[Federal Register Volume 78, Number 159 (Friday, August 16, 2013)]
[Proposed Rules]
[Pages 50259-50311]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19845]
[[Page 50259]]
Vol. 78
Friday,
No. 159
August 16, 2013
Part IV
Commodity Futures Trading Commission
-----------------------------------------------------------------------
17 CFR Parts 39, 140, and 190
Derivatives Clearing Organizations and International Standards;
Proposed Rule
Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 /
Proposed Rules
[[Page 50260]]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 39, 140, and 190
RIN Number 3038-AE06
Derivatives Clearing Organizations and International Standards
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
proposing amendments to its regulations to establish additional
standards for compliance with the derivatives clearing organization
(``DCO'') core principles set forth in Section 5b(c)(2) of the
Commodity Exchange Act (``CEA'') for systemically important DCOs
(``SIDCOs'') and DCOs that elect to opt-in to the SIDCO regulatory
requirements (``Subpart C DCOs''). SIDCOs and Subpart C DCOs would be
required to comply with the requirements applicable to all DCOs, which
are set forth in the Commission's DCO regulations on compliance with
core principles, to the extent those requirements are not inconsistent
with the requirements of the regulations in this proposed rule. The
proposed amendments include: Procedural requirements for opting in to
the regulatory regime as well as substantive requirements relating to
governance, financial resources, system safeguards, special default
rules and procedures for uncovered losses or shortfalls, risk
management, additional disclosure requirements, efficiency, and
recovery and wind-down procedures. These additional requirements would
also be consistent with the Principles for Financial Market
Infrastructures (``PFMIs'') published by the Committee on Payment and
Settlement Systems and the Board of the International Organization of
Securities Commissions (``CPSS-IOSCO''). In addition, the Commission is
proposing certain delegation provisions and certain technical
clarifications.
DATES: Submit comments on or before September 16, 2013.
ADDRESSES: You may submit comments, identified by RIN number 3038-
AE06, by any of the following methods:
Agency Web site: http://comments.cftc.gov.
Mail: Secretary of the Commission, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,
Washington, DC 20581.
Hand Delivery/Courier: Same as Mail, above.
Federal eRulemaking Portal: http://www.Regulations.gov.
Follow the instructions for submitting comments.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that may be exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the procedures established in
Commission regulation 145.
The Commission reserves the right but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language.
All submissions that have been redacted or removed that contain
comments on the merits of the rulemaking will be retained in the public
comment file and will be considered as required under the
Administrative Procedure Act and other applicable laws, and may be
accessible under the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Ananda Radhakrishnan, Director,
Division of Clearing and Risk (``DCR''), at 202-418-5188 or
[email protected]; Robert B. Wasserman, Chief Counsel, DCR, at
202-418-5092 or [email protected]; M. Laura Astrada, Associate Chief
Counsel, DCR, at 202-418-7622 or [email protected]; Peter A. Kals,
Special Counsel, DCR, at 202-418-5466 or [email protected]; Jocelyn
Partridge, Special Counsel, DCR, at 202-418-5926 or
[email protected]; Tracey Wingate, Special Counsel, DCR, at 202-418-
5319 or [email protected]; or Kathryn L. Ballintine, Attorney-Advisor,
DCR, at 202-418-5575 or [email protected], in each case, at the
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Regulatory Framework for Registered DCOs
B. Designation of DCOs as Systemically Important Under Title
VIII of the Dodd-Frank Act
C. Existing Standards for SIDCOs
D. DCO Core Principles and Existing Regulations for Registered
DCOs
E. PFMIs
F. The Role of the PFMIs in International Banking Standards
G. Proposed Rulemaking Applicable to SIDCOs and Subpart C DCOs
II. Discussion of Revised and Proposed Rules
A. Regulation 39.2 (Definitions)
B. Regulation 39.30 (Scope)
C. Regulation 39.31 (Election To Become Subject to the
Provisions of Subpart C)
D. Regulation 39.32 (Governance for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives
Clearing Organizations)
E. Regulation 39.33 (Financial Resources for Systemically
Important Derivatives Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
F. Regulation 39.34 (System Safeguards for Systemically
Important Derivatives Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
G. Regulation 39.35 (Default Rules and Procedures for Uncovered
Losses or Shortfalls (Recovery) for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives
Clearing Organizations)
H. Regulation 39.36 (Risk Management for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives
Clearing Organizations)
I. Regulation 39.37 (Additional Disclosure for Systemically
Important Derivatives Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
J. Regulation 39.38 (Efficiency for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives
Clearing Organizations)
K. Regulation 39.39 (Recovery and Wind-Down for Systemically
Important Derivatives Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
L. Regulation 39.40 (Consistency With the Principles for
Financial Market Infrastructures)
M. Regulation 39.41 (Special Enforcement Authority For
Systemically Important Derivatives Clearing Organizations)
N. Regulation 39.42 (Advance Notice of Material Risk-Related
Rule Changes by Systemically Important Derivatives Clearing
Organizations)
O. Regulation 140.94 (Delegation of Authority to the Director of
the Division of Clearing and Risk)
P. Regulation 190.09 (Member Property)
III. Effective Date
IV. Related Matters
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Consideration of Costs and Benefits
I. Background
A. Regulatory Framework for Registered DCOs
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII
of the
[[Page 50261]]
Dodd-Frank Act, entitled the ``Wall Street Transparency and
Accountability Act of 2010,'' \2\ amended the Commodity Exchange Act
(``CEA'' or the ``Act'') \3\ to establish a comprehensive regulatory
framework for over-the-counter (``OTC'') derivatives, including swaps.
The legislation was enacted to reduce risk, increase transparency, and
promote market integrity within the financial system by, among other
things: (1) Providing for the registration and comprehensive regulation
of swap dealers and major swap participants; (2) imposing mandatory
clearing and trade execution requirements on clearable swap contracts;
(3) creating rigorous recordkeeping and real-time reporting regimes;
and (4) enhancing the Commission's rulemaking and enforcement
authorities with respect to, among others, all registered entities and
intermediaries subject to the Commission's oversight.
---------------------------------------------------------------------------
\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010). The text of the Dodd-
Frank Act may be accessed at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
\2\ Section 701 of the Dodd-Frank Act.
\3\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------
Section 725(c) of the Dodd-Frank Act amended Section 5b(c)(2) of
the CEA, which sets forth core principles that a DCO must comply with
in order to register and maintain registration with the Commission. The
core principles were originally added to the CEA by the Commodity
Futures Modernization Act of 2000,\4\ and, in 2001, the Commission
issued guidance on DCO compliance with these core principles.\5\
However, in furtherance of the goals of the Dodd-Frank Act to reduce
risk, increase transparency, and promote market integrity, the
Commission, pursuant to the Commission's enhanced rulemaking
authority,\6\ withdrew the 2001 guidance and adopted regulations
establishing standards for compliance with the DCO core principles.\7\
As noted in the preamble to the final rule for Subpart A and Subpart B
of part 39 of the Commission's regulations (``Subpart A'' and ``Subpart
B,'' respectively), the implementing regulations of the DCO core
principles, the Commission sought to provide legal certainty for market
participants, strengthen the risk management practices of DCOs, and
increase overall confidence in the financial system by assuring
``market participants and the public that DCOs are meeting minimum risk
management standards.'' \8\
---------------------------------------------------------------------------
\4\ See Commodity Futures Modernization Act of 2000, Public Law
106-554, 114 Stat. 2763 (2000).
\5\ See A New Regulatory Framework for Clearing Organizations,
66 FR 45604 (Aug. 29, 2001) (adopting 17 CFR Part 39, Appendix A).
\6\ See Section 725(c)(2)(i) of the Dodd Frank Act (giving the
Commission explicit authority to promulgate rules regarding the core
principles pursuant to its rulemaking authority under Section 8a(5)
of the CEA, 7 U.S.C. 12a(5)).
\7\ See Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR 69334 (Nov. 8, 2011).
\8\ Id. at 69335.
---------------------------------------------------------------------------
B. Designation of DCOs as Systemically Important Under Title VIII of
the Dodd-Frank Act
Title VIII of the Dodd-Frank Act, entitled ``Payment, Clearing, and
Settlement Supervision Act of 2010,'' \9\ was enacted to mitigate
systemic risk in the financial system and promote financial
stability.\10\ Section 804 of the Dodd-Frank Act requires the Financial
Stability Oversight Council (``Council'') to designate those financial
market utilities (``FMUs'') \11\ that the Council determines are, or
are likely to become, systemically important.\12\
---------------------------------------------------------------------------
\9\ Section 801 of the Dodd-Frank Act.
\10\ Section 802(b) of the Dodd-Frank Act.
\11\ An FMU includes ``any person that manages or operates a
multilateral system for the purpose of transferring, clearing, or
settling payments, securities, or other financial transactions among
financial institutions or between financial institutions and the
person.'' Section 803(6)(A) of the Dodd-Frank Act.
\12\ Section 804(a)(1) of the Dodd-Frank Act. The term
``systemically important'' means ``a situation where the failure of
or a disruption to the functioning of a financial market utility . .
. could create, or increase, the risk of significant liquidity or
credit problems spreading among financial institutions or markets
and thereby threaten the stability of the financial system of the
United States.'' Section 803(9) of the Dodd-Frank Act. See also
Authority to Designate Financial Market Utilities as Systemically
Important, 76 FR 44763, 44774 (July 27, 2011) (final rule).
---------------------------------------------------------------------------
In determining whether an FMU is systemically important, the
Council uses a detailed two-stage designations process, using certain
statutory considerations \13\ and other metrics to assesses, among
other things, ``whether possible disruptions [to the functioning of an
FMU] are potentially severe, not necessarily in the sense that they
themselves might trigger damage to the U.S. economy, but because such
disruptions might reduce the ability of financial institutions or
markets to perform their normal intermediation functions.'' \14\ On
July 18, 2012, the Council designated eight FMUs as systemically
important under Title VIII.\15\ Two of these designated FMUs are CFTC-
registered DCOs \16\ for which the Commission is the Supervisory
Agency.\17\
---------------------------------------------------------------------------
\13\ Under Section 804(a)(2) of the Dodd-Frank Act, in
determining whether an FMU is or is likely to become systemically
important, the Council must take into consideration the following:
(A) The aggregate monetary value of transactions processed by the
FMU; (B) the aggregate exposure of an FMU to its counterparties; (C)
the relationship, interdependencies, or other interactions of the
FMU with other FMUs or payment, clearing or settlement activities;
(D) the effect that the failure of or a disruption to the FMU would
have on critical markets, financial institutions or the broader
financial system; and (E) any other factors the Council deems
appropriate.
\14\ 76 FR at 44766.
\15\ See Press Release, Financial Stability Oversight Council,
Financial Stability Oversight Council Makes First Designations in
Effort to Protect Against Future Financial Crises (July 18, 2012),
available at http://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.
\16\ While Chicago Mercantile Exchange, Inc. (``CME''), ICE
Clear Credit LLC (``ICE Clear Credit''), and The Options Clearing
Corporation (``OCC'') are the CFTC-registered DCOs that were
designated as systemically important by the Council, the CFTC is the
Supervisory Agency only for CME and ICE Clear Credit, the SEC serves
as OCC's Supervisory Agency.
\17\ See Section 803(8)(A) of the Dodd-Frank Act (defining
``Supervisory Agency'' as the federal agency that has primary
jurisdiction over a designated financial market utility under
federal banking, securities or commodity futures laws).
---------------------------------------------------------------------------
C. Existing Standards for SIDCOs
Section 805 of the Dodd-Frank Act directs the Commission to
consider relevant international standards and existing prudential
requirements when prescribing risk management standards governing the
operations related to payment, clearing, and settlement activities for
FMUs that are (1) designated as systemically important by the Council
and (2) engaged in activities for which the Commission is the
Supervisory Agency.\18\ More generally, Section 752 of the Dodd-Frank
Act directs the Commission to consult and coordinate with foreign
regulatory authorities on the establishment of consistent international
standards with respect to the regulation of, among other things, swaps,
futures, and options on futures.\19\
---------------------------------------------------------------------------
\18\ See Section 805(a)(2) of the Dodd-Frank Act. The Commission
notes that under section 805 of the Dodd-Frank Act it also has the
authority to prescribe risk management standards governing the
operations related to payment, clearing, and settlement activities
for FMUs that are designated as systemically important by the
Council and are engaged in activities for which the Commission is
the appropriate financial regulator.
\19\ Section 752 of the Dodd-Frank Act, codified at 15 U.S.C.
8325, provides:
(a) In order to promote effective and consistent global
regulation of swaps and security based swaps, the [CFTC], the
Securities and Exchange Commission, and the prudential regulators
(as that term is defined in section 1a(30) of the [CEA], as
appropriate, shall consult and coordinate with foreign regulatory
authorities on the establishment of international standards with
respect to the regulation * * * of swaps * * * [and] swap entities *
* *.
(b) In order to promote effective and consistent global
regulation of contracts of sale of a commodity for future delivery
and options on such contracts, the [CFTC] shall consult and
coordinate with foreign regulatory authorities on the establishment
of international standards with respect to the regulation of
contracts of a sale of a commodity for future delivery and on
options on such contracts.
---------------------------------------------------------------------------
The Commission has previously reviewed the risk management
[[Page 50262]]
standards set forth in part 39 of the Commission's regulations in light
of relevant international standards and existing prudential
requirements to identify those areas in which additional risk
management standards for SIDCOs would be appropriate. In 2010, the
Commission proposed enhanced financial resource requirements for SIDCOs
that would have required a SIDCO to (1) maintain sufficient financial
resources to meet the SIDCO's financial obligations to its clearing
members notwithstanding a default by the two clearing members creating
the largest combined financial exposure for the SIDCO in extreme but
plausible market conditions,\20\ and (2) only count the value of
assessments, after a 30% haircut, to meet up to 20% of the resources
required to meet obligations arising from a default by the clearing
member creating the second largest financial exposure.\21\ In addition,
in 2011 the Commission proposed to improve system safeguards for SIDCOs
by enhancing certain business continuity and disaster recovery
procedures.\22\
---------------------------------------------------------------------------
\20\ Financial Resources Requirements for Derivatives Clearing
Organizations, 75 FR 63113, at 63119 (Oct. 14, 2010) (notice of
proposed rulemaking).
\21\ Id.
\22\ See Risk Management Requirements for Derivatives Clearing
Organizations, 76 FR 3697, 3726-3727 (Jan. 20, 2011) (notice of
proposed rulemaking). The proposal also implemented special
enforcement authority over SIDCOs that, pursuant to section 807(c)
of the Dodd-Frank Act, would have granted the Commission authority
under the provisions of subsections (b) through (n) of section 8 of
the Federal Deposit Insurance Act in the same manner and to the same
extent as if the SIDCO were an insured depository institution and
the Commission were the appropriate federal banking agency for such
insured depository institution. See 76 FR at 3727.
---------------------------------------------------------------------------
Because efforts to finalize the PFMIs were ongoing at the time the
Commission adopted certain amendments to part 39 applicable to DCOs,
rules specific to SIDCOs could have put SIDCOs at a competitive
disadvantage vis-[agrave]-vis foreign central counterparties (``CCPs'')
not yet subject to comparable rules. Moreover, at the time, because no
DCO had been designated as systemically important by the Council, the
Commission concluded it would be premature to finalize the SIDCO
regulations in the Derivatives Clearing Organization General Provisions
and Core Principles adopting release.\23\ Instead, the Commission
decided, consistent with Section 805(a)(1) of the Dodd-Frank Act,\24\
to monitor domestic and international developments concerning CCPs and
reconsider the proposed SIDCO regulations in light of such
developments. In 2013, after careful consideration of the comments on
the 2010 proposed SIDCO rules and in light of domestic and
international market and regulatory developments, the Commission
finalized these proposed regulations in a manner consistent with the
PFMIs.\25\ Specifically, in the final rules the Commission amended part
39 by creating a Subpart C and adding regulations that (1) increased
the minimum financial resource requirements for SIDCOs, (2) restricted
the use of assessments by SIDCOs in meeting such financial resource
obligations, (3) enhanced the system safeguards requirements for
SIDCOs, and (4) granted the Commission special enforcement authority
over SIDCOs pursuant to Section 807 of the Dodd-Frank Act.\26\
---------------------------------------------------------------------------
\23\ See 76 FR at 69352.
\24\ The Commission notes again that Section 805(a)(1) of the
Dodd-Frank Act requires the Commission to consider international
standards in promulgating risk management rules.
\25\ Enhanced Risk Management Standards for Systemically
Important Derivatives Clearing Organizations, (final rule published
in the Federal Register August 15, 2013) (``SIDCO Final Rule'').
\26\ Id.
---------------------------------------------------------------------------
D. DCO Core Principles and Regulations for Registered DCOs
As noted above, in order to register and maintain registration
status with the Commission, DCOs must comply with all of the DCO core
principles set forth in Section 5b(c)(2) of the CEA, as amended by
Section 725 of the Dodd-Frank Act, as well as all applicable Commission
regulations. However, for purposes of this proposal, the Commission
would like to highlight the following requirements set forth in the
core principles and related Commission regulations: Core Principle B
(Financial Resources) and regulations 39.11 and 39.29; Core Principle D
(Risk Management) and regulation 39.13; Core Principle G (Default Rules
and Procedures) and regulation 39.16; Core Principle I (System
Safeguards) and regulations 39.18 and 39.30; Core Principle L (Public
Information) and regulation 39.21; Core Principle O (Governance Fitness
Standards); Core Principle P (Conflicts of Interest); and Core
Principle Q (Composition of Governing Boards).
1. Core Principle B: Financial Resources
Core Principle B requires DCOs to have ``adequate financial,
operational, and managerial resources, as determined by the Commission,
to discharge each responsibility of the [DCO].'' \27\ Specifically,
Core Principle B requires a DCO to possess financial resources that, at
a minimum, exceed the total amount that would enable the DCO to meet
its financial obligations to its clearing members, notwithstanding a
default by the clearing member creating the largest financial exposure
for the DCO in extreme but plausible market conditions and to cover its
operating costs for a period of one year, as calculated on a rolling
basis. Regulation 39.11 codifies these minimum requirements for all
DCOs.\28\ Pursuant to regulation 39.29, however, a SIDCO that is
systemically important in multiple jurisdictions or that is involved in
activities with a more-complex risk profile must maintain financial
resources sufficient to enable it to meet its financial obligations to
its clearing members notwithstanding a default by the two clearing
members creating the largest combined financial exposure for the SIDCO
in extreme but plausible market conditions.\29\
---------------------------------------------------------------------------
\27\ Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 7a-1(c)(2)(B).
\28\ Specifically, regulation 39.11 requires registered DCOs to
maintain financial resources sufficient to cover a wide range of
potential stress scenarios, which include, but are not limited to,
the default of the participant and its affiliates that would
potentially cause the largest aggregate credit exposure to the CCP
in extreme but plausible market conditions, otherwise known as
``Cover One.''
\29\ Financial resources sufficient to cover the default of the
two participants creating the largest credit exposure in extreme but
plausible circumstances is known as ``over two.'' See also infra
note 70.
---------------------------------------------------------------------------
2. Core Principle D: Risk Management
Core Principle D requires a DCO to ensure that it possesses the
ability to manage the risks associated with discharging the
responsibilities of the DCO through the use of appropriate tools and
procedures. It further requires a DCO to measure its credit exposures
to each clearing member not less than once each business day and to
monitor each such exposure periodically during the business day. Core
Principle D also requires a DCO to limit its exposure to potential
losses from defaults by clearing members through margin requirements
and other risk control mechanisms, to ensure that the DCO's operations
would not be disrupted and non-defaulting clearing members would not be
exposed to losses that non-defaulting clearing members cannot
anticipate or control. Finally, Core Principle D provides that a DCO
must require margin from each clearing member sufficient to cover
potential exposures in normal market conditions and that each model and
parameter used in setting such margin requirements must be risk-based
and reviewed on a regular basis. Regulation 39.13
[[Page 50263]]
establishes the requirements that a DCO must meet in order to comply
with Core Principle D, including documentation requirements, the
methodology for the calculation and coverage of margin requirements,
and the criteria and timing of stress tests that a DCO must
conduct.\30\
---------------------------------------------------------------------------
\30\ The Commission also requires that a DCO's actual coverage
of its initial margin requirements meet an established confidence
level of at least 99%, based on data from an appropriate historic
time period. See generally 17 CFR 39.13(g)(2)(iii).
---------------------------------------------------------------------------
3. Core Principle G: Default Rules and Procedures
Core Principle G requires a DCO to have rules and procedures
designed to allow for the efficient, fair, and safe management of
events during which clearing members become insolvent or otherwise
default on their obligations to the DCO. In addition, Core Principle G
requires a DCO to clearly state its default procedures, make its
default rules publicly available, and ensure that it may take timely
action to contain losses and liquidity pressures and to continue
meeting its obligations. Regulation 39.16 establishes the minimum
requirements that a DCO must meet in order to comply with Core
Principle G, including the requirements for the DCO's default
management plan and the procedures for dealing with the default and
insolvency of a clearing member.
4. Core Principle I: System Safeguards
Core Principle I requires a DCO to establish and maintain a program
of risk analysis and oversight that identifies and minimizes sources of
operational risk through the development of appropriate controls and
procedures, and automated systems that are reliable, secure, and have
adequate scalable capacity. Core Principle I also requires that the
emergency procedures, back-up facilities, and disaster recovery plans
that a DCO is obligated to establish and maintain specifically allow
for the timely recovery and resumption of the DCO's operations and the
fulfillment of each obligation and responsibility of the DCO. Finally,
Core Principle I requires that a DCO periodically conduct tests to
verify that the DCO's back-up resources are sufficient to ensure daily
processing, clearing, and settlement. Regulation 39.18 delineates the
minimum requirements that a DCO must satisfy in order to comply with
Core Principle I, including a recovery time objective of the next
business day. In addition, regulation 39.30 requires a SIDCO to have a
business continuity and disaster recovery plan with a recovery time
objective of not later than two hours following the disruption.
Regulation 39.30 also requires a SIDCO to have geographic diversity in
the resources used to enable the SIDCO to meet its recovery time
objective.
5. Core Principle L: Public Information
Core Principle L requires a DCO to provide market participants
sufficient information to enable the market participants to identify
and evaluate accurately the risks and costs associated with using the
DCO's services. More specifically, a DCO is required to make available
to market participants information concerning the rules and operating
and default procedures governing its clearing and settlement systems
and also to disclose publicly and to the Commission the terms and
conditions of each contract, agreement, and transaction cleared and
settled by the DCO; each clearing and other fee charged to members; the
DCO's margin-setting methodology; daily settlement prices; and other
matters relevant to participation in the DCO's clearing and settlement
activities. Regulation 39.21 sets forth the requirements a DCO must
meet in order to comply with Core Principle L and details the
information to be disclosed to the public and requirements regarding
the method and timing of such disclosure.
6. Core Principle O: Governance Fitness Standards
Core Principle O requires a DCO to establish transparent governing
arrangements to both fulfill public interest requirements and to permit
the consideration of the views of owners and participants. In addition,
Core Principle O requires a DCO to establish and enforce appropriate
fitness standards for directors, members of any disciplinary committee,
members of the DCO, any other individual or entity with direct access
to the settlement or clearing activities of the DCO, and affiliated
parties.
7. Core Principle P: Conflicts of Interest
Core Principle P requires a DCO to establish and enforce rules to
minimize conflicts of interest in the decision making process of the
DCO. Core Principle P further requires a DCO to establish a process for
resolving conflicts of interest.
8. Core Principle Q: Composition of Governing Boards
Core Principle Q requires a DCO to ensure that the composition of
the governing board or committee of the DCO includes market
participants.
E. PFMIs
1. Overview
In the SIDCO Final Rule, the Commission determined that, for
purposes of meeting its obligation pursuant to Section 805(a)(2)(A) of
the Dodd-Frank Act, the PFMIs, which were developed by CPSS-IOSCO over
a period of several years,\31\ were the international standards most
relevant to the risk management of SIDCOs.\32\
---------------------------------------------------------------------------
\31\ See Committee on Payment and Settlement Systems and the
Technical Committee of the International Organization of Securities
Commissions, Principles for Financial Market Infrastructures, (April
2012) available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf. See also the Financial Stability Board June 2012
Third Progress Report on Implementation, available at http://www.financialstabilityboard.org/publications/r_120615.pdf (Noting
publication of the PFMIs as achieving ``an important milestone in
the global development of a sound basis for central clearing of all
standardised OTC derivatives'').
\32\ In making this determination, the Commission noted that
``the adoption and implementation of the PFMIs by numerous foreign
jurisdictions highlights the role these principles play in creating
a global, unified set of international risk management standards for
CCPs.'' See SIDCO Final Rule.
---------------------------------------------------------------------------
In February 2010, CPSS-IOSCO launched a review of the existing sets
of international standards for financial market infrastructures
(``FMIs'') in support of a broader effort by the Financial Stability
Board (``FSB'') \33\ to strengthen core financial infrastructures and
markets by ensuring that gaps in international standards were
identified and addressed.\34\ CPSS-IOSCO endeavored to incorporate in
the review process lessons from the 2008 financial crisis and the
experience of using the existing international standards, as well as
policy and analytical work by other international committees including
the Basel Committee on Banking Supervision (``BCBS'').\35\ The PFMIs
replace CPSS-IOSCO's previous international standards applicable to
CCPs,\36\ and establish international risk management standards for
FMIs, including CCPs, that facilitate clearing
[[Page 50264]]
and settlement.\37\ In issuing the PFMIs, CPSS-IOSCO sought to
strengthen and harmonize existing international standards and
incorporate new specifications for CCPs clearing OTC derivatives.\38\
The objectives of the PFMIs are to enhance the safety and efficiency of
FMIs and, more broadly, reduce systemic risk andfoster transparency and
financial stability.\39\
---------------------------------------------------------------------------
\33\ The FSB is an international organization that coordinates
with national financial authorities and international policy
organizations to develop and promote effective regulatory,
supervisory and other financial sector policies. See generally
http://www.financialstabilityboard.org.
\34\ PFMIs, ] 1.6.
\35\ Id.
\36\ The international standards for FMIs, prior to the
publication of the PFMIs, included, the Core Principles for
Systemically Important Payment Systems published by CPSS in 2001,
the Recommendations for Securities Settlement Systems published by
CPSS-IOSCO in 2001, and the Recommendations for Central
Counterparties published by CPSS-IOSCO in 2004 (collectively all
three are referred to as the ``CPSS-IOSCO Principles and
Recommendations''). See PFMIs, ]] 1.4-1.5.
\37\ The PFMIs define a ``financial market infrastructure'' as a
``multilateral system among participating institutions, including
the operator of the system, used for the purposes of clearing,
settling, or recording payments, securities, derivatives, or other
financial transactions.'' See PFMIs, ] 1.8.
\38\ See id., ] 1.2.
\39\ Id., ] 1.15.
---------------------------------------------------------------------------
The PFMIs set out 24 principles which address the risk and
efficiency of an FMI's operations.\40\ Assessments of observance with
the PFMIs focus also on the ``key considerations'' set forth for each
of the principles.\41\ While Subpart A and Subpart B incorporate the
vast majority of the standards set forth in the PFMIs,\42\ the
Commission, which is a member of the Board of IOSCO, intends to
implement rules and regulations that are fully consistent with the
standards set forth in the PFMIs by the end of 2013. To that end, the
Commission has recognized that in certain instances, the standards set
forth in the PFMIs may not be fully covered by the requirements set
forth in Subpart A and Subpart B. Thus, this rulemaking would revise
Subpart C to address those gaps, specifically with respect to the
following PFMI principles: Principle 2 (Governance); Principle 3
(Framework for the comprehensive management of risks); Principle 4
(Credit risk); Principle 6 (Margin); Principle 7 (Liquidity risk);
Principle 9 (Money settlements); Principle 14 (Segregation and
portability); Principle 15 (General business risk); Principle 16
(Custody and investment risks); Principle 17 (Operational risk);
Principle 21 (Efficiency and effectiveness); Principle 22
(Communication procedures and standards); and Principle 23 (Disclosure
of rules, key procedures, and market data).
---------------------------------------------------------------------------
\40\ See id., ] 1.19.
\41\ See Committee on Payment and Settlement Systems and the
Board of the International Organization of Securities Commissions
Principles for Financial Market Infrastructures: Disclosure
Framework and Assessment Methodology (Dec. 2012) (hereinafter
``Disclosure Framework and Assessment Methodology''), available at
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
\42\ Indeed, Subpart A and Subpart B were informed by the
consultative report for the PFMIs. See generally 76 FR at 69334.
---------------------------------------------------------------------------
2. Principle 2: Governance
Principle 2 addresses the governance arrangements of an FMI.\43\
Specifically, it states that the governance arrangements of an FMI
should be ``clear and transparent, promote the safety and efficiency of
the FMI, and support the stability of the broader financial system.''
\44\ An FMI's governance arrangements must be documented and set forth
``direct lines of responsibility and accountability,'' which are
disclosed to owners, regulators, clearing members and their customers,
and the public.\45\ In addition, an FMI must clearly specify the roles
and responsibilities of the board of directors and management, ensure
that the board of directors and management have appropriate experience,
design procedures to identify and resolve conflicts of interest for
members of the board of directors, and regularly review the performance
of the board of directors as a whole and individual directors.\46\ In
order to ensure that the board of directors has the appropriate
incentive to fulfill its multiple roles, the board must typically
include non-executive board members.\47\ Further, the FMI's risk
management framework must be clear, documented and reflect the risk-
tolerance policy, assign responsibility and accountability for risk
decisions, and specify how decisions will be made in crises and
emergencies.\48\ Finally, Principle 2 requires the FMI's ``design,
rules, overall strategy, and decisions to reflect appropriately the
legitimate interests of its direct and indirect participants and other
relevant stakeholders,'' and requires that ``major decisions'' be
``clearly disclosed to relevant stakeholders'' and to the public when
there is ``a broad market impact.'' \49\
---------------------------------------------------------------------------
\43\ The PFMIs define ``governance'' as ``the set of
relationships between an FMI's owners, board of directors (or
equivalent), management, and other relevant parties, including
participants, authorities, and other stakeholders (such as
participants' customers, other interdependent FMIs, and the broader
market).'' PFMIs at Annex H: Glossary.
\44\ See PFMIs at Principle 2.
\45\ Id. at Principle 2, Key Consideration (hereinafter,
``K.C.'') 2.
\46\ Id. at Principle 2, K.C. 3, 5.
\47\ Id. at Principle 2, K.C. 4.
\48\ See id. at Principle 2, K.C. 6.
\49\ Id. at Principle 2, K.C. 7.
---------------------------------------------------------------------------
3. Principle 3: Framework for the Comprehensive Management of Risks
Principle 3 addresses an FMI's risk management framework, requiring
it to ``comprehensively manag[e] legal, credit, liquidity, operational,
and other risks.'' \50\ In addition, as part of its risk management
framework, an FMI ``must regularly review'' and develop tools to
address ``the material risks it bears from and poses to other entities
. . . as a result of interdependencies,'' \51\ and ``identify scenarios
that may potentially prevent it from being able to provide its critical
operations and services as a going concern.\52\ Principle 3 further
requires an FMI to ``assess the effectiveness of a full range of
options for recovery or orderly wind-down'' and to ``prepare
appropriate plans for its recovery or orderly wind-down as a result of
that assessment.'' \53\ An FMI is required to ``provide incentives'' so
that its participants and their customers ``manage and contain the
risks they pose to the FMI.'' \54\ Finally, Principle 3 requires an
FMI's risk management framework to be periodically reviewed.\55\
---------------------------------------------------------------------------
\50\ PFMIs at Principle 3.
\51\ PFMIs at Principle 3, K.C. 3.
\52\ PFMIs at Principle 3, K.C. 4.
\53\ Id.
\54\ PFMIs at Principle 3, K.C. 2.
\55\ PFMIs at Principle 3, K.C. 1.
---------------------------------------------------------------------------
4. Principle 4: Credit Risk
Principle 4 addresses an FMI's credit risk, that is, the risk that
a counterparty to the CCP will be unable to fully meet its financial
obligations when due.\56\ Generally, Principle 4 requires all FMIs to
establish explicit rules and procedures to address any credit losses
they may face as a result of an individual or combined default among
its participants with respect to any of their obligations to the
FMI.\57\ These rules and procedures should also address how potentially
uncovered credit losses would be allocated, how the funds an FMI may
borrow from liquidity providers will be repaid, and how an FMI will
replenish its financial resources that it may use during a stress
event, such as a default, so that it can continue to operate in a safe
and sound manner.\58\ More specifically, Principle 4 states that ``a
CCP should cover its current and potential future exposures to each
participant fully with a high degree of confidence using margin and
other prefunded financial resources.'' \59\ Additionally, Principle 4
provides that a CCP involved in activities with a more complex risk
profile \60\ or that is
[[Page 50265]]
systemically important in multiple jurisdictions should maintain
additional financial resources sufficient to cover a wide range of
potential stress scenarios, including, but not limited to, the default
of the two participants and their affiliates that would potentially
cause the largest aggregate credit exposure to the CCP in extreme but
plausible market conditions.
---------------------------------------------------------------------------
\56\ The PFMIs define ``credit risk'' as the risk that a
counterparty, whether a participant or other entity, will be unable
to meet fully its financial obligations when due, or at any time in
the future. PFMIs at Annex H: Glossary.
\57\ See PFMIs at Principle 4, K.C. 7.
\58\ See id.
\59\ Id. at Principle 4, K.C. 4.
\60\ Activities ``with a more complex risk profile'' include
clearing financial instruments that are characterized by discrete
jump-to-default price changes or that are highly correlated with
potential participant defaults. Id. at Explanatory Note
(hereinafter, ``E.N.'') 3.4.19.
---------------------------------------------------------------------------
5. Principle 6: Margin
Principle 6 addresses an FMI's margin requirements and requires a
CCP to use ``an effective margin system that is risk-based and
regularly reviewed'' to ``cover its credit exposures to its
participants for all products.'' \61\ Specifically, Principle 6
requires a CCP's margin system to take into account the ``risks and
particular attributes of each product, portfolio and market that it
serves'' and be calibrated accordingly.\62\ Further, a CCP's margin
system must have reliably sourced and timely price data.\63\ A CCP's
regular reviews of its margin models and coverage must include, at
minimum, (i) rigorous daily backtesting, (ii) monthly sensitivity
analyses, and (iii) regular ``assessment of the theoretical and
empirical properties'' of the margin models, which consider a wide
range of possible market conditions ``including the most-volatile
periods that have been experienced by the markets it serves and extreme
changes in the correlation between prices.'' \64\ Principle 6 also
states that ``[a] CCP should have the authority and operational
capacity to make intraday margin calls and payments, both scheduled and
unscheduled, to participants.'' \65\
---------------------------------------------------------------------------
\61\ PFMIs at Principle 6.
\62\ Id. at Principle 6, K.C. 1.
\63\ See id. at Principle 6, K.C. 2.
\64\ Id. at Principle 6, K.C. 6.
\65\ Id. at Principle 6, K.C. 4.
