR-
ICC-2021-005) (``ICC 2021 Notice''). ICEEU's plans outlines a number 
of firm-specific and market-wide stress scenarios that, in its 
determination, may result in significant losses or liquidity 
shortfall, suspension or failure of its critical services and 
related functions and systems, and damage to other market 
infrastructure, with resulting uncertainty in the markets for which 
ICEEU clears. See Exchange Act Release No. 82496 (Jan. 12, 2018), 83 
FR 2855 (Jan. 19, 2018) (SR-ICEEU-2017-016). LCH SA's plans 
categorizes potential stress scenarios in two ways as a result of 
either: (i) Clearing member defaults and (ii) non-clearing member 
events. See LCH 2017 Notice, supra note 118, 82 FR at 60248. In 
addition, each of the plans for NSCC, FICC, and DTC discuss, at a 
general level, scenarios in terms of uncovered losses or liquidity 
shortfalls that could result from the default of one or more of its 
members as well as losses that could arising from non-default 
events. See, e.g., NSCC 2021 Notice, supra note 119, 86 FR at 17441; 
FICC 2021 Notice, supra note 119, 86 FR at 17433; DTC 2021 Notice, 
supra note 119, 86 FR 17421.
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d. Criteria That Would Trigger Implementation
    Each RWP identifies and describes criteria that would trigger the 
implementation of the recovery and orderly wind-down plan.\121\ The 
RWPs differ in the number of identified triggering criterion and the 
detail in which they discuss each triggering criteria; there are also 
differences in the descriptions of the processes that covered clearing 
agencies use to monitor and determine whether the triggering criteria 
have been met, thus causing their RWPs to be activated.
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    \121\ See OCC 2017 Notice, supra note 118, 82 FR at 61079-80 
(discussing OCC's identification of qualitative trigger events for 
both recovery and wind-down); 83 FR at 34183, 34221, and 44970 
(stating the DTC, NSCC, and FICC have identified wind-down triggers 
and that a covered clearing agency would have entered ``recovery 
phase'' when it issues its first loss allocation round); ICC 2021 
Order, supra note 41, 86 FR at 26562; 84 FR at 24455 (ICEEU).
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e. Rules, Policies, Procedures, and Other Tools or Resources
    Each RWP describes, to varying degrees, the rules, policies, 
procedures, and other tools or resources the covered clearing agency 
would rely upon in a recovery or orderly wind-down to address the 
scenarios identified in the RWP.\122\
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    \122\ See, e.g., 83 FR at 34220-21 (identifying NSCC's recovery 
tool characteristics); FICC 2017 Notice, supra note 118, 83 FR at 
878 (identifying FICC's recovery tool characteristics); 83 FR at 
44970 (identifying DTC's recovery tool characteristics); OCC 2017 
Notice, supra note 118, 82 FR at 61075-80 (identifying OCC's 
enhanced risk management and recovery tools); ICC 2021 Order, supra 
note 41, 86 FR at 26562 (identifying ICC's recovery tools); 84 FR at 
34456 (identifying key aspects of recovery tools for ICEEU); 83 FR 
at 28886-87 (describing LCH SA's tools).
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f. Procedures To Ensure Timely Implementation
    Each RWP mentions, to varying degrees, mechanisms that would ensure 
timely implementation of the RWP.\123\ Some of the RWPs include 
specific procedures to ensure timely implementation of a recovery and 
orderly wind-down plan after specific criteria have been triggered. One 
of the RWPs has taken steps to ensure timely completion of a recovery 
or orderly wind-down.
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    \123\ Each of the plans for NSCC, FICC, and DTC provides a 
description of the governance and process around management of a 
stress event along a ``Crisis Continuum'' timeline. See, e.g., NSCC 
2017 Notice, supra note 118, 83 FR at 842; FICC 2017 Notice, supra 
note 118, 83 FR at 872; DTC 2017 Notice, supra note 118, 83 FR at 
886. OCC's recovery plan outlines an escalation process for the 
occurrence of a ``Recovery Trigger Event'' as well as provides 
general descriptions of how it would anticipate deploying its 
recovery tools in response to the six stress scenarios it 
identified. OCC 2017 Notice, supra note 118, 82 FR at 61079-80. The 
ICC recovery plan describes the governance arrangements that provide 
oversight and direction of the plan. See ICC 2021 Notice, supra note 
120, 86 FR 17649. ICEEU revised its recovery plan to more clearly 
address decision-making during recovery in 2019. See Securities 
Exchange Act Release No. 85907 (May 21, 2019), 84 FR 24549 (May 28, 
2019) (SR-ICEEU-2019-013) (``ICEEU 2019 Notice''). The LCH SA 
recovery plan identifies the groups and individuals within LCH SA 
that are responsible for the various aspects of plan. See LCH 2017 
Notice, supra note 118, 82 FR at 60250.
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g. Procedures for Informing the Commission
    Each RWP generally refers to informing the Commission about 
recovery or orderly wind-down activities, but the majority of RWPs do 
not include specific procedures for informing the Commission. Some of 
the RWPs state that they will inform the Commission after a recovery or 
wind-down has been initiated.
h. Testing
    Three RWPs provide for annual plan testing but with varying degrees 
of specificity about the participants' involvement as well as the 
frequency of such testing. One such covered clearing agency 
specifically refers to sharing the results of the testing with the 
board of directors and another states that the RWP would be updated as 
appropriate as a result of the testing.\124\ The remaining covered 
clearing agencies do not mention testing in their RWPs.
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    \124\ See ICC 2021 Order, supra note 41, 86 FR at 26562 
(referencing testing its Recovery Plan at least annually, as part of 
its annual default management drills and providing the results of 
such testing, as well as any changes it recommends due to such 
testing, to the ICC Board and Risk Committee); ICCEU, 83 FR at 2857 
(referencing testing elements of the Recovery Plan as part of normal 
operations and risk management procedures); LCH 2017 Notice, supra 
note 118, 82 FR at 60250 (referencing fire drills intended to 
simulate all aspects of a member default, including the auctioning 
of the defaulting members portfolio to non-defaulting members (where 
appropriate) and involving the participation of members and relevant 
functions within the LCH SA organization., with revisions to the 
recovery plan as appropriate in light of the testing).
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i. Plan Reviews
    Each RWP provides for periodic plan reviews, typically annually or 
biennially.\125\ Two RWPs provide for

[[Page 34731]]

non-scheduled reviews. In the existing plans, the boards of directors 
of the covered clearing agency are responsible for the review and 
approval of the RWPs, but the plans vary in whether they specify that 
such review will also occur after material changes to the covered 
clearing agency's operations or in light of the results of periodic 
testing of the RWPs.
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    \125\ NSCC, FICC, and DTC review their respective RWPs 
biennially. See NSCC 2021 Notice, supra note 119, 86 FR at 17441; 
FICC 2021 Notice, supra note 119, 86 FR at 17433; DTC 2021 Notice, 
supra note 119, 86 FR at 17421. OCC conducts an annual review of its 
RWP. See Securities Exchange Act Release No. 90315 (Nov. 3, 2020), 
85 FR 71384, 71385 (Nov. 9, 2020) (SR-OCC-2020-013); see also OCC 
2017 Notice, supra note 118, 82 FR at 61080. ICC's RWP describes 
governance arrangements that provide for oversight and direction in 
respect to review and testing of the plans. See ICC 2021 Notice, 
supra note 120, 86 FR at 17651-52. The ICEEU recovery plan is 
subject to annual review and ad hoc reviews may be commissioned if 
the business materially changes. See Securities Exchange Act Release 
No. 83651 (Jul. 17, 2018), 83 FR 34891, 34893 (Jul. 23, 2018) (SR-
ICEEU-2017-016 and SR-ICEEU-2017-017). In addition, ICEEU requires 
annual testing of the plan via a table-top exercise to ensure ICE 
Clear Europe staff's understanding of the plan and its 
implementation. See ICEEU 2019 Notice, supra note 123, 84 FR at 
24550. LCH SA decided to review its wind-down plan on an annual 
basis or more frequently, if required. See Securities Exchange Act 
Release No. 88297 (Feb. 27, 2020), 85 FR 12814 (Mar. 4, 2020) (SR-
LCH SA-2020-001).
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4. Current Risk-Based Margin
    As discussed in section III.A supra, Rule 17Ad-22(e)(6) requires 
covered clearing agencies that provide central counterparty services to 
establish written policies and procedures reasonably designed to cover 
its credit exposure to its participants by establishing a risk-based 
margin systems with certain characteristics. Intraday margining 
represents an important tool that covered clearing agencies use to 
manage risk exposures on a real-time basis, by virtue of allowing a 
quick response to volatility spikes that call for changes in collateral 
to cover actual and potential losses.
a. Monitoring Exposure and Intraday Margin Calls
    Each covered clearing agency currently has some ability to monitor 
for intraday exposure and to make certain intraday margin calls. The 
frequency of intraday monitoring and margin calls varies across 
markets, and it is responsive to the risk characteristics of the 
underlying markets and participants. Participants are generally 
required to post margin within an hour of notification or at specified 
times pursuant to the covered clearing agency's rules and procedures. 
The current practice of covered clearing agencies is to release excess 
margin to participants only once a day at a pre-scheduled time.
    For example, OCC revalues its participants' portfolios throughout 
the day to calculated updated account net asset value, and its rules 
provide it the authority to issue intraday margin calls. Its intraday 
calls are generally issued between 11 a.m. and 1:30 p.m. when 
unrealized losses of an account, based on its start-of-day positions, 
exceed 50% of the account's total margin.\126\ NSCC's rules provide the 
authority to impose intraday mark-to-market charges, and it tracks 
intraday market price and position changes in 15-minute intervals. NSCC 
generally collects additional margin if the difference between the most 
recent mark-to-market price of a participant's net positions and the 
most recent observed market price exceeds a predetermined threshold, 
which is currently 80 percent of the participant's volatility charge 
and may be reduced if NSCC determines that a reduction of the threshold 
is appropriate to mitigate risk during volatile market conditions.\127\
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    \126\ See Options Clearing Corporation, Disclosure Framework at 
52, available at https://www.theocc.com/getmedia/4664dece-7172-42a5-8f55-5982f358b696/pfmi-disclosures.pdf, and OCC Rule 609 (regarding 
intra-day margin calls).
    \127\ See NSCC Disclosure Framework at 58, available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf (``NSCC Disclosure Framework''), and 
NSCC Rules, Procedure XV (defining intraday mark-to-market charge).
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    FICC's GSD and FICC's MBSD have the authority to make intraday 
margin calls.\128\ FICC monitors changes in pricing and positions 
frequently throughout the day, and it may collect intraday margin to 
cover the price movement from those participants with a significant 
exposure in an identified security or net portfolio and the market 
value of those positions.\129\
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    \128\ See FICC's GSD Rule 4, section 2a (regarding the intraday 
supplemental fund deposit); FICC's MBSD Rule 1 (defining intraday 
VaR and intraday mark-to-market charges) and Rule 4, section 2(b) 
(regarding the daily margin requirement) and section 3a (regarding 
the intraday requirements). In addition, FICC's GSD collects margin 
twice a day under its current rules, notwithstanding any additional 
intraday margin calls. See FICC's GSD Rules, schedule of timeframes.
    \129\ See generally note 128 supra and FICC Disclosure Framework 
at 65, available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf.
---------------------------------------------------------------------------

