2010-17606
FR Doc 2010-17606[Federal Register: July 22, 2010 (Volume 75, Number 140)]
[Proposed Rules]
[Page 42633-42639]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22jy10-18]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 38, 39, and 40
RIN 3038-AC91
Business Continuity and Disaster Recovery
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is proposing a rule that would establish standards for
recovery and resumption of trading and clearing operations by
designated contract markets (``DCMs'') and registered derivatives
clearing organizations (``DCOs'') that the Commission determines to be
critical financial markets or core clearing and settlement
organizations in the event of a wide-scale disruption affecting such
entities' trading or clearing operations. These proposed standards
would require such entities to maintain business continuity and
disaster recovery resources sufficient to meet a same-day recovery time
objective for trading and clearing, and maintain geographic dispersal
of infrastructure and personnel sufficient to enable achievement of a
same-day recovery time objective, in the event of a wide-scale
disruption. The proposed amendments also revise application guidance
and acceptable practices under the Core Principles for DCMs relating to
business continuity and disaster recovery matters that would harmonize
acceptable practices for DCMs and DCOs.
DATES: Comments must be received on or before August 23, 2010.
ADDRESSES: Comments should be sent to David Stawick, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. Comments may be submitted via e-mail
at [email protected]. ``Business Continuity and Disaster Recovery'' must be
in the subject field of responses submitted via e-mail, and clearly
indicated on written submissions. Comments may also be submitted at
http://www.regulations.gov. All comments must be submitted in English,
or if not, accompanied by an English translation.
FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate
Director, Division of Clearing and Intermediary Oversight, 202-418-
5092, [email protected]; David Taylor, Special Counsel, Division of
Market Oversight, 202-418-5488, [email protected]; Jocelyn Partridge,
Special Counsel, Division of Clearing and Intermediary Oversight, 202-
418-5926, [email protected]; or Cody J. Alvarez, Attorney Advisor,
Division of Market Oversight, 202-418-5404, [email protected];
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Introduction
While the experience of the Commission is that DCMs and DCOs
registered with it maintain adequate business continuity and disaster
recovery (``BC-DR'') programs, the Commission believes that additional
regulatory steps should be taken to further improve the resiliency and
recovery capabilities of registered entities, particularly those
organizations which meet the financial sector's accepted definitions of
``critical financial markets'' and ``core clearing and settlement
organizations.'' \1\ These accepted definitions come from the
Interagency Paper on Sound Practices to Strengthen the Resilience of
the U.S. Financial System, commonly known as the ``White Paper,'' that
was issued by the Board of Governors of the Federal Reserve System
(``Fed''), the Department of the Treasury (``Treasury''), and the
Securities and Exchange Commission (``SEC'') in 2003.\2\ Although the
Commission did not participate in the issuance of the White Paper, the
Commission has determined that it would be appropriate to apply
standards analogous to those set forth in the White Paper to DCMs and
DCOs.\3\
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\1\ See infra note 2.
\2\ 68 FR 17809 (April 11, 2003). The White Paper considers new
risks present in the post-September 11 environment, addresses steps
needed to strengthen the overall resilience of the U.S. financial
system in the event of a wide-scale disruption, and is the principal
source of common business continuity and disaster recovery standards
applicable across the U.S. financial sector.
\3\ Because there are no Derivatives Transaction Facilities
(``DTEFs'') currently registered with the Commission, the Commission
has chosen to refrain from similarly modifying any regulations or
guidance applicable to DTEFs at this time.
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B. Standards Established by Regulators of Comparable Financial Entities
The White Paper explained that critical financial markets are those
markets that provide the means for financial institutions to adjust
their cash and securities positions and those of their customers in
order to manage liquidity, market, and other risks to their
organizations, and provide support for the provision of a wide range of
financial services to U.S. businesses and consumers. The White Paper
defined ``critical financial markets'' as ``markets for [(1)] federal
funds, foreign exchange, and commercial paper; [(2)] U.S. government
and agency securities; and [(3)] corporate debt and equity
securities.'' \4\ ``Core clearing and settlement organizations'' are
those that (a) provide clearing and settlement services for critical
financial markets, or (b) act as large-value payment systems operators
and present systemic risk should they be unable to perform.\5\ This
proposal would apply these White Paper standards to futures markets
related to the aforementioned instruments and extend it to futures
markets for essential physical commodities.
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\4\ See 68 FR at 17811.
\5\ See id. at 17811.