---------------------------------------------------------------------------
6. Principle 7: Liquidity risk
Principle 7 addresses the risk that an FMI may not have sufficient
funds to meet its financial obligations as and when due.\66\
Specifically, Principle 7 provides that an FMI manage its liquidity
risks from a variety of sources, including participants, settlement
banks, custodian banks, and liquidity providers \67\ on an ongoing and
timely basis \68\ and regularly test the sufficiency of liquidity
resources through rigorous stress testing.\69\ Additionally, Principle
7 provides that the minimum liquid resource requirement for CCPs should
be resources that would permit Cover One, but a CCP that is involved in
activities with a more complex risk profile or that is systemically
important in multiple jurisdictions should ``maintain additional
liquidity resources sufficient to cover a wider range of potential
stress scenarios,'' including resources that would permit Cover
Two.\70\ Principle 7 also sets forth specifications for qualifying
liquidity resources which may be used to meet the minimum liquid
resource requirement.\71\
---------------------------------------------------------------------------
\66\ The PFMIs define ``liquidity risk'' as ``the risk that a
counterparty, whether a participant or other entity, will have
insufficient funds to meet its financial obligations as and when
expected, although it may be able to do so in the future.'' Id. at
Annex H: Glossary.
\67\ See PFMIs at Principle 7, K.C. 1.
\68\ See PFMIs at Principle 7, K.C. 2.
\69\ See PFMIs at Principle 7, K.C. 9.
\70\ PFMIs at Principle 7, K.C. 4. The term ``Cover Two'' refers
to the requirement that a CCP maintain financial resources
sufficient to enable it to meet its financial obligations to its
clearing members notwithstanding a default by the two clearing
members creating the largest combined financial exposure for the
SIDCO in extreme but plausible market conditions.
\71\ See PFMIs at Principle 7, K.C. 5-8.
---------------------------------------------------------------------------
7. Principle 9: Money Settlements
Principle 9 addresses money settlements, stating that an FMI should
minimize and strictly control the credit and liquidity risk arising
from the use of commercial bank money.\72\ In other words, an FMI
should ``monitor, manage, and limit its credit and liquidity risks
arising from commercial settlement banks,'' by (i) establishing and
monitoring ``adherence to strict criteria for its settlement banks that
take into account of, among other things, their regulation and
supervision, creditworthiness, capitalization, access to liquidity, and
operational reliability;'' \73\ and (ii) monitoring and managing ``the
concentration credit and liquidity exposures to its commercial
settlement banks.'' \74\
---------------------------------------------------------------------------
\72\ Id.
\73\ See PFMIs at Principle 7, K.C. 3.
\74\ See id.
---------------------------------------------------------------------------
8. Principle 14: Segregation and Portability
Principle 14 addresses segregation and portability, stating that
``a CCP should have rules and procedures that enable the segregation
and portability of a participant's customers and the collateral
provided to the CCP with respect to those positions.'' \75\ A CCP's
segregation and portability rules should, at a minimum, ``effectively
protect a participant's customers' positions and related collateral
from the default or insolvency of that participant.'' \76\ Further,
Principle 14 states that a CCP's segregation and portability
arrangements should be disclosed, including whether the protection
provided for customer collateral is on an individual or omnibus basis
and whether there are any ``constraints, such as legal or operational
constraints'' that may impair its ability to segregate or port a
participant's customers' positions and related collateral.'' \77\
---------------------------------------------------------------------------
\75\ PFMIs at Principle 14.
\76\ Id. at K.C. 1.
\77\ PFMIs at Principle 14, K.C. 4.
---------------------------------------------------------------------------
9. Principle 15: General Business Risk
Principle 15 addresses general business risk, the inability of an
FMI to continue as a going concern, requiring an FMI to ``hold
sufficient liquid net assets funded by equity to cover potential
general business losses.'' \78\ The liquid net assets should be
sufficient, at all times, ``to ensure a recovery or orderly wind-down
of critical operations and services.'' \79\ Specifically, ``an FMI
should maintain a viable recovery or orderly wind-down plan'' that is
supported by ``liquid net assets funded by equity equal to at least six
months of current operating expenses.'' \80\
10. Principle 16: Custody and Investment Risk
---------------------------------------------------------------------------
\78\ The PFMIs define ``general business risk'' as ``any
potential impairment of the FMI's financial position (as a business
concern) as a consequence of a decline in its revenues or an
increase in its expenses, such that expenses exceed revenues and
result in a loss that must be charged against capital.'' PFMIs at
Annex H: Glossary.
\79\ PFMIs at Principle 15.
\80\ Id. at K.C. 3. Such liquid net assets used to support the
recovery and orderly wind-down plan should be held in addition to
the assets required to cover participant defaults and other risks.
Id.
---------------------------------------------------------------------------
Principle 16 addresses custody and investment risks, stating that
an FMI should safeguard its own assets as well as the assets of its
participants.\81\ Specifically, the FMI should minimize the risk of
loss on and delay in access to these assets.\82\ In addition, the FMI's
investments should be in instruments with minimal credit, market and
liquidity risks.\83\
---------------------------------------------------------------------------
\81\ PFMIs at Principle 16.
\82\ Id.
\83\ Id.
---------------------------------------------------------------------------
11. Principle 17: Operational Risk
Principle 17 addresses the risk of deficiencies in information
systems or internal processes, human errors, management failures, or
disruptions from external events that will result in the reduction or
deterioration of services provided by the FMI.\84\ Principle 17 states
that ``[b]usiness continuity management should aim for timely recovery
of operations and fulfillment [sic] of the FMI's obligations, including
in the event of a wide-scale or
[[Page 50266]]
major disruption.'' \85\ Additionally, an FMI's business continuity
plan ``should incorporate the use of a secondary site and should be
designed to ensure that critical information technology (``IT'')
systems can resume operations within two hours following disruptive
events.'' \86\
---------------------------------------------------------------------------
\84\ PFMIs, ] 2.9.
\85\ PFMIs at Principle 17.
\86\ Id. at Principle 17, K.C. 6.
---------------------------------------------------------------------------
12. Principle 21: Efficiency and Effectiveness
Principle 21 addresses the efficiency and effectiveness of an FMI.
An FMI should be designed to meet the needs of its participants and the
markets it serves, in particular, with regard to choice of clearing and
settlement arrangement, operating structure, scope of products cleared
or settled and integration of technology and procedures.\87\ An
effective CCP reliably meets its obligations in a timely manner and
achieves the public policy goals of safety and efficiency for
participants and the markets it serves.\88\
---------------------------------------------------------------------------
\87\ PFMIs at Principle 21, K.C. 1.
\88\ Id. at Principle 21, K.C. 2-3.
---------------------------------------------------------------------------
13. Principle 22: Communication Procedures and Standards
Principle 22 addresses communication procedures and standards. An
FMI should use, or at a minimum accommodate, internationally accepted
communication procedures and standards.\89\ These include common sets
of rules across systems for exchange messages, standardized messaging
formats, and reference data standards for identifying financial
instruments and counterparties.
---------------------------------------------------------------------------
\89\ PFMIs at Principle 22, K.C. 1.
---------------------------------------------------------------------------
14. Principle 23: Disclosure of Rules, Key Procedures, and Market Data
Principle 23 addresses the disclosure of an FMI's rules and
procedures to participants and the public. An FMI should disclose its
rules and procedures to participants, so that participants can have an
``accurate understanding of the risks, fees, and other material costs
they incur by participating in the FMI.'' \90\ Further, the FMI should
make disclosures to the public regarding fees, basic operational
information, and other relevant information, such as the responses to
the Disclosure Framework published by CPSS-IOSCO,\91\ so that
prospective participants can also assess the risks, fees, and other
material costs incurred by participating in the FMI.\92\
---------------------------------------------------------------------------
\90\ PFMIs at Principle 23.
\91\ See Disclosure Framework and Assessment Methodology, supra
note 41.
\92\ See PFMIs at E.N. 3.23.1.
---------------------------------------------------------------------------
F. The Role of the PFMIs in International Banking Standards
The Commission notes that where a CCP is not prudentially
supervised in a jurisdiction that has domestic rules and regulations
that are consistent with the standards set forth in the PFMIs, the
implementation of certain international banking regulations will have
significant cost implications for that CCP and its market participants.
In July of 2012, the BCBS,\93\ the international body that sets
standards for the regulation of banks, published the ``Capital
Requirements for Bank Exposures to Central Counterparties'' (``Basel
CCP Capital Requirements''), which sets forth interim rules governing
the capital charges arising from bank exposures to CCPs related to OTC
derivatives, exchange traded derivatives and securities financing
transactions.\94\ The Basel CCP Capital Requirements create financial
incentives for banks \95\ to clear financial derivatives with CCPs that
are licensed in a jurisdiction where the relevant regulator has adopted
rules or regulations that are consistent with the standards set forth
in the PFMIs. Specifically, the Basel CCP Capital Requirements
introduce new capital charges based on counterparty risk for banks
conducting financial derivatives transactions through a CCP.\96\ These
new capital charges relate to a bank's trade exposure and default fund
exposure to a CCP.\97\
---------------------------------------------------------------------------
\93\ The BCBS is comprised of senior representatives of bank
supervisory authorities and central banks from around the world
including, Argentina, Australia, Belgium, Brazil, Canada, China,
France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan,
Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia,
Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the
United Kingdom and the United States. See Bank for International
Settlements, Basel III: A Global Regulatory Framework for More
Resilient Banks and Banking Systems, December 2010 (revised June
2011), available at http://www.bis.org/publ/bcbs189.htm.
\94\ See Capital Requirements for Bank Exposures to Central
Counterparties (July 2012), available at www.bis.org/publ/bcbs227.pdf. The Basel CCP Capital Requirements are one component of
Basel III, a framework that ``is part of a comprehensive set of
reform measures developed by the BCBS to strengthen the regulation,
supervision and risk management of the international banking
sector.'' See Bank for International Settlement's Web site for
compilation of documents that form the regulatory framework of Basel
III, available at http://www.bis.org/bcbs/basel3.htm.
\95\ ``Bank'' is defined in accordance with the Basel framework
to mean a bank, banking group or other entity (i.e. bank holding
company) whose capital is being measured. See Basel III: A Global
Regulatory Framework, Definition of Capital, paragraph 51. The term
``bank,'' as used herein, also includes subsidiaries and affiliates
of the banking group or other entity. The Commission notes that a
bank may be a client and/or a clearing member of a DCO.
\96\ See Basel CCP Capital Requirements, Annex 4, Section II,
6(i).
\97\ Trade exposure is a measure of the amount of loss a bank is
exposed to, based on the size of its position, given a CCP's
failure. Under the Basel CCP Capital Requirements, trade exposure is
defined to include the current and potential future exposure of a
bank acting as either a clearing member or a client to a CCP arising
from OTC derivatives, exchange traded derivatives transactions or
securities financing transactions, as well as initial margin. See
Basel CCP Capital Requirements, Annex 4, Section I, A: General
Terms. Current exposure, includes variation margin that is owed by
the CCP, but not yet been received by the clearing member or client.
Id.
Default fund exposure is a measure of the loss a bank acting as
a clearing member is exposed to arising from the use of its
contributions to the CCP's mutualized default fund resources. See
Basel CCP Capital Requirements, Annex 4, Section I, A: General
Terms.
---------------------------------------------------------------------------
The capital charges for trade exposure are based upon a function
multiplying exposure by risk weight. Risk weight is a measure that
represents the likelihood that the loss to which the bank is exposed
will be incurred, and the extent of that loss. The risk weight assigned
under the Basel CCP Capital Requirements varies significantly depending
on whether or not the counterparty is a qualified CCP (``QCCP'').\98\ A
QCCP is defined as an entity that (i) is licensed to operate as a CCP,
and is permitted by the appropriate regulator to operate as such, and
(ii) is prudentially supervised in a jurisdiction where the relevant
regulator has established and publicly indicated that it applies to the
CCP on an ongoing basis, domestic rules and regulations that are
consistent with the PFMIs.\99\ If a bank transacts through a QCCP
acting either as (1) a clearing member of a CCP for its own account or
for clients \100\ or (2) a client of a clearing member that enters into
an OTC derivatives transaction with the clearing member acting as a
financial intermediary, then the risk weight is a flat 2% for purposes
of calculating the counterparty risk.\101\ If
[[Page 50267]]
the CCP is non-qualifying, then risk weight is the same as a bilateral
OTC derivative trade and the bank applies the corresponding bilateral
risk-weight treatment, which is at least 20% if the CCP is a bank or as
high as 100% if the CCP is a corporate institution.\102\
---------------------------------------------------------------------------
\98\ See id. at Annex 4, Section IX, Exposures to Qualifying
CCPs, paragraphs 110-119 (describing the methodology for calculating
a bank's trade exposure to a qualified CCP); see also id. at
paragraph 126 (describing methodology for calculating a bank's trade
exposure to a non-qualifying CCP). ``A QCCP is defined as an entity
that (i) is licensed to operate as a CCP, and is permitted by the
appropriate regulator to operate as such, and (ii) is prudentially
supervised in a jurisdiction where the relevant regulator has
established and publicly indicated that it applies to the CCP on an
ongoing basis, domestic rules and regulations that are consistent
with the PFMIs.'' See Section I, A: General Terms of the Basel CCP
Capital Requirements).
\99\ Id. at Section I, A: General Terms.
\100\ The term ``client'' as used herein refers to a customer of
a DCO.
\101\ Id. at Section IX: Central Counterparties, paragraphs 110
and 114. Client trade exposures are risk-weighted at 2% if the
following two conditions are met: (1) The offsetting transactions
are identified by the CCP as client transactions and collateral to
support them is held by the CCP and/or clearing member, as
applicable, under arrangements that prevent losses to the client due
to the default or insolvency of the clearing member, or the clearing
member's other clients, or the joint default or insolvency of the
clearing member and any of its other clients and (2) relevant laws,
regulations, contractual or administrative arrangements provide that
the offsetting transactions with the defaulted or insolvent clearing
member are highly likely to continue to be indirectly transacted
through the CCP, or by the CCP, should the clearing member default
or become insolvent.
However, in certain circumstances risk weight may increase.
Specifically, if condition 1 is not met (i.e. where a client is not
protected from losses in the case that the clearing member and
another client of the clearing member jointly default or become
jointly insolvent) but condition 2 is met, the banks trade exposure
is risk-weighted at 4%. If neither condition 1 nor 2 is met, then
the bank must capitalize its exposure to the CCP as a bilateral
trade. Id. at paragraphs 115 and 116.
\102\ See BCBS, Consultative Document: Capitalisation of Bank
Exposures to Central Counterparties, paragraph 28 (Nov. 2011),
available at http://www.bis.org/publ/bcbs.206.htm.
---------------------------------------------------------------------------
With respect to default fund exposure, whenever a clearing member
bank is required to maintain capital for exposures arising from default
fund contributions to a QCCP, the clearing member bank may apply one of
two methodologies for determining the capital requirement: The risk-
sensitive approach, or the 1250% risk weight approach.\103\ The risk-
sensitive approach considers various factors in determining the risk
weight for a bank's default exposure to a QCCP such as (i) the size and
quality of a QCCP's financial resources, (ii) the counterparty credit
risk exposures of such a CCP, and (iii) the application of such
financial resources via the CCP's loss bearing waterfall in the case
one or more clearing members default.\104\ The 1250% risk weight
approach allows a clearing member bank to apply a 1250% risk weight to
its default fund exposures to the QCCP, subject to an overall cap of
20% on the risk-weighted assets from all trade exposures to the
QCCP.\105\ In other words, banks with exposures to QCCPs have a cap on
the capital charges related to their default fund exposure. In
contrast, a clearing member bank with exposures to a non-qualified CCP
must apply a risk weight of 1250% with no cap for default fund
exposures.\106\
---------------------------------------------------------------------------
\103\ See Basel CCP Capital Requirements, Annex 4, Section IX,
paragraphs 121-125.
\104\ Id. at paragraph 122. The Commission notes that the 1250%
risk weight represents the reciprocal of the 8% capital ratio (which
is the percentage of a bank's capital to its risk-weighted assets).
\105\ Id. at paragraph 125.
\106\ Id. at paragraph 127.
---------------------------------------------------------------------------
Thus, the Basel CCP Capital Requirements provide incentives for
banks, including their subsidiaries and affiliates, to clear
derivatives through CCPs that are QCCPs by setting (1) lower capital
charges for OTC derivatives transacted through a QCCP and (2)
significantly higher capital charges for OTC derivatives transacted
through non-qualifying CCPs. The increased capital charges for
transactions through non-qualifying CCPs may have significant business
and operational implications for U.S. DCOs that operate internationally
and are not QCCPs. Specifically, banks faced with such higher capital
charges may transfer their OTC derivatives business away from such DCOs
to a QCCP in order to benefit from the preferential capital charges
provided by Basel CCP Capital Requirements. Alternatively, banks may
reduce or discontinue their OTC business altogether. Banks may also
pass through the higher costs of transacting on a non-qualifying DCO
that result from the higher capital charges to their customers.
Accordingly, customers using such banks as intermediaries may transfer
their business to an intermediary at a QCCP. In short, a DCO's failure
to be a QCCP may cause it to face a competitive disadvantage retaining
members and customers.
G. Proposed Rulemaking Applicable to SIDCOs and Subpart C DCOs
As described in detail in section II below, this proposed
rulemaking would create a new category of DCO, a Subpart C DCO. A
Subpart C DCO would include any registered DCO that elects to become
subject to the provisions in Subpart C of part 39 of the Commission's
regulations (``Subpart C''). Further, this rulemaking would revise
Subpart C so that Subpart C would apply to SIDCOs and Subpart C DCOs,
and would include new or revised standards for governance, financial
resources, system safeguards, default rules and procedures for
uncovered losses or shortfalls, risk management, disclosure,
efficiency, and recovery and wind-down procedures. These requirements
would address any remaining gaps between the Commission's regulations
and the PFMI standards. Thus, Subpart C, together with the provisions
in Subpart A and Subpart B, would establish domestic rules and
regulations that are consistent with the PFMIs. As such, because SIDCOs
and Subpart C DCOs would have the requirements of Subpart A, Subpart B,
and Subpart C applied to them on a continuing basis, SIDCOs and Subpart
C DCOs would be QCCPs for purposes of the Basel CCP Capital
Requirements.\107\ The Commission requests comment on all aspects of
the rules proposed herein, as well as comment on the specific
provisions and issues highlighted in section II, below.
---------------------------------------------------------------------------
\107\ See discussion of QCCP status supra Section I.F.
---------------------------------------------------------------------------
II. Discussion of Revised and Proposed Rules
A. Regulation 39.2 (Definitions)
The Commission proposes to amend regulation 39.2 by amending one
definition and adding six definitions. First, the Commission proposes a
technical amendment to the definition of ``systemically important
derivatives clearing organization.'' The definition now describes a
SIDCO as a registered DCO ``which has been designated by the [Council]
to be systemically important . . . .'' The proposed definition would
describe a SIDCO as a registered DCO ``which is currently designated .
. . '' This revision is necessary to allow for the possibility that a
systemic importance designation may be rescinded.\108\
---------------------------------------------------------------------------
\108\ See 76 FR at 44775 (finalizing 12 CFR 1320.13(b), which
states that ``[t]he Council shall rescind a designation of systemic
importance for a designated financial market utility if the Council
determines that the financial market utility no longer meets the
standards for systemic importance.'').
---------------------------------------------------------------------------
Second, the Commission proposes to add a definition for the phrase
``activity with a more complex risk profile,'' to provide greater
clarity as to the types of activities that would trigger a Cover Two
financial resources requirement. The Commission proposes to define
``activity with a more complex risk profile'' to include clearing
credit default swaps, credit default futures, and derivatives that
reference either credit default swaps or credit default futures, as
well as any other activity designated as such by the Commission. By
permitting activities to be added by Commission action, the proposed
definition provides the Commission with flexibility to address new and
innovative market activities. The phrase ``activity with a more complex
risk profile'' appears in regulation 39.29 (Financial resources
requirements), which this rulemaking proposes to revise and renumber as
regulation 39.33. The phrase also appears in PFMI Principles 4 (Credit
risk) and 7 (Liquidity risk).
The Commission also proposes to add a definition for the term
``subpart C
[[Page 50268]]
derivatives clearing organization.'' As proposed, a ``subpart C
derivatives clearing organization'' would include any registered DCO
that is not a SIDCO and that has elected to become subject to Subpart
C.
In addition, the Commission proposes to add definitions for
``depository institution,'' ``U.S. branch and agency of a foreign
banking organization,'' and ``trust company.'' A ``depository
institution'' would have the meaning set forth in Section 19(b)(1)(A)
of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)). A ``U.S. branch
and agency of a foreign banking organization'' would mean the U.S.
branch and agency of a foreign banking organization as defined in
Section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
A ``trust company'' would mean a trust company that is a member of the
Federal Reserve System, under Section 1 of the Federal Reserve Act (12
U.S.C. 221), but that does not meet the definition of ``depository
institution.''
The Commission requests comment on these definitions. In
particular, the Commission requests comment on the potential costs and
benefits resulting from or arising out of the proposed definition of
``activity with a more complex risk profile.'' The Commission requests
that, where possible, commenters provide both quantitative data and
detailed analysis in their comments, particularly with respect to
estimates of costs and benefits. In addition, the Commission requests
comment on whether there are alternative definitions that would provide
a more effective or efficient means for achieving consistency with the
standards set forth by the PFMIs. The Commission requests that
commenters include a detailed description of any such alternatives, and
estimates of the costs and benefits of such alternatives.
B. Regulation 39.30 (Scope)
The Commission proposes to expand regulation 39.28 (and renumber it
as regulation 39.30) so that Subpart C would apply to SIDCOs and
Subpart C DCOs. As described above, the rules proposed in Subpart C
address the gaps between Commission regulations and the standards set
forth in the PFMIs.\109\ As such, a DCO that is subject to the
requirements of Subpart A, Subpart B, and Subpart C should meet the
requirements for QCCP status and benefit from the lower capital charges
on clearing member banks and bank customers of clearing members for
exposures resulting from derivatives cleared through QCCPs.\110\ Such a
DCO may also be viewed more favorably by potential members or customers
of members in that it would be seen to be held to international
standards. Because of these potential benefits, the Commission proposes
that a DCO that has not been designated to be systemically important
should have the option to elect to become subject to Subpart C.\111\
---------------------------------------------------------------------------
\109\ See also supra Section I.G.
\110\ See supra Section I.F.
\111\ As a technical matter, the Commission proposes to move
existing paragraph (c) of renumbered regulation 39.30 (requiring a
SIDCO to provide notice to the Commission in advance of any proposed
change to its rules, procedures, or operations that could materially
affect the nature or level of risks presented by the SIDCO, in
accordance with the requirements of regulation 40.10) to proposed
new regulation 39.42. Because the other provisions of proposed
regulation 39.30 would pertain exclusively to the scope of Subpart
C, it would be appropriate for existing paragraph (c) to be codified
in a separate regulation. See infra Section II.N for further detail.
---------------------------------------------------------------------------
With respect to SIDCOs, the Commission is committed to maintaining
risk management standards that enhance the safety and efficiency of a
SIDCO, reduce systemic risks, foster transparency and support the
stability of the broader financial system.\112\ To support financial
stability, a SIDCO must operate in a safe and sound manner. If it fails
to measure, monitor, and manage its risks effectively, a SIDCO could
pose significant risk to its participants and the financial system more
broadly.\113\ The Commission shares the stated objectives of the PFMIs,
namely to enhance the safety and efficiency of FMIs and, more broadly,
reduce systemic risk and foster transparency and financial
stability.\114\ The PFMIs have been adopted and implemented by numerous
foreign jurisdictions.\115\ A global, unified set of international risk
management standards for systemically important CCPs can help support
the stability of the broader financial system and, for the reasons set
forth in the discussion below, the Commission proposes that SIDCOs be
required to comply with all of the requirements set forth in part 39 of
the Commission's regulations, including the proposed standards set
forth in Subpart C.
---------------------------------------------------------------------------
\112\ See SIDCO Final Rule (Discussion of risk management
standards). See also Section 805(b) of the Dodd-Frank Act.
\113\ See supra Section I.E.
\114\ PFMIs ] 1.15.
\115\ In Europe, the European Market Infrastructure Regulation
and implementing technical standards entered into force on March 15,
2013, and establish standards for CCPs that are consistent with the
PFMIs. See Commission Delegated Regulation (EU) No 153/2013,
available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:052:0041:0074:EN:PDF; and Regulation
(EU) No 648/2012 of the European Parliament and of the Council on
OTC Derivatives, Central Counterparties and Trade Repositories,
preamble paragraph 90, 2012 O.J. (L 201), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:FULL:EN:PDF.
In Asia, Singapore has adopted the PFMIs into its financial
regulations pertaining to FMIs. See Monetary Authority of Singapore,
``Supervision of Financial Market Infrastructures in Singapore,''
(January 2013), available at http://www.mas.gov.sg/~/media/MAS/
About%20MAS/Monographs%20and%20information%20papers/MASMonograph--
Supervision--of--Financial--Market--Infrastructures--in--
Singapore%202.pdf.
In addition, Australia and Canada have publicly indicated their
intent to adopt the PFMIs. See Reserve Bank of Australia,
``Consultation on New Financial Stability Standards,'' (August
2012), available at http://www.rba.gov.au/payments-system/clearing-settlement/consultations/201208-new-fin-stability-standards/index.html; Canadian Securities Administrators Consultation Paper
91-406 ``Derivatives: OTC Central Counterparty Clearing,'' (June 20,
2012), available at http://www.osc.gov.on.ca/documents/en/Securities-Category9/csa_20120620_91-406_counterparty-clearing.pdf.
In the United States, the SEC adopted a final rule that
incorporates heightened risk management standards for CCPs that
clear security-based swaps, based on, in part, the PFMIs' ``Cover
Two'' standard for CCPs engaged in a more complex risk profile or
that are systemically important in multiple jurisdictions. See 17
CFR 240.17Ad-22(b)(3) (2013) (requiring, in relevant part, SEC-
registered clearing agencies (i.e., CCPs) to maintain sufficient
financial resources to withstand, at a minimum, a default by the
participant family to which they have the largest exposure in
extreme but plausible conditions, provided that a security-based
swap clearing agency, (i.e., a CCP that clears security-based swaps)
shall maintain sufficient financial resources to withstand, at a
minimum, a default by the two participant families to which it has
the largest exposure in extreme but plausible market conditions).
---------------------------------------------------------------------------
The Commission requests comment on the proposed rules.
Specifically, and in light of the potential impact that a SIDCO's
failure could have on the U.S. financial system, the Commission
requests comment on the potential costs and benefits resulting from, or
arising out of, requiring SIDCOs to comply with Subpart C. The
Commission requests that, where possible, commenters provide
quantitative data and detailed analysis in their comments, particularly
with respect to estimates of costs and benefits. In addition, the
Commission requests comment on whether there are more effective or
efficient means for achieving consistency with the standards set forth
by the PFMIs. The Commission requests that commenters include a
detailed description of any such alternatives, and estimates of the
costs and benefits of such alternatives.
C. Regulation 39.31 (Election To Become Subject to the Provisions of
Subpart C)
As discussed above,\116\ the Basel CCP Capital Requirements impose
significantly higher capital charges on banks (including their
subsidiaries and
[[Page 50269]]
affiliates) that clear derivatives through CCPs that do not qualify as
QCCPs. Because such charges could create incentives for banks to
migrate their business to CCPs that are QCCPs or to avoid clearing,
U.S. DCOs that operate internationally, but that are not QCCPs, may
face a substantial competitive disadvantage. It would appear that DCOs
that have not been designated by the Council as systemically important
should have the ability to be held to international standards and to
attain QCCP status.\117\ Accordingly, the Commission is proposing
regulation 39.31, which would provide a mechanism whereby a DCO that
has not been designated by the Council as systemically important may
elect to become subject to the provisions of Subpart C (i.e., may
``opt'' to become subject to the regulations otherwise applicable only
to SIDCOs) and, thereby, attain QCCP status. The Commission is also
proposing procedures for withdrawing or rescinding that election.
---------------------------------------------------------------------------
\116\ See discussion supra Section I.F.
\117\ A DCO that is subject to the obligations contained in
Subpart A, Subpart B, and Subpart C would be a QCCP.
---------------------------------------------------------------------------
The proposed amendments to Subpart C are intended to enhance the
financial integrity and operational security of a SIDCO, which is
critically important to safeguarding the stability of the U.S.
financial system. Accordingly, the Commission proposes that a SIDCO
should be subject to all of the requirements set forth in Subpart C.
The Commission recognizes, however, that the overall balance of the
costs and benefits of this enhanced regulatory regime, including the
benefits accruing from QCCP status, and the costs associated with the
implementation of Subpart C, may vary among DCOs that are not SIDCOs.
The proposed ``opt-in'' regime allows DCOs that are not designated by
the Council as systemically important to weigh for themselves the costs
and benefits of attaining QCCP status.
The authority provided by Sections 5b(c)(2)(A) and 8a(5) of the CEA
permits the Commission to establish and enforce regulations applicable
to specified categories of DCOs that affirmatively elect to become
subject to such regulations. Indeed, the Commission notes that it
applies, and maintains the authority to enforce, regulations to persons
and entities that voluntarily register in certain capacities.\118\
---------------------------------------------------------------------------
\118\ See, e.g., Section 5b(b) of the CEA, 7 U.S.C. 7a-1(b)
(voluntary registration as a DCO). The Commission recognizes that
for such entities, the benefits of voluntary registration outweigh
the costs of complying with the CEA and Commission regulations.
Thus, the Commission permits such entities to register with it,
which registration necessarily entails continuing supervision by the
Commission, compliance with the CEA and Commission regulations, and
Commission authority to enforce the CEA and its regulations against
such entities.
---------------------------------------------------------------------------
Authority for proposed regulation 39.31 is also supported by
Section 752 of the Dodd- Frank Act,\119\ which, as described above,
directs the Commission to consult and coordinate with foreign
regulatory authorities on effective and consistent global regulation of
swaps and futures. Expanding the application of Subpart C to include
DCOs that have not been designated by the Council as systemically
important, but that nonetheless wish to become subject to regulations
that are fully consistent with the standards set forth in the PFMIs,
helps promote the international consistency called for in Section 752.
---------------------------------------------------------------------------
\119\ See supra note 19.
---------------------------------------------------------------------------
The mandate of Section 15 of the CEA further supports the adoption
of a flexible approach, permitting some non-SIDCOs, but not all DCOs,
to be subject to the additional regulations of Subpart C. As discussed
below in more detail, the Commission is required by Section 15(a)(1) to
consider the costs and benefits of any proposed regulation prior to
promulgating it.\120\ The benefits of enhanced financial integrity and
operational security, the benefits accruing from being held to
international standards and from QCCP status, and the costs associated
with the implementation of Subpart C, may vary among DCOs that have not
been designated as systemically important. DCOs that wish to compete
internationally may find compliance with Subpart C a necessary cost to
operate on a global stage. Similarly, DCOs that have banks or bank
affiliates as members may find such compliance important to their
membership and, in turn, to their own business. Accordingly, the
Commission proposes that, at this time, DCOs that are not designated as
systemically important should be provided with the opportunity to
become subject to Subpart C based upon their assessments of the
benefits and burdens associated with meeting the regulations set out in
this Subpart C.
---------------------------------------------------------------------------
\120\ See infra Section IV.C (Consideration of Costs and
Benefits); see also Section 15(a)(1) of the CEA, 7 U.S.C. 19(a)(1),
stating that, ``Before promulgating a regulation under this Act or
issuing an order . . . the Commission shall consider the costs and
benefits of the action of the Commission.''
---------------------------------------------------------------------------
The Commission emphasizes however, that, under the present
proposal, once a non-SIDCO elects to become subject to Subpart C, that
non-SIDCO would, as of the effective date of the election, be subject
to examination for compliance with Subpart C and to enforcement action
for non-compliance. This status would continue until such time, if any,
as the election is properly vacated as set forth in proposed regulation
39.31(e).
1. Regulation 39.31(a): Eligibility Requirements
Proposed regulation 39.31(a) sets forth the two categories of
entities that would be eligible to elect to become subject to the
provisions in Subpart C. A DCO that is not a SIDCO could request such
election using the procedures set forth in proposed regulation
39.31(b). An entity applying for registration as a DCO pursuant to
regulation 39.3 (``DCO Applicant'') could request the election in
conjunction with its application for registration (``Registration
Application'') using the procedures set forth in proposed regulation
39.31(c).
2. Regulation 39.31(b): Subpart C Election and Withdrawal Procedures
for Registered DCOs
Proposed regulation 39.31(b) would establish the procedures by
which a DCO that is already registered could elect to become subject to
the provisions of Subpart C and the procedure by which it could
withdraw that election. These procedures are intended to provide the
Commission, clearing members, and customers (and regulators of such
clearing members and customers) with assurance that the electing DCO
will be held to and will be required to meet the standards set forth in
Subpart C and in the PFMIs.
A DCO seeking to become subject to Subpart C would be required to
file with the Commission a completed Subpart C Election Form, which is
proposed to be included in part 39 of the Commission's regulations as
Appendix B thereto. The proposed Subpart C Election Form would include
three parts: (1) General Instructions, (2) Elections and
Certifications, and (3) Disclosures and Exhibits. As discussed below, a
DCO Applicant requesting an election to become subject to Subpart C
also would be required to file a Subpart C Election Form with the
Commission.\121\
---------------------------------------------------------------------------
\121\ See discussion infra Section II.C.3.
---------------------------------------------------------------------------
In the Elections and Certifications portion of the Subpart C
Election Form, a DCO would be required to affirmatively elect to become
subject to Subpart C and to specify the date upon which it seeks to
make its election effective. The effective date selected by the DCO
could be no earlier than ten business days after the date the Subpart C
Election Form is filed with the
[[Page 50270]]
Commission. The DCO, through its duly authorized representative,\122\
would be required to certify that, as of the effective date of its
election, the DCO will be in compliance with Subpart C and will remain
in compliance unless and until the DCO rescinds its election pursuant
to proposed regulation 39.31(e), discussed below.\123\ The DCO also
would be required to certify, through its duly authorized
representative, that all information contained in the Subpart C
Election Form is ``true, current and complete in all material
respects.''
---------------------------------------------------------------------------
\122\ The signatures required by the ``Elections and
Certifications'' portion of the proposed Subpart C Election Form
would be required to be the manual signatures of the duly authorized
representatives of the DCO described in the instructions. If the
Subpart C Election Form is filed by a corporation, the Elections and
Certifications would be required to be signed in the name of the
corporation by a principal officer duly authorized; if filed by a
limited liability company, they would be required to be signed in
the name of the limited liability company by a manager or member
duly authorized to sign on the limited liability company's behalf;
if filed by a partnership, they would be required to be signed in
the name of the partnership by a general partner duly authorized;
and if filed by an unincorporated organization or association which
is not a partnership, they would be required to be signed in the
name of such organization or association by the managing agent
(i.e., a duly authorized person who directs or manages or who
participates in the directing or managing of its affairs).
\123\ See discussion infra Section II.C.5.