    ICC also monitors each participant's intraday profit and loss to 
determine if its intraday exposure is covered by the margin on deposit, 
and it may issue margin calls to participants that are not sufficiently 
collateralized.\130\ LCH SA also has the ability and authority to make 
intraday margin calls that are based on intraday positions and 
valuations.\131\
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    \130\ ICC Disclosure Framework at 22-23, available at https://www.theice.com/publicdocs/clear_credit/ICEClearCredit_DisclosureFramework.pdf, and ICC Rule 401.
    \131\ See generally LCH SA Disclosure Framework at 31, available 
at https://www.lch.com/system/files/media_root/LCH%20SA%20-%20Comprehensive%20Disclosure%20as%20required%20by%20SEC%20Rule%2017Ad-22%28e%29%2823%29_2022%20Q32022.pdf, and LCH CDS Clearing 
Procedures section 2.21 (describing ``extraordinary margin'' that 
LCH SA may require to cover the risk of price/spread fluctuations 
occurring on an intraday basis).
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b. Reliable Sources of Timely Price Data and Other Substantive Inputs
    Covered clearing agencies use price data as well as other data 
sources and other substantive inputs in their risk-based margin 
systems, which is expected given the substantive differences in the 
markets and participants they serve. Based on its supervisory 
experience, the Commission understands that all covered clearing 
agencies generally have policies and procedures in place to use a risk-
based margin system that uses reliable sources of timely price data and 
includes procedures and sound valuation models for addressing 
circumstances in which price data are not readily available or 
reliable. The Commission also understands that if a covered clearing 
agency uses other substantive inputs, such as portfolio size, asset 
price volatility, duration, convexity, and outputs from external model 
vendors, which are not required by the Commission's rules, not all 
covered clearing agencies have policies and procedures for addressing 
circumstances in which those substantive inputs are not readily 
available or reliable so that the covered clearing agency can continue 
to meet its requirements under Rule 17Ad-22(e)(6).
    The policies and procedures used when price data or other 
substantive inputs are not available vary from one RWP to another. For 
example, the largest component of margin at FICC's GSD is typically its 
``VaR Charge.'' The VaR Charge is based on the potential price 
volatility of unsettled positions using a sensitivity-based Value-at-
Risk (``VaR'') methodology over a ten-year historical look-back period. 
In addition, FICC's GSD also uses an alternative ``Margin Proxy'' 
calculation as a back-up VaR Charge calculation to the sensitivity 
approach in the event that FICC experiences a data disruption with the 
third-party vendor upon which FICC relies to produce the sensitivity-
based VaR Charge.\132\ FICC's MBSD relies upon a similar approach, that 
is, using a sensitivity-based VaR methodology as its primary model, 
which relies upon third-party data, as well as a Margin Proxy, and it 
also uses an additional alternative calculation referred to as the 
``Minimum Margin Amount'' that also does not rely on external vendor 
data.\133\

[[Page 34732]]

NSCC relies upon a parametric VaR model to determine the potential 
future exposure of a given portfolio based on historical price 
movements, using 153 days as the minimum sample period for the 
historical data. For certain securities, including fixed income 
securities, UITs, illiquid securities, securities that are amendable to 
statistical analysis only in a complex manner and securities that are 
less amenable to statistical analysis, a haircut-based volatility 
charge is applied in lieu of the VaR charge.\134\
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    \132\ See generally FICC Disclosure Framework at 62, Exchange 
Act Release No. 82779 (Feb. 26, 2018) (File No. SR-FICC-2018-801) 
(describing both the sensitivity-based VaR model that would use a 
third party vendor to supply security-level risk sensitivity data 
and relevant historical risk factor time series data and the use of 
the Margin Proxy in the event of a disruption at FICC's third-party 
vendor, as well as the procedures that would govern in the event 
that the vendor fails to deliver such data).
    \133\ See, e.g., FICC Disclosure Framework at 64; 81 FR 95669 
(Dec. 28, 2016) (describing both the sensitivity-based VaR model 
that would use a third party vendor to supply security-level risk 
sensitivity data and relevant historical risk factor time series 
data and the use of the Margin Proxy in the event of a disruption at 
FICC's third-party vendor, as well as the procedures that would 
govern in the event that the vendor fails to deliver such data); 
Exchange Act Release No. 92145 (June 10, 2021), 86 FR 32079 (June 
16, 2021) (File No. SR-FICC-2020-804) (describing the calculation of 
the Minimum Margin Amount).
    \134\ See NSCC Disclosure Framework, supra note 127, at 58-61.
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C. Consideration of Benefits and Costs as Well as the Effects on 
Efficiency, Competition, and Capital Formation

    The following discussion sets forth the potential economic effects 
stemming from adopting the proposed rule and amendments, including the 
effects on efficiency, competition, and capital formation.
    The benefits and costs discussed in this subsection are relative to 
the economic baseline discussed previously, which includes the covered 
clearing agencies' current RWPs and their current risk-based margin 
practices. In some instances, the proposals reflect what the Commission 
understands to be current practices at many covered clearing agencies. 
To the extent that a covered clearing agency's current practices align 
with part of a proposed rule or amendment, the covered clearing agency, 
its participants, and the broader market would have already absorbed 
the benefits and costs of that part of the proposed rule and amendments 
and, therefore, might not experience any direct benefits or costs if 
the Commission adopts that part of the new rule or amendments. In this 
case, the Commission believes that imposing these requirements on 
covered clearing agencies that have largely implemented the proposals 
in this release would essentially codify these elements and ensure that 
the covered clearing agencies are required to continue to include these 
elements in their RWPs or risk-based margin systems. Additionally, the 
proposed rule and amendments would ensure that the RWPs and risk-based 
margin systems of any new covered clearing agency would be required to 
have RWPs that contain all of the proposed elements.
    Disruptions in the operations at any of the covered clearing 
agencies would cause significant negative externalities in the markets 
they serve, which would likely spill over into other markets. These 
ripple effects would negatively affect numerous market participants, 
including investors. Because covered clearing agencies may not 
internalize the full cost of these externalities, their investments in 
their RWPs and risk-based margin systems might be suboptimal from a 
public welfare perspective. An important benefit of the proposed rule 
and amendments is that they require covered clearing agencies to 
maintain a higher investment than they might otherwise maintain.
    The Commission recognizes that the existing rules allow a degree of 
discretion that would be reduced or eliminated by the proposals. Even 
if covered clearing agencies would not need to change their current 
practices significantly to align with the proposals, if adopted, they 
would incur indirect costs in terms of less discretion in the future. 
For example, a covered clearing agency that currently plans an annual 
review of its RWP would lose the ability to change to a biennial review 
in the future.
    The costs discussed in this subsection would be borne by covered 
clearing agencies and their participants. For covered clearing agencies 
owned by participants, all of the costs will ultimately be passed on to 
participants because they are residual beneficiaries of the covered 
clearing agency. For covered clearing agencies not owned by 
participants, the level of pass-through would depend upon a number of 
factors, including the level of competition among clearing agencies. In 
both cases, the participants will likely pass through some of these 
costs to their customers, the level of which will depend on factors 
such as the customers' sensitivities to costs and the amount of 
competition between participants for customers. Generally, if a covered 
clearing agency does not face significant competition, it will have an 
incentive to absorb part of the cost increase. On the other hand, in 
the extreme case of a perfectly competitive market, there are no 
economic profits and price equals marginal costs so an increase in cost 
could be fully passed through to the customer.\135\ If the Commission 
adopts the proposed rule and amendments, to the extent that a covered 
clearing agency's current practices are misaligned with a proposed rule 
or amendment, the covered clearing agency, as discussed in the 
remainder of this subsection, would need to modify its RWP or risk-
based margin system in order to comply with the new standards. The 
resulting benefits and costs would increase with the amount of 
modifications. Because the Commission has previously stated that RWPs 
are rules for purposes of a covered clearing agency's SRO obligations, 
and because the covered clearing agencies already have filed such RWPs 
with the Commission for approval, any such modifications would be 
subject to Commission review and public comment pursuant to Rule 19b-
4,\136\ the costs of which are included in the cost estimates presented 
in this subsection. Similarly, the Commission considers changes to a 
covered clearing agency's risk-based margin system as part of the SRO 
rule filing process, making any such modifications also subject to 
Commission review and public comment pursuant to Rule 19b-4, the costs 
of which are included in the cost estimates presented in this 
subsection. Adopting the proposed rule and amendments could also cause 
a clearing agency to make different business decisions, such as capital 
expenditure decisions, that may not be subject to the same Commission 
review process.
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    \135\ More specifically, the market clearing quantity of the 
good or service supplied will adjust and the extent of industry-wide 
cost pass-through in a perfectly competitive market depends on the 
elasticity of demand relative to supply. The more elastic is demand, 
and the less elastic is supply, the smaller the extent of pass-
through, all else being equal. See RBB Economics, Cost Pass-Through: 
Theory, Measurement and Potential Policy Implications, 4 (Feb. 
2014), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/320912/Cost_Pass-Through_Report.pdf.
    \136\ Supra note 115.
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1. Proposed Rule 17ad-26
    Proposed Rule 17ad-26 sets forth nine elements that must be 
included in a covered clearing agency's RWP. The remainder of this 
subsection discusses each of these elements in turn, explaining how 
some would make RWPs more effective in guiding the covered clearing 
agencies during times of recovery or wind-down while others would help 
participants and regulators better understand how the covered clearing 
agencies will prepare for and respond to stress. The Commission 
believes that this proposed rule would reduce systemic risk to the 
extent that it reduces the risk of unsuccessful recoveries, disorderly 
wind-downs, and negative spillovers to other clearing

[[Page 34733]]

agencies and to other markets.\137\ These benefits are expected to 
increase with the amount of change each covered clearing agency makes 
to align itself with the rule. Proposed Rule 17ad-26 would require 
covered clearing agencies to modify their RWPs to the extent their RWPs 
do not already align with the proposed rule. The Commission anticipates 
that these changes may result in the covered clearing agencies being 
more aware of potential risks and the associated costs of certain 
factors under their control, which could, in turn, lead to the covered 
clearing agency making changes to certain business practices.
---------------------------------------------------------------------------