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The Commission believes that some of the registered entities
regulated by the Commission may be ``critical financial markets'' or
``core clearing and settlement organizations.'' They provide the means
for financial institutions to adjust their financial positions and
those of their customers in order to manage liquidity, market, and
other risks, and provide support for provision of a wide range of
financial services to U.S. businesses and consumers. Their products
include futures on U.S. government and agency securities, equity
indexes, foreign exchange and physical commodities that comprise
critical components of the world financial system. For these reasons,
it might present unacceptable risks to the U.S. financial system if
these entities were to become inoperative and unavailable for an
extended period of time for any reason up to and including a wide-scale
disruption. The ability of critical financial markets and core clearing
and settlement organizations to recover and resume trading and clearing
promptly in the event of a wide-scale
[[Page 42634]]
disruption is important to the U.S. economy.
The White Paper calls for core clearing and settlement
organizations to have the capacity to meet a same-day recovery time
objective (``RTO''); that is, the capacity to recover and resume
clearing and settlement activities within the business day on which the
disruption occurs.\6\ Further, the White Paper recognizes that the
ability to meet a same-day RTO during a wide-scale disruption requires
an appropriate level of geographic diversity between primary and backup
sites, with the latter as far away as necessary to avoid being subject
to the same set of risks as the primary site. Backup sites should not
rely on the same transportation, telecommunications, power, water, or
other critical infrastructure components as the primary location. In
addition, operation of the backup site should not be impaired by a
wide-scale evacuation at, or the inaccessibility of staff that service,
the primary site. Therefore, the White Paper calls for core clearing
and settlement organizations to maintain backup facilities that are a
significant distance away from their primary facilities, a distance
sufficient to address the risk that a wide-scale disruption could make
the organization's labor pool across the entire metropolitan or other
geographic area of the primary site (including adjacent communities
economically integrated with it) unavailable to support achievement of
the organization's RTO.\7\
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\6\ The White Paper also mentions, as an aspirational ``overall
goal,'' an RTO of two hours for core clearing and settlement
organizations.
\7\ See generally, White Paper, 68 FR at 17813.
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While the White Paper defines critical financial markets, it
establishes an RTO only for core clearing and settlement organizations.
The Policy Statement: Business Continuity Planning for Trading Markets
issued by the Securities and Exchange Commission (``SEC Policy
Statement'') establishes an RTO and a geographic dispersal of disaster
recovery resources requirement for U.S. securities markets.\8\ The SEC
Policy Statement recognizes that U.S. securities markets collectively
constitute critical financial markets. It establishes a next-day,
rather than same-day, RTO for securities markets because securities
trading is ``relatively fungible across markets,'' since most
securities are traded on more than one market.\9\ As a result, if
trading on one securities market were incapacitated, that trading could
be shifted to one or more of the other securities markets. By contrast,
trading of futures is generally not fungible across markets. The
geographic dispersal requirement for securities markets set in the SEC
Policy Statement is the same as that set forth in the White Paper for
core clearing and settlement organizations.
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\8\ See 68 FR 56656 (October 1, 2003) (Release No. 34-48545;
File No. S7-17-03).
\9\ We understand that an exception to this general observation
is the listing and trading of certain index option products that may
be subject to exclusive licensing arrangements.
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C. Applicable Provisions of the Commodity Exchange Act
The Commodity Exchange Act (``CEA'' or ``Act'') provides for the
protection of the ``public interest'' through a system of effective
self-regulation of trading facilities, clearing systems and markets
participants under Commission oversight. As specifically set forth in
the Act, ensuring the integrity of the futures markets and the
avoidance of systemic risk are critical functions of the
Commission.\10\ Accordingly, the Commission believes that this proposal
relating to BC-DR standards is essential for the proper functioning of
the futures markets and the U.S. financial system.
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\10\ Section 3(b), 7 U.S.C. 5(c). Congress gave the Commission
broad authority in Section 8a(5) of the Act, 7 U.S.C. 12a(5), to
make and promulgate rules, such as those contained in this Proposal,
that are reasonably necessary to prevent disruptions to market
integrity, ensure the financial integrity of futures and options
transactions and promote the avoidance of systemic risk.
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The BC-DR requirements currently applicable to DCMs are set forth
in Core Principle 6, Emergency Authority (``Core Principle 6''),\11\
Core Principle 9, Execution of Transactions (``Core Principle 9''),\12\
and Part 38 of the Commission's Regulations. The BC-DR requirements
currently applicable to DCOs are set forth in Core Principle I, System
Safeguards (``Core Principle I'') \13\ and Part 39 of the Commission's
Regulations. Pursuant to these provisions, DCMs and DCOs are required
to have appropriate emergency authority, emergency procedures, backup
facilities, and disaster recovery plans. Such entities must also ensure
the proper functioning, adequate capacity, and security of their
automated trading and clearing systems, and conduct adequate testing
and review of those systems.
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\11\ 7 U.S.C. 7(d)(6).
\12\ 7 U.S.C. 7(d)(9).