---------------------------------------------------------------------------
In the Disclosures and Exhibits portion of the Subpart C Election
Form, a DCO would be required to provide a regulatory compliance chart
that separately sets forth for proposed Subpart C regulations 39.32
through 39.39, citations to the relevant rules, policies and procedures
of the DCO that address each such regulation and a summary of the
manner in which the DCO will comply with each regulation. In addition,
the DCO would be required to provide, in separate exhibits, any
documents that demonstrate its compliance with proposed Subpart C
regulations 39.32 through 39.36 and 39.39.\124\ The Commission also
proposes requiring the DCO to complete and to publish on the DCO's Web
site the DCO's responses to the Disclosure Framework and to provide the
Commission with the URL to the specific page where such responses can
found.\125\ The Disclosure Framework would be required to be completed
in accordance with section 2.0 and Annex A thereof \126\ and would be
expected to fully explain how the DCO complies with the standards set
forth in the PFMIs. As noted in section 2.5 of the Disclosure
Framework, CPSS-IOSCO are in the process of developing a set of
criteria for the disclosure by an FMI of quantitative information to
enable stakeholders to evaluate FMIs and to make cross-comparisons
(``Quantitative Information Disclosure''). The Commission proposes
requiring the DCO, in the event that such criteria are published, to
publish its Quantitative Information Disclosure on the DCO's Web site
and to provide the Commission, on its Subpart C Election Form, the URL
to the specific page where the Quantitative Information Disclosure may
be found.
---------------------------------------------------------------------------
\124\ This approach is consistent with the Form DCO that must be
filed by DCO Applicants. The Form DCO requires DCO Applicants to
submit to the Commission, as individual exhibits to the Form DCO,
documents that demonstrate compliance with the requirements
contained in Subpart B. 17 CFR Part. 39, Appendix A.
\125\ This proposed obligation is consistent with the obligation
under proposed regulation 39.37 of SIDCOs and Subpart C DCOs to
complete and publically disclose their Disclosure Framework
responses. See discussion infra Section II.I.
\126\ Compliance with Section 2 and Annex A of the Disclosure
Framework, collectively, would require the SIDCO or Subpart C DCO to
provide ``a comprehensive narrative disclosure for each applicable
[PFMI] principle with sufficient detail and context to enable the
reader to understand the [SIDCO's or Subpart C DCO's] approach to
observing the principle. In addition, the SIDCO or Subpart C DCO
would be required to provide: (1) An executive summary of the key
points from the disclosure [responses]; (2) a summary of the major
changes since the last update of the disclosure[responses]; (3) a
description of the SIDCO or Subpart C DCO and the markets it serves,
including basic data and performance statistics on its services and
operations; (4) a description of the SIDCO's or Subpart C DCO's
general organization and governance structure; (5) an overview of
the SIDCO's or Subpart C DCO's legal and regulatory framework; (6)
an explanation of the SIDCO's or Subpart C DCO's system design and
operation; (6) a list of publicly available resources, including
those referenced in the disclosure [responses], that may help a
reader understand the SIDCO or Subpart C DCO and its approach to
observing each applicable PFMI principle. The narrative disclosure
for each principle would be required to provide sufficient detail
and context ``to enable a variety of readers with different
backgrounds to understand the [SIDCO's or Subpart C DCO's] approach
to observing the principle.'' Id.
---------------------------------------------------------------------------
Pursuant to proposed regulation 39.31(b)(2), the filing of a
Subpart C Election Form would not create a presumption that the Subpart
C Election Form is materially complete or that supplemental information
would not be required. The Commission could, prior to the effective
date, request that the DCO provide supplemental information in order to
process the DCO's Subpart C Election Form and the DCO would be required
to file such supplemental information with the Commission. Proposed
regulation 39.31(b)(3) also would require the DCO to promptly amend its
Subpart C Election Form if it discovers a material omission or error
in, or if there is a material change in, the information provided to
the Commission in the Subpart C Election Form or other information
provided in connection with the Subpart C Election Form.
Once a Subpart C Election Form is filed by a DCO, the Commission
may permit the DCO's election to become subject to Subpart C to take
effect as set forth in proposed regulation 39.31(b)(4) or may stay or
deny the election under proposed regulation 39.31(b)(5). If the
Commission stays or denies the election, it would issue written
notification thereof to the DCO. Proposed regulation 39.31(b)(4) would
provide that, unless the Commission stays or denies the DCO's election
to become subject to Subpart C, such election would become effective
upon the later of: (1)(i) The effective date specified by the DCO in
its Subpart C Election Form or (ii) ten business days after the DCO
files its Subpart C Election Form with the Commission or (2) or upon
the effective date set forth in written notification from the
Commission that it shall permit the election to take effect after a
stay issued pursuant to proposed regulation 39.31(b)(5). The Commission
may provide written acknowledgement of receipt of the DCO's Subpart C
Election Form, as well as written acknowledgement that it has permitted
the DCO's election to become subject to Subpart C to take effect and
the effective date of that election.\127\ The Commission emphasizes
that, consistent with the certification required to be provided by a
DCO as part of its Subpart C Election Form, a DCO, as of the date its
election to become subject to Subpart C becomes effective, would be
held to the requirements of Subpart C and the DCO would become subject
to potential enforcement action by the Commission for failure to comply
with any such requirements. To the extent that compliance with Subpart
C would require the DCO to implement new rules or rule amendments, all
such rules or rule amendments must be approved or permitted to take
effect prior to the effective date.
---------------------------------------------------------------------------
\127\ The decision to approve, to deny or to stay an election to
become subject to Subpart C may be made by, and the related written
notices may be provided by, the Director of the Division of Clearing
and Risk pursuant to the authority delegated to him or her under the
proposed amendment to regulation 140.94. See infra Section II.O.
---------------------------------------------------------------------------
Proposed regulation 39.31(b)(7) would allow a DCO that has
submitted a Subpart C Election Form to withdraw the form at any time
prior to the effective date specified therein by filing a notice
thereof with the Commission. Withdrawal, however, would not be
permitted on or after the specified effective date. A DCO that wishes
to rescind its election to become subject to
[[Page 50271]]
Subpart C after the effective date would be permitted to do so using
the procedures set forth in proposed regulation 39.31(e).\128\
---------------------------------------------------------------------------
\128\ See discussion infra Section II.C.5.
---------------------------------------------------------------------------
3. Regulation 39.31(c): Election and Withdrawal Procedures for DCO
Applicants
Proposed regulation 39.31(c) sets forth procedures through which a
DCO Applicant may request to become subject to the provisions of
Subpart C at the time that the DCO Applicant files its Registration
Application. These procedures are intended to provide the Commission
with a basis to evaluate the DCO Applicant's ability to comply with the
provisions of Subpart C, and ultimately to provide the Commission,
potential members and customers (and regulators of such members and
customers) with assurance that the DCO Applicant will, once DCO
registration has been granted, be held to and will, in fact, meet the
standards set forth in Subpart C and in the PFMIs.
The Commission encourages DCO Applicants to make their election to
become subject to Subpart C at the time that their Registration
Application is filed. The Commission anticipates considerable overlap
between the information and documentation contained in a Registration
Application filed by a DCO Applicant and the information and
documentation that would be required to be submitted to the Commission
as part of a Subpart C Election Form. It would appear that simultaneous
filings would allow Commission resources to be used more efficiently
and effectively.
As proposed, a DCO Applicant requesting an election to become
subject to Subpart C would make such request by attaching a Subpart C
Election Form to the Form DCO that the DCO Applicant files pursuant to
regulation 39.31. The certifications, disclosures, and exhibits that
would be required to be provided by a DCO Applicant in the Subpart C
Election Form would be the same as those required of registered
DCOs,\129\ except that the DCO Applicant would not specify an effective
date for its election. Rather, the DCO Applicant would certify that, if
the Commission permits its election to become subject to Subpart C to
become effective, the DCO Applicant will be in compliance with the
Subpart C regulations as of the date set forth in the Commission's
notice thereof.
---------------------------------------------------------------------------
\129\ The DCO Applicant would be required to: (1) Certify that
all information contained in its Subpart C Election Form is ``true,
correct and complete in all material respects;'' (2) provide a
regulatory compliance chart that separately sets forth, for proposed
Subpart C regulations 39.32 through 39.39, citations to the relevant
rules, policies and procedures of the DCO Applicant that address
each such regulation and a summary of the manner in which the DCO
Applicant will comply with each regulation; (c) provide, as separate
exhibits to the Subpart C Election Form, any documents that
demonstrate the DCO Applicant's compliance with proposed Subpart C
regulations 39.32 through 39.36 and 39.39; (d) complete and publish
on the DCO Applicant's Web site, the DCO's responses to the
Disclosure Framework and provide the Commission with the URL to
specific Web site page where such responses can found; and (e) if
applicable, publish on the DCO Applicant's Web site the DCO
Applicant's Quantitative Information Disclosure and provide the
Commission the URL to the specific page where such disclosure may be
found.
---------------------------------------------------------------------------
As with Subpart C Election Forms filed by registered DCOs, the
filing of a Subpart C Election Form by a DCO Applicant would not create
a presumption that the Subpart C Election Form is materially complete
or that supplemental information would not be required. Under proposed
regulation 39.31(c)(3), the Commission could, at any time during the
Commission's review of the Subpart C Election Form, request that the
DCO Applicant submit supplemental information in order for the
Commission to process the DCO Applicant's Subpart C Election Form or
its Registration Application and the DCO Applicant would be required to
file such supplemental information. In addition, the DCO Applicant
would be required by proposed regulation 39.31(c)(4) to promptly amend
its Subpart C Election Form if it discovers a material omission or
error in, or if there is a material change in, the information provided
to the Commission in the Subpart C Election Form or other information
provided in connection with the Subpart C Election Form.\130\
---------------------------------------------------------------------------
\130\ Proposed regulations 39.31(c)(3) and 39.31(c)(4) are
consistent with regulations 39.3(a)(2) and 39.3(a)(3) governing DCO
application amendments and the submission of supplemental
information in connection with a DCO application, respectively. 17
CFR 39.31(a)(2)-(3).
---------------------------------------------------------------------------
Under proposed regulation 39.31(c)(2), the Commission would review
the Subpart C Election Form as part of the Commission's review of the
DCO Applicant's Registration Application and the Commission, based upon
its review and analysis of the information submitted in the Subpart C
Election Form, could permit the DCO Applicant's election to take effect
at the time it approves the Registration Application. The Commission
would provide the DCO Applicant written notice of its determination to
permit the election to become subject to Subpart C to become
effective.\131\ The Commission notes that any Registration Application
for which there is a Subpart C Election Form pending would be evaluated
against the standards set forth in Subpart C as well as the standards
set forth in Subpart A and Subpart B in order for the Commission to
approve the Registration Application. That is, the Commission would not
approve any such Registration Application if the Commission determines
that the DCO Applicant's election to become subject to Subpart C should
not become effective because the DCO Applicant has not demonstrated its
ability to comply with the requirements of Subpart C. The DCO Applicant
would be permitted to withdraw the Subpart C Election Form as set forth
in proposed regulation 39.31(c)(5), however, prior to the Commission's
taking action on the Registration Application.
---------------------------------------------------------------------------
\131\ The decision to permit a DCO to become subject to Subpart
C may be made by, and notice thereof may be provided by, the
Director of the Division of Clearing and Risk, as set forth in
Commission regulation 140.94, as proposed to be amended herein. See
discussion infra Section II.O.
---------------------------------------------------------------------------
Proposed regulation 39.31(c)(5) would permit a DCO Applicant to
withdraw a request to become subject to Subpart C by filing with the
Commission a notice of the withdrawal. The DCO Applicant could withdraw
its Subpart C Election Form without withdrawing its Form DCO.
4. Regulation 39.31(d)--Public Information
Proposed regulation 39.31(d) would provide that certain portions of
the Subpart C Election Form will be considered public documents that
may routinely be made available for public inspection. Such portions
include: The Elections and Certifications and Disclosures in the
Subpart C Election Form, the rules of the DCO, the regulatory
compliance chart, and any other part of the Subpart C Election Form
that is not covered by a request for confidential treatment subject to
regulation 145.9. This proposal is consistent with the transparent
treatment typically afforded materials submitted in connection with
applications to become registered with the Commission.\132\
---------------------------------------------------------------------------
\132\ See, e.g., 17 CFR 39.3(a)(5) (setting forth those portions
of DCO Registration Applications that are considered public
information).
---------------------------------------------------------------------------
5. Regulation 39.31(e)--Rescission
Proposed 39.31(e) would permit a Subpart C DCO to rescind its
election to comply with Subpart C by filing a notice of its intent to
rescind the election with the Commission. The Commission proposes that
DCOs that ``opt-in'' to Subpart C should be permitted to rescind,
subject to certain conditions. These conditions are intended to provide
the DCO's members and
[[Page 50272]]
customers, and the regulators of such members and customers, notice of,
and time to take such actions as these entities may deem appropriate in
light of, the DCO's decision to rescind its election. As discussed
above, the Commission proposes that a SIDCO should be required to
comply with the Subpart C provisions unless and until the SIDCO's
designation as systemically important is rescinded by the Council.\133\
---------------------------------------------------------------------------
\133\ See 12 CFR 1320.13(b) (procedure for the Council to
rescind a designation of systemic importance for a systemically
important financial market utility).
---------------------------------------------------------------------------
As proposed, the rescission of a DCO's election to become subject
to Subpart C would become effective on the date specified by the
Subpart C DCO in its notice of intent to rescind the Subpart C
election, except that the rescission could not become effective any
earlier than 90 days after the date the notice of intent to rescind is
filed with the Commission. This proposed 90-day period is necessary to
provide banks and other entities that wish to limit their cleared
transactions to clearing solely through a QCCP (e.g., because of the
preferential Basel CCP Capital Requirements applicable to exposures to
derivatives cleared through a QCCP) sufficient time to transfer their
business to another Subpart C DCO or SIDCO. The Subpart C DCO would be
required to comply with all of the provisions of Subpart C until such
rescission is effective. The Commission also proposes requiring that
the notice of intent to rescind include a certification that the
Subpart C DCO has complied with and will comply with the notice
requirements set forth in proposed regulation 39.31(e)(3).
Proposed regulation 39.31(e)(3)(i) would require a Subpart C DCO
that files a notice of intent to rescind to provide periodic notices to
each of its clearing members, and to have rules in place requiring each
of its clearing members to provide such notices to each of the clearing
member's customers. Specifically, a Subpart C DCO would be required to
issue the following notices to its clearing members: (1) No later than
the filing with the Commission of the notice of its intent to rescind
its election to be subject to Subpart C, written notice that the
Subpart C DCO intends to file such notice and the date that the
rescission is intended to take effect, and (2) on the effective date of
the rescission of its election to be subject to Subpart C, written
notice that the rescission has become effective. These notices appear
necessary to ensure that the Subpart C DCO's clearing members and
customers are afforded sufficient time to consider and react to the
implications of the Subpart C DCO's rescission of its election to be
subject to Subpart C.
Proposed regulation 39.31(e)(3)(ii) would also require a Subpart C
DCO to: (1) No later than the date it files a notice of its intent to
rescind its election to be subject to Subpart C, provide notice to the
general public of its intent to rescind such election; (2) on the
effective date of the rescission of its election to be subject to
Subpart C, provide written notice to the general public that the
rescission has become effective; and (3) remove all references to its
Subpart C DCO (and QCCP) status on its Web site and in all other
materials that it provides to its clearing members and customers, other
market participants, or members of the public. As discussed herein,
because of the potential capital impact of transacting through a
clearinghouse that is not a QCCP, these public notices would appear
necessary to ensure that market participants are afforded sufficient
time to consider and react to a Subpart C DCO's rescission of its
election to be subject to Subpart C. However, the Commission proposes
that the notices to the general public required by this subsection may
be accomplished through publication on the Subpart C DCO's Web site.
In addition, the employees and representatives of the Subpart C DCO
would be prohibited by proposed regulation 39.31(e)(3)(iii) from making
any reference to the organization as a Subpart C DCO (or QCCP) on and
after the date that the notice of its intent to rescind its election to
become subject to Subpart C is filed. Because the QCCP recognition that
accompanies Subpart C DCO status provides significant benefits to those
transacting through a Subpart C DCO, it would be inappropriate and
misleading to permit a DCO to hold itself out as a Subpart C DCO (or
QCCP) once it has filed a notice of intention to rescind that status,
even though the rescission is not immediately effective.
Proposed regulation 39.31(e)(4) provides that the rescission of a
DCO's election to be subject to Subpart C would not affect the
authority of the Commission concerning any activities or events
occurring during the time that the DCO maintained its status as a
Subpart C DCO. That is, the Subpart C DCO is continually obligated to,
and would be subject to enforcement action for failure to, comply with
the Subpart C provisions during the time that it was subject to Subpart
C and maintained its Subpart C DCO status.
Proposed regulation 39.31(f) would provide that a SIDCO that is
registered with the Commission, but whose designation of systemic
importance is rescinded by the Council, shall immediately be deemed to
be a Subpart C DCO. Such Subpart C DCO would be subject to the Subpart
C provisions unless and until it elects to rescind its status as a
Subpart C DCO.
The Commission requests comment on all aspects of proposed
regulation 39.31 including, without limitation, the following:
(1) All aspects of the proposed Subpart C election eligibility
requirements including, without limitation, the appropriateness of
permitting DCO Applicants to request to become subject to Subpart C at
the time of filing their Registration Applications. If DCO Applicants
should not be permitted to request to become subject to Subpart C at
the time of filing their Registration Applications, what would be the
basis for such prohibition and what would be a suitable waiting period
after registration with the Commission for making a Subpart C Election
Form filing?
(2) All aspects of the proposed Subpart C Election Form including,
without limitation, the following:
(a) The elections and certifications contained therein and the
disclosures and exhibits required;
(b) whether DCOs and DCO Applicants should be permitted to amend or
supplement their Subpart C Election Form; and
(c) possible incentives to encourage DCOs and DCO Applicants to
file Subpart C Election Forms that are accurate and complete at the
time of filing, in order to avoid amendments, supplements and
withdrawals.
(3) Whether the Commission should require the Subpart C Election
Form certifications to be made under penalty of perjury.
(4) All aspects of the proposed election and withdrawal procedures
applicable to DCOs including, without limitation, the following:
(a) The appropriateness of permitting a DCO to designate the
effective date of its status as a Subpart C DCO that is subject to the
provisions of Subpart C;
(b) The appropriateness of the ten-business-day waiting period
prior to a DCO's status as a Subpart C DCO becoming effective, any
suggested alternative time frame, and the reasons why such alternatives
would be preferable; and
(c) The circumstances under which it would be appropriate for the
Commission to provide written acknowledgement of receipt of the Subpart
C Election Form and/or the effective date of the DCO's Subpart C
[[Page 50273]]
DCO status, and the form of such acknowledgment.
(5) All aspects of the proposed election and withdrawal procedures
applicable to DCO Applicants including, without limitation, the
following:
(a) The prohibition against approving a Registration Application if
a related Subpart C Election Form is pending and the Commission has
determined that the DCO Applicant's request to become subject to
Subpart C should not take effect;
(b) The circumstances under which it may be appropriate for the
Commission to approve a Registration Application, but to stay or deny
an election to become subject to Subpart C;
(c) If the Commission were to approve a Registration Application,
but deny an election to become subject to Subpart C, whether the DCO
Applicant should be required to wait a particular amount of time (and
if so, what amount of time would be appropriate) before being permitted
to elect to become subject to Subpart C pursuant to proposed 39.31(b);
(d) If an election to become subject to Subpart C could be stayed
when a Registration Application is approved, whether the stay should be
limited to a particular time period (and if so, what time period) after
which the election must be permitted to take effect or be denied; and
(e) Any incentives, including but not limited to any waiting period
after registration for eligibility to elect to become a Subpart C DCO,
to encourage DCO Applicants to submit their Subpart C Election Form
with their Registration Applications.
(6) The circumstances under which a DCO or DCO Applicant should be
permitted to withdraw its Subpart C Election Form.
(7) All aspects of the proposed procedures for rescinding an
election to become subject to Subpart C including, without limitation,
the following:
(a) The information that must be contained with the notice of
intent to rescind;
(b) The benefits and burden of the mandatory 90-day waiting period
between the filing of the notice of intent to rescind and the date the
rescission is effective;
(c) The timing, content and methods, and the costs and benefits, of
providing the required notices to clearing members, the customers of
clearing members, and the general public;
(d) The requirement to remove and refrain from references to the
DCO as a Subpart C DCO (and QCCP) and the timing thereof;
(e) The burden of a Subpart C DCO's rescission on bank clearing
members and the bank customers of such Subpart C DCO's clearing
members, including the costs associated with unwinding and/or
transferring positions; and
(f) Whether any alternative or additional conditions should be
required of a Subpart C DCO beyond the proposed 90-day waiting period
(and if so what alternative or additional conditions would be
appropriate). For example, is 90 days sufficient time for clearing
members and their customers to take such action as they may deem
appropriate in light of such rescission?
(8) Any alternative approach to permitting a DCO or DCO Applicant
to elect to become subject to Subpart C.
(9) The provision that a SIDCO whose status as a designated
financial market utility is rescinded by the Financial Stability
Oversight Council, be immediately deemed to be a Subpart C DCO, pending
an election by the former SIDCO to rescind Subpart C DCO status.
(10) What additional disclosures should the Commission require or
what other measures should the Commission take to help ensure that
Subpart C DCOs obtain QCCP status?
(11) The costs and potential benefits resulting from or arising out
of, permitting a DCO to elect to become subject to the provisions of
Subpart C, any aspect of the procedures for allowing such election
under proposed regulation 39.31, and any aspect of any suggested
alternative procedures.
For each comment submitted, the Commission requests that each
commenter please provide detailed rationale supporting the response, as
well as quantitative data where practicable, particularly with respect
to estimates of costs and benefits.
D. Regulation 39.32 (Governance for Systemically Important Derivatives
Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
The Commission proposes to add regulation 39.32 in order to
implement DCO Core Principles O (Governance Fitness Standards), P
(Conflicts of Interest), and Q (Composition of Governing Boards) for
SIDCOs and Subpart C DCOs in a manner that is consistent with PFMI
Principle 2 (Governance).\134\
---------------------------------------------------------------------------
\134\ In 2010 and 2011, the Commission proposed regulations
concerning the governance of DCOs (the ``2010/2011 Proposals''). See
Requirements for Derivatives Clearing Organizations, Designated
Contract Markets, and Swap Execution Facilities Regarding the
Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010);
see also Governance Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities, 76 FR 722 (Jan. 8, 2011). The Commission notes that the
regulations contained in the 2010/2011 Proposals are the subject of
a separate rulemaking and, as such, the Commission does not intend
to address or include those regulations in this rulemaking.
---------------------------------------------------------------------------
As discussed above, DCO Core Principle O states that each DCO must
establish governance arrangements that are transparent to fulfill
public interest requirements and to permit the consideration of the
views of owners and participants.\135\ DCO Core Principle O also
requires each DCO to establish and enforce appropriate fitness
standards for (i) directors, (ii) members of any disciplinary
committee, (iii) members of the DCO, (iv) any other individual or
entity with direct access to the settlement or clearing activities of
the DCO, and (v) any party affiliated with any entity mentioned in (i)-
(v) above. In addition, DCO Core Principle P requires each DCO to
establish and enforce rules to minimize conflicts of interest in the
decision making process of the DCO, and DCO Core Principle Q states
that each DCO must ensure that the composition of the governing board
or committee of the DCO includes market participants. These core
principles are substantively similar to PFMI Principle 2, which states
that a CCP ``should have governance arrangements that are clear and
transparent, promote the safety and efficiency of [the CCP], and
support the stability of the broader financial system, other relevant
public interest considerations, and the objectives of relevant
stakeholders.'' Additionally, under PFMI Principle 2, a CCP should have
procedures for managing conflicts of interest among board members and
board members and managers should be required have ``appropriate
skills,'' ``incentives,'' and ``experience.'' \136\
---------------------------------------------------------------------------
\135\ See supra Section I.D.6.
\136\ PFMIs at Principle 2, K.C. 4-5.
---------------------------------------------------------------------------
The governance requirements set forth in proposed regulation 39.32
are designed to enhance risk management and controls by promoting
fitness standards for directors and managers, promoting transparency of
governance arrangements, and making sure that the interests of a
SIDCO's or Subpart C DCO's clearing members and, where relevant,
customers are taken into account. Because of the potential impact that
a SIDCO's failure could have on the U.S. financial markets, the
Commission is proposing these requirements for SIDCOs. Moreover, it
would be beneficial to Subpart C DCOs, their members and customers, and
the financial system generally to apply these standards to Subpart C
DCOs.
[[Page 50274]]
Specifically, subsection (a) (General rules) would require a SIDCO
or Subpart C DCO to establish governance arrangements that: (1) Are
written, clear and transparent, place a high priority on the safety and
efficiency of the SIDCO or Subpart C DCO, and explicitly support the
stability of the broader financial system and other relevant public
interest considerations; (2) ensure that the design, rules, overall
strategy, and major decisions of the SIDCO or Subpart C DCO
appropriately reflect the legitimate interests of clearing members,
customers of clearing members, and other relevant stakeholders; and (3)
disclose, to an extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure: (i) Major decisions of
the board of directors to clearing members, other relevant
stakeholders, and to the Commission, and (ii) major decisions of the
board of directors having a broad market impact to the public.\137\
---------------------------------------------------------------------------
\137\ The provisions concerning transparency describe which
information, including the identities of board members, should be
disclosed to the public and/or the Commission.
---------------------------------------------------------------------------
Subsection (b) (Governance arrangements) would require the rules
and procedures of a SIDCO or Subpart C DCO to: (1) Describe the SIDCO's
or Subpart C DCO's management structure; (2) clearly specify the roles
and responsibilities of the board of directors and its committees,
including the establishment of a clear and documented risk management
framework; (3) clearly specify the roles and responsibilities of
management; (4) establish procedures for managing conflicts of interest
among board members; and (5) assign responsibility and accountability
for risk decisions and for implementing rules concerning default,
recovery, and wind-down.
Subsection (c) (Fitness standards for the board of directors and
management) would require that board members and managers have the
appropriate experience, skills, incentives and integrity; risk
management and internal control personnel have sufficient independence,
authority, resources and access to the board of directors; and that the
board of directors include members who are not executives, officers or
employees of the SIDCO or Subpart C DCO or of their affiliates.
The Commission requests comment on all aspects of these proposals.
The Commission is particularly interested in the following: In light of
the potential impact that a SIDCO's failure could have on the U.S.
financial system, would compliance with proposed regulation 39.32
reduce systemic risks? Would applying proposed regulation 39.32 to
SIDCOs and to Subpart C DCOs contribute to the goals articulated in the
Dodd-Frank Act, particularly the goals of Titles VII and VIII of the
Dodd-Frank Act? If so, in what ways? If not, why not? What
alternatives, if any, to proposed regulation 39.32 would be more
effective in reducing systemic risk or accomplishing the goals
articulated in the Dodd-Frank Act? Is proposed regulation 39.32
consistent with the PFMIs? If not, what changes need to be made to
achieve such consistency? What alternatives to proposed regulation
39.32, if any, would be more effective or efficient for achieving
consistency with the standards set forth by the PFMIs? Can proposed
regulation 39.32 be effectively implemented and complied with? If not,
what changes can be made to permit effective implementation and
compliance? What are the potential benefits and costs resulting from,
or arising out of, requiring SIDCOs to comply with regulation 39.32?
The Commission also requests comment on the potential costs and
benefits resulting from, or arising out of, requiring Subpart C DCOs to
comply with regulation 39.32. In considering costs and benefits,
commenters are requested to address the effect of the proposed
regulation not only on a DCO, but also on the DCO's clearing members,
the customers of clearing members, and the financial system more
broadly. The Commission requests that, where possible, commenters
provide quantitative data in their comments, particularly with respect
to estimates of costs and benefits. The Commission requests that
commenters include a detailed description of any alternatives to
proposed regulation 39.32 and estimates of the costs and benefits of
such alternatives.
E. Regulation 39.33 (Financial Resources Requirements for Systemically
Important Derivatives Clearing Organizations and Subpart C Derivatives
Clearing Organizations)
In 2013, the Commission finalized financial resource requirements
for SIDCOs in a manner that parallels the financial resources standard
in Principle 4 of the PFMIs.\138\ Regulation 39.29 requires a SIDCO
that is systemically important in multiple jurisdictions, or that is
involved in activities with a more complex risk profile, to meet a
Cover Two requirement, i.e. financial resources sufficient to enable it
to meet its financial obligations to its clearing members
notwithstanding a default by the two clearing members creating the
largest combined financial exposure in extreme but plausible market
conditions. Moreover, where a clearing member controls another clearing
member or is under common control with another clearing member,
regulation 39.29 also requires SIDCOs to treat affiliated clearing
members as a single clearing member for the purposes of the Cover Two
requirement. In addition, regulation 39.29 prohibits a SIDCO from using
assessments as a financial resource to meet this Cover Two standard.
---------------------------------------------------------------------------
\138\ See SIDCO Final Rule.
---------------------------------------------------------------------------
The Commission proposes to further amend regulation 39.29 to
enhance financial resources requirements for SIDCOs and Subpart C DCOs
and to achieve consistency with the relevant provisions of the PFMIs,
in particular Principle 4 and Principle 7.
The Commission first proposes to renumber existing regulation 39.29
to 39.33 and to apply the requirements set forth therein to Subpart C
DCOs. The Commission further proposes, for purposes of organization,
deleting from paragraph (a)(1) the requirement that, where a clearing
member controls another clearing member or is under common control with
another clearing member, a SIDCO treat affiliated clearing members as a
single clearing member (the ``Clearing Member Aggregation
Requirement''). The Commission proposes to include such language in new
paragraph (a)(4) to clarify that the Clearing Member Aggregation
Requirement applies when a SIDCO or Subpart C DCO calculates its
financial resources requirements under regulation 39.33(a) as well as
its liquidity resources requirements under regulation 39.33(c).
The Commission also proposes amending paragraph (a) to state that
the Commission shall, if it deems appropriate, determine whether a
SIDCO or Subpart C DCO is systemically important in multiple
jurisdictions. In making this determination, the Commission would, in
order to limit such determinations to appropriate cases, review whether
another jurisdiction had determined the SIDCO or Subpart C DCO to be
systemically important according to a designations process that
considers whether the foreseeable effects of a failure or disruption of
the derivatives clearing organization could threaten the stability of
each relevant jurisdiction's financial system. In addition, the
Commission proposes amending paragraph (a) to state that the Commission
shall also determine, if it deems appropriate, whether any of the
activities of a SIDCO
[[Page 50275]]
or Subpart C DCO, in addition to clearing credit default swaps, credit
default futures, and any derivatives that reference either, has a more
complex risk profile and may take into consideration characteristics
such as non-linear and discrete jump-to-default price changes.\139\ In
addition and in light of the proposed liquidity provisions discussed
below, the Commission proposes a technical clarification to paragraph
(a)(1) to make clear that such a SIDCO or Subpart C DCO must meet its
``credit exposure'' (rather than ``financial obligations'') to its
clearing members notwithstanding a default by the two clearing members
creating the largest ``aggregate credit'' (rather than ``combined
financial'') exposure in extreme but plausible market conditions. The
Commission also proposes amending paragraph (b) to clarify that the
prohibition on including assessments as a financial resource applies to
calculating financial resources needed to cover the default of the
largest and, where applicable, second largest clearing member, in
extreme but plausible circumstances.\140\
---------------------------------------------------------------------------
\139\ The Commission's proposed amendment to regulation
140.94(a) would delegate the authority to make these determinations
to the Director of the Division of Clearing and Risk.
\140\ The preamble to the SIDCO Final Rule adopting release made
clear that paragraph (b) applied to both Cover One and Cover Two,
but the Commission has decided to add clarifying language to the
regulation text. See generally SIDCO Final Rule.
---------------------------------------------------------------------------
The Commission proposes adding paragraphs (c), (d), and (e) to
address the liquidity of SIDCOs' and Subpart C DCOs' financial
resources. These new paragraphs are intended to address the gaps
between current part 39 requirements and standards set forth in
Principle 7.\141\
---------------------------------------------------------------------------
\141\ As discussed above in Section I.E.6, Principle 7, K.C. 2
requires a CCP to measure, monitor, and manage liquidity risk
effectively. This includes the CCP maintaining sufficient liquid
resources in all relevant currencies in order to effect same-day
and, where applicable, intraday and multiday settlement of payment
obligations in a wide range of potential stress scenarios, including
the default of the participant that would create the largest
aggregate payment obligations in extreme but plausible market
conditions. In addition, Principle 7, K. C. 5 limits a CCP to
counting only certain qualifying liquid resources for the purpose of
meeting its financial resources requirement. These resources
include: Cash in the currency of the requisite obligations, held
either at the central bank of issue or at a creditworthy commercial
bank; committed lines of credit; or high quality, liquid, general
obligations of a sovereign nation. In addition, Principle 7, K. C. 4
states that a CCP that is systemically important in multiple
jurisdictions or that is involved in activities with a more complex
risk profile should consider maintaining sufficient qualifying
liquid resources to meet the default of the two participants that
would create the largest aggregate payment obligations in such
circumstances. Principle 7, K. C. 7 also requires a CCP to monitor
its liquidity providers, including clearing members, by undertaking
due diligence to confirm that they have sufficient information to
understand and manage their liquidity risks and have the capacity to
perform as required under their commitments to the CCP.
---------------------------------------------------------------------------
Proposed paragraph (c)(1) would require a SIDCO or Subpart C DCO to
maintain eligible liquidity resources that will enable the SIDCO or
Subpart C DCO to meet its intraday, same-day, and multiday settlement
obligations, as defined in regulation 39.14(a), with a high degree of
confidence under a wide range of stress scenarios, including the
default of the member creating the largest liquidity requirements under
extreme but plausible circumstances. Maintaining resources that enable
the DCO to meet these obligations will help prevent a SIDCO or Subpart
C DCO from defaulting on its obligations to non-defaulting clearing
members, which is particularly important for a SIDCO because of the
potential impact that the failure of a SIDCO could have on the U.S.
financial markets.
Proposed paragraph (c)(2) would require a SIDCO or Subpart C DCO to
maintain liquidity resources that are sufficient to satisfy the
obligations required by new paragraph (c)(1) in all relevant currencies
for which the SIDCO or Subpart C DCO has settlement obligations to its
clearing members. A SIDCO should be able promptly to meet its
obligations in each relevant currency. If a SIDCO has sufficient funds
to meet an obligation, but the funds are not in the correct currency,
then the SIDCO cannot meet that obligation in a timely manner, which
could lead to a disruption of the SIDCO's services. Such disruption
could, in turn, have a significant impact on the financial stability of
the U.S. economy.