    \137\ See supra note 106 and accompanying text.
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a. Critical Clearing and Settlement Services
    Proposed Rule 17ad-26(a)(1) requires RWPs to identify and describe 
their critical payment, clearing, and settlement services and to 
address how the covered clearing agency would continue to provide such 
critical services in the event of a recovery and during an orderly 
wind-down, including the identification of the staffing necessary to 
support such critical services and analysis of how such staffing would 
continue in the event of a recovery and during an orderly wind-down.
    Covered clearing agencies play an important role as financial 
market utilities. By virtue of the unique services that they offer, the 
network effects under which they operate, and their specialization by 
asset class, any failure of the covered clearing agency to provide 
their critical services would have implications with respect to 
financial stability.\138\ Policies and procedures that increase the 
resiliency of covered clearing agencies have, as a result, direct 
benefits on the stability of U.S. financial markets.
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    \138\ Five of the seven covered clearing agencies have been 
designated by the Financial Stability Oversight Council as 
Significantly Important Financial Market Utilities (``SIFMUs'') 
because the failure or disruption to the functioning of the 
financial market utility could create or increase the risk of 
significant liquidity or credit problems spreading among financial 
institutions or markets. See Designations, U.S. Dep't Treasury, 
available at https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations.
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    Each of the covered clearing agencies' RWPs currently identifies 
its critical services, as stated in the baseline analysis, but they 
differ in the degree to which they address continuation.
    Markets in which the dominant covered clearing agencies are 
currently less comprehensive in addressing continuation in their RWPs 
are expected to benefit from this requirement because they would be 
required to work through and memorialize in their RWPs how the clearing 
agency would continue to provide its critical services in case of a 
recovery or during an orderly wind-down.
    As mentioned in the economic baseline section, none of the covered 
clearing agencies currently identifies the staffing necessary to 
support critical services or provides in their RWPs analyses of how 
such staffing would continue in the event of a recovery and during an 
orderly wind-down. Because covered clearing agencies do not currently 
identify the staffing necessary to support critical services and how 
such staffing would continue during times of crisis, this new 
requirement likely would provide benefits to the market. Forward-
looking analyses around issues such as potential staffing shortfalls 
and employment agreement terms that are robust regardless of the 
financial situation of the covered clearing agency should provide each 
covered clearing agency with additional certainty and clarity around 
the presence of key personnel that would deploy the RWPs and supervise 
their implementation.
    Similarly, the current lack of these staffing analyses creates 
costs that covered clearing agencies would have to assume, in terms of 
both drafting the analyses and implementing the resulting conclusions 
from the analyses. For instance, a covered clearing agency may conclude 
when undertaking this analysis that key personnel could easily leave 
their organization in case of a recovery or wind-down scenario. In that 
case, the covered clearing agency may wish to incur the extra costs 
attendant to strengthening its employee agreements so that key 
employees remain at the covered clearing agency during a sale or 
transfer of one or more of its critical services to another entity or a 
receiver.
b. Service Providers
    Proposed Rule 17ad-26(a)(2) requires RWPs to identify and describe 
any service providers upon which the covered clearing agency relies to 
provide the services identified in Rule 17ad-26(a)(1), specify to what 
services such service providers are relevant, and address how the 
covered clearing agency would ensure that such service providers would 
continue to perform in the event of a recovery and during an orderly 
wind-down. As stated in the baseline analysis, the RWPs differ in their 
degree of alignment with this proposed rule and the level of 
descriptiveness of service providers. The markets that likely would 
benefit the most from this proposed requirement are the ones in which 
the dominant covered clearing agencies' RWPs are currently the least 
comprehensive in identifying and describing the required service 
provides and identifying how those service providers will perform in 
the event of a recovery and during an orderly wind-down, as they would 
be better prepared to manage and negotiate with service providers to 
ensure their continued performance. Covered clearing agencies that make 
more changes in identifying the service providers and the critical 
services provided by each critical service provider likely will bring 
more benefits to the markets they serve by putting themselves in a 
better position to manage their service providers during a recovery or 
orderly wind-down.
    Each covered clearing agency would incur costs to bring its RWP 
into alignment with the proposed rule. These alignment costs would 
depend on the extent of the enhancements the covered clearing agency 
makes to its RWP, including any contractual changes with the service 
providers.
c. Scenarios
    Proposed Rule 17ad-26(a)(3) requires RWPs to identify and describe 
scenarios that may potentially prevent the covered clearing agency from 
being able to provide its critical payment, clearing, and settlement 
services as a going concern, including uncovered credit losses, 
uncovered liquidity shortfalls, and general business losses. As stated 
in the baseline analysis, each of the covered clearing agencies' RWPs 
currently identifies and describes, to varying degrees, certain 
relevant scenarios. The Commission believes that the more significant 
benefits of being required to identify these scenarios would accrue to 
those markets in which the dominant covered clearing agencies lack 
breadth and specificity in identifying and describing their scenarios. 
By better understanding the circumstances that could threaten their 
ability to provide their critical services, these covered clearing 
agencies can take steps to reduce the likelihood of these scenarios 
and, should they materialize, be better prepared to achieve a recovery 
or orderly wind-down.
    Each covered clearing agency would incur costs to bring its RWP 
into alignment with the proposed rule. The alignment costs would depend 
on the extent of the enhancements the covered clearing agency makes to 
its RWP. The Commission believes that the costs to modify plans that 
require changes, including those that need to be

[[Page 34734]]

expanded to include additional scenarios, would be modest but would 
vary across covered clearing agencies because of differences in the 
markets and participants they serve.
d. Criteria That Would Trigger Implementation
    Proposed Rule 17ad-26(a)(4) requires RWPs to identify and describe 
criteria that would trigger the implementation of the RWPs. As stated 
in the baseline analysis, each covered clearing agency's RWP identifies 
and describes, to varying degrees, criteria that would trigger the 
implementation of a recovery or orderly wind-down. The Commission 
believes that the largest benefits of this rule likely would accrue to 
the markets in which the dominant covered clearing agencies that 
currently have the least comprehensive RWPs in identifying and 
describing appropriate triggers. The ex ante identification and 
description of triggers should have the benefit of being a disciplining 
mechanism that signals when the covered clearing agency may act during 
periods of market stress.\139\ The Commission further believes that the 
ex ante identification and description of triggers would lead covered 
clearing agencies to anticipate and prepare for market stress or other 
events that could lead to a recovery or wind-down.
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    \139\ Ansgar Walther and Lucy White, Rules Versus Discretion in 
Bank Resolution, Banque de France (Mar. 25, 2016), available at 
https://acpr.banque-france.fr/sites/default/files/medias/documents/waltherwhite.pdf (``[T]he optimal regulatory arrangement is a 
combination of rules and discretion: Discretion when public 
information is relatively benign, and rules when public information 
is more negative.'').
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    Each covered clearing agency would incur costs to bring its RWP 
into alignment with the proposed rule. The alignment costs would depend 
on the extent of the enhancements the covered clearing agency makes to 
its RWP.
e. Rules, Policies, Procedures, and Other Tools or Resources
    Proposed Rule 17ad-26(a)(5) requires RWPs to identify and describe 
the rules, policies, procedures, and any other tools or resources the 
covered clearing agency would use in a recovery or orderly wind-down to 
address the scenarios identified in the RWP. The Commission believes 
that the markets that likely would benefit the most from this 
requirement are the ones in which the dominant covered clearing 
agencies have the least comprehensive RWPs in describing how the rules, 
policies, procedures, tools and other resources would be used during a 
recovery or wind-down. Making these changes to their RWPs should enable 
the covered clearing agencies to more fully anticipate how future 
crises might impact their operations, which should enhance their 
ability to respond and accordingly decrease the expected costs borne by 
covered clearing agencies, the participants, and other stakeholders in 
future crises. For example, if a covered clearing agency determines 
that it needs a new rule to respond to a specific scenario and if that 
scenario ever materializes, the covered clearing agency should be 
better positioned to respond appropriately to it.
    Each covered clearing agency would incur costs to bring its RWP 
into alignment with the proposed rule. The alignment costs would depend 
on the extent of the enhancements the covered clearing agency makes to 
its RWP. Covered clearing agencies that determine that they need to 
include more responses, different resources, or better descriptions 
would incur more costs as they make appropriate revisions to their RWPs 
and their resources. The Commission believes that the costs to modify 
plans that require changes, including those that need to be expanded, 
would increase in the number of required changes such as the number of 
new rules the covered clearing agency is required to adopt.
f. Procedures To Ensure Timely Implementation
    Proposed Rule 17ad-26(a)(6) requires RWPs to address how the rules, 
policies, procedures, and any other tools or resources identified in 
17ad-26(a)(5) would ensure timely implementation of the RWP. As stated 
in the baseline analysis, each RWP mentions the concept of timeliness 
in either recovery or wind-down, but most RWPs do not list specific 
procedures to ensure timely implementation of itself. A key benefit of 
this rule is that covered clearing agencies will address in their RWPs 
how the RWP will be implemented in a timely manner when the need 
arises. The Commission believes that a timely start will increase the 
chance that the covered clearing agency is able to address the 
underlying problem in a timely manner and with lower costs to the 
various stakeholders. The benefits of this rule likely would accrue 
primarily to the markets in which the dominant covered clearing 
agencies add more or better rules, policies, procedures, tools, or 
other resources to ensure timely implementation of their RWPs.
    Each covered clearing agency would incur costs to bring its RWP 
into alignment with the proposed rule. The alignment costs would depend 
on the extent of the enhancements the covered clearing agency makes to 
its RWP. The Commission believes that the costs to modify plans that 
require changes, including those that need to be expanded to include 
additional rules, policies, procedures, or any other tool or resource 
would be modest because current RWPs already place some focus on 
timeliness as a desired feature.
g. Procedures for Informing the Commission
    Proposed Rule 17ad-26(a)(7) requires RWPs to include procedures for 
informing the Commission as soon as practicable when the covered 
clearing agency is considering initiating a recovery or orderly wind-
down. As stated in the baseline analysis, each RWP generally refers to 
informing the Commission, but not every plan includes specific 
procedures, and some plans include procedures for informing the 
Commission after initiating a recovery or orderly wind-down. Providing 
notice to the Commission may help ensure that the Commission has the 
opportunity to consider whether a covered clearing agency engages the 
recovery or wind-down event consistent with its established RWPs and 
the requirements of Commission rules to help mitigate the potential 
onward transmission of system risk and may help ensure that a wind-
down, if necessary, is orderly. These benefits likely would accrue 
primarily to the markets in which the dominant covered clearing 
agencies currently do not have procedures in place for informing the 
Commission as soon as practicable.
    Each covered clearing agency would incur costs to bring its RWP 
into alignment with the proposed rule. The alignment costs would depend 
on the extent of the enhancements the covered clearing agency makes to 
its RWP. The Commission believes that the costs to modify plans that 
require changes, including those that need to be expanded to include 
additional procedures would be modest because current RWPs already 
place some focus on informing the Commission.
h. Testing
    Proposed Rule 17ad-26(a)(8) requires RWPs to include procedures for 
testing the covered clearing agency's ability to implement the recovery 
and wind-down plans at least every twelve months, including by 
requiring the covered clearing agency's participants and, when 
practicable, other stakeholders to participate in the testing of its 
plans, providing for reporting the results of the testing to the 
covered clearing agency's board of directors and senior management, and 
specifying the procedures for, as appropriate,