\13\ 7 U.S.C. 7a-1(c)(2)(I).
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With respect to DCMs, Core Principle 6, Emergency Authority,
requires DCMs to adopt rules providing for the exercise of emergency
authority. The Application Guidance set forth in Appendix B to Part 38
of the Commission's Regulations relating to Core Principle 6 notes that
this authority should allow the DCM to ``intervene as necessary to
maintain markets with fair and orderly trading as well as procedures
for carrying out the intervention.'' \14\ Core Principle 9, Execution
of Transactions, also requires DCMs to ``provide a competitive, open,
and efficient market and mechanism for executing transactions.''
Consistent with Core Principle 9, DCMs are required to periodically
test and review automated systems to ensure proper system functioning,
adequate capacity, and security.\15\
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\14\ See Application Guidance set forth in Appendix B to Part 38
of the Commission's Regulations relating to Core Principle 6.
\15\ See Application Guidance set forth in Appendix B to Part 38
of the Commission's Regulations relating to Core Principle 9.
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With respect to DCOs, Core Principle I, System Safeguards, requires
DCOs to maintain ``a program of oversight and risk analysis to ensure
that the automated systems of the [DCO] function properly and have
adequate capacity and security.'' It also requires DCOs to ``maintain
emergency procedures and a plan for disaster recovery, and to
periodically test backup facilities sufficient to ensure daily
processing, clearing, and settlement of transactions.'' \16\
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\16\ See Section 5b(c)(2)(I) of the Act, 7 U.S.C. 7a-1(c)(2)(I).
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In the near-decade that has passed since the Act's Core Principles
were established by the Commodity Futures Modernization Act of 2000
(``CFMA''),\17\ historical events have resulted in substantial and
important changes in BC-DR standards for financial sector
organizations. The events of September 11, 2001, the Northeast regional
power outages of 2003, the economic events of 2008-2009, and the
current rise in cyber threats have resulted in important lessons
learned, and in changed thinking about how normal financial institution
operations could be disrupted, and the preparedness principles that
should be followed to ensure the financial sector's ability to recover
and resume operations promptly after a disruption. In light of these
developments, and of the vital importance of critical financial markets
and core clearing and settlement organizations to the national economy,
the Commission believes that the additional, new standards proposed for
those DCMs and DCOs that the Commission may determine to be critical
financial markets or core clearing and settlement organizations are
essential to ensure the capacity of such entities to recover and resume
operations promptly in the event they are affected by a wide-scale
disruption.
[[Page 42635]]
The Commission also believes that, to better ensure the resiliency of
futures and options trading and the ability of the industry to respond
to current threats to its operations, the application guidance and
acceptable practices language concerning BC-DR standards applicable to
all DCMs should be updated and harmonized with the BC-DR standards
applicable to DCOs. The proposed amendments to the existing BC-DR
standards for all DCMs also seek to better explain those standards
through the use of current terms of art with respect to BC-DR matters.
The Commission believes the approach to BC-DR standards taken by the
White Paper and the SEC Policy Statement, particularly with respect to
the recovery time objective and geographic dispersal requirements
needed to provide resiliency in the event of a wide-scale disruption,
is appropriate for the Commission to take in adopting requirements
applicable to registered entities that are critical financial markets
or core clearing and settlement organizations.
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\17\ See Public Law 106-554 (December 21, 2000).
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The Commission believes that certain DCMs and DCOs may be critical
financial markets or core clearing and settlement organizations. Some
DCMs and DCOs provide the means for financial institutions to adjust
their financial positions and those of their customers in order to
manage liquidity, market, and other risks, and provide support for
provision of a wide range of financial services to U.S. businesses and
consumers. The available products include futures contracts and related
options on U.S. government and agency securities, equity indexes,
foreign exchange and physical commodities that comprise critical
components of the world financial system. For these reasons, it might
present unacceptable risks to the U.S. financial system if such DCMs or
DCOs were to become inoperative and unavailable for an extended period
of time for any reason up to and including a wide-scale disruption, and
their ability to recover and resume trading and clearing promptly in
the event of a wide-scale disruption may be critically important to the
U.S. economy. Mitigating systemic risk through the application of
consistent, same-day RTOs for clearing and settlement activities across
the nation's critical financial markets in the event of a wide-scale
disruption may be important to financial sector resiliency. Sufficient
geographic dispersal of BC-DR resources, including both technology and
personnel, is an essential means of ensuring that critical financial
markets and core clearing and settlement organizations have the ability
to recover and resume trading and clearing within a same-day RTO.