Proposed paragraph (c)(3) would limit a SIDCO or Subpart C DCO to
using only certain types of liquidity resources to satisfy the minimum
liquidity requirement set forth in proposed paragraph (c)(1).\142\
Among these ``qualifying liquidity resources'' are ``committed lines of
credit,'' ``committed foreign exchange swaps,'' and ``committed
repurchase agreements.'' ``Committed'' is intended to connote a legally
binding contract under which a liquidity provider agrees to provide the
relevant liquidity resource without delay or further evaluation of the
DCO's creditworthiness, e.g., a line of credit that cannot be withdrawn
at the election of the liquidity provider during times of financial
stress, or in the event of the default of a member of the SIDCO or
Subpart C DCO.\143\ The proposed list of these resources is consistent
with those set forth in Principle 7. Also consistent with Principle 7,
proposed paragraph (c)(1)(ii) would require a SIDCO or Subpart C DCO
that is systemically important in multiple jurisdictions, or that is
involved in activities with a more complex risk profile, to consider
maintaining eligible liquidity resources that, at a minimum, will
enable it to meet its intraday, same-day, and multiday settlement
obligations, stress scenarios that include a default of the two
clearing members creating the largest aggregate liquidity obligation
for the DCO in extreme but plausible market conditions. The financial
integrity of a SIDCOs and or Subpart C DCOs might be enhanced if it
considers meeting this enhanced standard.
---------------------------------------------------------------------------
\142\ In determining whether the liquidity resources that are
eligible under paragraph (c)(3) are sufficient to meet the
obligation specified under paragraph (c)(1) (resources that
``enable'' the DCO to meet its settlement obligations), it is
important to avoid double counting. For example, one may not count
both a committed repurchase arrangement and U.S. Treasury Bills that
would be used to collateralize that arrangement.
\143\ Times of financial stress, and the event of the default of
a member of the DCO are, of course, the times when reliable
liquidity arrangements are most needed.
---------------------------------------------------------------------------
Under proposed paragraph (c)(3)(ii), a SIDCO or Subpart C DCO would
be required to take appropriate steps to verify that its qualifying
liquidity arrangements do not include material adverse change
provisions and are enforceable, and will be highly reliable, even in
extreme but plausible market conditions. This requirement is consistent
with Principle 7.
Also consistent with Principle 7, under proposed paragraph (c)(4),
if a SIDCO or Subpart C DCO maintains liquid financial resources in
addition to those required to satisfy the Cover One requirement, then
those resources should be in the form of assets that are likely to be
saleable with proceeds available promptly or acceptable as collateral
for lines of credit, swaps, or repurchase agreements on an ad hoc
basis. In addition, Principle 7 provides and proposed paragraph
39.33(c)(4) requires that a SIDCO or Subpart C DCO should consider
maintaining collateral with low credit, liquidity, and market risks
that is typically accepted by a central bank of issue for any currency
in which it may have settlement obligations, but shall not assume the
availability of emergency central bank credit as a part of its
liquidity plan.\144\
[[Page 50276]]
These provisions are designed to enhance the financial condition of
SIDCOs and Subpart C DCOs and help reinforce stability.\145\
---------------------------------------------------------------------------
\144\ It should be noted that the requirement of proposed
paragraph (c)(4) that a SIDCO or Subpart C DCO consider maintaining
certain types of collateral, like the requirement of proposed
paragraph (c)(1)(ii), does not include a requirement as to the
decision to be made following such consideration.
\145\ See generally Financial Stability Oversight Council 2012
Annual Report, Appendix A at 163 (finding that ``the contagion
effect of a CME failure could impose material financial losses on
CME's clearing members and other market participants (such as
customers) and could lead to increased liquidity demands and credit
problems across financial institutions, especially those that are
active in the futures and options markets.'').
---------------------------------------------------------------------------
Pursuant to proposed paragraphs (d)(1)-(2), a SIDCO or Subpart C
DCO would be required to monitor its liquidity providers in a manner
consistent with Principle 7. Proposed paragraph (d)(1) would define
``liquidity provider'' to mean any of the following: (i) A depository
institution, a U.S. branch and agency of a foreign banking
organization, a trust company, or a syndicate of depository
institutions, U.S. branches and agencies of foreign banking
organizations, or a trust companies providing a line of credit, foreign
exchange swap facility or repurchase facility to the SIDCO or Subpart C
DCO; and (ii) Any other counterparty relied upon by a SIDCO or Subpart
C DCO to meet its minimum liquidity resources requirement under
paragraph (c) of this section. Moreover, under proposed paragraph
(d)(5), a SIDCO with access to accounts and services at a Federal
Reserve Bank is encouraged to use those services, where practical, to
enhance its management of liquidity risk.\146\ In addition, proposed
paragraph (d)(4) would require a SIDCO or Subpart C DCO to regularly
test its procedures for accessing its liquidity resources. Finally,
pursuant to new subsection (e) and consistent with Principle 4, a SIDCO
or Subpart C DCO would be required to document its supporting rationale
for, and have appropriate governance arrangements relating to, the
amount of total financial resources it maintains pursuant to regulation
39.33(a) and the amount of total liquidity resources it maintains
pursuant to regulation 39.33(c).\147\
---------------------------------------------------------------------------
\146\ Under Section 806(a) of the Dodd-Frank Act, 12 U.S.C.
5465(a), the Board may authorize a Federal Reserve Bank to establish
and maintain an account for an FMU, which, as described above in
Section I.B., includes a SIDCO. A SIDCO with access to accounts and
services at a Federal Reserve Bank would be required to comply with
related rules published by the Board of Governors of the Federal
Reserve System. See generally Financial Market Utilities, 78 FR
14024 (Mar. 4, 2013) (proposal by the Board of rules to govern
accounts held by designated FMUs).
\147\ This provision is consistent with PFMI Principle 4, K.C.
4.
---------------------------------------------------------------------------
The Commission requests comment on all aspects of proposed
regulation 39.33. The Commission is particularly interested in the
following:
Are the proposed considerations in paragraph (a)(2) for determining
whether a DCO is systemically important in multiple jurisdictions and
in paragraph (a)(3) for determining whether it is engaged in activities
with a more complex risk profile workable? Should alternative
considerations be used?
In proposed paragraph (d)(4), should the Commission specify the
frequency with which a SIDCO or Subpart C DCO must test its procedures
for accessing its liquidity resources? In proposed paragraph
(c)(3)(i)(E)(1) and (c)(3)(ii), the Commission permits highly
marketable collateral to be used as a liquidity resource provided that
such collateral is held in custody and investments that are readily
available and convertible into cash with prearranged and highly
reliable funding arrangements, even in extreme but plausible market
conditions. As such, the Commission proposes to permit as a liquidity
resource obligations of the United States Treasury or high quality,
liquid, general obligations of a sovereign nation provided that such
obligations are readily available and convertible into cash pursuant to
prearranged and highly reliable funding arrangements. This is
consistent with the language of the PFMIs.\148\ Should the requirement
be for funding arrangements that are committed? The Commission requests
comment on whether there are any highly reliable funding arrangements
that meet the requirements of the proposed regulations that are not
committed funding arrangements.
---------------------------------------------------------------------------
\148\ See PFMI Principle 7, K.C. 5.
---------------------------------------------------------------------------
In addition, in light of the potential impact that a SIDCO's
failure could have on the U.S. financial system, would compliance with
proposed regulation 39.33 reduce systemic risks? Would proposed
regulation 39.33 contribute to the goals articulated in the Dodd-Frank
Act, particularly the goals of Titles VII and VIII of the Dodd-Frank
Act? If so, in what ways? If not, why not? What alternatives, if any,
to proposed regulation 39.33 would be more effective in reducing
systemic risk or accomplishing the goals articulated in the Dodd-Frank
Act? Is proposed regulation 39.33 consistent with the PFMIs? Are there
more effective or efficient means for achieving consistency with the
liquidity standards set forth in Principle 7? If not, what changes need
to be made to achieve such consistency? What alternatives to proposed
regulation 39.33, if any, would be more effective or efficient for
achieving consistency with the standards set forth by the PFMIs? The
Commission requests that commenters include a detailed description of
any such alternatives and estimates of the costs and benefits of such
alternatives. Should regulation 39.33 provide that only a SIDCO can be
deemed systemically important in multiple jurisdictions? Can proposed
regulation 39.33 be effectively implemented and complied with? If not,
what changes can be made to permit effective implementation and
compliance? What are the potential costs and benefits resulting from,
or arising out of, requiring a SIDCO to comply with proposed regulation
39.33? What are the potential costs and benefits resulting from, or
arising out of, requiring Subpart C DCOs to comply with proposed
regulation 39.33? In considering costs and benefits, commenters are
requested to address the effect of the proposed regulation not only on
a DCO, but also on the DCO's clearing members, the customers of
clearing members, and the financial system more broadly. The Commission
requests that, where possible, commenters provide quantitative data in
their comments, particularly with respect to estimates of costs and
benefits.
F. Regulation 39.34 (System Safeguards for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
In 2013, the Commission finalized regulation 39.30, which enhanced
system safeguards requirements for SIDCOs for business continuity and
disaster recovery, and included a two-hour recovery time objective
(``RTO'') for SIDCOs.\149\ As discussed in the adopting release, the
two-hour RTO is consistent with Principle 17 of the PFMIs and increases
the soundness and operating resiliency of the SIDCO, which in turn,
increases the overall stability of the U.S. financial markets.\150\ The
Commission proposes renumbering regulation 39.30 as regulation 39.34
and amending the regulation to cover SIDCOs and Subpart C DCOs as well
as a technical correction to paragraph (b) to make clear that
subparagraphs (1), (2), and (3) concern each activity necessary for the
daily processing, clearing, and settlement of existing and new
contracts. Finally, to provide flexibility to address the practical
burdens of obtaining the necessary physical and technological
resources, and of organizing human resources, as appropriate to
implement a two-hour RTO, the Commission proposes amending the
regulation to allow the
[[Page 50277]]
Commission to, upon application, grant newly designated SIDCOs and
Subpart C DCOs up to one year to comply with the provisions of
regulation 39.34.
---------------------------------------------------------------------------
\149\ See SIDCO Final Rule.
\150\ Id.
---------------------------------------------------------------------------
The Commission requests comment on all aspects of proposed
regulation 39.34. The Commission is particularly interested in the
following: Would applying proposed regulation 39.34 to Subpart C DCOs
contribute to the goals articulated in the Dodd-Frank Act, particularly
the goals of Titles VII and VIII of the Dodd-Frank Act? If so, in what
ways? If not, why not? What alternatives, if any, to proposed
regulation 39.34 would be more effective in reducing systemic risk or
accomplishing the goals articulated in the Dodd-Frank Act? Is proposed
regulation 39.34 consistent with the PFMIs? If not, what changes need
to be made to achieve such consistency? What alternatives to proposed
regulation 39.34, if any, would be more effective or efficient for
achieving consistency with the standards set forth by the PFMIs? The
Commission requests that commenters include a detailed description of
any such alternatives and estimates of the costs and benefits of such
alternatives. Can proposed regulation 39.34 be effectively implemented
and complied with? If not, what changes can be made to permit effective
implementation and compliance? What are the potential costs and
benefits resulting from, or arising out of, requiring a SIDCO to comply
with proposed regulation 39.34? What are the potential costs and
benefits resulting from, or arising out of, requiring Subpart C DCOs to
comply with proposed regulation 39.34? In considering costs and
benefits, commenters are requested to address the effect of the
proposed regulation not only on a DCO, but also on the DCO's clearing
members, the customers of clearing members, and the financial system
more broadly. The Commission requests that, where possible, commenters
provide quantitative data in their comments, particularly with respect
to estimates of costs and benefits.
G. Regulation 39.35 (Default Rules and Procedures for Uncovered Credit
Losses or Liquidity Shortfalls (Recovery) for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
The Commission is proposing regulation 39.35, which adds
requirements pursuant to DCO Core Principle G, to address certain
potential gaps between Commission regulations and Principles 4 and
7.\151\ In particular, proposed regulation 39.35 is designed to protect
SIDCOs, Subpart C DCOs, their members and customers, and the financial
system more broadly by requiring SIDCOs and Subpart C DCOs to have
plans and procedures to address credit losses and liquidity shortfalls
beyond their prefunded resources, thus promoting their ability to
promptly fulfill their obligations and continue to perform their
critical functions.
---------------------------------------------------------------------------
\151\ DCO Core Principle G requires a DCO to have rules and
procedures ``designed to allow for the efficient, fair, and safe
management of events during which [clearing] members or
participants--(I) become insolvent; or (II) otherwise default on the
obligations of the members or participants to the [DCO].'' Each DCO
``is required to (I) clearly state the default procedures on the
[DCO]; (II) make publicly available the default rules of the [DCO];
and (III) ensure that the [DCO] may take timely action--(aa) to
contain losses and liquidity pressures; and (bb) to continue meeting
each obligation of the DCO.'' See supra Section I.D.3.
---------------------------------------------------------------------------
Regulation 39.16 currently requires a DCO to adopt procedures
permitting it to take timely action to contain losses and liquidity
pressures and to continue meeting its obligations in the event of a
default on the obligations of a clearing member to the DCO.\152\
Proposed regulation 39.35 would require SIDCOs and Subpart C DCOs to
adopt additional procedures to address certain issues arising from
extraordinary stress events, including the default of one or more
clearing members. Specifically, consistent with Principle 4 of the
PFMIs, proposed paragraph (a) would require a SIDCO or Subpart C DCO to
adopt rules and procedures addressing the following:
---------------------------------------------------------------------------
\152\ 17 CFR 39.16(c).
1. How the SIDCO or Subpart C DCO would allocate losses
exceeding the financial resources available to the SIDCO or Subpart
C DCO;
2. How the SIDCO or Subpart C DCO would arrange for the
repayment of any funds the SIDCO or Subpart C DCO may borrow; and
3. How the SIDCO or Subpart C DCO would replenish any financial
resources it may employ during such a stress event, so that the
SIDCO or Subpart C DCO would be able to continue to operate in a
safe and sound manner.
Consistent with Principle 7 of the PFMIs, proposed paragraph (b) would
require a SIDCO or Subpart C DCO to establish rules and procedures
enabling it to promptly meet all of its settlement obligations, on a
same day and, where appropriate, on an intraday and multiday basis, in
the context of the occurrence of either or both of the following
scenarios: (i) Following an individual or combined default involving
one or more clearing members' obligations to the SIDCO or Subpart C DCO
or (ii) if there is an unforeseen liquidity shortfall exceeding the
financial resources of the SIDCO or Subpart C DCO. Such rules and
procedures should be established ex ante and may provide for the means
of: increasing available assets (e.g. by using assessments) and/or
reducing the size of liabilities (e.g. by engaging in variation margin
haircuts or tear-ups); as well as obtaining liquidity from participants
(e.g. through rules-based repurchase arrangements); employing a
sequenced application of such tools; and replenishing any credit and
liquidity resources that may be employed during a stress event.
Proposed regulation 39.35 addresses significant consequences that
could result from a clearing member's default. Specifically, a DCO
might not have sufficient financial resources following a clearing
member's default either to cover the default or to fulfill its
settlement obligations. Similarly, a DCO may be unable to fulfill its
settlement obligations due to a liquidity shortfall exceeding its
financial resources. In order to avoid the negative effect on its
clearing members, their customers, and on the financial system more
broadly of a DCO's failure promptly to meet its settlement obligations,
it would be prudent for a DCO to have a recovery plan that addresses
these scenarios and, given their importance to the U.S. financial
system, it is critical for SIDCOs to have such plans. In addition,
because this plan would be specified in the DCO's rules and/or
procedures, it would be disclosed to clearing members, their customers,
and the broader public. Such transparency would likely help clearing
members, their customers, and other market participants properly
allocate capital and other resources as well as facilitate the
development of their own recovery plans.
The Commission requests comment on all aspects of these proposals.
The Commission is particularly interested in the following: In light of
the potential impact that a SIDCO's failure could have on the U.S.
financial system, would compliance with proposed regulation 39.35
reduce systemic risks? Would proposed regulation 39.35 contribute to
the goals articulated in the Dodd-Frank Act, particularly the goals of
Titles VII and VIII of the Dodd-Frank Act? If so, in what ways? If not,
why not? What alternatives, if any, to proposed regulation 39.35 would
be more effective in reducing systemic risk or accomplishing the goals
articulated in the Dodd-Frank Act? Is proposed regulation 39.35
consistent with the PFMIs? If not, what changes need to be made to
achieve such consistency?
[[Page 50278]]
What alternatives to proposed regulation 39.35, if any, would be more
effective or efficient for achieving consistency with the standards set
forth by the PFMIs? Can proposed regulation 39.35 be effectively
implemented and complied with? If not, what changes can be made to
permit effective implementation and compliance? What are the potential
benefits and costs resulting from, or arising out of, requiring SIDCOs
to comply with regulation 39.35? The Commission also requests comment
on the potential costs and benefits resulting from, or arising out of,
requiring Subpart C DCOs to comply with regulation 39.35. In
considering costs and benefits, commenters are requested to address the
effect of the proposed regulation not only on a DCO, but also on the
DCO's clearing members, the customers of clearing members, and the
financial system more broadly. The Commission requests that, where
possible, commenters provide quantitative data in their comments,
particularly with respect to estimates of costs and benefits. The
Commission requests that commenters include a detailed description of
any alternatives to proposed regulation 39.35 and estimates of the
costs and benefits of such alternatives.
H. Regulation 39.36 (Risk Management for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
Proposed regulation 39.36 would include additional risk management
requirements for SIDCOs and Subpart C DCOs. As noted above, regulation
39.13 establishes the risk management requirements that a DCO would
have to meet in order to comply with Core Principle D \153\ including,
among other things, specific criteria for stress tests that a DCO must
conduct.\154\ For example, regulation 39.13(h)(3)(ii) requires a
registered DCO to, ``on a weekly basis, conduct stress tests with
respect to each clearing member account, by house origin and by each
customer origin, and each swap portfolio[hellip]under extreme but
plausible market conditions.'' However, pursuant to this provision, a
DCO has reasonable discretion in determining the methodology used to
conduct such stress tests.
---------------------------------------------------------------------------
\153\ DCO Core Principle D requires each DCO to possess the
ability to manage the risks associated with discharging the
responsibilities of the DCO through the use of appropriate tools and
procedures. It further requires each DCO to measure its credit
exposures to each clearing member not less than once during each
business day and to monitor each such exposure periodically during
the business day. Core Principle D also requires each DCO to limit
its exposure to potential losses from defaults by clearing members,
through margin requirements and other risk control mechanisms, to
reduce the risk that its operations would not be disrupted and that
non-defaulting clearing members would not be exposed to losses that
non-defaulting clearing members cannot anticipate or control.
Finally, Core Principle D requires that the margin that the DCO
requires from each clearing member be sufficient to cover potential
exposures in normal market conditions, and that each model and
parameter used in setting such margin requirements be risk-based and
reviewed on a regular basis.
\154\ See supra Section I.D.2.
---------------------------------------------------------------------------
The Commission is proposing regulation 39.36 to address certain
differences between Commission regulations and Principles 4, 6, 7, and
9.\155\ In particular, proposed regulation 39.36 would require a SIDCO
or Subpart C DCO to enhance its stress testing procedures in ways that
will make it more likely that the SIDCO or Subpart C DCO will be able
to understand the risks posed by its members, so that it can ensure
that the relationship between its resources and obligations enables it
to meet its obligations promptly.
---------------------------------------------------------------------------
\155\ See discussion of Principles 4 and 6 supra Sections I.E.4,
I.E.5.
---------------------------------------------------------------------------
Specifically, and consistent with Principle 4, proposed regulation
39.36(a)(1) would require a SIDCO or Subpart C DCO to perform stress
testing, on a daily basis, of its financial resources using
predetermined parameters and assumptions. In addition, proposed
regulation 39.36(a)(2) would require a SIDCO or Subpart C DCO to
perform comprehensive analyses of stress testing scenarios and
underlying parameters to ascertain that they are appropriate for
determining the SIDCO's or Subpart C DCO's required level of financial
resources in current and evolving market conditions. Proposed
regulation 39.36(a)(3) would also require a SIDCO or Subpart C DCO to
perform the analyses in proposed regulation 39.36(a)(2) ``at least
monthly when products cleared or markets served display high
volatility, become less liquid, or when the size or concentration of
positions held by clearing members increases significantly.'' A SIDCO
or Subpart C DCO would also be required to ``evaluate [its] stress
testing scenarios, models, and underlying parameters more frequently
than once a month,'' where appropriate. For purposes of the analyses in
proposed regulation 39.36(a)(1) and proposed regulation 39.36(a)(2),
proposed regulation 39.36(a)(4) would require a SIDCO or Subpart C DCO
to include the following stress scenarios for both defaulting clearing
members' positions and possible price changes in liquidation periods:
(i) Relevant peak historic price volatilities; (ii) shifts in other
market factors including, as appropriate, price determinants and yield
curves; (iii) multiple defaults over various time horizons; (iv)
simultaneous pressures in funding and asset markets; and (v) a range of
forward-looking stress scenarios in a variety of extreme but plausible
market conditions. Moreover, proposed regulation 39.36(a)(5) would
require each SIDCO and Subpart C DCO to establish procedures for
reporting stress test results to its risk management committee or board
of directors, as appropriate, and for using the results to assess the
adequacy of, and to adjust the SIDCO's or Subpart C DCO's total
financial resources. Finally, proposed regulation 39.36(a)(6) would
require each SIDCO and Subpart C DCO to use the results of its
financial resources stress testing to help make sure it meets the
minimum financial resources requirement set forth in proposed
regulation 39.33(a).
In addition, and consistent with Principle 7, the Commission is
proposing stress testing requirements for liquidity resources that are
analogous to the stress testing requirements for financial resources in
proposed regulation 39.36(a), with the exception that the stress
testing scenarios required by proposed regulation 39.36(c)(5) should
consider the following: (i) All entities that might pose material
liquidity risks to the DCO, including settlement banks, permitted
depositories, liquidity providers, and other entities; (ii) intraday
and multiday scenarios, where appropriate; (iii) inter-linkages between
its clearing members and the multiple roles that they may play in in
the SIDCO's or Subpart C DCO's risk management (e.g., scenarios where a
clearing member or its affiliate is also a liquidity provider); and
(iv) the probability of multiple failures and contagion effect among
clearing members.
Proposed regulation 39.36(c)(7) would require a SIDCO or Subpart C
DCO to use the results of such stress tests to make certain that it
meets the financial resources requirement set forth in regulation
39.33(a), and the liquidity resources requirements set forth in
regulation 39.33(c). In addition, each SIDCO and Subpart C DCO would be
required to perform, on an annual basis, a full validation of its
financial risk management model and its liquid risk management model.
Proposed paragraphs (a), (c), (d), and (e) are important because
stress testing scenarios, underlying risk factors that constitute such
scenarios, and the relationship between different risk
[[Page 50279]]
factors are dynamic, and need to be updated due to changing market
conditions. For example, use of relative, instead of absolute, changes
in interest rates may be sufficient in a normal interest rate
environment, but can lead to nonsensical estimates during low rate
periods. In other words, changes in a particular risk factor during
unusually volatile periods may be more extreme than any in the existing
scenarios. In addition, it is important for SIDCOs and Subpart C DCOs
to stress test both their financial resources and liquidity resources.
While stress testing financial resources helps SIDCOs and Subpart C
DCOs make sure they have the right amount, SIDCOs and Subpart C DCOs
need access to liquid assets subject to arrangements in which they can
promptly be convertible to cash to fulfill their obligations in a
timely manner. As such, stress testing liquidity resources is a
critical exercise for SIDCOs and Subpart C DCOs as such testing will
help ensure that SIDCOs and Subpart C DCOs have enough resources to
cover their obligations at the time and on the day that such
obligations are due. Moreover, given the significant role SIDCOs play
in the U.S. financial markets, it would appear that obtaining an in-
depth understanding of potential liquidity needs through comprehensive
stress testing under a broad range of scenarios is critical for a
SIDCO's effective risk management.
As noted above, Principle 6 requires a CCP's margin system to take
into account the ``risks and particular attributes of each product,
portfolio and market that it serves'' and be calibrated
accordingly.\156\ In particular, Principle 6 requires a CCP to conduct
a ``sensitivity analysis'' of its margin system at least monthly, and,
more frequently, when appropriate. Accordingly, consistent with the
standards set forth in Principle 6, paragraph (c) of proposed
regulation 39.36 would require a SIDCO or Subpart C DCO to conduct a
sensitivity analysis of its margin model at least monthly to analyze
and monitor model performance and overall margin coverage. Moreover,
paragraph (c) would require the sensitivity analysis to involve
reviewing a wide range of parameter settings and assumptions that
reflect possible market conditions in order to understand how the level
of margin coverage might be affected by highly stressed market
conditions. The parameters and assumptions used by a SIDCO or Subpart C
DCO would be expected to capture a variety of historical and
hypothetical conditions, including the most volatile periods that have
been experienced by the markets served by the SIDCO or Subpart C DCO
and extreme changes in the correlations between prices. In addition,
the sensitivity analysis would be conducted on both actual and
hypothetical positions, and would include testing of the abilities of
the models or model components to produce accurate results using actual
or hypothetical datasets and assessing the impact of different model
parameter settings. The SIDCO or Subpart C DCO would also be required
to evaluate potential losses in clearing members' proprietary positions
and, where appropriate, customer positions. With respect to SIDCOs and
Subpart C DCOs that are involved in activities with a more complex risk
profile, the Commission proposes requiring such SIDCOs and Subpart C
DCOs to take into consideration parameter settings that reflect the
potential impact of the simultaneous default of two clearing members
and consider the underlying credit instruments.\157\ Proposed
regulation 39.36(d) would require a SIDCO or Subpart C DCO regularly to
conduct an assessment of the theoretical and empirical properties of
its margin model for all products it clears, and proposed regulation
39.36(e) would require a SIDCO or Subpart C DCO to perform, on an
annual basis, a full validation of its financial risk management model
and its liquid risk management model. Moreover, under proposed
paragraph (f), and consistent with Principle 16, custody and investment
arrangements for a systemically important derivatives clearing
organization's and subpart C derivatives clearing organization's own
funds and assets would be subject to the same requirements as those
specified in Sec. 39.15 of this chapter for funds and assets of
clearing members. This includes establishing standards and procedures
that are designed to protect and ensure safety as specified in Sec.
39.15(a), custody arrangements that minimize the risk of loss or of
delay in access by the DCO as specified in Sec. 39.15(c), and
limitation of investments to instruments with minimal credit, market,
and liquidity risks as specified in Sec. 39.15(e).
---------------------------------------------------------------------------
\156\ See supra Section I.E.5.
\157\ See supra Section II.E (discussing ``Cover Two'' in
connection with revised regulation 39.33 (financial resources)). See
generally PFMIs at E.N. 3.6.17.
---------------------------------------------------------------------------
It is vitally important that all DCOs obtain an in-depth
understanding of their exposure to credit risk. As financial
derivatives markets expand globally and counterparty credit risk
increases in size and complexity, a DCO's ability to assess its
exposure to credit risk becomes even more critical. These proposed
regulations are intended to enhance the ability of SIDCOs and Subpart C
DCOs to manage their risk exposure. Because a SIDCO plays a significant
role in the financial markets, accurate and dynamic risk management is
critical not only to the SIDCO, but also to the stability of the
broader U.S. financial system.
Under proposed paragraph (g), and consistent with Principle 9, a
SIDCO or Subpart C DCO would be required to monitor, manage, and limit
its credit and liquidity risks arising from its settlement banks.\158\
Specifically, a SIDCO or Subpart C DCO would be required to establish,
and monitor adherence to, strict criteria for its settlement banks that
take account of, among other things, their regulation and supervision,
creditworthiness, capitalization, access to liquidity, and operational
reliability. In addition, a SIDCO or Subpart C DCO would be required to
monitor and manage the concentration of credit and liquidity exposures
to its settlement banks. In order to mitigate both the probability of
being exposed to a settlement bank's failure and the potential losses
and liquidity pressures to which it would be exposed in the event of
such a failure, each SIDCO and Subpart C DCO should, where reasonable
and practicable, use multiple settlement banks instead of one and
consider using different settlement banks for different functions, such
as depositing funds, investing funds or holding liquidity
resources.\159\
---------------------------------------------------------------------------
\158\ See discussion of Principle 9 supra Section I.E.7.
\159\ See PFMIs at E.N. 3.9.5, 3.9.6. These issues could be
avoided by a SIDCO to the extent it uses Federal Reserve Bank
accounts and services pursuant to proposed regulation 39.33(d)(5).
---------------------------------------------------------------------------
The Commission requests comment on all aspects of proposed
regulation 39.36. The Commission is particularly interested in the
following: In light of the potential impact that a SIDCO's failure
could have on the U.S. financial system, would compliance with proposed
regulation 39.36 reduce systemic risks? Would proposed regulation 39.36
contribute to the goals articulated in the Dodd-Frank Act, particularly
the goals of Titles VII and VIII of the Dodd-Frank Act? If so, in what
ways? If not, why not? What alternatives, if any, to proposed
regulation 39.36 would be more effective in reducing systemic risk or
accomplishing the goals articulated in the Dodd-Frank Act? Is proposed
regulation 39.36 consistent with the PFMIs? If not, what changes need
to be made to achieve such consistency? What alternatives to proposed
[[Page 50280]]
regulation 39.36, if any, would be more effective or efficient for
achieving consistency with the standards set forth by the PFMIs? Can
proposed regulation 39.36 be effectively implemented and complied with?
If not, what changes can be made to permit effective implementation and
compliance? What are the potential benefits and costs resulting from,
or arising out of, requiring SIDCOs to comply with regulation 39.36?
The Commission also requests comment on the potential costs and
benefits resulting from, or arising out of, requiring Subpart C DCOs to
comply with regulation 39.36. In considering costs and benefits,
commenters are requested to address the effect of the proposed
regulation not only on a DCO, but also on the DCO's clearing members,
the customers of clearing members, and the financial system more
broadly. The Commission requests that, where possible, commenters
provide quantitative data in their comments, particularly with respect
to estimates of costs and benefits. The Commission requests that
commenters include a detailed description of any alternatives to
proposed regulation 39.36 and estimates of the costs and benefits of
such alternatives.
I. Regulation 39.37 (Additional Disclosure for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
The Commission is proposing regulation 39.37 to set forth
additional public disclosure requirements for SIDCOs and Subpart C
DCOs.\160\ These requirements are intended to address differences
between current requirements and PFMI Principles 14 and 23. In
particular, proposed regulation 39.37 is designed to enable members of
SIDCOs and Subpart C DCOs, their customers, and the general public to
understand the risk of exposures to such DCOs, and to promote their
ability to evaluate the quality of such DCOs, thereby enhancing
competition and market discipline.
---------------------------------------------------------------------------
\160\ Public disclosure requirements for all registered DCOs are
set forth in Regulation 39.21, which implements DCO Core Principle L
(Public Information), and requires DCOs to provide to market
participants sufficient information to enable them to identify and
evaluate accurately the risks and costs associated with using the
services of the DCO.
---------------------------------------------------------------------------
Specifically, proposed regulation 39.37 would require SIDCOs and
Subpart C DCOs to disclose certain information to the public and to the
Commission. First, consistent with Principle 23, a SIDCO or Subpart C
DCO would be required to disclose its responses to the CPSS-IOSCO
Disclosure Framework, discussed in section II.C.2, above. Further, a
SIDCO or Subpart C DCO would be required to review and update at least
every two years and following material changes to the SIDCO's or
Subpart C DCO's system or its environment, its responses to the
Disclosure Framework to ensure the continued accuracy and usefulness of
the responses.\161\ A material change to the SIDCO's or Subpart C DCO's
system or environment is a change that would significantly change the
accuracy and usefulness of the SIDCO's or Subpart C DCO's existing
responses. Proposed regulation 39.37 would also require a SIDCO or
Subpart C DCO to disclose, publicly and to the Commission, relevant
basic data on transaction volume and values. This requirement is
intended to be consistent with the Quantitative Information Disclosure
that CPSS-IOSCO are in the process of developing.\162\
---------------------------------------------------------------------------
\161\ Available at: http://www.bis.org/publ/cpss106.pdf.
\162\ See supra section II.C.2. for a discussion of the
Quantitative Information Disclosure (referencing section 2.5 of the
CPSS-IOSCO Disclosure Framework).
---------------------------------------------------------------------------
Also under proposed regulation 39.37, a SIDCO or Subpart C DCO
would be required, consistent with Principle 14, to publish its rules,
policies, and procedures describing whether customer funds are
protected on an individual or omnibus basis and whether customer funds
are subject to any legal or operational constraints that may impair the
ability of the SIDCO or Subpart C DCO to segregate or port the
positions and related collateral of a clearing member's customers. This
additional transparency, particularly with respect to information
regarding the protection of customer positions and related collateral,
is important for the safe and effective transfer of positions and
collateral in a default, resolution or insolvency scenario.\163\ The
Commission notes that the ability to transfer customer positions and
associated collateral may reduce the need to liquidate positions, which
liquidation could create substantial losses for customers and further
disrupt the stability of the financial markets during times of market
stress. In addition, these proposed additional disclosures will help
regulators and market participants assess SIDCOs and Subpart C DCOs,
particularly with respect to a SIDCO's or Subpart C DCO's compliance
with the PFMIs. Because of a SIDCO's importance to the U.S. financial
markets, it would appear that such public assessment will help provide
comfort to market participants, which could prove to be a stabilizing
force in times of severe market stress.
---------------------------------------------------------------------------
\163\ See PFMIs at E.N. 3.14.1.
---------------------------------------------------------------------------
The Commission requests comment on all aspects of these proposals.
The Commission is particularly interested in the following: In light of
the potential impact that a SIDCO's failure could have on the U.S.
financial system, would compliance with proposed regulation 39.37
reduce systemic risks? Would proposed regulation 39.37 contribute to
the goals articulated in the Dodd-Frank Act, particularly the goals of
Titles VII and VIII of the Dodd-Frank Act? If so, in what ways? If not,
why not? What alternatives, if any, to proposed regulation 39.37 would
be more effective in reducing systemic risk or accomplishing the goals
articulated in the Dodd-Frank Act? Is proposed regulation 39.37
consistent with the PFMIs? If not, what changes need to be made to
achieve such consistency? What alternatives to proposed regulation
39.37, if any, would be more effective or efficient for achieving
consistency with the standards set forth by the PFMIs? Can proposed
regulation 39.37 be effectively implemented and complied with? If not,
what changes can be made to permit effective implementation and
compliance? What are the potential benefits and costs resulting from,
or arising out of, requiring SIDCOs to comply with regulation 39.37?
The Commission also requests comment on the potential costs and
benefits resulting from, or arising out of, requiring Subpart C DCOs to
comply with regulation 39.37. In considering costs and benefits,
commenters are requested to address the effect of the proposed
regulation not only on a DCO, but also on the DCO's clearing members,
the customers of clearing members, and the financial system more
broadly. The Commission requests that, where possible, commenters
provide quantitative data in their comments, particularly with respect
to estimates of costs and benefits. The Commission requests that
commenters include a detailed description of any alternatives to
proposed regulation 39.37 and estimates of the costs and benefits of
such alternatives.