[[Page 34735]]

amending the plans to address the results of the testing. As stated in 
the baseline analysis, only a few RWPs refer to plan testing. The 
Commission believes that the markets that likely would benefit the most 
from this requirement are those in which the dominant covered clearing 
agencies have the least comprehensive policies around testing in their 
RWPs because those covered clearing agencies would create procedures 
for more frequent testing, and those changes should help ensure that 
those RWPs remain current and take into account changing system and 
market conditions.
    The Commission believes that the costs to start plan tests every 
twelve months will not be large for the four covered clearing agencies 
that do not mention plan testing in their RWPs because they might be 
able to leverage existing requirements around default management 
testing.\140\ On a preliminary basis, the Commission believes that the 
corresponding testing costs for the covered clearing agencies' 
participants and, when practicable, other stakeholders likely will be 
moderate, in part because the covered clearing agencies are already 
required to include such entities in their default procedures testing 
under Rule 17Ad-22(e)(13). The costs for any subsequent RWP amendments 
likely will be small.
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    \140\ See 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

i. Plan Reviews
    Proposed Rule 17ad-26(a)(9) requires RWPs to include procedures 
requiring review and approval by the board of directors of the plans at 
least every twelve months or following material changes to the covered 
clearing agency's operations that would significantly affect the 
viability or execution of the plans, with such review informed, as 
appropriate, by the covered clearing agency's testing of the plans. As 
stated in the baseline analysis, each RWP makes reference to periodic 
plan reviews, typically annually or biennially.
    The Commission believes that the markets that likely would benefit 
the most from this requirement are those in which the dominant covered 
clearing agencies currently have the least comprehensive RWPs in 
addressing plan review because they would create more frequent 
procedures for review, and more frequent reviews, in turn, should help 
ensure that RWPs remain current and take into account any changes to 
the covered clearing agencies' operations.
    Each covered clearing agency would incur costs to bring its RWP 
into alignment with the proposed rule. The alignment costs would depend 
on the extent of the enhancements the covered clearing agency makes to 
its RWP. The Commission believes that the costs to modify plans that 
have biennial reviews to replace them with annual reviews will be 
modest. The costs to review RWPs after material changes to the covered 
clearing agencies' operations will depend on the nature and number of 
material changes that result in new reviews.
j. Burden Estimate Associated With Proposed Rule 17ad-26
    The Commission has estimated the initial and ongoing cost burden of 
adopting proposed rule 17ad-26. Accordingly, the Commission 
preliminarily believes that eight respondent clearing agencies would 
incur an aggregate one-time burden of approximately 960 hours (or 120 
hours each) to review and update existing policies and procedures. The 
cost estimate associated with the initial burden is based on 20 hours 
for an assistant general counsel at $551 per hour; 50 hours for a 
compliance attorney at $432 per hour; 35 hours for a business risk 
analyst at $ 235 per hour; and 15 hours for a senior risk management 
specialist at $423 per hour. The initial burden for one covered 
clearing agency is $47,190, and it is $377,520 for all eight covered 
clearing agencies.
    Proposed Rule 17ad-26 would also impose ongoing burdens on a 
respondent covered clearing agency. The proposed rule would require 
ongoing monitoring and compliance activities with respect to the 
written policies and procedures created in response to the proposed 
rule. Based on the Commission's previous estimates for ongoing 
monitoring and compliance burdens with respect to existing 17 CFR 
240.17Ad-22(e)(2) (``Rule 17Ad-22(e)(2)''),\141\ the Commission 
preliminarily estimates that the ongoing activities required by 
proposed Rule 17ad-26 would impose an aggregate annual burden on 
respondent covered clearing agencies of 320 hours (40 hours for each 
covered clearing agency). The ongoing burden is based on 10 hours for 
an assistant general counsel at $551 per hour and 30 hours for a 
compliance attorney at $432 per hour, totaling $18,470 per covered 
clearing agency and $147,760 for all eight covered clearing 
agencies.\142\
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    \141\ See CCA Standards Adopting Release, supra note 7, 81 FR at 
70892 (discussing Rule 17Ad-22(e)(2)).
    \142\ All values were determined from SIFMA's October 2013 
values (see, Management and Professional Earnings in the Security 
Industry--2013 (Oct. 7, 2013) and adjusted to March 2023 values 
using the Bureau of Labor Statistics' CPI Inflation Calculator, 
available at https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------

2. Amendments to Rule 17Ad-22(e)(6)
    Rule 17Ad-22(e)(6) requires covered clearing agencies that provide 
central counterparty services to establish a risk-based margin system 
to manage their credit exposures to their participants. The proposed 
amendment to Rule 17Ad-22(e)(6)(ii) will strengthen the requirements: 
(a) by requiring that covered clearing agencies monitor intraday risk 
exposures to their participants on an ongoing basis, and (b) by 
providing additional specificity to the circumstances in which covered 
clearing agencies should have policies and procedures in place to make 
intraday margin calls. The proposed amendment to Rule 17Ad-22(e)(6)(iv) 
will amend the requirements by ensuring covered clearing agencies can 
meet their Rule 17Ad-22(e)(6) obligations when their price data and 
substantive inputs are not available by including procedures to use 
price data or substantive inputs from an alternate source or to use an 
alternate risk-based margin system that does not similarly rely on the 
unavailable or unreliable substantive inputs.
a. Monitoring Exposure and Intraday Margin Calls
    The ability to assess intraday margin calls is an important tool 
that covered clearing agencies have to manage their credit exposures to 
their participants. The proposed amendment to Rule 17Ad-22(e)(6)(ii) 
requires covered clearing agencies to monitor exposure on an ongoing 
basis and to make intraday margin calls as frequently as circumstances 
warrant, including when risk thresholds specified by the covered 
clearing agency are breached or when the products cleared or markets 
served display elevated volatility, which would help reduce, but not 
eliminate, their credit exposure to their participants.
    Each covered clearing agency would have to determine how to 
operationalize ``on an ongoing basis'' and ``as frequently as 
circumstances warrant'' given its own market and participants. Each 
covered clearing agency would also need to ensure that its systems are 
capable of monitoring exposure and making margin calls at those 
frequencies. As discussed in the baseline analysis, each covered 
clearing agency is already capable of monitoring exposure and 
collecting margin on an intraday basis; nevertheless, some covered 
clearing agencies might need to

[[Page 34736]]

make changes to align with the proposed amendment such as increasing 
the frequency of exposure monitoring and improving their information 
technology so they can process more frequent margin calls.
    To the extent a covered clearing agency currently aligns with the 
proposed amendment it will not experience new benefits from its 
adoption. Nevertheless, the proposed amendment will have incremental 
benefits for the market because it will ensure that the covered 
clearing agencies continue to meet the standard of the proposed 
amendment that they are currently aligned with and that any new covered 
clearing agency that provides central counterparty services meets the 
same standard.
    The Commission further believes that the costs to modify the risk-
based margin systems that require changes would be modest because 
covered clearing agencies have already incurred the initial costs of 
building their risk management infrastructure, including the ability to 
make intraday margin calls based on some sort of intraday monitoring. 
Once those costs have been incurred and amortized, the variable costs 
of modifying the frequency of the monitoring, and any additional margin 
calls, are likely low.
    To the extent that the proposed amendment results in covered 
clearing agencies making more unanticipated margin calls, participants 
may face increased liquidity-management costs. This may potentially 
result in procyclicality problems that exacerbate market stress: margin 
calls during periods of declining asset prices may cause participants 
to sell assets, putting further negative pressure on asset prices and 
the market that may spill over into other covered clearing agencies and 
their markets. This stress may be transmitted by participants that are 
members of more than one covered clearing agency when, for example, a 
margin call in one market makes a participant sell assets in a 
different market. The stress may also be transmitted by assets that are 
linked between markets, such as the link between option prices (OCC) 
and equity prices (NSCC). Various industry participants have expressed 
concerns that excessive intraday margin calls, especially unanticipated 
ones, have the potential to exacerbate liquidity issues for clearing 
members who would have to post new liquid collateral to the covered 
clearing agency with little notice.\143\ On the other hand, such 
intraday margin calls reduce credit risk during periods of market 
stress.
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    \143\ Revisiting Procyclicality: The Impact of the COVID Crisis 
on CCP Margin Requirements, Futures Indus. Ass'n (Oct. 2020), 
available at https://www.fia.org/sites/default/files/2020-10/FIA_WP_Procyclicality_CCP%20Margin%20Requirements.pdf.
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b. Reliable Sources of Timely Price Data and Other Substantive Inputs
    The Commission believes that every covered clearing agency has a 
risk-based margin system that largely aligns with the proposed 
amendment to Rule 17Ad-22(e)(6)(iv), with the exception of at least one 
covered clearing agency that likely would need to implement additional 
changes to its risk-based margin system to ensure that it could 
continue to meet its obligations under Rule 17Ad-22(e)(6) in the event 
of the unavailability of a substantive inputs from a third party. If 
that one covered clearing agency were to lose access to its price data 
or other inputs, it may be unable to perform its critical payment, 
clearing, and settlement services, and that, in turn, may force it into 
a wind-down, which may have negative implications for its participants 
and the broader financial system.
    The incremental benefits of these proposed amendments beyond the 
baseline lie primarily in expanding the scope of this rule beyond price 
data and further specifying the nature of the procedures that a covered 
clearing agency uses in the event that such data or inputs are not 
readily available or reliable and in ensuring that any new covered 
clearing agency keeps that same standard of the proposed amendment. The 
Commission is unable to estimate the specific quantitative benefit of 
that covered clearing agency meeting the proposed amendment, but it 
believes that it is substantial because the proposed amendment reduces 
the risk that the covered clearing agency fails to provide its critical 
payment, clearing, and settlement services in future periods of high 
market stress. For example, the Options Clearing Corporation cleared a 
year-to-date average daily volume of 46.3 million contracts through 
March 2023, and DTCC reported that the average daily cleared broker-to-
broker transactions was $2 trillion in 2021.\144\ Assuming that a price 
data shortage happens by the end of a regular trading day, when there 
is increased activity in the financial markets,\145\ even a one-hour 
price data feed malfunction could affect the normal processing of 
millions of options contracts and hundreds of billions of dollars of 
equity transactions.
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    \144\ See OCC Clears Over 1B Total Contracts in March 2023, 
Highest Month on Record and up 12.2% Year-Over-Year, supra note 103 
and DTCC 2021 Annual Report, supra note 100.
    \145\ Trading after the opening bell and right before the 
closing bell are usually the two busiest trading periods for both 
equities and equity options.
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    Moreover, a price data shortage in one covered clearing agency that 
is closely interconnected to another covered clearing agency \146\ 
could result in spill-over effects that spread to that other covered 
clearing agency, magnifying the effect of the initial price data 
shortage.
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    \146\ For instance, OCC and NSCC have an information-sharing 
agreement to facilitate the settlement and delivery of physically-
settled stock options cleared by OCC via NSCC. See Securities 
Exchange Act Release No. 37731 (September 26, 1996), 61 FR 51731 
(October 3, 1996) (SR-OCC-96-04 and SRNSCC-96-11) (Order Approving 
Proposed Rule Change Related to an Amended and Restated Options 
Exercise Settlement Agreement Between the Options Clearing 
Corporation and the National Securities Clearing Corporation); 
Securities Exchange Act Release No. 43837 (January 12, 2001), 66 FR 
6726 (January 22, 2001) (SR-OCC-00-12) (Order Granting Accelerated 
Approval of a Proposed Rule Change Relating to the Creation of a 
Program to Relieve Strains on Clearing Members' Liquidity in 
Connection With Exercise Settlements); and Securities Exchange Act 
Release No. 58988 (November 20, 2008), 73 FR 72098 (November 26, 
2008) (SR-OCC-2008-18 and SR-NSCC-2008-09) (Notice of Filing and 
Order Granting Accelerated Approval of Proposed Rule Changes 
Relating to Amendment No. 2 to the Third Amended and Restated 
Options Exercise Settlement Agreement).
---------------------------------------------------------------------------