II. Proposed New Regulation 40.9
The Commission proposes amendments to Part 40 of its Regulations as
follows: (1) The addition of new definitions in Regulation 40.1; (2)
adoption of new Regulation 40.9 setting forth same-day RTO and
geographic dispersal requirements for critical financial markets and
core clearing and settlement organizations; and (3) the adoption of new
Appendix E providing guidance regarding the Commission's determination
of critical financial markets and core clearing and settlement
organizations. The Commission also proposes to amend the application
guidance provided in Appendix B to Part 38 and Appendix A to Part 39 of
the Commission's regulations to incorporate the new Part 40
requirements.
Five new definitions are proposed to be added to Regulation 40.1.
The terms defined include ``critical financial market,'' ``core
clearing and settlement organization,'' ``relevant area,'' ``recovery
time objective,'' and ``wide-scale disruption.''
Proposed Regulation 40.1(j) would define ``critical financial
market'' to mean a DCM that provides the means for financial
institutions to adjust their financial positions and those of their
customers in order to manage liquidity, market, and other risks to
their organizations, and provides support for the provision of a wide
range of financial services to businesses and consumers in the United
States, particularly including markets whose trading impacts federal
funds, foreign exchange, commercial paper, U.S. government and agency
securities, corporate debt, equity securities, or physical commodities
of broad, major importance to the national or international economy.
Proposed Regulation 40.1(k) would define ``core clearing and
settlement organization'' as a DCO that provides clearing and
settlement services integral to a critical financial market (or to
multiple DCMs that are critical financial markets on a collective
rather than individual basis).
Proposed Regulation 40.1(l) would define ``relevant area,'' for the
purposes of Part 40, as the metropolitan or other geographic area
within which a critical financial market or core clearing and
settlement organization has physical infrastructure or personnel
necessary for it to, as appropriate, (a) conduct electronic trading,
(b) disseminate market data and provide price reporting, (c) conduct
electronic surveillance and maintain access to audit trail information,
or (d) conduct activities necessary to the clearance and settlement of
existing and new contracts, including communities economically
integrated with, adjacent to, or within normal commuting distance of
that metropolitan or other geographic area.
Proposed Regulation 40.1(m) would define ``recovery time
objective'' as the time period within which an entity should be able to
achieve recovery and resumption of, as appropriate, (a) electronic
trading, (b) market data dissemination and price reporting, (c) access
to audit trail information and electronic surveillance tools, or (d)
clearing and settlement of existing and new contracts, after those
capabilities become temporarily inoperable for any reason up to or
including a wide-scale disruption.
Proposed Regulation 40.1(n) would define ``wide-scale disruption''
to mean an event that causes a severe disruption or destruction of
transportation, telecommunications, power, water, or other critical
infrastructure components in a relevant area, or an event that results
in the evacuation or unavailability of the population in a relevant
area.
Proposed Regulation 40.9(a) would require any registered entity
that the Commission determines is a critical financial market or core
clearing and settlement organization to maintain a disaster recovery
plan and BC-DR resources, including infrastructure and personnel,
sufficient to enable it to achieve a same-day RTO in the event of a
wide-scale disruption affecting the relevant area of any of its normal-
use trading or clearing operations.
Proposed Regulation 40.9(b) would provide that a same-day RTO is
one calling for recovery and resumption of trading and clearing within
the business day on which the disruption occurs.\18\
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\18\ The same-day RTO is not intended to mandate the specific
response of a particular entity to a particular disaster. Rather,
the objective is intended to establish the recovery goal that the
BC-DR plans of certain registrants must be designed to meet and, in
turn, the resources that such registrants are expected to allocate
to ensure that they are capable of achieving the objective. The
Commission recognizes that a wide-scale disruption could occur near
the close of a business day, and would interpret this requirement in
a practical manner in such an event.
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Proposed Regulation 40.9(c) would set forth the minimal
requirements for geographic dispersal of infrastructure and personnel
needed to meet a same-day RTO. It would provide that infrastructure
sufficient to enable a critical financial market or core clearing
[[Page 42636]]
and settlement organization to meet a same-day recovery time objective
after interruption of normal trading and clearing by a wide-scale
disruption must be located outside the relevant area of the
infrastructure the entity normally relies upon to (a) conduct
electronic trading, (b) disseminate market data and provide price
reporting, (c) conduct electronic surveillance and maintain access to
audit trail information, or (d) conduct activities necessary to the
clearance and settlement of existing and new contracts, and may not
rely on the same critical transportation, telecommunications, power,
water, or other critical infrastructure components as the
infrastructure the entity normally relies upon for such activities. It
would also provide that personnel sufficient to enable the critical
financial market or core clearing and settlement organization to meet a
same-day recovery time objective, after interruption of normal trading
or 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, must live and work outside that relevant area,
so that they will not be made unavailable by a wide-scale evacuation or
unavailability of personnel who live or work in that relevant area.