J. Regulation 39.38 (Efficiency for Systemically Important Derivatives
Clearing Organizations and Subpart C Derivatives Cearing Organizations)
Consistent with Principle 21, proposed regulation 39.38 would
require a SIDCO or Subpart C DCO to design efficiently and effectively
its clearing and settlement arrangements,
[[Page 50281]]
operating structure and procedures, product scope, and use of
technology. In addition, a SIDCO or Subpart C DCO would be required to
establish clearly defined goals and objectives that are measurable and
achievable, including goals with regards to minimum service levels,
risk management expectations, and business priorities. Moreover, a
SIDCO or Subpart C DCO would be required to facilitate efficient
payment, clearing, and settlement by accommodating internationally
accepted communication procedures and standards. The explanatory notes
to Principle 21 provide that an efficient CCP has the required
resources to perform its functions \164\ and the efficiency of the CCP
depends on the choice of clearing and settlement arrangement, operating
structure, scope of products cleared or settled, and integration of
technology and procedures.\165\ In addition, the explanatory notes
state that an effective CCP reliably meets its obligations in a timely
manner and achieves the public policy goals of safety and efficiency
for participants and the markets it serves.\166\ Finally, consistent
with Principle 22, proposed regulation 39.38(d) would require each
SIDCO and Subpart C DCO to facilitate efficient payment, clearing, and
settlement by accommodating internationally accepted communication
procedures and standards.
---------------------------------------------------------------------------
\164\ See PFMIs at E.N. 3.21.1.
\165\ PFMIs at E.N. 3.21.2.
\166\ PFMIs at E.N. 3.21.5.
---------------------------------------------------------------------------
It would appear to be prudent for SIDCOs and Subpart C DCOs to
comply with such international standards of efficiency and
effectiveness. A SIDCO or Subpart C DCO that is inefficient or
ineffective could distort financial activity and market structure,
increasing financial and other risks to the SIDCO's or Subpart C DCO's
participants.\167\ Although there is no DCO Core Principle specifically
directed at efficiency and effectiveness, furthering these goals would
improve compliance with Core Principle D (requiring, in part, that a
DCO ensure it has the ability to manage the risks associated with
discharging its responsibilities through the use of appropriate tools
and procedures) and Core Principle G (requiring, in part, that a DCO
have rules and procedures designed to allow for the efficient, fair,
and safe management of events during which members or participants
become insolvent or other default).
---------------------------------------------------------------------------
\167\ PFMIs at E.N. 3.21.1.
---------------------------------------------------------------------------
The Commission requests comment on all aspects of these proposals.
The Commission is particularly interested in the following: In light of
the potential impact that a SIDCO's failure could have on the U.S.
financial system, would compliance with proposed regulation 39.38
reduce systemic risks? Would proposed regulation 39.38 contribute to
the goals articulated in the Dodd-Frank Act, particularly the goals of
Titles VII and VIII of the Dodd-Frank Act? If so, in what ways? If not,
why not? What alternatives, if any, to proposed regulation 39.38 would
be more effective in reducing systemic risk or accomplishing the goals
articulated in the Dodd-Frank Act? Is proposed regulation 39.38
consistent with the PFMIs? If not, what changes need to be made to
achieve such consistency? What alternatives to proposed regulation
39.38, if any, would be more effective or efficient for achieving
consistency with the standards set forth by the PFMIs? Can proposed
regulation 39.38 be effectively implemented and complied with? If not,
what changes can be made to permit effective implementation and
compliance? What are the potential benefits and costs resulting from,
or arising out of, requiring SIDCOs to comply with regulation 39.38?
The Commission also requests comment on the potential costs and
benefits resulting from, or arising out of, requiring Subpart C DCOs to
comply with regulation 39.38. In considering costs and benefits,
commenters are requested to address the effect of the proposed
regulation not only on a DCO, but also on the DCO's clearing members,
the customers of clearing members, and the financial system more
broadly. The Commission requests that, where possible, commenters
provide quantitative data in their comments, particularly with respect
to estimates of costs and benefits. The Commission requests that
commenters include a detailed description of any alternatives to
proposed regulation 39.38 and estimates of the costs and benefits of
such alternatives.
K. Regulation 39.39 (Recovery and Wind-Down For Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
The Commission is proposing regulation 39.39 to require a SIDCO or
Subpart C DCO to maintain viable plans for recovery and orderly wind-
down. In particular, regulation 39.39 is designed to protect the
members of such DCOs and their customers, as well as the financial
system more broadly from the consequences of a disorderly failure of
such a DCO.
As noted above, Principle 3 requires a CCP to have a sound risk
management framework for comprehensively managing legal, credit,
liquidity, operational, and other risks.\168\ Under Principle 3, such a
framework would include identifying scenarios that may prevent the CCP
from providing critical operations and services as a going concern and
would assess the effectiveness of a full range of options for recovery
or orderly wind-down. Similarly, Principle 15 requires a CCP to
identify, monitor, and manage its general business risk and hold
sufficient liquid net assets funded by equity to cover potential
general business losses so that the CCP can continue operations and
services as a going concern if those losses materialize.\169\ Further,
these liquid net assets should, at all times, be sufficient to allow
for recovery or orderly wind-down of critical operations and
services.\170\ Although there is no Core Principle that pertains
directly to the establishment of a recovery and wind-down plan,
proposed regulation 39.37 promotes concepts set forth in Core
Principles B (Financial Resources), D (Risk Management), G (Default
Rules and Procedures), and I (System Safeguards).\171\
---------------------------------------------------------------------------
\168\ See supra Section I.E.3.
\169\ See supra Section I.E.9.
\170\ See id.
\171\ See supra Section I.D.1-4.
---------------------------------------------------------------------------
Accordingly, proposed regulation 39.39 requires a SIDCO or Subpart
C DCO to develop additional plans that specifically address
``recovery'' and ``wind-down.'' The Commission proposes defining
``recovery'' as the actions of a SIDCO or Subpart C DCO, consistent
with its rules, procedures, and other ex-ante contractual arrangements,
to address any uncovered credit loss, liquidity shortfall, capital
inadequacy, or business, operational or other structural weakness,
including the replenishment of any depleted pre-funded financial
resources and liquidity arrangements, as necessary to maintain the
SIDCO's or Subpart C DCO's viability as a going concern so that it can
continue to provide its critical services without requiring the
commencement of an insolvency proceeding or the use of resolution
powers by the Federal Deposit Insurance Corporation or any other
relevant resolution authority. The Commission proposes defining ``wind-
down'' as the actions of a SIDCO or Subpart C DCO to effect the
permanent cessation or sale or transfer of one or more services. The
Commission is also proposing to add a definition for
[[Page 50282]]
``general business risk,'' which would mean any potential impairment of
a SIDCO's or Subpart C DCO's financial position, as a business concern,
as a consequence of a decline in its revenues or an increase in its
expenses, such that expenses exceed revenues and result in a loss that
the SIDCO or Subpart C DCO must charge against capital. In addition,
the Commission proposes defining ``operational risk'' to mean the risk
that deficiencies in information systems or internal processes, human
errors, management failures or disruptions from external events will
result in the reduction, deterioration, or breakdown of services
provided by a SIDCO or Subpart C DCO. Finally, the Commission is
proposing to define ``unencumbered liquid financial assets'' to include
cash and highly liquid securities. These proposed definitions are
designed to be consistent with the meaning of such terms in the PFMIs.
The Commission requests comment as to whether these definitions are
appropriate. Specifically, the Commission requests comment on whether
the definition of ``recovery'' is appropriate in light of emerging
international consensus.
The Commission is proposing to require each SIDCO and Subpart C DCO
to maintain viable plans for: (i) Recovery or orderly wind-down,
necessitated by credit losses or liquidity shortfalls; and (ii)
recovery or orderly wind-down, necessitated by general business risk,
operational risk, or any other risk that threatens the SIDCO's or
Subpart C DCO's viability as a going concern. The Commission also
proposes requiring that the recovery and wind-down plans of SIDCOs and
Subpart C DCOs meet certain standards, set forth in proposed subsection
(c). Specifically, the Commission proposes requiring a SIDCO or Subpart
C DCO to identify scenarios that may potentially prevent it from being
able to 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. The SIDCO's or Subpart C DCO's plans should also
include procedures for informing the Commission, as soon as
practicable, when the recovery plan is initiated or wind-down is
pending, as well as procedures for providing the Commission and any
other relevant authorities (e.g., the Federal Deposit Insurance
Corporation) with information necessary for resolution planning.
Proposed regulation 39.39(d) requires that the recovery and wind-
down plans of a SIDCO or Subpart C DCO be supported by certain
resources. Specifically, in evaluating the resources available to cover
any uncovered credit losses or liquidity shortfalls as part of its
recovery or wind-down plans necessitated by credit losses of liquidity
shortfalls, a SIDCO or Subpart C DCO would be permitted to consider,
among other things, assessments of additional resources provided for
under its rules that it reasonably expects to collect from non-
defaulting members. In addition, a SIDCO or Subpart C DCO would be
required to maintain sufficient unencumbered liquid financial assets,
funded by the equity of its owners, to implement its recovery or wind-
down plans necessitated by general business risk, operational risk, or
any other risk that threatens the SIDCO's or Subpart C DCO's viability
as a going concern. Moreover, while the resources required by
regulation 39.11(a)(2) may be sufficient to maintain a SIDCO's or
Subpart C DCO's recovery or wind-down plans necessitated by general
business risk, operational risk, or any other risk that threatens the
SIDCO's or Subpart C DCO's viability as a going concern, a SIDCO or
Subpart C DCO would be required to (i) analyze such plans, including
the particular circumstances and risks associated with the SIDCO or
Subpart C DCO, and (ii) maintain any additional resources that may be
necessary to implement such plans.\172\ A SIDCO or Subpart C DCO would
be required to comply with regulation 39.11(e)(2) in allocating
sufficient financial resources to implement its recovery or wind-down
plans necessitated by general business risk, operational risk, or any
other risk that threatens the SIDCO's or Subpart C DCO's viability as a
going concern. Moreover, such plans would need to include evidence and
analysis to support the conclusion that the amount considered necessary
is, in fact, sufficient to implement them.
---------------------------------------------------------------------------
\172\ Thus, the requirements of proposed Sec. 39.39(d)(2) and
existing Sec. 39.11(a)(2) are overlapping, rather than alternative.
A SIDCO or Subpart C DCO whose plan pursuant to Sec. 39.39(b)(2)
anticipates completion of wind-down in three months would
nonetheless be held to the requirement of one year of operating
costs specified in Sec. 39.11(a)(2).
---------------------------------------------------------------------------
Proposed regulation 39.39(d)(3) would prohibit counting the
resources maintained to meet the requirements of regulations
39.11(a)(1) and 39.33 as available, in whole or in part, for uses other
than addressing the default of one or more clearing members. Further,
proposed regulation 39.39(d)(3) would prohibit a SIDCO or Subpart C DCO
from counting the same resources as available to address both its
recovery or orderly wind-down, necessitated by credit losses or
liquidity shortfalls; and its recovery or orderly wind-down,
necessitated by general business risk, operational risk, or any other
risk that threatens the SIDCO's or Subpart C DCO's viability as a going
concern. In other words, if a SIDCO or Subpart C DCO allocates
resources, in whole or in part, to execute its recovery plans required
by proposed regulation 39.39(b)(1), it may not allocate those same
resources, in whole or in part, to satisfy the requirements of proposed
regulation 39.39(b)(2).\173\ In addition, resources may be allocated
only to the extent the use of that resource is not otherwise limited by
the CEA, Commission regulations, the SIDCO's or Subpart C DCO's rules,
or any contractual arrangements to which the SIDCO or Subpart C DCO is
a party.
---------------------------------------------------------------------------
\173\ This is consistent with the approach taken in Sec.
39.11(b)(3).
---------------------------------------------------------------------------
Finally, under 39.39(e), a SIDCO or Subpart C DCO would be required
to maintain viable plans for raising additional financial resources,
including, where appropriate, capital, in a scenario in which it is
unable, or virtually unable, to comply with any financial resource
requirements set forth in part 39. These plans would also have to be
approved by the SIDCO's or Subpart C DCO's board of directors and be
updated regularly.
These proposed regulations are intended to address certain
differences between existing Commission regulations and the standards
set forth in the PFMIs. In addition, it would appear to be necessary
for a SIDCO to maintain and regularly update a recovery and wind-down
plan so as to reduce or attempt to control the potential impact a
failure or disruption of the SIDCO's operations would have on the
stability of the U.S. financial markets.
The Commission requests comment on all aspects of these proposals.
The Commission is particularly interested in the following: In light of
the potential impact that a SIDCO's failure could have on the U.S.
financial system, would compliance with proposed regulation 39.39
reduce systemic risks? Would proposed regulation 39.39 contribute to
the goals articulated in the Dodd-Frank Act, particularly the goals of
Titles VII and VIII of the Dodd-Frank Act? If so, in what ways? If not,
why not? What alternatives, if any, to proposed regulation 39.39 would
be more effective in reducing systemic risk or accomplishing the goals
articulated in the Dodd-Frank Act? Is proposed regulation 39.39
consistent with the PFMIs? If not, what changes need to be
[[Page 50283]]
made to achieve such consistency? What alternatives to proposed
regulation 39.39, if any, would be more effective or efficient for
achieving consistency with the standards set forth by the PFMIs? Can
proposed regulation 39.39 be effectively implemented and complied with?
If not, what changes can be made to permit effective implementation and
compliance? What are the potential benefits and costs resulting from,
or arising out of, requiring SIDCOs to comply with regulation 39.39?
The Commission also requests comment on the potential costs and
benefits resulting from, or arising out of, requiring Subpart C DCOs to
comply with regulation 39.39. In considering costs and benefits,
commenters are requested to address the effect of the proposed
regulation not only on a DCO, but also on the DCO's clearing members,
the customers of clearing members, and the financial system more
broadly. The Commission requests that, where possible, commenters
provide quantitative data in their comments, particularly with respect
to estimates of costs and benefits. The Commission requests that
commenters include a detailed description of any alternatives to
proposed regulation 39.39 and estimates of the costs and benefits of
such alternatives.
L. Regulation 39.40 (Consistency With the PFMIs)
Proposed regulation 39.40 would make clear that Subpart C is
intended to establish regulations that, together with Subpart A and
Subpart B, are consistent with the DCO Core Principles set forth in
Section 5b(c)(2) of the CEA and the PFMIs. Specifically, to the extent
of any ambiguity, the Commission intends to interpret the regulations
set forth in part 39 in a manner that is consistent with the standards
set forth in the PFMIs. Such consistency would appear to promote
international harmonization and is intended to allow the bank clearing
members and bank customers of SIDCOs and Subpart C DCOs to receive the
more favorable capital treatment under the Basel CCP Capital
Requirements.
The Commission requests comment on all aspects of these proposals.
Specifically, the Commission requests comment on whether there are more
effective or efficient means for achieving consistency with the
standards set forth by the PFMIs. The Commission requests that
commenters include a detailed description of any such alternatives and
estimates of the costs and benefits of any such alternatives.
M. Regulation 39.41 (Special Enforcement Authority for Systemically
Important Derivatives Clearing Organizations)
In 2013, the Commission adopted regulation 39.31, which implemented
special enforcement authority over SIDCOs granted to the Commission
under section 807(c) of the Dodd-Frank Act.\174\ The Commission is not
proposing any changes to regulation 39.31 other than to renumber it as
regulation 39.41.
---------------------------------------------------------------------------
\174\ See SIDCO Final Rule.
---------------------------------------------------------------------------
N. Regulation 39.42 (Advance Notice of Material Risk-Related Rule
Changes by Systemically Important Derivatives Clearing Organizations)
The Commission proposes moving existing paragraph (c) of regulation
39.30 (Scope) to proposed regulation 39.42.\175\ This provision
instructs a SIDCO to provide advance notice to the Commission of any
proposed change to its rules, procedures, or operations that could
materially affect the nature or level of risks presented by the SIDCO,
in accordance with regulation 40.10.\176\ Because the other provisions
of proposed revised regulation 39.28 (renumbered as regulation 39.30)
pertain to the scope of Subpart C,\177\ it would be appropriate for
paragraph (d) to be codified in a separate regulation. No substantive
change is intended.
---------------------------------------------------------------------------
\175\ See supra Section II.B and note 111.
\176\ The Commission promulgated this provision as part of the
SIDCO Final Rule.
\177\ See supra Section II.B. (discussing proposed revised
regulation 39.28, renumbered as regulation 39.30).
---------------------------------------------------------------------------
O. Regulation 140.94 (Delegation of Authority to the Director of the
Division of Clearing and Risk)
The Commission proposes amending regulation 140.94 so that certain
Commission functions contained in these proposed regulations would be
delegated to the Director of the Division of Clearing and Risk and to
such staff members as the Director may designate. Specifically, the
Commission proposes to delegate all functions reserved to the
Commission in proposed regulation 39.31 including, for example, the
authority to request that a DCO provide information supplementing a
Subpart C Election Form that it has filed with the Commission; to
determine whether an election to be subject to Subpart C should be
permitted to become effective, stayed or denied; and to provide any
notices regarding the foregoing. The Commission also proposes to
delegate to the Director of the Division of Clearing and Risk and to
his or her designees the decision described in regulation 39.34(d)
(whether to grant a SIDCO or a Subpart C DCO up to one year to comply
with any provision of regulation 39.34).
P. Regulation 190.09 (Member Property)
Certain of the proposed requirements for SIDCOs and Subpart C DCOs
necessitate certain clarifications to part 190 of the Commission's
regulations. Specifically, proposed regulation 39.35(a) would require a
SIDCO or Subpart C DCO to ``adopt explicit rules and procedures that
address fully any loss arising from any individual or combined default
relating to any clearing members' obligations to the SIDCO or Subpart C
DCO.'' Proposed regulation 39.37(b) would require a SIDCO or Subpart C
DCO to maintain viable plans for recovery and orderly wind-down. In
addition, SIDCOs and Subpart C DCOs must comply with Core Principle R,
which require all registered DCOs to ``have a well-founded,
transparent, and enforceable legal framework for each aspect of the
activities of the DCO.''
The Commission notes that the risk management practices of DCOs
vary depending, in part, on the types of assets that the DCO clears.
For example, some DCOs ring-fence mutualized default resources related
to certain asset classes separately from resources related to other
such classes, in part, because of the different risk profiles
associated with those asset classes and a desire among members to avoid
exposure to contributions to mutualized resources for asset classes in
which such members do not participate. In such cases, the DCOs have
updated their financial safeguards arrangements to accommodate these
differences.\178\
---------------------------------------------------------------------------
\178\ For example, CME Clearing has three independent guaranty
funds and financial safeguards: one for interest rate swap contracts
(IRS Contracts), one for credit default swap contracts (CDS
Contracts), and one for futures and cleared OTC products, other than
IRS or CDS (the Base Guaranty Fund). See Rule 802.A of the CME
Rulebook in respect of the Base Guaranty Fund, Rule 8G802.A of the
CME Rulebook in respect of IRS Contracts, and Rule 8H802.A of the
CME Rulebook in respect of CDS Contracts, each of which is available
at http://www.cmegroup.com/rulebook/CME/.
---------------------------------------------------------------------------
Recognizing the diversity of financial safeguard arrangements among
DCOs, it would appear to be prudent to clarify certain language in part
190 to materially aid compliance with Core Principle R and the proposed
regulations specified above. Specifically, regulation 190.09 defines
the scope of ``member property'' in the context of a DCO bankruptcy.
The Commission notes that when regulation
[[Page 50284]]
190.09(b) was first proposed and adopted in the early 1980s, DCOs did
not hold specific and independent guaranty funds for different product
classes within a single legal entity. As such, the definition of
``member property'' in regulation 190.09(b) does not expressly address
the treatment of independent guaranty fund deposits in the context of a
DCO bankruptcy. Thus, to avoid interference with the rules of a DCO
governing the operation of such funds, the Commission proposes the
clarifications discussed below.
Therefore, the Commission proposes amending paragraph (b) of
regulation 190.09 to clarify that the scope of member property will be
determined based on the by-laws and rules of the relevant DCO.
Specifically, this amendment would clarify that the inclusion of
guaranty fund contributions and other property as ``member property''
in the context of a DCO bankruptcy would be subject to the by-laws or
rules of the DCO. Thus, under proposed regulation 190.09(b), the
Commission proposes that a DCO's distinct guaranty funds, which are
established for separate product classes by the DCO's by-laws or rules,
shall be treated separately from one another to the extent required by
the DCO's by-laws or rules.
The Commission requests comment on all aspects of this proposal.
Specifically, the Commission requests comment on whether the amendments
to regulation 190.09 will impose any costs on DCOs, clearing members,
or other market participants, and whether there are more effective or
efficient means for recognizing the diversity of financial safeguard
arrangements among DCOs in a bankruptcy. The Commission requests that
commenters include a detailed description of any such alternatives and
estimates of the costs and benefits of such alternatives.
III. Effective Date
Revised regulation 190.09 would take effect upon publication of the
final rulemaking in the Federal Register. Proposed regulations 39.31
and 140.94 would take effect on December 13, 2013. All of the other
revised and proposed regulations set forth herein would take effect on
December 31, 2013, in accordance with the Commission's goal of
implementing DCO regulations consistent with the PFMIs by the end of
calendar year 2013.
IV. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA''), 44 U.S.C. 3501 et seq.,
provides that an agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a valid control number from the Office of Management and Budget
(``OMB''). This rulemaking contains recordkeeping and reporting
requirements that are collections of information within the meaning of
the PRA. In particular, although the Commission does not anticipate
that more than ten persons will respond initially to this collection of
information, the term ``ten or more persons,'' which triggers PRA
compliance, has been deemed to apply to ``[a]ny recordkeeping,
reporting, or disclosure requirement contained in a rule of general
applicability.'' 5 CFR. 1320.3(c)(4). The Commission will submit an
information collection request in the form of an amendment to existing
OMB control number 3038-0081.
This rulemaking contains many provisions that would qualify as
collections of information, for which the Commission has already sought
and obtained a control number from OMB. The burden hours associated
with those provisions are not replicated here because the Commission is
obligated to account for PRA burden once, and the PRA encourages
multiple applications of a single collection.\179\ Accordingly, the
burdens associated with the collections contained in this proposed
rulemaking, and the information collection request that will be
submitted to OMB, have been estimated only to the extent that the
proposed rulemaking imposes collections of information that OMB has not
yet reviewed and approved.
---------------------------------------------------------------------------
\179\ See 35 U.S.C. 3501(2) and (3).
---------------------------------------------------------------------------
It should be noted that among the thirteen DCOs presently
registered with the Commission, only two are SIDCOs. Moreover, not all
remaining DCOs or all DCO Applicants are likely to elect to become
Subpart C DCOs (for example, DCOs that are based outside of the U.S.
may seek to obtain QCCP status through regulation by their home country
regulator). Thus, the burden calculations herein are based on an
estimate of how many DCOs are SIDCOs and how DCOs and DCO Applicants
are likely to elect to become Subpart C DCOs. Additionally, many of the
collections herein, in particular those related to electing Subpart C
DCO status, are expected to be one-time events for a DCO. It is
anticipated that three DCOs will elect to become subject to Subpart C
in the year following the adoption of final rules, with possibly one or
two additional elections thereafter.
Finally, it is not possible to precisely estimate the reporting and
recordkeeping burden for the SIDCOs and Subpart C DCOs that will be
affected by the collections contained in this rulemaking, as the actual
burden will be dependent on the operations and staffing of each
particular SIDCO and Subpart C DCO and the manner in which they choose
to implement compliance with certain requirements. Therefore, the
burden estimates below are meant to be a composite of the burdens that
will be absorbed across all SIDCOs and Subpart C DCOs, to the extent
that the provisions for which information collection burdens are
applicable.
1. Collections Only Applicable to Subpart C DCOs
Proposed regulations 39.31(b) and 39.31(c) would establish the
process whereby DCO and DCO Applicants, respectively, may elect to
become Subpart C DCOs subject to the provisions of Subpart C. The
election involves filing the proposed Subpart C Election Form that
would be contained in proposed appendix B to part 39 (including
completing the certifications therein, providing proposed exhibits A
through G, and drafting and publishing the DCO's responses to the
Disclosure Framework, and, when applicable, the DCO's Quantitative
Information Disclosure). Additionally, paragraphs (b)(2) and (c)(3) of
proposed regulation 39.31 provide for Commission requests for
supplemental information from those requesting Subpart C DCO status;
paragraphs (b)(3) and (c)(4) require amendments to the Subpart C
Election Form in the event that a DCO or DCO Applicant, respectively,
discovers a material omission or error in, or if there is a material
change in, the information provided in the Subpart C Election Form;
paragraphs (b)(7) and (c)(5) permit a DCO or DCO Applicant,
respectively, to submit a notice of withdrawal to the Commission in the
event the DCO or DCO Applicant determines not to seek Subpart C DCO
status prior to such status becoming effective; and paragraph (e)
establishes the procedures by which a Subpart C DCO may rescind its
Subpart C DCO status after it has been permitted to take effect. Each
of these requirements implies recordkeeping that would be produced by a
DCO to the Commission on an occasional basis to demonstrate compliance
with the proposed rules.
It is estimated presently that it is likely that only three DCOs
will elect to become Subpart C DCOs, but it has been
[[Page 50285]]
conservatively estimated below that, collectively, five DCOs or DCO
Applicants may elect to become Subpart C DCOs. It is unlikely that any
DCO or DCO Applicant will withdraw its election to become subject to
Subpart C prior to such election becoming effective, but an estimate of
compliance with the withdrawal procedures by one DCO has been included
below. It is estimated presently that it is likely that none of the
Subpart C DCOs will elect to rescind its election, but it has been
conservatively estimated below that one Subpart C DCO may rescind its
election. Consequently, the burden hours for the proposed collection of
information in this rulemaking have been estimated as follows:
Reporting--Certifications--Subpart C Election Form
Estimated number of reporters: 5
Estimated number of reports per reporter: 1
Average number of hours per report: 25
Estimated gross annual reporting burden: 125
Reporting--Exhibits A through G--Subpart C Election Form
Estimated number of reporters: 5
Estimated number of reports per reporter: 1
Average number of hours per report: 155
Estimated gross annual reporting burden: 775
Reporting--Preparing and Publishing Disclosure Framework Responses
Estimated number of reporters: 5
Estimated number of reports per reporter: 1
Average number of hours per report: 200
Estimated gross annual reporting burden: 1,000
Reporting--Preparing Quantitative Information Disclosures
Estimated number of reporters: 5
Estimated number of reports per reporter: 1
Average number of hours per report: 80
Estimated gross annual reporting burden: 400
Reporting--Requests for Supplemental Information
Estimated number of reporters: 5
Estimated number of reports per reporter: 5
Average number of hours per report: 45
Estimated gross annual reporting burden: 1,125
Reporting--Amendments to Subpart C Election Form
Estimated number of reporters: 5
Estimated number of reports per reporter: 3
Average number of hours per report: 8
Estimated gross annual reporting burden: 120
Reporting--Withdrawal Notices
Estimated number of reporters: 1
Estimated number of reports per reporter: 1
Average number of hours per report: 2
Estimated gross annual reporting burden: 2
Reporting--Rescission Notices
Estimated number of reporters: 1
Estimated number of reports per reporter: 75
Average number of hours per report: 3
Estimated gross annual reporting burden: 225
Recordkeeping
Estimated number of recordkeepers: 5
Estimated number of records per recordkeeper: 82
Average number of hours per record: 1
Estimated gross annual recordkeeping burden: 410
2. Collections Applicable Both to SIDCOs and Subpart C DCOs
Proposed regulations 39.32(a) and (b) establish governance
requirements applicable to each SIDCO and Subpart C DCO, including
specific provisions requiring written and disclosed governance
arrangements and the disclosure of certain decisions on particular, not
regularly scheduled, occasions, to the Commission, the SIDCO or Subpart
C DCO's clearing members, other relevant stakeholders and/or the
public. Proposed regulation 39.33(d) requires a SIDCO or Subpart C DCO
to conduct due diligence on its liquidity providers and to conduct
periodic testing with respect to its access to liquidity resources.
Proposed regulation 39.33(e) establishes documentation requirements
with respect to the supporting rationale for the financial and
liquidity resources it maintains pursuant to proposed regulations
39.33(a) and 39.33(c), respectively.
Proposed regulation 39.36(c)(6) requires each SIDCO and Subpart C
DCO to report stress test results to its risk management committee or
board of directors. Proposed regulation 39.37(a) requires each SIDCO
and Subpart C DCO to complete and to publicly disclose its responses to
the Disclosure Framework and, when applicable, to complete and disclose
a Quantitative Information Disclosure. As described above and as
accounted for in the previous portion of this PRA burden estimate,
these tasks will be conducted by Subpart C DCOs as part of their
election to become subject to Subpart C. SIDCOs and DCOs also are
required to update their Disclosure Framework responses and
Quantitative Information Disclosure every two years. Proposed
regulations 39.37(c) and (d) require each SIDCO or Subpart C DCO to
disclose, publicly and to the Commission, certain data on transaction
volume and values and their rules, policies, and procedures related to
the segregation and the portability of customers' positions and funds.
Proposed regulation 39.38 requires each SIDCO or Subpart C DCO to
establish a process to review the efficiency and effectiveness of its
clearing and settlement arrangements, operating structure and
procedures, scope of products cleared and use of technology. Finally,
proposed regulations 39.39(b) and (c) require each SIDCO and Subpart C
DCO to develop and maintain viable plans for the recovery or wind-down
of the SIDCO or Subpart C DCO necessitated by certain circumstances.
Each of these requirements implies recordkeeping that would be produced
by the SIDCO or Subpart C DCO to the Commission on an occasional basis
to demonstrate compliance with the proposed rules.
It is not possible to estimate with precision how many DCOs may, in
the future, be determined to be SIDCOs and how many may elect to become
Subpart C DCOs, but it conservatively has been estimated below that,
collectively, a total of seven DCOs may be determined to be SIDCOs or
may opt to become Subpart C DCOs. Presently, there are two SIDCOs and
is has been estimated that five DCOs will elect to become Subpart C
DCOs. Consequently, the burden hours for the proposed collection of
information in this rulemaking have been estimated as follows:
Reporting--Governance Requirements--Written Governance Arrangements
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 200
Estimated gross annual reporting burden: 1,400
Reporting--Governance Requirements--Required Disclosures
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 6
Average number of hours per report: 3
Estimated gross annual reporting burden: 126
[[Page 50286]]
Reporting--Financial and Liquidity Resource Documentation
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 120
Estimated gross annual reporting burden: 840
Reporting--Stress Test Results
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 16
Average number of hours per report: 14
Estimated gross annual reporting burden: 1,568
Reporting--Preparing and Publishing Disclosure Framework Responses
(SIDCOs only)
Estimated number of reporters: 2
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 200
Estimated gross annual reporting burden: 400
Reporting--Updating and Republishing Disclosure Framework Responses
(SIDCOs and Subpart C DCOs)
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 80
Estimated gross annual reporting burden: 560
Reporting--Preparing and Publishing Quantitative Information
Disclosures (SIDCOs only)
Estimated number of reporters: 2
Estimated number of reports per reporter: 1
Average number of hours per report: 80
Estimated gross annual reporting burden: 160
Reporting--Updating and Republishing Quantitative Information
Disclosures (SIDCOs and Subpart C DCOs)
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 35
Estimated gross annual reporting burden: 245
Reporting--Transaction, Segregation, Portability Disclosures
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 2
Average number of hours per report: 35
Estimated gross annual reporting burden: 490
Reporting--Efficiency and Effectiveness Review
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 3
Estimated gross annual reporting burden: 21
Reporting--Recovery and Wind-Down Plan
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 480
Estimated gross annual reporting burden: 3,360
Recordkeeping--Liquidity Resource Due Diligence and Testing
Estimated number of recordkeepers: 7
Estimated number of records per recordkeeper: 4
Average number of hours per record: 10
Estimated gross annual recordkeeping burden: 280
Recordkeeping--Financial and Liquidity Resources, Excluding Due
Diligence and Testing
Estimated number of recordkeepers: 7
Estimated number of records per recordkeeper: 4
Average number of hours per record: 10
Estimated gross annual recordkeeping burden: 280
Recordkeeping--Generally
Estimated number of recordkeepers: 7
Estimated number of records per recordkeeper: 28
Average number of hours per record: 10
Estimated gross annual recordkeeping burden: 1960
3. Information Collection Comments
The Commission invites the public and other Federal agencies to
comment on any aspect of the proposed information collection
requirements discussed above. Pursuant to 44 U.S.C.3506(c)(2)(B), the
Commission will consider public comments on such proposed requirements
in:
Evaluating whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
Evaluating the accuracy of the estimated burden of the
proposed information collection requirements, including the degree to
which the methodology and the assumptions that the Commission employed
were valid;
Enhancing the quality, utility, and clarity of the
information proposed to be collected; and
Minimizing the burden of the proposed information
collection requirements on SIDCOs and Subpart C DCOs, including through
the use of appropriate automated, electronic, mechanical, or other
technological information collection techniques, e.g., permitting
electronic submission of responses.
Copies of the submission from the Commission to OMB are available
from the CFTC Clearance Officer, 1155 21st Street NW., Washington, DC
20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and
individuals desiring to submit comments on the proposed information
collection requirements should send those comments to:
The Office of Information and Regulatory Affairs, Office
of Management and Budget, Room 10235, New Executive Office Building,
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures
Trading Commission;
(202) 395-6566 (fax); or
[email protected] (email).
Please provide the Commission with a copy of submitted comments so
that all comments can be summarized and addressed in the final
rulemaking, and please refer to the ADDRESSES section of this
rulemaking for instructions on submitting comments to the Commission.
OMB is required to make a decision concerning the proposed information
collection requirements between thirty (30) and sixty (60) days after
publication of the NPRM in the Federal Register. Therefore, a comment
to OMB is best assured of receiving full consideration if OMB (as well
as the Commission) receives it within thirty (30) days of publication
of this NPRM. The time frame for commenting on the PRA does not affect
the deadline established by the Commission on the proposed rules,
provided in the DATES section of this rulemaking.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis respecting the impact.\180\
The rules proposed by the Commission will only affect DCOs. The
Commission has previously established certain definitions of ``small
entities'' to be used by the Commission in evaluating the impact of its
regulations on small entities in accordance with the
[[Page 50287]]
RFA.\181\ The Commission has previously determined that DCOs are not
small entities for the purpose of the RFA.\182\ Accordingly, the
Chairman, on behalf of the Commission, hereby certifies pursuant to 5
U.S.C. 605(b) that the proposed rules will not have a significant
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\180\ 5 U.S.C. 601 et seq.
\181\ Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618 (Apr. 30, 1982).
\182\ See 66 FR at 45609.
---------------------------------------------------------------------------
C. Consideration of Costs and Benefits
1. Introduction
Section 15(a) requires the Commission to consider the costs and
benefits of its actions before promulgating a regulation under the CEA
or issuing certain orders.\183\ Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The
Commission's cost and benefit considerations in accordance with Section
15(a) are discussed below.
---------------------------------------------------------------------------
\183\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
2. Background
As discussed above, this proposed rulemaking would: Address gaps
between part 39 of the Commission's regulations and the standards set
forth in the PFMIs; provide a procedure for Subpart C DCOs to elect to
become subject to the provisions of Subpart C; and make related
technical amendments to regulation 190.09. As proposed, revised Subpart
C, together with Subpart A and Subpart B, would establish regulations
that are consistent with the PFMIs.\184\
---------------------------------------------------------------------------
\184\ See supra Section I.G.