c. Burden Estimate Associated With Proposed Amendments to Rule 17Ad-
22(e)(6)
    Overall, the Commission preliminarily believes that the estimated 
burdens for the proposed amendment to Rule 17Ad-22(e)(6) may require a 
respondent covered clearing agency to make fairly substantial changes 
to its policies and procedures. Based on the similar policies and 
procedures requirements and the corresponding burden estimates 
previously made by the Commission for several rules in the Covered 
Clearing Agency Standards where the Commission anticipated similar 
burdens,\147\ the Commission preliminarily estimates that respondent 
covered clearing agencies would incur an aggregate one-time burden of 
approximately 903 hours (or 129 hours per covered clearing agency) to 
review existing policies and procedures and create new policies and 
procedures. The initial cost is based on 20 hours for an assistant 
general counsel at $551 per hour; 40 hours for a compliance attorney at 
$432 per hour; 12 hours for a computer operations manager at $521

[[Page 34737]]

per hour; 20 hours for a senior programmer at $392 per hour; 25 hours 
for a senior risk management specialist at $423 per hour; and 12 hours 
for a senior business analyst at $324 per hour. In total, the initial 
burden is estimated to be $56,855 per covered clearing agency or 
$397,985 for all seven covered clearing agencies combined.
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    \147\ See CCA Standards Adopting Release, supra note 7, 81 FR at 
70892 and 70895-97 (discussing Rules 17Ad-22(e)(2) and (13)). 
Although the proposed rule amendment is with respect to Rule 17Ad-
22(e)(6), the Commission believes that these Rules present the best 
overall comparison to the current proposed rule amendment, in light 
of the nature of the changes needed to implement the proposal here 
and what was proposed in the Covered Clearing Agency Standards.
---------------------------------------------------------------------------

    The proposed amendments to Rule 17Ad-22(e)(6) would also impose 
ongoing burdens on the covered clearing agencies. The proposed rule 
would require ongoing monitoring and compliance activities with respect 
to the written policies and procedures created in response to the 
proposed rule. Based on the similar reporting requirements and the 
corresponding burden estimates previously made by the Commission for 
several rules in the Covered Clearing Agency Standards where the 
Commission anticipated similar burdens,\148\ the Commission 
preliminarily estimates that the ongoing activities required by the 
proposed amendments to Rule 17Ad-22(e)(6) would impose an aggregate 
annual burden on covered clearing agencies of 595 hours (or 85 hours 
per covered clearing agency). The cost of the ongoing burden was 
estimated assuming 25 hours for a compliance attorney at $432 per hour; 
40 hours for a business risk analyst at $235 per hour; and 20 hours for 
a senior risk management specialist at $423 per hour, totaling $30,660 
per covered clearing agency or $214,620 for all seven covered clearing 
agencies combined.\149\
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    \148\ See CCA Standards Adopting Release, supra note 7, 81 FR at 
70893 and 70895-96 (discussing Rules 17Ad-22(e)(6) and (13)).
    \149\ All values were determined from SIFMA's October 2013 
values (see, Management and Professional Earnings in the Security 
Industry--2013 (Oct. 7, 2013) and adjusted to March 2023 values 
using the Bureau of Labor Statistics' CPI Inflation Calculator, 
available at https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------

3. Efficiency, Competition, and Capital Formation
a. Efficiency
    The Commission believes that the proposed rule and amendments, if 
adopted, may improve informational and productive efficiency in the 
market for cleared securities.
    Covered clearing agencies current policies and procedures largely 
align with proposed Rule 17ad-26. Therefore, the Commission does not 
expect substantive efficiency changes due to the proposed new rule.
    The proposed amendment to Rule 17Ad-22(e)(6)(ii) would benefit 
participants by providing increased specificity around the methods used 
by covered clearing agencies to assess intraday margin calls, thus 
enabling more efficient planning in the use of scarce margin funds.
    The proposed amendment to Rule 17Ad-22(e)(6)(iv) would increase 
informational efficiency during periods when price data or other 
substantive inputs are not available. Calculating margin and managing 
and disseminating risk information are core competencies of all covered 
clearing agencies, and various stakeholders rely on those data outputs. 
By requiring secondary sources, the proposed amendment may mitigate the 
reduction in efficiency that would otherwise happen when primary 
sources fail at a covered clearing that does not have secondary 
sources. Having the ability to continue calculating margin and 
disseminating that information to participants even when primary data 
are not available will prevent informational efficiency to decrease 
when price data or other substantive inputs are not available.
b. Competition
    As described in the baseline, covered clearing agencies are 
currently not subject to strong competitive pressures given high start-
up costs, the network effects that are inherent in the clearing 
business, and their subsequent historical consolidation by market 
segments (options clearing for OCC, equities clearing for NSCC, fixed-
income clearing for FICC, etc.). In terms of potential new entrants in 
the market for clearing and settlement services, the incremental costs 
of the proposed Rule 17ad-26 and the proposed amendment to Rule 17Ad-
22(e)(6)(ii) are small and, therefore, unlikely to be noteworthy 
barriers to entry. The amendment to Rule 17Ad-22(e)(6)(iv) may have a 
modest effect on competition because they are start-up costs that a new 
competitor would have to assume to enter into the covered clearing 
agency market.
c. Capital Formation
    The Commission expects the effects of the proposed rule and 
amendments on capital formation to be second-order because the proposal 
focuses on issues related to secondary market trading and not on issues 
related to primary market issuances. To the degree that market 
participants view equity and fixed-income covered clearing agencies as 
more reliable venues for risk transfer, they may increase their 
activity and therefore signal a demand for more capital-creating 
securities.

D. Reasonable Alternatives to the Proposed Rule and Amendments

1. Establish Precise Triggers for Implementation of RWPs Across Covered 
Clearing Agencies
    Instead of requiring covered clearing agencies to identify and 
implement their own triggers to resolution and wind-down procedures, 
the Commission could adopt a more prescriptive approach and determine 
specific triggers that covered clearing agencies would be required to 
follow. For example, the Commission could specify that exhausting 
prefunded financial resources in the waterfall structure of a covered 
clearing agency would immediately trigger a recovery or wind-down 
procedure.\150\ Alternatively, the Commission could require a trigger 
when unfunded commitments to the CCP are called upon and reach a 
specific dollar number.
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    \150\ See John W. McPartland and Rebecca Lewis, The Goldilocks 
Problem: How to Get Incentives and Default Waterfalls ``Just 
Right'', 41 Econ. Persps. 1, 2 (Mar. 2017), available at https://www.chicagofed.org/publications/economic-perspectives/2017/1-mcpartland-lewis (``All CCPs have a default waterfall that provides 
financial resources for managing a clearing member default. The 
waterfall consists of both prefunded resources and unfunded 
obligations. When a clearing member defaults, the CCP must continue 
to meet defaulter's financial obligations, whose performance it 
guarantees, to the non-defaulting clearing members, attempt to find 
clearing members willing accept the defaulter's clients, and return 
to a matched book status by liquidating or auctioning off the 
defaulter's positions. If the CCP cannot find other clearing members 
willing to onboard the defaulter's clients, then the clients' 
positions must be liquidated in order to restore the CCP to a 
matched book status. The default waterfall provides funding to cover 
the cost of meeting the defaulter's obligations and liquidating the 
defaulter's positions, as well as, if necessary, those of its 
clients.'').
---------------------------------------------------------------------------

    This alternative would harmonize triggers across covered clearing 
agencies and would create a single standard that market participants 
could rely on, eliminating any confusion or ambiguity attendant to 
different triggers. Nevertheless, covered clearing agencies are active 
in different markets (equities, bonds, options, CDS, etc.), have 
different organizational structures, and focus on different risks. As 
an example, one of the OCC's focus areas is monitoring option 
sensitivities, and, as a result, its margin models and waterfall 
structure are responsive to that consideration while FICC, on the other 
hand, focuses on duration and convexity so its waterfall structure is 
more responsive to those risks. The Commission preliminarily believes 
that having this more prescriptive approach would be unresponsive to 
the characteristics of each market and could expose covered clearing 
agencies to

[[Page 34738]]

recovery or wind-down triggers that are not aligned with the actual 
risks.
2. Establish Specific Scenarios and Analyses
    Instead of requiring covered clearing agencies to identify 
scenarios that may prevent the covered clearing agency from being able 
to provide its critical payment, clearing, and settlement services, the 
Commission could adopt a more prescriptive approach and identify 
specific scenarios in new Rule 17ad-26 that each covered clearing 
agency must include in its RWP. For example, the Commission could 
identify the scenario of the default of the covered clearing agency's 
one or two largest participants and scenarios of specific business 
risks such as the default of a custodian bank or a significant cyber-
attack.\151\ The Commission could also require more detail regarding 
how each the covered clearing agency analyzes these scenarios.\152\
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    \151\ Additional such scenarios that could be enumerated in new 
Rule 17ad-26 could include any or all of the following scenarios: 
(A) credit losses or liquidity shortfalls created by single and 
multiple clearing member defaults; (B) liquidity shortfall created 
by a combination of clearing member default and a failure of a 
liquidity provider to perform; (C) settlement bank failure; (D) 
custodian or depository bank failure; (E) losses resulting from 
investment risk; (F) losses from poor business results; (G) 
financial effects from cybersecurity events; (H) fraud (internal, 
external, and/or actions of criminals or of public enemies); (I) 
legal liabilities, including those not specific to the covered 
clearing agency's business as a covered clearing agency; (J) losses 
resulting from interconnections and interdependencies among the 
covered clearing agency and its parent, affiliates, and/or internal 
or external service providers; (K) losses resulting from 
interconnections and interdependencies with other covered clearing 
agencies; and (L) losses resulting from issues relating to services 
that are ancillary to the covered clearing agency's critical 
services. It could also include scenarios involving multiple 
failures (e.g., a member default occurring simultaneously, or nearly 
so, with a failure of a service provider) that, in the judgment of 
the covered clearing agency, are particularly relevant to its 
business.
    \152\ That is, the Commission could require in new Rule 17ad-26 
that the RWP include an analysis that includes: (A) a description of 
the scenario; (B) the events that are likely to trigger the 
scenario; (C) the covered clearing agency's process for monitoring 
for such events; (D) the market conditions, operational and 
financial difficulties and other relevant circumstances that are 
likely to result from the scenario; (E) the potential financial and 
operational impact of the scenario on the covered clearing agency 
and on its clearing members, internal and external service providers 
and relevant affiliated companies, both in an orderly market and in 
a disorderly market; and (F) the specific steps the covered clearing 
agency would expect to take when the scenario occurs, or appears 
likely to occur, including, without limitation, any governance or 
other procedures that may be necessary to implement the relevant 
recovery tools and to ensure that such implementation occurs in 
sufficient time for the recovery tools to achieve their intended 
effect.
---------------------------------------------------------------------------