Proposed Regulation 40.9(d) would require every registered entity
that the Commission determines is a critical financial market or core
clearing and settlement organization to conduct regular, periodic tests
of its business continuity and disaster recovery plans and resources
and its capacity to achieve a same-day RTO in the event of a wide-scale
disruption.
New Appendix E to Part 40 would provide guidance on the process the
Commission will follow, and the factors it will consider, to determine
that a registered entity is a critical financial market or a core
clearing and settlement organization. Appendix E would also describe
the notice and opportunity for comment that the Commission would
provide in this connection.
In connection with its proposal to adopt new Regulation 40.9, the
Commission has also proposed conforming amendments to certain
application guidance provisions of Commission Regulations relating to
various Core Principles. Specifically, Appendix B to Part 38 and
Appendix A to Part 39 are proposed to be amended to revise acceptable
practices provisions under Core Principle 6 and Core Principle 9 in
Part 38 and application guidance under Core Principle I in Part 39, to
note that Proposed Regulation 40.9 would govern the obligations of
registered entities that the Commission determines to be critical
financial markets or core clearing and settlement organizations, with
respect to maintenance and geographic dispersal of disaster recovery
resources sufficient to meet a same-day RTO in the event of a wide-
scale disruption. These proposed revisions would further note that,
therefore, Proposed Regulation 40.9 itself would establish the
application guidance and acceptable practices for core principle
compliance relating to those matters set forth in Regulation 40.9.
As previously discussed, the Commission in this proposal would
amend the acceptable practices provisions for Core Principle 9 set
forth in Appendix B to Part 38, to harmonize the language of those
provisions regarding BC-DR matters with the language of the parallel
application guidance provisions for Core Principle I in Part 39.
Moreover, the proposed revisions would also better explain the BC-DR
standards currently applicable to DCMs. DCMs that have not been
determined to be critical financial markets would be subject to the
generally applicable BC-DR requirements set forth in these revisions,
but would not be required to comply with the additional obligations
imposed on critical markets by new Regulation 40.9. The Commission is
aware that proposed legislation pending before Congress would amend the
Act,\19\ including certain portions that govern DCMs and DCOs.\20\ At
the time the Commission approved this proposed rulemaking, that
legislation contained provisions that would create a new Core Principle
20, System Safeguards, explicitly setting forth BC-DR requirements for
all DCMs. In the event that this pending legislation is enacted into
law, the proposed application guidance and acceptable practices
provisions relating to Core Principle 9 set forth below may be
considered by the Commission in connection with creation of application
guidance and acceptable practices provisions relating to Core Principle
20.
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\19\ 1 U.S.C. 1 et seq.
\20\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
H.R. 4173, 111th Cong. (2010).
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III. Proposed Effective Date
The Commission requests comment on a reasonable date for the
proposed amendments to become effective.
IV. Solicitation of Comments
The Commission requests comments on all aspects of the proposed
rule amendments, including the question of what RTO (e.g., the proposed
same-day RTO or the aspirational two-hour RTO also mentioned in the
White Paper) is appropriate. As noted above, at the time that the
Commission approved this proposal, legislation was pending before
Congress that would amend the CEA. The Commission specifically requests
comment on the effect, if any, the legislation would have on this
proposal.
V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that Federal
agencies, in proposing rules, consider the impact of those rules on
small businesses.\21\ New requirements related to the proposed rule
amendments would fall on DCMs and DCOs which the Commission may
determine to be critical financial markets or core clearing and
settlement organizations. The Commission has previously determined that
DCMs and DCOs are not small entities for purposes of the RFA.\22\
Accordingly, the Commission does not expect the rules proposed herein
to have a significant economic impact on any small entities. Therefore,
the Chairman, on behalf of the Commission, hereby certifies, pursuant
to 5 U.S.C. 605(b), that the actions proposed to be taken herein will
not have a significant economic impact on a substantial number of small
entities.
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\21\ 5 U.S.C. 601 et seq.
\22\ See 47 FR 18618 at 18619 (April 30, 1982) with respect to
DCMs, and 66 FR 45604 at 45609 (August 29, 2001) with respect to
DCOs.
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B. Paperwork Reduction Act
These proposed rule amendments will not impose any new
recordkeeping or information collection requirements, or other
collections of information that require approval of the Office of
Management and Budget under the Paperwork Reduction Act.\23\ All
recordkeeping or information collection requirements relevant to the
subject of this proposed rulemaking, or discussed herein, already exist
under current law. Accordingly, the Paperwork Reduction Act does not
apply. The Commission invites public comment on the accuracy of its
estimate that no additional recordkeeping or information collection
requirements or changes to existing collection requirements would
result from the amendments proposed herein.