---------------------------------------------------------------------------
3. Costs and Benefits of the Proposed Rules
a. Costs
The Commission does not have quantification or estimation of the
costs associated with the proposed regulations. However, in qualitative
terms, the Commission recognizes that the proposed regulations are
comprehensive and, compared to the status quo, may impose important
costs on SIDCOs and Subpart C DCOs depending, in particular, on the
SIDCO's or Subpart C DCO's current financial and liquid resources, and
risk management framework. In particular, these proposed regulations
may require SIDCOs and Subpart C DCOs to undertake a comprehensive
review and analysis of their current policies, procedures, and systems
in order to determine where it may be necessary to design and implement
additional or alternative policies, procedures, and systems. Such costs
may increase operational, administrative, and compliance costs for a
SIDCO or Subpart C DCO. The Commission requests comment on the
potential costs of the proposed regulations on SIDCOs and Subpart C
DCOs, including, where possible, quantitative data. In addition, the
Commission requests comment on the competitive impact, the costs as
well as benefits, resulting from, or arising out of, requiring SIDCOs
to comply with the provisions set forth in Subpart C, while permitting
other registered DCOs to elect to become subject to these requirements
(or to forego such election).
In addition to the costs for SIDCOs and Subpart C DCOs, the
Commission has considered the costs the proposed regulations would
impose upon market participants and the public. To the extent costs
increase, the Commission notes that higher trading prices for market
participants (i.e., increased clearing fees, guaranty fund
contributions, and margin fees, etc.) may discourage market
participation and result in decreased liquidity and reduced price
discovery.
i. Regulation 39.31 (Election To Become Subject to the Provisions of
Subpart C)
As discussed above, proposed regulation 39.31 would set forth the
procedures a DCO would be required to follow to elect to become subject
to the provisions of Subpart C.\185\ Proposed paragraph (b) would
require a registered DCO to file a completed Subpart C Election Form
with the Commission. The form appears in proposed Appendix B to Subpart
C and is modeled after Form DCO, which the Commission promulgated in
2011 as part of the DCO General Provisions and Core Principles final
rule.\186\ Proposed paragraph (c) would require the same of a DCO that
applies for registration with the Commission and that wants to be
subject to the provisions of Subpart C as of the date the DCO is
registered with the Commission. The Subpart C Election Form would
include disclosures and exhibits wherein the DCO would be required to
provide the following: a regulatory compliance chart; citations to the
relevant rules, policies, and procedures of the DCO that addresses each
Subpart C regulation; and a summary of the manner in which the DCO
would comply with each regulation. In addition, the DCO would be
required to provide, in separate exhibits, all documents that
demonstrate the DCO's compliance with proposed regulations 39.32
through 39.36 and proposed regulation 39.39. A DCO would also be
required to complete responses to the Disclosure Framework and publish
a copy of its responses on its Web site.
---------------------------------------------------------------------------
\185\ See supra Section II.C (discussing proposed regulation
39.31).
\186\ DCO General Provisions and Core Principles, 76 FR 69334
(Nov. 8, 2011) (final rule).
---------------------------------------------------------------------------
The Commission notes that proposed regulation 39.31 would only
apply to a DCO that the Council has not designated to be systemically
important and that elects to become subject to the provisions of
Subpart C. Proposed regulation 39.31, by providing an opt-in procedure
and a procedure to rescind such election offers the benefit of
permitting a DCO that is not systemically important may weigh (i) (1)
the cost of preparing a comprehensive and complete Subpart C Election
Form in accordance with the requirements set forth in proposed
regulation 39.31 and (2) the costs associated with the requirements set
forth in Subpart C against (ii) the benefit of attaining QCCP status,
and, thus, to decide for itself whether to become subject to Subpart C.
As discussed below, a Subpart C DCO's compliance with the
provisions of Subpart C would cause the Subpart C DCO to incur certain
costs. Some of these costs may then be incurred, indirectly, by the
Subpart C DCO's clearing members and their customers. The Commission
requests comments concerning examples of such costs. If a clearing
member or its customer would incur greater costs by clearing through a
Subpart C DCO rather than through a DCO that has not opted-in to
Subpart C, then that clearing member or customer may decide not to
clear through a Subpart C DCO. The Commission requests comment as to
how these indirect costs may be mitigated. The Commission also requests
comment concerning the extent to which a DCO's analysis of whether the
costs of being a Subpart C DCO may outweigh the benefits could be
affected by the possibility that some of the costs may be incurred
indirectly by clearing members and their customers.
In addition to the requests for comment set forth above, the
Commission requests comment concerning the costs associated with the
Subpart C Election Form, including without limitation, the election and
[[Page 50288]]
withdrawal procedures set forth in proposed regulation 39.31, as well
as the requirements surrounding completion and publication of responses
to the Disclosure Framework. The Commission also requests that each
commenter provide quantitative data where practicable, as well as a
detailed rationale supporting the response.
The Commission notes that pursuant to proposed paragraph (e), a
Subpart C DCO would be permitted, subject to a 90 day notice period, to
rescind its election to become subject to the provisions of Subpart C.
As a result of the rescission, the DCO would no longer be considered a
QCCP, which would likely create important costs for bank clearing
members and the bank customers of a DCO's clearing members due to the
higher capital costs that they would incur as a result of clearing
transactions through the DCO that is no longer a QCCP.\187\
Alternatively, clearing members and their customers may choose to end
their clearing activities and transact through another DCO that is a
QCCP, with either choice imposing costs on those clearing members and
their customers.
---------------------------------------------------------------------------
\187\ See supra Section I.F (discussing the treatment for non-
QCCP clearing members under the Basel CCP Capital Requirements).
---------------------------------------------------------------------------
As discussed in section II.C., above, the Commission requests
comments on the potential costs to a Subpart C DCO to comply with all
aspects of proposed regulation 39.32, including the cost of the opting-
in process (including but not limited to the completion of the Subpart
C Election Form) and the process for rescinding such an opting-in
(including the notices required) and any costs that would be imposed on
other market participants or the financial system more broadly.
ii. Regulation 39.32 (Governance for Systemically Important Derivatives
Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
As discussed above, proposed regulation 39.32 establishes
governance requirements for SIDCOs and Subpart C DCOs that are
consistent with the PFMIs and establish rules and procedures concerning
conflicts of interest, compensation policies, organizational structure,
and fitness standards for directors and officers.\188\ Specifically,
SIDCOs and Subpart C DCOs would be required to have written governance
arrangements that are clear and transparent, that place a high priority
on the safety and efficiency of the SIDCO or Subpart C DCOs, and that
explicitly support the stability of the broader financial system and
other relevant public interest considerations of clearing members,
customers of clearing members, and other relevant stakeholders. In
addition, these governance arrangements would be required to reflect
the legitimate interests of clearing members, customers of clearing
members, and other relevant stakeholders. To an extent consistent with
other statutory and regulatory requirements on confidentiality and
disclosure, SIDCO's and Subpart C DCOs would also be required to
disclose major decisions of the board.\189\ Proposed regulation 39.32
would require the rules and procedures of SIDCOs and Subpart C DCOs to:
(1) Describe the SIDCO's or Subpart C DCO's management structure; (2)
clearly specify the roles and responsibilities of the board of
directors and its committees, including the establishment of a clear
and documented risk management framework; (3) clearly specify the roles
and responsibilities of management; (4) establish appropriate
compensation policies; (5) establish procedures for managing conflicts
of interest among board members; and (6) assign responsibility and
accountability for risk decisions and for implementing rules concerning
default, recovery, and wind-down. Finally, proposed regulation 39.32
would require that the board members and managers of SIDCOs and Subpart
C DCOs have the appropriate experience, skills, incentives and
integrity; risk management and internal control personnel have
sufficient independence, authority, resources and access to the board
of directors; and that the board of directors include members who are
not executives, officers or employees of the SIDCO or Subpart C DCO or
of their affiliates.
---------------------------------------------------------------------------
\188\ See supra Section II.D (discussing proposed regulation
39.32).
\189\ Id.
---------------------------------------------------------------------------
To the extent these requirements affect the behavior of a DCO,
costs could arise from additional hours a DCO's employees might need to
spend analyzing the compliance of the DCO's rules and procedures with
these requirements, designing and drafting new or amended rules and
procedures where the analysis indicates that these are necessary, and
implementing these new or amended rules and procedures. These costs are
difficult for the Commission to assess in the abstract because the
proposed regulation grants a DCO a certain amount of discretion in
determining which rules and procedures should be adopted to comply with
the proposed regulation. As discussed in section II.D., above, the
Commission requests comments on the potential costs to a SIDCO or
Subpart C DCO to comply with all aspects of proposed regulation 39.32,
and any costs that would be imposed on other market participants or the
financial system more broadly. As noted above, the Commission
specifically requests comment on alternative means to establish
governance requirements consistent with the PFMIs, and the costs (or
cost savings) associated with such alternatives.
iii. Regulation 39.33 (Financial Resources for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
(a.) Regulation 39.33(a): Cover Two
As discussed above, proposed amended regulation 39.33(a) would
require a Subpart C DCO to comply with the Cover Two minimum financial
resource standard for all of its activities if the Subpart C DCO: (1)
Is involved in activities with a more complex risk profile or (2) is
systemically important in multiple jurisdictions. This requirement
currently applies to all SIDCOs.\190\
---------------------------------------------------------------------------
\190\ See supra Section II.E (discussing proposed revised
regulation 39.33).
---------------------------------------------------------------------------
The cost of the Cover Two requirement for a Subpart C DCO that
meets either or both of the two criteria described above \191\ includes
the opportunity cost \192\ of the additional financial resources needed
to satisfy the guaranty fund requirements for the risk of loss
resulting from the default of the clearing member creating the second
largest credit exposure.\193\ In addition, the possibility exists that
some market participants will port their positions from a Subpart C DCO
that either (1) is deemed systemically important in multiple
jurisdictions or (2) clears products of a more complex risk profile to
another DCO for which neither (1) nor (2) applies because the value of
the Cover Two protection to these market participants is less than the
price at which that protection is being offered. These market
participants will transact with SIDCOs or Subpart C DCOs that
[[Page 50289]]
operate under Cover One, which is a lower financial resources
requirement, and thus, get the benefit of lower transactional fees and
forego the enhanced protections associated with the SIDCOs or Subpart C
DCOs. However, the potential cost to a SIDCO or a Subpart C DCO subject
to the Cover Two requirement and to the goal of systemic risk reduction
would likely be mitigated because: (a) Not every product offered by a
SIDCO or Subpart C DCO would be available at other DCOs and (b) a SIDCO
or Subpart C DCO may offer benefits not available to a DCO does not
elect to become subject to the provisions of Subpart C, that is not
designated as systemically important, and/or that does not clear
products with a more complex risk profile. This would therefore reduce
the likelihood that market participants would port their positions to
other DCOs. As indicated in section II.E. (description of proposed
regulation 39.33), above, the Commission requests comment on these
costs, including quantitative data, if available.
---------------------------------------------------------------------------
\191\ All Subpart C DCOs would bear the administrative cost of
determining whether they meet either of the criteria.
\192\ For Subpart C DCOs that are not deemed systemically
important in multiple jurisdictions or that do not clear products
with a more complex risk profile, the Cover One financial resources
requirement would continue to apply, and therefore, these Subpart C
DCOs would not face increased opportunity costs associated with the
proposed regulation.
\193\ In the event that these additional resources would need to
be raised by the Subpart C DCO, as opposed to reallocated, this cost
would be the funding cost for raising these additional resources.
---------------------------------------------------------------------------
(b.) Regulation 39.33(b): Valuation of Financial Resources
Proposed amended regulation 39.33(b) would prohibit SIDCOs and
Subpart C DCOs from including assessments as part of their calculation
of the financial resources available to cover the default of the
clearing member creating the largest credit exposure and, where
applicable, the default of the two clearing members creating the
largest aggregate credit exposure, in extreme but plausible
circumstances, i.e., Cover One or Cover Two.\194\ This requirement
currently applies to all SIDCOs and would be expanded to include
Subpart C DCOs. The costs associated with the prohibition on the use of
assessments by a Subpart C DCO in calculating its obligations under
regulation 39.33(a) would include the opportunity cost of the
additional pre-funded financial resources needed to replace the value
of such assessments, which may require an infusion of additional
capital. In addition, as with the Cover Two requirement, market
participant demand may shift from a SIDCO or a Subpart C DCO subject to
the Cover Two requirement to a DCO with a lower capitalization
requirement. As indicated in Section II.E, above, the Commission
requests comment on these costs, including quantitative data, if
available.
---------------------------------------------------------------------------
\194\ See supra Section II.E (discussing proposed revised
regulation 39.33).
---------------------------------------------------------------------------
(c.) Regulation 39.33(c), (d) and (e): Liquidity
Proposed regulation 39.33(c) would require a SIDCO and a Subpart C
DCO to maintain eligible liquidity resources that will enable it to
meet its intraday, same-day and multiday settlement obligations, in all
relevant currencies, with a high degree of confidence under a wide
range of stress scenarios notwithstanding a default by the clearing
member creating the largest aggregate liquidity obligation. Eligible
resources are limited to cash in the currency of the requisite
obligation, held at the central bank of issue or a creditworthy
commercial bank, certain highly marketable collateral, subject to
certain prearranged and highly reliable funding arrangements, and
various committed liquidity arrangements. These arrangements must be
reliable and enforceable in extreme but plausible market conditions,
and must not contain material adverse change clauses.
In addition, a SIDCO or Subpart C DCO that is systemically
important in multiple jurisdictions or that is involved in activities
with a more complex risk profile would be required to consider
maintaining liquidity resources that would enable it to meet the
default of the two clearing members creating the largest aggregate
payment obligation. If a SIDCO or Subpart C DCO maintains liquid
financial resources in addition to those required to satisfy the
minimum financial resources requirement set forth in regulations
39.11(a)(1) and 39.33(a), then those resources should be in the form of
assets that are likely to be saleable or acceptable as collateral for
lines of credit, swaps, or repurchase agreements on an ad hoc
basis.\195\
---------------------------------------------------------------------------
\195\ Id.
---------------------------------------------------------------------------
Proposed regulation 39.33(d) would impose a duty on SIDCOs and
Subpart C DCOs to perform due diligence on their liquidity providers in
order to determine their ability to perform reliably their commitments
to provide liquidity. Finally, proposed regulation 39.33(e) would
require SIDCOs and Subpart C DCOs to document their supporting
rationale for the amount of financial resources they maintain pursuant
to proposed regulation 39.33(a) and the amount of liquidity resources
they maintain pursuant to proposed regulation 39.33(c).\196\
---------------------------------------------------------------------------
\196\ Id.
---------------------------------------------------------------------------
Proposed regulations 39.33(c)-(e) may result in additional costs
for a SIDCO or Subpart C DCO with respect to analyzing and measuring
intra-day, same-day, and multiday liquidity requirements in all
relevant currencies, developing plans to meet those requirements,
obtaining eligible liquidity resources and making eligible liquidity
arrangements, reviewing and monitoring each liquidity provider's risks
and reliability (including through periodic testing of access to
liquidity), and documenting the DCO's basis for conclusions with
respect to its financial resources and liquidity resources
requirements. These proposed regulations also will require stress
testing and other analysis of such resources as compared with the DCO's
liquidity needs. Specifically, with regards to proposed regulation
39.33(c), there may be costs involved in obtaining cash in the relevant
currencies or arranging for qualifying liquidity commitments, such as a
committed line of credit, to satisfy the minimum financial resources
requirement set forth in regulation 39.11(a)(1)(i.e., Cover One).
Obtaining these committed financial resources would involve
administrative expenses such as the negotiation and drafting of
committed arrangements, as well as costs arising from the payment of
fees to liquidity providers. In addition, there may be operational
costs involved in calculating the liquidity resources requirements at
the Cover One level on an intraday, same-day, and multiday basis over
the course of a default. This calculation may require undertaking a
complex analysis of the SIDCO's or Subpart C DCO's exposures and
processes, including various models, and, where appropriate, designing
and implementing changes to either create or modify existing internal
processes. While this analysis may involve costs, it would appear that
it will improve the SIDCO's or Subpart C DCO's financial condition, as
described below in section 2.b.iii. of the benefits section.
Proposed regulation 39.33(d) may increase administrative costs to
the extent that a SIDCO or a Subpart C DCO is required to review and
monitor its liquidity provider's capacity and reliability to perform
its liquidity obligations to the DCO. In addition, proposed regulation
39.33(e) may impose an administrative cost to document the SIDCO or
Subpart C DCO's rationale for the financial resources it maintains.
As discussed in section II.E., above, the Commission requests
comments on the potential costs to a SIDCO or a Subpart C DCO in
complying with all aspects of proposed regulation 39.33 and any costs
that would be imposed on other market participants or the financial
system more broadly. As noted above, the Commission specifically
[[Page 50290]]
requests comment on alternative means to establish financial resources
and liquidity requirements consistent with the PFMIs (including, e.g.,
through alternative definitions of terms), and the costs (or cost
savings) associated with such alternatives.
iv. Regulation 39.34 (System Safeguards for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
As discussed above, proposed amended regulation 39.34 would require
SIDCOs and Subpart C DCOs to comply with enhanced system safeguards
requirements.\197\ While SIDCOs are already subject to these
requirements, the Commission proposes expanding this regulation to
include Subpart C DCOs. The proposed regulation could increase
operational costs for Subpart C DCOs by requiring additional resources,
including with respect to personnel, technology (e.g., hardware and
software) and the purchase or rental of premises in order to achieve
geographic dispersal of resources. In particular, the costs of moving
from a next-day RTO, the minimum standard established by the DCO core
principles and current regulation 39.18, to a two-hour RTO as required
by proposed regulation 39.34, may be significant. Additionally, the
implementation of a two-hour RTO may impose one-time costs to establish
the enhanced resources and recurring costs to operate the additional
resources. As discussed in section II.F. above, the Commission requests
comments on the potential costs to a Subpart C DCO in complying with
all aspects of proposed regulation 39.34, and any costs that would be
imposed on other market participants or the financial system more
broadly. As noted above, the Commission specifically requests comment
on alternative means to establish, for Subpart C DCOs, system
safeguards requirements consistent with the PFMIs and the costs (or
cost savings) associated with such alternatives.
---------------------------------------------------------------------------
\197\ See supra Section II.F (discussing proposed regulation
39.34).
---------------------------------------------------------------------------
v. Regulation 39.35 (Default Rules and Procedures for Uncovered Losses
or Shortfalls (Recovery) for Systemically Important Derivatives
Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
Proposed regulation 39.35 would require SIDCOs and Subpart C DCOs
to adopt policies and procedures to address certain issues arising from
extraordinary stress events, including the default of one or more
clearing members.\198\ The costs associated with these default rules
and procedures may include administrative costs to: review and analyze
current policies and procedures; design and draft new or amended
policies and procedures; and implement the new or amended policies and
procedures. Such default rules and procedures must sufficiently (1)
allocate uncovered credit losses and (2) enable a SIDCO or Subpart C
DCO to promptly meet all of its obligations in the event of a default
by one or more clearing members or an unforeseen liquidity shortfall
exceeding the financial resources of the SIDCO or Subpart C DCO. As
discussed in section II.G. above, the Commission requests comments on
the potential costs to a SIDCO or a Subpart C DCO in complying with all
aspects of proposed regulation 39.35, and any costs that would be
imposed on other market participants or the financial system more
broadly. As noted above, the Commission specifically requests comment
on alternative means to establish requirements, in a manner consistent
with the PFMIs, for adopting rules and procedures for uncovered losses
or shortfalls, and the costs (or cost savings) associated with such
alternatives.
---------------------------------------------------------------------------
\198\ See supra Section II.G (discussing proposed regulation
39.35).
---------------------------------------------------------------------------
vi. Regulation 39.36 (Risk Management for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
Proposed regulation 39.36 would impose enhanced risk management
requirements for a SIDCO or Subpart C DCO, including, but not limited
to, specific criteria for stress tests of financial resources, specific
criteria for sensitivity analysis of margin models, specific criteria
for stress tests of liquidity resources, requirements surrounding the
monitoring and management of credit and liquidity risks arising out of
settlement banks, and requirements surrounding the custody and
investment of a SIDCO's or Subpart C DCO's own funds and assets.\199\
Complying with this regulation could involve operational costs to
perform the required testing, monitoring and analyses, which may
include: A comprehensive analysis of existing stress testing scenarios;
the design of new and/or alternative stress testing scenarios; and the
design of a sensitivity analysis; the creation of a system for
comprehensively monitoring, managing and limiting credit and liquidity
risks arising out of settlement banks; and the implementation of
controls surrounding the custody and investment of a SIDCO's or Subpart
C DCO's own funds and assets. In addition, there may be costs
associated with the modification and/or creation of processes necessary
to support the enhanced risk management requirements in the proposed
regulation. There would also be ongoing costs to conduct such risk
management, analyze the results, and take action based on such results.
In particular, to the extent that the analyses and monitoring reveal
the need for additional financial or liquidity resources, there would
be costs associated with obtaining such resources. In addition, there
may be administrative and other costs associated with the management of
a SIDCO's or Subpart C DCO's settlement bank exposures. As discussed in
section II.H., above, the Commission requests comments on the potential
costs to a SIDCO or a Subpart C DCO in complying with all aspects of
proposed regulation 39.36, and any costs that would be imposed on other
market participants or the financial system more broadly. As noted
above, the Commission specifically requests comment on alternative
means to establish risk management requirements consistent with the
PFMIs, and the costs (or cost savings) associated with such
alternatives.
---------------------------------------------------------------------------
\199\ See supra Section II.H (discussing proposed regulation
39.36).
---------------------------------------------------------------------------
vii. Regulation 39.37 (Additional Disclosure for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
Proposed regulation 39.37 would set forth additional public
disclosure requirements for a SIDCO and Subpart C DCO, including the
disclosure of, and updates to, the DCO's responses to the Disclosure
Framework for FMIs.\200\ Complying with this regulation may impose
administrative costs to conduct a comprehensive analysis of the SIDCO
or Subpart C DCO's policies, procedures and systems as well as the
costs associated with the design, drafting and implementation of any
new or modified policies, procedures and systems that would be
necessary to comply with the proposed regulation. As discussed in
section II.I. above, the Commission requests comments on the potential
costs to a SIDCO or a Subpart C DCO in complying with all aspects of
proposed regulation 39.37, and any costs that would be imposed on other
market participants or the financial system
[[Page 50291]]
more broadly. As noted above, the Commission specifically requests
comment on alternative means to establish disclosure requirements
consistent with the PFMIs, and the costs (or cost savings) associated
with such alternatives.
---------------------------------------------------------------------------
\200\ See supra Section II.I (discussing proposed regulation
39.37).
---------------------------------------------------------------------------
viii. Regulation 39.38 (Efficiency for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
Proposed regulation 39.38 would require a SIDCO or a Subpart C DCO
to comply with certain efficiency standards regarding its clearing and
settlement arrangements, operating structure and procedures, product
scope, and use of technology. In addition, a SIDCO or Subpart C DCO
would be required to establish clearly defined goals and objectives
that are measureable and achievable, including minimum service levels,
risk management expectations, and business priorities.\201\ SIDCOs and
Subpart C DCOs would also be required to facilitate efficient payment,
clearing and settlement by accommodating internationally accepted
communication procedures and standards. The costs associated with the
proposed regulation may include the administrative costs of conducting
a comprehensive review and analysis of the SIDCO's or Subpart C DCO's
policies, procedures and systems, and where appropriate, the design,
drafting and implementation of new or modified policies, procedures and
systems to establish the goals and objectives necessary to comply with
this regulations. There may also be administrative costs associated
with establishing a mechanism to review the DCO's compliance with the
proposed regulation, as well as operational costs associated with
designing and implementing processes to accommodate internationally
accepted communications standards. As discussed in section II.J. above,
the Commission requests comments on the potential costs to a SIDCO or a
Subpart C DCO in complying with all aspects of proposed regulation
39.38, and any costs that would be imposed on other market participants
or the financial system more broadly. As noted above, the Commission
specifically requests comment on alternative means to establish a
requirement for efficiency standards consistent with the PFMIs, and the
costs (or cost savings) associated with such alternatives.
---------------------------------------------------------------------------
\201\ See supra Section II.J (discussing proposed regulation
39.38).
---------------------------------------------------------------------------
ix. Regulation 39.39 (Recovery and Wind-Down for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
Proposed regulation 39.37 would require a SIDCO or Subpart C DCO to
maintain viable plans for recovery and orderly wind-down, in cases
necessitated by (1) credit losses or liquidity shortfalls and (2)
general business risk, operational risk, or any other risk that
threatens the DCO's viability as a going concern. This would require
the DCO to identify scenarios that may prevent a SIDCO or Subpart C DCO
from being able to provide its critical operations and services as a
going concern and to assess the effectiveness of a full range of
options for recovery or orderly wind-down.
The proposed regulation would also require a SIDCO or Subpart C DCO
to evaluate the resources available to meet the plan to cover credit
losses and liquidity shortfalls, and to maintain sufficient
unencumbered liquid financial assets to implement the plan to cover
other risks. The latter point requires a SIDCO or Subpart C DCO to
analyze whether its particular circumstances and risks require it to
maintain liquid net assets to fund the plan that are in addition to
those resources currently required by regulation 39.11(a)(2).
This proposed regulation may impose costs on a SIDCO or Subpart C
DCO to the extent it will be necessary to undertake a comprehensive
qualitative and quantitative analysis of the credit, liquidity, general
business, operational and other risks that may threaten the DCO's
ability to provide its critical operations and services as a going
concern, to design and draft plans to mitigate and address those risks,
to analyze whether the DCO's resources allocated to recovery and/or
wind-down are sufficient to implement those plans. This analysis may
lead to the design of alternative and/or additional scenarios to be
included in stress testing, the drafting of new or revised policies for
a recovery and/or wind-down plan, and potentially the necessity of
maintaining additional resources or procedures to obtain such resources
in the event they are needed. Moreover, the regulation prohibits the
double counting of available resources--that is, resources considered
as available to meet the recovery and orderly wind-down plan for credit
losses and liquidity shortfalls cannot be considered as available to
meet the recovery and orderly wind-down plan for general business risk,
operational risk, and other risks (or vice-versa). This may result in
the need to maintain a larger quantum of total resources to meet both
plans which, depending on the resources maintained, may involve costs
arising from factors such as greater use of capital by the DCO, or
greater capital charges for clearing members arising out of their
commitments to contribute default resources.
As discussed in section II.K. above, the Commission requests
comments on the potential costs to a SIDCO or a Subpart C DCO in
complying with all aspects of proposed regulation 39.39, and any costs
that would be imposed on other market participants or the financial
system more broadly. As noted above, the Commission specifically
requests comment on alternative means to establish, consistent with the
PFMIs, a requirement for the adoption of a recovery and wind-down plan,
and the costs (or cost savings) associated with such alternatives.
b. Benefits
As explained in the subsections that follow, this proposed rule
would hold SIDCOs and Subpart C DCOs to enhanced regulatory standards,
which are designed to promote the financial strength, operational
integrity, security, and reliability of these organizations and to
reduce the likelihood of their disruption or failure. This would then
increase the overall stability of the U.S. financial markets. As the
PFMIs note, FMIs, including CCPs (i.e. DCOs), play a critical role in
fostering financial stability.\202\ This is particularly the case with
respect to SIDCOs. The Council has determined that the failure of or a
disruption to the functioning of a SIDCO could create or increase the
risk of significant liquidity or credit problems spreading among
financial institutions or markets and thereby threaten the stability of
the U.S. financial system.\203\
---------------------------------------------------------------------------
\202\ PFMIs, E.N. 1.1.
\203\ See http://www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx (describing the designations of CME and ICE Clear
Credit to be systemically important financial market utilities) and
see supra Section I.C.
---------------------------------------------------------------------------
In addition, the proposed regulations would help ensure that SIDCOs
and Subpart C DCOs are held to international standards in order to
provide them with the opportunity to gain QCCP status. As discussed
above, attaining QCCP status would provide clearing members that are
banks, as well as banks that are customers of clearing members, with
the benefit of complying with less onerous capital requirements,
pursuant to the Basel CCP Capital Requirements, than if the SIDCO or
[[Page 50292]]
Subpart C DCO were not a QCCP.\204\ In turn, this may increase a SIDCO
or Subpart C DCO's competitiveness vis-[agrave]-vis non-U.S. clearing
organizations that demonstrate compliance with international standards
and are QCCPs.
i. Regulation 39.31 (Election To Become Subject to the Provisions of
Subpart C)
---------------------------------------------------------------------------
\204\ See supra Section I.F.
---------------------------------------------------------------------------
The procedures set forth in proposed regulation 39.31, together
with the proposed Subpart C Election Form, are intended to promote the
protection of market participants and the public. These proposed
procedures would require the Commission's staff to conduct a
comprehensive and thorough review of a DCO that elects to become
subject to the provisions of Subpart C. In addition, the international
Basel CCP Capital Requirements provide incentives for banks to clear
derivatives through CCPs that are qualified CCPs or ``QCCPs'' by
setting lower capital charges for exposures arising from derivatives
cleared through a QCCP and setting significantly higher capital charges
for exposures arising from derivatives cleared through non-qualifying
CCPs. These proposed regulations are consistent with the international
standards set forth in the PFMIs and address the remaining divergences
between part 39 of the Commission's regulations and the PFMIs, which
will provide an opportunity for a Subpart C DCO to gain QCCP status.
Without regulation 39.31, a DCO that is not designated by the
Council as being systemically important would not have the opportunity
to gain QCCP status, thereby potentially putting such a DCO at a
significant competitive disadvantage compared to SIDCOs and non-U.S.
clearing organizations. This would ultimately be to the detriment of
such a DCO's clearing members and their customers.\205\ The Commission
also notes that by clearing through a Subpart C DCO, a clearing member
and its customers would be afforded the benefits of clearing through a
DCO subject to enhanced risk management, operational, and other
standards. The Commission requests comment concerning the extent to
which clearing members and their customers would benefit from the
additional standards to which a Subpart C DCO and SIDCO would be
subject.
---------------------------------------------------------------------------
\205\ See supra Section I.F (discussing QCCP status and the
Basel CCP Capital Requirements); see also supra Section II.C.
(discussing proposed regulation 39.31).
---------------------------------------------------------------------------
Proposed regulation 39.31 would provide a benefit to a Subpart C
DCO by allowing the Subpart C DCO to weigh for itself the costs and
benefits of maintaining QCCP status. The notice requirements would
provide important benefits to clearing members of the rescinding
Subpart C DCO (and their customers), particularly those that are banks
or bank affiliates, by providing them with advance notice to permit
them to assess their options and take any actions they deem appropriate
with respect to clearing at a DCO that has acted to rescind its
election to be held to the standards of Subpart C (and thus to renounce
status as a QCCP).
In addition to the requests for comments detailed above, the
Commission invites public comment on its cost-benefit considerations.
Specifically, the Commission seeks comment, including quantitative
data, if available, concerning the costs and benefits associated with
having an opt-in process for DCOs that have not been designated as
systemically important by the Council to elect to be subject to Subpart
C, the proposed process for that election, and the costs and benefits
that may be incurred and realized by the clearing members and customers
of a Subpart C DCO that rescinds its election to become subject to the
provisions of Subpart C. In addition, the Commission seeks comment on
whether the notice requirements, the 90 day notice period and the
requirements set forth in proposed regulation 39.31(e)(3)(iii) are
sufficient to mitigate the costs associated with a Subpart C DCO's
ability to rescind its election. Commenters are also invited to submit
with their comment letters any data or other information that they may
have quantifying or qualifying the costs and benefits of the proposed
regulations.
ii. Regulation 39.32 (Governance for Systemically Important Derivatives
Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
The requirements set forth in proposed regulation 39.32 would
appear to be beneficial to the extent that they cause a SIDCO or
Subpart C DCO to internalize and/or more appropriately allocate certain
costs that would otherwise be borne by clearing members, customers of
clearing members, and other relevant stakeholders. Such requirements
would also appear to promote market stability because the governance
arrangements of SIDCOs and Subpart C DCOs would be required to
explicitly support the stability of the financial system and other
relevant public interest considerations of clearing members, customers
of clearing members, and other relevant stakeholders,\206\ and reflect
the legitimate interests of clearing members, customers of clearing
members, and other relevant stakeholders. Finally, the governance
arrangements required by proposed regulation 39.32 would promote a more
efficient, effective, and reliable DCO risk management and operating
structure.
---------------------------------------------------------------------------
\206\ See supra Section II.D (discussing proposed regulation
39.32).
---------------------------------------------------------------------------
As discussed in section II.D. above, the Commission requests
comments on the potential benefits to a SIDCO and a Subpart C DCO in
complying with all aspects of proposed regulation 39.32, and any
benefits that would be realized by other market participants (including
members of such a DCO and their customers) or the financial system more
broadly. As noted above, the Commission specifically requests comment
on alternative means to address these issues, and the benefits
associated with such alternatives.
iii. Regulation 39.33 (Financial Resources for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
As described above, proposed regulation 39.33(a), as revised, would
be expanded to include Subpart C DCOs and require those Subpart C DCOs
that engage in an activity with a more complex risk profile (e.g.,
clearing credit default swaps or credit default futures), or that are
systemically important in multiple jurisdictions, to comply with the
Cover Two minimum financial resources requirement.\207\ This regulation
currently applies to SIDCOs. Proposed regulation 39.33(a) would
increase the financial stability of Subpart C DCOs that are engaged in
activities with a more complex risk profile or that are systemically
important in multiple jurisdictions because it would require such
Subpart C DCOs to comply with enhanced minimum financial resource
requirements. Compliance with such standards, in turn, could increase
the overall stability of the U.S. financial markets because enhancing a
Subpart C DCO's financial resources requirements from the minimum of
Cover One to a more stringent Cover Two standard helps to ensure the
affected Subpart C DCO will have greater financial resources to meet
its obligations to market participants, including in the case of
defaults by multiple clearing members. These added financial resources
lessen the likelihood of the
[[Page 50293]]
Subpart C DCO's failure which, in times of market turmoil, could
increase the risk to the stability of the U.S. financial system.\208\
By bolstering certain Subpart C DCO's resources, regulation 39.33(a)
contributes to the financial integrity of the financial markets and
reduces the likelihood of systemic risk from spreading through the
financial markets due to the Subpart C DCO's failure or disruption. In
addition, the approach of obtaining resources in such low-stress
periods avoids the need to call for additional resources from clearing
members during less stable, more volatile times, which would have pro-
cyclical effects on the U.S. financial markets.
---------------------------------------------------------------------------
\207\ See supra Section II.E (discussing proposed revised
regulation 39.33).
\208\ See supra Section I.B.