    This alternative approach may reduce compliance costs by 
establishing the precise scope of the rule which could allow covered 
clearing agencies to tailor their RWPs to the enumerated requirements 
for identifying scenarios and analyses. In addition, including elements 
similar to those proscribed by other agencies that also regulate 
several covered clearing agencies could result in certain efficiencies 
and reduced costs for those covered clearing agencies. However, the 
Commission preliminarily believes that the proposed approach retains 
flexibility compared to this alternative by permitting the scenarios to 
vary across covered clearing agencies because the underlying risks vary 
across markets and participants. Because participants vary in size and 
economic significance across covered clearing agencies, scenarios 
invoking a pre-determined number of failures or fixed dollar amounts 
may have significantly different effects in one covered clearing agency 
than in another.
3. Establish Specific Rules, Policies, Procedures, Tools, and Resources
    Instead of requiring covered clearing agencies to describes the 
rules, policies, procedures, and any other tools or resources the 
covered clearing agency would rely upon in a recovery or orderly wind-
down to address the scenarios identified in their RWPs, the Commission 
could adopt a more prescriptive approach and identify in new Rule 17ad-
26 the rules, policies, procedures, and any other tools or resources 
for all covered clearing agencies. The Commission could also require in 
Rule 17ad-26 more detail regarding how a covered clearing agency 
analyzes its rules, policies, procedures, tools, and resources.\153\
---------------------------------------------------------------------------

    \153\ For example, the Commission could require in new Rule 
17ad-26 that the RWP include an analysis that includes: (i) a 
description of the tools that the covered clearing agency would 
expect to use in each scenario; (ii) the order in which each tool 
would be expected to be used; (iii) the time frame within which the 
tool would be used; (iv) the governance and approval processes and 
arrangements within the covered clearing agency for the use of each 
of the tools available, including the exercise of any available 
discretion; (v) the processes to obtain any approvals external to 
the covered clearing agency (including any regulatory approvals) 
that would be necessary to use each of the tools available, and the 
steps that might be taken if such approval is not obtained; (vi) the 
steps necessary to implement the tools; (vii) the roles and 
responsibilities of all parties, including non-defaulting 
participants; (viii) whether the tool is mandatory or voluntary; 
(ix) an assessment of the associated risks from the use of each tool 
to non-defaulting clearing members and their customers, linked 
financial market infrastructures, and the financial system more 
broadly; and (x), for wind-down, an assessment of the likelihood 
that the tool would result in orderly wind-down.
---------------------------------------------------------------------------

    This alternative approach may reduce compliance costs by 
establishing the precise scope of the rule, which could allow covered 
clearing agencies to tailor their RWPs to the enumerated requirements 
for describing rules, policies, procedures, and other tools or 
resources. In addition, including elements similar to those proscribed 
by other agencies that also regulate several covered clearing agencies 
could result in certain efficiencies and reduced costs for those 
covered clearing agencies.\154\
---------------------------------------------------------------------------

    \154\ See supra section IV.B.2, supra footnotes 68 and 69, and 
Request for Comments 15, 20-22, and 27.
---------------------------------------------------------------------------

    However, the Commission preliminarily believes that it is better to 
permit the rules, policies, procedures, and any other tools or 
resources to vary across covered clearing agencies because the 
underlying risks and resources vary. For example, a covered clearing 
agency that clears products of longer duration may have a greater need 
for a tear-up tool that extinguishes a participant's positions in 
certain circumstances than a covered clearing agency that clears 
contracts with a relatively short settlement cycle. In addition, the 
overall volume of transactions settled by a covered clearing agency may 
affect the choice of its liquidity tools or resources, as the covered 
clearing agency would have to ensure that it had sufficient liquidity 
resources to complete settlement.
4. Require the Identification of Interconnections and Interdependencies
    In addition to the requirements with respect to service providers 
set forth in proposed Rule 17ad-26(a)(2), the Commission could require 
that the covered clearing agency's RWP identify any financial or 
operational interconnections and interdependencies that the covered 
clearing agency has with other market participants. This would allow 
for consideration of the impact of the multiple roles and relationships 
that a single financial entity may have with respect to the covered 
clearing agency including affiliated entities and third parties (e.g., 
a single entity that acts as both a clearing member and a settlement 
bank and a liquidity provider).\155\
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    \155\ More specifically, a bank holding company structure may 
operate through a set of legal entities (e.g., a broker-dealer/
futures commission merchant separate from a bank separate from an 
information technology service provider), each of which has 
different relationships with the covered clearing agency.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is better not to 
include this particular requirement. A covered clearing agency is 
already required to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to identify, monitor, and 
manage risks related to

[[Page 34739]]

any link the covered clearing agency establishes with one or more other 
clearing agencies, financial market utilities, or trading markets.\156\ 
This requirement, in conjunction with the proposed requirement to 
identify and describe service providers for critical services and to 
specify to which critical service they relate, should accomplish the 
same general objective, making this reasonable alternative inferior to 
the proposed policy choice.
---------------------------------------------------------------------------

    \156\ 17 CFR 240.17Ad-22(e)(20).
---------------------------------------------------------------------------

5. Establish a Specific Monitoring Frequency for Intraday Margin Calls
    The proposed amendment to Rule 17Ad-22(e)(6)(ii) expressly 
incorporates the requirement of intraday monitoring to ensure that such 
monitoring is done on an ongoing basis. One reasonable alternative is 
to prescribe the necessary frequency of monitoring as opposed to ``on 
an ongoing basis''. For example, covered clearing agencies could be 
required to monitor exposure every 5 or 15 minutes.
    The Commission preliminarily believes, however, that monitoring on 
an ongoing basis is preferable because a fixed, pre-specified 
monitoring frequency may not be responsive enough to risk differences 
that exist across the markets served by the covered clearing agencies 
or to volatility changes that may happen through time.
6. Adopt Only Certain Elements of Proposed Rule 17ad-26
    Instead of adopting all nine elements of proposed Rule 17ad-26, the 
Commission could adopt a subset of the proposed elements. For example, 
the Commission could drop the proposed element to identify service 
providers or the proposed element to address how the covered clearing 
agency would ensure that the service providers would continue to 
perform in the event of a recovery and during and orderly wind-down. 
Alternatively, the Commission could drop the proposed element for plan 
review or the proposed element for plan testing.
    The Commission preliminarily believes that it is better to adopt 
all nine elements of proposed Rule 17ad-26 because each element helps 
ensure that the plan is fit for purpose and provides sufficient 
identification of how a covered clearing agency would operate in a 
recovery and how it would handle an orderly wind-down.
7. Focus Intraday Margin Requirements on a Subset of Covered Clearing 
Agencies
    As an alternative to implementing the proposed intraday margin 
amendments on a blanket basis, the Commission could adopt a more 
tailored approach that imposes the requirements only on a subset of 
covered clearing agencies that operate in certain markets such as those 
markets with the highest levels of activity \157\ or those markets that 
have only one covered clearing agency.\158\ A more tailored market-
level risk-based approach would adjust to the size and systemic 
importance of each market, which would reduce the counter-factual 
compliance costs for the covered clearing agencies in the markets with 
less activity or with more than one available clearing agency.
---------------------------------------------------------------------------

    \157\ Activity could be measured in different ways, including 
the number or value of cleared transactions. Average daily 
settlement value is much higher in the equity market (NSCC) than it 
is in the fixed income market (FICC). See DTCC, Annual Report 
(2021), available at https://www.dtcc.com/~/media/files/downloads/
about/annual-reports/DTCC-2021-Annual-Report.
    \158\ The following securities markets have only one central 
counterparty: exchange-traded equity options (OCC), government 
securities (FICC), mortgage-backed securities (FICC), and equity 
securities (NSCC). The market for central securities depository 
services has only one provider (DTC). The credit default swaps 
market is served by LCH SA, ICC, and ICEEU.
---------------------------------------------------------------------------

    However, the Commission preliminarily believes that the proposed 
amendments already include an appropriate adjustment for market-level 
risk insofar as they would require the covered clearing agencies to 
consider their own particular facts and circumstances when aligning 
with the proposed rules. For example, the proposed amendment to Rule 
17Ad-22(e)(6)(ii) would require covered clearing agencies to have the 
operational capacity to make intraday margin calls ``as frequently as 
circumstances warrant,'' and that frequency is expected to vary across 
markets and through time.