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\23\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Analysis
Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its actions before issuing a
[[Page 42637]]
new regulation or order under the Act.\24\ By its terms, Section 15(a)
does not require the Commission to quantify the costs and benefits of a
new rule or to determine whether the benefits of the adopted rule
outweigh its costs. Rather, section 15(a) requires the Commission to
``consider the costs and benefits'' of a subject rule. Section 15(a)
further specifies that the costs and benefits of proposed rules 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. In conducting its analysis, the Commission
may, in its discretion, give greater weight to any one of the five
enumerated areas of concern and may determine that, notwithstanding its
costs, a particular rule is necessary or appropriate to protect the
public interest or to effectuate any of the provisions or to accomplish
any of the purposes of the Act.\25\
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\24\ 7 U.S.C. 19(a).
\25\ E.g., Fishermen's Dock Co-op., Inc. v. Brown, 75 F3d 164
(4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336 (DC
Cir. 1985) (agency has discretion to weigh factors in undertaking
cost-benefit analyses).
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As discussed above, the proposed rule amendments would require DCMs
and DCOs that the Commission determines to be critical financial
markets or core clearing and settlement organizations to (1) maintain
business continuity and disaster recovery resources sufficient to meet
a same-day RTO for trading and clearing, and (2) maintain geographic
dispersal of infrastructure and personnel sufficient to enable
achievement of a same-day RTO in the event of a wide-scale disruption.
The Commission cannot fully quantify the costs that would be borne by
such entities in complying with the proposed rule amendments, as the
Commission has not yet determined which entities are critical financial
markets or core clearing or settlement organizations. Moreover, the
cost to comply with the proposed rule amendments would be likely to
vary depending on the nature and location of infrastructure and
personnel available to enable achievement of a same-day RTO that are
presently maintained by each such entity.
Notwithstanding the potential costs that could be incurred by DCMs
or DCOs that the Commission determines to be critical financial markets
or core clearing and settlement organizations in complying with the
proposed rule amendments, the Commission believes the benefits of the
proposed rule amendments are significant and important. The ability of
critical financial markets and core clearing and settlement
organizations to recover and resume trading and clearing promptly in
the event of a wide-scale disruption is significant to the U.S.
economy. Therefore, the proposed rule amendments may be crucially
important to sound risk management practices for such markets, an area
of concern that may deserve great weight in this connection. As such,
they may be needed to protect market participants and ensure the
continued efficiency, competitiveness, financial integrity, and price
discovery function of such markets in the event of a wide-scale
disruption. Accordingly, the Commission believes that the proposal is
consistent with the Act and would serve to protect the public interest
by promoting market integrity and the avoidance of systemic risk.
After considering the costs and benefits noted above, the
Commission has determined to issue the proposed rule amendments. The
Commission invites public comment on its application of the cost-
benefit provision. Commenters are also invited to submit any data that
they may have quantifying the costs and benefits of the proposed rule
amendments with their comment letter.
VI. Text of Proposed Amendments
List of Subjects
17 CFR Part 38
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 39
Commodity futures, Consumer protection, Reporting and recordkeeping
requirements.
17 CFR Part 40
Commodity futures, Reporting and recordkeeping requirements.
In light of the foregoing, and pursuant to the authority in the
Act, and in particular Sections 3, 5, 5c(a) and 8a(5) of the Act, the
Commission hereby proposes to amend Parts 38, 39, and 40 of Title 17 of
the Code of Federal Regulations as follows:
PART 38--DESIGNATED CONTRACT MARKETS
1. The authority citation for part 38 continues to read as follows:
Authority: 7 U.S.C. 2, 5, 6, 6c, 7, 7a-2 and 12a, as amended by
Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.
2. Amend Appendix B to Part 38 by revising paragraph (b) of Core
Principle 6; and paragraph (a)(2) and paragraph (b) of Core Principle
9, to read as follows:
Appendix B to Part 38--Guidance on, and Acceptable Practices in,
Compliance With Core Principles
* * * * *
Core Principle 6 of section 5(d) of the Act: EMERGENCY AUTHORITY
* * *
* * * * *
(b) Acceptable practices. Commission Regulation 40.9 governs the
obligations of designated contract markets that the Commission has
determined to be critical financial markets with respect to
maintenance and geographic dispersal of disaster recovery resources
sufficient to meet a same-day recovery time objective in the event
of a wide-scale disruption. Therefore, Regulation 40.9 itself
establishes the guidance and acceptable practices for core principle
compliance in that respect.