---------------------------------------------------------------------------
As described above, proposed regulation 39.33(a)(2) would provide
the Commission with the ability to determine that a SIDCO or a Subpart
C DCO is systemically important in multiple jurisdictions, considering
whether the DCO is a SIDCO and whether the DCO has been determined to
be systemically important by one or more foreign jurisdictions pursuant
to a designation process that considers whether the foreseeable effects
of a failure or disruption of the SIDCO or Subpart C DCO could threaten
the stability of each relevant jurisdiction's financial system.
Moreover, proposed regulation 39.33(a)(3) would provide the Commission
with the ability to expand the definition of ``activity with a more
complex risk profile'' beyond clearing credit default swaps or credit
default futures. These provisions give the Commission the flexibility
to determine, under appropriate circumstances, what particular SIDCOs
or Subpart C DCOs (or DCOs that engage in certain activities) would
need to maintain Cover Two default resources. Such a decision would
help to ensure that the affected SIDCO or Subpart C DCO would have
greater financial resources to meet its obligations to market
participants, including in the case of defaults by multiple clearing
members. These added financial resources would decrease the likelihood
that the SIDCO or Subpart C DCO would fail, thus contributing to the
integrity and stability of the financial markets.
Proposed regulation 39.33 would also prohibit a Subpart C DCO from
using assessments to meets its default resource obligations, i.e.,
those under regulations 39.11(a)(1) and 39.33(a). This prohibition
currently applies to SIDCOs. Prohibiting the use of assessments by a
Subpart C DCO in meeting its default resource requirement would appear
to increase the financial stability of the Subpart C DCO, which in
turn, would increase the overall stability of the U.S. financial
markets.
Assessment powers are more likely to be exercised during periods of
financial market stress. If, during such a period, a clearing member
defaults and the loss to the Subpart C DCO is sufficiently large to
deplete (1) the collateral posted by the defaulting clearing member,
(2) the defaulting clearing member's guaranty fund contribution, and
(3) the remaining pre-funded default fund contributions, a Subpart C
DCO's exercise of assessment powers over the non-defaulting clearing
members may exacerbate a presumably already weakened financial market.
The demand by a Subpart C DCO for more capital from its clearing
members could force one or more additional clearing members into
default because they cannot meet the assessment. The inability to meet
the assessment could lead clearing members and/or their customers to
de-leverage (i.e., sell off their positions) in falling asset markets,
which further drives down asset prices and may result in clearing
members and/or their customers defaulting on their obligations to each
other and/or to the Subpart C DCO. In such extreme circumstances,
assessments could trigger a downward spiral and lead to the
destabilization of the financial markets. Prohibiting the use of
assessments by a Subpart C DCO in meeting default resources
requirements is intended to require the Subpart C DCO to retain more
financial resources upfront, i.e., to prefund its financial resources
requirement to cover its potential exposure.
The increase in prefunding of financial resources by a Subpart C
DCO may increase costs to clearing members of that Subpart C DCO (e.g.,
requiring clearing members to post additional funds with the Subpart C
DCO), but it also reduces the likelihood that the Subpart C DCO will
require additional capital infusions during a time of financial stress
when raising such additional capital is expensive relative to market
norms. By increasing prefunded financial resources, a Subpart C DCO
becomes less reliant on the ability of its clearing members to pay an
assessment, more secure in its ability to meets its obligations, and
more viable in any given situation, even in the case of multiple
defaults of clearing members. Accordingly, proposed regulation 39.33(b)
would increase the financial security and reliability of the Subpart C
DCO, which will, therefore, further increase the overall stability of
the U.S. financial markets.
As described above, proposed regulation 39.33(c) would require a
SIDCO or Subpart C DCO to maintain a minimum level of eligible
liquidity resources that would permit the DCO to satisfy its intraday,
same-day, and multi-day settlement obligations in all relevant
currencies. Proposed regulation 39.33(d) would require a SIDCO or
Subpart C DCO to undertake due diligence to confirm that each liquidity
provider upon which the DCO relies has the capacity to perform its
commitments to provide liquidity (and to regularly test its own
procedures for accessing its liquidity resources) and would require a
SIDCO with access to accounts and services at a Federal Reserve Bank to
use such services where practical. Proposed regulation 39.33(e) would
require a SIDCO or Subpart C DCO to document its supporting rationale
for, and to have adequate governance arrangements relating to, the
amount of total financial resources it maintains and the amount of
total liquidity resources it maintains.
These requirements would increase the likelihood that a SIDCO or
Subpart C DCO would promptly meet its settlement obligations in a
variety of market conditions. In determining the resources that would
be necessary to meet the qualifying liquid resources requirements, a
SIDCO or Subpart C DCO may need to undertake a complex analysis of the
SIDCO's or Subpart C DCO's exposures and processes, including various
models, and, where appropriate, designing and implementing changes to
either create or modify existing internal processes and documenting the
rationale for the amount of total financial and total liquidity
resources the SIDCO or Subpart C DCO maintains. These efforts are
likely to contribute to a better ex ante understanding by the SIDCO's
or Subpart C DCO's management of the liquidity risks the DCO is likely
to face in a stress scenario, resources that are calculated to enable
the DCO to completely meets its settlement obligations on a prompt
basis despite the default of a clearing member, and better assurance of
its ability to rely on the commitments of its liquidity providers.
The result of this analysis and these enhanced resources is likely
to be better preparation to meet liquidity challenges promptly, and a
greater likelihood that the DCO would efficiently and effectively meet
its obligations promptly in a default scenario. This improved
preparation and enhanced likelihood of the SIDCO or Subpart C DCO's
prompt meeting of its own obligations will benefit the DCO's clearing
members and
[[Page 50294]]
their customers by avoiding an inability to meet settlement obligations
that might cause knock-on liquidity problems to such clearing members
and their customers. The harm to clearing members and customers from a
failure of a SIDCO or Subpart C DCO to meet its obligations promptly
would be especially serious in a time of general financial stress. The
assurance of the DCO meeting its settlement obligations promptly would
also redound to the benefit of the larger financial system by
mitigating systemic risk.
As discussed in section II.E. above, the Commission requests
comments on the potential benefits to a SIDCO or a Subpart C DCO in
complying with all aspects of proposed regulation 39.33, and any
benefits that would be realized by other market participants or the
financial system more broadly. As noted above, the Commission
specifically requests comment on alternative means to address these
issues, and the benefits associated with such alternatives.
iv. Regulation 39.34 (System Safeguards for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
As discussed above, proposed amended regulation 39.34 would require
SIDCOs and Subpart C DCOs to comply with enhanced system safeguards
requirements.\209\ While SIDCOs are already subject to these
requirements, the Commission proposes expanding this regulation to
include Subpart C DCOs. A two-hour RTO in a Subpart C DCO's BC-DR plan
would increase the soundness and operating resiliency of the Subpart C
DCO. The two-hour RTO ensures that even in the event of a wide-scale
disruption, the potential negative effects upon U.S. financial markets
would be minimized because the affected Subpart C DCO would recover
rapidly and resume its critical market functions. This would allow
other market participants to process their transactions, including
those participants in locations not directly affected by the
disruption. The two-hour RTO would increase a Subpart C DCO's
resiliency by requiring the Subpart C DCO to have the resources and
technology necessary to resume operations promptly. This resiliency, in
turn, would increase the overall stability of the U.S. financial
markets.
---------------------------------------------------------------------------
\194\ See supra Section II.F (discussing proposed regulation
39.34).
---------------------------------------------------------------------------
As discussed in section II.F. above, the Commission requests
comments on the potential benefits to a SIDCO or a Subpart C DCO in
complying with all aspects of proposed regulation 39.34, and any
benefits that would be realized by other market participants or the
financial system more broadly. As noted above, the Commission
specifically requests comment on alternative means to address these
issues, and the benefits associated with such alternatives.
v. Regulation 39.35 (Default Rules and Procedures for Uncovered Losses
or Shortfalls (Recovery) for Systemically Important Derivatives
Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
As discussed above, proposed regulation 39.35 would require SIDCOs
and Subpart C DCOs to adopt explicit rules and procedures for: (i)
Allocating uncovered credit losses and (ii) meeting all settlement
obligations in a variety of market conditions.\210\ The analysis SIDCOs
and Subpart C DCOs would need to perform to create these rules and
procedures are likely to contribute to a better ex ante understanding
by the SIDCO or Subpart C DCO of the scenarios that would lead to
uncovered credit losses or liquidity shortfalls. This analysis would
also enable the SIDCO or Subpart C DCO to more effectively and
efficiently meet its obligations promptly, thereby avoiding harm to
clearing members and their customers from a default. In addition,
requiring SIDCOs and Subpart C DCOs to have clear rules and procedures
addressing such scenarios would be beneficial for clearing members and
their customers in that these rules and procedures would provide
clearing members with a better understanding of the members' own
obligations, and the extent to which the SIDCO or Subpart C DCO would
perform its obligations to its clearing members during periods of
market stress. This understanding would, in turn, contribute to the
ability of clearing members and their customers to tailor their own
contingency plans to address those circumstances. Improved preparation
by SIDCOs, Subpart C DCOs, and their clearing members will also redound
to the benefit of the larger financial system by mitigating systemic
risk.
---------------------------------------------------------------------------
\210\ See supra Section II.G (discussing proposed regulation
39.35).
---------------------------------------------------------------------------
As discussed in section II.G. above, the Commission requests
comments on the potential benefits to a SIDCO or a Subpart C DCO in
complying with all aspects of proposed regulation 39.35, and any
benefits that would be realized by other market participants or the
financial system more broadly. As noted above, the Commission
specifically requests comment on alternative means to address these
issues, and the benefits associated with such alternatives.
vi. Regulation 39.36 (Risk Management for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
As discussed above, the enhanced risk management requirements set
forth in proposed regulation 39.36 are designed to help SIDCOs and
Subpart C DCOs manage their risk exposure.\211\ For example, the
proposed provisions would require SIDCOs and Subpart C DCOs to stress
test their financial resources, stress test their liquidity resources,
and conduct regular sensitivity analyses of their margin methodologies.
The analyses performed under the proposed requirements would appear to
increase the DCO's ability to mitigate and address credit risks, and to
create proper incentives for members with respect to the exposures they
create to the SIDCO or Subpart C DCO by enabling the DCO to tie risk
exposures to margin requirements. In addition, proposed regulation
39.36 would require a SIDCO or Subpart C DCO to monitor, manage and
limit its credit and liquidity risks arising from its settlement banks,
as well invest its own funds and assets in instruments with minimal
credit, market, and liquidity risks. This provision would also appear
to increase the SIDCO's or Subpart C DCO's ability to mitigate and
address the probability of being exposed to a settlement bank's failure
and the potential losses and liquidity pressures to which the SIDCO or
Subpart C DCO would be exposed in the event of such a failure. This, in
turn, would benefit members of such DCOs and their customers, as
discussed above. It would also appear that by enhancing the reliability
and stability of SIDCOs and Subpart C DCOs, the overall stability of
the U.S. financial markets will be strengthened.
---------------------------------------------------------------------------
\211\ See supra Section II.H (discussing proposed regulation
39.36).
---------------------------------------------------------------------------
As discussed in section II.H. above, the Commission requests
comments on the potential benefits to a SIDCO or a Subpart C DCO in
complying with all aspects of proposed regulation 39.36, and any
benefits that would be realized by members of such DCOs and their
customers, as well as other market participants or the financial system
more broadly. As noted above, the Commission specifically requests
comment on alternative means to address these issues, and the benefits
associated with such alternatives.
[[Page 50295]]
vii. Regulation 39.37 (Additional Disclosure for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
The disclosure requirements set forth in proposed regulation 39.37
\212\ would be beneficial to clearing members of SIDCOs and Subpart C
DCOs, as well as to customers of clearing members, because they would
provide transparency and certainty concerning the processes, operations
and exposures of these DCOs. In particular, proposed paragraph (d)
would require a SIDCO or Subpart C DCO to publicly disclose its
policies and procedures concerning the segregation and portability of
customers' positions and funds. These disclosures would enable clearing
members and their customers to better understand their respective
exposures to the SIDCO or Subpart C DCO, to better choose a DCO that
fits their needs, and, in turn, to create incentives for safe and
effective operations of SIDCOs and Subpart C DCOs.
---------------------------------------------------------------------------
\212\ See supra Section II.I (discussing proposed regulation
39.37).
---------------------------------------------------------------------------
As discussed in section II.I. above, the Commission requests
comments on the potential benefits to a SIDCO or a Subpart C DCO in
complying with all aspects of proposed regulation 39.37, and any
benefits that would be realized by members of such DCOs and their
customers, as well as other market participants or the financial system
more broadly. As noted above, the Commission specifically requests
comment on alternative means to address these issues, and the benefits
associated with such alternatives.
viii. Regulation 39.38 (Efficiency for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
The efficiency requirements set forth in proposed regulation 39.38
would be beneficial to clearing members of SIDCOs and Subpart C DCOs,
as well as to customers of clearing members, because they would require
these DCOs to regularly endeavor to improve their clearing and
settlement arrangements, operating structures and procedures, product
offerings, and use of technology. In addition, SIDCOs and Subpart C
DCOs would be required to facilitate efficient payment, clearing and
settlement by accommodating internationally accepted communication
procedures and standards, which could result in operational efficiency
for market participants. As a result, members of such DCOs and their
customers, as well as the marketplace more broadly, may be offered more
efficient clearing services that may be easier to access at an
operational level.
As discussed in section II.J. above, the Commission requests
comments on the potential benefits to a SIDCO or a Subpart C DCO in
complying with all aspects of proposed regulation 39.38, and any
benefits that would be realized by members of such DCOs, their
customers, as well as other market participants or the financial system
more broadly. As noted above, the Commission specifically requests
comment on alternative means to address these issues, and the benefits
associated with such alternatives.
ix. Regulation 39.39 (Recovery and Wind-Down for Systemically Important
Derivatives Clearing Organizations and Subpart C Derivatives Clearing
Organizations)
As discussed above, proposed regulation 39.39 would require a SIDCO
and Subpart C DCO to maintain viable plans for recovery and orderly
wind-down, in cases necessitated by (1) credit losses or liquidity
shortfalls and (2) general business risk, operational risk, or any
other risk that threatens the derivatives clearing organization's
viability as a going concern. This would require the DCO to identify
scenarios that may prevent a SIDCO or Subpart C DCO from being able to
provide its critical operations and services as a going concern and to
assess the effectiveness of a full range of options for recovery or
orderly wind-down.
The proposed regulation would also require a SIDCO or Subpart C DCO
to evaluate the resources available to meet the plan to cover credit
losses and liquidity shortfalls, and to maintain sufficient
unencumbered liquid financial assets to implement the plan to cover
other risks. The latter point requires a SIDCO or Subpart C DCO to
analyze whether its particular circumstances and risks require it to
maintain liquid net assets to fund the plan that are in addition to
those resources currently required by regulation 39.11(a)(2).\213\
---------------------------------------------------------------------------
\213\ See supra Section II.K (discussing proposed regulation
39.39).
---------------------------------------------------------------------------
The complex analysis and plan preparation that a SIDCO or Subpart C
DCO would undertake to comply with the proposed regulation, including
designing and implementing changes to existing plans, are likely to
contribute to a better ex ante understanding by the SIDCO's or Subpart
C DCO's management of the challenges the DCO would face in a recovery
or wind-down scenario, and thus better preparation to meet those
challenges. This improved preparation would help reduce the possibility
of market disruptions and financial losses to clearing members and
their customers. By maintaining and regularly updating recovery and
wind-down plans, and maintaining resources and arrangements designed to
meet the requirements of such plans, the DCO will better be able to
mitigate the impact that a threat to, or a disruption of, a SIDCO's or
Subpart C DCO's operations would have on customers, clearing members,
and, more broadly, the stability of the U.S. financial markets. By
reducing the possibility that a DCO would default in a disorganized
fashion, the proposed regulation would also help to reduce the
likelihood of a failure by the DCO to meet its obligations to its
members, thereby enhancing protection for members of such a DCO and
their customers, as well as helping to avoid the systemic effects of
DCO failure.
As discussed in section II.K. above, the Commission requests
comments on the potential benefits to a SIDCO or a Subpart C DCO in
complying with all aspects of proposed regulation 39.39, and any
benefits that would be realized by members of such DCOs and their
customers, as well as other market participants or the financial system
more broadly. As noted above, the Commission specifically requests
comment on alternative means to address these issues, and the benefits
associated with such alternatives.
4. Section 15(a) Factors
i. Protection of Market Participants and the Public
The proposed regulations create additional standards for compliance
with the CEA, which include governance standards, enhanced financial
resources and liquidity resource requirements, system safeguard
requirements, special default rules and procedures for uncovered losses
or shortfalls, enhanced risk management requirements, additional
disclosure requirements, efficiency standards, and standards for
recovery and wind-down procedures. They also include procedures for
Subpart C DCOs to elect to be held to such additional standards, and
procedures to rescind such election. These standards and procedures
would further the protection of members of SIDCOs and Subpart C DCOs,
customers of such members, as well as other market participants and the
public by increasing the financial stability and operational security
of SIDCOs and Subpart C DCOs. These proposed regulations could, more
broadly, increase the stability of the U.S.
[[Page 50296]]
financial markets. A designation of systemic importance under Title
VIII means the failure of a SIDCO or the disruption of its clearing and
settlement activities could create or increase the risk of significant
liquidity or credit problems spreading among financial institutions or
markets, thereby threatening the stability of the U.S. financial
markets. The regulations contained in this proposed rule are designed
to help ensure that SIDCOs continue to function even in extreme
circumstances, including multiple defaults by clearing members and
wide-scale disruptions. While there may be increased costs associated
with the implementation of the proposed rules, the increased costs
associated with the implementation of the proposed rules for Subpart C
DCOs would be borne only by those DCOs that have not been designated
systemically important under Title VIII and that elect to become
subject to the provisions of Subpart C. Some of those costs would
ultimately be borne by clearing members of such Subpart C DCOs, and by
customers of such clearing members.
The costs of this rulemaking would be mitigated by the
countervailing benefits of stronger resources, improved design, more
efficient and effective processes, and enhanced planning that would
lead to increased safety and soundness of SIDCOs and the reduction of
systemic risk, which protect market participants and the public from
the adverse consequences that would result from a SIDCO's failure or a
disruption in its functioning. Similarly, the proposed regulations
would increase the safety and soundness of Subpart C DCOs so that they
may continue to operate even in extreme circumstances, which would, in
turn, better protect members of such DCOs, their customers, and also
market participants and the public, particularly during time of severe
market stress.
ii. Efficiency, Competitiveness, and Financial Integrity
The regulations set forth in this proposed rulemaking would promote
the financial strength and stability of SIDCOs and Subpart C DCOs, as
well as, more broadly, efficiency and greater competition in the global
markets. Proposed regulation 39.38 expressly promotes efficiency in the
design of a SIDCO's or Subpart C DCO's settlement and clearing
arrangements, operating structure and procedures, scope of products
cleared, and use of technology. The proposed regulation also requires
SIDCOs and Subpart C DCOs to accommodate internationally accepted
communication procedures and standards to facilitate efficient payment,
clearing, and settlement. In addition, the proposed regulations promote
efficiency insofar as SIDCOs and Subpart C DCOs that operate with
enhanced financial and liquidity resources, enhanced risk management
requirements, increased system safeguards, and wind-down or recovery
plans are more secure and are less likely to fail.
The proposed regulations would also promote competition because
they are consistent with the international standards set forth in the
PFMIs and will help to ensure that SIDCOs are held to international
standards and thus are enabled to gain QCCP status and accordingly
avoid an important competitive disadvantage relative to similarly
situated foreign CCPs that meet international standards and are QCCPs.
Moreover, by allowing other DCOs to elect to become subject to the
provisions of Subpart C and thus the opportunity to meet international
standards and to gain QCCP status, the proposed regulations promote
competition among registered DCOs, and between registered DCOs and
foreign CCPs that meet international standards and are QCCPs.
Conversely, the Commission notes that these enhanced financial
resources and risk management standards are also associated with
additional costs and to the extent that SIDCOs and Subpart C DCOs pass
along the additional costs to their clearing members and, indirectly,
those clearing members' customers, participation in the affected
markets may decrease and have a negative impact on price discovery.
However, it would appear that such higher transactional costs should be
offset by the lower capital charges granted to clearing members and
customers for exposures resulting from transactions that are cleared
through SIDCOs and Subpart C DCOs that are also QCCPs.
Additionally, enhanced risk management and operational standards
would promote financial integrity by leading to SIDCOs and Subpart C
DCOs to be more secure and less likely to fail. By increasing the
stability and strength of the SIDCOs and Subpart C DCOs, the proposed
regulations would help SIDCOs and Subpart C DCOs to meet their
obligations in extreme circumstances and be able to resume operations
even in the face of wide-scale disruption, which contributes to the
financial integrity of the financial markets. Moreover, in requiring
(1) more financial resources to be pre-funded by expanding the
potential losses those resources are intended to cover and restricting
the means for satisfying those resource requirements, and (2) requiring
greater liquidity resources, the requirements of these proposed
regulations seek to lessen the incidence of pro-cyclical demands for
additional resources and, in so doing, promote both financial integrity
and market stability. These efforts would redound to the benefit of
clearing members and their customers, as well as the financial system
more broadly.
iii. Price Discovery
The regulations in this proposed rulemaking would enhance financial
resources, liquidity resources, risk management standards, disclosure
standards, and recovery planning for SIDCOs and Subpart C DCOs which
may result in increased public confidence, which, in turn, might lead
to expanded participation in the affected markets (including markets
with products with a more complex risk profile). The expanded
participation in these markets (i.e., greater transactional volume) may
have a positive impact on price discovery. Conversely, the Commission
notes that these proposed regulations are also associated with
additional costs and to the extent that SIDCOs and Subpart C DCOs pass
along the additional costs to their clearing members and, indirectly,
to their clearing members' customers, participation in the affected
markets may decrease and have a negative impact on price discovery.
However, it is the Commission's belief that such higher transactional
costs should be offset by the lower capital charges granted to clearing
members and customers with exposures resulting from transactions
cleared through SIDCOs and Subpart C DCOs that are deemed QCCPs.
iv. Sound Risk Management Practices
The regulations in this proposed rulemaking contribute to the sound
risk management practices of SIDCOs and Subpart C DCOs because the
requirements would promote the safety and soundness of SIDCOs and
Subpart C DCOs by: (1) Enhancing the financial resources requirements
and liquidity resource requirements; (2) enhancing understanding of
credit and liquidity risks and related governance arrangements; (3)
enhancing system safeguards to facilitate the continuous operation and
rapid recovery of activities; \214\ (4) enhancing risk management
standards by creating new stress testing and sensitivity analysis
[[Page 50297]]
requirements; (5) promoting the active management of credit and
liquidity risks arising from settlement banks; \215\ and (6) enhancing
risk management by establishing rules and procedures addressing
uncovered credit losses or liquidity shortfalls, and recovery and wind-
down planning for credit risks and for business continuity and
operational risks.\216\ In addition, by strengthening financial and
liquidity resource requirements, enhancing risk management standards,
and enhancing disclosure and recovery planning requirements, these
proposed regulations would provide greater certainty for clearing
members of such DCOs, their customers, and other market participants
that obligations of the SIDCOs and Subpart C DCOs will be honored, and
provide certainty and security to market participants that potential
disruptions will be reduced and, by extension, the risk of loss of
capital and liquidity will be reduced.
---------------------------------------------------------------------------
\214\ As mentioned above, this proposed rulemaking would extend
to Subpart C DCOs the system safeguards requirements currently
applicable to SIDCOs. See supra Section II.F (discussing proposed
revised regulation 39.34 (system safeguards)).
\215\ See supra Section II.H (discussing proposed regulation
39.36).
\216\ See supra Section II.G (discussing proposed regulation
39.35); see also supra Section II.K (discussing proposed regulation
39.39).
---------------------------------------------------------------------------
v. Other Public Interest Considerations
The Commission notes the strong public interest for jurisdictions
to either adopt the PFMIs or establish standards consistent with the
PFMIs in order to allow CCPs licensed in the relevant jurisdiction to
gain QCCP status. As emphasized throughout this proposed rulemaking,
SIDCOs and Subpart C DCOs that are held to international standards and
that gain QCCP status might hold a competitive advantage in the
financial markets by, inter alia, helping bank clearing members and
bank customers avoid the much higher capital charges imposed by the
Basel CCP Capital Requirements on exposures to non-QCCPs. Moreover,
because ``enhancements to the regulation and supervision of
systemically important financial market utilities . . . are necessary .
. . to support the stability of the broader financial system,'' \217\
adopting these proposed rules would promote the public interest in a
more stable broader financial system.
---------------------------------------------------------------------------
\217\ See Section 802(a)(4) of the Dodd-Frank Act (Congressional
Findings).
---------------------------------------------------------------------------
List of Subjects in 17 CFR Part 39
Commodity futures, Risk management, Settlement procedures, Default
rules and procedures, System safeguards.
For the reasons stated in the preamble, the Commission proposes to
amend 17 CFR part 39 as follows:
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
0
1. The authority citation for part 39 is amended to read as follows:
Authority: 7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C.
8325.
0
2. Revise Sec. 39.2 to read as follows:
Sec. 39.2 Definitions.
For the purposes of this part: Activity with a more complex risk
profile includes:
(1) Clearing credit default swaps, credit default futures, or
derivatives that reference either credit default swaps or credit
default futures and
(2) Any other activity designated as such by the Commission
pursuant to Sec. 39.33(a)(3).
Back test means a test that compares a derivatives clearing
organization's initial margin requirements with historical price
changes to determine the extent of actual margin coverage.
Customer means a person trading in any commodity named in the
definition of commodity in section 1a(9) of the Act or in Sec. 1.3 of
this chapter, or in any swap as defined in section 1a(47) of the Act or
in Sec. 1.3 of this chapter; Provided, however, an owner or holder of
a house account as defined in this section shall not be deemed to be a
customer within the meaning of section 4d of the Act, the regulations
that implement sections 4d and 4f of the Act and Sec. 1.35, and such
an owner or holder of such a house account shall otherwise be deemed to
be a customer within the meaning of the Act and Sec. Sec. 1.37 and
1.46 of this chapter and all other sections of these rules,
regulations, and orders which do not implement sections 4d and 4f of
the Act.
Customer account or customer origin means a clearing member account
held on behalf of customers, as that term is defined in this section,
and which is subject to section 4d(a) or section 4d(f) of the Act.
Depository institution has the meaning set forth in section
19(b)(1)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)).
House account or house origin means a clearing member account which
is not subject to section 4d(a) or 4d(f) of the Act.
Key personnel means derivatives clearing organization personnel who
play a significant role in the operations of the derivatives clearing
organization, the provision of clearing and settlement services, risk
management, or oversight of compliance with the Act and Commission
regulations and orders. Key personnel include, but are not limited to,
those persons who are or perform the functions of any of the following:
Chief executive officer; president; chief compliance officer; chief
operating officer; chief risk officer; chief financial officer; chief
technology officer; and emergency contacts or persons who are
responsible for business continuity or disaster recovery planning or
program execution.
Stress test means a test that compares the impact of potential
extreme price moves, changes in option volatility, and/or changes in
other inputs that affect the value of a position, to the financial
resources of a derivatives clearing organization, clearing member, or
large trader, to determine the adequacy of the financial resources of
such entities.
Subpart C derivatives clearing organization means any derivatives
clearing organization, as defined in section 1a(15) of the Act and
Sec. 1.3(d) of this chapter, which:
(1) Is registered as a derivatives clearing organization under
section 5b of the Act;
(2) Is not a systemically important derivatives clearing
organization; and
(3) Has become subject to the provisions of this Subpart C,
pursuant to Sec. 39.31.
Systemically important derivatives clearing organization means a
financial market utility that is a derivatives clearing organization
registered under section 5b of the Act, which is currently designated
by the Financial Stability Oversight Council to be systemically
important and for which the Commission acts as the Supervisory Agency
pursuant to 12 U.S.C. 5462(8).
U.S. branch and agency of a foreign banking organization means the
U.S. branch and agency of a foreign banking organization as defined in
section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
Trust company means a trust company that is a member of the Federal
Reserve System, under section 1 of the Federal Reserve Act (12 U.S.C.
221), but that does not meet the definition of depository institution.
0
3. In Subpart B, add and reserve Sec. Sec. 39.28 and 39.29.
0
4. Revise Subpart C to read as follows:
Subpart C--Provisions Applicable to Systemically Important Derivatives
Clearing Organizations and Derivatives Clearing Organizations That
Elect To Be Subject to the Provisions of Subpart C
Sec.
39.30 Scope.
39.31 Election to become subject to the provisions of subpart C.
39.32 Governance for systemically important derivatives clearing
organizations and subpart C derivatives clearing organizations.
[[Page 50298]]
39.33 Financial resources for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
39.34 System safeguards for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
39.35 Default rules and procedures for uncovered losses or
shortfalls (recovery) for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
39.36 Risk management for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
39.37 Additional disclosure for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
39.38 Efficiency for systemically important derivatives clearing
organizations and subpart C derivatives clearing organizations.
39.39 Recovery and wind-down for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
39.40 Consistency with the Principles for Financial Market
Infrastructures.
39.41 Special enforcement authority for systemically important
derivatives clearing organizations.
39.42 Advance notice of material risk-related rule changes by
systemically important derivatives clearing organizations.
Appendix A to Part 39--Form DCO Derivatives Clearing Organization
Application for Registration
Appendix B to Part 39--Subpart C Election Form
Subpart C--Provisions Applicable to Systemically Important
Derivatives Clearing Organizations and Derivatives Clearing
Organizations That Elect To Be Subject to the Provisions of Subpart
C
Sec. 39.30 Scope.
(a) The provisions of this subpart C apply to each of the
following: A subpart C derivatives clearing organization, a
systemically important derivatives clearing organization, and any
derivatives clearing organization, as defined under section 1a(15) of
the Act and Sec. 1.3(d) of this chapter, seeking to become a subpart C
derivatives clearing organization pursuant to Sec. 39.31.
(b) A systemically important derivatives clearing organization is
subject to the provisions of subparts A and B of this part in addition
to the provisions of this subpart.
(c) A subpart C derivatives clearing organization is subject to the
provisions of subparts A and B of this part in addition to the
provisions of this subpart except for Sec. Sec. 39.41 and 39.42 of
this subpart.
Sec. 39.31 Election to become subject to the provisions of subpart C.
(a) Election eligibility. (1) A derivatives clearing organization
that is registered with the Commission and that is not a systemically
important derivatives clearing organization may elect to become a
subpart C derivatives clearing organization subject to the provisions
of this subpart, using the procedures set forth in paragraph (b) of
this section.
(2) An applicant for registration as a derivatives clearing
organization pursuant to Sec. 39.3 may elect to become a subpart C
derivatives clearing organization subject to the provisions of this
subpart as part of its application for registration using the
procedures set forth in paragraph (c) of this section.
(b) Election and withdrawal procedures applicable to registered
derivatives clearing organizations. (1) Election. A derivatives
clearing organization that is registered with the Commission and that
is not a systemically important derivatives clearing organization may
request that the Commission accept its election to become a subpart C
derivatives clearing organization by filing with the Commission a
completed Subpart C Election Form. The Subpart C Election Form shall
include the election and all certifications, disclosures and exhibits,
as provided in appendix B to this part and any amendments or
supplements thereto filed with the Commission pursuant to paragraphs
(b)(2) and (b)(3) of this section.
(2) Submission of supplemental information. The filing of a Subpart
C Election Form does not create a presumption that the Subpart C
Election Form is materially complete or that supplemental information
will not be required. The Commission, at any time prior to the
effective date, as provided in paragraph (b)(4) of this section, may
request that the derivatives clearing organization submit supplemental
information in order for the Commission to process the Subpart C
Election Form, and the derivatives clearing organization shall file
such supplemental information with the Commission.
(3) Amendments. A derivatives clearing organization shall promptly
amend its Subpart C Election Form if it discovers a material omission
or error in, or if there is a material change in, the information
provided to the Commission in the Subpart C Election Form or other
information provided in connection with the Subpart C Election Form.
(4) Effective date. A derivatives clearing organization's election
to become a subpart C derivatives clearing organization shall become
effective:
(i) Upon the later of the following, provided the Commission has
neither stayed nor denied such election as set forth in paragraph
(b)(5) of this section.
(A) The effective date specified by the derivatives clearing
organization in its Subpart C Election Form; or
(B) Ten business days after the derivatives clearing organization
files its Subpart C Election Form with the Commission;
(ii) Or upon the effective date set forth in written notification
from the Commission that it shall permit the election to take effect
after a stay issued pursuant to paragraph (b)(5) of this section.
(5) Stay or denial of election. Prior to the effective date set
forth in paragraph (b)(4)(i) of this section, the Commission may stay
or deny a derivatives clearing organization's election to become a
subpart C derivatives clearing organization by issuing a written
notification thereof to the derivatives clearing organization.
(6) Commission acknowledgement. The Commission may acknowledge, in
writing, that it has received a Subpart C Election Form filed by a
derivatives clearing organization and that it has permitted the
derivatives clearing organization's election to become subject to the
provisions of this subpart C to take effect, and the effective date of
such election.
(7) Withdrawal of election. A derivatives clearing organization
that has filed a Subpart C Election Form may withdraw an election to
become subject to the provisions of this subpart C at any time prior to
the date that the election is permitted to take effect by filing with
the Commission a notice of the withdrawal of election.
(c) Election and withdrawal procedures applicable to applicants for
registration as derivatives clearing organization--(1) Election. An
applicant for registration as a derivatives clearing organization that
requests an election to become subject to the provisions of this
subpart C may make that request by attaching a completed Subpart C
Election Form to the Form DCO that it files pursuant to Sec. 39.3. The
Subpart C Election Form shall include the election and all
certifications, disclosures and exhibits, as provided in appendix B to
part 39, and any amendments or supplements thereto filed with the
Commission pursuant to paragraphs (c)(3) or (c)(4) of this section.
(2) Election review and effective date. The Commission shall review
the applicant's Subpart C Election Form as part of the Commission's
review of its
[[Page 50299]]
application for registration pursuant to Sec. 39.3(a). The Commission
may permit the applicant's election to take effect at the time it
approves the applicant's application for registration by providing
written notice thereof to the applicant. The Commission shall not
approve any application for registration filed pursuant to Sec.
39.3(a) for which a Subpart C Election Form is pending, if the
Commission determines that the applicant's election to become subject
to Subpart C should not become effective because the applicant has not
demonstrated its ability to comply with the applicable provisions of
this subpart.
(3) Submission of supplemental information. The filing of a Subpart
C Election Form does not create a presumption that the Subpart C
Election Form is materially complete or that supplemental information
will not be required. At any time during the Commission's review of the
Subpart C Election Form, the Commission may request that the applicant
submit supplemental information in order for the Commission to process
the Subpart C Election Form and the applicant shall file such
supplemental information with the Commission.
(4) Amendments. An applicant for registration as a derivatives
clearing organization shall promptly amend its Subpart C Election Form
if it discovers a material omission or error in, or if there is a
material change in, the information provided to the Commission in the
Subpart C Election Form or other information provided in connection
with the Subpart C Election Form.