E. Request for Comment

    The Commission requests comment on all aspects of this initial 
economic analysis, including the potential benefits and costs, all 
effects on efficiency, competition (including any effects on barriers 
to entry), and capital formation, and reasonable alternatives to the 
proposed rule and amendments. We request and encourage any interested 
person to submit comments regarding the proposed rule and amendments, 
our analysis of the potential effects of the proposed rule and 
amendments, and other matters that may have an effect on the proposed 
rule and amendments. We request that commenters identify sources of 
data and information as well as provide data and information to assist 
us in analyzing the economic consequences of the proposed rule and 
amendments and each reasonable alternative. We are also interested in 
comments on the qualitative benefits and costs we have identified and 
any qualitative benefits and costs we may have overlooked, including 
those associated with each reasonable alternative. In addition, we are 
interested in comments on any other reasonable alternative, including 
any alternative that would distinguish covered clearing agencies based 
on certain factors, such as organizational structure or products 
cleared.
    34. For covered clearing agencies that are currently able to 
calculate and collect intraday margin, how costly is it to start 
monitoring exposure on an ongoing basis, and how costly is it to make 
intraday margin calls as frequently as circumstances warrant?
    35. How quickly are participants able to satisfy margin calls 
during periods of market calm? How quickly are participants able to 
satisfy margin calls during periods of market stress?
    36. How much more costly is it for participants to satisfy margin 
calls in periods of market stress than in periods of markets calm? How 
does an increase of margin call frequency affect costs for participants 
in periods of market stress?
    37. How much more costly is it for participants to satisfy margin 
calls that are unanticipated than those that are anticipated? To what 
extend do participants model when the covered clearing agency is likely 
to make margin calls? How will the proposed amendments affect 
participants' ability or incentive to model the timing of margin calls?
    38. Should the length of time participants takes to satisfy a 
margin call influence the decision of the covered clearing agency to 
make a margin call? For example, should covered clearing agencies 
refrain from issuing a new margin call before the participants have 
responded to a prior margin call? Why or why not?
    39. Do commenters believe that certain participants of covered 
clearing agencies, including, for example, participants with less 
capital or using smaller settlement banks, could face operational 
challenges or pricing disadvantages, if proposed Rule 17Ad-22(e)(ii) 
were to result in more frequent margin calls? If so, please explain 
those challenges and disadvantages.
    40. How costly is it for covered clearing agencies to secure the 
use of

[[Page 34740]]

price data or substantive inputs from an alternate source? Must the 
data or substantive inputs subscription be purchased outright, or can 
the covered clearing agency, for a lower fee, purchase an option to use 
the data and substantive inputs only when its primary sources prove 
inadequate?
    41. How costly is it for covered clearing agencies to secure the 
use of alternate risk-based margin systems? Would covered clearing 
agencies create their own alternate risk-based margin systems, or would 
they secure access to one from a third party, and, if so, at what cost?
    42. Are our estimates of the costs to secure alternate data inputs 
reasonable? Why or why not?
    43. Proposed Rule 17ad-26(a)(2) requires RWPs to address how the 
covered clearing agency would ensure that service providers would 
continue to perform in the event of a recovery and during an orderly 
wind-down. Would it be better for RWPs to address instead how the 
covered clearing agency would continue to provide its critical services 
in the event of the non-performance of one or more service providers? 
Why or why not?
    44. How costly will it be for covered clearing agencies to test 
their plans as required in proposed Rule 17ad-26(a)(8)? What costs will 
be incurred by the participants and, when practicable, other 
stakeholders? Will any of these costs substantively vary based on 
whether or not the current RWP includes testing?

V. Paperwork Reduction Act

    The proposed amendments to Rule 17Ad-22(e)(6) and Proposed Rule 
17ad-26 contain ``collection of information'' requirements within the 
PRA.\159\ The Commission is submitting the proposed collections of 
information to the Office of Management and Budget (``OMB'') for review 
in accordance with the PRA. The title of these information collections 
is ``Clearing Agency Standards for Operation and Governance'' (OMB 
Control No. 3235-0695). An agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \159\ See 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Proposed Amendment to Rule 17Ad-22(e)(6)

    Respondents under this Rule 17Ad-22(e)(6) are covered clearing 
agencies that provide central counterparty services, of which there are 
currently six. The Commission anticipates that one additional entity 
may seek to register as a clearing agency to provide CCP services in 
the next three years, and so for purposes of this proposal the 
Commission has assumed seven respondents.
    The purpose of this collection of information is to enable a 
covered clearing agency to have the authority and operational capacity 
to monitor intraday exposures on an ongoing basis and to collect 
intraday margin in certain specified circumstances. The collection is 
mandatory. To the extent that the Commission receives confidential 
information pursuant to this collection of information, such 
information would be kept confidential subject to the provisions of 
applicable law.\160\
---------------------------------------------------------------------------

    \160\ See, e.g., 5 U.S.C. 552. Exemption 4 of the Freedom of 
Information Act provides an exemption for trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of 
the Freedom of Information Act provides an exemption for matters 
that are contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions. See 5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    The proposed amendments to Rule 17Ad-22(e)(6) would require a 
covered clearing agency to establish, implement, maintain, and enforce 
written policies and procedures. The proposed rule amendment contains 
similar provisions to existing covered clearing agency rules (i.e., 
Rule 17Ad-22(e)(6)(ii) and (iv)), but would also impose additional 
requirements that do not appear in the existing Rule 17Ad-22. As a 
result, the Commission preliminarily believes that a respondent covered 
clearing agency would incur burdens of reviewing and updating existing 
policies and procedures to consider whether they comply with the 
proposed amendment to Rule 17Ad-22(e)(6) and, in some cases, may need 
to create new policies and procedures to comply with the proposed 
amendments to Rule 17Ad-22(e)(6). For example, a covered clearing 
agency likely would need to review its existing margin methodology and 
consider whether any additional changes are necessary to ensure that it 
can meet the strengthened requirements of the proposed rule.
    The Commission preliminarily believes that the estimated PRA 
burdens for the proposed amendment to Rule 17Ad-22(e)(6) may require a 
respondent covered clearing agency to make fairly substantial changes 
to its policies and procedures. Based on the similar policies and 
procedures requirements and the corresponding burden estimates 
previously made by the Commission for several rules in the Covered 
Clearing Agency Standards where the Commission anticipated similar 
burdens,\161\ the Commission preliminarily estimates that respondent 
covered clearing agencies would incur an aggregate one-time burden of 
approximately 903 hours to review existing policies and procedures and 
create new policies and procedures.\162\
---------------------------------------------------------------------------

    \161\ See CCA Standards Adopting Release, supra note 7, 81 FR at 
70892 and 70895-97 (discussing Rules 17Ad-22(e)(2) and (13)). 
Although the proposed rule amendment is with respect to Rule 17Ad-
22(e)(6), the Commission believes that these Rules present the best 
overall comparison to the current proposed rule amendment, in light 
of the nature of the changes needed to implement the proposal here 
and what was proposed in the Covered Clearing Agency Standards.
    \162\ This figure was calculated as follows: (Assistant General 
Counsel for 20 hours) + (Compliance Attorney for 40 hours) + 
(Computer Operations Manager for 12 hours) + (Senior Programmer for 
20 hours) + (Senior Risk Management Specialist for 25 hours) + 
(Senior Business Analyst for 12 hours) = 129 hours x 7 respondent 
clearing agencies = 903 hours.
---------------------------------------------------------------------------

    The proposed amendments to Rule 17Ad-22(e)(6) would impose ongoing 
burdens on a respondent covered clearing agencies. The proposed rule 
would require ongoing monitoring and compliance activities with respect 
to the written policies and procedures created in response to the 
proposed rule. Based on the similar reporting requirements and the 
corresponding burden estimates previously made by the Commission for 
several rules in the Covered Clearing Agency Standards where the 
Commission anticipated similar burdens,\163\ the Commission 
preliminarily estimates that the ongoing activities required by the 
proposed amendments to Rule 17Ad-22(e)(6) would impose an aggregate 
annual burden on respondent covered clearing agencies of 560 
hours.\164\
---------------------------------------------------------------------------

    \163\ See CCA Standards Adopting Release, supra note 7, 81 FR at 
70893 and 70895-96 (discussing Rules 17Ad-22(e)(6) and (13)).
    \164\ This figure was calculated as follows: (Compliance 
Attorney for 25 hours + Business Risk Analyst for 40 hours + Senior 
Risk Management Specialist for 20 hours) = 85 hours x 7 respondent 
clearing agencies = 560 hours.

[[Page 34741]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Number of      Initial burden     Aggregate      Ongoing burden     Aggregate
     Name of information collection            Type of burden          respondents       per entity     initial burden     per entity     ongoing burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
17Ad-22(e)(6)..........................  Recordkeeping.............               7              129              903               85              595
--------------------------------------------------------------------------------------------------------------------------------------------------------

B. Proposed Rule 17Ad-26

    Respondents under proposed Rule 17ad-26 are covered clearing 
agencies, of which there is currently seven. The Commission anticipates 
that one additional entity may seek to register as a covered clearing 
agency in the next three years, and so for purposes of this proposal 
the Commission has assumed eight respondents.
    The purpose of the collections under proposed Rule 17ad-26 is to 
ensure that covered clearing agencies include a set of particular items 
in the recovery and wind-down plans currently required under Rule 17Ad-
22(e)(3)(ii). The collections are mandatory. To the extent that the 
Commission receives confidential information pursuant to this 
collection of information, such information would be kept confidential 
subject to the provisions of applicable law.\165\
---------------------------------------------------------------------------

    \165\ See, e.g., 5 U.S.C. 552 et seq. Exemption 4 of the Freedom 
of Information Act provides an exemption for trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of 
the Freedom of Information Act provides an exemption for matters 
that are contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions. See 5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    Because of the existence of current Rule 17Ad-22(e)(3)(ii), which 
means that covered clearing agencies are already required to maintain 
RWPs, Proposed Rule 17ad-26 would impose on a covered clearing agency 
similar burdens as when, for example, Rule 17Ad-22(e)(2) was proposed 
and covered clearing agencies generally had governance arrangements in 
place at that time.\166\ Based on the Commission's review and 
understanding of the covered clearing agencies' existing RWPs,\167\ 
respondent covered clearing agencies generally have written rules, 
policies, and procedures similar to the requirements that would be 
imposed under the Proposed Rule 17ad-26. The PRA burden imposed by the 
proposed rule would therefore be minimal and would likely be limited to 
the review of current policies and procedures and updating existing 
policies and procedures where appropriate to ensure compliance with the 
proposed rule. Accordingly, the Commission preliminarily believes that 
respondent clearing agencies would incur an aggregate one-time burden 
of approximately 960 hours to review and update existing policies and 
procedures.\168\
---------------------------------------------------------------------------

    \166\ See CCA Standards Adopting Release, supra note 7, 81 FR at 
70892 (discussing Rule 17Ad-22(e)(2)).
    \167\ See supra, note 41.
    \168\ This figure was calculated as follows: ((Assistant General 
Counsel for 20 hours) + (Compliance Attorney for 50 hours) + 
(Business Risk Analyst for 35 hours) + (Senior Risk Management 
Specialist for 15) = 120 hours x 8 respondent clearing agencies = 
960 hours.
---------------------------------------------------------------------------

    Proposed Rule 17ad-26 would also impose ongoing burdens on a 
respondent covered clearing agency. The proposed rule would require 
ongoing monitoring and compliance activities with respect to the 
written policies and procedures created in response to the proposed 
rule. Based on the Commission's previous estimates for ongoing 
monitoring and compliance burdens with respect to existing Rule 17Ad-
22(e)(2),\169\ the Commission preliminarily estimates that the ongoing 
activities required by proposed Rule 17ad-26 would impose an aggregate 
annual burden on respondent covered clearing agencies of 40 hours.\170\
---------------------------------------------------------------------------

    \169\ See CCA Standards Adopting Release, supra note 7, 81 FR at 
70892 (discussing Rule 17Ad-22(e)(2)).
    \170\ This figure was calculated as follows: ((Assistant General 
Counsel for 10 hours) + Compliance Attorney for 30 hours)) x 8 
respondent clearing agencies = 320 hours.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Number of      Initial burden     Aggregate      Ongoing burden     Aggregate
     Name of information collection            Type of burden          respondents       per entity     initial burden     per entity     ongoing burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
17ad-26................................  Recordkeeping.............               8              120              960               40              320
--------------------------------------------------------------------------------------------------------------------------------------------------------

C. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    45. Evaluate whether the proposed collections of information are 
necessary for the proper performance of the Commission's functions, 
including whether the information shall have practical utility;
    46. Evaluate the accuracy of the Commission's estimates of the 
burdens of the proposed collections of information;
    47. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
    48. Evaluate whether there are ways to minimize the burden of 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology; and
    49. Evaluate whether the proposed rules and rule amendments would 
have any effects on any other collection of information not previously 
identified in this section.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Secretary, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with 
reference to File Number S7-10-23. Requests for materials submitted to 
OMB by the Commission with regard to this collection of information 
should be in writing, with reference to File Number S7-10-23 and be 
submitted to the Securities and Exchange Commission, Office of FOIA/PA 
Services, 100 F Street NE, Washington, DC 20549-2736. As OMB is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication, a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

[[Page 34742]]

VI. Small Business Regulatory Enforcement Fairness Act

    Under the Small Business Regulatory Enforcement Fairness Act of 
1996,\171\ a rule is ``major'' if it has resulted, or is likely to 
result in: an annual effect on the economy of $100 million or more; a 
major increase in costs or prices for consumers or individual 
industries; or significant adverse effects on competition, investment, 
or innovation. The Commission requests comment on whether the proposed 
rules and rule amendments would be a ``major'' rule for purposes of the 
Small Business Regulatory Enforcement Fairness Act. In addition, the 
Commission solicits comment and empirical data on: the potential effect 
on the U.S. economy on annual basis; any potential increase in costs or 
prices for consumer or individual industries; and any potential effect 
on competition, investment, or innovation.
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    \171\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') requires the Commission, 
in promulgating rules, to consider the impact of those rules on small 
entities.\172\ Section 603(a) of the Administrative Procedure Act,\173\ 
as amended by the RFA, generally requires the Commission to undertake a 
regulatory flexibility analysis of all proposed rules to determine the 
impact of such rulemaking on ``small entities.'' \174\ Section 605(b) 
of the RFA states that this requirement shall not apply to any proposed 
rule which, if adopted, would not have a significant economic impact on 
a substantial number of small entities.\175\
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    \172\ See 5 U.S.C. 601 et seq.
    \173\ 5 U.S.C. 603(a).
    \174\ Section 601(b) of the RFA permits agencies to formulate 
their own definitions of ``small entities.'' See 5 U.S.C. 601(b). 
The Commission has adopted definitions for the term ``small entity'' 
for the purposes of rulemaking in accordance with the RFA. These 
definitions, as relevant to this proposed rulemaking, are set forth 
in Rule 0-10, 17 CFR 240.0-10.
    \175\ See 5 U.S.C. 605(b).
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    The proposed amendments to Rule 17Ad-22 and new Rule 17ad-26 would 
apply to covered clearing agencies, which would include registered 
clearing agencies that provide the services of a central counterparty 
or central securities depository.\176\ For the purposes of Commission 
rulemaking and as applicable to the proposed amendments to Rule 17Ad-22 
and the addition of proposed Rule 17ad-26, a small entity includes, 
when used with reference to a clearing agency, a clearing agency that 
(i) compared, cleared, and settled less than $500 million in securities 
transactions during the preceding fiscal year, (ii) had less than $200 
million of funds and securities in its custody or control at all times 
during the preceding fiscal year (or at any time that it has been in 
business, if shorter), and (iii) is not affiliated with any person 
(other than a natural person) that is not a small business or small 
organization.\177\
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    \176\ 17 CFR 240.17AD-22(a)(5).
    \177\ See 17 CFR 240.0-10(d).
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    Based on the Commission's existing information about the clearing 
agencies currently registered with the Commission, the Commission 
preliminarily believes that such entities exceed the thresholds 
defining ``small entities'' set out above. While other clearing 
agencies may emerge and seek to register as clearing agencies, the 
Commission preliminarily does not believe that any such entities would 
be ``small entities'' as defined in Exchange Act Rule 0-10.\178\ In any 
case, clearing agencies can only become subject to the new requirements 
under proposed Rule 17Ad-22(e) should they meet the definition of a 
covered clearing agency, as described above. Accordingly, the 
Commission preliminarily believes that any such registered clearing 
agencies will exceed the thresholds for ``small entities'' set forth in 
Exchange Act Rule 0-10.
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    \178\ See 17 CFR 240.0-10(d). The Commission based this 
determination on its review of public sources of financial 
information about registered clearing agencies and lifecycle event 
service providers for OTC derivatives.
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    For the reasons described above, the Commission certifies that the 
proposed amendments to Rules 17Ad-22 and proposed new Rule 17ad-26 
would not have a significant economic impact on a substantial number of 
small entities for purposes of the RFA. The Commission requests comment 
regarding this certification. The Commission requests that commenters 
describe the nature of any impact on small entities, including clearing 
agencies, and provide empirical data to support the extent of the 
impact.

VIII. Statutory Authority

    The Commission is proposing amendments to 17 CFR 240.17Ad-22 and 
proposing 17 CFR 240.17ad-26 under the Commission's rulemaking 
authority set forth in section 17A of the Exchange Act, 15 U.S.C. 78q-1 
and Section 23(a), 15 U.S.C. 78w(a), and in Section 805 of the Clearing 
Supervision Act, 15 U.S.C. 5464.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendments

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 continues to read, and the 
sectional authority for Sec.  240.17Ad-22 is revised to read, as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.17ad-22 is also issued under 12 U.S.C. 5461 et seq.
* * * * *
0
2. Amend Sec.  240.17Ad-22 by:
0
a. Redesignating Sec.  240.17Ad-22 as Sec.  240.17ad-22; and
0
b. Revising paragraphs (e)(6)(ii) and (iv) in newly redesignated Sec.  
240.17ad-22.
    The revisions read as follows:


Sec.  240.17ad-22  Standards for clearing agencies.

* * * * *
    (e) * * *
    (6) * * *
    (ii) Marks participant positions to market and collects margin, 
including variation margin or equivalent charges if relevant, at least 
daily, monitors intraday exposures on an ongoing basis, and includes 
the authority and operational capacity to make intraday margin calls as 
frequently as circumstances warrant, including when risk thresholds 
specified by the covered clearing agency are breached or when the 
products cleared or markets served display elevated volatility;
* * * * *
    (iv) Uses reliable sources of timely price data and other 
substantive inputs, and uses procedures and, with respect to price 
data, sound valuation models, for addressing circumstances in which 
price data or other substantive inputs are not readily available or 
reliable to ensure that the covered clearing agency

[[Page 34743]]

can continue to meet its obligations under this section. Such 
procedures shall include the use of price data or substantive inputs 
from an alternate source or, if it does not use an alternate source, 
the use of an alternate risk-based margin system that does not 
similarly rely on the unavailable or unreliable substantive input;
* * * * *
0
3. Section 240.17ad-26 is added to read as follows:


Sec.  240.17ad-26  Covered Clearing Agency Recovery and Orderly Wind-
Down Plans.

    (a) The plans for the recovery and orderly wind-down of the covered 
clearing agency referenced in 17 CFR 240.17ad-22(e)(3)(ii) shall:
    (1) Identify and describe the covered clearing agency's critical 
payment, clearing, and settlement services and address how the covered 
clearing agency would continue to provide such critical services in the 
event of a recovery and during an orderly wind-down, including the 
identification of the staffing necessary to support such critical 
services and analysis of how such staffing would continue in the event 
of a recovery and during an orderly wind-down;
    (2) Identify and describe any service providers upon which the 
covered clearing agency relies to provide the services identified in 
paragraph (a)(1) of this section, specify to what services such service 
providers are relevant, and address how the covered clearing agency 
would ensure that such service providers would continue to perform in 
the event of a recovery and during an orderly wind-down, including 
consideration of contractual obligations with such service providers 
and whether those obligations are subject to alteration or termination 
as a result of initiation of the recovery and orderly wind-down plan;
    (3) Identify and describe scenarios that may potentially prevent 
the covered clearing agency from being able to provide its critical 
payment, clearing, and settlement services identified in paragraph 
(a)(1) of this section as a going concern, including uncovered credit 
losses (as described in paragraph (e)(4)(viii) of 17 CFR 240.17ad-22), 
uncovered liquidity shortfalls (as described in paragraph (e)(7)(viii) 
of 17 CFR 240.17ad-22), and general business losses (as described in 
paragraph (e)(15) of 17 CFR 240.17ad-22);
    (4) Identify and describe criteria that would trigger the 
implementation of the recovery and orderly wind-down plans and the 
process that the covered clearing agency uses to monitor and determine 
whether the criteria have been met, including the governance 
arrangements applicable to such process;
    (5) Identify and describe the rules, policies, procedures, and any 
other tools or resources the covered clearing agency would rely upon in 
a recovery or orderly wind-down;
    (6) Address how the rules, policies, procedures, and any other 
tools or resources identified in paragraph (a)(5) of this section would 
ensure timely implementation of the recovery and orderly wind-down 
plan;
    (7) Include procedures for informing the Commission as soon as 
practicable when the covered clearing agency is considering initiating 
a recovery or orderly wind-down;
    (8) Include procedures for testing the covered clearing agency's 
ability to implement the recovery and wind-down plans at least every 
twelve months, including by requiring the covered clearing agency's 
participants and, when practicable, other stakeholders to participate 
in the testing of its plans, providing for reporting the results of the 
testing to the covered clearing agency's board of directors and senior 
management, and specifying the procedures for, as appropriate, amending 
the plans to address the results of the testing; and
    (9) Include procedures requiring review and approval by the board 
of directors of the plans at least every twelve months or following 
material changes to the covered clearing agency's operations that would 
significantly affect the viability or execution of the plans, with such 
review informed, as appropriate by the covered clearing agency's 
testing of the plans.
    (b) Definitions. For the purposes of this section:
    Affiliate means a person that directly or indirectly controls, is 
controlled by, or is under common control with the covered clearing 
agency.
    Orderly wind-down means the actions of a covered clearing agency to 
effect the permanent cessation, sale, or transfer of one or more of its 
critical services in a manner that would not increase the risk of 
significant liquidity, credit, or operational problems spreading among 
financial institutions or markets and thereby threaten the stability of 
the U.S. financial system.
    Recovery means the actions of a covered clearing agency, consistent 
with its rules, procedures, and other ex ante contractual arrangements, 
to address any uncovered loss, liquidity shortfall, or capital 
inadequacy, whether arising from participant default or other causes 
(such as business, operational, or other structural weaknesses), 
including actions to replenish any depleted prefunded financial 
resources and liquidity arrangements, as necessary to maintain the 
covered clearing agency's viability as a going concern and to continue 
its provision of critical services.
    Service provider means any person, including an affiliate or a 
third party, that is contractually obligated to the covered clearing 
agency in any way related to the provision of critical services, as 
identified by the covered clearing agency in 17 CFR 240.17ad-26(a)(1).

    By the Commission.

    Dated: May 17, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-10889 Filed 5-26-23; 8:45 am]
BILLING CODE 8011-01-P