* * * * *
Core Principle 9 of section 5(d) of the Act: EXECUTION OF
TRANSACTIONS * * *
* * * * *
(a) * * *
(2) The board of trade shall:
(i) Establish and maintain a program of risk analysis and
oversight to identify and minimize sources of operational risk,
through the development of appropriate controls and procedures;
(ii) Establish and maintain a program of regular, periodic
testing to ensure that all automated systems used by the board of
trade function properly and have adequate security and capacity; and
(iii) Establish and maintain emergency procedures, backup
facilities, a disaster recovery plan, and regular, periodic testing
to ensure timely recovery and resumption of order processing and
trade matching, market data dissemination and price reporting,
market and trade practice surveillance, and maintenance of a
comprehensive and accurate audit trail.
* * * * *
(b) Acceptable practices. (1) Testing and review of automated
systems should be conducted by qualified, independent professionals.
Such qualified independent professionals may be independent
contractors or employees of the board of trade, but should not be
persons responsible for development or operation of the systems
being tested. Pursuant to the provisions of Commission Regulations
Sections 1.31 and 1.35, the board of trade must keep records of all
such tests, and make all test results available to the Commission
upon request.
(2) In fulfilling its obligations set forth in the Application
Guidance above with respect to its automated systems, the board of
trade should follow the guidelines issued by the International
Organization of Securities Commissions (``IOSCO'') in 1990 (the
``IOSCO Principles''), and adopted by the Commission on November 21,
1990 (55 FR 48670), as supplemented and amended, and any similar
guidelines issued by the Commission or its staff.
[[Page 42638]]
(3) Commission Regulation 40.9 governs the obligations of
registered entities that the Commission has determined to be
critical financial markets, with respect to maintenance and
geographic dispersal of disaster recovery resources sufficient to
meet a same-day recovery time objective in the event of a wide-scale
disruption. Therefore, Regulation 40.9 itself establishes the
guidance and acceptable practices for core principle compliance in
that respect.
* * * * *
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
3. The authority citation for part 39 continues to read as follows:
Authority: 7 U.S.C. 7b as added by Appendix E of Pub. L. 106-
554, 114 Stat. 2763A-365.
4. Amend Appendix A to Part 39 by adding a new paragraph 3 after
paragraph 2.b. of the guidance under Core Principle I, as follows:
Appendix A to Part 39--Application Guidance and Compliance With Core
Principles
* * * * *
Core Principle I: SYSTEM SAFEGUARDS * * *
* * * * *
2. * * *
b. * * *
3. Commission Regulation 40.9 governs the obligations of
derivatives clearing organizations that the Commission determines to
be core clearing and settlement organizations, with respect to
maintenance and geographic dispersal of disaster recovery resources
sufficient to meet a same-day recovery time objective in the event
of a wide-scale disruption. Therefore, Regulation 40.9 itself
establishes the guidance for core principle compliance in that
respect.
* * * * *
PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES
5. The authority citation for part 40 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as
amended by Title XIII of the Food, Conservation and Energy Act of
2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 2008).
6. Amend Sec. 40.1 by adding paragraphs (j) through (n) to read as
follows:
Sec. 40.1 Definitions.
* * * * *
(j) Critical financial market means a designated contract market
that provides the means for financial institutions to adjust their
financial positions and those of their customers in order to manage
liquidity, market, and other risks to their organizations, and provides
support for the provision of a wide range of financial services to
businesses and consumers in the United States, particularly including
markets whose trading impacts federal funds, foreign exchange,
commercial paper, U.S. government and agency securities, corporate
debt, equity securities, or physical commodities of broad, major
importance to the national and international economy. Guidance as to
how the Commission will determine whether a registered entity is a
critical financial market is set forth in Appendix E to Part 40.
(k) Core clearing and settlement organization means a derivatives
clearing organization that provides clearing and settlement services
integral to a critical financial market (or to multiple designated
contract markets that are critical financial markets on a collective
rather than individual basis). Guidance as to how the Commission will
determine whether a derivatives clearing organization is a core
clearing and settlement organization is set forth in Appendix E to Part
40.
(l) Relevant area means the metropolitan or other geographic area
within which a critical financial market or core clearing and
settlement organization has physical infrastructure or personnel
necessary for it to, as appropriate, conduct electronic trading,
disseminate market data and provide price reporting, conduct electronic
surveillance and maintain access to audit trail information, or conduct
activities necessary to the clearance and settlement of existing and
new contracts; including communities economically integrated with,
adjacent to, or within normal commuting distance of that metropolitan
or other geographic area.
(m) Recovery time objective means the time period within which an
entity should be able to achieve recovery and resumption of, as
appropriate, electronic trading, market data dissemination and price
reporting, access to audit trail information and electronic
surveillance tools, or clearing and settlement of existing and new
contracts, after those capabilities become temporarily inoperable for
any reason up to or including a wide-scale disruption.