(5) Withdrawal of election. An applicant for registration as a
derivatives clearing organization may withdraw an election to become
subject to the provisions of this subpart C by filing with the
Commission a notice of the withdrawal of its Subpart C Election Form at
any time prior to the date that the Commission approves its application
for registration as a derivatives clearing organization. The applicant
may withdraw its Subpart C Election Form without withdrawing its Form
DCO.
(d) Public information. The following portions of the Subpart C
Election Form will be public: The Elections and Certifications and
Disclosures in the Subpart C Election Form, the rules of the
derivatives clearing organization, the regulatory compliance chart, and
any other portion of the Subpart C Election Form not covered by a
request for confidential treatment complying with the requirements of
Sec. 145.9 of this chapter.
(e) Rescission of election--(1) Notice of intent to rescind. A
subpart C derivatives clearing organization may rescind its election to
be subject to the provisions of this subpart C and terminate its status
as a subpart C derivatives clearing organization by filing with the
Commission a notice of its intent to rescind such election. The notice
of intent to rescind the election shall include:
(i) The effective date of the rescission; and
(ii) A certification signed by the relevant duly authorized
representative of the subpart C derivatives clearing organization, as
specified in paragraph three of the General Instructions to the Subpart
C Election Form, stating that the subpart C derivatives clearing
organization:
(A) Has provided the notice to its clearing members required by
paragraph (e)(3)(i)(A) of this section;
(B) Will provide the notice to its clearing members required by
paragraph (e)(3)(i)(B) of this section;
(C) Has provided the notice to the general public required by
paragraph (e)(3)(ii)(A) of this section;
(D) Will provide notice to the general public required by paragraph
(e)(3)(ii)(B) of this section; and
(E) Has removed all references to the organization as a subpart C
derivatives clearing organization and a qualifying central counterparty
on its Web site and in all other material that it provides to its
clearing members and customers, other market participants or members of
the public, as required by paragraph (e)(3)(ii)(C) of this section.
(2) Effective date. The rescission of the election to be subject to
the provisions of this subpart C shall become effective on the date set
forth in the notice of intent to rescind the election filed by the
subpart C derivatives clearing organization pursuant to Sec.
39.31(e)(1), provided that the rescission may become effective no
earlier than 90 days after the notice of intent to rescind the election
is filed with the Commission. The subpart C derivatives clearing
organization shall continue to comply with all of the provisions of
this subpart C until such effective date.
(3) Additional notice requirements.
(i) A subpart C derivatives clearing organization shall provide the
following notices, at the following times, to each of its clearing
members and shall have rules in place requiring each of its clearing
members to provide the following notices to each of the clearing
member's customers:
(A) No later than the filing of a notice of its intent to rescind
its election to be subject to the provisions of this subpart C, written
notice that it intends to file such notice with the Commission and the
effective date thereof; and
(B) On the effective date of the rescission of its election to be
subject to the provisions of this subpart C, written notice that the
rescission has become effective.
(ii) A subpart C derivatives clearing organization shall:
(A) No later than the filing of a notice of its intent to rescind
its election to be subject to the provisions of this subpart C, provide
notice to the general public, displayed prominently on its Web site, of
its intent to rescind its election to be subject to the provisions of
this subpart C;
(B) On and after the effective date of the rescission of its
election to be subject to the provisions of this subpart C, provide
notice to the general public, displayed prominently on its Web site,
that the rescission has become effective; and
(C) Prior to the filing of a notice of its intent to rescind its
election to become subject to the provisions of this subpart C, remove
all references to the derivatives clearing organization's status as a
subpart C derivatives clearing organization and a qualifying central
counterparty on its Web site and in all other materials that it
provides to its clearing members and customers, other market
participants, or the general public.
(iii) The employees and representatives of a derivatives clearing
organization that has filed a notice of its intent to rescind its
election to be subject to the provisions of this subpart C shall
refrain from referring to the organization as a subpart C derivatives
clearing organization and a qualifying central counterparty on and
after the date that the notice of intent to rescind the election is
filed.
(4) Effect of rescission. The rescission of a subpart C derivatives
clearing organization's election to be subject to the provisions of
this subpart C shall not affect the authority of the Commission
concerning any activities or events occurring during the time that the
derivatives clearing organization maintained its status as a subpart C
derivatives clearing organization.
(f) Loss of designation as a systemically important derivatives
clearing organization. A systemically important derivatives clearing
organization whose designation of systemic importance is rescinded by
the Financial Stability Oversight Council, shall immediately be deemed
to be a subpart C derivatives clearing organization and shall continue
to
[[Page 50300]]
comply with the provisions of this subpart C unless such derivatives
clearing organization elects to rescind its status as a subpart C
derivatives clearing organization in accordance with the requirements
of paragraph (e) of this section.
(g) All forms and notices required by this Sec. 39.31 shall be
filed electronically with the Secretary of the Commission in the format
and manner specified by the Commission.
Sec. 39.32 Governance for systemically important derivatives clearing
organizations and subpart C derivatives clearing organizations.
(a) General rules. (1) Each systemically important derivatives
clearing organization and subpart C derivatives clearing organization
shall have governance arrangements that:
(i) Are written;
(ii) Are clear and transparent;
(iii) Place a high priority on the safety and efficiency of the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization; and
(iv) Explicitly support the stability of the broader financial
system and other relevant public interest considerations of clearing
members, customers of clearing members, and other relevant
stakeholders.
(2) The board of directors shall make certain that the systemically
important derivatives clearing organization's or subpart C derivatives
clearing organization's design, rules, overall strategy, and major
decisions appropriately reflect the legitimate interests of clearing
members, customers of clearing members, and other relevant
stakeholders.
(3) To an extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure:
(i) Major decisions of the board of directors should be clearly
disclosed to clearing members, other relevant stakeholders, and to the
Commission; and
(ii) Major decisions of the board of directors having a broad
market impact should be clearly disclosed to the public;
(b) Governance arrangements. Each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization shall have governance arrangements that:
(1) Are clear and documented;
(2) To an extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure, are disclosed, as
appropriate, to the Commission and to other relevant authorities, to
clearing members and to customers of clearing members, to the owners of
the systemically important derivatives clearing organization or subpart
C derivatives clearing organization, and to the public;
(3) Describe the structure pursuant to which the board of
directors, committees, and management operate;
(4) Include clear and direct lines of responsibility and
accountability;
(5) Clearly specify the roles and responsibilities of the board of
directors and its committees, including the establishment of a clear
and documented risk management framework;
(6) Clearly specify the roles and responsibilities of management;
(7) Describe procedures for identifying, addressing, and managing
conflicts of interest involving members of the board of directors;
(8) Describe procedures pursuant to which the board of directors
oversees the chief risk officer, risk management committee, and
material risk decisions;
(9) Assign responsibility and accountability for risk decisions,
including in crises and emergencies; and
(10) Assign responsibility for implementing the:
(i) Default rules and procedures required by Sec. Sec. 39.16 and
39.35;
(ii) System safeguard rules and procedures required by Sec. Sec.
39.18 and 39.34; and
(iii) Recovery and wind-down plans required by Sec. 39.39.
(c) Fitness standards for board of directors and management. Each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall maintain policies to make
certain that:
(1) The board of directors consists of suitable individuals having
appropriate skills and incentives;
(2) The board of directors includes individuals who are not
executives, officers or employees of the systemically important
derivatives clearing organization or subpart C derivatives clearing
organization or an affiliate thereof;
(3) The performance of the board of directors and the performance
of individual directors are reviewed on a regular basis;
(4) Managers have the appropriate experience, skills, and integrity
necessary to discharge operational and risk management
responsibilities; and
(5) Risk management and internal control personnel have sufficient
independence, authority, resources, and access to the board of
directors so that the operations of the systemically important
derivatives clearing organization or subpart C derivatives clearing
organization are consistent with the risk management framework
established by the board of directors.
Sec. 39.33 Financial resources requirements for systemically
important derivatives clearing organizations and subpart C derivatives
clearing organizations.
(a) General rule. (1) Notwithstanding the requirements of Sec.
39.11(a)(1), each systemically important derivatives clearing
organization and subpart C derivatives clearing organization that, in
either case, is systemically important in multiple jurisdictions or is
involved in activities with a more complex risk profile shall maintain
financial resources sufficient to enable it to meet its credit exposure
to its clearing members notwithstanding a default by the two clearing
members creating the largest aggregate credit exposure for the
derivatives clearing organization in extreme but plausible market
conditions.
(2) The Commission shall, if it deems appropriate, determine
whether a systemically important derivatives clearing organization or
subpart C derivatives clearing organization is systemically important
in multiple jurisdictions. In determining whether a systemically
important derivatives clearing organization or subpart C derivatives
clearing organization is systemically important in multiple
jurisdictions, the Commission shall consider whether the derivatives
clearing organization:
(i) Is a systemically important derivatives clearing organization,
as defined by Sec. 39.2; or
(ii) Has been determined to be systemically important by one or
more jurisdictions other than the United States pursuant to a
designation process that considers whether the foreseeable effects of a
failure or disruption of the derivatives clearing organization could
threaten the stability of each relevant jurisdiction's financial
system.
(3) The Commission shall, if it deems appropriate, determine
whether any of the activities of a systemically important derivatives
clearing organization or a subpart C derivatives clearing organization,
in addition to clearing credit default swaps, credit default futures,
and any derivatives that reference either credit default swaps or
credit default futures, has a more complex risk profile. In determining
whether an activity has a more complex risk profile, the Commission
will consider characteristics such as discrete jump-to-default price
changes or high correlations with potential participant defaults as
factors supporting (though
[[Page 50301]]
not necessary for) a finding of a more complex risk profile.
(4) For purposes of this section 39.33, if a clearing member
controls another clearing member or is under common control with
another clearing member, such affiliated clearing members shall be
deemed to be a single clearing member.
(b) Valuation of financial resources. Notwithstanding the
provisions of Sec. 39.11(d)(2), assessments for additional guaranty
fund contributions (i.e., guaranty fund contributions that are not pre-
funded) shall not be included in calculating the financial resources
available to meet a systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's
obligations under paragraph (a) of this section or Sec. 39.11(a)(1).
(c) Liquidity resources--(1) Minimum amount of liquidity resources.
(i) Notwithstanding the provisions of Sec. 39.11(e)(1)(ii), each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall maintain eligible liquidity
resources that, at a minimum, will enable it to meet its intraday,
same-day, and multiday obligations to perform settlements, as defined
in Sec. 39.14(a)(1), with a high degree of confidence under a wide
range of stress scenarios that should include, but not be limited to, a
default by the clearing member creating the largest aggregate liquidity
obligation for the systemically important derivatives clearing
organization or subpart C derivatives clearing organization in extreme
but plausible market conditions.
(ii) A systemically important derivatives clearing organization and
subpart C derivatives clearing organization that is subject to Sec.
39.33(a)(1) shall consider maintaining eligible liquidity resources
that, at a minimum, will enable it to meet its intraday, same-day, and
multiday obligations to perform settlements, as defined in Sec.
39.14(a)(1), with a high degree of confidence under a wide range of
stress scenarios that should include, but not be limited to, a default
of the two clearing members creating the largest aggregate liquidity
obligation for the systemically important derivatives clearing
organization or subpart C derivatives clearing organization in extreme
but plausible market conditions.
(2) Satisfaction of settlement in all relevant currencies. Each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall maintain liquidity resources
that are sufficient to satisfy the obligations required by paragraph
(c)(1) of this section in all relevant currencies for which the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization has obligations to perform
settlements, as defined in Sec. 39.14(a)(1), to its clearing members.
(3) Qualifying liquidity resources. (i) Only the following
liquidity resources are eligible for the purpose of meeting the
requirement of paragraph (c)(1) of this section:
(A) Cash in the currency of the requisite obligations, held either
at the central bank of issue or at a creditworthy commercial bank;
(B) Committed lines of credit;
(C) Committed foreign exchange swaps;
(D) Committed repurchase agreements; or
(E) (1) Obligations of the United States Treasury or high quality,
liquid, general obligations of a sovereign nation.
(2) The assets described in paragraph (c)(3)(i)(E)(1) of this
section must be readily available and convertible into cash pursuant to
prearranged and highly reliable funding arrangements.
(ii) With respect to the arrangements described in paragraph
(c)(3)(i) of this section, the systemically important derivatives
clearing organization or subpart C derivatives clearing organization
must take appropriate steps to verify that such arrangements do not
include material adverse change provisions and are enforceable, and
will be highly reliable, in extreme but plausible market conditions.
(4) Additional liquidity resources. If a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization maintains financial resources in addition to those
required to satisfy paragraph (c)(1) of this section, then those
resources should be in the form of assets that are likely to be
saleable with proceeds available promptly or acceptable as collateral
for lines of credit, swaps, or repurchase agreements on an ad hoc
basis. A systemically important derivatives clearing organization or
subpart C derivatives clearing organization should consider maintaining
collateral with low credit, liquidity, and market risks that is
typically accepted by a central bank of issue for any currency in which
it may have settlement obligations, but shall not assume the
availability of emergency central bank credit as a part of its
liquidity plan.
(d) Liquidity providers. (1) For the purposes of this paragraph, a
liquidity provider means:
(i) A depository institution, a U.S. branch and agency of a foreign
banking organization, a trust company, or a syndicate of depository
institutions, U.S. branches and agencies of foreign banking
organizations, or trust companies providing a line of credit, foreign
exchange swap facility or repurchase facility to a systemically
important derivatives clearing organization or subpart C derivatives
clearing organization;
(ii) Any other counterparty relied upon by a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization to meet its minimum liquidity resources requirement under
paragraph (c) of this section.
(2) In fulfilling its obligations under paragraph (c) of this
section, each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall undertake due
diligence to confirm that each of its liquidity providers, whether or
not such liquidity provider is a clearing member, has:
(i) Sufficient information to understand and manage the liquidity
provider's liquidity risks; and
(ii) The capacity to perform as required under its commitments to
provide liquidity to the systemically important derivatives clearing
organization or subpart C derivatives clearing organization.
(3) Where relevant to a liquidity provider's ability reliably to
perform its commitments with respect to a particular currency, the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization may take into account the liquidity
provider's access to the central bank of issue of that currency.
(4) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall regularly test
its procedures for accessing its liquidity resources under paragraph
(c)(3)(i) of this section, including testing its arrangements under
paragraph (c)(3)(ii) and its relevant liquidity provider(s) under
paragraph (d)(1) of this section.
(5) A systemically important derivatives clearing organization with
access to accounts and services at a Federal Reserve Bank, pursuant to
section 806(a) of the Dodd-Frank Act, 12 U.S.C. 5465(a), shall use
these services, where practical.
(e) Documentation of financial resources and liquidity resources.
Each
[[Page 50302]]
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall document its supporting
rationale for, and have appropriate governance arrangements relating
to, the amount of total financial resources it maintains pursuant to
paragraph (a) of this section and the amount of total liquidity
resources it maintains pursuant to paragraph (c) of this section.
Sec. 39.34 System safeguards for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
(a) Notwithstanding Sec. 39.18(e)(3), the business continuity and
disaster recovery plan described in Sec. 39.18(e)(1) for each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall have the objective of enabling,
and the physical, technological, and personnel resources described in
Sec. 39.18(e)(1) shall be sufficient to enable, the systemically
important derivatives clearing organization or subpart C derivatives
clearing organization to recover its operations and resume daily
processing, clearing, and settlement no later than two hours following
the disruption, for any disruption including a wide-scale disruption.
(b) To facilitate its ability to achieve the recovery time
objective specified in paragraph (a) of this section in the event of a
wide-scale disruption, each systemically important derivatives clearing
organization and subpart C derivatives clearing organization must
maintain a degree of geographic dispersal of physical, technological
and personnel resources consistent with the following for each activity
necessary for the daily processing, clearing, and settlement of
existing and new contracts:
(1) Physical and technological resources (including a secondary
site), sufficient to enable the entity to meet the recovery time
objective after interruption of normal clearing by a wide-scale
disruption, must be located outside the relevant area of the physical
and technological resources the systemically important derivatives
clearing organization or subpart C derivatives clearing organization
normally relies upon to conduct that activity, and must not rely on the
same critical transportation, telecommunications, power, water, or
other critical infrastructure components the entity normally relies
upon for such activities;
(2) Personnel, who live and work outside that relevant area,
sufficient to enable the entity to meet the recovery time objective
after interruption of normal clearing by a wide-scale disruption
affecting the relevant area in which the personnel the entity normally
relies upon to engage in such activities are located;
(3) The provisions of Sec. 39.18(f) shall apply to these resource
requirements.
(c) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization must conduct regular,
periodic tests of its business continuity and disaster recovery plans
and resources and its capacity to achieve the required recovery time
objective in the event of a wide-scale disruption. The provisions of
Sec. 39.18(j) apply to such testing.
(d) The Commission may, upon application, grant an entity, which
has been designated as a systemically important derivatives clearing
organization or that has elected to become subject to subpart C, up to
one year to comply with any provision of this section.
Sec. 39.35 Default rules and procedures for uncovered credit losses
or liquidity shortfalls (recovery) for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
(a) Allocation of uncovered credit losses. Each systemically
important derivatives clearing organization and subpart C derivatives
clearing organization shall adopt explicit rules and procedures that
address fully any loss arising from any individual or combined default
relating to any clearing members' obligations to the systemically
important derivatives clearing organization or subpart C derivatives
clearing organization. Such rules and procedures shall address how the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization would:
(1) Allocate losses exceeding the financial resources available to
the systemically important derivatives clearing organization or subpart
C derivatives clearing organization;
(2) Repay any funds it may borrow; and
(3) Replenish any financial resources it may employ during such a
stress event, so that the systemically important derivatives clearing
organization or subpart C derivatives clearing organization can
continue to operate in a safe and sound manner.
(b) Allocation of uncovered liquidity shortfalls. (1) Each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall establish rules and/or
procedures that enable it promptly to meet all of its settlement
obligations, on a same day and, as appropriate, intraday and multiday
basis, in the context of the occurrence of either or both of the
following scenarios:
(i) An individual or combined default involving one or more
clearing members' obligations to the systemically important derivatives
clearing organization or subpart C derivatives clearing organization;
or
(ii) A liquidity shortfall exceeding the financial resources of the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization.
(2) The rules and procedures described in paragraph (b)(1) of this
section shall:
(i) Enable the systemically important derivatives clearing
organization or subpart C derivatives clearing organization promptly to
meet its payment obligations in all relevant currencies;
(ii) Be designed to enable the systemically important derivatives
clearing organization or subpart C derivatives clearing organization to
avoid unwinding, revoking, or delaying the same-day settlement of
payment obligations; and
(iii) Address the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's process
to replenish any liquidity resources it may employ during a stress
event so that it can continue to operate in a safe and sound manner.
Sec. 39.36 Risk management for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
(a) Stress tests of financial resources. In addition to conducting
stress tests pursuant to Sec. 39.13(h)(3), each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization shall conduct stress tests of its financial resources in
accordance with the following standards and practices:
(1) Perform, on a daily basis, stress testing of its financial
resources using predetermined parameters and assumptions;
(2) Perform comprehensive analyses of stress testing scenarios and
underlying parameters to ascertain their appropriateness for
determining the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's
required level of financial resources in current and evolving market
conditions;
[[Page 50303]]
(3) Perform the analyses required by paragraph (a)(2) of this
section at least monthly and when products cleared or markets served
display high volatility or become less liquid, when the size or
concentration of positions held by clearing members increases
significantly, or as otherwise appropriate, evaluate the stress testing
scenarios, models, and underlying parameters more frequently than once
a month;
(4) For the analyses required by paragraph (a)(1) and paragraph
(a)(2) of this section, include a range of relevant stress scenarios,
in terms of both defaulting clearing members' positions and possible
price changes in liquidation periods. The scenarios considered shall
include, but are not limited to, the following:
(i) Relevant peak historic price volatilities;
(ii) Shifts in other market factors including, as appropriate,
price determinants and yield curves;
(iii) Multiple defaults over various time horizons;
(iv) Simultaneous pressures in funding and asset markets; and
(v) A range of forward-looking stress scenarios in a variety of
extreme but plausible market conditions.
(5) Establish procedures for:
(i) Reporting stress test results to its risk management committee
or board of directors, as applicable; and
(ii) Using the results to assess the adequacy of, and to adjust,
its total amount of financial resources; and
(6) Use the results of stress tests to support compliance with the
minimum financial resources requirement set forth in Sec. 39.33(a).
(b) Sensitivity analysis of margin model.
(1) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall, at least monthly
and more frequently as appropriate, conduct a sensitivity analysis of
its margin models to analyze and monitor model performance and overall
margin coverage. Sensitivity analysis shall be conducted on both actual
and hypothetical positions.
(2) For the purposes of this paragraph (b), a sensitivity analysis
of a margin model includes:
(i) Reviewing a wide range of parameter settings and assumptions
that reflect possible market conditions in order to understand how the
level of margin coverage might be affected by highly stressed market
conditions. The range of parameters and assumptions should capture a
variety of historical and hypothetical conditions, including the most
volatile periods that have been experienced by the markets served by
the systemically important derivatives clearing organization or subpart
C derivatives clearing organization and extreme changes in the
correlations between prices.
(ii) Testing of the ability of the models or model components to
produce accurate results using actual or hypothetical datasets and
assessing the impact of different model parameter settings.
(iii) Evaluating potential losses in clearing members' proprietary
positions and, where appropriate, customer positions.
(3) A systemically important derivatives clearing organization or
subpart C derivatives clearing organization involved in activities with
a more complex risk profile shall take into consideration parameter
settings that reflect the potential impact of the simultaneous default
of clearing members and, where applicable, the underlying credit
instruments.
(c) Stress tests of liquidity resources. Each systemically
important derivatives clearing organization and subpart C derivatives
clearing organization shall conduct stress tests of its liquidity
resources in accordance with the following standards and practices:
(1) Perform, on a daily basis, stress testing of its liquidity
resources using predetermined parameters and assumptions;
(2) Perform comprehensive analyses of stress testing scenarios and
underlying parameters to ascertain their appropriateness for
determining the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's
required level of liquidity resources in current and evolving market
conditions;
(3) Perform the analyses required by paragraph (c)(2) of this
section at least monthly and when products cleared or markets served
display high volatility or become less liquid, when the size or
concentration of positions held by clearing members increases
significantly, or as otherwise appropriate, evaluate its stress testing
scenarios, models, and underlying parameters more frequently than once
a month;
(4) For the analyses required by paragraph (c)(1) and paragraph
(c)(2) of this section, include a range of relevant stress scenarios,
in terms of both defaulting clearing members' positions and possible
price changes in liquidation periods. The scenarios considered shall
include, but are not limited to, the following:
(i) Relevant peak historic price volatilities;
(ii) Shifts in other market factors including, as appropriate,
price determinants and yield curves;
(iii) Multiple defaults over various time horizons;
(iv) Simultaneous pressures in funding and asset markets; and
(v) A range of forward-looking stress scenarios in a variety of
extreme but plausible market conditions.
(5) For the scenarios enumerated in paragraph (c)(4) of this
section, consider the following:
(i) All entities that might pose material liquidity risks to the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization, including settlement banks,
permitted depositories, liquidity providers, and other entities,
(ii) Multiday scenarios as appropriate,
(iii) Inter-linkages between its clearing members and the multiple
roles that they may play in the systemically important derivatives
clearing organization's or subpart C derivatives clearing
organization's risk management; and
(iv) The probability of multiple failures and contagion effect
among clearing members.
(6) Establish procedures for:
(i) Reporting stress test results to its risk management committee
or board of directors, as applicable; and
(ii) Using the results to assess the adequacy of, and to adjust its
total amount of liquidity resources.
(7) Use the results of stress tests to support compliance with the
liquidity resources requirement set forth in Sec. 39.33(c).
(d) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall regularly conduct
an assessment of the theoretical and empirical properties of its margin
model for all products it clears.
(e) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall perform, on an
annual basis, a full validation of its financial risk management model
and its liquid risk management model.
(f) Custody and investment risk. Custody and investment
arrangements of a systemically important derivatives clearing
organization's and subpart C derivatives clearing organization's own
funds and assets shall be subject to the same requirements as those
specified in Sec. 39.15 of this chapter for the funds and assets of
clearing members, and shall apply to the derivatives clearing
[[Page 50304]]
organization's own funds and assets to the same extent as if such funds
and assets belonged to clearing members.
(g) Settlement banks. Each systemically important derivatives
clearing organization and subpart C derivatives clearing organization
shall:
(1) Monitor, manage, and limit its credit and liquidity risks
arising from its settlement banks;
(2) Establish, and monitor adherence to, strict criteria for its
settlement banks that take account of, among other things, their
regulation and supervision, creditworthiness, capitalization, access to
liquidity, and operational reliability; and
(3) Monitor and manage the concentration of credit and liquidity
exposures to its settlement banks.
Sec. 39.37 Additional disclosure for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
In addition to the requirements of Sec. 39.21, each systemically
important derivatives clearing organization and subpart C derivatives
clearing organization shall:
(a) Complete and publicly disclose its responses to the Disclosure
Framework for Financial Market Infrastructures published by the
Committee on Payment and Settlement Systems and the Board of the
International Organization of Securities Commissions;
(b) Review and update its responses disclosed as required by
paragraph (a) of this section at least every two years and following
material changes to the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's system
or the environment in which it operates. A material change to the
systemically important derivatives clearing organization's or subpart C
derivatives clearing organization's system or the environment in which
it operates is a change that would significantly change the accuracy
and usefulness of the existing responses;
(c) Disclose, publicly and to the Commission, relevant basic data
on transaction volume and values; and
(d) Disclose, publicly and to the Commission, rules, policies, and
procedures concerning segregation and portability of customers'
positions and funds, including whether each of:
(1) Futures customer funds, as defined in Sec. 1.3(jjjj) of this
chapter;
(2) Cleared Swaps Customer Collateral, as defined in Sec. 22.1 of
this chapter; or
(3) Foreign futures or foreign options secured amount, as defined
in Sec. 1.3(rr) of this chapter is:
(i) Protected on an individual or omnibus basis or
(ii) Subject to any constraints, including any legal or operational
constraints that may impair the ability of the systemically important
derivatives clearing organization or subpart C derivatives clearing
organization to segregate or transfer the positions and related
collateral of a clearing member's customers.
Sec. 39.38 Efficiency for systemically important derivatives clearing
organizations and subpart C derivatives clearing organizations.
(a) General rule. In order to meet the needs of clearing members
and markets, each systemically important derivatives clearing
organization and subpart C derivatives clearing organization should
efficiently and effectively design its:
(1) Clearing and settlement arrangements;
(2) Operating structure and procedures;
(3) Scope of products cleared; and
(4) Use of technology.
(b) Review of efficiency. Each systemically important derivatives
clearing organization and subpart C derivatives clearing organization
should establish a mechanism to review, on a regular basis, its
compliance with paragraph (a) of this section.
(c) Clear goals and objectives. Each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization should have clearly defined goals and objectives that are
measurable and achievable, including in the areas of minimum service
levels, risk management expectations, and business priorities.
(d) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall facilitate
efficient payment, clearing and settlement by accommodating
internationally accepted communication procedures and standards.
Sec. 39.39 Recovery and wind-down for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
(a) Definitions. For purposes of this section:
(1) General business risk means any potential impairment of a
systemically important derivatives clearing organization's or subpart C
derivatives clearing organization's financial position, as a business
concern, as a consequence of a decline in its revenues or an increase
in its expenses, such that expenses exceed revenues and result in a
loss that the derivatives clearing organization must charge against
capital.
(2) Wind-down means the actions of a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization to effect the permanent cessation or sale or transfer or
one or more services.
(3) Recovery means the actions of a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization, consistent with its rules, procedures, and other ex-ante
contractual arrangements, to address any uncovered credit loss,
liquidity shortfall, capital inadequacy, or business, operational or
other structural weakness, including the replenishment of any depleted
pre-funded financial resources and liquidity arrangements, as necessary
to maintain the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's
viability as a going concern.
(4) Operational risk means the risk that deficiencies in
information systems or internal processes, human errors, management
failures or disruptions from external events will result in the
reduction, deterioration, or breakdown of services provided by a
systemically important derivatives clearing organization or subpart C
derivatives clearing organization.
(5) Unencumbered liquid financial assets include cash and highly
liquid securities.
(b) Recovery and wind-down plan. Each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization shall maintain viable plans for:
(1) Recovery or orderly wind-down, necessitated by uncovered credit
losses or liquidity shortfalls; and, separately,
(2) Recovery or orderly wind-down necessitated by general business
risk, operational risk, or any other risk that threatens the
derivatives clearing organization's viability as a going concern.
(c) (1) In developing the plans specified in paragraph (b) of this
section, the systemically important derivatives clearing organization
or subpart C derivatives clearing organization shall identify scenarios
that may potentially prevent it 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. The plans shall include procedures for
informing the Commission, as soon as practicable, when the recovery
plan is initiated or wind-down is pending,
[[Page 50305]]
(2) A systemically important derivatives clearing organization or
subpart C derivatives clearing organization shall have procedures for
providing the Commission and the Federal Deposit Insurance Corporation
with information needed for purposes of resolution planning.
(d) Financial resources to support the recovery and wind-down plan.
(1) In evaluating the resources available to cover an uncovered
credit loss or liquidity shortfall as part of its recovery plans
pursuant to paragraph (b)(1) of this section, a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization may consider, among other things, assessments of
additional resources provided for under its rules that it reasonably
expects to collect from non-defaulting clearing members.
(2) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall maintain
sufficient unencumbered liquid financial assets, funded by the equity
of its owners, to implement its recovery or wind-down plans pursuant to
paragraph (b)(2) of this section. In general, the financial resources
required by Sec. 39.11(a)(2) may be sufficient, but the systemically
important derivatives clearing organization or subpart C derivatives
clearing organization shall analyze its particular circumstances and
risks and maintain any additional resources that may be necessary to
implement the plans. In allocating sufficient financial resources to
implement the plans, the systemically important derivatives clearing
organization or subpart C derivatives clearing organization shall
comply with Sec. 39.11(e)(2). The plan shall include evidence and
analysis to support the conclusion that the amount considered necessary
is, in fact, sufficient to implement the plans.
(3) Resources counted in meeting the requirements of Sec. Sec.
39.11(a)(1) and 39.33 may not be allocated, in whole or in part, to the
recovery plans required by paragraph (b)(2) of this section. Other
resources may be allocated, in whole or in part, to the recovery plans
required by either paragraph (b)(1) or paragraph (b)(2) of this
section, but not both paragraphs, and only to the extent the use of
such resources is not otherwise limited by the Act, Commission
regulations, the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's rules,
or any contractual arrangements to which the systemically important
derivatives clearing organization or subpart C derivatives clearing
organization is a party.
(e) Plan for raising additional financial resources. All
systemically important derivatives clearing organizations and subpart C
derivatives clearing organizations shall maintain viable plans for
raising additional financial resources, including, where appropriate,
capital, in a scenario in which the systemically important derivatives
clearing organization or subpart C derivatives clearing organization is
unable, or virtually unable, to comply with any financial resources
requirements set forth in this part. This plan shall be approved by the
board of directors and be updated regularly.
Sec. 39.40 Consistency with the Principles for Financial Market
Infrastructures.
This subpart C is intended to establish standards which, together
with subparts A and B of this part, are consistent with section 5b(c)
of the Act and the Principles for Financial Market Infrastructures
published by the Committee on Payment and Settlement Systems and the
Board of the International Organization of Securities Commissions and
should be interpreted in that context.
Sec. 39.41 Special enforcement authority for systemically important
derivatives clearing organizations.
For purposes of enforcing the provisions of Title VIII of the Dodd-
Frank Act, a systemically important derivatives clearing organization
shall be subject to, and the Commission has authority under the
provisions of subsections (b) through (n) of section 8 of the Federal
Deposit Insurance Act (12 U.S.C. 1818) in the same manner and to the
same extent as if the systemically important derivatives clearing
organization were an insured depository institution and the Commission
were the appropriate Federal banking agency for such insured depository
institution.
Sec. 39.42 Advance notice of material risk-related rule changes by
systemically important derivatives clearing organizations.
A systemically important derivatives clearing organization shall
provide notice to the Commission in advance of any proposed change to
its rules, procedures, or operations that could materially affect the
nature or level of risks presented by the systemically important
derivatives clearing organization, in accordance with the requirements
of Sec. 40.10 of this chapter.
0
5. Redesignate the Appendix to Part 39 as Appendix A to Part 39.
0
6. Add appendix B to Part 39 to read as follows:
Appendix B to Part 39--Subpart C Election Form
BILLING CODE 6351-01-P
[[Page 50306]]
[GRAPHIC] [TIFF OMITTED] TP16AU13.004
[[Page 50307]]
[GRAPHIC] [TIFF OMITTED] TP16AU13.005
[[Page 50308]]
[GRAPHIC] [TIFF OMITTED] TP16AU13.006
[[Page 50309]]
[GRAPHIC] [TIFF OMITTED] TP16AU13.007
[[Page 50310]]
[GRAPHIC] [TIFF OMITTED] TP16AU13.008
[[Page 50311]]
[GRAPHIC] [TIFF OMITTED] TP16AU13.009
BILLING CODE 6351-01-C
PART 140--ORGANIZATION, FUNCTIONS AND PROCEDURES OF THE COMMISSION
0
7. The authority citation for part 140 continues to read as follows:
Authority: 7 U.S.C. 2 and 12a.
0
8. Amend Sec. 140.94 to add new paragraphs (c)(12), (c)(13) and
(c)(14) as follows:
Sec. 140.94 Delegation of authority to the Director of the Division
of Clearing and Risk.
* * * * *
(c) * * *
(12) All functions reserved to the Commission in Sec. 39.31 of
this chapter; and
(13) The authority to approve the application described in Sec.
39.34(d) of this chapter.
* * * * *
PART 190--BANKRUPTCY
0
9. The authority citation for part 190 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24,
and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise
noted.
0
10. In Sec. 190.09, revise paragraph (b) to read as follows:
Sec. 190.09 Member property.
* * * * *
(b) Scope of member property. Member property shall include all
money, securities and property received, acquired, or held by a
clearing organization to margin, guarantee or secure, on behalf of a
clearing member, the proprietary account, as defined in Sec. 1.3 of
this chapter, any account not belonging to a foreign futures or foreign
options customer pursuant to the proviso in Sec. 30.1(c), and any
Cleared Swaps Proprietary Account, as defined in Sec. 22.1: Provided,
however, that any guaranty deposit or similar payment or deposit made
by such member and any capital stock, or membership of such member in
the clearing organization shall also be included in member property
after payment in full, in each case in accordance with the by-laws or
rules of the clearing organization, of that portion of:
(1) The net equity claim of the member based on its customer
account; and
(2) Any obligations due to the clearing organization which may be
paid therefrom, including any obligations due from the clearing
organization to the customers of other members.
Issued in Washington, DC on August 12, 2013, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.
Appendix to Notice of Proposed Rulemaking on Derivatives Clearing
Organizations and International Standards--Commission Voting Summary
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Chilton,
O'Malia, and Wetjen voted in the affirmative.
[FR Doc. 2013-19845 Filed 8-15-13; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: August 16, 2013