(n) Wide-scale disruption means an event that causes a severe
disruption or destruction of transportation, telecommunications, power,
water, or other critical infrastructure components in a relevant area,
or an event that results in an evacuation or unavailability of the
population in a relevant area.
7. Add Sec. 40.9 to read as follows:
Sec. 40.9 Disaster recovery requirements for critical financial
markets and core clearing and settlement organizations.
(a) Each designated contract market or derivatives clearing
organization that the Commission determines is a critical financial
market or a core clearing and settlement organization must maintain a
disaster recovery plan and business continuity and disaster recovery
resources, including infrastructure and personnel, sufficient to enable
it to achieve a same-day recovery time objective in the event that its
normal trading or clearing and settlement capabilities become
temporarily inoperable for any reason up to and including a wide-scale
disruption.
(b) A same-day recovery time objective is a recovery time objective
within the same business day on which normal trading or clearing and
settlement capabilities become temporarily inoperable for any reason up
to and including a wide-scale disruption.
(c) To ensure its ability to achieve a same-day recovery time
objective in the event of a wide-scale disruption, each designated
contract market or derivatives clearing organization that the
Commission determines is a critical financial market or a core clearing
and settlement organization must maintain a degree of geographic
dispersal of both infrastructure and personnel such that:
(1) Infrastructure sufficient to enable the entity to meet a same-
day recovery time objective after interruption of normal trading and
clearing by a wide-scale disruption is located outside the relevant
area of the infrastructure the entity normally relies upon to conduct
electronic trading, disseminate market data and provide price
reporting, conduct electronic surveillance and maintain access to audit
trail information, or conduct activities necessary to the clearance and
settlement of existing and new contracts, and does not rely on the same
critical transportation, telecommunications, power, water, or other
critical infrastructure components the entity normally relies upon for
such activities; and
(2) Personnel sufficient to enable the entity to meet a same-day
recovery time objective, after interruption of normal trading or
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, live and work outside that relevant area.
(d) Each registered entity that the Commission determines is a
critical financial market or core clearing and settlement organization
must conduct
[[Page 42639]]
regular, periodic tests of its business continuity and disaster
recovery plans and resources and its capacity to achieve a same-day
recovery time objective in the event of a wide-scale disruption.
* * * * *
8. Add Appendix E to Part 40 to read as follows:
Appendix E to Part 40--Guidance on Critical Financial Market and Core
Clearing and Settlement Organization Determination
(a) Critical financial market determination. (1) The Commission
may determine, in its discretion, whether a designated contract
market is a critical financial market. In making such a
determination, the Commission will evaluate each such entity on a
case-by-case basis, giving consideration to whether the entity
provides the means for financial institutions to adjust their
financial positions and those of their customers in order to manage
liquidity, market, and other risks to their organizations, and
provides support for the provision of a wide range of financial
services to businesses and consumers in the United States; or
whether the entity conducts trading that impacts Federal funds,
foreign exchange, commercial paper, U.S. government and agency
securities, corporate debt, equity securities, or physical
commodities of broad, major importance to the national and
international economy. The Commission may also consider other
relevant factors that it finds important.
(2) The Commission will notify the designated contract market
that it intends to undertake a determination with respect to whether
it is a critical financial market. The entity may provide written
data, views, and arguments relevant to the Commission's
determination. Any such written data, views, and arguments shall be
filed with the Secretary of the Commission, in the form and manner
specified by the Commission, within 30 calendar days of receiving
notice or within such other time specified by the Commission. After
prompt consideration of all relevant information, the Commission
will issue an order directly to the designated contract market
explaining the Commission's determination of whether it is a
critical financial market as defined by Sec. 40.1(j).
(b) Core clearing and settlement organization determination. (1)
The Commission may determine, in its discretion, whether a
derivatives clearing organization is a core clearing and settlement
organization. In making such a determination, the Commission will
evaluate each such entity on a case-by-case basis, giving
consideration to whether the entity provides clearing and settlement
services integral to a critical financial market (or to multiple
designated contract markets that are critical financial markets on a
collective rather than individual basis). The Commission may also
consider other relevant factors that it finds important.
(2) The Commission will notify the derivatives clearing
organization that it intends to undertake a determination with
respect to whether it is a core clearing and settlement
organization. The entity may provide written data, views, and
arguments relevant to the Commission's determination. Any such
written data, views, and arguments shall be filed with the Secretary
of the Commission, in the form and manner specified by the
Commission, within 30 calendar days of receiving notice or within
such other time specified by the Commission. After prompt
consideration of all relevant information, the Commission will issue
an order directly to the derivatives clearing organization
explaining the Commission's determination of whether it is a core
clearing and settlement organization as defined by Sec. 40.1(k).
Issued in Washington, DC, on July 14, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-17606 Filed 7-21-10; 8:45 am]
BILLING CODE P